NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles
of Consolidation
: The consolidated financial statements include Poage Bankshares, Inc. (the “Company” or “Poage
Bankshares”) and the Company’s wholly owned subsidiary, Town Square Bank (the “Bank”) (which was formerly
operated under the name “Home Federal Savings and Loan Association”). The Company’s principal business is the
business of the Bank. Inter-company transactions and balances are eliminated in consolidation.
The Bank is a federally chartered savings
association. The Bank currently serves the financial needs of communities in its market area through its main office located in
Ashland, Kentucky and its branch offices located in Flatwoods, South Shore, Louisa, Cannonsburg, Nicholasville, Greenup and Mt.
Sterling, Kentucky. The Bank also has a loan production office located in the Cincinnati, Ohio. The Bank’s business involves
attracting deposits from the general public and using such deposits, together with other funds, to originate one-to-four family
residential mortgage loans, commercial and multi-family real estate loans, construction loans, commercial and industrial loans
and consumer loans primarily in its market area which includes the Kentucky counties of Boyd, Greenup, Jessamine, Lawrence, Montgomery,
Fayette and Campbell and the Ohio counties of Scioto, Lawrence, Hamilton, Butler, Warren and Clermont.
Use of Estimates
: To prepare financial
statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates
and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements
and the disclosures provided, and actual results could differ.
Cash Flows
: Cash and cash equivalents
include cash, deposits with other financial institutions with maturities fewer than 90 days, and federal funds sold. Net cash flows
are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, federal funds
purchased and sold, and repurchase agreements.
Interest Bearing Deposits in Other Financial
Institutions
: Interest bearing deposits in other financial institutions mature within five year and are carried at cost.
Securities
: Debt securities are
classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to
maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with
readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax.
Interest income includes amortization of
purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating
prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on
the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary
impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such
an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized
loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or
it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized
cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost
and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria,
the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the
income statement, and 2) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive
income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected
and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
Loans Held for Sale
: Mortgage loans
originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined
by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings.
Mortgage loans held for sale are generally
sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing
right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value
of the related loan sold.
Loans
: Loans that management has
the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding,
net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance.
Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the contractual
life of the loan using the level-yield method without anticipating prepayments.
Interest income on mortgage and commercial
loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection.
Consumer loans are typically charged off no later than 120 days past due. Real estate loans and commercial and industrial loans
are charged off on a case by case basis at such time that management determines the loan to be uncollectible. Past due status of
all loan types is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an
earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on
accrual include both smaller balance homogeneous loans and individually classified impaired loans. All loan types are moved to
non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment.
All interest accrued but not received for
all loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis
or cost-recovery method, until qualifying for return to accrual. All types of loans are returned to accrual status when all the
principal and interest are brought current and the loan has been performing according to the contractual terms for a period of
not less than 6 months.
Concentration of Credit Risk
: The
majority of the Company’s business activity is with customers located within a 25 mile radius of its branch and loan production
office. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in those areas.
Purchased Credit Impaired Loans
:
The Company purchases groups of loans, some of which have shown evidence of credit deterioration since origination. These purchased
credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan
losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.
Such purchased credit impaired loans are
accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type,
and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected
cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield).
The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable
difference).
Allowance for Loan Losses
: The allowance
for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed. If a loan is categorized as loss under the regulatory
definitions of loan classifications, the loan is immediately charged off. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information
about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment,
should be charged off. The allowance for loan losses reflects the estimate management believes to be appropriate to cover incurred
probable losses which are inherent in the loan portfolio at December 31, 2017 and 2016.
The allowance consists of specific and
general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified
as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted
for qualitative factors.
A loan is impaired when, based on current
information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Loans, for which the terms have been modified at the borrower’s request, and for which the borrower
is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally
are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal
and interest owed. Impairment is measured on a loan by loan basis for all commercial and construction loans by either the present
value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market
price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans
are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential
mortgage loans for impairment disclosures.
TDRs are individually evaluated for impairment
and included in the separately identified impairment disclosures. TDRs are measured at the present value of estimated future cash
flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is
reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of the
allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified
as impaired.
The general component of the allowance
covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience
is determined by portfolio segment and is based on the actual loss history experienced by the Company. This actual loss experience
is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include
consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and
recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes
in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff;
national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following
portfolio segments have been identified as having differing risk characteristics:
Real estate loans:
Loans secured
by real estate represent the lowest risk of loans for the Company. The majority of loans in this segment are loans secured by the
borrower’s principal residence; however, there are also loans secured by apartment buildings, non-owner occupied property,
commercial real estate, or construction and land development projects. They include fixed and floating rate loans as well as loans
for commercial purposes or consumer purposes. Borrowers with loans in this category, whether for commercial or consumer purposes,
tend to make their payments timely as they do not want to risk foreclosure and loss of the real estate.
Commercial and industrial loans:
These loans to businesses do not have real estate as the underlying collateral. Instead of real estate, collateral could be business
assets such as equipment or accounts receivable or the personal guarantee of one or more guarantors. These loans generally present
a higher level of risk than loans secured by real estate because in the event of default by the borrower, the business assets must
be liquidated and/or guarantors pursued for deficit funds. Business assets are worth more while they are in use to produce income
for the business and worth significantly less if the business is no longer in operation. For this reason, the Company discounts
the value on these types of collateral prior to meeting the Company’s loan-to-value policy limits.
Consumer loans:
Consumer loans are
generally loans to borrowers for non-business purposes. They can be either secured or unsecured. Consumer loans are generally small
in the individual amount of principal outstanding and are repaid from the borrower’s private funds earned from employment.
Consumer lending risk is very susceptible to local economic trends. If there is a consumer loan default, any collateral that may
be repossessed is generally not well maintained and has a diminished value. For this reason, consumer loans tend to have higher
overall interest rates to cover the higher cost of repossession and charge-offs. However, due to their smaller average balance
per borrower, consumer loans are collectively evaluated for impairment in determining the appropriate allowance for loan losses.
Servicing Rights
: Servicing rights
are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially
recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices
for comparable mortgage servicing contracts when available or, alternatively, is based on a valuation model that calculates the
present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization
method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying loans. Servicing rights are included in the other assets line item of the balance
sheet.
Servicing rights are evaluated for impairment
based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings
based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through
a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company
later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance
may be recorded as an increase to income. No valuation allowance was required at December 31, 2017 or 2016. The fair values of
servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default
rates and losses.
Servicing fee income which is reported
on the income statement as other income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage
of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing
rights is netted against loan servicing fee income.
Other Real Estate Owned
: Assets
acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing
a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when
legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the
loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently accounted
for at the lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation
allowance is recorded through expense. Operating costs after acquisition are expensed.
Premises and Equipment
: Land is
carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are
depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Furniture, fixtures and equipment are
depreciated using the straight-line method with useful lives ranging from 3 to 10 years.
Restricted Stock
: The Bank is a
member of the Federal Home Loan Bank (FHLB) system and Bankers’ Bank of Kentucky (BBK). Members of the FHLB are required
to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB
and BBK stock are carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate
recovery of par value. Both cash and stock dividends are reported as income.
Company Owned Life Insurance
: The
Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount
that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other
charges or other amounts due that are probable at settlement.
Goodwill and Other Intangible Assets
:
Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred,
plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities
assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and
circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected December 31 as
the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated
useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
Other intangible assets consist of core
deposit intangible assets arising from whole bank acquisitions are amortized on an accelerated method over their estimated useful
lives, which range from 7 to 10 years.
Loan Commitments and Related Financial
Instruments
: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial
letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Stock-Based Compensation
: Compensation
cost is recognized for stock options and restricted stock awards issued to employees over the required service period, generally
defined as the vesting period. The fair value of restricted stock awards is estimated by using the market price of the Company’s
common stock at the date of grant, a Black-Scholes model is used to estimate the fair value of stock options. For awards with graded
vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Income Taxes
: Income tax expense
is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases
of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the
amount expected to be realized.
A tax position is recognized as a benefit
only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company recognizes interest and/or
penalties related to income tax matters in income tax expense. There were no such expenses recognized in the years ended December
31, 2017 and 2016.
Retirement Plans
: Employee 401(k)
and profit sharing plan expense is the amount of matching contributions. The Bank participates in the Pentegra Defined Benefit
Pension Plan for Financial Institutions. This plan covers eligible employees who were employed by the Bank prior to January 1,
2007. Employees hired subsequent to that date are not eligible to participate. The employees hired prior to January 1, 2007 continue
to earn benefits under the plan. It is the policy of the Company to fund the amount that is determined by annual actuarial valuations.
Comprehensive Income (Loss)
: Comprehensive
income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized
gains and losses on securities available for sale which are also recognized as separate components of equity.
Loss Contingencies
: Loss contingencies,
including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood
of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there now are such
matters that will have a material effect on the financial statements.
Restrictions on Cash
: Cash on hand
or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. The Bank is required
to maintain reserve funds in cash or on deposit with a designated depository financial institution. The required reserve at December
31, 2017 and 2016 was $106,000 and $107,000, respectively.
Fair Value of Financial Instruments
:
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed
in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit
risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or
in market conditions could significantly affect the estimates.
Employee Stock Ownership Plan (“ESOP”)
:
The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of shareholders’ equity.
Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends
on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.
Earnings (Loss) Per Common Share
:
Basic earnings (loss) per common share is net income (loss) divided by the weighted average number of common shares outstanding
during the period. ESOP shares are considered outstanding for this calculation unless unearned. All outstanding unvested share-based
payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Diluted
earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings
and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Segment Reporting:
The Company has
one reportable segment: banking. While the chief decision-makers monitor the revenue streams of the various products and services,
operations are managed, and financial performance is evaluated on a Company-wide basis.
Reclassifications
: Some items in
the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on
prior year net income or shareholders’ equity.
Recently Adopted Accounting Pronouncements
:
In March 2016, the FASB issued ASU No.
2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
This ASU will require
recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled (i.e.,
Additional Paid-in-Capital pools will be eliminated). The amendments are effective for public companies for annual periods beginning
after December 15, 2016. The guidance in the ASU No. 2016-09 was adopted by the Company and did not have a material impact on its
consolidated financial statements.
In February 2018, the FASB issued ASU
2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income. On December 22, 2017, the U.S. federal government enacted the Tax
Act. The amendments in this update allow a reclassification from accumulated other comprehensive income to
retained earnings for stranded tax effects resulting from the Tax Act. Consequently, the amendments eliminate the stranded
tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users.
The amendments only relate to the reclassification of the income tax effects of the Tax Act; the underlying guidance that
requires that the effect of a change in tax laws or rates be included in income from continuing operations is not
affected. The Company adopted this update, as permitted by the guidance, which resulted in a reclassification of
$43,000 from accumulated other comprehensive income to retained earnings for stranded tax effects for the year ended
December 31, 2017 as disclosed on the Company’s Consolidated Statements of Changes in Shareholders’
Equity.
Newly Issued Accounting Standard Not
Yet Effective
:
In May 2014 the FASB issued
Accounting
Standards Update 2014-09
Revenue from Contracts with Customers (Topic 606)
developed as a joint project with the
International Accounting Standards Board to remove inconsistencies in revenue requirements and provide a more robust framework
for addressing revenue issues. The ASU's core principle is that an entity should recognize revenue when it transfers promised goods
or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for
those goods or services. In August 2015, the FASB issued
Accounting Standards Update 2015-14
, which deferred the
effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted,
but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). Poage
has determined that ASU 2014-09 will not have a significant impact on its financial statements as a significant portion of the
Company’s revenue is scoped out of the standard. The Company’s sources of non-interest income that fall within the
scope of the new standard, such as service charges on deposits and wire transfer fees, are structured so that the non-interest
income is earned immediately and not over a period of time, which is similar to the treatment under previous revenue recognition
standards. The Company adopted this standard on January 1, 2018 using the modified retrospective method with a cumulative effect
of the initial application in the first quarter of 2018 but there was no impact to retained earnings as a result of the adoption
of the new standard.
In January 2016, the FASB issued ASU No.
2016-01,
Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities.
The ASU makes several modifications to Subtopic 825-10 including the elimination of the available-for-sale
classification of equity investments and requires equity investments with readily determinable fair values to be measured at fair
value with changes in fair value recognized in net income. This ASU will become effective for the Company for interim and
annual periods beginning after December 15, 2017. The adoption of ASU No. 2016-01 in the first quarter of 2018 is not expected
to have a material effect on the Company’s operating results or financial condition.
In February 2016, the FASB issued
Accounting Standards
Update 2016-02 Leases
guidance requiring the recognition in the statement of financial position of lease assets and lease
liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires that a lessee
should recognize lease assets and lease liabilities as compared to previous GAAP that did not require lease assets and lease liabilities
to be recognized for most leases. The guidance becomes effective for us on January 1, 2019. Poage is currently evaluating
the impact on its leases to determine the impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial
Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
(the ASU), which introduces the current
expected credit losses methodology. This ASU significantly changes how entities will measure credit losses for most financial assets
and certain other instruments that aren’t measured as fair value through net income. Among other things, the ASU requires
the measurement of all expected credit losses for financial assets, including loans and available-for-sale debt securities,
held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect
the collectability of the reported amount. In issuing the standard, the FASB is responding to criticism that today’s guidance
delays recognition of credit losses. The new model, referred to as the current expected credit loss (“CECL”) model,
will require institutions to calculate all probable and estimable losses that are expected to be incurred through the loan's entire
life. ASU 2016-13 also requires the allowance for credit losses for purchased financial assets with credit deterioration since
origination to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial
allowance will be added to the purchase price rather than recorded as credit loss expense. The disclosure of credit quality indicators
related to the amortized cost of financing receivables will be further disaggregated by year of origination (or vintage). Institutions
are to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting
period in which the standard is effective. The amendments are effective for fiscal years beginning after December 15, 2019. Early
application will be permitted for fiscal years beginning after December 15, 2018. Management has formed a CECL committee that is
evaluating the data gathering requirements, available economic forecasting and loss estimation models and potential software that
would be employed by the Company to facilitate the adoption of this guidance and its required disclosures on the Company’s
consolidated financial statements. Upon adoption, management anticipates an initial one-time increase in the allowance for loan
losses along with a corresponding decrease in capital as permitted by the standard.
In January 2017, FASB issued ASU 2017-4,
Intangible-Goodwill and Other (Topic 350)
, to simplify accounting for goodwill impairment. The new guidance will simplify
financial reporting because it eliminates the need to determine the fair value of individual assets and liabilities of a reporting
unit to measure goodwill impairment. The revised guidance is effective for fiscal years beginning after December 15, 2019. Early
adoption is permitted for any impairment tests performed after January 1, 2017. Poage is currently evaluating the impact of the
new guidance on its consolidated financial statements.
In March 2017, the FASB issued ASU No.
2017-08,
Receivables-Nonrefundable Fee and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.
The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess
of the amount that is repayable by the issuer. The amendments require the premium for certain callable debt securities to be amortized
to the earliest call date. The amendments are effective for public companies for annual periods beginning after December 15, 2019.
The adoption of ASU No. 2017-08 is not expected to have a material effect on the Company’s consolidated operating results
or financial condition.
In May 2017, the FASB issued ASU No. 2017-09,
Scope of Modification Accounting
which amends the scope of modification accounting for share-based payment arrangements.
The ASU provided guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would
be required to apply modification accounting under ASC 718,
Compensation-Stock Compensation.
Specifically, an entity would
not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately
before and after the modification. The amendments are effective for public companies for annual periods beginning after December
15, 2017. The adoption of ASU No. 2017-09 is not expected to have a material effect on the Company’s consolidated operating
results or financial condition.
NOTE 2 – SECURITIES AVAILABLE FOR SALE
The following table
summarizes the amortized cost and fair value of securities available for sale at December 31, 2017 and 2016, and the corresponding
amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) (in thousands):
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
19,082
|
|
|
$
|
190
|
|
|
$
|
(108
|
)
|
|
$
|
19,164
|
|
U.S. Government agencies and sponsored entities
|
|
|
3,500
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
3,450
|
|
Mortgage-backed securities
|
|
|
27,449
|
|
|
|
44
|
|
|
|
(226
|
)
|
|
|
27,267
|
|
Collateralized mortgage obligations
|
|
|
5,048
|
|
|
|
-
|
|
|
|
(93
|
)
|
|
|
4,955
|
|
SBA loan Pools
|
|
|
9,379
|
|
|
|
-
|
|
|
|
(85
|
)
|
|
|
9,294
|
|
Total securities
|
|
$
|
64,458
|
|
|
$
|
234
|
|
|
$
|
(562
|
)
|
|
$
|
64,130
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
19,785
|
|
|
$
|
291
|
|
|
$
|
(184
|
)
|
|
$
|
19,892
|
|
U.S. Government agencies and sponsored entities
|
|
|
3,500
|
|
|
|
-
|
|
|
|
(37
|
)
|
|
|
3,463
|
|
Mortgage-backed securities
|
|
|
22,303
|
|
|
|
48
|
|
|
|
(196
|
)
|
|
|
22,155
|
|
Collateralized mortgage obligations
|
|
|
5,495
|
|
|
|
-
|
|
|
|
(89
|
)
|
|
|
5,406
|
|
SBA loan Pools
|
|
|
7,411
|
|
|
|
9
|
|
|
|
(75
|
)
|
|
|
7,345
|
|
Total securities
|
|
$
|
58,494
|
|
|
$
|
348
|
|
|
$
|
(581
|
)
|
|
$
|
58,261
|
|
There were no proceeds from sales of securities
for the years ended December 31, 2017 and 2016.
The amortized cost
and fair value of the securities portfolio at December 31, 2017 are shown by contractual maturity. Expected maturities may differ
from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
|
|
December 31,
|
|
|
|
2017
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
(in thousands)
|
|
Within one year
|
|
$
|
2,417
|
|
|
$
|
2,434
|
|
One to five years
|
|
|
7,757
|
|
|
|
7,722
|
|
Five to ten years
|
|
|
8,737
|
|
|
|
8,803
|
|
Beyond ten years
|
|
|
3,671
|
|
|
|
3,655
|
|
Mortgage-backed securities, collateralized mortgage obligations and SBA loan pools
|
|
|
41,876
|
|
|
|
41,516
|
|
Total
|
|
$
|
64,458
|
|
|
$
|
64,130
|
|
Securities pledged
at December 31, 2017 and 2016 had a carrying amount of $10.3 million and $11.9 million, respectively, and were pledged to secure
public deposits.
At December 31, 2017
and 2016, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount
greater than 10% of shareholders’ equity.
The following table
summarizes the securities with unrealized losses at December 31, 2017 and 2016, aggregated by major security type and length of
time in a continuous unrealized loss position:
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
5,080
|
|
|
$
|
(56
|
)
|
|
$
|
1,024
|
|
|
$
|
(52
|
)
|
|
$
|
6,104
|
|
|
$
|
(108
|
)
|
U.S. Government agencies and sponsored entities
|
|
|
992
|
|
|
|
(8
|
)
|
|
|
2,458
|
|
|
|
(42
|
)
|
|
|
3,450
|
|
|
|
(50
|
)
|
Mortgage-backed securities
|
|
|
19,256
|
|
|
|
(181
|
)
|
|
|
2,394
|
|
|
|
(45
|
)
|
|
|
21,650
|
|
|
|
(226
|
)
|
Collateralized mortgage obligations
|
|
|
1,953
|
|
|
|
(15
|
)
|
|
|
3,001
|
|
|
|
(78
|
)
|
|
|
4,954
|
|
|
|
(93
|
)
|
SBA loan Pools
|
|
|
6,565
|
|
|
|
(66
|
)
|
|
|
1,343
|
|
|
|
(19
|
)
|
|
|
7,908
|
|
|
|
(85
|
)
|
Total available-for-sale securities
|
|
$
|
33,846
|
|
|
$
|
(326
|
)
|
|
$
|
10,220
|
|
|
$
|
(236
|
)
|
|
$
|
44,066
|
|
|
$
|
(562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
6,952
|
|
|
$
|
(184
|
)
|
|
$
|
296
|
|
|
$
|
-
|
|
|
$
|
7,248
|
|
|
$
|
(184
|
)
|
U.S. Government agencies and sponsored entities
|
|
|
3,463
|
|
|
|
(37
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,463
|
|
|
|
(37
|
)
|
Mortgage-backed securities
|
|
|
13,409
|
|
|
|
(196
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
13,409
|
|
|
|
(196
|
)
|
Collateralized mortgage obligations
|
|
|
2,671
|
|
|
|
(33
|
)
|
|
|
2,735
|
|
|
|
(56
|
)
|
|
|
5,406
|
|
|
|
(89
|
)
|
SBA loan Pools
|
|
|
5,865
|
|
|
|
(75
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
5,865
|
|
|
|
(75
|
)
|
Total available-for-sale securities
|
|
$
|
32,360
|
|
|
$
|
(525
|
)
|
|
$
|
3,031
|
|
|
$
|
(56
|
)
|
|
$
|
35,391
|
|
|
$
|
(581
|
)
|
Unrealized losses on bonds have not been
recognized into income because the issuers of the bonds are of high credit quality, management does not intend to sell, and it
is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the
decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach
maturity.
As of December 31, 2017, the Company’s
security portfolio consisted of 99 securities, 65 of which were in an unrealized loss position.
Management evaluates securities for other-than-temporary
impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such
an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized
loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or
it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized
cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost
and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria,
the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the
income statement, and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss
is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
For equity securities, the entire amount of impairment is recognized through earnings.
NOTE 3 – LOANS
Loans at December 31, 2017 and 2016 were as follows (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Real estate:
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
170,754
|
|
|
$
|
177,801
|
|
Multi-family
|
|
|
6,505
|
|
|
|
6,823
|
|
Commercial real estate
|
|
|
84,312
|
|
|
|
83,169
|
|
Construction and land
|
|
|
10,004
|
|
|
|
11,019
|
|
|
|
|
271,575
|
|
|
|
278,812
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
33,664
|
|
|
|
38,747
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
10,707
|
|
|
|
10,655
|
|
Motor vehicle
|
|
|
10,368
|
|
|
|
10,624
|
|
Other
|
|
|
7,420
|
|
|
|
7,877
|
|
|
|
|
28,495
|
|
|
|
29,156
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
333,734
|
|
|
|
346,715
|
|
Less:
|
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
|
499
|
|
|
|
445
|
|
Allowance for loan losses
|
|
|
4,681
|
|
|
|
2,349
|
|
Net loans
|
|
$
|
328,554
|
|
|
$
|
343,921
|
|
On September 12, 2017, the Bank uncovered evidence
of suspected fraud involving the origination of fictitious loans by an employee of the Bank. The individual is no longer
employed by the Bank. The Bank informed its fidelity blanket bond insurer of the suspected fraud and engaged an outside firm
to perform a forensic audit. To date, the Bank believes it has identified suspected fictitious loans totaling approximately
$1.4 million of which $934,000 were acquired in the Town Square acquisition in 2014. It was the Company’s conclusion,
based on the advice of outside legal counsel, that the bond should provide indemnity for the lost principal of $1.4 million,
less a $25,000 deductible, and it was probable that the Bank would recover its loss. The Company recorded a receivable
on insurance proceeds in other assets and a net loss of $25,000 in other expenses during the three months ended September
30, 2017.
The Company received correspondence dated March 29,
2018 from counsel to the Bank’s fidelity bond insurer indicating the insurer’s position that the claimed loss
for purpose of evaluating coverage under the fidelity bond may not be $1.4 million. Even though the Company still believes
the insurance claim is valid and collectible, based on this correspondence, management has determined that collection of
the insurance receivable does not meet the threshold of probable, which is a high threshold under general accepted
accounting principles. Therefore, the Company has reversed the receivable on insurance proceeds and recorded a loss on
fictitious loans of $481,000, an increase to goodwill of $617,000 and an increase to deferred taxes of $317,000. Since
$934,000 in fictitious loans were acquired in the Town Square acquisition in 2014, this reduced the fair value of net assets
acquired, which resulted in the aforementioned increases in goodwill and deferred tax assets. The total fictitious loan balance
increased by $481,000 from $934,000 at the date of acquisition to $1,415,000 at the date of discovery. $101,000 of the
increase occurred in 2014, $165,000 of the increase occurred in 2015, $196,000 of the increase occurred in 2016 and $19,000
of the increase occurred in 2017. As the annual increases were not material to any individual period nor was the cumulative
increase from the date of acquisition to the date of discovery material, the Company recorded the entire loss of $481,000 in
2017.
The following tables present the balance
in the allowance for loan losses and recorded investment in loans by portfolio segment based on impairment method as of December
31, 2017 and 2016. Accrued interest receivable and net deferred loan fees are not considered significant and therefore are not
included in the loan balances presented in the table below (in thousands):
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
Loan Balances
|
|
|
|
|
|
|
Purchased
|
|
|
Collectively
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
Collectively
|
|
|
|
|
|
|
Individually
|
|
|
Credit-
|
|
|
Evaluated
|
|
|
|
|
|
Individually
|
|
|
Credit-
|
|
|
Evaluated
|
|
|
|
|
|
|
Evaluated for
|
|
|
Impaired
|
|
|
for
|
|
|
|
|
|
Evaluated for
|
|
|
Impaired
|
|
|
for
|
|
|
|
|
Portfolio Segment
|
|
Impairment
|
|
|
Loans
|
|
|
Impairment
|
|
|
Total
|
|
|
Impairment
|
|
|
Loans
|
|
|
Impairment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
624
|
|
|
$
|
-
|
|
|
$
|
2,232
|
|
|
$
|
2,856
|
|
|
$
|
5,523
|
|
|
$
|
1,305
|
|
|
$
|
264,747
|
|
|
$
|
271,575
|
|
Commercial and industrial
|
|
|
1,290
|
|
|
|
-
|
|
|
|
275
|
|
|
|
1,565
|
|
|
|
2,612
|
|
|
|
-
|
|
|
$
|
31,052
|
|
|
|
33,664
|
|
Consumer
|
|
|
5
|
|
|
|
-
|
|
|
|
255
|
|
|
|
260
|
|
|
|
60
|
|
|
|
-
|
|
|
$
|
28,435
|
|
|
|
28,495
|
|
Total
|
|
$
|
1,919
|
|
|
$
|
-
|
|
|
$
|
2,762
|
|
|
$
|
4,681
|
|
|
$
|
8,195
|
|
|
$
|
1,305
|
|
|
$
|
324,234
|
|
|
$
|
333,734
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
Loan Balances
|
|
|
|
|
|
|
Purchased
|
|
|
Collectively
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
Collectively
|
|
|
|
|
|
|
Individually
|
|
|
Credit-
|
|
|
Evaluated
|
|
|
|
|
|
Individually
|
|
|
Credit-
|
|
|
Evaluated
|
|
|
|
|
|
|
Evaluated for
|
|
|
Impaired
|
|
|
for
|
|
|
|
|
|
Evaluated for
|
|
|
Impaired
|
|
|
for
|
|
|
|
|
Portfolio Segment
|
|
Impairment
|
|
|
Loans
|
|
|
Impairment
|
|
|
Total
|
|
|
Impairment
|
|
|
Loans
|
|
|
Impairment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
23
|
|
|
$
|
-
|
|
|
$
|
1,923
|
|
|
$
|
1,946
|
|
|
$
|
4,844
|
|
|
$
|
1,871
|
|
|
$
|
272,097
|
|
|
$
|
278,812
|
|
Commercial and industrial
|
|
|
7
|
|
|
|
-
|
|
|
|
211
|
|
|
|
218
|
|
|
|
89
|
|
|
|
-
|
|
|
$
|
38,658
|
|
|
|
38,747
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
185
|
|
|
|
185
|
|
|
|
40
|
|
|
|
1
|
|
|
$
|
29,115
|
|
|
|
29,156
|
|
Total
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
2,319
|
|
|
$
|
2,349
|
|
|
$
|
4,973
|
|
|
$
|
1,872
|
|
|
$
|
339,870
|
|
|
$
|
346,715
|
|
The following table presents information related to impaired
loans by class of loans as of December 31, 2017 and December 31, 2016 (in thousands):
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
|
Unpaid
|
|
|
|
|
|
for Loan
|
|
|
Unpaid
|
|
|
|
|
|
for Loan
|
|
|
|
Principal
|
|
|
Recorded
|
|
|
Losses
|
|
|
Principal
|
|
|
Recorded
|
|
|
Losses
|
|
|
|
Balance
|
|
|
Investment
|
|
|
Allocated
|
|
|
Balance
|
|
|
Investment
|
|
|
Allocated
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
699
|
|
|
$
|
655
|
|
|
$
|
-
|
|
|
$
|
883
|
|
|
$
|
883
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
2,593
|
|
|
|
2,452
|
|
|
|
-
|
|
|
|
3,780
|
|
|
|
3,726
|
|
|
|
-
|
|
Construction and land
|
|
|
179
|
|
|
|
179
|
|
|
|
-
|
|
|
|
193
|
|
|
|
193
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
136
|
|
|
|
136
|
|
|
|
-
|
|
|
|
270
|
|
|
|
82
|
|
|
|
-
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity and lines of credit
|
|
|
31
|
|
|
|
31
|
|
|
|
-
|
|
|
|
40
|
|
|
|
40
|
|
|
|
-
|
|
Motor vehicle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
$
|
3,638
|
|
|
$
|
3,453
|
|
|
$
|
-
|
|
|
$
|
5,166
|
|
|
$
|
4,924
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
1,091
|
|
|
$
|
988
|
|
|
$
|
367
|
|
|
$
|
42
|
|
|
$
|
42
|
|
|
$
|
23
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
1,249
|
|
|
|
1,249
|
|
|
|
257
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2,476
|
|
|
|
2,476
|
|
|
|
1,290
|
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity and lines of credit
|
|
|
29
|
|
|
|
29
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Motor vehicle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
$
|
4,845
|
|
|
$
|
4,742
|
|
|
$
|
1,919
|
|
|
$
|
49
|
|
|
$
|
49
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,483
|
|
|
$
|
8,195
|
|
|
$
|
1,919
|
|
|
$
|
5,215
|
|
|
$
|
4,973
|
|
|
$
|
30
|
|
For purposes of this disclosure, the unpaid balance is not reduced
for partial charge-offs.
The following table presents the average balance of loans individually
evaluated for impairment and interest income recognized on these loans for the twelve months ended December 31, 2017 and 2016 (in
thousands).
|
|
Average
|
|
|
Interest
|
|
|
Cash Basis
|
|
Year Ended
|
|
Recorded
|
|
|
Income
|
|
|
Interest
|
|
December 31, 2017
|
|
Investment
|
|
|
Recognized
|
|
|
Recognized
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
1,999
|
|
|
$
|
16
|
|
|
$
|
15
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
3,791
|
|
|
|
116
|
|
|
|
4
|
|
Construction and land
|
|
|
185
|
|
|
|
7
|
|
|
|
7
|
|
Commercial and industrial
|
|
|
700
|
|
|
|
14
|
|
|
|
-
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity and lines of credit
|
|
|
42
|
|
|
|
-
|
|
|
|
-
|
|
Motor vehicle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
$
|
6,717
|
|
|
$
|
153
|
|
|
$
|
26
|
|
|
|
Average
|
|
|
Interest
|
|
|
Cash Basis
|
|
Year Ended
|
|
Recorded
|
|
|
Income
|
|
|
Interest
|
|
December 31, 2016
|
|
Investment
|
|
|
Recognized
|
|
|
Recognized
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
778
|
|
|
$
|
13
|
|
|
$
|
6
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
1,927
|
|
|
|
145
|
|
|
|
-
|
|
Construction and land
|
|
|
48
|
|
|
|
10
|
|
|
|
1
|
|
Commercial and industrial
|
|
|
345
|
|
|
|
32
|
|
|
|
1
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity and lines of credit
|
|
|
26
|
|
|
|
1
|
|
|
|
1
|
|
Motor vehicle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
$
|
3,124
|
|
|
$
|
201
|
|
|
$
|
9
|
|
The recorded investment in loans excludes accrued interest receivable
and loan origination fees, net, due to immateriality.
The following table presents the activity in the allowance for
loan losses by portfolio segment for the periods indicated was as follows (in thousands):
Year Ended
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Real Estate
|
|
|
and Industrial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,946
|
|
|
$
|
218
|
|
|
$
|
185
|
|
|
$
|
2,349
|
|
Provision for loan losses
|
|
|
1,772
|
|
|
|
1,400
|
|
|
|
344
|
|
|
|
3,516
|
|
Loans charged-off
|
|
|
(873
|
)
|
|
|
(97
|
)
|
|
|
(328
|
)
|
|
|
(1,298
|
)
|
Recoveries
|
|
|
11
|
|
|
|
44
|
|
|
|
59
|
|
|
|
114
|
|
Total ending allowance balance
|
|
$
|
2,856
|
|
|
$
|
1,565
|
|
|
$
|
260
|
|
|
$
|
4,681
|
|
Year Ended
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Real Estate
|
|
|
and Industrial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,676
|
|
|
$
|
77
|
|
|
$
|
105
|
|
|
$
|
1,858
|
|
Provision for loan losses
|
|
|
754
|
|
|
|
242
|
|
|
|
253
|
|
|
|
1,249
|
|
Loans charged-off
|
|
|
(511
|
)
|
|
|
(146
|
)
|
|
|
(280
|
)
|
|
|
(937
|
)
|
Recoveries
|
|
|
27
|
|
|
|
45
|
|
|
|
107
|
|
|
|
179
|
|
Total ending allowance balance
|
|
$
|
1,946
|
|
|
$
|
218
|
|
|
$
|
185
|
|
|
$
|
2,349
|
|
Nonaccrual loans and loans past due 90
days still on accrual consist of smaller balance homogeneous loans that are collectively evaluated for impairment.
The following table presents the recorded
investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2017 and 2016 (in
thousands):
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Loans Past Due
|
|
|
|
|
|
Loans Past Due
|
|
|
|
|
|
|
Over 90 Days
|
|
|
|
|
|
Over 90 Days
|
|
|
|
Nonaccrual
|
|
|
Still Accruing
|
|
|
Nonaccrual
|
|
|
Still Accruing
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
2,911
|
|
|
$
|
-
|
|
|
$
|
3,428
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
1,677
|
|
|
|
-
|
|
|
|
970
|
|
|
|
-
|
|
Construction and land
|
|
|
34
|
|
|
|
-
|
|
|
|
41
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
1,638
|
|
|
|
-
|
|
|
|
90
|
|
|
|
-
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
66
|
|
|
|
-
|
|
|
|
155
|
|
|
|
-
|
|
Motor vehicle
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
6
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Total
|
|
$
|
6,358
|
|
|
$
|
-
|
|
|
$
|
4,689
|
|
|
$
|
-
|
|
The following table presents the aging of the recorded investment
in past due loans as of December 31, 2017 and 2016 by class of loans. Non-accrual loans of $6.3 million and $4.7 million as of
December 31, 2017 and 2016 respectively, are included in the tables below and have been categorized based on their payment status
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
30-59
|
|
|
60-89
|
|
|
Greater than
|
|
|
|
|
|
Credit-
|
|
|
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
89 Days
|
|
|
Total
|
|
|
Impaired
|
|
|
Loans Not
|
|
|
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Loans
|
|
|
Past Due
|
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
1,615
|
|
|
$
|
628
|
|
|
$
|
1,199
|
|
|
$
|
3,442
|
|
|
$
|
590
|
|
|
$
|
166,722
|
|
|
$
|
170,754
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,505
|
|
|
|
6,505
|
|
Commercial real estate
|
|
|
249
|
|
|
|
315
|
|
|
|
1,367
|
|
|
|
1,931
|
|
|
|
715
|
|
|
|
81,666
|
|
|
|
84,312
|
|
Construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,004
|
|
|
|
10,004
|
|
Commercial and industrial
|
|
|
1,133
|
|
|
|
4
|
|
|
|
1,631
|
|
|
|
2,768
|
|
|
|
-
|
|
|
|
30,896
|
|
|
|
33,664
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity loans and lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
|
|
60
|
|
|
|
-
|
|
|
|
10,647
|
|
|
|
10,707
|
|
Motor vehicle
|
|
|
40
|
|
|
|
-
|
|
|
|
21
|
|
|
|
61
|
|
|
|
-
|
|
|
|
10,307
|
|
|
|
10,368
|
|
Other
|
|
|
3
|
|
|
|
6
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
7,411
|
|
|
|
7,420
|
|
Total
|
|
$
|
3,040
|
|
|
$
|
953
|
|
|
$
|
4,278
|
|
|
$
|
8,271
|
|
|
$
|
1,305
|
|
|
$
|
324,158
|
|
|
$
|
333,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
30-59
|
|
|
60-89
|
|
|
Greater than
|
|
|
|
|
|
Credit-
|
|
|
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
89 Days
|
|
|
Total
|
|
|
Impaired
|
|
|
Loans Not
|
|
|
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Loans
|
|
|
Past Due
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
899
|
|
|
$
|
454
|
|
|
$
|
1,679
|
|
|
$
|
3,032
|
|
|
$
|
1,013
|
|
|
$
|
173,756
|
|
|
$
|
177,801
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,823
|
|
|
|
6,823
|
|
Commercial real estate
|
|
|
101
|
|
|
|
-
|
|
|
|
465
|
|
|
|
566
|
|
|
|
858
|
|
|
|
81,745
|
|
|
|
83,169
|
|
Construction and land
|
|
|
41
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41
|
|
|
|
-
|
|
|
|
10,978
|
|
|
|
11,019
|
|
Commercial and industrial
|
|
|
1
|
|
|
|
47
|
|
|
|
76
|
|
|
|
124
|
|
|
|
-
|
|
|
|
38,623
|
|
|
|
38,747
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity loans and lines of credit
|
|
|
-
|
|
|
|
1
|
|
|
|
155
|
|
|
|
156
|
|
|
|
-
|
|
|
|
10,499
|
|
|
|
10,655
|
|
Motor vehicle
|
|
|
40
|
|
|
|
15
|
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
10,569
|
|
|
|
10,624
|
|
Other
|
|
|
2
|
|
|
|
20
|
|
|
|
-
|
|
|
|
22
|
|
|
|
1
|
|
|
|
7,854
|
|
|
|
7,877
|
|
Total
|
|
$
|
1,084
|
|
|
$
|
537
|
|
|
$
|
2,375
|
|
|
$
|
3,996
|
|
|
$
|
1,872
|
|
|
$
|
340,847
|
|
|
$
|
346,715
|
|
Troubled Debt Restructurings
:
As of December 31,
2017, the Company has a recorded investment in three TDRs which totaled $3.2 million. There were $3.2 million at December 31, 2016.
A less than market rate and extended term was granted as concessions for TDRs. No additional charge-off or provision has been made
for the loan relationships. No additional commitments to lend have been made to the borrower.
|
|
TDR's on Non-
|
|
|
|
|
|
|
|
December 31, 2017
|
|
accrual status
|
|
|
Other TDR's
|
|
|
Total TDR's
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
30
|
|
|
$
|
16
|
|
|
$
|
46
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
933
|
|
|
|
2,195
|
|
|
|
3,128
|
|
Construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Motor vehicle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
963
|
|
|
$
|
2,211
|
|
|
$
|
3,174
|
|
|
|
TDR's on Non-
|
|
|
|
|
|
|
|
December 31, 2016
|
|
accrual status
|
|
|
Other TDR's
|
|
|
Total TDR's
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
-
|
|
|
$
|
17
|
|
|
$
|
17
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
166
|
|
|
|
3,047
|
|
|
|
3,213
|
|
Construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
19
|
|
|
|
-
|
|
|
|
19
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Motor vehicle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
185
|
|
|
$
|
3,064
|
|
|
$
|
3,249
|
|
The following table presents loans by class modified as troubled
debt restructuring that occurred during the years ended December 31, 2017 and 2016.
|
|
Year Ended December 31, 2017
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
(Dollars in thousands)
|
|
Loans
|
|
|
Investment
|
|
|
Investment
|
|
|
Loans
|
|
|
Investment
|
|
|
Investment
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
|
2
|
|
|
$
|
144
|
|
|
$
|
144
|
|
|
|
1
|
|
|
$
|
17
|
|
|
$
|
17
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
1
|
|
|
|
100
|
|
|
|
100
|
|
|
|
1
|
|
|
|
2,200
|
|
|
|
2,200
|
|
Construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
847
|
|
|
|
847
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Motor vehicle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
3
|
|
|
$
|
244
|
|
|
$
|
244
|
|
|
|
3
|
|
|
$
|
3,064
|
|
|
$
|
3,064
|
|
During the year ended December 31, 2017, a one to four family
loan in the amount of $114,000 modified as a troubled debt restructuring subsequently defaulted within twelve months following
the modification. During the year ended December 31, 2016, there were no loans modified as troubled debt restructurings that subsequently
defaulted within twelve months following the modification.
CREDIT QUALITY INDICATORS:
The Company categorizes loans into risk
categories based on relevant information about the ability of borrowers to service their debt such as: current financial information,
historical payment experience, credit documentation, public information, and current economic trends, among other factors. The
Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans,
such as commercial and commercial real estate loans. The analysis for residential real estate and consumer loans primarily includes
review of past due status. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk
ratings:
Special Mention.
Loans
classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected,
these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit
position at some future date.
Substandard.
Loans classified
as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged,
if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized
by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful.
Loans classified
as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable.
Loss.
Loans classified
as loss are considered uncollectable and of such little value that continuing to carry them as an asset is not feasible.
Loans will be classified as a loss when it is not practical or desirable to defer writing off or reserving all or a portion of
a basically worthless asset, even though partial recovery may be possible at some time in the future.
Loans not meeting the criteria above that
are analyzed individually as part of the above described process are considered to be pass rated loans.
Based on the most recent analysis performed,
the risk category of loans by class of loans is as follows (in thousands):
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
One to four family
|
|
$
|
163,709
|
|
|
$
|
1,673
|
|
|
$
|
5,372
|
|
|
$
|
-
|
|
|
$
|
170,754
|
|
Multi-family
|
|
|
6,505
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,505
|
|
Commercial real estate
|
|
|
76,226
|
|
|
|
2,957
|
|
|
|
5,129
|
|
|
|
-
|
|
|
|
84,312
|
|
Construction and land
|
|
|
9,825
|
|
|
|
-
|
|
|
|
179
|
|
|
|
-
|
|
|
|
10,004
|
|
Commercial and industrial
|
|
|
25,891
|
|
|
|
2,602
|
|
|
|
5,171
|
|
|
|
-
|
|
|
|
33,664
|
|
Home equity loans and lines of credit
|
|
|
10,549
|
|
|
|
-
|
|
|
|
158
|
|
|
|
-
|
|
|
|
10,707
|
|
Motor vehicle
|
|
|
10,291
|
|
|
|
9
|
|
|
|
68
|
|
|
|
-
|
|
|
|
10,368
|
|
Other
|
|
|
7,413
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7,420
|
|
Total
|
|
$
|
310,409
|
|
|
$
|
7,241
|
|
|
$
|
16,084
|
|
|
$
|
-
|
|
|
$
|
333,734
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
One to four family
|
|
$
|
171,109
|
|
|
$
|
2,167
|
|
|
$
|
4,525
|
|
|
$
|
-
|
|
|
$
|
177,801
|
|
Multi-family
|
|
|
6,823
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,823
|
|
Commercial real estate
|
|
|
74,267
|
|
|
|
4,048
|
|
|
|
4,854
|
|
|
|
-
|
|
|
|
83,169
|
|
Construction and land
|
|
|
10,826
|
|
|
|
-
|
|
|
|
193
|
|
|
|
-
|
|
|
|
11,019
|
|
Commercial and industrial
|
|
|
36,172
|
|
|
|
1,802
|
|
|
|
773
|
|
|
|
-
|
|
|
|
38,747
|
|
Home equity loans and lines of credit
|
|
|
10,478
|
|
|
|
6
|
|
|
|
171
|
|
|
|
-
|
|
|
|
10,655
|
|
Motor vehicle
|
|
|
10,594
|
|
|
|
2
|
|
|
|
28
|
|
|
|
-
|
|
|
|
10,624
|
|
Other
|
|
|
7,872
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
7,877
|
|
Total
|
|
$
|
328,141
|
|
|
$
|
8,025
|
|
|
$
|
10,549
|
|
|
$
|
-
|
|
|
$
|
346,715
|
|
At December 31, 2017 and 2016, there were no loans classified
in the “loss” category.
There were $1.3 million and $1.9 million
PCI loans included in disclosure above at December 31, 2017 and 2016, respectively.
The Company holds purchased loans without
evidence of credit quality deterioration. In addition, the Company holds purchased loans for which there was, at their acquisition
date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, which all contractually
required payments would not be collected. A summary of non-impaired purchased loans and credit-impaired purchased loans with the
carrying amount of those loans is as follows at December 31, 2017 and 2016 (in thousands):
|
|
Non-impaired
|
|
|
Credit-impaired
|
|
|
|
Purchased
|
|
|
Purchased
|
|
Purchased Loans as of December 31, 2017
|
|
Loans
|
|
|
Loans
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
25,437
|
|
|
$
|
590
|
|
Multi-family
|
|
|
1,829
|
|
|
|
-
|
|
Commercial real estate
|
|
|
15,157
|
|
|
|
715
|
|
Construction and land
|
|
|
510
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
1,359
|
|
|
|
-
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
959
|
|
|
|
-
|
|
Motor vehicle
|
|
|
43
|
|
|
|
-
|
|
Other
|
|
|
521
|
|
|
|
-
|
|
Total
|
|
$
|
45,815
|
|
|
$
|
1,305
|
|
|
|
Non-impaired
|
|
|
Credit-impaired
|
|
|
|
Purchased
|
|
|
Purchased
|
|
Purchased Loans as of December 31, 2016
|
|
Loans
|
|
|
Loans
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
30,449
|
|
|
$
|
1,013
|
|
Multi-family
|
|
|
2,115
|
|
|
|
-
|
|
Commercial real estate
|
|
|
19,278
|
|
|
|
858
|
|
Construction and land
|
|
|
652
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2,783
|
|
|
|
-
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
1,433
|
|
|
|
-
|
|
Motor vehicle
|
|
|
202
|
|
|
|
-
|
|
Other
|
|
|
706
|
|
|
|
1
|
|
Total
|
|
$
|
57,618
|
|
|
$
|
1,872
|
|
For those purchased loans disclosed
above, the Company did not have an allowance for loan losses for the years ended December 31, 2017 or 2016.
The following tables present
the composition of the acquired loans at December 31, 2017 and 2016 (in thousands):
|
|
Contractual
|
|
|
Remaining
|
|
|
Carrying
|
|
As of December 31, 2017
|
|
Amount
|
|
|
Discount
|
|
|
Amount
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
|
26,335
|
|
|
|
(308
|
)
|
|
|
26,027
|
|
Multi-family
|
|
|
1,832
|
|
|
|
(3
|
)
|
|
|
1,829
|
|
Commercial real estate
|
|
|
16,050
|
|
|
|
(178
|
)
|
|
|
15,872
|
|
Construction and land
|
|
|
511
|
|
|
|
(1
|
)
|
|
|
510
|
|
Commercial and industrial
|
|
|
1,360
|
|
|
|
(1
|
)
|
|
|
1,359
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
962
|
|
|
|
(3
|
)
|
|
|
959
|
|
Motor vehicle
|
|
|
44
|
|
|
|
(1
|
)
|
|
|
43
|
|
Other
|
|
|
522
|
|
|
|
(1
|
)
|
|
|
521
|
|
Total
|
|
$
|
47,616
|
|
|
$
|
(496
|
)
|
|
$
|
47,120
|
|
|
|
Contractual
|
|
|
Remaining
|
|
|
Carrying
|
|
As of December 31, 2016
|
|
Amount
|
|
|
Discount
|
|
|
Amount
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
|
32,006
|
|
|
|
(544
|
)
|
|
|
31,462
|
|
Multi-family
|
|
|
2,129
|
|
|
|
(14
|
)
|
|
|
2,115
|
|
Commercial real estate
|
|
|
20,460
|
|
|
|
(324
|
)
|
|
|
20,136
|
|
Construction and land
|
|
|
656
|
|
|
|
(4
|
)
|
|
|
652
|
|
Commercial and industrial
|
|
|
2,802
|
|
|
|
(19
|
)
|
|
|
2,783
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines of credit
|
|
|
1,445
|
|
|
|
(12
|
)
|
|
|
1,433
|
|
Motor vehicle
|
|
|
204
|
|
|
|
(2
|
)
|
|
|
202
|
|
Other
|
|
|
713
|
|
|
|
(6
|
)
|
|
|
707
|
|
Total
|
|
$
|
60,415
|
|
|
$
|
(925
|
)
|
|
$
|
59,490
|
|
The following table presents the purchased
loans that are included within the scope of ASC Topic 310-30,
Loans and Debt Securities Acquired with Deteriorated Credit Quality,
as of December 31, 2017 and 2016.
(in thousands)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
$
|
1,305
|
|
|
$
|
1,872
|
|
Non-accretable difference
|
|
|
214
|
|
|
|
272
|
|
Accretable yield
|
|
|
100
|
|
|
|
146
|
|
Contractually-required principal and interest payments
|
|
$
|
1,619
|
|
|
$
|
2,290
|
|
The Company adjusted interest income to
recognize $41,000 and $146,000 of accretable yield on credit-impaired purchased loans for the years ended December 31, 2017 and
2016, respectively.
Accretable yield, or income expected to be collected, is as
follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
146
|
|
|
$
|
292
|
|
New Loans Purchased
|
|
|
-
|
|
|
|
-
|
|
Accretion of income
|
|
|
(41
|
)
|
|
|
(146
|
)
|
Reclassifications from nonaccretable difference
|
|
|
-
|
|
|
|
-
|
|
Disposals
|
|
|
(5
|
)
|
|
|
-
|
|
Balance at December 31
|
|
$
|
100
|
|
|
$
|
146
|
|
NOTE 4 – FAIR VALUE
Fair value is the exchange price that would
be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that
may be used to measure fair values:
Level 1 – Quoted prices
(unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement
date.
Level 2 – Significant
other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant
unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in
pricing an asset or liability.
The Company used the following methods
and significant assumptions to estimate fair value:
Securities
: The fair values for
securities are determined by quoted market prices, if available (Level 1). If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments (Level 2). This includes the use of “matrix pricing” used
to value debt securities absent the exclusive use of quoted prices. For securities where quoted prices or market prices of similar
securities are not available, fair values are calculated using discounted cash flows (Level 3). As of December 31, 2017 and 2016,
all securities were classified as a Level 2 fair value.
Other Real Estate Owned
: Commercial
and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell.
Fair values are based on recent real estate appraisals. These appraisals may use single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent
appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant
and typically result in a Level 3 classification of the inputs for determining fair value. Appraisals for real estate properties
classified as other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential
appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank’s management.
The appraisal values are discounted to allow for selling expenses and fees, and the discounts range from 5% to 10%.
Impaired Loans:
The fair value of
impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals.
These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income
approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for the differences between
the comparable sales and income data available for similar loans and collateral underlying such loans. Non-real estate collateral
may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted
based on management’s historical knowledge of the client and client’s business, resulting in a Level 3 fair value classification.
Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.
The appraisal values are discounted to allow for selling expenses and fees, and the discounts range from 10% to 20%.
Assets and liabilities measured at fair
value on a recurring basis, at December 31, 2017 and 2016, are as follows (in thousands):
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
December 31, 2017 Using:
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
19,164
|
|
|
$
|
-
|
|
|
$
|
19,164
|
|
|
$
|
-
|
|
U.S. Government agencies and sponsored entities
|
|
|
3,450
|
|
|
|
-
|
|
|
|
3,450
|
|
|
|
-
|
|
Mortgage backed securities: residential
|
|
|
27,267
|
|
|
|
-
|
|
|
|
27,267
|
|
|
|
-
|
|
Collateralized mortgage obligations
|
|
|
4,955
|
|
|
|
-
|
|
|
|
4,955
|
|
|
|
-
|
|
SBA loan pools
|
|
|
9,294
|
|
|
|
-
|
|
|
|
9,294
|
|
|
|
-
|
|
Total securities
|
|
$
|
64,130
|
|
|
$
|
-
|
|
|
$
|
64,130
|
|
|
$
|
-
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
December 31, 2016 Using:
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
19,892
|
|
|
$
|
-
|
|
|
$
|
19,892
|
|
|
$
|
-
|
|
U.S. Government agencies and sponsored entities
|
|
|
3,463
|
|
|
|
-
|
|
|
|
3,463
|
|
|
|
-
|
|
Mortgage backed securities: residential
|
|
|
22,155
|
|
|
|
-
|
|
|
|
22,155
|
|
|
|
-
|
|
Collateralized mortgage obligations
|
|
|
5,406
|
|
|
|
-
|
|
|
|
5,406
|
|
|
|
-
|
|
SBA loan pools
|
|
|
7,345
|
|
|
|
-
|
|
|
|
7,345
|
|
|
|
-
|
|
Total securities
|
|
$
|
58,261
|
|
|
$
|
-
|
|
|
$
|
58,261
|
|
|
$
|
-
|
|
There were no transfers between Level 1 and Level 2.
Assets measured at fair value on a non-recurring basis at December
31, 2017 and 2016 are summarized below (in thousands):
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
December 31, 2017 Using:
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Impaired Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate, net
|
|
$
|
621
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
621
|
|
Commercial real estate, net
|
|
|
992
|
|
|
|
-
|
|
|
|
-
|
|
|
|
992
|
|
Commercial and industrial, net
|
|
|
1,186
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,186
|
|
Consumer loan HELOC, net
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
December 31, 2017 Using:
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Other real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family, net
|
|
$
|
610
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
610
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
December 31, 2016 Using:
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Impaired Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate, net
|
|
$
|
613
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
613
|
|
Consumer loan HELOC, net
|
|
|
250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250
|
|
Commercial and industrial, net
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
December 31, 2016 Using:
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Other real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family, net
|
|
$
|
268
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
268
|
|
Commercial real estate, net
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
At December 31, 2017, impaired loans recorded
at fair value had a net carrying amount of $2.8 million, equal to the outstanding balance of $4.7 million, net of a valuation allowance
of $1.9 million. At December 31, 2016, impaired loans recorded at fair value had a net carrying amount of $921,000, equal to the
outstanding balance of $951,000, net of a valuation allowance of $30,000. There were charge-offs in the amount of $288,000 and
$130,000 for the years ended December 31, 2017 and 2016, respectively. The charge-offs and change in specific reserve on impaired
loans resulted in an increase to the provision for loan losses of $2.2 million for the year ended December 31, 2017. The charge-offs
and change in specific reserve on impaired loans resulted in an increase to the provision for loan losses of $15,000 for the year
ended December 31, 2016.
At December 31, 2017, other real estate
owned recorded at fair value had a net carrying amount of $610,000, equal to the outstanding balance of $1.03 million, net of a
valuation allowance of $420,000. There were write-downs of $466,000 for the year ended December 31, 2017. At December 31, 2016,
other real estate owned recorded at fair value had a net carrying amount of $276,000, equal to the outstanding balance of $390,000,
net of a valuation allowance of $114,000. There were write-downs of $163,000 for the year ended December 31, 2016.
The carrying amounts and estimated fair
values of financial instruments, at December 31, 2017 and 2016 are as follows (in thousands):
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,499
|
|
|
$
|
20,499
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,499
|
|
Interest bearing deposits
|
|
|
2,988
|
|
|
|
-
|
|
|
|
2,988
|
|
|
|
-
|
|
|
|
2,988
|
|
Securities
|
|
|
64,130
|
|
|
|
-
|
|
|
|
64,130
|
|
|
|
-
|
|
|
|
64,130
|
|
Restricted stock
|
|
|
3,276
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans held for sale
|
|
|
256
|
|
|
|
-
|
|
|
|
256
|
|
|
|
-
|
|
|
|
256
|
|
Loans, net
|
|
|
328,554
|
|
|
|
-
|
|
|
|
-
|
|
|
|
328,236
|
|
|
|
328,236
|
|
Accrued interest receivable
|
|
|
1,413
|
|
|
|
-
|
|
|
|
333
|
|
|
|
1,080
|
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
370,050
|
|
|
$
|
212,625
|
|
|
$
|
154,859
|
|
|
$
|
-
|
|
|
$
|
367,484
|
|
Federal Home Loan Bank advances
|
|
|
7,419
|
|
|
|
4,999
|
|
|
|
2,404
|
|
|
|
-
|
|
|
|
7,403
|
|
Subordinated debenture
|
|
|
2,890
|
|
|
|
-
|
|
|
|
2,873
|
|
|
|
-
|
|
|
|
2,873
|
|
Accrued interest payable
|
|
|
24
|
|
|
|
-
|
|
|
|
24
|
|
|
|
-
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,389
|
|
|
$
|
24,389
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,389
|
|
Interest bearing deposits
|
|
|
1,992
|
|
|
|
-
|
|
|
|
1,992
|
|
|
|
-
|
|
|
|
1,992
|
|
Securities
|
|
|
58,261
|
|
|
|
-
|
|
|
|
58,261
|
|
|
|
-
|
|
|
|
58,261
|
|
Restricted stock
|
|
|
3,276
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans held for sale
|
|
|
611
|
|
|
|
-
|
|
|
|
611
|
|
|
|
-
|
|
|
|
611
|
|
Loans, net
|
|
|
343,921
|
|
|
|
-
|
|
|
|
-
|
|
|
|
341,288
|
|
|
|
341,288
|
|
Accrued interest receivable
|
|
|
1,397
|
|
|
|
-
|
|
|
|
300
|
|
|
|
1,097
|
|
|
|
1,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
374,708
|
|
|
$
|
196,133
|
|
|
$
|
179,266
|
|
|
$
|
-
|
|
|
$
|
375,399
|
|
Federal Home Loan Bank advances
|
|
|
9,332
|
|
|
|
5,004
|
|
|
|
4,454
|
|
|
|
-
|
|
|
|
9,458
|
|
Subordinated debenture
|
|
|
2,825
|
|
|
|
-
|
|
|
|
2,825
|
|
|
|
-
|
|
|
|
2,825
|
|
Accrued interest payable
|
|
|
52
|
|
|
|
-
|
|
|
|
52
|
|
|
|
-
|
|
|
|
52
|
|
The methods and assumptions, not previously
presented, used to estimate fair value is described as follows:
Cash and Cash Equivalents:
The carrying amounts of cash and short-term instruments
approximate fair values and are classified as Level 1.
Restricted Stock:
It is not practical to determine the fair value of
FHLB stock due to restrictions placed on its transferability.
Loans:
Fair values of loans, excluding
loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated
using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of
similar credit quality resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily
represent an exit price.
The fair value of loans held
for sale is estimated based upon binding contracts and quotes from third party investors in a Level 2 classification.
Deposits:
The fair values disclosed for
demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are by
definition equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification.
The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair value
at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using
a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits resulting in a Level 2 classification.
Federal Home Loan Bank Advances and Subordinate
Debenture:
The fair values of the Company’s
long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of
borrowing arrangements resulting in a Level 2 classification.
Accrued Interest Receivable/Payable:
The carrying amounts of accrued
interest approximate fair value and are classified by level consistent with the level of the related assets or liabilities.
NOTE 5 – LOAN SERVICING
Mortgage loans serviced for others are
not reported as assets. The principal balance of these loans at December 31, 2017 and 2016 were $45.1 million and $42.6 million,
respectively. Custodial escrow balances maintained in connection with serviced loans were $217,000 and $191,000 at December 31,
2017 and 2016, respectively.
Activity for loan servicing rights during
the years ended December 31, 2017 and 2016 were as follows (in thousands):
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
349
|
|
|
$
|
340
|
|
Additions
|
|
|
65
|
|
|
|
81
|
|
Amortized to expense
|
|
|
(84
|
)
|
|
|
(72
|
)
|
End of year
|
|
$
|
330
|
|
|
$
|
349
|
|
Loan servicing rights are reported as other
assets. There was no valuation allowance for servicing rights at December 31, 2017 and 2016. The fair value of servicing rights
is estimated to be $483,000 and $381,000 at December 31, 2017 and 2016, respectively. Fair value at December 31, 2017 was determined
using a discount rate of 10%, prepayment speeds ranging from 78% to 312%, depending on the stratification of the specific right
and a weighted average default rate of 0%. Fair value at December 31, 2016 was determined using a discount rate of 10%, prepayment
speeds ranging from 136% to 260%, depending on the stratification of the specific right and a weighted average default rate of
0%.
At December 31, 2017, the weighted average
amortization period was 7.1 years.
NOTE 6 – PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2017 and 2016 were as
follows (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,848
|
|
|
$
|
2,664
|
|
Buildings and leasehold improvements
|
|
|
10,625
|
|
|
|
10,727
|
|
Furniture, fixtures, and equipment
|
|
|
2,639
|
|
|
|
2,576
|
|
Automobiles
|
|
|
195
|
|
|
|
195
|
|
|
|
|
16,307
|
|
|
|
16,162
|
|
Less: Accumulated depreciation
|
|
|
5,807
|
|
|
|
5,047
|
|
|
|
$
|
10,500
|
|
|
$
|
11,115
|
|
Depreciation expense was $798,000 and $854,000
for the years ended December 31, 2017 and 2016, respectively.
Operating Leases
: The Company leases two loan production
offices under operating leases. Rent expense was $53,000 and $62,000 for the years ended December 31, 2017 and 2016, respectively.
Rent commitments, before considering renewal options that generally are present, were $62,000 for 2018, $70,000 for each of 2019
and 2020, and $72,000 for each of 2021 and 2022.
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
The change in goodwill during the years ended December 31, 2017
and 2016 is as follows (in thousands):
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
1,277
|
|
|
$
|
1,277
|
|
Fictitious loans from Town Square acquisition, net of deferred tax benefit
|
|
|
617
|
|
|
|
-
|
|
Impairment
|
|
|
-
|
|
|
|
-
|
|
End of year
|
|
$
|
1,894
|
|
|
$
|
1,277
|
|
Goodwill is not amortized but is assessed at least annually
for impairment and any such impairment will be recognized in the period identified. Impairment is evaluated using the aggregate
of all banking operations as a single reporting unit. At December 31, 2017, the Company had positive equity and the elected to
perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded
its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value
of the reporting unit exceeded its carrying value, resulting in no impairment.
Acquired intangible assets were as follows at year-end (in thousands):
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Core deposit intangibles
|
|
$
|
1,961
|
|
|
$
|
1,294
|
|
|
$
|
1,961
|
|
|
$
|
954
|
|
Aggregate amortization expense was $339,000 for 2017 and $347,000
for 2016.
Estimated amortization expense for each of the next five years
is as follows (in thousands):
2018
|
|
$
|
334
|
|
2019
|
|
|
262
|
|
2020
|
|
|
71
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
NOTE 8 – DEPOSITS
Time deposits that meet or exceed the FDIC
Insurance limit of $250,000 at year-end 2017 and 2016 were $21.4 million and $24.5 million, respectively.
Scheduled maturities of time deposits for
the next five years were as follows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
2018
|
|
$
|
47,844
|
|
2019
|
|
|
31,981
|
|
2020
|
|
|
49,902
|
|
2021
|
|
|
14,777
|
|
2022
|
|
|
12,921
|
|
Total
|
|
$
|
157,425
|
|
NOTE 9 – FEDERAL HOME LOAN BANK ADVANCES
At December 31, 2017 and 2016, advances
from the Federal Home Loan Bank were as follows (dollars in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Maturities March 2018 through January 2029, fixed rate at rates from 1.52% to 4.72%, weighted average rate of 1.97% at December 31, 2017 and weighted average rate of 1.80% at December 31, 2016.
|
|
$
|
7,419
|
|
|
$
|
9,332
|
|
Rates on advances were as follows (dollars in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
0.00% - 1.75%
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
1.76% - 2.75%
|
|
|
1,189
|
|
|
|
2,103
|
|
2.76% - 3.75%
|
|
|
1,148
|
|
|
|
1,973
|
|
3.76% - 4.75%
|
|
|
82
|
|
|
|
256
|
|
5.76% - 6.75%
|
|
|
-
|
|
|
|
-
|
|
6.76% - 7.75%
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
7,419
|
|
|
$
|
9,332
|
|
Each advance is payable at its maturity
date, with a prepayment penalty for fixed rate advances. The advances were collateralized by all of the Bank’s one to four
family first mortgage loans under a blanket lien arrangement at December 31, 2017 and 2016 and the Company’s FHLB stock.
Based on this collateral and the Company’s holdings of FHLB stock, the Bank is eligible to borrow an additional $85.5 million
at December 31, 2017.
Payments contractually required over the next five years as
of December 31, 2017 (in thousands):
2018
|
|
$
|
6,608
|
|
2019
|
|
|
356
|
|
2020
|
|
|
89
|
|
2021
|
|
|
75
|
|
2022
|
|
|
64
|
|
Thereafter
|
|
|
227
|
|
Total
|
|
$
|
7,419
|
|
NOTE 10 – SUBORDINATED DEBENTURES
In December 2006, Town Square Statutory
Trust I, a trust formed by the Town Square Financial Corporation, closed a pooled private offering of 4,000 trust preferred securities
with a liquidation amount of $1,000 per security. The Company issued $4,124,000 of subordinated debentures to the trust in exchange
for ownership of all the common security of the trust and the proceeds of the preferred securities sold by the trust. The Company
is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in
the Company’s financial statements, but rather the subordinated debentures are shown as a liability. The Company’s
investment in the common stock of the trust was $124,000 and is included in other assets. As of December 31, 2017 and 2016, the
book value of the Company’s subordinated debt was net of an unaccreted discount of $1.2 million and $1.3 million resulting
in an increase in interest expense related to the subordinated debt of $65,000 and $64,000 for the years then ended.
The Company may redeem the subordinated
debentures, in whole or in part, in a principal amount with integral multiples of $1,000, on or after December 22, 2012 at 100%
of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on December 22, 2036. The subordinated
debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the
trust indenture. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period
not to exceed five consecutive years.
The subordinated debentures may be included
in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The subordinated
debentures have a variable rate of interest equal to the three month London Interbank Offered Rate (LIBOR) plus 1.83%, which was
3.42% at December 31, 2017.
NOTE 11 – BENEFIT PLANS
The Bank participates in the Pentegra Defined
Benefit Plan for Financial Institutions (“Pentegra DB Plan”), a tax-qualified defined-benefit pension plan. The Pentegra
DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer
plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the
Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single plan under
Internal Revenue Code Section 413C and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under
the Pentegra DB Plan contributions made by a participating employer may be used to provide benefits to participants of other participating
employers.
Funded Status (Market value of plan assets
divided by funding target) as of July 1,
|
|
2017*
|
|
|
2016**
|
|
Source
|
|
Valuation
|
|
|
Valuation
|
|
|
|
Report
|
|
|
Report
|
|
|
|
|
|
|
|
|
|
|
Bank Plan
|
|
|
102.46
|
%
|
|
|
105.06
|
%
|
*Market value of plan assets reflects any
contributions received through December 31, 2017.
**Market value of plan assets reflects any contributions received
through December 31, 2016.
Employer Contributions
Total contributions made to the Pentegra
DB Plan, as reported on Form 5500, equal $366.1 million and $136.7 million for the plan years ended June 30, 2017 and June 30,
2016, respectively. The Bank’s contributions to the Pentegra DB Plan are not more than 5% of the total contributions to the
Pentegra DB Plan.
The following contributions were paid by
the Bank during the fiscal years ended December 31, 2017 and 2016 (in thousands):
December 31,
|
|
December 31,
|
2017
|
|
2016
|
Date Paid
|
|
Amount
|
|
|
Date Paid
|
|
Amount
|
|
12/28/2017
|
|
$
|
119
|
|
|
12/28/2016
|
|
$
|
105
|
|
This plan was “frozen” as of
February 1, 2013. The Bank no longer allows new employees to enroll in the plan. Contributions will be limited to sustaining earned
participant benefits.
401(k) Plan
: A 401(k) benefit plan
allows employee contributions up to 15% of their compensation, which are matched equal to 50% of the first 6% of the compensation
contributed. Expense for the years ended December 31, 2017 and 2016 was $85,000 and $87,000, respectively.
Deferred Compensation Plan
: A deferred
compensation plan covers certain directors and certain executive officers. Under the plan, the Bank pays each participant, or their
beneficiary, the amount of fees deferred plus interest over 20 years, beginning with the individual’s termination of service.
A liability is accrued for the obligation under these plans. In January 2003, the Bank adopted a non-contributory retirement plan
which provides benefits to certain directors and certain key officers. The Company’s obligations under the plan have been
informally funded through the purchase of single premium key man life insurance of which the Company is the beneficiary. The expense
incurred for the deferred compensation for the years ended December 31, 2017 and 2016 was $102,000 and $104,000, respectively resulting
in a deferred compensation liability of $1.5 million and $1.5 million at December 31, 2017 and 2016, respectively. The cash surrender
value of the key man life insurance policies totaled $7.3 million and $7.1 million at December 31, 2017 and 2016, respectively.
NOTE 12 – INCOME TAXES
The provision for income taxes consists
of the following (in thousands):
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current expense
|
|
$
|
394
|
|
|
$
|
192
|
|
Deferred expense (benefit)
|
|
|
(1,477
|
)
|
|
|
440
|
|
Tax rate change - 2017 Tax Cuts & Job Act
|
|
|
1,152
|
|
|
|
-
|
|
Federal income tax expense
|
|
$
|
69
|
|
|
$
|
632
|
|
The following tabulation reconciles the
federal statutory tax rate of 34% to the effective rate of taxes provided for income taxes (dollars in thousands):
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Tax at statutory rate
|
|
$
|
(952
|
)
|
|
$
|
825
|
|
Tax exempt interest
|
|
|
(156
|
)
|
|
|
(153
|
)
|
Income from company owned life insurance
|
|
|
(58
|
)
|
|
|
(61
|
)
|
Tax rate change - 2017 Tax Cuts & Job Act
|
|
|
1,152
|
|
|
|
-
|
|
Stock based compensation
|
|
|
52
|
|
|
|
-
|
|
Other
|
|
|
31
|
|
|
|
21
|
|
Federal income tax expense
|
|
$
|
69
|
|
|
$
|
632
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
|
2.47
|
%
|
|
|
26.04
|
%
|
The components of the Company’s net
deferred tax asset as of December 31, 2017 and 2016 are summarized as follows (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
252
|
|
|
$
|
404
|
|
Deferred loan origination fees
|
|
|
105
|
|
|
|
151
|
|
Allowance for loan losses
|
|
|
983
|
|
|
|
799
|
|
AMT credit carryforward
|
|
|
268
|
|
|
|
432
|
|
Stock based compensation plans
|
|
|
45
|
|
|
|
174
|
|
Basis in other real estate owned
|
|
|
88
|
|
|
|
39
|
|
ESOP compensation expense
|
|
|
39
|
|
|
|
56
|
|
Interest on non-accrual loans
|
|
|
168
|
|
|
|
268
|
|
Net operating loss carryforward
|
|
|
152
|
|
|
|
267
|
|
Deconversion and early termination fees
|
|
|
378
|
|
|
|
-
|
|
Fictitious loan loss
|
|
|
297
|
|
|
|
-
|
|
Unrealized losses on available for sale securities
|
|
|
68
|
|
|
|
79
|
|
Other
|
|
|
22
|
|
|
|
23
|
|
|
|
|
2,865
|
|
|
|
2,692
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock dividends
|
|
|
306
|
|
|
|
496
|
|
Basis in property and equipment
|
|
|
82
|
|
|
|
203
|
|
Accretion on securities
|
|
|
2
|
|
|
|
2
|
|
Mortgage servicing rights
|
|
|
69
|
|
|
|
118
|
|
Purchase accounting fair value adjustments
|
|
|
138
|
|
|
|
77
|
|
Core deposit intangible
|
|
|
140
|
|
|
|
342
|
|
|
|
|
737
|
|
|
|
1,238
|
|
Net deferred tax asset
|
|
$
|
2,128
|
|
|
$
|
1,454
|
|
On December 22, 2017, The Tax Cuts and
Jobs Act (the “Act”) was signed into law. Among other things, the Act reduces the corporate federal tax rate from 35%
to 21% effective January 1, 2018 as well as repealing the alternative minimum tax. As a result, we are required to re-measure,
through income tax expense, our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered
or settled. The re-measurement of our deferred tax assets and liabilities resulted in a one-time charge to the Company’s
earnings and reduction to its net deferred tax assets of approximately $1.2 million in 2017.
Management evaluated whether a valuation
allowance was necessary based on taxes paid in prior periods and recoverable, projected future income, projected future reversals
of deferred tax items, and tax planning strategies. Based on its assessments, management concluded that it was more likely than
not that all deferred tax assets could be realized based primarily on current taxes paid and recoverable and projected reversals
of deferred tax liabilities, as well as future income. As such, no valuation allowance was recorded as of December 31, 2017 or
2016.
At December 31, 2017, the Company deferred
tax assets had net operating loss carryforwards of $725,000 from the Commonwealth acquisition. The deductibility of the net operating
loss carryforwards is limited under IRC Sec. 382 and estimated to be $41,000 annually.
The Company is subject to U.S. federal
income tax. The Company is no longer subject to examination by taxing authorities for years before December 31, 2014.
The Company had no unrecognized tax benefits
at December 31, 2017 or 2016. No change in unrecognized tax benefits is expected in the next twelve months.
Retained earnings at December 31, 2017
and 2016 included approximately $2.3 million, for which no provision for federal income taxes has been made. This amount represents
the tax bad debt reserve at September 30, 1987, which is the end of the Bank’s base year for purposes of calculating the
bad debt deduction for tax purposes. If this portion of retained earnings is used in the future for any purpose other than to absorb
bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability on the above amount at
December 31, 2017 and 2016 was approximately $483,000 and $796,000.
NOTE 13 – RELATED-PARTY TRANSACTIONS
Loans to principal officers, directors,
and their affiliates at December 31, 2017 and 2016 were as follows (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
1,042
|
|
|
$
|
1,258
|
|
New loans
|
|
|
143
|
|
|
|
111
|
|
Terminated officer due to fraud
|
|
|
(67
|
)
|
|
|
-
|
|
Repayments
|
|
|
(492
|
)
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
626
|
|
|
$
|
1,042
|
|
Deposits from principal officers, directors,
and their affiliates at December 31, 2017 and 2016 were $4.5 million and $4.7 million, respectively.
The Bank purchases office supplies and
equipment from a company owned by a director of the Company. Purchases of such supplies and equipment totaled $78,953 in 2017 and
$74,868 in 2016.
NOTE 14 – REGULATORY CAPITAL MATTERS
The Bank is subject to regulatory capital requirements administered
by its primary federal regulator, the Office of the Comptroller of the Currency (OCC). Capital adequacy guidelines and prompt corrective
action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure
to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s
capital guidelines for U.S. banks (Basel III rules) became effective for the Bank on January 1, 2015 with full compliance with
all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under Basel III rules,
the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation
buffer in being phased in from 0% in 2015 to 2.5% in 2019. At December 31, 2017, the actual capital conservation buffer for the
Bank was 11.1% compared to the capital conservation buffer requirement of 1.25%. The net unrealized gain or loss on available for
sale securities is not included in computing regulatory capital. Management believes as of December 31, 2017, the Bank meets all
capital adequacy requirements to which it is subject.
Prompt corrective action regulations provide
five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory
approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. At year-end 2017 and 2016, the most recent regulatory notification from
the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes have changed the institution’s category.
Actual ratios exceed regulatory thresholds
plus the conservation buffer. Actual and required capital amounts and ratios are presented below at December 31, 2017 and 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
|
|
|
|
|
|
|
|
For Capital Adequacy
|
|
|
Prompt Corrective
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
Action Regulations
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
|
|
$
|
57,678
|
|
|
|
19.10
|
%
|
|
$
|
24,159
|
|
|
|
8.00
|
%
|
|
$
|
30,198
|
|
|
|
10.00
|
%
|
(to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
53,891
|
|
|
|
17.85
|
|
|
|
18,119
|
|
|
|
6.00
|
|
|
|
24,159
|
|
|
|
8.00
|
|
(to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity
|
|
|
53,891
|
|
|
|
17.85
|
|
|
|
13,589
|
|
|
|
4.50
|
|
|
|
19,629
|
|
|
|
6.50
|
|
(to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
53,891
|
|
|
|
11.80
|
|
|
|
18,272
|
|
|
|
4.00
|
|
|
|
22,840
|
|
|
|
5.00
|
|
(to Adjusted Total Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
|
|
|
|
|
|
|
|
For Capital Adequacy
|
|
|
Prompt Corrective
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
Action Regulations
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
|
|
$
|
64,925
|
|
|
|
21.01
|
%
|
|
$
|
24,722
|
|
|
|
8.00
|
%
|
|
$
|
30,903
|
|
|
|
10.00
|
%
|
(to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
62,513
|
|
|
|
20.23
|
|
|
|
18,542
|
|
|
|
6.00
|
|
|
|
24,722
|
|
|
|
8.00
|
|
(to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity
|
|
|
62,513
|
|
|
|
20.23
|
|
|
|
13,906
|
|
|
|
4.50
|
|
|
|
20,087
|
|
|
|
6.50
|
|
(to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
62,513
|
|
|
|
13.52
|
|
|
|
18,501
|
|
|
|
4.00
|
|
|
|
23,126
|
|
|
|
5.00
|
|
(to Adjusted Total Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 12, 2011, the Bank converted
from a mutual to a stock institution and a liquidation account was established in the amount of $29.0 million which represented
the Bank’s retained earnings as of the latest statement of financial condition contained in the conversion prospectus. The
liquidation account is maintained for the benefit of eligible depositors who continue to maintain their accounts. The liquidation
account is reduced annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent increases
will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation,
each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held. The Company may not declare, pay a dividend on, or repurchase any
of its capital stock, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount.
Dividend Restrictions:
The Company’s
principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends
that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid
in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding
two years, subject to the capital requirements described above. On November 30, 2017, the Federal Reserve Bank of Cleveland approved
a $6.0 million cash dividend from the Bank to the Company for stock repurchases and other general corporate purposes. As of December
31, 2017, the Bank could not, without prior approval, declare dividends to the Company.
NOTE 15 – LOAN COMMITMENTS AND OTHER
RELATED ACTIVITIES
Some financial instruments, such as loan
commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are
agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the
face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such
commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments
with off-balance-sheet risk at December 31, 2017 and 2016 were as follows (in thousands):
|
|
December 31, 2017
|
|
|
|
Fixed Rate
|
|
|
Variable Rate
|
|
Unused lines of credit
|
|
$
|
7,487
|
|
|
$
|
21,117
|
|
Standby letters of credit
|
|
|
671
|
|
|
|
-
|
|
|
|
December 31, 2016
|
|
|
|
Fixed Rate
|
|
|
Variable Rate
|
|
Unused lines of credit
|
|
$
|
7,110
|
|
|
$
|
14,324
|
|
Standby letters of credit
|
|
|
905
|
|
|
|
-
|
|
NOTE 16 – ESOP
Effective January 1, 2011, the Bank adopted
an Employee Stock Ownership Plan (“ESOP”) for eligible employees. The ESOP borrowed $2.7 million from the Company and
used those funds to acquire 269,790 shares issued by the Company in its initial public offering. The shares were acquired at a
price of $10.00 per share.
The debt is secured by the shares purchased
with the debt proceeds and will be repaid by the ESOP over the 20-year term of the debt with funds from Town Square’s contributions
to the ESOP and dividends payable on unallocated shares, if any. The interest rate on the ESOP loan adjusts annually and is the
prime rate on the first business day of the calendar year, as published in The Wall Street Journal.
Shares purchased by the ESOP are held by
a trustee in an unallocated suspense account and shares are released annually from the suspense account on a pro-rata basis as
principal and interest payments are made by the ESOP to the Company. The trustee allocates the shares released among participants
on the basis of each participant’s proportional share of compensation relative to all participants. Total ESOP shares may
be reduced as a result of employees leaving the Company; shares that have previously been released to those exiting employees may
be removed from the plan and transferred to that employee. As shares are committed to be released from the suspense account, the
Company reports compensation expense based on the average fair value of shares committed to be released with a corresponding credit
to shareholders’ equity.
Compensation expense recognized for the
years ended December 31, 2017 and 2016 was $258,000 and $241,000, respectively.
Shares held by the ESOP at December 31,
2017 and 2016 were as follows (dollars in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Allocated to participants
|
|
|
64,148
|
|
|
|
54,165
|
|
Released, but unallocated
|
|
|
13,538
|
|
|
|
13,501
|
|
Unearned
|
|
|
185,420
|
|
|
|
198,958
|
|
|
|
|
|
|
|
|
|
|
Total ESOP shares
|
|
|
263,106
|
|
|
|
266,624
|
|
|
|
|
|
|
|
|
|
|
Fair value of unearned shares
|
|
$
|
3,894
|
|
|
$
|
3,740
|
|
NOTE 17 – EARNINGS PER SHARE
The two-class method is used in the calculation
of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are
allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participating
rights in undistributed earnings. The factors used in the earnings per share computation follow (dollars in thousands except per
share data):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,868
|
)
|
|
$
|
1,795
|
|
Less: Net income (loss) attributable to participating securities
|
|
|
(16
|
)
|
|
|
18
|
|
Net income available to common shareholders
|
|
$
|
(2,852
|
)
|
|
$
|
1,777
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
3,600,288
|
|
|
|
3,784,583
|
|
Less: Average unallocated ESOP shares
|
|
|
(192,688
|
)
|
|
|
(206,229
|
)
|
Average participating shares
|
|
|
(19,690
|
)
|
|
|
(36,980
|
)
|
Average shares
|
|
|
3,387,910
|
|
|
|
3,541,374
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(0.84
|
)
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,852
|
)
|
|
$
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per common share
|
|
|
3,387,910
|
|
|
|
3,541,374
|
|
Add: Dilutive effects of assumed exercises of stock options
|
|
|
-
|
|
|
|
22,962
|
|
|
|
|
|
|
|
|
|
|
Average shares and dilutive potential common shares
|
|
|
3,387,910
|
|
|
|
3,564,336
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(0.84
|
)
|
|
$
|
0.50
|
|
Because the Company had a net loss for
2017, stock options of 145,200 shares of common stock were not considered in computing diluted earnings per common share for December
31, 2017, as they were considered anti-dilutive. There were 22,962 potentially dilutive securities outstanding at December 31,
2016. Stock options of 179,900 shares of common stock were considered in computing diluted earnings per common share for December
31, 2016.
NOTE 18 – STOCK BASED COMPENSATION
On January 8, 2013, the shareholders of
Poage Bankshares, Inc. approved the Poage Bankshares, Inc. 2013 Equity Incentive Plan (the “Plan”) for employees and
directors of the Company. The Plan authorizes the issuance of up to 472,132 shares of the Company’s common stock, with no
more than 134,895 of shares as restricted stock awards and 337,237 as stock options, either incentive stock options or non-qualified
stock options. The exercise price of options granted under the Plan may not be less than the fair value on the date the stock option
is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity
incentive awards are granted.
On April 16, 2013, the compensation committee
of the board of directors approved the issuance of 134,895 shares of restricted stock to its directors and officers. In addition,
on May 10, 2013, the compensation committee of the board of directors approved the issuance of 300,000 stock options to its directors
and officers. An additional 20,000 stock option shares were issued on March 19, 2014 as a result of the acquisition of Town Square
Financial Corporation by Poage Bankshares, Inc. All stock options and restricted stock awards vest ratably over five years. Stock
options expire ten years after issuance. An additional 5,000 stock option shares were issued on May 31, 2015 to employees as a
result of the acquisition of Commonwealth. Apart from the vesting schedule for both stock options and restricted stock, there are
no performance-based conditions or any other material conditions applicable to the awards issued.
The following table summarizes stock option
activity for the year ended December 31, 2017:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding - January 1, 2017
|
|
|
179,900
|
|
|
$
|
14.92
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(38,050
|
)
|
|
|
14.99
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding - December 31, 2017
|
|
|
141,850
|
|
|
$
|
14.88
|
|
|
|
|
|
|
|
|
|
|
Fully vested and exercisable at December 31, 2017
|
|
|
99,600
|
|
|
|
|
|
Fully vested and exercisable at December 31, 2016
|
|
|
101,400
|
|
|
|
|
|
Expected to vest in future periods
|
|
|
42,250
|
|
|
|
|
|
Stock options are assumed to be earned
ratably over their respective vesting periods and charged to compensation expense based upon their grant date fair value and the
number of options assumed to be earned. At December 31, 2017, 141,850 options were outstanding, and 99,600 options were fully vested
and exercisable with intrinsic value of $868,000 and $610,000, respectively. At December 31, 2016, 179,900 options were outstanding,
and 101,400 options were fully vested and exercisable with aggregate intrinsic value of $698,000 and $393,000, respectively. Stock-based
compensation expense for stock options included in salaries and benefits for the year ended December 31, 2017 and 2016 was $73,000
and $86,000, respectively. Total unrecognized compensation cost related to vested and non-vested stock options was $39,000 at December
31, 2017 and is expected to be recognized over a weighted average period of 2.4 years. During the year ended December 31, 2017,
the aggregate intrinsic value of the options exercised under the plan was $166,000 determined as of the date of the option exercise.
The following table summarizes non-vested
restricted stock activity for the year ended December 31, 2017:
Balance - January 1, 2016
|
|
|
53,947
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
(2,156
|
)
|
Vested
|
|
|
(21,320
|
)
|
Balance - January 1, 2017
|
|
|
30,471
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Vested
|
|
|
(15,249
|
)
|
Balance - December 31, 2017
|
|
|
15,222
|
|
The fair value of the restricted stock
awards is amortized to compensation expense over the vesting period (generally five years) and is based on the market price of
the Company’s common stock at the date of the grant multiplied by the number of shares granted that are expected to vest.
Stock-based compensation expense for the vested and non-vested restricted stock included in salaries and benefits for the years
ended December 31, 2017 and 2016 was $230,000 and $291,000, respectively. The fair value of the 2017 vested restricted stock awards
was $299,000, or $19.63 per weighted-average share. The fair value of the 2016 vested restricted stock awards was $348,000, or
$16.31 per weighted-average share. Unrecognized compensation expense for vested and non-vested restricted stock awards was $69,000
at December 31, 2017 and is expected to be recognized over a weighted-average period of 1.0 year.
NOTE 19 – HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following balance sheets, statements
of income and comprehensive income and statements of cash flows for Poage Bankshares, Inc. should be read in conjunction with the
consolidated financial statements and notes thereto.
BALANCE SHEETS
December 31, 2017 and 2016
(In thousands)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,355
|
|
|
$
|
3,845
|
|
Investment in subsidiary
|
|
|
55,945
|
|
|
|
64,035
|
|
Investment in statutory trust
|
|
|
124
|
|
|
|
124
|
|
ESOP note receivable
|
|
|
2,040
|
|
|
|
2,153
|
|
Other assets
|
|
|
2,265
|
|
|
|
1,539
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
64,729
|
|
|
|
71,696
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
124
|
|
|
|
170
|
|
Subordinated Debenture
|
|
|
2,890
|
|
|
|
2,825
|
|
Total shareholders' equity
|
|
|
61,715
|
|
|
|
68,701
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
64,729
|
|
|
$
|
71,696
|
|
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
Years ended December 31, 2017 and 2016
(
In thousands
)
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
81
|
|
|
$
|
79
|
|
Dividends from subsidiaries
|
|
|
6,004
|
|
|
|
6,003
|
|
Interest expense
|
|
|
226
|
|
|
|
169
|
|
Other expense
|
|
|
772
|
|
|
|
890
|
|
Income before income taxes and equity in undistributed income of Subsidiary
|
|
|
5,087
|
|
|
|
5,023
|
|
Income tax benefit
|
|
|
(377
|
)
|
|
|
(365
|
)
|
Net income before equity in undistributed income of Bank
|
|
|
5,464
|
|
|
|
5,388
|
|
Equity in undistributed income (excess dividends received) from Bank
|
|
|
(8,332
|
)
|
|
|
(3,593
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,868
|
)
|
|
$
|
1,795
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(2,932
|
)
|
|
$
|
1,258
|
|
STATEMENTS OF CASH FLOWS
Years ended December 31, 2017 and 2016
(In thousands)
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,868
|
)
|
|
$
|
1,795
|
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
Amortization of fair value related to subordinated debenture
|
|
|
65
|
|
|
|
64
|
|
Deferred income tax benefit
|
|
|
(195
|
)
|
|
|
(73
|
)
|
Equity in undistributed income (excess dividends received) from Bank
|
|
|
8,332
|
|
|
|
3,593
|
|
Share based compensation expense
|
|
|
561
|
|
|
|
618
|
|
Increase in other assets
|
|
|
(837
|
)
|
|
|
(244
|
)
|
Decrease in other liabilities
|
|
|
(46
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,012
|
|
|
|
5,709
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments received loan to ESOP
|
|
|
113
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
|
113
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Stock repurchases
|
|
|
(3,798
|
)
|
|
|
(3,524
|
)
|
Proceeds from exercise of stock options, including tax benefit
|
|
|
-
|
|
|
|
108
|
|
Dividends paid
|
|
|
(817
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(4,615
|
)
|
|
|
(4,416
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
510
|
|
|
|
1,403
|
|
Cash and cash equivalents at beginning of period
|
|
|
3,845
|
|
|
|
2,442
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,355
|
|
|
$
|
3,845
|
|