SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
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Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the Fiscal Year Ended September 30, 2012
OR
¨
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For transition period from
to
Commission File Number 001-35295
Poage
Bankshares, Inc.
(Exact Name of Registrant as Specified in Charter)
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Maryland
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45-3204393
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S Employer
Identification Number)
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1500 Carter Avenue, Ashland, KY 41101
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41101
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(Address of Principal Executive Officer)
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(Zip Code)
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606-324-7196
(Registrants telephone number)
Securities Registered Pursuant to
Section 12(b) of the Act:
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Title of each class
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Name of exchange on which registered
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Common Stock, $0.01 par value
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The NASDAQ Stock Market, LLC
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Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES
¨
NO
x
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES
¨
NO
x
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 such shorter period that the registrant was required to submit and post such
files). Yes
x
No
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x
.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, 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):
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Large accelerated filer
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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x
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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 December 11, 2012, 3,372,375 shares of the Registrants common stock, $.01 par value, were issued and outstanding. The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant, computed by reference to the last sale price on March 31, 2012, was $41.6 million.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
February 19, 2013 are incorporated by reference into Part III.
Table of Contents
PART I
Cautionary Note on
Forward-Looking Statements
This prospectus contains forward-looking statements, which can be identified by the use of
words such as estimate, project, believe, intend, anticipate, plan, seek, expect, will, may and words of similar meaning. These
forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the asset quality of our loan and investment portfolios; and
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estimates of our risks and future costs and benefits.
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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 prospectus.
The following factors, among others,
could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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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;
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risks related to high concentration of loans secured by real estate located in our market areas;
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our success in increasing our originations of adjustable-rate mortgage loans;
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our success in increasing our originations of nonresidential real estate loans, home equity loans and lines of credit, other consumer loans and
commercial business loans;
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competition among depository and other financial institutions;
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inflation and changes in the interest rate environment that reduce our margins, cause declines in our yields, or reduce the fair value of financial
instruments;
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adverse changes in the securities markets;
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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
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our ability to successfully enhance internal controls;
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our ability to enter new markets successfully manage and capitalize on growth opportunities, including acquisitions, if any;
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changes in consumer spending, borrowing and savings habits;
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decreases in asset quality;
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loan delinquencies and changes in the underlying cash flows of our borrowers resulting in increased loan losses;
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future deposit insurance premium levels and special assessments;
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our reliance on a small executive staff;
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future regulatory compliance costs, including any increased costs resulting from the recently enacted financial reform legislation or from new
regulations imposed by the Consumer Finance Protection Bureau;
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changes in the level of government support of housing finance;
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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;
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changes in our organization, compensation and benefit plans;
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changes in our financial condition or results of operations that reduce capital available to pay dividends; and
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changes in the financial condition or future prospects of issuers of securities that we own.
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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. Please see Risk Factors beginning on page 35.
Poage Bankshares, Inc.
Poage Bankshares, Inc. is incorporated in the State of Maryland. We are the holding company for Home Federal Savings and
Loan Association (Home Federal), a federal mutual savings and loan association that converted to a stock savings association in connection with our initial public offering of common stock in September 2011.
We completed our initial public offering of common stock in September 2011. In that offering, Poage Bankshares, Inc. sold 3,372,375
shares of common stock at $10.00 per share. After costs of $1.7 million directly attributable to the offering, net proceeds, excluding ESOP loan, amounted to $32.0 million. Poage Bankshares, Inc. contributed $16.0 million of the net proceeds of the
offering to Home Federal.
Our executive offices are located at 1500 Carter Avenue, Ashland, Kentucky 41101. Our telephone
number at this address is (606) 324-7196.
Recent Adjustments to Financial Statements for Fictitious Loan
On November 26, 2012, we determined that we were required to record a loss for certain fraudulent loans in the aggregate amount of
$950,000 including accrued interest of $127,000, which, net of tax, is a loss of $627,000. The loss relates to the creation of fictitious loans by a former employee of Home Federal and was discovered by management while in the process of upgrading
our lending controls and procedures. See Note 2 to our Consolidated Financial Statements.
2
We have reported this event to its blanket bond insurance provider and are working with the
provider to determine the extent of any coverage. No amount has been recorded related to potential recoveries from the blanket bond coverage. That amount, if any, will be recorded when the amount can be accurately measured and collectability can be
reasonably ascertained.
We are applying relevant guidance from the SEC and FASB to adjust for the cumulative effect of
immaterial errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings in the year of adoption. The
guidance also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Such adjustments do not require previously
filed reports with the SEC to be amended. In accordance with the relevant guidance, we have adjusted our opening retained earnings for 2011 for the item described above. We consider these adjustments to be immaterial to prior periods.
Home Federal Savings and Loan Association
General
Home Federal is
a federal savings and loan association headquartered in Ashland, Kentucky. Home Federal was originally chartered in 1889. Home Federals business consists primarily of accepting savings accounts and certificates of deposits from the general
public and investing those deposits, together with funds generated from operations and borrowings, primarily in first lien one- to four-family mortgage loans and, to a lesser extent, commercial and multi-family real estate loans, consumer loans,
consisting primarily of automobile loans and home equity loans and lines of credit, and construction loans. Home Federal also purchases investment securities consisting primarily of mortgage-backed securities issued by United States Government
agencies and government-sponsored enterprises, and obligations of state and political subdivisions. Home Federal offers a variety of deposit accounts, including passbook accounts, NOW and demand accounts, certificates of deposits, money market
accounts and retirement accounts. Home Federal provides financial services to individuals, families and businesses through our banking offices located in and around Ashland, Kentucky.
Home Federals executive offices are located at 1500 Carter Avenue, Ashland, Kentucky 41101. Its telephone number at this address is
(606) 324-7196, and its website address is http://www.hfsl.com. Information on this website is not and should not be considered to be part of this annual report on Form 10-K.
Market Area
Our primary lending markets are in Boyd, Greenup, and Lawrence
Counties in Kentucky, and Lawrence and Scioto Counties in Ohio. Our retail deposit market includes the areas surrounding our six offices in northeastern Kentucky, including our main office in Ashland and our branch offices in Flatwoods, Greenup,
Louisa, South Shore and Summit. We also operate an automated teller machine at each of our offices.
Our market area includes
both rural and urban communities. The total population base in the three counties where we operate offices was 103,000 in 2011, with Boyd County comprising approximately 50% of the population base. This represents a slight increase in total
population base in these three counties from approximately 102,000 in 2000. The economic base in our lending market was in the past primarily industrial and reliant upon a small number of large employers, particularly in the steel and petroleum
industries. A decline in these segments of the local economy has resulted in slow economic growth and population loss over the last several decades. However, during recent years, a diversification of our employment base into services including
healthcare has offset to some extent the adverse impact of the decline of our industrial base.
Per capita incomes in the
counties comprising our lending market all lag the applicable Kentucky or Ohio State averages, with the exception of Boyd County, where our headquarters is located. As of October, 2012, the unemployment rate in Boyd County, Kentucky was 6.9%, which
is less than the national unemployment rate, while the unemployment rates in Lawrence and Greenup Counties, Kentucky were 9.4% and 7.0%, respectively. Our
3
market area did not experience the high growth in 2003 through 2007 that characterized many bubble markets across the country. As a result, although real estate values have softened,
our market area has not experienced the level of decline in real estate values that has occurred in many other markets over the past several years.
Competition
We compete with national financial institutions, as well as
numerous state chartered banking institutions of comparable or larger size and resources, smaller community banking organizations and a variety of nonbank competitors. We compete for deposits with other commercial banks, savings associations and
credit unions and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. In making loans, we compete with other banks, savings associations, consumer finance companies, credit unions, leasing
companies and other lenders. Many of the institutions against whom we compete are national and regional banks that are significantly larger than us and, therefore, have significantly greater resources and the ability to achieve economies of scale by
offering a broader range of products and services at more competitive prices than we can offer. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry.
As of June 30, 2012, our market share of deposits represented 17.5% of
Federal Deposit Insurance Corporation-insured deposits in Boyd, Greenup and Lawrence Counties in Kentucky combined. To effectively compete, we seek to emphasize community orientation, local and timely decision making and superior customer service.
Lending Activities
Our principal lending activity has been the origination of first lien one- to four-family residential mortgage loans and, to a lesser extent, commercial and multi-family real estate loans, consumer loans,
consisting primarily of automobile loans, home equity loans and lines of credit, commercial business and construction loans. In order to diversify our loan portfolio, we recently increased our emphasis on commercial business loans, commercial real
estate loans and consumer loans.
During July 2010, we began selling substantially all of our fixed-rate residential mortgages
to the Federal Home Loan Bank of Cincinnati (FHLBCincinnati) with servicing retained. Total proceeds from mortgages sold under this program equaled approximately $13.4 million for the year ended September 30, 2012, compared to
$11.7 million for the year ended September 30, 2011. The sale of our fixed-rate residential mortgage originations to the FHLBCincinnati, and our increased originations of nonresidential loans, which generally have shorter terms than one-
to four-family residential loans, will give us new tools to manage the interest rate risk associated with our portfolio of long-term fixed-rate one- to four-family residential loans.
4
Loan Portfolio Composition
.
The following table sets forth the
composition of our loan portfolio by type of loan at the dates indicated.
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At or For the Year Ended September 30,
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2012
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2011
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2010
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2009
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2008
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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(Revised)
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(Revised)
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(Revised)
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(Revised)
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(Dollars in thousands)
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Real estate loans:
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One- to four-family
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$
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141,307
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77.60
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%
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$
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147,733
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79.95
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%
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154,098
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84.16
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%
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$
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145,077
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86.81
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%
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$
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97,075
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86.98
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%
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Multi-family
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985
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0.54
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%
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2,016
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1.09
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%
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2,860
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1.56
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%
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1,232
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0.74
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%
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1,188
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1.06
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%
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Commercial real estate
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16,333
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8.97
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%
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9,786
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5.30
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%
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7,331
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4.00
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%
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5,292
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3.17
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%
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5,120
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4.59
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%
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Construction and land
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3,095
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1.70
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%
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5,209
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2.82
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%
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3,700
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2.02
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%
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2,888
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1.73
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%
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4,003
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3.59
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%
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Total real estate loans
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161,720
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88.82
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%
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164,744
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89.16
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%
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167,989
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91.75
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%
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154,489
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92.44
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%
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107,386
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96.22
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%
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Commercial business loans
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4,895
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2.69
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%
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3,722
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2.01
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%
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1,970
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1.08
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%
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3,910
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2.34
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%
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758
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0.67
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%
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Consumer loans:
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Home equity loans and lines of credit
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5,911
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3.25
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%
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5,796
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3.14
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%
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5,005
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2.72
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%
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3,280
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1.96
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%
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1,250
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1.12
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%
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Motor vehicle
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6,968
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3.83
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%
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7,299
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3.95
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%
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5,544
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3.03
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%
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3,027
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1.81
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%
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1,118
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0.99
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%
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Other
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2,592
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1.42
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%
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3,212
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1.74
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%
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2,583
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1.41
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%
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2,419
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1.45
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%
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1,091
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0.98
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%
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Total consumer loans
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15,471
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8.50
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%
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16,307
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8.83
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%
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13,132
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7.17
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%
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8,726
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5.22
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%
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3,459
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3.10
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%
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Total loans
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182,086
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100.00
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%
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184,773
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100.00
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%
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183,091
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100.00
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%
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167,125
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100.00
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%
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111,603
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100.00
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%
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Net deferred loan fees
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84
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92
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92
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86
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119
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Allowance for losses
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2,004
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1,658
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1,134
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555
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254
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Loans, net
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$
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179,998
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$
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183,023
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$
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181,865
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$
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166,484
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$
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111,230
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5
Contractual Maturities and Interest Rate Sensitivity
.
The following
table summarizes the scheduled maturities of our loan portfolio at September 30, 2012. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Loans are presented
net of loans in process.
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September 30, 2012
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One-to
Four-
Family
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Home Equity
|
|
|
Multi-Family
and
Commercial
Real Estate
|
|
|
Construction
and Land
|
|
|
Commercial
Business
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Amounts due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
1,619
|
|
|
$
|
40
|
|
|
$
|
81
|
|
|
$
|
1,891
|
|
|
$
|
2,906
|
|
|
$
|
420
|
|
|
$
|
6,957
|
|
More than one to two years
|
|
|
95
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
38
|
|
|
|
869
|
|
|
|
1,040
|
|
More than two to three years
|
|
|
222
|
|
|
|
10
|
|
|
|
196
|
|
|
|
3
|
|
|
|
101
|
|
|
|
1,799
|
|
|
|
2,331
|
|
More than three to five years
|
|
|
1,533
|
|
|
|
21
|
|
|
|
20
|
|
|
|
13
|
|
|
|
1,133
|
|
|
|
4,311
|
|
|
|
7,031
|
|
More than five to ten years
|
|
|
8,743
|
|
|
|
5,829
|
|
|
|
2,201
|
|
|
|
377
|
|
|
|
71
|
|
|
|
1,571
|
|
|
|
18,792
|
|
More than ten to fifteen years
|
|
|
19,511
|
|
|
|
11
|
|
|
|
6,942
|
|
|
|
724
|
|
|
|
346
|
|
|
|
28
|
|
|
|
27,562
|
|
More than fifteen years
|
|
|
109,584
|
|
|
|
|
|
|
|
7,840
|
|
|
|
87
|
|
|
|
300
|
|
|
|
562
|
|
|
|
118,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
141,307
|
|
|
|
5,911
|
|
|
|
17,318
|
|
|
|
3,095
|
|
|
|
4,895
|
|
|
|
9,560
|
|
|
|
182,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our fixed and adjustable-rate loans at September 30, 2012 that are
contractually due after September 30, 2013. Loans are presented net of loans in process.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After September 30, 2013
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
73,771
|
|
|
$
|
65,917
|
|
|
$
|
139,688
|
|
Multi-family and commercial real estate
|
|
|
4,602
|
|
|
|
12,635
|
|
|
|
17,237
|
|
Construction and land
|
|
|
1,165
|
|
|
|
39
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
79,538
|
|
|
|
78,591
|
|
|
|
158,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
9,010
|
|
|
|
130
|
|
|
|
9,140
|
|
Home equity lines-of-credit
|
|
|
3,241
|
|
|
|
2,630
|
|
|
|
5,871
|
|
Commercial business
|
|
|
698
|
|
|
|
1,291
|
|
|
|
1,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer and other loans
|
|
|
12,949
|
|
|
|
4,051
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
92,487
|
|
|
$
|
82,642
|
|
|
$
|
175,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to Four-Family Residential Real Estate Lending
.
The focus of our lending
program has long been the origination of one- to four-family residential mortgage loans. At September 30, 2012, $141.3 million, or 77.3% of our total loan portfolio, consisted of loans secured by one- to four-family residences.
Historically, we have originated both fixed-rate and adjustable-rate one- to four-family mortgage loans. At September 30, 2012,
51.4% of our total one- to four-family mortgage loans were fixed-rate loans, all of which were originated for sale to the FHLB-Cincinnati, and 48.6% were adjustable-rate loans.
Our fixed-rate one- to four-family residential mortgage loans are generally underwritten according to secondary market standards (e.g.,
Freddie Mac guidelines), and we refer to loans that conform to such guidelines as conforming loans. We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established
by the Federal Housing Finance Agency, which as of September 30, 2012 was generally $417,000 for single-family homes in our market area. We also originate adjustable rate loans above the lending limit for conforming loans, which are referred to
as jumbo loans. Virtually all of our residential loans are secured by properties located in our market area.
6
We generally limit the loan-to-value ratios of our mortgage loans to 80% of the sales price
or appraised value, whichever is lower. Loans with certain credit enhancements, such as private mortgage insurance, may be made with loan-to-value ratios up to 95%. We participate in the Welcome Home Program for affordable housing provided by the
FHLB.
Our fixed-rate one- to four-family mortgage loans typically have terms of 15 or 30 years, with a 30-year term
constituting 56.1% of these loans and 39.9% of total loans.
Although we have offered adjustable-rate loans for many years,
beginning in fiscal 2010 we began to increase our emphasis on such loans, subject to demand for such loans in a lower rate interest rate environment, and to increase the sale of fixed-rate residential mortgage loans that we originate, in order to
enhance the interest rate sensitivity of our loan portfolio. Our owner-occupied adjustable-rate one- to four-family residential mortgage loans generally have fixed rates for initial terms of one to five years, and adjust annually thereafter at a
margin (generally of 3.5% for owner-occupied properties and 4.5% for investment properties in the current market place) over the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year. The maximum amount by
which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan. Our adjustable-rate loans carry terms to maturity of up
to 30 years.
Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest
rates because, as interest rates increase, they periodically reprice, and the required payments due from the borrower also increase (subject to rate caps), and the ability of the borrower to repay the loan and the marketability of the underlying
collateral may be adversely affected. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on most of our
adjustable-rate loans do not adjust for up to five years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising
interest rates.
We do not offer interest only mortgage loans on one- to four-family residential properties (where
the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as Option ARM loans, where the borrower can
pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer subprime loans (i.e., loans that generally target borrowers with weakened credit histories typically
characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), or Alt-A loans (i.e., loans that
generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income).
Until fiscal 2010, we generally retained in our portfolio all of the loans that we originated. In July 2010, as part of our interest rate risk management strategy, we initiated a secondary market program
focused on reducing the origination of fixed-rate residential mortgage loans for our portfolio and instead selling some or all of our fixed rate mortgage originations in the FHLBCincinnati Mortgage Purchase Program, with servicing retained.
Since beginning this program, we have sold $24.2 million in fixed-rate mortgage loans to the FHLBCincinnati. We expect that loans sold under this program will continue to increase.
Based on our emphasis on adjustable rate lending and our initiation of a secondary market program for new fixed rate loan originations,
we expect that adjustable-rate one- to four-family residential mortgage loans will account for the largest increase in our loan portfolio over the next three years. Currently, all fixed rate one- to four- family residential mortgage loans we
originate are sold in the secondary market, and we retain all adjustable-rate one- to four-family residential mortgage loans we originate.
Consumer Lending and Home Equity Loans and Lines of Credit
.
At September 30, 2012, $5.9 million, or 3.3% of our total loan portfolio, consisted of home equity loans and lines of
credit, and $9.6 million, or 5.3% of our total loan portfolio, consisted of other consumer loans. In order to reduce the term of our loans and enhance the yields thereof, we intend to increase our consumer loans and home equity loans and lines of
credit over the next three years.
7
Our consumer loans include, among other loans, new and used automobile and truck loans,
recreational vehicle loans and personal loans.
Consumer loans may entail greater credit risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or that are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrowers continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. In determining
whether to make a consumer loan, we consider the appraised value of collateral, and the borrowers, employment history, annual income and debt service ratio which, including all mortgage payments and the credit line payment, generally may not
exceed 40% of net monthly income without prior approval of the banks credit committee or senior officer with appropriate lending authority.
We have offered home equity loans and lines of credit secured by a first or second mortgage on residential property (principal dwelling, condominium, etc.) since fiscal 2007. Home equity loans and lines
of credit are made with fixed or adjustable rates, and with combined loan-to-value ratios up to 85% on an owner-occupied principal residence and up to 80% on a second home, condominium or vacation home. On a limited basis, loan-to-value ratios may
exceed 90% of appraised value if approved by the banks credit committee or senior officer with appropriate lending authority.
Home equity loans and lines of credit may entail greater credit risk than one- to four-family residential mortgage loans, as they typically involve higher loan-to-value ratios and are typically second in
priority behind first mortgages on the applicable property. Therefore, any decline in real estate values may have a more detrimental effect on our home equity loans and lines of credit than on our one- to four-family residential mortgage loans.
At September 30, 2012, the average balance of our outstanding home equity loans and lines of credit was $5.9 million,
and the largest outstanding balance of any such loan was $488,000. This loan was performing in accordance with its original terms at September 30, 2012.
Commercial Real Estate and Multi-Family Loans
.
At September 30, 2012, our commercial real estate loans totaled $16.3 million and our multi-family loans totaled $1.0 million,
compared to $9.8 million and $2.0 million, respectively, at September 30, 2011. Subject to market conditions, we intend to continue to increase the proportion of these nonresidential real estate loans in our loan portfolio over the next few
years.
Maturities for our commercial real estate and multi-family loans generally do not exceed 15 years, although exceptions
may be made for terms of up to 20 years. Rates are generally adjustable based upon the weekly average yield on U.S. treasury securities adjusted to a constant maturity of one year or another floating index. The maximum loan-to-value ratio on our
commercial real estate and multi-family loans is 80% for owner-occupied commercial real estate and one- to four-family residential rental properties, and 75% for office or retail non-owner-occupied commercial real estate or rental properties with
greater than five units. We generally require a first mortgage on all commercial real estate loans, as well as a debt service coverage ratio of 1.25:1. At September 30, 2012, our largest outstanding commercial real estate loan was a $2.7
million loan secured by several convenience store/gas station operations. Our largest multi-family real estate loan at September 30, 2012 was a $1.0 million loan secured by a 38-unit affordable housing complex. Both of these loans were
performing in accordance with their original terms at September 30, 2012.
8
Set forth below is information regarding our commercial real estate loans at
September 30, 2012.
|
|
|
|
|
|
|
|
|
Type of Loan
|
|
Number of Loans
|
|
|
Balance
|
|
|
|
|
|
|
(In thousands)
|
|
Office
|
|
|
6
|
|
|
$
|
1,273
|
|
Industrial
|
|
|
17
|
|
|
|
2,326
|
|
Retail
|
|
|
21
|
|
|
|
10,770
|
|
Mixed use
|
|
|
|
|
|
|
|
|
Church
|
|
|
2
|
|
|
|
531
|
|
Other
|
|
|
7
|
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
53
|
|
|
$
|
16,333
|
|
|
|
|
|
|
|
|
|
|
Commercial and multi-family real estate loans generally carry higher interest rates and have shorter
terms than one- to four-family residential mortgage loans. Multi-family and commercial real estate loans, however, entail greater credit risks compared to one- to four-family residential mortgage loans because they typically involve larger loan
balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is
dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan
or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial and multi-family real estate than residential properties.
Commercial Business Loans
.
Our portfolio of commercial business loans increased from $3.7 million at
September 30, 2011, to $4.9 million at September 30, 2012. Our commercial business loans generally consist of regular lines of credit and revolving lines of credit to businesses to finance short-term working capital needs like accounts
receivable and inventory. These loans are generally priced on an adjustable-rate basis and may be secured or unsecured. We generally obtain personal guarantees with all commercial business loans. Business assets such as accounts receivable,
inventory, equipment, furniture and fixtures may be used to secure lines of credit. Our revolving lines of credit typically have a maximum term of 12 months.
We also originate commercial term loans to fund long-term borrowing needs such as purchasing equipment, property improvements or other fixed asset needs. We fix the maturity of a term loan to correspond
to 75% of the useful life of any equipment purchased or seven years, whichever is less. Term loans can be secured with a variety of collateral, including business assets such as accounts receivable and inventory or long-term assets such as
equipment, furniture, fixtures or real estate.
Unlike single-family residential real estate loans, which we generally
originate on the basis of the borrowers ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, we typically originate commercial loans
(including real estate as well as non-real estate loans) on the basis of the borrowers ability to make repayment from the cash flow of the borrowers business or rental income produced by the property. As a result, the availability of
funds for the repayment of commercial loans may be substantially dependent on the success of the business or rental property itself and the general economic environment. Therefore, commercial loans that we originate have greater credit risk than
one- to four-family residential real estate loans or consumer loans. In addition, commercial loans generally result in larger outstanding balances to single borrowers, or related groups of borrowers, and also generally require substantially greater
evaluation and oversight efforts.
At September 30, 2012, the average balance of our outstanding commercial business
loans was $67,000, and the largest outstanding balance of such loans was a $514,000 loan secured by accounts receivable. This loan was performing in accordance with its original terms at September 30, 2012.
Construction and Land Loans.
We make construction loans to individuals for the construction of their primary residences.
These loans generally have maximum terms of 12 months, and upon completion of construction convert to conventional amortizing mortgage loans. These construction loans have higher risk based interest rates and terms. During the construction phase,
the borrower generally pays interest only. The maximum loan-to-value ratio of our owner-occupied construction loans is generally 80% of construction costs or completed-appraised-value, whichever is less. Residential construction loans are generally
underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans.
9
We also make construction loans for the construction of homes on speculation.
These loans are for pre-sold and spec homes, and no more than two such loans may be outstanding to one borrower at any time. These loans generally have initial maximum terms of nine months, although the term may be extended
to up to 18 months. The loans generally carry variable rates of interest. The maximum loan-to-value ratio of these construction loans is generally 80% of construction costs or completed-appraised-value, whichever is less.
To a much lesser extent, we make loans for the construction of commercial buildings. At September 30, 2012, we had $1.9 million of
these loans outstanding.
In addition, we make loans secured by unimproved land to complement our construction and
non-residential lending activities. These loans have terms of up to 15 years, and maximum loan-to-value ratios of 75%.
Set
forth below is information regarding our construction and land loans at September 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Loans
|
|
|
Loans in
Process
|
|
|
Net Principal
Balance
|
|
|
Non-Performing
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
One- to four-family construction
|
|
|
8
|
|
|
|
691
|
|
|
|
1,890
|
|
|
|
|
|
Multi-family construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential land
|
|
|
50
|
|
|
|
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total construction and land loans
|
|
|
58
|
|
|
|
691
|
|
|
|
3,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To the extent our construction loans are not made to owner-occupants of single-family homes, they are
more vulnerable to changes in economic conditions and the concentration of credit with a limited number of borrowers. Further, the nature of these loans is such that they are more difficult to evaluate and monitor. Our risk of loss on a construction
or land loan is dependent largely upon the accuracy of the initial estimate of the propertys value upon completion of the project and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, we
may be confronted, at or prior to the maturity of the loan, with a project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial investments to complete and sell the project. Because
defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage.
Loan Approval Procedures and Authority
.
The aggregate amount of loans that we are permitted to make to any one borrower or group of related borrowers is generally limited to 15% of
Home Federals unimpaired capital and surplus (25% if the amount in excess of 15% is secured by readily marketable collateral). At September 30, 2012, based on the 15% limitation, Home Federals loans-to-one-borrower limit
was approximately $6.89 million. On the same date, Home Federal had no lending relationships with outstanding balances in excess of this amount.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and
property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our Board of Directors, as well as internal evaluations, where permitted by regulations. The loan applications are designed
primarily to determine the borrowers ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.
Under our loan policy, the individual processing an application is responsible for ensuring that all documentation is obtained prior to
the submission of the application to an officer for approval. An officer then reviews these materials and verifies that the requested loan meets our underwriting guidelines.
Our loan approval authority is based upon the knowledge and experience of our individual lending officers. Larger and more complicated loans require the approval of the banks internal Credit
Committee, which is chaired by the Chief Credit Officer and includes the President and Chief Executive Officer and two other senior officers
10
with appropriate credit backgrounds. All loans on an aggregate basis exceeding $1 million require the approval of both the internal Credit Committee and Directors Loan Committee, which is
essentially the entire board of directors. The Directors Loan Committee may approve loans up to our legal lending limit.
Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.
Originations, Sales and Servicing.
Lending activities are conducted solely by our salaried loan personnel. All loans originated by us are underwritten pursuant to our policies and
procedures. We originate both fixed-rate and adjustable-rate loans. Our ability to originate fixed or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected by current and expected future levels of market
interest rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.
Until recently, we have retained in our portfolio all of the loans that we have originated. In July 2010, as part of our interest rate
risk management strategy, we initiated a secondary market program focused on selling some or all of our fixed rate one- to four-family mortgage loan originations in the FHLBCincinnati Mortgage Purchase Program. We have also undertaken a review
of our existing loan portfolio to identify customers who may qualify and benefit from this product. Loans are sold to the FHLBCincinnati without recourse, except for limited circumstances including failure of the mortgage to meet
FHLBCincinnati guidelines or our breach of any representation and warranty in the sales transaction.
In addition to the
representations and warranties described above, Home Federal provides credit enhancements to the FHLBCincinnati by sharing losses with other members of the program in an aggregated pool. A Fixed Lender Risk Account (LRA) has
been established and is maintained by the FHLB on behalf of the Association and other members selling mortgages to the FHLBCincinnati . The LRA amount is established as a percentage applied to the sum of the initial unpaid principal
balance of each mortgage in the Aggregated Pool at the time of the purchase of the mortgage as determined by the FHLB and is funded by the deduction from the proceeds of sale of each mortgage in the Aggregated Pool to the FHLB. Home Federal had on
deposit with the FHLBCincinnati $364,000 at September 30, 2012 and $33,000 at September 30, 2011 in the LRA. These accounts are held by the FHLB and Home Federal bears the risk of receiving less than 100% of its LRA contribution
in the event of losses, either by Home Federal or other members selling mortgages in the aggregated pool. Any losses will be deducted first from the individual LRA contribution of Home Federal that sold the mortgage of which the loss was
incurred. If losses incurred in the aggregated pool are greater than the members LRA contribution, such losses will be deducted from the LRA contribution of other members selling mortgages in that aggregated pool. Any portion of the
LRA not used to pay losses will be released over a thirty year period and will not start until the end of five years after the initial fill-up period. Home Federal has not had any of the LRA amounts release as of September 30, 2012 and the
LRA balance is not recorded as an asset on Home Federals balance sheet at September 30, 2012 or September 30, 2011, because of the unknown likelihood of receipt of these funds. Unless Home Federal is required to repurchase a
loan because it did not meet the criteria under the representations and warranties to be covered as part of the aggregated pool, the credit risk is limited to the amount provided in the LRA.
All of the loans sold at September 30, 2012 and September 30, 2011 were subject to these representations and warranties. As of
September 30, 2012 there have been no required repurchases of loans sold, there have been no recourse claims, nor does Home Federal believe it has incurred any such losses. Therefore, no liabilities have been accrued at September 30, 2012
or September 30, 2011.
Loan servicing includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain
a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities. For the year ended September 30, 2012 and the year ended September 30, 2011, we received loan servicing fees of $38,000
and $22,000, respectively. As of September 30, 2012 and September 30, 2011, the principal balance of loans serviced for the FHLBCincinnati totaled $24.2 million and $14.4 million, respectively.
11
We currently do not purchase whole loans or interests in loans from third parties. However,
we may in the future elect to do so, depending on market conditions, in order to supplement our loan production.
The
following table shows our loan origination and principal repayment activity for loans originated during the periods indicated. One- to four-family loans include $22.1 million and $20.4 million of adjustable rate mortgage loans originated during the
years ended, September 30, 2012 and 2011, respectively. Loans are presented net of loans in process.
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(Revised)
|
|
|
|
(Dollars in thousands)
|
|
Total loans at beginning of period
|
|
$
|
184,773
|
|
|
$
|
183,091
|
|
|
|
|
|
|
|
|
|
|
Loans originated:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
36,281
|
|
|
|
34,093
|
|
Multi-family
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
9,165
|
|
|
|
1,389
|
|
Construction and land
|
|
|
1,059
|
|
|
|
5,521
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
46,505
|
|
|
|
41,003
|
|
Commercial and industrial loans
|
|
|
1,501
|
|
|
|
1,574
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
3,009
|
|
|
|
2,313
|
|
Motor vehicle
|
|
|
3,925
|
|
|
|
5,064
|
|
Other
|
|
|
1,562
|
|
|
|
1,868
|
|
|
|
|
|
|
|
|
|
|
Total loans originated
|
|
|
56,502
|
|
|
|
51,822
|
|
Loans purchased:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
|
|
|
|
|
|
Commercial and industrial loans
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
|
|
|
|
|
|
Motor vehicle
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans purchased
|
|
|
|
|
|
|
|
|
Loans sold:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
13,434
|
|
|
|
10,627
|
|
Multi-family
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans sold
|
|
|
13,434
|
|
|
|
10,627
|
|
Deduct:
|
|
|
|
|
|
|
|
|
Principal repayments
|
|
|
45,755
|
|
|
|
39,513
|
|
Net other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan activity
|
|
|
(2,687
|
)
|
|
|
1,682
|
|
|
|
|
|
|
|
|
|
|
Total loans at end of period
|
|
$
|
182,086
|
|
|
$
|
184,773
|
|
|
|
|
|
|
|
|
|
|
12
Delinquencies and Non-Performing Assets
Delinquency Procedures
.
When a borrower fails to make their required monthly payment on or before the late payment
date, a notice is generated stating the amount of the payment and applicable late charge(s) that are due. An attempt is also made at this time to contact the borrower by telephone regarding their late payment. Collection procedures provide that if
no response or payment is received from the borrower, additional collections efforts will be taken through the generation of a 30-day right to cure or demand letter. Contact with the borrower regarding establishment of payment arrangements to
satisfy their delinquency will be coordinated through the lending officer and collections department. If, at this point, no response is received from the borrower, further accelerated collection efforts such as the pursuit of legal action,
repossession or foreclosure may be initiated. If any of these actions are pursued, all further communication with the borrower will be directed to the collections area.
When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate and held in the OREO asset account until it is sold. The
real estate is appraised and recorded at estimated fair value after acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Subsequent decreases in the value of the
property are charged to expense. After acquisition, all costs in maintaining the property are expensed as incurred. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value
less estimated costs to sell.
Delinquent Loans
. The following table sets forth our loan delinquencies,
including non-accrual loans, by type and amount at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
30-59
Days
Past Due
|
|
|
60-89
Days
Past Due
|
|
|
90 Days
or More
Past Due
|
|
|
30-59
Days
Past Due
|
|
|
60-89
Days
Past Due
|
|
|
90 Days
or More
Past Due
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
1,117
|
|
|
$
|
169
|
|
|
$
|
803
|
|
|
$
|
100
|
|
|
$
|
11
|
|
|
$
|
2,158
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
495
|
|
Commercial real estate
|
|
|
139
|
|
|
|
|
|
|
|
307
|
|
|
|
302
|
|
|
|
59
|
|
|
|
|
|
Construction and land
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
1,781
|
|
|
|
169
|
|
|
|
1,110
|
|
|
|
402
|
|
|
|
90
|
|
|
|
2,653
|
|
Commercial and industrial loans
|
|
|
4
|
|
|
|
135
|
|
|
|
14
|
|
|
|
1,030
|
|
|
|
1
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Motor vehicle
|
|
|
87
|
|
|
|
28
|
|
|
|
|
|
|
|
49
|
|
|
|
59
|
|
|
|
21
|
|
Other
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
89
|
|
|
|
28
|
|
|
|
15
|
|
|
|
56
|
|
|
|
60
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquent loans
|
|
$
|
1,874
|
|
|
$
|
332
|
|
|
$
|
1,139
|
|
|
$
|
1,488
|
|
|
$
|
151
|
|
|
$
|
2,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified Assets
. Federal regulations provide for the classification of loans and other
assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency (OCC) to be of lesser quality, as substandard, doubtful or loss. An asset is considered
substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct
possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with
the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as
loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not currently expose the insured
institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as special mention by our management.
13
When an insured institution classifies problem assets as either substandard or doubtful, it
may establish general allowances in an amount deemed prudent by management to cover probable incurred losses. General allowances represent loss allowances which have been established to cover probable incurred losses associated with lending
activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies a problem asset as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge-off such amount. An institutions determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory
authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the
filing of our periodic reports with the OCC and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable
regulations.
On the basis of this review of our assets, our classified and special mention assets at the dates indicated were
as set forth below. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Thus, the homogenous pools are
not considered for classification or special mention status. At September 30, 2012 and September 30, 2011, all loans classified as substandard were comprised of loans that were individually evaluated for impairment and no loans were deemed
to be impaired.
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Special mention assets
|
|
$
|
1,799
|
|
|
$
|
2,161
|
|
Substandard assets
|
|
|
3,317
|
|
|
|
2,928
|
|
Doubtful assets
|
|
|
|
|
|
|
|
|
Loss assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total classified assets
|
|
$
|
5,116
|
|
|
$
|
5,089
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Assets.
We generally cease accruing interest on our loans when contractual
payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the
process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Funds received on nonaccrual loans generally are applied against principal. Generally, loans
are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no
longer in doubt.
14
The table below sets forth the amounts and categories of our non-performing assets at the
dates indicated. At the dates indicated, we had no loan classified as a troubled debt restructuring.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
972
|
|
|
$
|
2,158
|
|
|
$
|
1,322
|
|
|
$
|
747
|
|
|
$
|
386
|
|
Multi-family
|
|
|
|
|
|
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
972
|
|
|
|
2,653
|
|
|
|
1,322
|
|
|
|
747
|
|
|
|
386
|
|
Commercial and industrial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
15
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motor vehicle
|
|
|
|
|
|
|
21
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
987
|
|
|
|
2,697
|
|
|
|
1,334
|
|
|
|
747
|
|
|
|
386
|
|
Accruing loans past due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
|
|
|
|
|
|
890
|
|
|
|
18
|
|
|
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
307
|
|
|
|
|
|
|
|
890
|
|
|
|
18
|
|
|
|
|
|
Commercial and industrial loans
|
|
|
14
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motor vehicle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans past due 90 days or more
|
|
|
321
|
|
|
|
|
|
|
|
896
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of nonaccrual and 90 days or more past due loans
|
|
|
1,308
|
|
|
|
2,697
|
|
|
|
2,230
|
|
|
|
790
|
|
|
|
386
|
|
Real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
566
|
|
|
|
87
|
|
|
|
207
|
|
|
|
125
|
|
|
|
68
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Commercial
|
|
|
435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
32
|
|
|
|
8
|
|
General Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate owned
|
|
|
1,001
|
|
|
|
87
|
|
|
|
219
|
|
|
|
148
|
|
|
|
113
|
|
Total nonperforming assets
|
|
|
2,309
|
|
|
|
2,784
|
|
|
|
2,449
|
|
|
|
938
|
|
|
|
499
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings and total nonperforming assets
|
|
$
|
2,309
|
|
|
$
|
2,784
|
|
|
$
|
2,449
|
|
|
$
|
938
|
|
|
$
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans to total loans
|
|
|
0.72
|
%
|
|
|
1.46
|
%
|
|
|
1.22
|
%
|
|
|
0.47
|
%
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets to total assets
|
|
|
0.73
|
%
|
|
|
0.85
|
%
|
|
|
0.84
|
%
|
|
|
0.34
|
%
|
|
|
0.22
|
%
|
Total nonperforming assets and troubled debt restructurings to total assets
|
|
|
0.73
|
%
|
|
|
0.85
|
%
|
|
|
0.84
|
%
|
|
|
0.34
|
%
|
|
|
0.22
|
%
|
15
There were no loans that are not disclosed above under Classified Assets
and Non-Performing Assets where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in
disclosure of such loans in the future.
For the years ended September 30, 2012 and 2011, gross interest income that
would have been recorded had our non-accruing loans been current in accordance with their original terms was $20,000, and $58,000, respectively. Interest of $33,000 and $9,000 was recognized on these loans and included in net income for the years
ended September 30, 2012 and 2011, respectively.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses
. Our allowance for loan losses is the amount considered
necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to
earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements:
(i) specific allowances for identified problem loans; and (ii) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for
loan losses is available for the entire portfolio.
Specific Allowances for Identified Problem Loans
. We
establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market
conditions and selling expenses. Factors in identifying a specific problem loan include: (i) the strength of the customers personal or business cash flows; (ii) the availability of other sources of repayment; (iii) the amount
due or past due; (iv) the type and value of collateral; (v) the strength of our collateral position; (vi) the estimated cost to sell the collateral; and (vii) the borrowers effort to cure the delinquency. In addition, for
loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on the Remainder of the Loan Portfolio
. We establish a general allowance for loans that are not classified as impaired to recognize the inherent losses associated
with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based
on our historical loss experience, delinquency trends and managements evaluation of the collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in managements judgment, affect the collectability
of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends,
collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss
factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.
In addition, as an
integral part of their examination process, the OCC will periodically review our allowance for loan losses, and they may require that we recognize additions to the allowance based on their judgments of information available to them at the time of
their examination.
16
Allowance for Loan Losses
.
The following table sets forth activity in
our allowance for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Allowance at beginning of period
|
|
$
|
1,658
|
|
|
$
|
1,134
|
|
|
$
|
555
|
|
|
$
|
254
|
|
|
$
|
176
|
|
Provision for loan losses
|
|
|
902
|
|
|
|
615
|
|
|
|
650
|
|
|
|
312
|
|
|
|
102
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
443
|
|
|
|
83
|
|
|
|
48
|
|
|
|
20
|
|
|
|
24
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motor vehicle
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1
|
|
|
|
11
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
633
|
|
|
|
94
|
|
|
|
71
|
|
|
|
20
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
(15
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motor vehicle
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
(77
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries)
|
|
|
556
|
|
|
|
91
|
|
|
|
71
|
|
|
|
11
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
2,004
|
|
|
$
|
1,658
|
|
|
$
|
1,134
|
|
|
$
|
555
|
|
|
$
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to nonperforming loans
|
|
|
153.21
|
%
|
|
|
61.48
|
%
|
|
|
50.85
|
%
|
|
|
70.25
|
%
|
|
|
65.80
|
%
|
Allowance to total loans outstanding at the end of the period
|
|
|
1.10
|
%
|
|
|
0.90
|
%
|
|
|
0.62
|
%
|
|
|
0.33
|
%
|
|
|
0.23
|
%
|
Net (charge-offs) recoveries to average loans outstanding during the period
|
|
|
0.31
|
%
|
|
|
0.05
|
%
|
|
|
0.04
|
%
|
|
|
0.01
|
%
|
|
|
0.02
|
%
|
Allocation of Allowance for Loan Losses.
The following table sets forth the allowance for
loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of
future losses in any particular category and does not restrict the use of the general allowance to absorb losses in other categories.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Amount
|
|
|
% of
Allowance
to Total
Allowance
|
|
|
% of
Loans in
Category
to Total
Loans
|
|
|
Amount
|
|
|
% of
Allowance
to
Total
Allowance
|
|
|
% of
Loans in
Category
to Total
Loans
|
|
|
Amount
|
|
|
% of
Allowance
to Total
Allowance
|
|
|
% of
Loans in
Category
to Total
Loans
|
|
|
|
(Dollars in thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
1,248
|
|
|
|
62.28
|
%
|
|
|
0.68
|
%
|
|
$
|
1,167
|
|
|
|
70.39
|
%
|
|
|
0.63
|
%
|
|
$
|
684
|
|
|
|
60.32
|
%
|
|
|
0.37
|
%
|
Multi-family
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
16
|
|
|
|
0.97
|
%
|
|
|
0.01
|
%
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
567
|
|
|
|
28.29
|
%
|
|
|
0.31
|
%
|
|
|
129
|
|
|
|
7.78
|
%
|
|
|
0.07
|
%
|
|
|
184
|
|
|
|
16.23
|
%
|
|
|
0.10
|
%
|
Construction and land
|
|
|
9
|
|
|
|
0.45
|
%
|
|
|
0.00
|
%
|
|
|
56
|
|
|
|
3.38
|
%
|
|
|
0.03
|
%
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
1,824
|
|
|
|
91.02
|
%
|
|
|
0.99
|
%
|
|
|
1,368
|
|
|
|
82.51
|
%
|
|
|
0.74
|
%
|
|
|
868
|
|
|
|
76.54
|
%
|
|
|
0.47
|
%
|
Commercial and industrial loans
|
|
|
47
|
|
|
|
2.35
|
%
|
|
|
0.03
|
%
|
|
|
49
|
|
|
|
2.96
|
%
|
|
|
0.03
|
%
|
|
|
49
|
|
|
|
4.32
|
%
|
|
|
0.03
|
%
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
40
|
|
|
|
2.00
|
%
|
|
|
0.02
|
%
|
|
|
83
|
|
|
|
5.01
|
%
|
|
|
0.04
|
%
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Motor vehicle
|
|
|
81
|
|
|
|
4.04
|
%
|
|
|
0.04
|
%
|
|
|
104
|
|
|
|
6.27
|
%
|
|
|
0.06
|
%
|
|
|
139
|
|
|
|
12.26
|
%
|
|
|
0.08
|
%
|
Other
|
|
|
12
|
|
|
|
0.60
|
%
|
|
|
0.01
|
%
|
|
|
54
|
|
|
|
3.26
|
%
|
|
|
0.03
|
%
|
|
|
78
|
|
|
|
6.88
|
%
|
|
|
0.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
133
|
|
|
|
6.64
|
%
|
|
|
0.07
|
%
|
|
|
241
|
|
|
|
14.54
|
%
|
|
|
0.13
|
%
|
|
|
217
|
|
|
|
19.14
|
%
|
|
|
0.12
|
%
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
2,004
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
1,658
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
1,134
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2009
|
|
|
2008
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
% of
Allowance
to Total
Allowance
|
|
|
%
of
Loans in
Category
to Total
Loans
|
|
|
Amount
|
|
|
% of
Allowance
to Total
Allowance
|
|
|
%
of
Loans in
Category
to Total
Loans
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
280
|
|
|
|
50.45
|
%
|
|
|
0.17
|
%
|
|
$
|
143
|
|
|
|
56.30
|
%
|
|
|
0.13
|
%
|
Multi-family
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
97
|
|
|
|
17.48
|
%
|
|
|
0.06
|
%
|
|
|
67
|
|
|
|
26.38
|
%
|
|
|
0.06
|
%
|
Construction and land
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
377
|
|
|
|
67.93
|
%
|
|
|
0.23
|
%
|
|
|
210
|
|
|
|
82.68
|
%
|
|
|
0.19
|
%
|
Commercial and industrial loans
|
|
|
71
|
|
|
|
12.79
|
%
|
|
|
0.04
|
%
|
|
|
9
|
|
|
|
3.54
|
%
|
|
|
0.01
|
%
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Motor vehicle
|
|
|
55
|
|
|
|
9.91
|
%
|
|
|
0.03
|
%
|
|
|
15
|
|
|
|
5.91
|
%
|
|
|
0.01
|
%
|
Other
|
|
|
52
|
|
|
|
9.37
|
%
|
|
|
0.03
|
%
|
|
|
20
|
|
|
|
7.87
|
%
|
|
|
0.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
107
|
|
|
|
19.28
|
%
|
|
|
0.06
|
%
|
|
|
35
|
|
|
|
13.78
|
%
|
|
|
0.03
|
%
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
555
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
254
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for loan losses was $2.0 million, or 1.10% of total loans at September 30, 2012
compared to $1.7 million, or 0.90% of total loans, at September 30, 2011. A provision of $902,000 was recorded for the year ended September 30, 2012, an increase of $287,000, or 46.7%, from the provision of $615,000 for the year ended
September 30, 2011. The provision for loan losses for the year ended September 30, 2012, reflected net charge-offs of $556,000, compared to net charge-offs of $91,000 for the year ended September 30, 2011, because during the year
ended September 30, 2012, we charged off a number of loans, including loans to four borrowers totaling $392,000, that were non-performing as of September 30, 2011. Reduced valuations on loans as the loans were transferred to foreclosed
real estate due to the poor condition of the properties was the primary cause of the increase in net charge-offs. Total nonperforming loans were $1.3 million at September 30, 2012 compared to $2.7 million at September 30, 2011. At
September 30, 2012 and 2011, we had no impaired loans. As a percentage of nonperforming loans, the allowance for loan losses was 153.2% at September 30, 2012 compared to 61.5% at September 30, 2011. The increase in the provision and
resulting allowance for loan losses for the year ended September 30, 2012 compared to the year ended September 30, 2011 reflected the write-off of real estate loans that were reclassified to other real estate owned, as well as current
economic conditions in our market area. Although we
18
believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could
be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally
accepted in the United States of America, regulators, in reviewing our loan portfolio, may require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with
certainty, the existing allowance for loan losses may not be adequate and increases may be necessary if the quality of our loans deteriorates as a result of the factors discussed above. Any material increase in the allowance for loan losses may
adversely affect our financial condition and results of operations.
Investment Activities
General
. The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan
funding needs, to help manage our interest rate risk, and to generate a favorable return on idle funds within the context of our interest rate and credit risk objectives.
Our Board of Directors is responsible for monitoring compliance with our investment policy. The investment policy is reviewed annually by management and any changes to the policy are recommended to and
subject to the approval of the Board of Directors. A management committee made up of four of the highest ranking officers or the Executive Committee may purchase investments based on recommendations of the Asset/Liability Committee and submit the
purchase to the full Board of Directors at the next scheduled meeting.
Our current investment policy permits investments in
securities issued by the United States Government and its agencies or government sponsored entities, including residential mortgage-backed securities, municipalities, school boards and fully insured certificates of deposit. We maintain investment
securities concentration limits that we periodically amend based on market conditions and changes in our assets. Current concentration restrictions limit investments to no more than $50 million of mortgage-backed securities per each U.S.
Government-sponsored entity, $25 million of securities per each U.S. Government agency, $5 million per each issuing municipal authority and an aggregate of $30 million of all municipal investments. Our investment policy also permits investment in
FHLBCincinnati common stock.
At September 30, 2012, we did not have an investment in the securities of any single
non-government issuer that exceeded 10% of equity at that date.
Our current investment policy does not permit investment in
stripped mortgage-backed securities, complex securities and derivatives as defined in federal banking regulations and other high-risk securities. Our current policy does not permit hedging activities, such as engaging in futures, options or swap
transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
At September 30, 2012, none of the collateral underlying our securities portfolio was considered subprime or Alt-A and we did not
hold any common or preferred stock issued by Freddie Mac or Fannie Mae as of that date.
State and Political Subdivision
Debt Securities
. We have purchased primarily bank-qualified and rated general obligation and revenue bonds of certain state and political subdivisions, which provide interest income that is mostly exempt from federal income taxation. All
purchases are approved by Home Federals Board of Directors and are reviewed each quarter. At September 30, 2012, substantially all of our state and political subdivision portfolio consisted of revenue bonds issued by the State of
Kentucky.
U.S. Government and Federal Agency Obligations.
We may invest in U.S. Government and federal
agency securities. While these securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings
and for prepayment protection.
Residential Mortgage-Backed Securities
. Residential mortgage-backed securities
are securities issued in the secondary market that are collateralized by pools of mortgages. We invest in mortgage-backed securities commonly referred to as pass-through certificates. The principal and interest of the loans underlying
these certificates pass through to investors, net of certain costs, including servicing and guarantee fees. We invest
19
primarily in residential mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities
to investors such as Home Federal. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. Most of our mortgage-backed securities are either backed by Ginnie
Mae, a United States Government agency, or government-sponsored entities, such as Fannie Mae and Freddie Mac.
Residential mortgage-backed securities issued by United States Government agencies and government-sponsored entities are more liquid than
individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a
risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting
the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Federal Home Loan Bank Stock.
We held common stock of the FHLBCincinnati in connection with our borrowing activities totaling $2.0 million at September 30, 2012. The common stock
of the FHLBCincinnati is carried at cost and classified as restricted equity securities.
Bank-Owned Life
Insurance.
We invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides us non-interest income that is non-taxable. Federal regulations
generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. At September 30, 2012, we had invested $6.7 million in bank-owned life insurance.
Securities Portfolio Composition
. The following table sets forth the composition of our securities portfolio at the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(Dollars in thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government sponsored entities
|
|
$
|
22,250
|
|
|
$
|
22,257
|
|
|
$
|
39,093
|
|
|
$
|
39,331
|
|
|
$
|
16,003
|
|
|
$
|
16,024
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
45,161
|
|
|
|
46,011
|
|
|
|
3,944
|
|
|
|
3,997
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
24,445
|
|
|
|
26,188
|
|
|
|
32,132
|
|
|
|
33,417
|
|
|
|
28,201
|
|
|
|
29,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
91,856
|
|
|
$
|
94,456
|
|
|
$
|
75,169
|
|
|
$
|
76,745
|
|
|
$
|
44,204
|
|
|
$
|
45,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Portfolio Maturities and Yields
. The following table sets forth the contractual
maturities and weighted average yields of our securities portfolio at September 30, 2012. Mortgage-backed securities are anticipated to be repaid in advance of their contractual maturities as a result of projected mortgage loan prepayments.
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
More than One Year
to Five Years
|
|
|
More than Five Years
to Ten Years
|
|
|
More than Ten Years
|
|
|
Total
|
|
September 30, 2012
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
|
(Dollars in Thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government-sponsored entities
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
2,000
|
|
|
|
1.09
|
%
|
|
$
|
15,250
|
|
|
|
0.87
|
%
|
|
$
|
5,000
|
|
|
|
1.00
|
%
|
|
$
|
22,250
|
|
|
|
0.91
|
%
|
Mortgage-backed securities
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
45,161
|
|
|
|
2.10
|
%
|
|
|
45,161
|
|
|
|
2.11
|
%
|
State and political subdivisions
|
|
|
470
|
|
|
|
3.41
|
%
|
|
|
1,728
|
|
|
|
3.37
|
%
|
|
|
10,654
|
|
|
|
3.50
|
%
|
|
|
11,593
|
|
|
|
4.07
|
%
|
|
|
24,445
|
|
|
|
3.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
470
|
|
|
|
|
|
|
$
|
3,728
|
|
|
|
|
|
|
$
|
25,904
|
|
|
|
|
|
|
$
|
61,754
|
|
|
|
|
|
|
$
|
91,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sources of Funds
General.
Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily FHLBCincinnati advances, to
supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained
earnings, income on earning assets and the sale of assets from time to time. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by
prevailing interest rates, market conditions and levels of competition.
Deposits.
Our deposits are generated
primarily from within our primary market area. We offer a selection of deposit accounts, including statement savings accounts, NOW accounts, business checking, certificates of deposit, money market accounts and retirement accounts. Deposit account
terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We have not accepted brokered deposits in the past, although we have the authority to do so.
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and
terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely upon personalized customer service, long-standing relationships with customers, convenient
offices and ATM locations and the favorable image of Home Federal in the community to attract and retain deposits. We have also expanded our products to include debit cards, on-line banking services and mobile banking services for the convenience of
our customers.
The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and
competition. Our ability to gather deposits is impacted by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products. We may use promotional rates to meet
asset/liability and market segment goals.
The variety of rates and terms on the deposit accounts we offer allows us to be
competitive in obtaining funds and responding to changes in consumer demand. Based on our experience, we believe that NOW and demand deposits may be somewhat more stable sources of funding than certificates of deposits.
21
The following table sets forth the distribution of total deposits by account type, at the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
NOW and demand deposits
|
|
$
|
26,683
|
|
|
|
11.28
|
%
|
|
$
|
26,720
|
|
|
|
11.01
|
%
|
|
$
|
21,033
|
|
|
|
9.23
|
%
|
Money market deposits
|
|
|
3,606
|
|
|
|
1.52
|
%
|
|
|
7,230
|
|
|
|
2.98
|
%
|
|
|
6,509
|
|
|
|
2.86
|
%
|
Savings and other deposits
|
|
|
65,393
|
|
|
|
27.65
|
%
|
|
|
59,216
|
|
|
|
24.40
|
%
|
|
|
38,299
|
|
|
|
16.81
|
%
|
Certificates of deposit
|
|
|
114,405
|
|
|
|
48.38
|
%
|
|
|
124,448
|
|
|
|
51.27
|
%
|
|
|
139,171
|
|
|
|
61.09
|
%
|
Retirement accounts
|
|
|
26,385
|
|
|
|
11.16
|
%
|
|
|
25,108
|
|
|
|
10.34
|
%
|
|
|
22,800
|
|
|
|
10.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
236,472
|
|
|
|
100.00
|
%
|
|
$
|
242,722
|
|
|
|
100.00
|
%
|
|
$
|
227,812
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012, the aggregate amount of our outstanding time deposits in amounts greater
than or equal to $100,000 was $67.3 million. The following table sets forth the maturity of these time deposits as of September 30, 2012.
|
|
|
|
|
September 30, 2012
|
|
Certificates of
Deposit
|
|
|
|
(In thousands)
|
|
Maturity Period:
|
|
|
|
|
Three months or less
|
|
$
|
12,088
|
|
Over three through six months
|
|
|
8,945
|
|
Over six through twelve months
|
|
|
14,473
|
|
Over twelve months
|
|
|
31,800
|
|
|
|
|
|
|
Total
|
|
$
|
67,306
|
|
|
|
|
|
|
The following table sets forth our time deposits classified by interest rate as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in Thousands)
|
|
Interest Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1%
|
|
$
|
52,512
|
|
|
$
|
16,524
|
|
|
$
|
61
|
|
1.00% - 1.99%
|
|
|
50,478
|
|
|
|
64,663
|
|
|
|
76,062
|
|
2.00% - 2.99%
|
|
|
35,586
|
|
|
|
63,822
|
|
|
|
58,685
|
|
3.00% - 3.99%
|
|
|
1,920
|
|
|
|
3,097
|
|
|
|
23,130
|
|
4.00% - 4.99%
|
|
|
295
|
|
|
|
421
|
|
|
|
2,784
|
|
5.00% - 5.99%
|
|
|
|
|
|
|
1,029
|
|
|
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,791
|
|
|
$
|
149,556
|
|
|
$
|
161,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
The following table sets forth the amount and maturities of our time deposits at
September 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2012
|
|
|
|
Period to Maturity
|
|
|
|
Less Than
One Year
|
|
|
Over One
Year to
Two Years
|
|
|
Over Two
Years
to
Three Years
|
|
|
Over Three
Years
|
|
|
Total
|
|
|
Percentage
of Total
Certificate
Accounts
|
|
|
|
(Dollars in thousands)
|
|
Interest Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1%
|
|
$
|
36,804
|
|
|
$
|
12,364
|
|
|
$
|
3,342
|
|
|
$
|
|
|
|
$
|
52,510
|
|
|
|
37.30
|
%
|
1.00% - 1.99%
|
|
|
18,648
|
|
|
|
12,422
|
|
|
|
4,213
|
|
|
|
15,195
|
|
|
|
50,478
|
|
|
|
35.85
|
%
|
2.00% - 2.99%
|
|
|
23,250
|
|
|
|
3,788
|
|
|
|
1,235
|
|
|
|
7,315
|
|
|
|
35,588
|
|
|
|
25.28
|
%
|
3.00% - 3.99%
|
|
|
328
|
|
|
|
1,448
|
|
|
|
144
|
|
|
|
|
|
|
|
1,920
|
|
|
|
1.36
|
%
|
4.00% - 4.99%
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295
|
|
|
|
0.21
|
%
|
5.00% - 5.99%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,325
|
|
|
$
|
30,022
|
|
|
$
|
8,934
|
|
|
$
|
22,510
|
|
|
$
|
140,791
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
.
Our borrowings currently consist primarily of advances from the
FHLBCincinnati. We obtain advances from the FHLBCincinnati upon the security of our capital stock in the FHLBCincinnati and certain of our mortgage loans. Such advances may be made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile.
From time to time during recent years, we have utilized short-term borrowings to fund loan demand. To a limited extent, we have also used
borrowings where market conditions permit us to purchase securities and make loans of a similar duration in order to increase our net interest income by the amount of the spread between the asset yield and the borrowing cost. Finally, from time to
time, we have obtained advances with longer terms for asset liability management.
The following table sets forth information
concerning balances and interest rates on our FHLBCincinnati advances at the date and for the noted year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Average amount outstanding during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
20,263
|
|
|
$
|
26,448
|
|
|
$
|
36,408
|
|
Other borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
3.00
|
%
|
|
|
3.02
|
%
|
|
|
2.91
|
%
|
Other borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
17,672
|
|
|
$
|
23,117
|
|
|
$
|
32,205
|
|
Other borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
2.95
|
%
|
|
|
2.95
|
%
|
|
|
2.94
|
%
|
Other borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2012, based on available collateral and our ownership of FHLBCincinnati
common stock, we had access to additional FHLBCincinnati advances of up to $56.0 million.
23
Subsidiary and Other Activities
Home Federal has no subsidiaries.
Expense and Tax Allocation
Home Federal has entered into an agreement with
Poage Bankshares, Inc. to provide it with certain administrative support services for compensation not less than the fair market value of the services provided. In addition, Home Federal and Poage Bankshares have entered into an agreement to
establish a method for allocating and for reimbursing the payment of their consolidated tax liability.
Personnel
As of September 30, 2012, we had 63 full-time employees and 10 part-time employees. Our employees are not represented by any
collective bargaining group. Management believes that we have good relations with our employees.
TAXATION
Federal Taxation
General.
Poage Bankshares and Home Federal are subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Poage Bankshares
and Home Federal.
Method of Accounting
.
For federal income tax purposes, Home Federal currently reports
its income and expenses on the accrual method of accounting and uses a tax year ending September 30th for filing its federal income tax return. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for
bad debt reserves by savings institutions, effective for taxable years beginning after 1995.
Minimum Tax.
The
Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as alternative minimum taxable income. The alternative minimum
tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. At September 30, 2012, Home Federal had alternative minimum tax credit carryforwards of approximately $681,000.
Net Operating Loss Carryovers.
Generally, a financial institution may carry back net operating losses to the preceding two
taxable years and forward to the succeeding 20 taxable years. At September 30, 2012, Home Federal had no net operating loss carryforward for federal income tax purposes.
Corporate Dividends-Received Deduction.
Poage Bankshares will be able to exclude from its income 100% of dividends received from Home Federal as a member of the same affiliated group of
corporations.
Audit of Tax Returns.
Home Federals federal income tax returns have not been audited in the
most recent five-year period.
24
State Taxation
Poage Bankshares is subject to the Kentucky corporation income tax and Limited Liability Entity Tax (LLET). The income of corporations subject to Kentucky income tax is similar to income
reported for federal income tax purposes except that dividend income, among other income items, is exempt from taxation. Corporations pay the greater of the income tax or the LLET. The LLET is the greater of (i) $175 or (ii) the lesser of
(a) $0.095 per $100 of the corporations gross receipts, or (b) $0.75 per $100 of the corporations gross profits. Gross profits equal gross Kentucky receipts reduced by returns and allowances attributable to Kentucky gross
receipts, less Kentucky cost of goods sold. Poage Bankshares, in its capacity as a holding company for a financial institution, will not have a material amount of cost of goods sold.
Home Federal is exempt from both the Kentucky corporation income tax and LLET, but is subject to an annual franchise tax imposed on
federally or state-chartered savings and loan associations, savings banks and other similar institutions operating in Kentucky. The tax is 0.1% of taxable capital stock held as of January 1 each year. Taxable capital stock includes an
institutions undivided profits, surplus and general reserves plus deposits and paid-up stock less deductible items. Deductible items include certain exempt federal obligations and Kentucky municipal bonds. Savings and loans that are subject to
tax both within and without Kentucky must apportion their net capital
.
SUPERVISION AND REGULATION
General.
The federal system of regulation and supervision establishes a comprehensive framework of activities in which Home
Federal may engage and is intended primarily for the protection of depositors and the Federal Deposit Insurance Corporations deposit insurance fund. Home Federal is periodically examined by the Office of the Comptroller of the Currency to
ensure that it satisfies applicable standards with respect to its capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Home Federal also is regulated to a lesser extent by the Board of Governors of the
Federal Reserve System, or Federal Reserve Board, which governs the reserves to be maintained against deposits and other matters. In addition, Home Federal is a member of and owns stock in the FHLBCincinnati, which is one of the twelve
regional banks in the Federal Home Loan Bank System. Home Federals relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, including in matters concerning the
ownership of deposit accounts and the form and content of Home Federals loan documents.
As a savings and loan holding
company, Poage Bankshares is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board. Poage Bankshares will also be subject to the rules and regulations of the Securities and Exchange
Commission under the federal securities laws. Under the Dodd-Frank Act, as discussed below, the Office of Thrift Supervisions functions relating to savings and loan holding companies were transferred to the Federal Reserve Board.
Set forth below are certain material regulatory requirements that are applicable to Home Federal and Poage Bankshares. This description
of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Home Federal and Poage Bankshares. Any change in these laws or regulations, whether by Congress or the applicable
regulatory agencies, could have a material adverse impact on Poage Bankshares, Home Federal and their operations.
Dodd-Frank Act
The Dodd-Frank Act is significantly changing the bank regulatory structure and affecting the lending, investment, trading
and operating activities of financial institutions and their holding companies. The Dodd-Frank Act eliminated our primary federal regulator, the Office of Thrift Supervision, and required Home Federal to be regulated by the Office of the Comptroller
of the Currency (the primary federal regulator for national banks). The Dodd-Frank Act also authorized the Federal Reserve Board to supervise and regulate all savings and loan holding companies, such as Poage Bankshares, in addition to bank holding
companies, which the Federal Reserve Board currently regulates. The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository
subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Bank holding companies with assets of less than $500 million are
exempt from these capital requirements. Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies
with less than $15 billion of assets. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new
leverage and capital requirements within 18 months of the July 21, 2010 passage date of the Dodd-Frank Act. These new leverage and capital requirements must take into account off-balance sheet activities and other risks, including risks
relating to securitized products and derivatives.
25
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers
to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Home Federal, including
the authority to prohibit unfair, deceptive or abusive acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.
Banks and savings institutions with $10 billion or less in assets, such as Home Federal, will continue to be examined for compliance by their applicable bank regulators. The new legislation also weakens the federal preemption available for national
banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.
The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital
of a financial institution. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing
transaction accounts have unlimited deposit insurance through December 31, 2012. The Dodd-Frank Act has increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive
compensation and so-called golden parachute payments, and authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate and solicit votes for their own candidates using a companys
own proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. The Dodd-Frank
Act provided for originators of certain securitized loans to return a percentage of the risk for the transferred loan, directed the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contained a number of reforms
related to mortgage origination.
Federal Banking Regulation
Business Activities.
A federal savings and loan association derives its lending and investment powers from the Home Owners Loan Act, as amended, and the regulations of the Office of
the Comptroller of the Currency. Under these laws and regulations, Home Federal may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain
other assets, subject to applicable limits. Home Federal also may establish subsidiaries that may engage in activities not otherwise permissible for Home Federal, including real estate investment and securities and insurance brokerage. The
Dodd-Frank Act authorized depository institutions to commence paying interest on business checking accounts, effective July 21, 2011.
Capital Requirements.
Office of the Comptroller of the Currency regulations currently require savings and loan associations to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for savings banks receiving the highest rating on the CAMELS rating system), a 4% core capital to risk-weighted assets ratio and an 8% risk-based capital ratio.
The risk-based capital standard for savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as
core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of
0% to 200%, assigned by the Office of the Comptroller of the Currency, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary
capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of
core capital. Additionally, a federal savings and loan association that retains credit risk in
26
connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings and loan association. In assessing an institutions
capital adequacy, the Office of the Comptroller of the Currency takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual associations
where necessary.
At September 30, 2012, Home Federals capital exceeded all applicable requirements.
The federal banking regulators have recently issued proposed rules that, if adopted, will significantly increase regulatory capital
requirements. Among other things, the proposed rules would introduce a new minimum common equity tier 1 capital ratio of 4.5% of risk-weighted assets and increase the minimum tier 1 capital ratio from 4.0% to 6.0% of risk-weighted assets. There
would also be a new capital conservation buffer that would require an institution to hold an additional 2.5% of common equity tier 1 capital to risk-based assets in order to avoid restriction on dividends and executive compensation. The
proposed rules would also impose stricter capital deduction requirements and revise the current risk-weighting categories. The new requirements would be phased in over a period of several years if the proposed rules are finalized and adopted.
Loans-to-One Borrower.
Generally, a federal savings and loan association may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which
generally does not include real estate. As of September 30, 2012, Home Federal was in compliance with its loans-to-one borrower limitations.
Qualified Thrift Lender Test.
As a federal savings and loan association, Home Federal must satisfy the qualified thrift lender, or QTL, test. Under the QTL test, Home Federal
must maintain at least 65% of its portfolio assets in qualified thrift investments (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent
12-month period. Portfolio assets generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the
conduct of the savings banks business.
A federal savings and loan association that fails the QTL test must either
convert to a commercial bank charter or operate under specified restrictions set forth in the Home Owners Loan Act. The Dodd-Frank Act made noncompliance with the QTL test potentially subject to agency enforcement action for a violation of
law. At September 30, 2012, Home Federal satisfied the QTL test with approximately 69.59% of its portfolio assets in qualified thrift investments.
Capital Distributions.
Office of the Comptroller of the Currency regulations govern capital distributions by a savings and loan association, which include cash dividends, stock repurchases
and other transactions charged to the savings and loan associations capital account. A federal savings and loan association must file an application for approval of a capital distribution if:
|
|
|
the total capital distributions for the applicable calendar year exceed the sum of the savings and loan associations net income for that year to
date plus the savings and loan associations retained net income for the preceding two years;
|
|
|
|
the savings and loan association would not be at least adequately capitalized following the distribution;
|
|
|
|
the distribution would violate any applicable statute, regulation, agreement or written regulatory condition; or
|
|
|
|
the savings and loan association is not eligible for expedited treatment of its filings.
|
Even if an application is not otherwise required, every savings and loan association that is a subsidiary of a holding company must still file a notice
with the Federal Reserve Board and Office of the Comptroller of the Currency at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.
27
A notice or application for capital distribution may be disapproved if:
|
|
|
the savings and loan association would be undercapitalized following the distribution;
|
|
|
|
the proposed capital distribution raises safety and soundness concerns; or
|
|
|
|
the capital distribution would violate a prohibition contained in any statute, regulation or regulatory condition.
|
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution,
if after making such distribution the institution would be undercapitalized.
Liquidity.
A federal savings and
loan association is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.
Community Reinvestment Act and Fair Lending Laws.
All savings institutions have a responsibility under the Community
Reinvestment Act and related regulations of the Office of the Comptroller of the Currency to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings and
loan association, the Office of the Comptroller of the Currency is required to assess the institutions record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings and loan associations failure to comply with the provisions of the Community Reinvestment Act could, at a minimum,
result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the
Office of the Comptroller of the Currency, as well as other federal regulatory agencies and the Department of Justice. Home Federal received a satisfactory Community Reinvestment Act rating in its most recent federal examination. The Community
Reinvestment Act requires all Federal Deposit Insurance-insured institutions to publicly disclose their rating.
Transactions with Related Parties.
A savings and loan associations authority to engage in transactions with its
affiliates is limited by Office of the Comptroller of the Currency regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Federal Reserve Board. An affiliate is generally a company
that controls, is controlled by, or is under common control with an insured depository institution such as Home Federal. Poage Bankshares is an affiliate of Home Federal. In general, transactions between an insured depository institution and its
affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliate are limited to 10% of the institutions unimpaired capital and unimpaired
surplus for transactions with any one affiliate, and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction
must usually be provided by affiliates in order to receive loans from the depository institution. In addition, Office of the Comptroller of the Currency regulations prohibit a savings and loan association from lending to any of its affiliates that
are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking
practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. The Office of the Comptroller of the Currency requires savings banks to maintain detailed records of
all transactions with affiliates.
Home Federals authority to extend credit to its directors, executive officers and 10%
stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these
provisions require that extensions of credit to insiders:
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be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and
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not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of
Home Federals capital.
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In addition, extensions of credit in excess of certain limits must be approved by
Home Federals Board of Directors. Home Federal is in compliance with these credit limitations.
Enforcement.
The Office of the Comptroller of the Currency has primary enforcement responsibility over Federal Deposit Insurance Corporation insured savings and loan associations and has the authority to bring enforcement action against all
institution-affiliated parties, including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on the savings and loan
association. Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution, and the appointment of a
receiver or conservator. Civil money penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The Federal
Deposit Insurance Corporation also has the authority to terminate deposit insurance or to recommend to the Director of the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances.
Standards for Safety and Soundness.
Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among
other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate.
Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls
and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to
meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal
banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money
penalties.
Prompt Corrective Action Regulations
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Under prompt corrective action regulations, the Office
of the Comptroller of the Currency is authorized and, under certain circumstances, required to take supervisory actions against undercapitalized savings and loan associations. For this purpose, a federal savings and loan association is placed in one
of the following five categories based on the savings banks capital:
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well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);
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adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);
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undercapitalized (less than 4% leverage capital, 4% Tier 1 risk-based capital or 8% total risk-based capital);
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significantly undercapitalized (less than 3% leverage capital, 3% Tier 1 risk-based capital or 6% total risk-based capital); and
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critically undercapitalized (less than 2% tangible capital).
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The recently proposed rules discussed under Capital Requirements that would increase regulatory capital requirements
would, if adopted, adjust the prompt corrective action categories accordingly.
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Generally, the Office of the Comptroller of the Currency is required to appoint a receiver
or conservator for a savings bank that is critically undercapitalized within specific time frames. The regulations also provide that a capital restoration plan must be filed with the Office of the Comptroller of the Currency within 45
days of the date a savings bank receives notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Any holding company for a savings and loan holding company that is
required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the associations assets at the time it was notified or deemed to be undercapitalized by the Office of the Comptroller of the Currency, or the
amount necessary to restore the savings bank to adequately capitalized status. This guarantee remains in place until the Office of the Comptroller of the Currency notifies the federal saving and loan association that it has maintained adequately
capitalized status for each of four consecutive calendar quarters, and the Office of the Comptroller of the Currency has the authority to require payment and collect payment under the guarantee. Failure by a holding company to provide the required
guarantee will result in certain operating restrictions on the savings and loan association, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations.
The Office of the Comptroller of the Currency may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive
officers and directors.
At September 30, 2012, Home Federal met the criteria for being considered
well-capitalized.
Insurance of Deposit Accounts.
Deposit accounts in Home Federal are insured by
the Federal Deposit Insurance Corporation generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The Federal Deposit Insurance Corporation charges the insured
financial institutions premiums to maintain the Deposit Insurance Fund.
Under the Federal Deposit Insurance
Corporations current risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Assessments are based on an
individual institutions category, with the institutions perceived as riskiest paying higher assessments.
As part of its
plan to restore the Deposit Insurance Fund in the wake of the large number of bank failures following the financial crisis, the Federal Deposit Insurance Corporation imposed a special assessment of 5 basis points for the second quarter of 2009. In
addition, the Federal Deposit Insurance Corporation required all insured institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. As part of this prepayment, the Federal
Deposit Insurance Corporation assumed a 5% annual growth in the assessment base and applied a 3 basis point increase in assessment rates effective January 1, 2011.
On April 1, 2011, the Federal Deposit Insurance Corporation implemented rulemaking under the Dodd-Frank Act to reform the deposit insurance assessment system. The final rule redefined the assessment
base used for calculating deposit insurance assessments. Specifically, the rule bases assessments on an institutions total assets less tangible capital, as opposed to total deposits. Since the new base is larger than the prior base, the
Federal Deposit Insurance Corporation also proposed lowering assessment rates so that the rules would not significantly alter the total amount of revenue collected from the industry. The new assessment scale ranges from 2.5 basis points for the
least risky institutions to 45 basis points for the riskiest. The rule is expected to benefit smaller financial institutions, which typically rely more on deposits for funding, and shift more of the burden for supporting the insurance fund to larger
institutions, which have greater access to non-deposit sources of funding.
The Dodd-Frank Act also extended the unlimited
deposit insurance on non-interest bearing transaction accounts through December 31, 2012.
Insurance of deposits may be
terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the Federal Deposit Insurance Corporation. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
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In addition to the Federal Deposit Insurance Corporation assessments, the Financing
Corporation (FICO) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to
recapitalize the former Federal Savings and Loan Insurance Corporation. For the quarter ended September 30, 2012, the annualized FICO assessment rate equaled 1.485 basis point for each $100 in domestic deposits maintained at an institution.
Beginning with the fourth quarter of 2011, the FICO assessment will be based on total assets less tangible capital instead of deposits. The fourth quarter 2012 FICO assessment rate is 0.59 basis point. The bonds issued by the FICO are due to mature
in 2017 through 2019.
Prohibitions Against Tying Arrangements
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Federal Deposit Insurance Corporation
insured savings and loan associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home Loan Bank System.
Home Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System
provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the FHLBCincinnati, Home Federal is required to acquire and hold shares of capital stock in the
Federal Home Loan Bank. As of September 30, 2012, Home Federal was in compliance with this requirement.
Other Regulations
Interest and other charges collected or contracted for by Home Federal are subject to state usury laws and federal laws
concerning interest rates. Home Federals operations are also subject to federal laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Truth in Savings Act; and
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rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
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The operations of Home Federal also are subject to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying
with administrative subpoenas of financial records;
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and
customers rights and liabilities arising from the use of automated teller machines and other electronic banking services;
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Check Clearing for the
21
st
Century Act (also known as Check 21),
which gives substitute checks, such as digital check images and copies made from that image, the same legal standing as the original paper check;
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The USA PATRIOT Act, which requires savings and loan associations operating to, among other things, establish broadened anti-money laundering
compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial
institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
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The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third
parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institutions privacy policy and provide such
customers the opportunity to opt out of the sharing of certain personal financial information with unaffiliated third parties.
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Holding Company Regulation
General
. Poage Bankshares is a
non-diversified savings and loan holding company within the meaning of the Home Owners Loan Act. As such, Poage Bankshares is registered with the Federal Reserve Board and subject to Federal Reserve Board regulations, examinations, supervision
and reporting requirements. In addition, the Federal Reserve Board has enforcement authority over Poage Bankshares and its subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings institution.
Permissible Activities.
Under present
law, the business activities of Poage Bankshares are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan
holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a
financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Federal
Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations.
Federal law prohibits a
savings and loan holding company, including Poage Bankshares, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the
Federal Reserve Board. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or
retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of
the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two exceptions:
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the approval of interstate supervisory acquisitions by savings and loan holding companies; and
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the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
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The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
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Savings and loan holding companies have not historically been subjected to consolidated
regulatory capital requirements. However, the Dodd-Frank Act requires the Federal Reserve Board to set for all depository institution holding companies minimum consolidated capital levels that are as stringent as those required for the insured
depository subsidiaries. The components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions, which would exclude instruments such as trust preferred
securities and cumulative preferred stock. Instruments issued before May 19, 2010 are grandfathered for companies of consolidated assets of $15 billion or less. Bank holding companies with assets of less than $500 million are exempt from the
consolidated capital requirements. Holding companies that were not regulated by the Federal Reserve Board as of May 19, 2010 receive a five year phase-in from the July 21, 2010 date of enactment of the Dodd-Frank Act. The recently proposed
rules discussed under Federal Banking RegulationCapital Requirements that would increase regulatory capital requirements would, if adopted, apply regulatory capital requirements to savings and loan holding companies as
required by the Dodd-Frank Act.
The Dodd-Frank Act extends to savings and loan holding companies the Federal Reserve
Boards source of strength doctrine, which has long applied to bank holding companies. The regulatory agencies must promulgate regulations implementing the source of strength policy, which requires holding companies to
act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies that it has made applicable to savings and loan holding companies as well. In
generally, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organizations capital needs, asset quality and
overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the companys net income for the past four quarters, net of dividends previously paid over
that period, is insufficient to fully fund the dividend or the companys overall rate of earnings retention is inconsistent with the companys capital needs and overall financial condition. The ability of a holding company to pay dividends
may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of Poage Bankshares to pay dividends or otherwise engage in capital distributions.
Federal Securities Laws
Our common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We will be subject
to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As
directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer will be required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities
and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over
financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports
about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
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Risks Related to Our
Business
Future Changes in Interest Rates Could Reduce Our Profits.
Future changes in interest rates could impact our financial condition and results of operations.
Net income is the amount by which net interest income and non-interest income exceeds non-interest expense and the provision for loan
losses. Net interest income makes up a majority of our income and is based on the difference between:
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interest income earned on interest-earning assets, such as loans and securities; and
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interest expense paid on interest-bearing liabilities, such as deposits and borrowings.
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We are vulnerable to changes in interest rates including the shape of the yield curve because of a mismatch between the terms to
repricing of our assets and liabilities. Historically, our liabilities repriced more quickly than our assets, which made us vulnerable to increases in interest rates. For the years ended September 30, 2012 and 2011, our net interest margin was
3.22% and 3.08%, respectively. Our Asset/Liability Management Committee utilizes a computer simulation model to provide an analysis of estimated changes in net interest income in various interest rate scenarios. At September 30, 2012, in the
event of an immediate 100 basis point decrease in interest rates, our model projects an increase in our net portfolio value of $2,043 million, or 4.1%. In the event of an immediate 200 basis point increase in interest rates, our model projects a
decrease in our net portfolio value of $7,919 million, or 15.8%.
Changes in interest rates can affect the average life of
loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This
creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand
and/or make it more difficult for borrowers to repay adjustable-rate loans.
We Have Increased and Plan to Continue to Increase Our Levels
of Commercial Real Estate, Multi-Family, Commercial Business and Construction and Land Loans, Which in Turn Increases Our Exposure to Credit Risks.
At September 30, 2012, our portfolio of commercial real estate, multi-family, commercial business and construction and land loans totaled $25.3 million, or 13.8% of our total loans, compared to $20.7
million, or 11.2% of our total loans at September 30, 2011. We intend to continue to emphasize the origination of these types of loans consistent with safety and soundness.
These loans generally expose a lender to a greater risk of loss than one- to four-family residential loans. Repayment of such loans
generally depends, in large part, on sufficient income from the property or the borrowers business to cover operating expenses and debt service. These types of loans typically involve larger loan balances to single borrowers or groups of
related borrowers compared to one- to four-family residential mortgage loans. Changes in economic conditions that are beyond the control of the borrower and lender could affect the value of the security for the loan, the future cash flow of the
affected property or business, or the marketability of a construction project with respect to loans originated for the acquisition and development of property. As we increase our portfolio of these loans, we may experience higher levels of
non-performing assets and/or loan losses. Finally, a significant portion of our commercial real estate, multi-family, commercial business and construction and land loan portfolio is unseasoned, meaning that such loans have been originated recently.
It is difficult to assess the future performance of this part of our loan portfolio, and these loans may have delinquency or charge-off levels above our historical experience.
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We target our business lending and marketing strategy towards small- to medium-sized
businesses. These small- to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, our results of operations
and financial condition may be adversely affected. In addition, we expect to continue to incur additional personnel expenses as a result of our expansion of this type of lending, as we have recently hired a Chief Credit Officer and a Retail Lending
Manager, and expect to hire additional personnel to support our commercial real estate, multi-family, commercial business and construction and land lending operations.
We may not be successful in executing our plan to increase significantly the percentage of our one- to four-family residential mortgage loans with adjustable-rate mortgages, which could increase our
exposure to interest rate risk.
In order to reduce our vulnerability to changes in interest rates, in 2009, we changed our
business strategy to increase our focus on adjustable-rate mortgage loans. In addition, in fiscal year 2010, we began selling substantially all of our originated fixed-rate one- to four-family residential mortgage loans.
Historically, it has often been difficult for thrift institutions to originate adjustable-rate mortgage loans with a spread that compares
favorably with the cost of funds. In addition, borrower demand for adjustable-rate mortgage loans decreases significantly during periods of low interest rates, including the current low interest rate environment. During the year ended
September 30, 2012, we were able to originate $22.1 million of adjustable-rate mortgage loans, most of which carried rates that adjust annually at a spread of 3.55% over the applicable index (the weekly average yield on United States Treasury
securities). At September 30, 2012, $69.6 million, or 21.9% of our assets consisted of adjustable-rate mortgage loans.
Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they
periodically reprice, as interest rates increase the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan
and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan
documents. Moreover, the interest rates on most of our adjustable-rate loans do not adjust for up to five years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates
may be limited during periods of rapidly rising interest rates.
Our loan portfolio has greater risk than those of many savings
institutions due to the substantial number of automobile loans in our portfolio.
Our loan portfolio includes a substantial
number of motor vehicle loans, as well as other consumer loans. At September 30, 2012, our consumer loans totaled $15.5 million, or 8.5% of our total loan portfolio, of which motor vehicle loans totaled $7.0 million, or 3.8% of total loans.
Automobile loans decreased by $0.3 million from September 30, 2011 to September 30, 2012, and represented a small portion of the overall decrease in our loan portfolio.
As of September 30, 2012, we had $28,000 of motor vehicle loans delinquent 60 days or more, which was 1.9% of total delinquent loans
60 days or more past due. For the year ended September 30, 2012, we had charge-offs of motor vehicle loans totaling $28,000, representing 4.4% of total charge-offs for the period. As we maintain or increase our automobile loan portfolio, we may
experience increased delinquencies and charge-offs in future periods.
Consumer loans generally have a greater risk of loss or
default than one- to four-family residential real estate loans, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles. We face the risk that any collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance. Thus, the recovery and sale of such property could be insufficient to compensate us for the principal outstanding on these loans. Furthermore, the application of various federal and state
laws, including bankruptcy and insolvency laws, may limit our ability to recover on such loans. As a result of our relatively large portfolio of consumer loans, it may become necessary to increase our provision for loan losses in the event our
losses on these loans increase, which would reduce our profits.
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If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Will
Decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and
delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance.
While our allowance for loan losses was 1.1% of total loans at September 30, 2012, future additions to our allowance could materially decrease our net income.
In addition, the Office of the Comptroller of the Currency periodically reviews our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan
charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by regulatory authorities might have a material adverse effect on our financial condition and results of operations.
The United States Economy Remains Weak and Unemployment Levels Are High. Continued Adverse Economic Conditions, Especially Affecting Our Geographic
Market Area, Could Adversely Affect Our Financial Condition and Results of Operations.
The United States experienced a
severe economic recession in 2008 and 2009, the effects of which have continued. Recent growth has been slow and unemployment remains at high levels; as a result, economic recovery is expected to be slow. Loan portfolio quality has remained poor at
many financial institutions reflecting, in part, the weak United States economy and high unemployment rates. In addition, the value of real estate collateral supporting many commercial loans and home mortgages throughout the United States has
declined. The real estate downturn also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans in many markets across the United States.
Our lending market area consists of Greenup, Lawrence and Boyd Counties in Kentucky, and Lawrence and Scioto Counties in Ohio. These five
counties have experienced minimal changes in population and households from 2000 to 2010, including population growth or shrinkage of 1.9%, 5.2%, -1.9%, 0.1% and -3.1%, respectively. In addition, the five counties have recorded only modest changes
in the number of households from 2000 to 2010, consisting of household growth or shrinkage of 5.7%, 8.9%, 0.3%, 2.9% and -1.5%, respectively. While we did not originate or invest in sub-prime mortgages, our lending business is tied, in part, to the
real estate market, which has been weakened by the recession. While we believe our lending market area has not been as adversely affected by the real estate crisis as some other areas of the country, real estate values and demand have softened and
we remain vulnerable to adverse changes in the real estate market. In addition, a significant weakening in general economic conditions such as inflation, recession, unemployment or other factors beyond our control, could negatively affect our
financial results. Finally, negative developments in the securities markets could adversely affect the value of our securities.
If we fail
to maintain an effective system of internal and disclosure controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting,
which would harm our business and the trading price of our securities.
Effective internal control over financial reporting
and disclosure controls and procedures are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our
reputation and operating results would be harmed. We continually review and analyze our internal control over financial reporting for Sarbanes-Oxley Section 404 compliance. As part of that process we discovered and disclosed material weaknesses
and significant deficiencies in our internal control. Material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the
companys annual or interim financial statements will not be prevented or detected in a timely basis.
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As a result of weaknesses that may be identified in our internal control, we may also
identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover weaknesses, we will make efforts to improve our internal and disclosure control. However, there is no assurance that
we will be successful. Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could
affect our ability to remain listed with The NASDAQ Capital Market. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the
trading price of our securities.
Financial Reform Legislation Recently Enacted by Congress Will Result in New Laws and Regulations That
Are Expected to Increase Our Costs of Operations.
Congress enacted the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act) in 2010. This new law significantly changed the bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding
companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in
drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
Also effective one year after the date of enactment was a provision of the Dodd-Frank Act that eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have
interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse effect on our interest expense.
The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments are now be based on the average consolidated total assets less tangible equity
capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and
non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.
The Dodd-Frank Act
requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called golden parachute payments, and authorizes the Securities and Exchange Commission to promulgate rules that would allow
stockholders to nominate their own candidates using a companys proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless
of whether the company is publicly traded or not.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with
broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the
authority to prohibit unfair, deceptive or abusive acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks
and savings institutions with $10 billion or less in assets will continue to be examined for compliance by their applicable bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks
and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet-to-be-written implementing rules and
regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.
The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules are uncertain.
On June 7, 2012, the Federal Reserve Board approved proposed rules that would substantially amend the regulatory risk-based capital
rules applicable to us. The Office of the Comptroller of the Currency subsequently approved these proposed rules on June 12, 2012. The proposed rules implement the Basel III regulatory capital
37
reforms and changes required by the Dodd-Frank Act. Basel III was initially intended to be implemented beginning January 1, 2013, however on November 9, 2012, the U.S. federal banking
agencies announced that they do not expect that any of the proposed rules would become effective on January 1, 2013.
Various provisions of the Dodd-Frank Act increase the capital requirements of financial institutions. The proposed rules include new
minimum risk-based capital and leverage ratios, which would be phased in during 2013 and 2014, and would refine the definition of what constitutes capital for purposes of calculating those ratios. The proposed new minimum capital level
requirements applicable to Home Federal under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from
current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a capital conservation buffer of 2.5% above the new regulatory minimum capital ratios, and would result in the
following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in
January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses
if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions. While the proposed Basel III changes and other regulatory capital
requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict when or how any new standards will ultimately be applied to Home Federal.
In addition, in the current economic and regulatory environment, bank regulators may impose capital requirements that are more stringent
than those required by applicable existing regulations.
The application of more stringent capital requirements for Home
Federal could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of
liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to
asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our
ability to make distributions, including paying out dividends or buying back shares.
The expiration of full FDIC insurance on certain
non-interest-bearing transaction accounts may increase our costs and reduce our liquidity levels. Increased FDIC insurance assessments could significantly increase our expenses.
On December 31, 2012, full FDIC insurance on certain non-interest-bearing transaction accounts is scheduled to expire. Full
insurance coverage does not apply to money market deposit accounts or negotiable order of withdrawal accounts. The reduction in FDIC insurance on other types of accounts may cause depositors to place such funds in fully insured interest-bearing
accounts, which would increase our costs of funds and negatively affect our results of operations, or may cause depositors to withdraw their deposits and invest uninsured funds in investments perceived as being more secure, such as securities issued
by the United States Treasury. This may reduce our liquidity, or require us to pay higher interest rates to maintain our liquidity by retaining deposits.
In addition, the FDIC may increase deposit insurance fees and expenses. In particular, if our regulators issue downgraded ratings of Home Federal in connection with their examinations, the FDIC could
impose significant additional fees and assessments on us.
Strong Competition Within Our Market Areas May Limit Our Growth and
Profitability.
Competition in the banking and financial services industry is intense. In our market areas, we compete with
commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. In our five-county market area,
including Boyd, Greenup and Lawrence Counties in Kentucky and Lawrence and Scioto Counties in Ohio, there are a total of 20 commercial bank and savings institution competitors, along with 10 credit
38
union competitors. The commercial banks and savings institutions operate a total of 91 branch offices in those counties, containing $2.5 billion of deposits. The commercial bank and
savings institution competitors include those larger institutions with nationwide or regional operations, and local community institutions such as us that serve the local markets only. The credit union competitors consist of local community
based institutions with total deposits of approximately $0.6 billion. The asset size of the largest credit union competitor is approximately $244 million. Some of our competitors have greater name recognition and market presence that benefit
them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain
profitable on a long-term basis. Our profitability depends upon our continued ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin
and profitability could be adversely affected. For additional information see Item 1. BusinessHome Federal Savings and Loan AssociationMarket Area and Competition.
The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes
and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance
(both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment
systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of
products and services as well as better pricing for those products and services than we can.
We are a community bank and our ability to
maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in
part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is
negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.
We Depend On Our Management Team To Implement Our Business Strategy And Execute Successful Operations And We Could Be Harmed By The Loss Of Their Services.
We are dependent upon the services of our senior management team. Our strategy and operations are directed by the senior management team.
Any loss of the services of our president and chief executive officer or other members of our senior management team could impact our ability to implement our business strategy, and have a material adverse effect on our results of operations and our
ability to compete in our markets.
We Operate in a Highly Regulated Environment and May Be Adversely Affected by Changes in Laws and
Regulations.
We are subject to extensive regulation, supervision, and examination by the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board. Such regulators govern the activities in which we may engage, primarily for the protection of depositors. These regulatory authorities have extensive discretion in
connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a financial institution, the classification of assets by a financial institution, and the adequacy of a financial
institutions allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on us and our operations. Because our business is highly
regulated, the applicable laws, rules and regulations are subject to regular modification and change. Laws, rules and regulations may be adopted in the future that could make compliance more difficult or expensive or otherwise adversely affect our
business, financial condition or prospects.
39
Changes in Accounting Standards Could Affect Reported Earnings.
The accounting standard setters, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other
regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. These changes can be hard to predict and can materially affect how we record and report our
financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.
The
Implementation of Stock-Based Benefit Plans May Dilute Your Ownership Interest.
We intend to adopt one or more stock-based benefit plans,
which will allow participants to be awarded shares of common stock (at no cost to them) and/or options to purchase shares of our common stock. If these stock-based benefit plans are funded from the issuance of authorized but unissued shares of
common stock, stockholders would experience a reduction in ownership interest. Although the implementation of the stock-based benefit plan will be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans
adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
As of
September 30, 2012, the net book value of our offices was $5.3 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Leased or
Owned
|
|
|
Year Acquired
or Leased
|
|
|
Square
Footage
|
|
|
Net Book Value
of Real Property
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Main office:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1500 Carter Avenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ashland, Kentucky
|
|
|
Owned
|
|
|
|
2007
|
|
|
|
12,000
|
|
|
$
|
3,765
|
|
Branch offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1608 Argilite Road,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flatwoods, Kentucky
|
|
|
Owned
|
|
|
|
1969
|
|
|
|
1,728
|
|
|
$
|
281
|
|
US 23, South Shore, Kentucky
|
|
|
Owned
|
|
|
|
1978
|
|
|
|
1,575
|
|
|
$
|
81
|
|
Main Cross, Louisa, Kentucky
|
|
|
Owned
|
|
|
|
1984
|
|
|
|
1,748
|
|
|
$
|
142
|
|
6628 US 60, Summit, Kentucky
|
|
|
Owned
|
|
|
|
1993
|
|
|
|
8,640
|
|
|
$
|
528
|
|
501 US 23, Greenup, Kentucky
|
|
|
Owned
|
|
|
|
2008
|
|
|
|
1,120
|
|
|
$
|
496
|
|
We believe that current facilities are adequate to meet our present and foreseeable needs, subject to
possible future expansion.
40
ITEM 3.
|
LEGAL PROCEEDINGS
|
We are
not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. At September 30, 2012, we were not involved in any legal proceedings, the outcome of
which would be material to our financial condition or results of operations.
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
PART II
ITEM 5.
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
(a) Our shares of common stock are traded on the NASDAQ Capital Market under the symbol PBSK. The approximate number of holders of record of Poage
Bankshares, Inc.s common stock as of September 30, 2012 was 331. Certain shares of Poage Bankshares, Inc. are held in nominee or street name and accordingly, the number of beneficial owners of such shares is not
known or included in the foregoing number. The following table presents quarterly market information for Poage Bankshares, Inc. common stock for each quarter of the previous fiscal year. Poage Bankshares, Inc. began trading on the NASDAQ Capital
Market on September 13, 2011. The following information was provided by the NASDAQ Stock Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 30, 2012
|
|
High
|
|
|
Low
|
|
|
Closing
Price
|
|
|
Dividends
Declared
|
|
Quarter ended September 30, 2012
|
|
$
|
12.32
|
|
|
$
|
12.20
|
|
|
$
|
12.32
|
|
|
$
|
0.04
|
|
Quarter ended June 30, 2012
|
|
|
12.67
|
|
|
|
12.63
|
|
|
|
12.63
|
|
|
|
0.04
|
|
Quarter ended March 31, 2012
|
|
|
12.34
|
|
|
|
12.30
|
|
|
|
12.34
|
|
|
|
0.04
|
|
Quarter ended December 31, 2011
|
|
|
11.00
|
|
|
|
10.85
|
|
|
|
10.92
|
|
|
|
|
|
Quarter ended September 31, 2011
|
|
|
11.02
|
|
|
|
11.00
|
|
|
|
11.02
|
|
|
|
|
|
Dividend payments by Poage Bankshares, Inc. are dependent primarily on dividends it receives from Home
Federal, because Poage Bankshares, Inc. has no source of income other than dividends from Home Federal, earnings from the investment of proceeds from the sale of shares of common stock retained by Poage Bankshares, Inc., and interest payments with
respect to Poage Bankshares Inc.s loan to the Employee Stock Ownership Plan. For more information on regulatory restrictions regarding the payment of dividends, see Item 1. BusinessSupervision and RegulationFederal Banking
RegulationCapital Distributions and Holding Company RegulationPermissible Activities.
Other than its employee stock ownership plan, Poage Bankshares, Inc. does not have any equity compensation plans that were not approved
by stockholders.
(c)
|
Share repurchases. None.
|
41
ITEM 6.
|
SELECTED FINANCIAL DATA
|
The following tables set forth selected historical financial and other data of Home Federal for the years and at the dates indicated. The
information at September 30, 2012 and 2011 and for the fiscal years ended September 30, 2012 and 2011 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto of Poage
Bankshares that appear in this Annual Report on Form 10-K. The information at September 30, 2010, 2009 and 2008 and for the fiscal years ended September 30, 2010, 2009 and 2008 is derived in part from audited financial statements that do
not appear in this Annual Report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
|
(Dollars in thousands)
|
|
Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
317,159
|
|
|
$
|
327,437
|
|
|
$
|
290,767
|
|
|
$
|
278,665
|
|
|
$
|
231,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
23,430
|
|
|
|
48,440
|
|
|
|
43,233
|
|
|
|
18,715
|
|
|
|
2,200
|
|
Investment securities
|
|
|
94,456
|
|
|
|
76,745
|
|
|
|
45,234
|
|
|
|
77,684
|
|
|
|
101,666
|
|
Loans held for sale
|
|
|
719
|
|
|
|
1,012
|
|
|
|
1,701
|
|
|
|
166,484
|
|
|
|
|
|
Loans receivable, net
|
|
|
179,998
|
|
|
|
183,023
|
|
|
|
181,865
|
|
|
|
1,666,484
|
|
|
|
111,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
236,472
|
|
|
|
242,722
|
|
|
|
227,812
|
|
|
|
209,698
|
|
|
|
179,119
|
|
Federal Home Loan Bank advances
|
|
|
17,672
|
|
|
|
23,117
|
|
|
|
32,205
|
|
|
|
39,368
|
|
|
|
27,149
|
|
Retained earnings
|
|
|
29,416
|
|
|
|
28,242
|
|
|
|
26,688
|
|
|
|
24,557
|
|
|
|
23,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
60,582
|
|
|
|
58,573
|
|
|
|
27,367
|
|
|
|
26,558
|
|
|
|
23,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
|
(Dollars in thousands)
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
12,983
|
|
|
$
|
12,912
|
|
|
$
|
13,716
|
|
|
$
|
13,318
|
|
|
$
|
11,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,253
|
|
|
|
4,530
|
|
|
|
5,571
|
|
|
|
6,603
|
|
|
|
7,367
|
|
Net interest income
|
|
|
9,730
|
|
|
|
8,382
|
|
|
|
8,145
|
|
|
|
6,715
|
|
|
|
4,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
902
|
|
|
|
615
|
|
|
|
650
|
|
|
|
312
|
|
|
|
102
|
|
Net interest income after provision for loan losses
|
|
|
8,828
|
|
|
|
7,767
|
|
|
|
7,495
|
|
|
|
6,403
|
|
|
|
4,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
1,442
|
|
|
|
1,067
|
|
|
|
3,111
|
|
|
|
1,090
|
|
|
|
562
|
|
Non-interest expenses
|
|
|
8,284
|
|
|
|
7,071
|
|
|
|
7,854
|
|
|
|
5,792
|
|
|
|
4,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,986
|
|
|
|
1,763
|
|
|
|
2,756
|
|
|
|
1,701
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit)
|
|
|
407
|
|
|
|
209
|
|
|
|
622
|
|
|
|
257
|
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,579
|
|
|
|
1,554
|
|
|
|
2,130
|
|
|
|
1,444
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
(Revised)
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.49
|
%
|
|
|
0.52
|
%
|
|
|
0.76
|
%
|
|
|
0.57
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
2.57
|
%
|
|
|
5.49
|
%
|
|
|
7.93
|
%
|
|
|
5.78
|
%
|
|
|
1.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (1)
|
|
|
3.01
|
%
|
|
|
3.04
|
%
|
|
|
3.00
|
%
|
|
|
2.71
|
%
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (2)
|
|
|
3.22
|
%
|
|
|
3.08
|
%
|
|
|
3.10
|
%
|
|
|
2.85
|
%
|
|
|
1.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense to average assets
|
|
|
2.56
|
%
|
|
|
2.36
|
%
|
|
|
2.79
|
%
|
|
|
2.29
|
%
|
|
|
1.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio (3)
|
|
|
74.15
|
%
|
|
|
74.83
|
%
|
|
|
69.78
|
%
|
|
|
74.21
|
%
|
|
|
93.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earnings assets to average interest-bearing liabilities
|
|
|
119.47
|
%
|
|
|
101.99
|
%
|
|
|
104.64
|
%
|
|
|
104.99
|
%
|
|
|
107.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average assets
|
|
|
18.99
|
%
|
|
|
9.46
|
%
|
|
|
9.55
|
%
|
|
|
9.89
|
%
|
|
|
10.37
|
%
|
|
|
|
|
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital to risk-weighted assets
|
|
|
29.29
|
%
|
|
|
28.19
|
%
|
|
|
19.49
|
%
|
|
|
18.68
|
%
|
|
|
22.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-weighted assets
|
|
|
28.03
|
%
|
|
|
27.11
|
%
|
|
|
18.70
|
%
|
|
|
18.28
|
%
|
|
|
22.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to adjusted total assets
|
|
|
13.78
|
%
|
|
|
12.72
|
%
|
|
|
9.20
|
%
|
|
|
8.94
|
%
|
|
|
10.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital to adjusted total assets
|
|
|
N/A
|
|
|
|
12.72
|
%
|
|
|
9.20
|
%
|
|
|
8.94
|
%
|
|
|
10.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percentage of total loans
|
|
|
1.10
|
%
|
|
|
0.90
|
%
|
|
|
0.62
|
%
|
|
|
0.33
|
%
|
|
|
0.23
|
%
|
Allowance for loan losses as a percentage of nonperforming loans
|
|
|
153.21
|
%
|
|
|
61.48
|
%
|
|
|
50.85
|
%
|
|
|
70.25
|
%
|
|
|
65.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries to average outstanding loans during the period
|
|
|
0.31
|
%
|
|
|
0.05
|
%
|
|
|
0.04
|
%
|
|
|
0.01
|
%
|
|
|
0.02
|
%
|
Non-performing loans as a percent of total loans
|
|
|
0.72
|
%
|
|
|
1.46
|
%
|
|
|
1.22
|
%
|
|
|
0.47
|
%
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets as a percent of total assets
|
|
|
0.73
|
%
|
|
|
0.85
|
%
|
|
|
0.84
|
%
|
|
|
0.34
|
%
|
|
|
0.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of offices
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
(1)
|
Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.
|
(2)
|
Represents net interest income as a percent of average interest-earning assets.
|
(3)
|
Represents noninterest expense divided by the sum of net interest income and noninterest income.
|
ITEM 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview
We have historically operated as a traditional thrift institution
headquartered in Ashland, Kentucky. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, and to a lesser extent,
borrowings, in one- to four-family residential mortgage loans, commercial and multi-family real estate loans, commercial business loans, consumer loans, consisting primarily of automobile loans, home equity loans and lines of credit, and
construction loans. We also purchase investment securities consisting primarily of securities issued by United States Government agencies and government sponsored entities, including obligations of state and political subdivisions and
mortgage-backed securities. At September 30, 2012, we had total assets of $317.2 million, total deposits of $236.5 million and total equity of $60.6 million.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on
our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts,
net gain on sales of securities and loans, income from company-owned life insurance and miscellaneous other income. Non-interest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy and equipment,
data processing, federal deposit insurance, foreclosed assets, advertising, professional and accounting fees, and other operating expenses.
43
Other than our loans for the construction of one- to four-family properties, we do not offer
interest only mortgage loans (where the borrower pays only interest for an initial period, after which the loan converts to a fully amortizing loan) on one- to four-family residential properties. We also do not offer loans that provide
for negative amortization of principal, such as Option ARM loans, where the borrower can pay less than the interest owed on his or her loan, resulting in an increased principal balance during the life of the loan. We do not offer
subprime loans (i.e., loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity
as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation, such as little or no verification of income).
Business Strategy
Highlights of our current business strategy include the following:
|
|
|
Continuing to emphasize one- to four-family residential mortgage loans while increasing our holdings of such loans with adjustable rates.
We have been primarily a one- to four-family residential mortgage lender to borrowers in our market area. As of September 30, 2012, $141.3 million, or 44.5%, of our total assets consisted of one- to four-family residential mortgage
loans, compared to $147.7 million, or 45.1%, of total assets at September 30, 2011.
|
We historically
have held primarily fixed-rate loans in our one- to four-family residential mortgage loan portfolio. However, in order to better manage the interest rate sensitivity of our loan portfolio, in 2009 we began to increase our emphasis on adjustable-rate
mortgage loan originations, subject to demand for such loans in a lower rate interest rate environment. In addition, in fiscal year 2010, we began selling substantially all of our new fixed-rate one- to four-family residential mortgage loans through
the FHLBCincinnati Mortgage Purchase Program.
|
|
|
Increasing our origination of commercial real estate loans, home equity loans and lines of credit, and other consumer loans.
While we
will continue to emphasize one- to four-family residential mortgage loans, we also intend to continue to increase our origination of nonresidential real estate loans, home equity loans and lines of credit, other consumer loans and commercial
business loans in order to increase the yield of, and reduce the term to repricing of, our total loan portfolio. Between September 30, 2011 and September 30, 2012, commercial real estate loans increased $6.5 million, or 66.9%, home equity
loans and lines of credit increased $115,000, or 2.0%, other consumer loans decreased $957,000, or 9.0%, and commercial business loans increased $1.2 million, or 31.5%. We expect each of these loan categories to continue to grow over the next three
years. The additional capital raised in the stock offering increased our commercial real estate lending capacity by enabling us to originate more loans and loans with larger balances. See Item 1. Business Home Federal Savings and Loan
AssociationLending ActivitiesCommercial Real Estate Lending.
|
|
|
|
Managing interest rate risk while enhancing to the extent practicable our net interest margin
. During the last several years, we have
taken steps that are intended to enhance our interest rate margin (in relation to what it would have been had we remained exclusively a residential lender) as well as our ability to manage our interest rate risk in the future. In particular, we have
attempted to increase our commercial real estate, multi-family commercial business and construction and land loans, which generally have shorter terms to maturity and higher yields than fixed-rate one- to four-family mortgage loans, and which allows
us to reinvest these funds into market-rate loans as interest rates change. In addition, we have increased our origination of adjustable-rate one- to four-family residential loans and have developed a secondary market capability with the
FHLBCincinnati so that we can sell our new fixed-rate one- to four-family mortgage loans that do not fit within our asset/liability management parameters.
|
44
|
|
|
Increasing our core deposit base.
We are seeking to build our core deposit base, with particular focus on NOW accounts and
non-interest bearing demand deposit accounts. We believe such core deposits not only have favorable cost and interest rate change resistance, but also allow us greater opportunity to connect with our customers and offer them other financial services
and products. As part of this plan, we added a new branch office in Greenup in 2009 and installed ATMs at all of our retail offices. We will continue to provide our high quality service and products, including our reward checking program, as well as
competitive pricing to attract deposits.
|
|
|
|
Expanding our banking relationships to a larger base of customers
. We were established in 1889 and have been operating continuously since
that time. As of June 30, 2012 (the latest date for which deposit market share information is available from the Federal Deposit Insurance Corporation), our market share of deposits represented 17.5% of Federal Deposit Insurance
Corporation-insured deposits in Boyd, Greenup and Lawrence Counties in Kentucky, combined. We will seek to expand our customer base, primarily through organic growth and opportunistic acquisition, and offer our products and services to the new base
of customers by using our recognized brand name and the goodwill developed over years of providing timely, efficient banking services.
|
|
|
|
Maintaining strong asset quality
. We have emphasized maintaining strong asset quality by following conservative underwriting guidelines,
sound loan administration, and focusing on loans secured by real estate located within our primary market area. Our non-performing assets totaled $2.3 million or 0.73% of total assets at September 30, 2012. Our ratio of total nonperforming
loans to total loans was 0.72% at September 30, 2012.
|
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions
that have, or could have, a material impact on income or on the carrying value of certain assets, to be critical accounting policies. We consider the following to be our critical accounting policy:
Allowance for Loan Losses.
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan
losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in managements judgment, should be charged-off.
The allowance consists
of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on
historical loss experience adjusted for current factors.
A loan is impaired when full payment under the terms of the loan is
not expected. Commercial and non-residential real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash
flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively
evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
Comparison of Financial
Condition at September 30, 2012 and September 30, 2011
In November of 2012, we discovered that an employee had
engaged in the origination of fictitious loans and that we would be required to record a loss of approximately $950,000 on those loans. See SummaryAdjustment for Fictitious Loans. As a result, we have adjusted our net loans for the
year ended September 30, 2011 to $183.0 million from the $183.7 million reported in our annual report on Form 10-K for that period, our accrued interest for the year ended September 30, 2011 to $1.4 million from the $1.5 million reported
in our annual report on Form 10-K for that period, and our retained earnings for the year ended September 30, 2011 to $28.2 million from the $28.8 million reported in our annual report on Form 10-K for that period. In addition, our interest
income was adjusted downward by $26,000 for the year ended September 30, 2011. See Note 2 to the Consolidated Financial Statements.
45
Our total assets decreased $10.3 million, or 3.1% to $317.2 million at September 30,
2012 from $327.4 million at September 30, 2011. The decrease was primarily due to a decrease of cash and due from financial institutions of $25.0 million, or 52.1%, to $23.4 million at September 30, 2012 from $48.4 million at
September 30, 2011, partially offset by an increase in securities available for sale of $17.7 million, or 23.1%, to $94.5 million at September 30, 2012 from $76.7 million at September 30, 2011.
Loans held for sale decreased $293,000, or 29.3% to $719,000 at September 30, 2012 from $1.0 million at September 30, 2011.
This decrease was largely due to fluctuations in the timing between our origination of loans and the sale of loans to the FHLBCincinnati.
Loans receivable, net, decreased $3.0 million or 1.6% to $180.0 million at September 30, 2012 from $183.0 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 $1.4 million, or 51.9%, from $2.7 million at September 30, 2011 to $1.3 million at September 30,
2012.
Securities available for sale increased to $94.5 million at September 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 $6.2 million, or 2.4%, to $236.5 million at September 30, 2012 from $242.7 million at September 30, 2011.
This decrease was primarily attributable to an increase in savings, money market and NOW accounts of $2.5 million, or 2.7% offset by a decrease of $10.0 million, or 8.0%, in certificates of deposit.
FHLBCincinnati advances decreased $5.4 million, or 23.4%, to $17.7 million at September 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 $60.6 million at September 30, 2012, compared to $58.6 million at September 30,
2011. The increase resulted primarily from net income of $1.6 million for the year ended September 30, 2012, and an increase in other comprehensive income of $676,000, partially offset by the payment of cash dividends of $405,000.
Comparison of Operating Results for the Years Ended September 30, 2012 and September 30, 2011
General.
Net income was constant for the year ended September 30, 2012 and September 30, 2011 at $1.6 million.
Interest Income.
Total interest income increased $71,000, or 0.6%, to $13 million for the year ended
September 30, 2012 from $12.9 million for the year ended September 30, 2011. This increase was primarily due to a $746,000 increase in interest income on taxable securities, partially offset by a decrease of $225,000 in interest income
from tax exempt securities, and a $486,000 decrease in interest income on loans to $10.6 million. The average balance of loans during fiscal year 2012 decreased $1.3 million to $181.5 million, while the average yield on loans decreased by 22 basis
points to 5.82% for fiscal year 2012 from 6.04% for fiscal year 2011. The decrease in yield reflected the generally lower interest rate environment. The decrease in income from investment securities reflected a decrease in the average yield on
investment securities by 4 basis points to 2.40% for fiscal year 2012 from 2.44% for fiscal year 2011.
Interest
Expense.
Total interest expense decreased $1.3 million, or 28.2%, to $3.3 million for the year ended September 30, 2012 from $4.5 million for the year ended September 30, 2011. Interest expense on deposit accounts decreased $1.1
million, or 29.1%, to $2.6 million for the year ended September 30, 2012 from $3.7 million for the year ended September 30, 2011. The decrease was primarily due to a decrease in average cost of deposits to 1.14% in fiscal year 2012 from
1.55% for fiscal year 2011, reflecting the declining interest rate environment, and an $8.4 million, or 3.5%, decrease in the average balance of interest-bearing deposits to $232.4 million for fiscal year 2012 from $240.8 million for fiscal year
2011.
46
Interest expense on FHLBCincinnati advances decreased $192,000 to $607,000 for the
year ended September 30, 2012 from $799,000 for the year ended September 30, 2011. The average balance of advances decreased $6.1 million to $20.3 million for fiscal year 2012 from $26.4 million for fiscal year 2011, while the average cost
of advances decreased by 2 basis points to 3.00% for fiscal year 2012 from 3.02% for fiscal year 2011.
Net Interest
Income
.
Net interest income increased $1.3 million, or 15.5%, to $9.7 million for the year ended September 30, 2012 from $8.4 million for the year ended September 30, 2011. The increase reflected a slight decrease in our
interest rate spread to 3.01% in fiscal year 2012 from 3.04% in fiscal year 2011, a slight increase in our net interest margin to 3.22% in fiscal year 2012 from 3.08% in fiscal year 2011 and a decrease of 0.71% in the average balance of loans
outstanding to $181.5 million for the year ended September 30, 2012 from $182.8 million for the year ended September 30, 2011.
Provision for Loan Losses.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are
charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
We evaluate the allowance for loan losses on a regular basis and the provision is based upon our periodic review of the collectibility of the loans in light of historical experience, the nature and volume
of the loan portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based
on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The factors we considered in determining
impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the
delay, the borrowers prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash
flows discounted at the loans effective interest rate, the loans obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Groups of loans with similar loan characteristics, including individually evaluated loans not determined to be impaired, are collectively evaluated for impairment based on the groups historical loss
experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements.
Due to the fact that commercial loans are a relatively new product line for Home Federal and considering little historical loss basis
exists, we have made qualitative adjustments to the allowance for loan losses to account for the fact that this is a new product line. At the time of the first of these commercial loan originations, peer data provided an industry average of
approximately 2% which was applied to the commercial loan portfolio in the allowance for loan loss calculation. Over time, the continued lack of historical loss in this product line allowed some reduction of the calculation percentage. As
economic conditions, unemployment and limited growth in the local economy have worsened, these and other qualitative factors were considered in continuing adjustments to the allowance for loan losses for commercial loans, which was 2.7% of the
portfolio at September 30, 2012 with no loss to date. In addition, minimal loss history is available for the consumer loan portfolio which was 8.5% of the portfolio at September 30, 2012.
47
Based upon our evaluation of these factors, a provision of $902,000 was recorded for the
year ended September 30, 2012, an increase of $287,000, or 46.7%, from the provision of $615,000 for the year ended September 30, 2011. The provision for loan losses for the year ended September 30, 2012 reflected net charge-offs of
$556,000 compared to net charge-offs of $91,000 for fiscal year 2011. The allowance for loan losses was $2.0 million, or 1.1% of total loans at September 30, 2012 compared to $1.7 million or 0.9% of total loans at September 30, 2011. Total
nonperforming loans were $1.3 million at September 30, 2012 compared to $2.7 million at September 30, 2011. At September 30, 2012 and September 30, 2011, we had no impaired loans. As a percentage of nonperforming loans, the
allowance for loan losses was 153.2% at September 30, 2012 compared to 61.5% at September 30, 2011. The increase in the allowance for loan losses for the year ended September 30, 2012 compared to the year ended September 30, 2011
reflected increases in allowance due to managements quarterly calculations and resulted primarily from increased write-off of real estate loans, an increase in classified loans, and subjective factors applied to the loan portfolio.
To the best of our knowledge, the allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable
losses, which were inherent in the loan portfolio at September 30, 2012 and September 30, 2011.
Noninterest
Income
.
Noninterest income increased to $1.4 million for the year ended September 30, 2012 from $1.1 million for the year ended September 30, 2011. The increase in noninterest income was primarily attributable to an increase
in service charges on deposits to $578,000 for the year-end September 30, 2012 from $416,000 for the year ended September 30, 2011 and an increase in net gains on sales of securities to $246,000 for the year ended September 30, 2012
from $361,000 for the year ended September 30, 2011, partially offset by a $69,000 loss on disposal of equipment for the year ended September 30, 2012.
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 $1.2 million, or 17.2%, to $8.3 million for the year ended September 30, 2012 compared to $7.1 million for the year ended
September 30, 2011. This increase was due largely to an increase in salaries and employee benefits to $4.2 million for the year ended September 30, 2012 from $3.5 million for the year ended September 30, 2011 as well as an increase in
professional expenses of $449,000 to $649,000 for the year ended September 30, 2012 compared to $200,000 for the year ended September 30, 2011.
The total number of employees has steadily increased from 50 at September 30, 2010 to 63 at September 30, 2012. Personnel expenses will continue to increase as we continue to build our
management and administrative teams. 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 Home Federal from a business
focused on residential lending 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-CEOs.In late July, 2012, we hired a Director
of Human Resources and Training. In addition, we expect to hire additional personnel to support our commercial banking operations, including a network administrator, one or more branch administrators and one or more internal audit personnel.
Provision for Income Taxes.
Income tax expense was $407,000 for the year ended September 30, 2012 compared
to $209,000 for the year ended September 30, 2011. The effective tax rate as a percent of pre-tax income was 20.5% and 11.9% for the years ended September 30, 2012 and 2011, respectively. This increase in the effective tax rate was due to
the decrease in tax exempt interest income in the amount of $225,000 or 22.1%.
48
Analysis of Net Interest Income
Net interest income represents the difference between the income we earn on interest-earning assets and the interest expense we pay on
interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.
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 Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/
Cost
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/
Cost
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
(Revised)
|
|
|
(Revised)
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
181,477
|
|
|
$
|
10,558
|
|
|
|
5.82
|
%
|
|
$
|
182,826
|
|
|
$
|
11,044
|
|
|
|
6.04
|
%
|
|
$
|
175,563
|
|
|
$
|
10,973
|
|
|
|
6.25
|
%
|
Investment securities
|
|
|
95,929
|
|
|
|
2,301
|
|
|
|
2.40
|
%
|
|
|
73,070
|
|
|
|
1,780
|
|
|
|
2.44
|
%
|
|
|
61,437
|
|
|
|
2,643
|
|
|
|
4.30
|
%
|
FHLB stock
|
|
|
1,928
|
|
|
|
82
|
|
|
|
4.25
|
%
|
|
|
1,893
|
|
|
|
80
|
|
|
|
4.23
|
%
|
|
|
1,858
|
|
|
|
83
|
|
|
|
4.47
|
%
|
Other interest-earning assets
|
|
|
22,504
|
|
|
|
42
|
|
|
|
0.19
|
%
|
|
|
14,759
|
|
|
|
8
|
|
|
|
0.05
|
%
|
|
|
23,825
|
|
|
|
18
|
|
|
|
0.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
301,838
|
|
|
|
12,983
|
|
|
|
4.30
|
%
|
|
|
272,548
|
|
|
|
12,912
|
|
|
|
4.74
|
%
|
|
|
262,683
|
|
|
|
13,717
|
|
|
|
5.22
|
%
|
Noninterest-earning assets
|
|
|
21,132
|
|
|
|
|
|
|
|
|
|
|
|
26,834
|
|
|
|
|
|
|
|
|
|
|
|
18,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
322,970
|
|
|
|
|
|
|
|
|
|
|
|
299,382
|
|
|
|
|
|
|
|
|
|
|
|
281,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, savings, money market, and other
|
|
|
88,760
|
|
|
|
376
|
|
|
|
0.42
|
%
|
|
|
85,055
|
|
|
|
694
|
|
|
|
0.82
|
%
|
|
|
57,315
|
|
|
|
566
|
|
|
|
0.99
|
%
|
Certificates of deposit
|
|
|
143,623
|
|
|
|
2,270
|
|
|
|
1.58
|
%
|
|
|
155,723
|
|
|
|
3,037
|
|
|
|
1.95
|
%
|
|
|
157,351
|
|
|
|
3,947
|
|
|
|
2.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
232,383
|
|
|
|
2,646
|
|
|
|
1.14
|
%
|
|
|
240,778
|
|
|
|
3,731
|
|
|
|
1.55
|
%
|
|
|
214,666
|
|
|
|
4,513
|
|
|
|
2.10
|
%
|
FHLB advances
|
|
|
20,263
|
|
|
|
607
|
|
|
|
3.00
|
%
|
|
|
26,448
|
|
|
|
799
|
|
|
|
3.02
|
%
|
|
|
36,367
|
|
|
|
1,058
|
|
|
|
2.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
252,646
|
|
|
|
3,253
|
|
|
|
1.29
|
%
|
|
|
267,226
|
|
|
|
4,530
|
|
|
|
1.70
|
%
|
|
|
251,033
|
|
|
|
5,571
|
|
|
|
2.22
|
%
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
5,774
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
454
|
|
|
|
|
|
|
|
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,847
|
|
|
|
|
|
|
|
|
|
|
|
2,358
|
|
|
|
|
|
|
|
|
|
|
|
2,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing liabilities
|
|
|
9,075
|
|
|
|
|
|
|
|
|
|
|
|
3,840
|
|
|
|
|
|
|
|
|
|
|
|
3,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
261,721
|
|
|
|
|
|
|
|
|
|
|
|
271,066
|
|
|
|
|
|
|
|
|
|
|
|
254,418
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
61,349
|
|
|
|
|
|
|
|
|
|
|
|
28,316
|
|
|
|
|
|
|
|
|
|
|
|
26,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
323,070
|
|
|
|
|
|
|
|
|
|
|
$
|
299,382
|
|
|
|
|
|
|
|
|
|
|
$
|
281,289
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
9,730
|
|
|
|
|
|
|
|
|
|
|
|
8,382
|
|
|
|
|
|
|
|
|
|
|
|
8,146
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.01
|
%
|
|
|
|
|
|
|
|
|
|
|
3.04
|
%
|
|
|
|
|
|
|
|
|
|
|
3.00
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.22
|
%
|
|
|
|
|
|
|
|
|
|
|
3.08
|
%
|
|
|
|
|
|
|
|
|
|
|
3.10
|
%
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
119.47
|
%
|
|
|
|
|
|
|
|
|
|
|
101.99
|
%
|
|
|
|
|
|
|
|
|
|
|
104.64
|
%
|
|
|
|
|
49
Rate/Volume Analysis
The following tables present, for the periods indicated, the dollar amount of changes in interest income and interest expense for the major categories of Home Federals interest-earning assets and
interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by
the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of these tables, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and the change due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
2012 Compared to 2011 (Revised)
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
(In thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
(81
|
)
|
|
$
|
(405
|
)
|
|
$
|
(486
|
)
|
Investment securities
|
|
|
549
|
|
|
|
(28
|
)
|
|
|
521
|
|
Other interest-earning assets
|
|
|
7
|
|
|
|
29
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
475
|
|
|
|
(404
|
)
|
|
|
71
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Now, Savings, Money Market, and other
|
|
|
29
|
|
|
|
(347
|
)
|
|
|
(318
|
)
|
Certificates
|
|
|
(223
|
)
|
|
|
(544
|
)
|
|
|
(767
|
)
|
FHLB advances
|
|
|
(185
|
)
|
|
|
(7
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(379
|
)
|
|
|
(898
|
)
|
|
|
(1,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
854
|
|
|
$
|
494
|
|
|
$
|
1,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
2011 Compared to 2010 (Revised)
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
(In thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
446
|
|
|
$
|
(375
|
)
|
|
$
|
71
|
|
Investment securities
|
|
|
434
|
|
|
|
(1,297
|
)
|
|
|
(863
|
)
|
Other interest-earning assets
|
|
|
(4
|
)
|
|
|
(9
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
876
|
|
|
|
(1,681
|
)
|
|
|
(805
|
)
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Now, savings, money market, and other
|
|
|
239
|
|
|
|
(111
|
)
|
|
|
128
|
|
Certificates
|
|
|
(40
|
)
|
|
|
(870
|
)
|
|
|
(910
|
)
|
FHLB advances
|
|
|
(298
|
)
|
|
|
39
|
|
|
|
(259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(99
|
)
|
|
|
(942
|
)
|
|
|
(1,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
975
|
|
|
$
|
(739
|
)
|
|
$
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management of Market Risk
Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a
principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates.
Our Board of Directors is responsible for the review and oversight of our asset/liability strategies. Our Board of Directors has also established an Asset/Liability Management Committee consisting of
senior management. This committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
50
Among the techniques we are currently using to manage interest rate risk are:
(i) increasing our portfolio of adjustable-rate one- to four-family residential loans, subject to demand for such loans in a lower rate interest rate environment, while endeavoring to sell a large portion of the fixed rate mortgage loans that
we originate to the FHLBCincinnati; (ii) increasing our origination of commercial and multifamily residential real estate, commercial business and motor vehicle and other consumer loans as they generally reprice more quickly than
residential mortgage loans; (iii) maintaining a strong capital position, which provides for a favorable level of interest-earning assets relative to interest-bearing liabilities; and (iv) emphasizing less interest rate sensitive and
lower-costing core deposits. We also maintain a portfolio of short-term or adjustable-rate assets and from time to time have used fixed-rate FHLBCincinnati advances and brokered deposits to extend the term to repricing of our
liabilities.
Depending on market conditions, from time to time we place more emphasis on enhancing net interest margin rather
than matching the interest rate sensitivity of our assets and liabilities. In particular, we believe that the increased net interest income resulting from a mismatch in the maturity of our assets and liabilities portfolios can, during periods of
stable or declining interest rates, provide high enough returns to justify increased exposure to sudden and unexpected increases in interest rates. As a result of this philosophy, our results of operations and the economic value of our equity will
remain vulnerable to increases in interest rates and to declines due to differences between long and short-term interest rates.
An important measure of interest rate risk is the amount by which the economic value of equity of an institutions cash flow from
assets, liabilities and off balance sheet items changes in the event of a range of assumed changes in market interest rates. We have utilized the Sterne Agee Bank Earnings Report (SABER) to provide an analysis of estimated changes in our EVE under
the assumed instantaneous changes in the United States treasury yield curve. The financial model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest rate sensitivity of the EVE.
Set forth below is an analysis of the changes to the economic value of our equity (EVE) that would occur September 30,
2012 in the event of designated changes in the United States treasury yield curve. At September 30, 2012, the economic value of our equity exposure related to these hypothetical changes in market interest rates was within the current guidelines
we have established.
Interest Rate Sensitivity of Economic Value of Equity (EVE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Value of Equity
(Dollars in
thousands)
|
|
|
EVE as %
of EV of Assets
|
|
Change in Rates
|
|
|
$ Amount
|
|
|
$ Change
|
|
|
% Change
|
|
|
EVE Ratio
|
|
|
Change
|
|
|
+400bp
|
|
|
$
|
30,117
|
|
|
$
|
(19,929
|
)
|
|
|
39.8
|
%
|
|
|
10.80
|
%
|
|
|
(40) bp
|
|
|
+300bp
|
|
|
|
35,790
|
|
|
|
(14,257
|
)
|
|
|
28.5
|
%
|
|
|
12.34
|
%
|
|
|
(28) bp
|
|
|
+200bp
|
|
|
|
42,128
|
|
|
|
(7,919
|
)
|
|
|
15.8
|
%
|
|
|
13.93
|
%
|
|
|
(16) bp
|
|
|
+100bp
|
|
|
|
47,666
|
|
|
|
(2,031
|
)
|
|
|
4.8
|
%
|
|
|
15.17
|
%
|
|
|
(5) bp
|
|
|
0bp
|
|
|
|
50,047
|
|
|
|
|
|
|
|
|
|
|
|
15.48
|
%
|
|
|
|
|
|
-100bp
|
|
|
|
52,089
|
|
|
|
2,043
|
|
|
|
4.1
|
%
|
|
|
15.72
|
%
|
|
|
4 bp
|
|
|
-200bp
|
|
|
|
58,544
|
|
|
|
8,497
|
|
|
|
17.0
|
%
|
|
|
17.29
|
%
|
|
|
17 bp
|
|
|
-300bp
|
|
|
|
65,791
|
|
|
|
15,744
|
|
|
|
31.5
|
%
|
|
|
19.03
|
%
|
|
|
31 bp
|
|
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement.
The EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet items and off balance sheet items. The EVE of the balance sheet is the discounted present value of assets and derivative cash flows minus discounted
value of liability cash flows at a point in tiem and is a measure of longer term interest rate risk. The results of the model are dependent on assumptions concerning the timing and variability of cash flows along with projected prepayments and
deposit decay rates.
51
Our policies do not permit hedging activities, such as engaging in futures, options or swap
transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.
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 FHLBCincinnati advances. While maturities and
scheduled amortization of loans and securities are predictable 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.
Our cash flows are comprised of
three primary classifications: (i) operating activities, (ii) investing activities, and (iii) financing activities. Net cash flows provided by operating activities were $3.5 million for the year ended September 30, 2012, and $3.6
million for the year ended September 30, 2011. Net cash flows used in investing activities were $(16.4) million for the year ended September 30, 2012 and $(33.5) million for the year ended September 30, 2011. Net cash flows used in
investing activities consisted primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, and proceeds from maturities and sales of securities. Net cash flows used in financing
activities for fiscal year 2012 consisted of activity in deposits and FHLB borrowings and equaled $12.1 million, while net cash flows from financing activities in fiscal year 2011 consisted of activity in deposits and FHLB borrowings and issuance of
common stock equaled $35.1 million.
Our most liquid assets are cash and cash equivalents. The levels of these assets are
dependent on our operating, financing, lending, and investing activities during any given period. At September 30, 2012 and 2011, cash and cash equivalents totaled $23.4 million and $48.4 million, respectively. We may also utilize the sale of
securities available for sale, FHLBCincinnati advances and other borrowings as sources of funds.
At September 30,
2012 and September 30, 2011, we had outstanding commitments to originate loans of $1.4 million and $2.4 million, respectively, unfunded commitments under lines of credit of $4.9 million and $4.0 million, respectively, and standby letters of
credit of $80,000, and $40,000, respectively. We anticipate that we will have sufficient funds available to meet our current loan commitments. Loan commitments have, in recent periods, been funded through liquidity and normal deposit flows.
Certificates of deposit scheduled to mature in one year or less from September 30, 2012 totaled $79.3 million.
Management believes, based on past experience, that a significant portion of such deposits will remain with us. Based on the foregoing, in addition to our level of core deposits and capital, we consider our liquidity and capital resources sufficient
to meet our outstanding short-term and long-term needs.
Liquidity management is both a daily and long-term responsibility of
management. We adjust our investments in liquid assets based upon managements 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 FHLBCincinnati and the Federal Reserve Bank of Cleveland. At September 30, 2012, we had $17.7 million in advances from the
FHLBCincinnati and an additional borrowing capacity of $56.0 million. At September 30, 2012, we had $4.5 million borrowing capacity from the Federal Reserve Bank of Cleveland. Upon completion of the conversion and offering, the liquid
assets of Poage Bankshares and Home Federal increased.
We are subject to various regulatory capital requirements. At
September 30, 2012, we were in compliance with all applicable capital requirements. See BusinessSupervision and RegulationFederal Banking RegulationCapital Requirements, and Note 12 of the Notes to our Financial
Statements.
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. For information about our loan commitments and unused lines of credit, see Note 13 of the Notes to our
Financial Statements.
52
For the fiscal years ended 2012 and 2011, we did not engage in any off-balance-sheet
transactions other than loan origination commitments in the normal course of our lending activities.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, and newly issued, but not yet effective accounting
standards, see Note 1 of the Notes to our Financial Statements.
Impact of Inflation and Changing Prices
Our consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the
measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost
of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
For information regarding market risk, see Item 7 Managements Discussion and Analysis of Financial Conditions and Results of Operation.
53
ITEM 8.
|
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Poage Bankshares, Inc.
Ashland, Kentucky
We have audited the accompanying consolidated balance sheets of Poage Bankshares, Inc. (the Company) as of September 30,
2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Poage Bankshares, Inc. as of September 30, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in
conformity with U. S. generally accepted accounting principles.
/s/ Crowe Horwath LLP
Louisville, Kentucky
December 18, 2012
54
POAGE BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
(Revised)
|
|
|
|
(in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from financial institutions
|
|
$
|
23,430
|
|
|
$
|
48,440
|
|
Securities available for sale
|
|
|
94,456
|
|
|
|
76,745
|
|
Loans held for sale
|
|
|
719
|
|
|
|
1,012
|
|
Loans, net of allowance of $ 2,004 and $1,658
|
|
|
179,998
|
|
|
|
183,023
|
|
Federal Home Loan Bank stock, at cost
|
|
|
1,953
|
|
|
|
1,906
|
|
Other real estate owned, net
|
|
|
1,001
|
|
|
|
87
|
|
Premises and equipment, net
|
|
|
6,078
|
|
|
|
6,322
|
|
Company owned life insurance
|
|
|
6,685
|
|
|
|
6,467
|
|
Accrued interest receivable
|
|
|
1,255
|
|
|
|
1,384
|
|
Other assets
|
|
|
1,584
|
|
|
|
2,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
317,159
|
|
|
$
|
327,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
6,422
|
|
|
$
|
1,139
|
|
Interest bearing
|
|
|
230,050
|
|
|
|
241,583
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
236,472
|
|
|
|
242,722
|
|
Federal Home Loan Bank advances
|
|
|
17,672
|
|
|
|
23,117
|
|
Accrued interest payable
|
|
|
376
|
|
|
|
435
|
|
Other liabilities
|
|
|
2,057
|
|
|
|
2,590
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
256,577
|
|
|
|
268,864
|
|
|
|
|
Commitments and contingent liabilities (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 30,000,000 shares authorized, 3,372,375 issued and outstanding
|
|
|
34
|
|
|
|
34
|
|
Additional paid-in-capital
|
|
|
31,979
|
|
|
|
31,955
|
|
Retained earnings
|
|
|
29,416
|
|
|
|
28,242
|
|
Unearned Employee Stock Ownership Plan (ESOP) shares
|
|
|
(2,563
|
)
|
|
|
(2,698
|
)
|
Accumulated other comprehensive income
|
|
|
1,716
|
|
|
|
1,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
60,582
|
|
|
|
58,573
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
317,159
|
|
|
$
|
327,437
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
55
POAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
(Revised)
|
|
|
|
(in thousands except per share)
|
|
Interest and dividend income
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
10,558
|
|
|
$
|
11,044
|
|
Taxable securities
|
|
|
1,504
|
|
|
|
758
|
|
Tax exempt securities
|
|
|
797
|
|
|
|
1,022
|
|
Federal funds sold and other
|
|
|
124
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,983
|
|
|
|
12,912
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,646
|
|
|
|
3,731
|
|
Federal Home Loan Bank advances and other
|
|
|
607
|
|
|
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,253
|
|
|
|
4,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
9,730
|
|
|
|
8,382
|
|
|
|
|
Provision for loan losses
|
|
|
902
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
8,828
|
|
|
|
7,767
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
Service charges on deposits
|
|
|
578
|
|
|
|
416
|
|
Loss on disposal of equipment
|
|
|
(69
|
)
|
|
|
|
|
Net gains on sales of loans
|
|
|
442
|
|
|
|
361
|
|
Net gains on sales of securities
|
|
|
246
|
|
|
|
28
|
|
Income from company owned life insurance
|
|
|
218
|
|
|
|
226
|
|
Other
|
|
|
27
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,442
|
|
|
|
1,067
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
4,223
|
|
|
|
3,693
|
|
Occupancy and equipment
|
|
|
845
|
|
|
|
751
|
|
Data processing
|
|
|
661
|
|
|
|
502
|
|
Federal deposit insurance
|
|
|
189
|
|
|
|
260
|
|
Foreclosed assets, net
|
|
|
144
|
|
|
|
204
|
|
Advertising
|
|
|
280
|
|
|
|
279
|
|
Professional Fees
|
|
|
649
|
|
|
|
200
|
|
Other taxes
|
|
|
233
|
|
|
|
203
|
|
Loss on fictitious loans
|
|
|
151
|
|
|
|
180
|
|
Other
|
|
|
909
|
|
|
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,284
|
|
|
|
7,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,986
|
|
|
|
1,763
|
|
|
|
|
Income tax expense
|
|
|
407
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,579
|
|
|
$
|
1,554
|
|
|
|
|
|
|
|
|
|
|
Earnings per share since conversion:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.51
|
|
|
$
|
0.01
|
|
Diluted
|
|
|
0.51
|
|
|
|
0.01
|
|
See Notes to Consolidated Financial Statements.
56
POAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended September 30, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
(Revised)
|
|
|
|
(in thousands)
|
|
|
|
|
Net income
|
|
$
|
1,579
|
|
|
$
|
1,554
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized holding gains/losses on available for sale securities
|
|
|
1,270
|
|
|
|
574
|
|
Reclassification adjustments for (gains) losses recognized in income
|
|
|
(246
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) on available for sale securities
|
|
|
1,024
|
|
|
|
546
|
|
Tax effect
|
|
|
(348
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
676
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
2,255
|
|
|
$
|
1,915
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
57
POAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years ended September 30, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Unearned
ESOP
Shares
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
Shareholders
Equity
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Balances, October 1, 2010
|
|
|
|
|
|
|
|
|
|
|
27,067
|
|
|
|
|
|
|
|
679
|
|
|
|
27,746
|
|
|
|
|
|
|
|
|
Adjustment for fictitious loans
|
|
|
|
|
|
|
|
|
|
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, October 1, 2010 (Revised)
|
|
|
|
|
|
|
|
|
|
|
26,688
|
|
|
|
|
|
|
|
679
|
|
|
|
27,367
|
|
|
|
|
|
|
|
|
Net income (revised)
|
|
|
|
|
|
|
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on securities available for sale, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361
|
|
|
|
361
|
|
|
|
|
|
|
|
|
Issuance of 3,372,375 common shares, net of costs of $1.7 million
|
|
|
34
|
|
|
|
31,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,989
|
|
|
|
|
|
|
|
|
269,790 shares purchased under employee stock ownership plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,698
|
)
|
|
|
|
|
|
|
(2,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2011
|
|
|
34
|
|
|
|
31,955
|
|
|
|
28,242
|
|
|
|
(2,698
|
)
|
|
|
1,040
|
|
|
|
58,573
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,579
|
|
|
|
|
|
|
|
|
|
|
|
1,579
|
|
|
|
|
|
|
|
|
Dividends paid ($0.12/share)
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
ESOP compensation earned
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on securities available for sale, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
676
|
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2012
|
|
$
|
34
|
|
|
$
|
31,979
|
|
|
$
|
29,416
|
|
|
$
|
(2,563
|
)
|
|
$
|
1,716
|
|
|
$
|
60,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
58
POAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
(Revised)
|
|
|
|
(in thousands)
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,579
|
|
|
$
|
1,554
|
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
391
|
|
|
|
371
|
|
Provision for loan losses
|
|
|
902
|
|
|
|
615
|
|
ESOP compensation expense
|
|
|
159
|
|
|
|
|
|
Net gains on sales of securities
|
|
|
(246
|
)
|
|
|
(28
|
)
|
Loss on disposal of equipment
|
|
|
69
|
|
|
|
|
|
Loss on sale of other real estate owned
|
|
|
20
|
|
|
|
81
|
|
Loss on fictitious loans
|
|
|
151
|
|
|
|
180
|
|
Net amortization on securities
|
|
|
724
|
|
|
|
459
|
|
Deferred income tax (benefit) expense
|
|
|
(41
|
)
|
|
|
(230
|
)
|
Net gain on sale of loans
|
|
|
(442
|
)
|
|
|
(361
|
)
|
Origination of loans held for sale
|
|
|
(12,699
|
)
|
|
|
(10,627
|
)
|
Proceeds from loans held for sale
|
|
|
13,434
|
|
|
|
11,677
|
|
Increase in cash value of life insurance
|
|
|
(218
|
)
|
|
|
(226
|
)
|
Decrease (increase) in:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
129
|
|
|
|
(95
|
)
|
Other assets
|
|
|
159
|
|
|
|
550
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
(59
|
)
|
|
|
(70
|
)
|
Other liabilities
|
|
|
(533
|
)
|
|
|
(291
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
|
3,479
|
|
|
|
3,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
Proceeds from sales
|
|
|
15,969
|
|
|
|
1,964
|
|
Proceeds from calls
|
|
|
54,685
|
|
|
|
41,143
|
|
Proceeds from maturities
|
|
|
665
|
|
|
|
445
|
|
Purchases
|
|
|
(94,928
|
)
|
|
|
(75,065
|
)
|
Principal payments received
|
|
|
6,444
|
|
|
|
117
|
|
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
|
|
|
496
|
|
|
|
(2,504
|
)
|
Proceeds from the sale of other real estate owned
|
|
|
543
|
|
|
|
602
|
|
Purchase of office properties and equipment
|
|
|
(216
|
)
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities
|
|
|
(16,389
|
)
|
|
|
(33,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
(6,250
|
)
|
|
|
14,910
|
|
Payments on Federal Home Loan Bank borrowings
|
|
|
(5,445
|
)
|
|
|
(9,088
|
)
|
Cash dividend paid
|
|
|
(405
|
)
|
|
|
|
|
Proceeds from issuance of common stock, net of conversion costs
|
|
|
|
|
|
|
31,989
|
|
Cash provided to ESOP
|
|
|
|
|
|
|
(2,698
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
(12,100
|
)
|
|
|
35,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(25,010
|
)
|
|
|
5,207
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
48,440
|
|
|
|
43,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
23,430
|
|
|
$
|
48,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional cash flows and supplementary information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest on deposits and advances
|
|
$
|
3,312
|
|
|
$
|
4,600
|
|
Income taxes
|
|
|
250
|
|
|
|
|
|
Real estate acquired in settlement of loans
|
|
$
|
1,437
|
|
|
$
|
551
|
|
See Notes to Consolidated Financial Statements.
59
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation
: The
consolidated financial statements include Poage Bankshares, Inc. (the Company) and the Companys wholly owned subsidiary, Home Federal Savings and Loan Association (the Association). The Companys principal business
is the business of the Association. Inter-company transactions and balances are eliminated in consolidation.
The Association is a federally
chartered savings and loan association. The Association currently serves the financial needs of communities in its market area through its main office located in Ashland, Kentucky and its branch offices located in Flatwoods, South Shore, Louisa,
Summitt and Greenup, Kentucky. The Associations business involves attracting deposits from the general public and using such deposits, together with other funds, to originate primarily one-to-four family residential mortgage loans and, to a
lesser extent, commercial and multi-family real estate and construction loans primarily in its market area which includes the Kentucky counties of Boyd, Greenup and Lawrence and the Ohio counties of Scioto and Lawrence.
Reorganization:
The Board of Directors of the Association adopted a Plan of Conversion on
December 21, 2010 (the Plan) from a federally chartered mutual savings association to a federally chartered stock savings association (the Conversion). The Conversion was accomplished through the amendment of the
Associations charter and the sale of common stock in an amount equal to the market value of the Association. A subscription offering the shares of the Associations common stock was offered to the Associations depositors, and
second, to the Associations tax-qualified employee benefit plans. No shares in the subscription were offered for sale to the general public.
On September 12, 2011, the conversion from a mutual savings association to a federally chartered stock savings association was completed. A new holding company, Poage Bankshares, Inc., was
established as part of the conversion. The public offering was consummated through the sale and issuance by the Company of 3,372,375 shares of common stock at $10 per share. Net proceeds of $32.0 million were raised in the stock offering, after
deduction of conversion costs of $1.7 million and excluding $2.7 million which was loaned by the Company to a trust for the Employee Stock Ownership Plan (the ESOP), enabling it to finance the purchase of 269,790 shares of common stock in the
offering.
Voting rights are held and exercised exclusively by the stockholders of the new holding company. Deposit account holders will
continue to be insured by the FDIC.
A liquidation account was established in the amount of $28,049,000, which represented the
Associations retained earnings as of the latest statement of financial condition contained in the final offering circular utilized in connection with the Conversion. The liquidation account will be maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Association after the conversion. The liquidation account will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holders interest in the liquidation account. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held. The Association may not declare, pay a dividend on, or repurchase any of its capital stock, if the effect thereof would cause retained earnings to be reduced below the liquidation account
amount or regulatory capital requirements. Any repurchases of the Companys common stock will be conducted in accordance with applicable laws and regulations.
(Continued)
60
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Use of Estimates
: To prepare financial statements in conformity with accounting principles generally accepted
in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results
could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.
Cash Flows
: Cash and cash equivalents include cash, deposits with other financial
institutions with maturities fewer than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, federal funds purchased and sold, and
repurchase agreements.
Interest-Bearing Deposits in Other Financial Institutions
:
Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.
Securities
: Debt securities are classified as held to maturity and carried at amortized cost
when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as
available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage
backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
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) other-than-temporary impairment (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.
Loans Held for Sale
: Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount
allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
(Continued)
61
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans
: Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported at the principal balance outstanding, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized in interest income over the contractual life of the loan using the level-yield method without anticipating prepayments.
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically
charged off no later than 120 days past due. Real estate loans and commercial and industrial loans are charged off on a case by case basis at such time management determines the loan to be uncollectible. Past due status of all loan types is based on
the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include
both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. All loan types are moved to non-accrual status in accordance with the Companys policy, typically after 90 days of
non-payment.
All interest accrued but not received for all loans placed on nonaccrual is reversed against interest income. Interest received
on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. All types of loans are returned to accrual status when all the principal and interest are brought current and the loan has been
performing according to the contractual terms for a period of not less than 6 months.
Concentration of Credit Risk:
Most of the Companys business activity is with customers
located within a 50 mile radius of its home office. Therefore, the Companys exposure to credit risk is significantly affected by changes in the economy in the immediate area. The Company held common stock of the FHLB totaling $1,953,000 and
$1,906,000 and other deposits totaling $3,830,000 and $6,376,000 at year end 2012 and 2011, respectively.
Allowance for Loan Losses
: The allowance for loan losses is a
valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. If a loan is categorized as loss under the regulatory definitions of
loan classifications, the loan is immediately charged off. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in
managements judgment, should be charged off. The allowance for loan losses reflects the estimate management believes to be appropriate to cover incurred probable losses which are inherent in the loan portfolio at September 30, 2012 and
2011.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as
impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. At September 30, 2012, although all of the
aforementioned qualitative factors were considered, management specifically made qualitative adjustments to increase the general component of the reserve to reflect the impact of the continued weak national and local economies as well as the decline
in real estate values for all loan segments. For commercial and industrial loans, management increased the general component to reflect the lack of prolonged history of the Company in making these types of loans.
(Continued)
62
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
A loan is impaired when, based on current information and events, it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified at the borrowers request, and for which the borrower is experiencing financial difficulties, are
considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration
all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for all commercial and construction loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the
fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential
mortgage loans for impairment disclosures. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loans effective rate at inception.
The general component of the allowance covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment
and is based on the actual loss history experienced by the Company. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the
following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in
lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The
following portfolio segments have been identified as having differing risk characteristics:
Real estate loans:
Loans secured by real
estate represent the lowest risk of loans for the Company. The majority of loans in this segment are loans secured by the borrowers principal residence; however, there are also loans secured by apartment buildings, non-owner occupied property,
commercial real estate, or construction and land development projects. They include fixed and floating rate loans as well as loans for commercial purposes or consumer purposes. Borrowers with loans in this category, whether for commercial or
consumer purposes, tend to make their payments timely as they do not want to risk foreclosure and loss of the primary residence.
Commercial and industrial loans:
These loans to businesses do not have real estate as the underlying collateral. Instead of real estate,
collateral could be business assets such as equipment or accounts receivable or the personal guarantee of one or more guarantors. These loans generally present a higher level of risk than loans secured by real estate because in the event of default
by the borrower, the business assets must be liquidated and/or guarantors pursued for deficit funds. Business assets are worth more while they are in use to produce income for the business and worth significantly less if the business is no longer in
operation. For this reason, the Company discounts the value on these types of collateral prior to meeting the Companys loan-to-value policy limits.
(Continued)
63
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Consumer loans:
Consumer loans are generally loans to borrowers for non-business purposes. They
can be either secured or unsecured. Consumer loans are generally small in the individual amount of principal outstanding and are repaid from the borrowers private funds earned from employment. Consumer lending risk is very susceptible to local
economic trends. If there is a consumer loan default, any collateral that may be repossessed is generally not well maintained and has a diminished value. For this reason, consumer loans tend to have higher overall interest rates to cover the higher
cost of repossession and charge-offs. However, due to their smaller average balance per borrower, consumer loans are collectively evaluated for impairment in determining the appropriate allowance for loan losses.
Servicing Rights
: Servicing rights are
recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on
market prices for comparable mortgage servicing contracts when available or, alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently
measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are
included in the other assets line item of the balance sheet.
Servicing rights are evaluated for impairment based upon the fair value of the
rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation
allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance
may be recorded as an increase to income. No valuation allowance was required at September 30, 2012 or September 30, 2011. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and
actual prepayment speeds and default rates and losses.
Servicing fee income which is reported on the income statement as other income is
recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted
against loan servicing fee income.
Foreclosed Assets
: 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 the lower of cost or fair value less estimated costs to sell. If fair
value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
Premises and Equipment
: Land is carried at cost. Premises and equipment are stated at
cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 50 years.
Furniture, fixtures and equipment are depreciated using the straight-line method
with useful lives ranging from 3 to 10 years.
(Continued)
64
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Federal Home Loan Bank (FHLB) Stock
: The Association is a member of the FHLB system.
Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for
impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Company Owned Life Insurance
: The Association has purchased life insurance policies on certain
key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable
at settlement.
Loan Commitments and Related Financial Instruments
: Financial
instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Income Taxes
: Income tax expense is the total of the current year income tax due or refundable and the
change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.
A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a
benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. There were no such expenses recognized in the years
ended September 30, 2012 or 2011.
Retirement Plans
: Employee 401(k) and profit sharing plan expense is the amount of
matching contributions. Supplemental retirement plan expense allocates the benefits over years of service. The Association participates in the Pentegra Defined Benefit Pension Plan for Financial Institutions. This plan covers eligible employees who
were employed by the Association prior to January 1, 2007. Employees hired subsequent to that date are not eligible to participate. The employees hired prior to January 1, 2007 continue to earn benefits under the plan. It is the policy of
the Association to fund the amount that is determined by annual actuarial valuations.
Comprehensive Income
: Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.
Loss Contingencies
: Loss contingencies, including claims and legal actions arising in
the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect
on the financial statements.
Restrictions on Cash
: Cash on hand or on deposit with
the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. The Association is required to maintain reserve funds in cash or on deposit with a designated depository financial institution. The required reserve at
September 30, 2012 and 2011 was $809,000 and $360,000, respectively.
(Continued)
65
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Fair Value of Financial Instruments
: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Employee Stock Ownership Plan
: The cost of shares issued to the ESOP, but not yet
allocated to participants, is shown as a reduction of shareholders equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce
retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.
Earnings Per Common Share
: Basic earnings per common share is net income since the conversion
divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. All outstanding unvested share-based payment awards that contain rights to
nonforfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per
share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Segment Reporting:
The Company has one reportable segment: banking. While the chief
decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis.
Reclassifications
: Some items in the prior year financial statements
were reclassified to conform to the current presentation.
Recently Issued but not yet Effective Accounting Pronouncements
:
In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditors evaluation of whether it has
granted a concession and whether a debtor is experiencing financial difficulties. With regard to determining whether a concession has been granted, the ASU clarifies that creditors are precluded from using the effective interest method to determine
whether a concession has been granted. In the absence of using the effective interest method, a creditor must now focus on other considerations such as the value of the underlying collateral, evaluation of other collateral or guarantees, the
debtors ability to access other funds at market rates, interest rate increases and whether the restructuring results in a delay in payment that is insignificant. This guidance is effective for interim and annual reporting periods beginning
after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively
for the first interim or annual period beginning on or after June 15, 2011. The adoption of this guidance did not have a material impact on the Companys financial statements.
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 Companys financial statements.
(Continued)
66
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 shareholders 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
Companys financial statements.
NOTE 2 - ADJUSTMENT FOR FICTITIOUS LOANS
The Company is applying relevant guidance from the SEC and FASB to adjust for the cumulative effect of immaterial errors relating to
prior years in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings in the year of adoption. The guidance also requires the adjustment
of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Such adjustments do not require previously filed reports with the SEC to be
amended. In accordance with the relevant guidance, the Company has adjusted its opening retained earnings for 2011 for the item described below. The Company considers these adjustments to be immaterial to prior periods.
On November 26, 2012, the Company determined that it was required to record a loss for certain fraudulent loans in the aggregate amount of $950,000
including accrued interest of $127,000, which, net of tax, is a loss of $627,000. The loss relates to the creation of fictitious loans by a former employee of the Companys subsidiary and was discovered by management while in the process of
upgrading the Companys lending controls and procedures.
The Company has reported this event to its blanket bond insurance provider and
is working with the provider to determine the extent of any coverage. No amount has been recorded related to potential recoveries from the blanket bond coverage. That amount, if any, will be recorded when it can be accurately measured and
collectibility can be reasonably ascertained.
(Continued)
67
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 2 - SAB 108 ADJUSTMENT
(Continued)
The applicable effect on the prior year balance sheet and statement of income related to these
fictitious loans is as follows (in thousands):
|
|
|
|
|
|
|
September 30,
2011
|
|
Balance Sheet:
|
|
|
|
|
Loans, net as previously reported
|
|
$
|
183,696
|
|
Fictitious loans
|
|
|
(673
|
)
|
|
|
|
|
|
Loans, net as adjusted
|
|
$
|
183,023
|
|
|
|
|
|
|
|
|
Accrued interest receivable as previously reported
|
|
$
|
1,491
|
|
Accrued interest receivable fictitious loans
|
|
|
(107
|
)
|
|
|
|
|
|
Accrued interest receivable as adjusted
|
|
$
|
1,384
|
|
|
|
|
|
|
|
|
Other assets as previously reported
|
|
$
|
1,786
|
|
Deferred tax asset adjustment
|
|
|
265
|
|
|
|
|
|
|
Other assets as adjusted
|
|
$
|
2,051
|
|
|
|
|
|
|
|
|
Total assets as previously stated
|
|
$
|
327,952
|
|
Net impact of fictitious loans and related accrual, interest net of tax
|
|
|
(515
|
)
|
|
|
|
|
|
Total assets as adjusted
|
|
$
|
327,437
|
|
|
|
|
|
|
|
|
Retained earnings as previously reported
|
|
$
|
28,757
|
|
Net impact of fictitious loans and related accrual, interest net of tax
|
|
|
(515
|
)
|
|
|
|
|
|
Retained earnings as adjusted
|
|
$
|
28,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
September 30, 2011
|
|
Statement of Income:
|
|
|
|
|
Interest and dividend income as previously reported
|
|
$
|
12,938
|
|
Interest income fictitious loans
|
|
|
(26
|
)
|
|
|
|
|
|
Interest and dividend income as adjusted
|
|
$
|
12,912
|
|
|
|
|
|
|
|
|
Net interest income as previously reported
|
|
$
|
8,408
|
|
Interest income fictitious loans
|
|
|
(26
|
)
|
|
|
|
|
|
Net interest income as adjusted
|
|
$
|
8,382
|
|
|
|
|
|
|
|
|
Non-interest income after provision for loan loss as previously reported
|
|
$
|
7,793
|
|
Interest income fictitious loans
|
|
|
(26
|
)
|
|
|
|
|
|
Net interest income after provision for loan loss as adjusted
|
|
$
|
7,767
|
|
|
|
|
|
|
|
|
Non-interest expense as previously reported
|
|
$
|
6,891
|
|
Fictitious loans
|
|
|
180
|
|
|
|
|
|
|
Non-interest expense as adjusted
|
|
$
|
7,071
|
|
|
|
|
|
|
|
|
Income before income taxes previously reported
|
|
$
|
1,969
|
|
Interest income fictitious loans
|
|
|
(26
|
)
|
|
|
|
|
|
Fictitious loans
|
|
|
(180
|
)
|
|
|
|
|
|
Income before income tax as adjusted
|
|
$
|
1,763
|
|
|
|
|
|
|
|
|
Income tax expense as previously reported
|
|
$
|
279
|
|
Tax impact of fictitious loans and related interest
|
|
|
(70
|
)
|
|
|
|
|
|
Income tax expense as adjusted
|
|
$
|
209
|
|
|
|
|
|
|
|
|
Net income as previously reported
|
|
$
|
1,690
|
|
Fictitious loans and related interest adjustment, net of tax
|
|
|
(136
|
)
|
|
|
|
|
|
Net income as adjusted
|
|
$
|
1,554
|
|
|
|
|
|
|
(Continued)
68
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 3 - SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of securities available for sale at September 30, 2012 and 2011 and the corresponding amounts of
gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
24,445
|
|
|
$
|
1,743
|
|
|
$
|
|
|
|
$
|
26,188
|
|
U.S. Government agencies and sponsored entities
|
|
|
22,250
|
|
|
|
16
|
|
|
|
(9
|
)
|
|
|
22,257
|
|
Government sponsored entities residential mortgage-backed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
25,330
|
|
|
|
444
|
|
|
|
|
|
|
|
25,774
|
|
FNMA
|
|
|
19,831
|
|
|
|
406
|
|
|
|
|
|
|
|
20,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
91,856
|
|
|
$
|
2,609
|
|
|
$
|
(9
|
)
|
|
$
|
94,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
69
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 3 - SECURITIES AVAILABLE FOR SALE
(Continued)
The proceeds from sales of securities and the associated gross gains and losses are listed below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Proceeds
|
|
$
|
15,969
|
|
|
$
|
1,964
|
|
Gross gains
|
|
|
246
|
|
|
|
28
|
|
Gross losses
|
|
|
|
|
|
|
|
|
The provision for income taxes related to net realized gains and losses was $84,000 and $10,000 for the years ended September 30,
2012 and 2011, respectively, based on an income tax rate of 34%.
The amortized cost and fair value of the securities portfolio at
September 30, 2012 and 2011 are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at
a single maturity date, primarily mortgage-backed securities, are shown separately.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Within one year
|
|
$
|
470
|
|
|
$
|
474
|
|
One to five years
|
|
|
3,728
|
|
|
|
3,806
|
|
Five to ten years
|
|
|
25,904
|
|
|
|
26,616
|
|
Beyond ten years
|
|
|
16,593
|
|
|
|
17,549
|
|
Mortgage-backed securities
|
|
|
45,161
|
|
|
|
46,011
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,856
|
|
|
$
|
94,456
|
|
|
|
|
|
|
|
|
|
|
Securities pledged at September 30, 2012 and 2011 had a carrying amount of $6,479,000 and $1,313,000, respectively, and were
pledged to secure public deposits and repurchase agreements.
At year-end 2012 and 2011, there were no holdings of securities of any one
issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of equity.
(Continued)
70
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 3 - SECURITIES AVAILABLE FOR SALE
(Continued)
The following table summarizes the securities with unrealized losses at September 30, 2012 and
September 30, 2011 aggregated by major security type and length of time in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and sponsored entities
|
|
$
|
10
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
$
|
10
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
10
|
|
|
$
|
(9
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
(Continued)
71
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 4 - LOANS
Loans at September 30, 2012 and 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
141,307
|
|
|
$
|
147,733
|
|
Multi-family
|
|
|
985
|
|
|
|
2,016
|
|
Commercial Real Estate
|
|
|
16,333
|
|
|
|
9,786
|
|
Construction and land
|
|
|
3,095
|
|
|
|
5,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,720
|
|
|
|
164,744
|
|
|
|
|
Commercial and Industrial
|
|
|
4,895
|
|
|
|
3,722
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
5,911
|
|
|
|
5,796
|
|
Motor vehicle
|
|
|
6,968
|
|
|
|
7,299
|
|
Other
|
|
|
2,592
|
|
|
|
3,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,471
|
|
|
|
16,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
182,086
|
|
|
|
184,773
|
|
Less: Net deferred loan fees
|
|
|
84
|
|
|
|
92
|
|
Allowance for loan losses
|
|
|
2,004
|
|
|
|
1,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
179,998
|
|
|
$
|
183,023
|
|
|
|
|
|
|
|
|
|
|
(Continued)
72
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 4 - LOANS
(Continued)
The following tables present the balance in the allowance for loan losses and recorded investment in
loans by portfolio segment based on impairment method as of September 30, 2012 and 2011. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
Loan Balances
|
|
September 30, 2012
|
|
Individually
Evaluated for
Impairment
|
|
|
Collectively
Evaluated for
Impairment
|
|
|
Total
|
|
|
Individually
Evaluated for
Impairment
|
|
|
Collectively
Evaluated for
Impairment
|
|
|
Total
|
|
Loan Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
|
|
|
$
|
1,824
|
|
|
$
|
1,824
|
|
|
$
|
|
|
|
$
|
161,720
|
|
|
$
|
161,720
|
|
Commercial and industrial
|
|
|
|
|
|
|
47
|
|
|
|
47
|
|
|
|
|
|
|
|
4,895
|
|
|
|
4,895
|
|
Consumer
|
|
|
|
|
|
|
133
|
|
|
|
133
|
|
|
|
|
|
|
|
15,471
|
|
|
|
15,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
2,004
|
|
|
$
|
2,004
|
|
|
$
|
|
|
|
$
|
182,086
|
|
|
$
|
182,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
Loan Balances
|
|
September 30, 2011 (Revised)
|
|
Individually
Evaluated for
Impairment
|
|
|
Collectively
Evaluated for
Impairment
|
|
|
Total
|
|
|
Individually
Evaluated for
Impairment
|
|
|
Collectively
Evaluated for
Impairment
|
|
|
Total
|
|
Loan Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
|
|
|
$
|
1,368
|
|
|
$
|
1,368
|
|
|
$
|
|
|
|
$
|
164,744
|
|
|
$
|
164,744
|
|
Commercial and industrial
|
|
|
|
|
|
|
49
|
|
|
|
49
|
|
|
|
|
|
|
|
3,722
|
|
|
|
3,722
|
|
Consumer
|
|
|
|
|
|
|
241
|
|
|
|
241
|
|
|
|
|
|
|
|
16,307
|
|
|
|
16,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
1,658
|
|
|
$
|
1,658
|
|
|
$
|
|
|
|
$
|
184,773
|
|
|
$
|
184,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
73
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 4 - LOANS
(Continued)
The following table sets forth an analysis of our allowance for loan losses for September 30, 2012
and 2011 by class (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Balance at beginning of period
|
|
$
|
1,658
|
|
|
$
|
1,134
|
|
Provision for loan losses:
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
(2
|
)
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
537
|
|
|
|
(55
|
)
|
Residential
|
|
|
446
|
|
|
|
636
|
|
Consumer
|
|
|
(79
|
)
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Total Provision
|
|
|
902
|
|
|
|
615
|
|
Amounts charged off:
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(151
|
)
|
|
|
|
|
Residential
|
|
|
(443
|
)
|
|
|
(83
|
)
|
Consumer
|
|
|
(39
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Total loans charged off
|
|
|
(633
|
)
|
|
|
(94
|
)
|
Recoveries of amounts previously charged off:
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
52
|
|
|
|
|
|
Residential
|
|
|
15
|
|
|
|
2
|
|
Consumer
|
|
|
10
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
77
|
|
|
|
3
|
|
Net charge-offs
|
|
|
(556
|
)
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,004
|
|
|
$
|
1,658
|
|
|
|
|
|
|
|
|
|
|
There were no impaired loans as of or during the years ended September 30, 2012 or 2011.
Nonaccrual loans and loans past due 90 days still on accrual consist of smaller balance homogeneous loans that are collectively evaluated for impairment.
(Continued)
74
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 4 - LOANS
(Continued)
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 September 30, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
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
|
|
$
|
972
|
|
|
$
|
|
|
|
$
|
2,158
|
|
|
$
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
495
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
15
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
Motor vehicle
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
987
|
|
|
$
|
321
|
|
|
$
|
2,697
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
75
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 4 - LOANS
(Continued)
The following table presents the aging of the recorded investment in past due loans as of
September 30, 2012 and September 30, 2011 by class of loans. Non-accrual loans of $987,000 and $2,697,000 as of September 30, 2012 and 2011 are included in the tables below and has 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
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
1,117
|
|
|
$
|
169
|
|
|
$
|
803
|
|
|
$
|
2,089
|
|
|
$
|
139,218
|
|
|
$
|
141,307
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
985
|
|
|
|
985
|
|
Commercial real estate
|
|
|
139
|
|
|
|
|
|
|
|
307
|
|
|
|
446
|
|
|
|
15,887
|
|
|
|
16,333
|
|
Construction and land
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
525
|
|
|
|
2,570
|
|
|
|
3,095
|
|
Commercial and industrial
|
|
|
4
|
|
|
|
135
|
|
|
|
14
|
|
|
|
153
|
|
|
|
4,742
|
|
|
|
4,895
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
15
|
|
|
|
5,896
|
|
|
|
5,911
|
|
Motor vehicle
|
|
|
87
|
|
|
|
28
|
|
|
|
|
|
|
|
115
|
|
|
|
6,853
|
|
|
|
6,968
|
|
Other
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2,590
|
|
|
|
2,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,874
|
|
|
$
|
332
|
|
|
$
|
1,139
|
|
|
$
|
3,345
|
|
|
$
|
178,741
|
|
|
$
|
182,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (Revised)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
3,200
|
|
|
|
3,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,488
|
|
|
$
|
151
|
|
|
$
|
2,697
|
|
|
$
|
4,336
|
|
|
$
|
180,437
|
|
|
$
|
184,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
76
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 4 - LOANS
(Continued)
CREDIT QUALITY INDICATORS:
Beginning in the fiscal year ended September 30, 2012, 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 managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institutions 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
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
137,968
|
|
|
$
|
954
|
|
|
$
|
2,385
|
|
|
$
|
|
|
|
$
|
|
|
Multi family
|
|
|
985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
14,654
|
|
|
|
810
|
|
|
|
869
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
3,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
4,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
5,874
|
|
|
|
15
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
Motor vehicle
|
|
|
6,907
|
|
|
|
20
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
176,970
|
|
|
$
|
1,799
|
|
|
$
|
3,317
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no troubled debt restructuring at September 30, 2012 or September 30, 2011.
(Continued)
77
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 4 - LOANS
(Continued)
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 September 30, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011 (Revised)
|
|
|
|
Performing
|
|
|
Nonperforming
|
|
|
Performing
|
|
|
Nonperforming
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
140,335
|
|
|
$
|
972
|
|
|
$
|
145,575
|
|
|
$
|
2,158
|
|
Multi-family
|
|
|
985
|
|
|
|
|
|
|
|
1,521
|
|
|
|
495
|
|
Commercial real estate
|
|
|
16,026
|
|
|
|
307
|
|
|
|
9,786
|
|
|
|
|
|
Construction and land
|
|
|
3,095
|
|
|
|
|
|
|
|
5,209
|
|
|
|
|
|
Commercial and industrial
|
|
|
4,881
|
|
|
|
14
|
|
|
|
3,722
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
5,896
|
|
|
|
15
|
|
|
|
5,777
|
|
|
|
19
|
|
Motor vehicle
|
|
|
6,968
|
|
|
|
|
|
|
|
7,278
|
|
|
|
21
|
|
Other
|
|
|
2,592
|
|
|
|
|
|
|
|
3,208
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
180,778
|
|
|
$
|
1,308
|
|
|
$
|
182,076
|
|
|
$
|
2,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 - 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 companys 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 comparable instruments (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, which include municipal securities, fair values are calculated using discounted cash flows (Level 3).
Other Real Estate
Owned
: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally
based on third party appraisals of the property resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
(Continued)
78
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 5 - FAIR VALUE
(Continued)
Assets and liabilities measured at fair value on a recurring basis, including financial assets and
liabilities for which the Company has elected the fair value option, are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
September 30, 2012 Using:
|
|
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
26,188
|
|
|
$
|
|
|
|
$
|
26,188
|
|
|
$
|
|
|
U.S. Government agencies and sponsored entities
|
|
|
22,257
|
|
|
|
|
|
|
|
22,257
|
|
|
|
|
|
Mortgage backed securities: residential
|
|
|
46,011
|
|
|
|
|
|
|
|
46,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
94,456
|
|
|
$
|
|
|
|
$
|
94,456
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
September 30, 2011 Using:
|
|
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
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.
(Continued)
79
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 5 - FAIR VALUE
(Continued)
Assets measured at fair value on a non-recurring basis are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
September 30, 2012
Using:
|
|
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
|
|
|
|
Other real estate owned (One to four family), net
|
|
$
|
268
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
268
|
|
Commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs
to sell. Fair values are based on recent real estate appraisals. These appraisals may use 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 Associations management. The appraisal values are discounted to allow for selling expenses and fees, and the discounts range from 5% to 10%.
At September 30, 2012, other real estate owned had a net carrying amount of $268,000 made up of the outstanding balance of $336,000, net of a
valuation allowance of $68,000 which resulted in a write-down of $68,000 for the year ended September 30, 2012. There was no other real estate owned measured at fair value on a non-recurring basis as of September 30, 2011.
(Continued)
80
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 5 - FAIR VALUE
(Continued)
The carrying amounts and estimated fair values of financial instruments, at September 30, 2012 and
2011 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Carrying
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,430
|
|
|
$
|
23,430
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,430
|
|
Securities
|
|
|
94,456
|
|
|
|
|
|
|
|
94,456
|
|
|
|
|
|
|
|
94,456
|
|
Federal Home Loan Bank stock
|
|
|
1,953
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans held for sale
|
|
|
719
|
|
|
|
|
|
|
|
739
|
|
|
|
|
|
|
|
739
|
|
Loans, net
|
|
|
179,998
|
|
|
|
|
|
|
|
|
|
|
|
202,153
|
|
|
|
202,153
|
|
Accrued interest receivable
|
|
|
1,255
|
|
|
|
|
|
|
|
509
|
|
|
|
746
|
|
|
|
1,255
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
236,472
|
|
|
$
|
96,176
|
|
|
$
|
141,826
|
|
|
$
|
|
|
|
$
|
238,002
|
|
Federal Home Loan Bank advances
|
|
|
17,672
|
|
|
|
|
|
|
|
18,764
|
|
|
|
|
|
|
|
18,764
|
|
Accrued interest payable
|
|
|
376
|
|
|
|
|
|
|
|
376
|
|
|
|
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
September 30, 2011 (Revised)
|
|
|
|
|
|
|
|
|
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
|
|
|
183,023
|
|
|
|
190,064
|
|
Accrued interest receivable
|
|
|
1,384
|
|
|
|
1,384
|
|
|
|
|
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 value 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.
(Continued)
81
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 5 - FAIR VALUE
(Continued)
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 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 value 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.
FHLB Advances
The fair values of the Companys 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.
(Continued)
82
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 6 - LOAN SERVICING
The Company began selling mortgage loans with servicing rights retained during the year ended September 30, 2010. Mortgage loans
serviced for others are not reported as assets. The principal balances of these loans at September 30, 2012 and 2011 were $24,230,000 and $14,387,000, respectively. Custodial escrow balances maintained in connection with serviced loans were
$31,000 and $19,000 at September 30, 2012 and 2011.
Activity for loan servicing rights during the years ended September 30, 2012
and 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Beginning of year
|
|
$
|
133
|
|
|
$
|
31
|
|
Additions
|
|
|
138
|
|
|
|
112
|
|
Amortized to expense
|
|
|
(51
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
220
|
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
There was no valuation allowance for servicing rights at September 30, 2012 and 2011. The fair value of servicing rights is
estimated to be $220,000 and $133,000 at September 30, 2012 and 2011.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment at September 30, 2012 and 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Land
|
|
$
|
1,132
|
|
|
$
|
1,132
|
|
Buildings
|
|
|
5,740
|
|
|
|
5,702
|
|
Furniture, fixtures, and equipment
|
|
|
1,506
|
|
|
|
1,920
|
|
Automobiles
|
|
|
59
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,437
|
|
|
|
8,813
|
|
Less: Accumulated depreciation
|
|
|
2,359
|
|
|
|
2,491
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,078
|
|
|
$
|
6,322
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $391,000 and $371,000 for the years end September 30, 2012 and 2011, respectively.
(Continued)
83
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 8 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Loans
|
|
$
|
746
|
|
|
$
|
765
|
|
Securities
|
|
|
380
|
|
|
|
606
|
|
Mortgage backed securities: residential
|
|
|
129
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,255
|
|
|
$
|
1,384
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 - DEPOSITS
Time deposits of $100,000 or more were $67,306,000 and $70,008,000 at year-end 2012 and 2011.
Scheduled maturities of time deposits for the next five years were as follows (in thousands):
|
|
|
|
|
|
|
September 30,
|
|
2013
|
|
$
|
79,325
|
|
2014
|
|
|
30,022
|
|
2015
|
|
|
8,934
|
|
2016
|
|
|
7,381
|
|
2017
|
|
|
15,129
|
|
|
|
|
|
|
Total
|
|
$
|
140,791
|
|
|
|
|
|
|
At September 30, 2012 and 2011, generally accounts in excess of $250,000 are not federally insured.
Interest expense on deposits was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Savings and interest bearing checking accounts
|
|
$
|
374
|
|
|
$
|
691
|
|
Time deposits
|
|
|
2,272
|
|
|
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,646
|
|
|
$
|
3,731
|
|
|
|
|
|
|
|
|
|
|
(Continued)
84
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 2012 and 2011, advances from the Federal Home Loan Bank were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Maturities October 2011 through June 2024, fixed rate atrates from 2.16% to 6.70%, weighted average rate of 2.95% at
September 30, 2012 and September 30, 2011
|
|
$
|
17,672
|
|
|
$
|
23,117
|
|
Rates on advances were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
1.75% - 2.75%
|
|
$
|
8,868
|
|
|
$
|
11,601
|
|
2.76% - 3.75%
|
|
|
6,899
|
|
|
|
8,908
|
|
3.76% - 4.75%
|
|
|
1,788
|
|
|
|
2,446
|
|
4.76% - 5.75%
|
|
|
|
|
|
|
|
|
5.76% - 6.75%
|
|
|
117
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,672
|
|
|
$
|
23,117
|
|
|
|
|
|
|
|
|
|
|
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by
all of the Associations one to four family first mortgage loans under a blanket lien arrangement at year-end 2012 and 2011 and the Associations FHLB stock. Based on this collateral and the Associations holdings of FHLB stock, the
Association is eligible to borrow up to a total of $56,041,000 at year-end 2012.
Payments contractually required over the next five years are
as follows (in thousands):
|
|
|
|
|
|
|
September 30,
|
|
2013
|
|
$
|
4,623
|
|
2014
|
|
|
3,614
|
|
2015
|
|
|
2,948
|
|
2016
|
|
|
2,385
|
|
2017
|
|
|
1,908
|
|
Thereafter
|
|
|
2,194
|
|
|
|
|
|
|
Total
|
|
$
|
17,672
|
|
|
|
|
|
|
NOTE 11 - BENEFIT PLANS
The Association participates in the Pentegra Defined Benefit Plan for Financial Institutions (The Pentegra DB Plan), a
tax-qualified defined-benefit pension plan. The Pentegra DB Plans Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a
multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.
(Continued)
85
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 11 - BENEFIT PLANS
(Continued)
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413C and, as a result,
all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan contributions made by a participating employer may be used to provide benefits to participants of other participating employers.
Funded Status (Market value of plan assets divided by funding target) as of July 1,
|
|
|
|
|
|
|
|
|
|
|
2012*
|
|
|
2011
|
|
Source
|
|
|
Valuation
Report
|
|
|
|
Valuation
Report
|
|
|
|
|
Association Plan
|
|
|
100.75
|
%
|
|
|
82.20
|
%
|
*
|
Market value of plan assets reflects any contributions received through September 30, 2012
|
Employer Contributions
Total
contributions made to the Pentegra DB Plan, as reported on For 5500, equal $299,729,365 and $203,582,159 for the plan years ending June 30, 2011 and June 30, 2010, respectively. The Associations contributions to the Pentegra DB Plan
are not more than 5% of the total contributions to the Pentegra DB Plan.
The following contributions were paid by the Association during the
fiscal years ending September 30,
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Date Paid
|
|
Amount
|
|
|
Date Paid
|
|
Amount
|
|
12/27/2011
|
|
$
|
569,618
|
|
|
1/7/2011
|
|
$
|
560,499
|
|
|
|
|
|
|
|
9/2/2011
|
|
$
|
122,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
569,618
|
|
|
|
|
$
|
683,263
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) Plan
: A 401(k) benefit plan allows employee contributions up to 15% of their compensation, which are matched equal to 50%
of the first 6% of the compensation contributed. Expense for the years ended September 30, 2012 and 2011 was $16,000 and $22,000, respectively.
Deferred Compensation Plan
: A deferred compensation plan covers all directors and certain executive officers. Under the plan, the Association pays each participant, or their beneficiary, the
amount of fees deferred plus interest over 20 years, beginning with the individuals termination of service. A liability is accrued for the obligation under these plans. In January 2003, the Association adopted a non-contributory retirement
plan which provides benefits to directors and certain key officers. The Companys obligations under the plan have been informally funded through the purchase of single premium key man life insurance of which the Company is the beneficiary. The
expense incurred for the deferred compensation for each of the last two years was $173,000 and $199,000 resulting in a deferred compensation liability of $1,264,000 and $1,128,000 as of year-end 2012 and 2011. The cash surrender value of the key man
life insurance policies totaled $6,685,000 and $6,467,000 at September 30, 2012 and 2011, respectively.
(Continued)
86
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 12 - INCOME TAXES
The provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
Current expense
|
|
$
|
448
|
|
|
$
|
439
|
|
Deferred expense (benefit)
|
|
|
(41
|
)
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
407
|
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
The following tabulation reconciles the federal statutory tax rate of 34% to the effective rate of taxes provided for income taxes (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
Tax at statutory rate
|
|
$
|
675
|
|
|
$
|
599
|
|
Tax exempt interest
|
|
|
(271
|
)
|
|
|
(394
|
)
|
Income from company owned life insurance
|
|
|
(74
|
)
|
|
|
(77
|
)
|
Other
|
|
|
77
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense
|
|
$
|
407
|
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
|
20.49
|
%
|
|
|
11.85
|
%
|
(Continued)
87
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 12 - INCOME TAXES
(Continued)
The components of the Companys net deferred tax asset (liability) as of September 30, 2012
and 2011 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(Revised)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
356
|
|
|
$
|
384
|
|
Deferred loan origination fees
|
|
|
29
|
|
|
|
31
|
|
Allowance for loan losses
|
|
|
681
|
|
|
|
591
|
|
AMT credit carryforward
|
|
|
446
|
|
|
|
564
|
|
Fictitous loans loss
|
|
|
323
|
|
|
|
265
|
|
Other
|
|
|
68
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,903
|
|
|
|
1,855
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock dividends
|
|
|
431
|
|
|
|
431
|
|
Basis in property and equipment
|
|
|
331
|
|
|
|
343
|
|
Accretion on securities
|
|
|
32
|
|
|
|
43
|
|
Mortgage servicing rights
|
|
|
75
|
|
|
|
45
|
|
Unrealized gains on available for sale securities
|
|
|
884
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,753
|
|
|
|
1,398
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
150
|
|
|
$
|
457
|
|
|
|
|
|
|
|
|
|
|
Management evaluated whether a valuation allowance was necessary based on taxes paid in prior periods and recoverable, projected future
income, projected future reversals of deferred tax items, and tax planning strategies. Based on its assessments, management concluded that it was more likely than not that all deferred tax assets could be realized based primarily on current taxes
paid and recoverable and projected reversals of deferred tax liabilities, as well as future income. As such, no valuation allowance was recorded as of September 30, 2012 or 2011.
The Company is subject to U.S. federal income tax. The Company is no longer subject to examination by taxing authorities for years before September 30, 2009.
The Company had no unrecognized tax benefits at September 30, 2012 or 2011. No change in unrecognized tax benefits is expected in the next twelve
months.
Retained earnings at September 30, 2012 included approximately $2,341,000 for which no provision for federal income taxes has
been made. This amount represents the tax bad debt reserve at September 30, 1987, which is the end of the Associations base year for purposes of calculating the bad debt deduction for tax purposes. If this portion of retained earnings is
used in the future for any purpose other than to absorb bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability on the above amount at September 30, 2012 was approximately $796,000.
(Continued)
88
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 13 - RELATED-PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates during 2012 and 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Beginning balance
|
|
$
|
432
|
|
|
$
|
1,182
|
|
New loans
|
|
|
809
|
|
|
|
336
|
|
Repayments
|
|
|
(310
|
)
|
|
|
(1,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
931
|
|
|
$
|
432
|
|
|
|
|
|
|
|
|
|
|
Deposits from principal officers, directors, and their affiliates at year-end 2012 and 2011 were $3,028,000 and $3,179,000.
During the years ended September 30, 2012 and 2011, the Company paid approximately $37,000 to a principal officer who is a Certified Residential
Real Estate Appraiser for appraisals performed on real estate properties that were used as collateral on loans extended to customers. The appraisals are validated through an internal validation process and once a property is foreclosed upon or the
loan is deemed impaired, an appraisal from an outside party is obtained.
NOTE 14 - REGULATORY CAPITAL MATTERS
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 Associations assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.
The
Associations 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, for 2011, tangible capital to adjusted total assets (as defined).
As of September 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 Associations prompt corrective action category.
(Continued)
89
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 14 - REGULATORY CAPITAL MATTERS
(Continued)
Actual and required capital amounts (in thousands) and ratios for the Association are presented below at
September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
For Capital Adequacy
Purposes
|
|
|
To Be Well Capitalized
Under Prompt Corrective
Action Regulations
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
As of September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
(to Risk-weighted Assets)
|
|
$
|
45,499
|
|
|
|
29.29
|
%
|
|
³
$
|
12,429
|
|
|
³
|
8.00
|
%
|
|
³
$
|
15,536
|
|
|
³
|
10.00
|
%
|
Tier I Capital
(to Risk-weighted Assets)
|
|
$
|
43,547
|
|
|
|
28.03
|
%
|
|
³
$
|
6,214
|
|
|
³
|
4.00
|
%
|
|
³
|
9,322
|
|
|
³
|
6.00
|
%
|
Tier I Capital
(to Adjusted Total Assets)
|
|
$
|
43,547
|
|
|
|
13.78
|
%
|
|
³
$
|
12,644
|
|
|
³
|
4.00
|
%
|
|
³
|
15,805
|
|
|
³
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
For Capital Adequacy
Purposes
|
|
|
To Be Well Capitalized
Under Prompt Corrective
Action Regulations
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
As of September 30, 2011:
(Revised)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
(to Risk-weighted Assets)
|
|
$
|
43,233
|
|
|
|
28.19
|
%
|
|
³
$
|
12,270
|
|
|
³
|
8.00
|
%
|
|
³
$
|
15,388
|
|
|
³
|
10.00
|
%
|
Tier I Capital
(to Risk-weighted Assets)
|
|
$
|
41,575
|
|
|
|
27.11
|
%
|
|
³
$
|
6,135
|
|
|
³
|
4.00
|
%
|
|
³
|
9,203
|
|
|
³
|
6.00
|
%
|
Tier I Capital
(to Adjusted Total Assets)
|
|
$
|
41,575
|
|
|
|
12.72
|
%
|
|
³
$
|
13,076
|
|
|
³
|
4.00
|
%
|
|
³
|
16,346
|
|
|
³
|
5.00
|
%
|
Tangible Capital
(to Adjusted Total Assets)
|
|
$
|
41,575
|
|
|
|
12.72
|
%
|
|
³
$
|
4,904
|
|
|
³
|
1.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
(Continued)
90
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 14 - REGULATORY CAPITAL MATTERS
(Continued)
Regulatory capital levels reported above differ from the Associations total capital, computed in
accordance with accounting principles generally accepted in the United States (GAAP), as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
Total capital, computed in accordance with GAAP
|
|
$
|
45,285
|
|
|
$
|
42,615
|
|
Accumulated other comprehensive (income) loss
|
|
|
(1,716
|
)
|
|
|
(1,040
|
)
|
Disallowed servicing assets
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I (tangible) capital
|
|
|
43,547
|
|
|
|
41,575
|
|
Allowance for loan losses
|
|
|
1,952
|
|
|
|
1,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
|
|
$
|
45,499
|
|
|
$
|
43,233
|
|
|
|
|
|
|
|
|
|
|
Dividend Restrictions:
The Companys principal source of funds for dividend payments is dividends received from the
Association. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current
years net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. As of September 30, 2012, the Association could, without prior approval, declare dividends of
approximately $5,558,000.
NOTE 15 - LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet
customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral
at exercise of the commitment.
(Continued)
91
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 15 - LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
(Continued)
The contractual amounts of financial instruments with off-balance-sheet risk at September 30, 2012
and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
Fixed
Rate
|
|
|
Rate
|
|
Variable
Rate
|
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
Commitments to make loans held for sale
|
|
$
|
1,696,000
|
|
|
3.00% - 3.65%
|
|
$
|
|
|
|
|
|
$
|
1,696,000
|
|
Commitments to make loans
|
|
|
1,200,000
|
|
|
6.00%
|
|
|
178,000
|
|
|
3.50% - 3.99%
|
|
|
1,378,000
|
|
Unused lines of credit
|
|
|
2,641,000
|
|
|
5.00% - 6.99%
|
|
|
2,247,000
|
|
|
3.25% - 6.50%
|
|
|
4,888,000
|
|
Standby letters of credit
|
|
|
40,000
|
|
|
0.00%
|
|
|
40,000
|
|
|
4.25%
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
Fixed
Rate
|
|
|
Rate
|
|
Variable
Rate
|
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
Commitments to make loans held for sale
|
|
$
|
609,000
|
|
|
3.375% - 4.00%
|
|
$
|
|
|
|
|
|
$
|
609,000
|
|
Commitments to make loans
|
|
|
740,000
|
|
|
6.00% - 6.50%
|
|
|
1,669,000
|
|
|
3.99% - 5.50%
|
|
|
2,409,000
|
|
Unused lines of credit
|
|
|
2,799,000
|
|
|
3.25% - 5.25%
|
|
|
1,239,000
|
|
|
3.25% - 5.25%
|
|
|
4,038,000
|
|
Standby letters of credit
|
|
|
|
|
|
|
|
|
40,000
|
|
|
4.25%
|
|
|
40,000
|
|
NOTE 16 - ESOP PLAN
Employees participate in an Employee Stock Option Plan (ESOP). The ESOP borrowed from the Company to purchase 269,790 shares of stock
at $10 per share. The Company makes discretionary contributions to the ESOP, as well as paying 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.
Contribution to the ESOP for the year ended September 30, 2012 and 2011 totaled $46,000 and $0.
Shares held by the ESOP at September 30, 2012 and 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Allocated to participants
|
|
$
|
3,372
|
|
|
$
|
|
|
Unearned
|
|
|
266,418
|
|
|
|
269,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP shares
|
|
|
269,790
|
|
|
|
269,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of unearned shares
|
|
$
|
3,282
|
|
|
$
|
2,973
|
|
|
|
|
|
|
|
|
|
|
(Continued)
92
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 17 - EARNINGS PER SHARE
The factors used in the earnings per share computation, at September 30, 2012 and 2011, follow (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Basic
|
|
|
|
|
|
|
|
|
Net income (2011 includes only post converstion period September 12, 2011 to September 30, 2011)
|
|
$
|
1,579
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
3,372,375
|
|
|
|
3,372,375
|
|
Less: Average unallocated ESOP shares
|
|
|
(267,238
|
)
|
|
|
(269,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares
|
|
|
3,105,137
|
|
|
|
3,102,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.51
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,579
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per common share
|
|
|
3,105,137
|
|
|
|
3,102,585
|
|
Add: Dilutive effects of assumed exercises of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares and dilutive potential common shares
|
|
|
3,105,137
|
|
|
|
3,102,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.51
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
There were no potentially dilutive securities outstanding as of September 30, 2012 or 2011.
(Continued)
93
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 18 - HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following balance sheets, statements of income and statements of cash flows for Poage Bankshares, Inc. should be read in
conjunction with the financial statements and notes thereto.
BALANCE SHEETS
September 30, 2012 and 2011
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
(Revised)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,428
|
|
|
$
|
13,461
|
|
Investment in Bank
|
|
|
45,285
|
|
|
|
42,614
|
|
ESOP note receivable
|
|
|
2,678
|
|
|
|
2,698
|
|
Other assets
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
60,612
|
|
|
$
|
58,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
30
|
|
|
$
|
200
|
|
|
|
|
Total shareholders equity
|
|
|
60,582
|
|
|
|
58,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
60,612
|
|
|
$
|
58,773
|
|
|
|
|
|
|
|
|
|
|
(Continued)
94
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 18 - HOLDING COMPANY ONLY FINANCIAL STATEMENTS
(Continued)
STATEMENTS OF INCOME
For the Year Ended September 30, 2012 and the
Period from September 12, 2011 through September 30, 2011
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended
September 30,
2012
|
|
|
Period From
September 12, 2011
through September 30,
2011
|
|
|
|
|
Interest and dividend income
|
|
$
|
92
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
92
|
|
|
|
|
|
Noninterest expense
|
|
|
482
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in undistributed income of Bank
|
|
|
(390
|
)
|
|
|
(53
|
)
|
Income tax benefit
|
|
|
(133
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before equity in undistributed income of Bank
|
|
|
(257
|
)
|
|
|
(35
|
)
|
Equity in undistributed income of Bank
|
|
|
1,836
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,579
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
(Continued)
95
POAGE BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
NOTE 18 - HOLDING COMPANY ONLY FINANCIAL STATEMENTS
(Continued)
STATEMENTS OF CASH FLOWS
For the Year Ended September 30, 2012 and the
Period from September 12, 2011 through September 30, 2011
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended
September 30,
2012
|
|
|
Period from
September 12, 2011
through September 30,
2011
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,579
|
|
|
$
|
33
|
|
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of Bank
|
|
|
(1,836
|
)
|
|
|
|
|
Increase in other assets
|
|
|
(221
|
)
|
|
|
(68
|
)
|
Increase (Decrease) in other liabilities
|
|
|
(170
|
)
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities
|
|
|
(648
|
)
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital contribution to Bank
|
|
|
|
|
|
|
(15,995
|
)
|
Loan to ESOP to finance shares
|
|
|
|
|
|
|
(2,698
|
)
|
Payments received on loan to ESOP
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) for investing activities
|
|
|
20
|
|
|
|
(18,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of costs
|
|
|
|
|
|
|
31,989
|
|
Dividends paid
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
|
|
(405
|
)
|
|
|
31,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,033
|
)
|
|
|
13,461
|
|
Cash and cash equivalents at beginning of period
|
|
|
13,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
12,428
|
|
|
$
|
13,461
|
|
|
|
|
|
|
|
|
|
|
96
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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Not Applicable.
ITEM 9A.
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CONTROLS AND PROCEDURES
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(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the fiscal year (the Evaluation Date). Based upon that evaluation, the Chief Executive Officer and 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 Securities Exchange Act of 1934, as amended (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 disclosure.
(b) Managements Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that:
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pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our
assets;
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provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with
accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
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provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a
material effect on the financial statements.
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Because of its inherent limitations, a system of internal
control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness as to future periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system
contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
Our management and
audit committee conducted an evaluation of the effectiveness of the system of internal control over financial reporting as of September 30, 2012 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal ControlIntegrated Framework. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Based on our assessment, we believe that, as of September 30, 2012, the Companys internal control over financial reporting was
not effective based on those criteria because management identified the following material weaknesses.
97
Underwriting and Approval and Lack of Effective Supervision and Oversight by Management
Over the Loan Approval Process With Respect to Certain Loans.
The Company is in the process of conducting an extensive
internal review of our internal controls with the assistance of outside independent professional firms and its internal audit department, with specific focus on our loan underwriting, approval and review procedures. In the course of this review,
management discovered that an employee had been using our share loan product to make fictitious loans and convert the proceeds to her own use, and, in connection with these fictitious loans, also had been improperly accessing branch cash drawers.
This employee is no longer with the Company. As a result of the internal investigation, 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.
As a result of the internal
investigations, management determined that we were required to record a charge for impairment of certain loans in the aggregate amount of $950,000 including accrued interest of $127,000. We have adjusted our opening retained earnings for 2011 for
the item described above, which adjustment is reflected in the consolidated financial statements contained in this Annual Report on Form 10-K, and consider these adjustments to be immaterial to prior periods.
Management determined that these significant control deficiencies, combined with the material adjustment to the Companys retained
earnings, constitute a material weakness in the Companys internal control over financial reporting.
Promptly following
the identification of the material weakness related to the fraud described above, we began taking the following steps to remediate this material weakness, with a specific focus on enhancing oversight of loan origination, loan processing function,
underwriting, branch management and cash control functions:
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management reviewed this material weakness with our audit committee, senior management and independent public accounting firm;
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management reviewed with the board of directors the policies previously introduced in August, 2012, which modified the loan product that the employee
used to perpetrate fraud, and which resulted in the discovery of the fictitious loans;
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the board of directors approved modifications of such loan product and the administration of such loan product, which are intended to eliminate the
possibility of future fraud; and
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management is in the process of centralizing the dual control of cash collateral associated with each individual loan.
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In addition to the steps management has taken, management intends to continue develop and improve our management oversight and loan
approval process as our ongoing remediation efforts are pursued, including:
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continuing to review and monitor the material weakness and the effectiveness of our remedial actions with our audit committee and senior management;
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continuing to enhance loan documentation and underwriting procedures;
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reinforcing our loan review policies and procedures, including the engagement of a third party loan review firm to assist in our loan evaluations;
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continuing to enhance branch management policies and procedures, particularly with respect to access to cash on hand; and
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engaging a third party accounting firm to perform a forensic investigation into the fictitious loans.
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Management believes that these changes will contribute significantly to the remediation of the material weakness in internal control over
financial reporting that was in existence as of September 30, 2012. Additional changes will be implemented as determined necessary.
Although the Companys remediation efforts are well underway and are expected to be completed in the near future, the Companys weakness will not be considered remediated until new internal
controls are operational for a period of time and are tested, and management and concludes that these controls are operating effectively.
98
Improper Accounting for a Third Party Contract.
During the conduct of our 2012 audit, we learned that we had not properly accounted for a contract with the FHLBCincinnati related
to the sale of mortgage loans to the FHLBCincinnati, and that to account for this contract correctly, an asset and a corresponding gain on sale of loans should have been recorded. While this did not result in a material adjustment to our
financial statements, we believe that our internal controls would not have identified this deficiency and that the matter could have become material in the future.
Management is in the process of designing controls, which will be implemented during the first quarter of 2013, to ensure accounting for the contract is accurate.
(c) Changes in internal controls.
Other than as discussed above, there were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that has materially affected
or is reasonably likely to materially affect, the Companys internal control over financial reporting.
ITEM 9B.
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OTHER INFORMATION
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None.
PART III
ITEM 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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The information required by Item 10 of Form 10-K appears under the caption Proposal IElection of Directors in the Proxy Statement for the Companys 2013 Annual Meeting of
Stockholders (the Proxy Statement) and is hereby incorporated by reference.
ITEM 11.
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EXECUTIVE COMPENSATION
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The information required by Item 11 of Form 10-K appears under the caption Executive Compensation in the Proxy Statement
and is hereby incorporated by reference.
ITEM 12.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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The information required by Item 12 of Form 10-K appears under the caption Voting Securities and Principal Holders in the
Proxy Statement and is hereby incorporated by reference.
ITEM 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
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The information required by Item 13 of Form 10-K appears under the caption Proposal IElection of Directors in the Proxy Statement and is hereby incorporated by reference.
ITEM 14.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
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The information required by Item 10 of Form 10-K appears under the caption Proposal VRatification of Appointment of Independent Registered Public Accounting Firm in the Proxy Statement
and is hereby incorporated by reference.
99
ITEM 15.
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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(a)(1)
Financial Statements
The following documents are filed as item 8
of this Form 10-K.
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(A)
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Report of Independent Registered Public Accounting Firm
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(B)
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Consolidated Balance Sheets at September 30, 2012 and 2011
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(C)
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Statements of Income Years ended September 30, 2012 and 2011
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(D)
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Consolidated Statements of Comprehensive Income Years ended September 30, 2012 and 2011
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(E)
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Consolidated Statements of Changes In Shareholders Equity Years ended September 30, 2012 and 2011
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(F)
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Consolidated Statements of Cash Flows Years ended September 30, 2012 and 2011
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(G)
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Notes to Consolidated Financial Statements
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(a)(2)
Financial Statement Schedules
(a)(3)
Exhibits
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3.1
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Articles of Incorporation of Poage Bankshares, Inc.*
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3.2
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Bylaws of Poage Bankshares, Inc.*
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4
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Form of Common Stock Certificate of Poage Bankshares, Inc.*
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10.1
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Form of Employee Stock Ownership Plan*
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10.2
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Employment Agreement, dated April 26, 2012, by and between Ralph E. Coffman, Jr. and Home Federal Savings and Loan Association**
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10.3
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Employment dated May 1, 2011, by and among Miles R. Armentrout, Poage Bankshares, Inc. and Home Federal Savings and Loan Association***
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10.4
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Non-Competition, Consulting and Health Insurance Agreement, dated April 29, 2011, by and between Robert S. Curtis and Home Federal Savings and Loan
Association*
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10.5
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Retention and Non-Competition Agreement, dated April 29, 2011, by and between Robert S. Curtis and Home Federal Savings and Loan Association*
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10.6
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Three Year Change in Control Agreement, dated September 12, 2011, by and between Darryl E. Akers and Home Federal Savings and Loan Association.*
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100
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10.7
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Three Year Change in Control Agreement, dated September 12, 2011, by and between Robert S. Curtis and Home Federal Savings and Loan Association.*
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10.8
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Three Year Change in Control Agreement, dated September 12, 2011, by and between James W. King and Home Federal Savings and Loan Association.*
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10.9
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Life Insurance Endorsement Method Split Dollar Plan Agreement, dated April 29, 2003, by and between Darryl E. Akers and Home Federal Savings and Loan
Association.
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10.10
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Life Insurance Endorsement Method Split Dollar Plan Agreement, dated April 29, 2003, by and between James W. King and Home Federal Savings and Loan
Association.
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10.11
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Form of Director Supplemental Retirement Plan Agreement.*
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10.12
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Form of Executive Supplemental Retirement Plan Agreement.*
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10.13
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Form of Amendment to the Executive Supplemental Retirement Plan Agreement.*
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10.14
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Change in Salary of Ralph E. Coffman, Jr. and James W. King.***
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21
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Subsidiaries of registrant*
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31.1
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Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32
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Certification of Co-Chief Executive Officers and Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002.
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101
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Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011,
(ii) the Statements of Income for the years ended September 30, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Income for the years ended September 30, 2012 and 2011, (iv) the Consolidated Statements of
Changes in Shareholders Equity for the years ended September 30, 2012 and 2011, (v) the Consolidated Statements of Cash Flows for the years ended September 30, 2012 and 2011, and (vi) the Notes to the Consolidated Financial
Statements.****
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*
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Incorporated by reference to the Registration Statement on Form S-1 of Poage Bankshares, Inc. (File No. 333-172192, originally filed with the Securities and
Exchange Commission on February 11, 2011, and as subsequently amended).
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**
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Incorporated by reference to the Current Report on Form 8-K of Poage Bankshares, Inc. (File No. 001-35295, filed with the Securities and Exchange Commission on
April 30, 2012).
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***
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Incorporated by reference to the Current Report on Form 8-K of Poage Bankshares, Inc. (File No. 001-35295, filed with the Securities and Exchange Commission on
June 27, 2012).
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****
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Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under
those sections.
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101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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Poage Bankshares, Inc.
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Date: December 18, 2012
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/s/ Ralph E. Coffman, Jr.
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Ralph E. Coffman, Jr.
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President & Chief Executive Officer
(duly authorized representative)
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Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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Name
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Position
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Date
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By:
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/s/ Ralph E. Coffman, Jr.
Ralph E. Coffman, Jr.
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President & Chief Executive Officer
(Principal Executive Officer)
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December 18, 2012
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By:
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/s/ Jeffery W. Clark
Jeffery W. Clark
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Chief Financial Officer
(Principal Financial and Accounting Officer)
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December 18, 2012
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By:
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/s/ J. Thomas Rupert
J. Thomas Rupert
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Chairman of the Board
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December 18, 2012
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By:
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/s/ Darryl E. Akers
Darryl E. Akers
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Director
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December 18, 2012
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By:
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/s/ Robert S. Curtis
Robert S. Curtis
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Director
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December 18, 2012
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By:
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/s/ Everette B. Gevedon
Everette B. Gevedon
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Director
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December 18, 2012
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By:
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/s/ Thomas P. Carver
Thomas P. Carver
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Director
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December 18, 2012
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By:
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/s/ Stuart N. Moore
Stuart N. Moore
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Director
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December 18, 2012
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By:
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/s/ Charles W. Robinson
Charles W. Robinson
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Director
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December 18, 2012
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102
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