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PBSK > SEC Filings for PBSK > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for POAGE BANKSHARES, INC.

Form 10-Q for POAGE BANKSHARES, INC.


14-Aug-2013

Quarterly Report


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

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

statements of our goals, intentions and expectations;

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

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

estimates of our risks and future costs and benefits.

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

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

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

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

significant increases in our loan losses, exceeding our allowance;

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

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

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

significant increases in our loan losses;

our ability to increase multi-family, commercial real estate and commercial loan portfolio while maintaining asset quality;

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

our ability to pay dividends;

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

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

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

potential increases in deposit assessments;

significantly increased competition among depository and other financial institutions;

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

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

changes in the level of government support of housing finance;

significantly increased competition with financial institutions;

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

changes in our organization, compensation and benefit plans.

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


Table of Contents

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in Poage Bankshares, Inc.'s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 19, 2012.

Comparison of Financial Condition at June 30, 2013 and September 30, 2012

Our total assets decreased $17.4 million, or 5.5%, to $299.8 million at June 30, 2013 from $317.2 million at September 30, 2012. The decrease was primarily due to a decrease of cash and due from financial institutions of $10.5 million, or 44.9%, to $12.9 million at June 30, 2013 from $23.4 million at September 30, 2012 and a decrease in loans receivable of $5.3 million, or 2.9%, to $174.7 million at June 30, 2013 from $180.0 million at September 30, 2012.

Loans receivable, net, decreased $5.3 million, or 2.9%, to $174.7 million at June 30, 2013 from $180.0 million at September 30, 2012. This decrease was largely due to reduced one-to-four family loan in house originations, increases in loans sold in the secondary market and the reduced level of refinancing, partially offset by increases in other loan products. Non-performing loans decreased to $764,000, or 41.2% of total loans at June 30, 2013 from $1.3 million September 30, 2012.

Loans held for sale decreased $364,000, or 50.6%, to $355,000 at June 30, 2013 from $719,000 at September 30, 2012.

Securities available for sale decreased $1.2 million, or 1.3%, to $93.3 million at June 30, 2013 from $94.5 million at September 30, 2012.

Deposits decreased $11.9 million, or 5.0%, to $224.5 million at June 30, 2013 from $236.4 million at September 30, 2012. The decrease was primarily attributable to a decrease of $10.8 million, or 7.7%, in certificates of deposit, as well a decrease in savings and NOW accounts of $0.7 million, or 0.8%. The decrease in certificates of deposit is primarily related to depositors seeking better yields on their funds through other sources given the low interest rate environment.

Federal Home Loan Bank advances decreased $3.2 million, or 18.1%, to $14.5 million at June 30, 2013 from $17.7 million at September 30, 2012. This decrease in borrowings was primarily the result of regular principal payments and maturities.

Total shareholders' equity decreased $2.1 million, or 3.5%, to $58.5 million at June 30, 2013, compared to $60.6 million at September 30, 2012. The decrease resulted primarily from a decrease in accumulated other comprehensive income of $1.6 million, cash dividends of $0.4 million and repurchases of company stock in the amount of $2.0 million, partially offset by net income of $1.8 million for the nine months ended June 30, 2013. The decrease in accumulated other comprehensive income was due to an increase in unrealized losses on securities available for sale.


Table of Contents

Average Balance and Yields

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

                                                                For the Three Months Ended June 30,
                                                          2013                                        2012
                                                        Interest                                    Interest
                                          Average          and          Yield/        Average          and          Yield/
                                          Balance       Dividends        Cost         Balance       Dividends        Cost
                                                                                                    (revised)
Assets:
Interest-earning assets:
Loans                                    $ 174,305     $     2,407         5.52 %    $ 180,048     $     2,592         5.76 %
Investment securities                       94,466             464         1.96 %       99,557             609         2.45 %
FHLB stock                                   1,953              21         4.30 %        1,947              20         4.11 %
Other interest-earning assets               11,272               7         0.25 %       19,712               7         0.14 %

Total interest-earning assets              281,996           2,899         4.11 %      301,264           3,228         4.29 %

Noninterest-earning assets                  25,825                                      19,392

Total assets                               307,821                                     320,656

Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other       88,601              35         0.16 %       93,919              82         0.35 %
Certificates of deposit                    133,141             387         1.16 %      142,258             533         1.50 %

Total interest bearing deposits            221,742             422         0.76 %      236,177             615         1.04 %

FHLB advances                               17,486             110         2.52 %       19,758             146         2.96 %

Total interest bearing liabilities         239,228             532         0.89 %      255,935             761         1.19 %

Non-interest bearing liabilities:
Non-interest bearing deposits                5,909                                       1,014
Accrued interest payable                       180                                         353
Other liabilities                            3,433                                       2,898

Total non-interest bearing liabilities       9,522                                       4,265

Total liabilities                          248,750                                     260,200

Total equity                                59,071                                      60,457

Total liabilities and equity             $ 307,821                                   $ 320,657

Net interest income                                          2,367                                       2,467
Interest rate spread                                                       3.22 %                                      3.10 %
Net interest margin                                                        3.36 %                                      3.28 %
Average interest-earning assets to
average interest-bearing liabilities                        117.88 %                                    117.71 %


Table of Contents
                                                                 For the Nine Months Ended June 30,
                                                          2013                                        2012
                                                        Interest                                    Interest
                                          Average          and          Yield/        Average          and          Yield/
                                          Balance       Dividends        Cost         Balance       Dividends        Cost
                                                                                                    (revised)
Assets:
Interest-earning assets:
Loans                                    $ 176,579     $     7,407         5.59 %    $ 181,056     $     7,966         5.87 %
Investment securities                       96,703           1,387         1.91 %       96,671           1,797         2.48 %
FHLB stock                                   1,953              65         4.44 %        1,919              61         4.24 %
Other interest-earning assets               17,726              26         0.20 %       22,711              31         0.18 %

Total interest-earning assets              292,961           8,885         4.04 %      302,357           9,855         4.35 %

Noninterest-earning assets                  19,173                                      20,555

Total assets                               312,134                                     322,912

Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other       87,587             191         0.29 %       91,526             292         0.43 %
Certificates of deposit                    133,710           1,291         1.29 %      144,471           1,764         1.63 %

Total interest bearing deposits            221,297           1,482         0.89 %      235,997           2,056         1.16 %

FHLB advances                               15,979             353         2.95 %       21,057             475         3.01 %

Total interest bearing liabilities         237,276           1,835         1.03 %      257,054           2,531         1.31 %

Non-interest bearing liabilities:
Non-interest bearing deposits                6,203                                         956
Accrued interest payable                       311                                         380
Other liabilities                            8,809                                       4,651

Total non-interest bearing liabilities      15,323                                       5,987

Total liabilities                          252,599                                     263,041

Total equity                                59,535                                      59,871

Total liabilities and equity             $ 312,134                                   $ 322,912

Net interest income                                          7,050                                       7,324
Interest rate spread                                                       3.01 %                                      3.04 %
Net interest margin                                                        3.21 %                                      3.23 %
Average interest-earning assets to
average interest-bearing liabilities                        123.47 %                                    117.62 %


Table of Contents

Liquidity and Capital Resources

Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. We also utilize Federal Home Loan Bank advances. While maturities and scheduled amortization of loans and securities are predicable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to maintain core deposit relationships.

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management's assessment of
(i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold and short and intermediate-term investment securities. If we require funds beyond our ability to generate them internally we have additional borrowing capacity with the Federal Home Loan Bank of Cincinnati. At June 30, 2013, we had $14.4 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $59.6 million.

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

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

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

As of June 30, 2013, based on the most recent notification from the OCC, the Association was categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the most recent notification that management believes have changed the Association's prompt corrective action category.


Table of Contents

Actual and required capital amounts (in thousands) and ratios for the Association are presented below at June 30, 2013 and year-end:

                                                                                                                     To Be Well
                                                                                                                 Capitalized Under
                                                                             For Capital Adequacy                Prompt Corrective
                                              Actual                               Purposes                      Action Regulations
                                        Amount       Ratio                 Amount               Ratio        Amount               Ratio
As of June 30, 2013:
Total Risk-Based Capital
(to Risk-weighted Assets)              $ 47,704       31.01 %           $   12,307              8.00 %    $ 15,383              10.00 %
Tier I Capital
(to Risk-weighted Assets)                45,781       29.76 %                6,153              4.00 %       9,230               6.00 %
Tier I Capital
(to Adjusted Total Assets)               45,781       15.29 %               11,978              4.00 %      14,972               5.00 %




                                                                                                                     To Be Well
                                                                                                                 Capitalized Under
                                                                             For Capital Adequacy                Prompt Corrective
                                              Actual                               Purposes                      Action Regulations
                                        Amount       Ratio                 Amount               Ratio        Amount               Ratio
As of September 30, 2012:
Total Risk-Based Capital
(to Risk-weighted Assets)              $ 45,499       29.29 %           $   12,429              8.00 %    $ 15,388              10.00 %
Tier I Capital
(to Risk-weighted Assets)                43,547       28.03 %                6,214              4.00 %       9,203               6.00 %
Tier I Capital
(to Adjusted Total Assets)               43,547       13.78 %               12,644              4.00 %      16,346               5.00 %

In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Company and the Association on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

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

Comparison of Operating Results for the Three and Nine Months Ended June 30, 2013 and June 30, 2012

General. Net income increased to $878,000 for the three months ended June 30, 2013 from $549,000 for the three months ended June 30, 2012. The increase reflected an increase in non-interest income of $820,000 to $1.2 million for the three months ended June 30, 2013 from $346,000 for the three months ended June 30, 2012, partially offset by a decrease in net interest income of $100,000 and an increase in non-interest expense of $197,000 for the three months ended June 30, 2013.

Net income increased to $1.8 million for the nine months ended June 30, 2013 from $1.6 million for the nine months ended June 30, 2012. The increase reflected an increase in non-interest income of $786,000 to $1.9 million for the nine months ended June 30, 2013 from $1.2 million for the nine months ended June 30, 2012, partially offset by a decrease in net interest income of $274,000 and an increase in non-interest expense of $332,000 for the nine months ended June 30, 2013.

Interest Income.Interest income decreased to $2.9 million for the three months ended June 30, 2013 from $3.2 million for the three months ended June 30, 2012.

Interest income on loans decreased $185,000, or 7.1%, to $2.4 million for the three months ended June 30, 2013 from $2.6 million for the three months ended June 30, 2012. The average balance of loans decreased $5.7 million, or 3.2%, to $174.3 million for the three months ended June 30, 2013 from $180.0 million for the three months ended June 30, 2012. Likewise, the average yields on loans decreased to 5.52% for the three months ended June 30, 2013, compared to 5.76% for the three months ended June 30, 2012. Interest income on investment securities decreased $145,000, or 23.8%, to $464,000 for the three months ended June 30, 2013 from $609,000 for the three months ended June 30, 2012. The decrease resulted from a decrease in the average balance of such securities to $94.4 million at June 30, 2013 from $99.6 million at June 30, 2012 and a decrease in average yield to 1.96% for the three months ended June 30, 2013, compared to 2.45% for the three months ended June 30, 2012.


Table of Contents

Interest income decreased $970,000, or 9.8%, to $8.9 million for the nine months ended June 30, 2013 from $9.9 million for the nine months ended June 30, 2012.

Interest income on loans decreased $559,000, or 7.0%, to $7.4 million for the nine months ended June 30, 2013, from $8.0 million for the nine months ended June 30, 2012. The average balance of loans decreased $4.5 million, or 2.5%, to $176.6 million for the nine months ended June 30, 2013 from $181.1 million for the nine months ended June 30, 2012. The average yields on loans decreased to 5.59% for the nine months ended June 30, 2013, compared to 5.87% for the nine months ended June 30, 2012. Interest income on investment securities decreased $410,000, or 22.9%, to $1.4 million for the nine months ended June 30, 2013 from $1.8 million for the nine months ended June 30, 2012. The average balance of such securities remained constant at June 30, 2013 and 2012 at $96.7 million. The average yield on investment securities decreased to 1.91% for the nine months ended June 30, 2013, compared to 2.48% for the nine months ended June 30, 2012.

Interest Expense. Interest expense decreased $229,000, or 30.1%, to $532,000 for the three months ended June 30, 2013 from $761,000 for the three months ended June 30, 2012. The decrease primarily reflected a decrease in the average rate paid on deposits to 0.76% for the three months ended June 30, 2013 from 1.04% for the three months ended June 30, 2012, and a decrease in the average balance of deposits to $221.7 million from $236.2 million for the same periods. Interest expense on Federal Home Loan Bank Advances decreased $36,000 or 24.7% to $110,000 for the three months ended June 30, 2013 from $146,000 for the three months ended June 30, 2012. This decrease was due to a decrease of $2.3 million in the average balance of these borrowings, and a 44 basis point decrease in the average rate paid on these borrowings.

Interest expense decreased $696,000, or 27.5%, to $1.8 million for the nine months ended June 30, 2013 from $2.5 million for the nine months ended June 30, 2012. The decrease primarily reflected a decrease in the average rate paid on deposits to 0.89% for the nine months ended June 30, 2013 from 1.16% for the nine months ended June 30, 2012, and a decrease in the average balance of deposits from $236.9 million to $221.3 million for the same periods. Interest expense on Federal Home Loan Bank Advances decreased $122,000 or 25.7% to $353,000 for the nine months ended June 30, 2013 from $475,000 for the nine months ended June 30, 2012. This decrease was due to a decrease of $5.1 million in the average balance of these borrowings, and a 6 basis point decrease in the average rate paid on these borrowings.

Interest expense on certificates of deposits decreased $146,000, or 27.4%, to $387,000 for the three months ended June 30, 2013 from $533,000 for the three months ended June 30, 2012. This decrease reflected a decrease in the average rate paid on certificates of deposits to 1.16% for the three months ended June 30, 2013 from 1.50% for the three months ended June 30, 2012, as well as a decrease in the average balance of such certificates to $133.1 million from $142.3 million. Interest expense on money market deposits, savings, and NOW and demand deposits decreased $47,000, or 57.3%, to $35,000 for the three months ended June 30, 2013 from $82,000 for the three months ended June 30, 2012. The decrease was due to a decrease in cost on these deposits to 0.16% for the three months ended June 30, 2013 from 0.35% for the three months ended June 30, 2012, as well as a decrease in average balance of such deposits to $88.6 million from $93.9 million.

. . .

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