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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|
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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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|
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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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|
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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
|
|
|
2,004
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|
|
|
|
|
|
|
1,658
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|
|
|
|
|
|
|
1,134
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|
|
|
|
|
|
|
555
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|
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|
|
254
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|
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|
|
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|
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Loans, net
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$
|
179,998
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$
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183,023
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|
|
|
$
|
181,865
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|
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|
|
|
$
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166,484
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|
|
|
|
$
|
111,230
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|
|
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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
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|
Multi-Family
and
Commercial
Real Estate
|
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|
Construction
and Land
|
|
|
Commercial
Business
|
|
|
Consumer
|
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|
Total
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(Dollars in thousands)
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|
|
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Amounts due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
1,619
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|
|
$
|
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:
|
(i)
|
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
|
28
|
(ii)
|
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.
|
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
.
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:
|
|
|
well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);
|
|
|
|
adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);
|
|
|
|
undercapitalized (less than 4% leverage capital, 4% Tier 1 risk-based capital or 8% total risk-based capital);
|
|
|
|
significantly undercapitalized (less than 3% leverage capital, 3% Tier 1 risk-based capital or 6% total risk-based capital); and
|
|
|
|
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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(ii)
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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
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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
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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.
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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.