Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended June 30, 2017

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

For transition period from ______________________ to___________________

Commission File Number 001-35295

Poage Bankshares, Inc.

(Exact Name of Registrant as Specified in Charter)

Maryland		45-3204393
(State of Other Jurisdiction		(I.R.S Employer
of Incorporation)		Identification Number)

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

606-324-7196

Registrant’s telephone number, including area code

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of August 1, 2017, the number of shares of the Registrant’s common stock, par value $.01 per share, was 3,521,959.

POAGE BANKSHARES, INC.

Form 10-Q Quarterly Report

Table of Contents

	PART I. FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS – POAGE BANKSHARES, INC.	3

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	43

ITEM 4.	CONTROLS AND PROCEDURES	43

	PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	44

ITEM 1A.	RISK FACTORS	44

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45

ITEM 4.	MINE SAFETY DISCLOSURES	45

ITEM 5.	OTHER INFORMATION	45

ITEM 6.	EXHIBITS	45

SIGNATURES		46

PART I

ITEM 1. FINANCIAL STATEMENTS

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)

	June 30,			December 31,
	2017			2016
ASSETS
Cash and due from financial institutions	$	27,388		$	24,389
Interest-bearing deposits in other financial institutions		2,241			1,992
Securities available for sale		62,935			58,261
Loans held for sale		216			611
Loans, net of allowance of $2,687 and $2,349		336,311			343,921
Restricted stock, at cost		3,276			3,276
Other real estate owned, net		693			718
Premises and equipment, net		10,836			11,115
Company owned life insurance		7,206			7,121
Accrued interest receivable		1,320			1,397
Goodwill		1,277			1,277
Other intangible assets, net		835			1,006
Deferred tax asset, net		1,092			1,454
Other assets		2,055			1,927
Total assets	$	457,681		$	458,465

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing	$	52,840		$	52,288
Interest bearing		319,297			322,420
Total deposits		372,137			374,708
Federal Home Loan Bank advances		11,302			9,332
Subordinated debenture		2,857			2,825
Other borrowings		1,500			-
Accrued interest payable		63			52
Other liabilities		3,611			2,847
Total liabilities		391,470			389,764

Commitments and contingent liabilities		-			-

Shareholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized, 3,522,759 and 3,704,704 issued and outstanding at June 30, 2017 and December 31, 2016, respectively		35			37
Additional paid-in-capital		32,329			35,742
Retained earnings		35,453			35,065
Unearned Employee Stock Ownership Plan (ESOP) shares		(1,922	)		(1,990	)
Accumulated other comprehensive income (loss)		316			(153	)
Total shareholders' equity		66,211			68,701
Total liabilities and shareholders' equity	$	457,681		$	458,465

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands except per share data)

	Three months ended					Six months ended
	June 30,					June 30,
	2017		2016			2017		2016
Interest and dividend income
Loans, including fees	$	4,262	$	4,361		$	8,580	$	8,678
Taxable securities		250		241			474		496
Tax-exempt securities		113		111			229		222
Federal funds sold and other		99		49			189		100
		4,724		4,762			9,472		9,496
Interest expense
Deposits		597		485			1,179		957
Federal Home Loan Bank advances and other borrowings		85		100			169		191
		682		585			1,348		1,148
Net interest income		4,042		4,177			8,124		8,348

Provision for loan losses		346		85			699		460
Net interest income after provision for loan losses		3,696		4,092			7,425		7,888

Non-interest income
Service charges on deposits		523		513			999		1,006
Other service charges		12		13			27		27
Net gain on disposal of land and equipment		-		-			16		92
Loan servicing fees		82		139			164		205
Gains on mortgage loans sold, net		56		54			73		97
Net gains (losses) on securities		-		(3	)		-		(3	)
Income from company owned life insurance		43		45			85		90
Other		2		7			7		12
		718		768			1,371		1,526
Non-interest expense
Salaries and employee benefits		1,732		1,843			3,557		3,721
Occupancy and equipment		471		508			945		964
Data processing		691		616			1,266		1,323
Federal deposit insurance		32		51			67		116
Loan processing and collection		104		85			190		160
Foreclosed assets, net		54		64			147		115
Advertising		101		68			215		116
Professional fees		83		137			162		258
Other taxes		116		107			236		214
Director fees and expenses		39		34			79		91
Amortization of intangible assets		85		87			171		174
Other		294		289			542		515
		3,802		3,889			7,577		7,767
Income before income taxes		612		971			1,219		1,647
Income tax expense		245		283			389		460
Net income	$	367	$	688		$	830	$	1,187
Earnings per common share:
Basic	$	0.11	$	0.19		$	0.24	$	0.33
Dilutive		0.11		0.19		$	0.24	$	0.33
Dividend per share	$	0.06	$	0.06		$	0.12	$	0.12

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands except per share data)

	Three months ended						Six months ended
	June 30,						June 30,
	2017			2016			2017			2016

Net income	$	367		$	688		$	830		$	1,187
Other comprehensive income:
Unrealized holding gains on available for sale securities		279			406			711			799
Reclassification adjustments for losses recognized in income		-			3			-			3
Net unrealized holding gains on available for sale securities		279			409			711			802
Tax effect		(95	)		(139	)		(242	)		(273	)
Other comprehensive income		184			270			469			529
Comprehensive income	$	551		$	958		$	1,299		$	1,716

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Dollar amounts in thousands except per share data)

													Accumulated
				Additional						Unearned			Other			Total
	Common			Paid-In			Retained			ESOP			Comprehensive			Shareholders'
	Stock			Capital			Earnings			Shares			Income			Equity
Balances, January 1, 2017	$	37		$	35,742		$	35,065		$	(1,990	)	$	(153	)	$	68,701
Net income		-			-			830			-			-			830
Stock repurchases, 187,572 shares repurchased		(2	)		(3,628	)		-			-			-			(3,630	)
Dividends paid ($0.12/share)		-			-			(442	)		-			-			(442	)
ESOP compensation earned		-			64			-			68			-			132
Stock based compensation expense		-			151			-			-			-			151
Exercise of stock options, 5,627 shares exercised, net		-			-			-			-			-			-
Other comprehensive income		-			-			-			-			469			469
Balances, June 30, 2017	$	35		$	32,329		$	35,453		$	(1,922	)	$	316		$	66,211

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands except per share data)

	Six months ended
	June 30,
	2017			2016
Operating activities:
Net income	$	830		$	1,187
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		378			406
Provision for loan losses		699			460
ESOP compensation expense		132			113
Stock based compensation expense		151			228
Loss on securities		-			3
Net gain on sale of premises and equipment		(16	)		(92	)
Loss on sale and write-downs of other real estate owned		97			46
(Gain) Loss on sale of repossessed assets		1			-
Amortization of core deposit intangible		171			174
Accretion of fair value adjustments related to loans		(219	)		(427	)
Accretion of fair value adjustments related to deposits		(32	)		(33	)
Amortization of fair value related to subordinated debenture		32			32
Net amortization on securities		66			173
Deferred income tax expense		120			388
Net gain on mortgage banking activities		(73	)		(97	)
Origination of loans held for sale		(2,995	)		(3,470	)
Proceeds from loans held for sale		3,463			3,543
Increase in cash value of life insurance		(85	)		(90	)
Change in asset and liabilities, net assets and liabilities acquired:
Accrued interest receivable		77			(37	)
Other assets		(128	)		(288	)
Accrued interest payable		11			53
Other liabilities		764			1,432
Net cash provided by operating activities		3,444			3,704

Investing activities:
Net increase in interest-bearing deposits with other institutions		(249	)		-
Securities available for sale:
Proceeds from calls		65			3,655
Proceeds from maturities		435			-
Purchases		(7,817	)		(4,510	)
Principal payments received		3,288			3,444
Loan originations and principal payments on loans, net		6,306			(28,243	)
Proceeds from the sale of other real estate owned		731			463
Proceeds from the sale of repossessed assets		20			-
Proceeds from the sale of premises and equipment		54			-
Purchase of premises and equipment, net		(137	)		(248	)
Net cash used in investing activities		2,696			(25,439	)

Financing activities:
Net change in deposits		(2,539	)		1,132
Proceeds from other borrowings		1,500			-
Proceeds from Federal Home Loan Bank borrowings		8,000			60,500
Payments on Federal Home Loan Bank borrowings		(6,030	)		(49,871	)
Cash dividend paid		(442	)		(459	)
Stock repurchases		(3,630	)		(1,840	)
Net cash provided by financing activities		(3,141	)		9,462

Net increase (decrease) in cash and cash equivalents		2,999			(12,273	)

Cash and cash equivalents at beginning of period		24,389			23,876

Cash and cash equivalents at the end of the period	$	27,388		$	11,603

Additional cash flows and supplementary information:
Cash paid during the year for:
Interest on deposits and debt	$	1,337		$	1,094
Income taxes (refund) payment		100			(600	)
Other real estate owned and other repossessed assets acquired in settlement of loans	$	824		$	1,021

See notes to unaudited consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The accompanying unaudited consolidated financial statements of Poage Bankshares, Inc. (the “Company” or “Poage”) and its wholly owned subsidiary Town Square Bank (which was formerly operated under the name “Home Federal Savings and Loan Association”) (the “Bank”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

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

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2017 and December 31, 2016 and the results of operations and cash flows for the interim periods ended June 30, 2017 and 2016. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto filed as part of the Company’s 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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.

Newly Issued Accounting Standards 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 requires that revenue from contracts with clients be recognized upon transfer of control of a good or service in the amount of consideration expected to be received and changes the accounting for certain contract costs, including whether they may be offset against revenue in the statements of income, and requires additional disclosures about revenue and contract costs. The ASU may be adopted using either a modified retrospective method or a full retrospective method. Poage intends to adopt the ASU during the first quarter of 2018, as required, using a modified retrospective approach. Poage’s preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material impact on the Company's consolidated financial statements as the majority of its revenue stream is generated from financial instruments which are not within the scope of this ASU. While the Company believes this ASU will have an immaterial impact, it continues to evaluate this ASU for changing facts and circumstances in the Company's operations as the effective date approaches.

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 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. The Company leases two facilities. Upon adoption of this standard, an asset will be recorded to recognize the right of the Company to use the leased facilities and a liability will be recorded representing the obligation to make all future lease payments on those facilities. Management is currently evaluating the impact of the new guidance on the Company’s 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. 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. The new 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. Poage is currently assessing the impact of the new guidance on its consolidated financial statements. Upon adoption, an initial increase in the allowance for loan losses is currently anticipated by management 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 requires 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 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 operating results or financial condition.

In March 2017, the FASB issued ASU No. 2017-10, Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services , in response to the consensus reached by the Emerging Issues Task Force at its March 2017 meeting. The ASU addresses diversity in practice in how an operating entity determines the customer of the operation services for transactions within the scope of Accounting Standards Codification (ASC) 853, Service Concession Arrangements , by clarifying that the grantor is the customer of the operation services in all cases for those arrangements. The amendments also allow for a more consistent application of other aspects of the revenue guidance, which are affected by this customer determination. For public business entities that have adopted ASC 606, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Poage’s preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material impact on the Company's consolidated financial statements.

In July 2017, the FASB issued Update No. 2017-11— Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. Poage is currently assessing the impact of the new guidance on its consolidated financial statements.

NOTE 2 – SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value of securities available for sale at June 30, 2017 and December 31, 2016 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2017
States and political subdivisions	$	19,089	$	398	$	(7	)	$	19,480
U.S. Government agencies and sponsored entities		3,500		-		(59	)		3,441
Government sponsored entities residential mortgage-backed:
FHLMC		10,582		119		(10	)		10,691
FNMA		14,707		81		(14	)		14,774
Collateralized mortgage obligations		5,818		8		(54	)		5,772
SBA loan pools		8,761		43		(27	)		8,777
Total securities	$	62,457	$	649	$	(171	)	$	62,935

			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
Government sponsored entities residential mortgage-backed:
FHLMC		10,954		29		(88	)		10,895
FNMA		11,349		19		(108	)		11,260
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 sales of securities for the three and six months ended June 30, 2017 and 2016.

The amortized cost and fair value of the securities portfolio at June 30, 2017 are shown in the following table 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 are shown separately (in thousands):

	June 30,
	2017
	Amortized		Fair
	Cost		Value

Within one year	$	1,453	$	1,461
One to five years		9,555		9,575
Five to ten years		8,804		9,064
Beyond ten years		2,777		2,821
Mortgage-backed securities and collateralized mortgage obligations		31,107		31,237
SBA loan pools		8,761		8,777
Total	$	62,457	$	62,935

The following table summarizes the securities with unrealized losses at June 30, 2017 and December 31, 2016, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2017
States and political subdivisions	$	2,631	$	(7	)	$	-	$	-		$	2,631	$	(7	)
U.S. Government agencies and sponsored entities		3,441		(59	)		-		-			3,441		(59	)
Government sponsored entities residential mortgage backed:
FHLMC		1,872		(10	)		-		-			1,872		(10	)
FNMA		3,709		(14	)		-		-			3,709		(14	)
Collateralized mortgage obligations		1,303		(13	)		2,429		(41	)		3,732		(54	)
SBA loan pools		3,887		(27	)		-		-			3,887		(27	)
Total available-for-sale securities	$	16,843	$	(130	)	$	2,429	$	(41	)	$	19,272	$	(171	)

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
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	)
Government sponsored entities residential mortgage backed:
FHLMC		6,479		(88	)		-		-			6,479		(88	)
FNMA		6,930		(108	)		-		-			6,930		(108	)
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.

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 June 30, 2017 and December 31, 2016 were as follows (in thousands):

	June 30,		December 31,
	2017		2016
Real estate:
One to four family	$	174,223	$	177,801
Multi-family		7,391		6,823
Commercial real estate		80,936		83,169
Construction and land		11,458		11,019
		274,008		278,812

Commercial and industrial		36,829		38,747

Consumer
Home equity loans and lines of credit		10,403		10,655
Motor vehicle		10,414		10,624
Other		7,796		7,877
		28,613		29,156

Total		339,450		346,715
Less: Net deferred loan fees		452		445
Allowance for loan losses		2,687		2,349
	$	336,311	$	343,921

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of June 30, 2017 and December 31, 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):

June 30, 2017
	Allowance for Loan Losses								Loan Balances
	Individually		Purchased		Collectively				Individually		Purchased		Collectively
	Evaluated for		Credit-Impaired		Evaluated for				Evaluated for		Credit-Impaired		Evaluated for
Loan Segment	Impairment		Loans		Impairment		Total		Impairment		Loans		Impairment		Total

Real estate	$	321	$	-	$	1,923	$	2,244	$	6,154	$	1,675	$	266,179	$	274,008
Commercial and industrial		6		-		227	$	233		29		-		36,800		36,829
Consumer		-		-		210	$	210		35		-		28,578		28,613
Unallocated		-		-		-		-		-		-		-		-
Total	$	327	$	-	$	2,360	$	2,687	$	6,218	$	1,675	$	331,557	$	339,450

December 31, 2016
	Allowance for Loan Losses								Loan Balances
	Individually		Purchased		Collectively				Individually		Purchased		Collectively
	Evaluated for		Credit-Impaired		Evaluated for				Evaluated for		Credit-Impaired		Evaluated for
Loan 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
Unallocated		-		-		-		-		-		-		-		-
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 June 30, 2017 and December 31, 2016 (in thousands):

	June 30, 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	$	670	$	613	$	-	$	883	$	883	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		3,518		3,378		-		3,780		3,726		-
Construction and land		187		187		-		193		193		-
Commercial and industrial		23		23		-		270		82		-
Consumer:
Home equity and lines of credit		35		35		-		40		40		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Subtotal	$	4,433	$	4,236	$	-	$	5,166	$	4,924	$	-

With an allowance recorded:
Real Estate:
One to four family	$	2,079	$	1,976	$	321	$	42	$	42	$	23
Multi-family		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		6		6		6		7		7		7
Consumer:
Home equity and lines of credit		-		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Subtotal		2,085		1,982		327		49		49		30
Total	$	6,518	$	6,218	$	327	$	5,215	$	4,973	$	30

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net, due to immateriality. For purposes of this disclosure, the unpaid balance is not reduced for partial charge-offs.

The following tables present the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three and six months ended June 30, 2017 and 2016 (in thousands):

	Three months ended June 30, 2017						Three months ended June 30, 2016
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
Real Estate:
One to four family	$	2,101	$	1	$	1	$	577	$	2	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		3,352		29		29		444		-		-
Construction and land		153		2		2		-		-		-
Commercial and industrial		124		-		-		130		-		-
Consumer:
Home equity and lines of credit		34		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total	$	5,764	$	32	$	32	$	1,151	$	2	$	-

	Six months ended June 30, 2017						Six months ended June 30, 2016
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
Real Estate:
One to four family	$	1,498	$	15	$	15	$	745	$	4	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		2,868		70		65		446		-		-
Construction and land		107		4		3		-		-		-
Commercial and industrial		229		-		-		146		-		-
Consumer:
Home equity and lines of credit		31		-		-		12		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total	$	4,733	$	89	$	83	$	1,349	$	4	$	-

The following tables set forth an analysis of our allowance for loan losses for the three and six months ended June 30, 2017 and 2016 (in thousands):

Three months ended				Commercial
June 30, 2017	Real Estate			and Industrial			Consumer			Unallocated		Total

Allowance for loan losses:
Beginning balance	$	2,035		$	231		$	197		$	-	$	2,463
Provision for loan losses		302			(9	)		53			-		346
Loans charged-off		(95	)		(2	)		(55	)		-		(152	)
Recoveries		2			13			15			-		30
Total ending allowance balance	$	2,244		$	233		$	210		$	-	$	2,687

Six months ended				Commercial
June 30, 2017	Real Estate			and Industrial			Consumer			Unallocated		Total

Allowance for loan losses:
Beginning balance	$	1,946		$	218		$	185		$	-	$	2,349
Provision for loan losses		586			11			102			-		699
Loans charged-off		(293	)		(23	)		(110	)		-		(426	)
Recoveries		5			27			33			-		65
Total ending allowance balance	$	2,244		$	233		$	210		$	-	$	2,687

Three months ended				Commercial
June 30, 2016	Real Estate			and Industrial			Consumer			Unallocated		Total

Allowance for loan losses:
Beginning balance	$	1,904		$	93		$	138		$	-	$	2,135
Provision for loan losses		(20	)		82			23			-		85
Loans charged-off		(94	)		(77	)		(44	)		-		(215	)
Recoveries		7			28			27			-		62
Total ending allowance balance	$	1,797		$	126		$	144		$	-	$	2,067

Six months ended				Commercial
June 30, 2016	Real Estate			and Industrial			Consumer			Unallocated		Total

Allowance for loan losses:
Beginning balance	$	1,676		$	77		$	105		$	-	$	1,858
Provision for loan losses		278			93			89			-		460
Loans charged-off		(167	)		(77	)		(114	)		-		(358	)
Recoveries		10			33			64			-		107
Total ending allowance balance	$	1,797		$	126		$	144		$	-	$	2,067

Nonaccrual loans, and loans past due 90 days still on accrual status, 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 status, by class of loans, as of June 30, 2017 and December 31, 2016 (in thousands):

	June 30, 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	$	4,181	$	-	$	3,428	$	-
Multi-family		-		-		-		-
Commercial real estate		1,348		-		970		-
Construction and land		38		-		41		-
Commercial and industrial		30		-		90		-
Consumer:
Home equity loans and lines of credit		171		-		155		-
Motor vehicle		13		-		-		-
Other		14		-		5		-
Total	$	5,795	$	-	$	4,689	$	-

The following tables present the aging of the recorded investment in past due loans as of June 30, 2017 and December 31, 2016 by class of loans. Non-accrual loans of $5.8 million as of June 30, 2017 and $4.7 million at December 31, 2016 are included in the tables below and have been categorized based on their payment status (in thousands):

	30 - 59		60 - 89		Greater than				Purchased
	Days		Days		89 Days		Total		Credit-Impaired		Loans Not
	Past Due		Past Due		Past Due		Past Due		Loans		Past Due		Total
June 30, 2017
Real estate:
One to four family	$	1,005	$	66	$	2,312	$	3,383	$	957	$	169,883	$	174,223
Multi-family		-		-		-		-		-		7,391		7,391
Commercial real estate		76		-		1,022		1,098		718		79,120		80,936
Construction and land		-		-		-		-		-		11,458		11,458
Commercial and industrial		-		6		-		6		-		36,823		36,829
Consumer:
Home equity loans and lines of credit		-		5		141		146		-		10,257		10,403
Motor vehicle		42		24		-		66		-		10,348		10,414
Other		19		27		4		50		-		7,746		7,796
Total	$	1,142	$	128	$	3,479	$	4,749	$	1,675	$	333,026	$	339,450

	30 - 59		60 - 89		Greater than				Purchased
	Days		Days		89 Days		Total		Credit-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 June 30, 2017, the Company had a recorded investment in six TDRs which totaled $3.3 million. There were three TDRs which totaled $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 has been made for the loan relationships. No additional commitments to lend have been made to the borrower. The Company has allocated $23,000 and $0 of specific allowance for the loan relationships at June 30, 2017 and December 31, 2016.

June 30, 2017	TDRs on
(in thousands)	Non-accrual		Other TDRs		Total TDRs
Real Estate:
One to four family	$	148	$	16	$	164
Multi-family		-		-		-
Commercial real estate		950		2,195		3,145
Construction and land		-		-		-
Commercial and industrial		-		-		-
Consumer:
Home equity loans and lines of credit		-		-		-
Motor vehicle		-		-		-
Other		-		-		-
Total	$	1,098	$	2,211	$	3,309

December 31, 2016	TDRs on
(in thousands)	Non-accrual		Other TDRs		Total TDRs
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 TDRs that occurred during the three and six months ended June 30, 2017 and 2016 (dollars in thousands):

	Three months ended June 30, 2017						Three months ended June 30, 2016
Loan Class	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real Estate:
One to four family		1	$	34	$	34		1	$	17	$	17
Multi-family		-		-		-		-		-		-
Commercial real estate		1		117		117		-		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer:
Home equity loans and lines of credit		-		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total		2	$	151	$	151		1	$	17	$	17

	Six months ended June 30, 2017						Six months ended June 30, 2016
Loan Class	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real Estate:
One to four family		2	$	148	$	148		1	$	17	$	17
Multi-family		-		-		-		-		-		-
Commercial real estate		1		117		117		-		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer:
Home equity loans and lines of credit		-		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total		3	$	265	$	265		1	$	17	$	17

There were two TDRs considered to be in default within twelve months of modification as of June 30, 2017. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The following tables includes defaults that occurred during the three and six months ended June 30, 2017 and 2016 which were within twelve months of modification.

	Three months ended June 30, 2017						Three months ended June 30, 2016
June 30, 2017	TDRs on						TDRs on
(in thousands)	Non-accrual		Other TDRs		Total TDRs		Non-accrual		Other TDRs		Total TDRs
Real Estate:
One to four family	$	114	$	-	$	114	$	-	$	-	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		833		-		833		-		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer:
Home equity loans and lines of credit		-		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total	$	947	$	-	$	947	$	-	$	-	$	-

	Six months ended June 30, 2017						Six months ended June 30, 2016
June 30, 2017	TDRs on						TDRs on
(in thousands)	Non-accrual		Other TDRs		Total TDRs		Non-accrual		Other TDRs		Total TDRs
Real Estate:
One to four family	$	114	$	-	$	114	$	-	$	-	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		833		-		833		-		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer:
Home equity loans and lines of credit		-		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total	$	947	$	-	$	947	$	-	$	-	$	-

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
June 30, 2017	Pass		Mention		Substandard		Doubtful		Loss		Total
One to four family	$	166,577	$	2,095	$	5,551	$	-	$	-	$	174,223
Multi-family		7,391		-		-		-		-		7,391
Commercial real estate		73,349		2,968		4,619		-		-		80,936
Construction and land		11,271		-		187		-		-		11,458
Commercial and industrial		33,171		2,402		1,256		-		-		36,829
Home equity loans and lines of credit		10,162		35		206		-		-		10,403
Motor vehicle		10,361		11		42		-		-		10,414
Other		7,778		7		11		-		-		7,796
Total	$	320,060	$	7,518	$	11,872	$	-	$	-	$	339,450

			Special
December 31, 2016	Pass		Mention		Substandard		Doubtful		Loss		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

There were $1.7 million and $1.9 million purchased credit impaired (“PCI”) loans included in substandard loans at June 30, 2017 and December 31, 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 that 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 June 30, 2017 and December 31, 2016 (in thousands):

	Non-impaired		Credit-impaired
	Purchased		Purchased
Purchased Loans as of June 30, 2017	Loans		Loans
Real estate:
One to four family	$	28,614	$	957
Multi-family		2,042		-
Commercial real estate		16,422		718
Construction and land		532		-
Commercial and industrial		2,171		-
Consumer loans:
Home equity loans and lines of credit		1,123		-
Motor vehicle		88		-
Other		593		-
Total loans	$	51,585	$	1,675

	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 loans:
Home equity loans and lines of credit		1,433		-
Motor vehicle		202		-
Other		706		1
Total loans	$	57,618	$	1,872

For the purchased loans disclosed above, the Company did not increase the allowance for loan losses for the three and six months ended June 30, 2017 and 2016.

The following table presents the composition of the acquired loans at June 30, 2017:

As of June 30, 2017
	Contractual		Remaining			Carrying
(in thousands)	Amount		Discount			Amount
Real estate:
One to four family	$	30,012	$	(441	)	$	29,571
Multi-family		2,050		(8	)		2,042
Commercial real estate		17,375		(235	)		17,140
Construction and land		534		(2	)		532
Commercial and industrial		2,180		(9	)		2,171
Consumer loans:
Home equity loans and lines of credit		1,129		(6	)		1,123
Motor vehicle		90		(2	)		88
Other		596		(3	)		593
Total loans	$	53,966	$	(706	)	$	53,260

The following tables 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 June 30, 2017 and December 31, 2016.

(in thousands)	June 30, 2017		December 31, 2016

Carrying amount	$	1,675	$	1,872
Non-accretable difference		261		272
Accretable yield		122		146
Contractually-required principal and interest payments	$	2,058	$	2,290

The Company adjusted interest income to recognize $12,000, $24,000, $19,000 and $86,000 of accretable yield on credit-impaired purchased loans for the three and six months ended June 30, 2017 and 2016, respectively.

Accretable yield, or income expected to be collected, is as follows for the six months ended June 30, 2017 and 2016 (in thousands):

	2017			2016

Balance at January 1,	$	146		$	292
New Loans Purchased		-			-
Accretion of income		(24	)		(86	)
Reclassifications from nonaccretable difference		-			-
Disposals		-			-
Balance at June 30,	$	122		$	206

NOTE 4 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

Advances from the FHLB at June 30, 2017 and December 31, 2016 were as follows (in thousands):

		June 30, 2017				December 31, 2016
Maturities September 2017 through January 2029, fixed rate at rates from 1.22% to 4.27%, weighted average rate of 1.74% at June 30, 2017 and 1.80% at December 31, 2016		$	11,302			$	9,332

Payments contractually required over the next five years are as follows as of June 30, 2017 (in thousands):

June 30,
2018	$	9,885
2019		914
2020		94
2021		80
2022		68
Thereafter		261
Total	$	11,302

Other borrowings at June 30, 2017 were $1.5 million. There were no other borrowings at December 31, 2016. On June 16, 2016, Poage Bankshares, Inc. executed a $2.0 million commercial line of credit secured with Town Square Bank common stock, with an unaffiliated lender. The initial variable rate on the line of credit was 4.0% with an interest rate equal to the Wall Street Prime plus 0.50%. On June 20, 2017, the Company borrowed $1.5 million for general working capital purposes and stock repurchases. On June 30, 2017, the interest rate on the line of credit was 4.50%. The line of credit matures June 16, 2018.

NOTE 5 – FAIR VALUE

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

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

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

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

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

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

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. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for 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, changes in market conditions from the time of the valuation, and management’s expertise and 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.

Other Real Estate Owned : Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, an impairment loss is recognized.

Assets and liabilities measured at fair value on a recurring basis, at June 30, 2017 and December 31, 2016, are as follows (in thousands):

	Fair Value Measurements at
	June 30, 2017 Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Securities:
States and political subdivisions	$	19,480	$	-	$	19,480	$	-
U.S. Government agencies and sponsored entities		3,441		-		3,441		-
Mortgage backed securities: residential		25,465		-		25,465		-
Collateralized mortgage obligations		5,772		-		5,772		-
SBA loan pools		8,777		-		8,777		-
Total securities	$	62,935	$	-	$	62,935	$	-

	Fair Value Measurements at
	December 31, 2016 Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other 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 during the six months ended June 30, 2017.

Assets measured at fair value on a non-recurring basis at June 30, 2017 and December 31, 2016 are summarized below (in thousands):

	Fair Value Measurements at
	June 30, 2017 Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans
Residential real estate, net	$	1,821	$	-	$	-	$	1,821
Commercial real estate, net		117		-		-		117

Other real estate owned
One to four family, net	$	228	$	-	$	-	$	228

	Fair Value Measurements at
	December 31, 2016 Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans
Residential real estate, net	$	613	$	-	$	-	$	613
Commercial real estate, net		250		-		-		250
Commercial and industrial, net		58		-		-		58

Other real estate owned
One to four family, net	$	268	$	-	$	-	$	268
Commercial real estate, net		8		-		-		8

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

At June 30, 2017, impaired loans recorded at fair value had a net carrying amount of $1.9 million equal to the outstanding balance of $2.2 million, net of a valuation allowance of $300,000. 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 of $13,000 for the three and six months ended June 30, 2017, and $31,000 for the three and six months ended June 30, 2016.

At June 30, 2017, other real estate owned recorded at fair value had a net carrying amount of $228,000 equal to the outstanding balance of $337,000, net of a valuation allowance of $109,000. There were $48,000 in write-downs for the three months ended June 30, 2017 and $58,000 in write-downs for the six months ended June 30, 2017. There were $14,000 in write-downs for the three and six months ended June 30, 2016. 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.

The carrying amounts and estimated fair values of financial instruments at June 30, 2017 and December 31, 2016 are as follows (in thousands):

			Fair Value Measurements
	Carrying
June 30, 2017	Value		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	27,388	$	27,388	$	-	$	-	$	27,388
Interest-bearing deposits		2,241		-		2,241		-		2,241
Securities		62,935		-		62,935		-		62,935
Restricted stock		3,276		N/A		N/A		N/A		N/A
Loans held for sale		216		-		216		-		216
Loans, net		336,311		-		-		340,448		340,448
Accrued interest receivable		1,320		-		313		1,007		1,320

Financial liabilities
Deposits	$	372,137	$	205,606	$	166,349	$	-	$	371,955
Other borrowings		1,500		-		1,500		-		1,500
Federal Home Loan Bank advances		11,302		-		11,314		-		11,314
Subordinated debenture		2,857		-		2,857		-		2,857
Accrued interest payable		63		-		63		-		63

			Fair Value Measurements
	Carrying
December 31, 2016	Value		Level 1		Level 2		Level 3		Total

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	$	164,914	$	179,266	$	-	$	344,180
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 values are described as follows:

Cash and Cash Equivalents:

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

Restricted Stock:

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

Loans:

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

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

Deposits:

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

Other borrowings, 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 6 – ESOP

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

There were no contributions to the ESOP for the three and six months ended June 30, 2017 and 2016.

Shares held by the ESOP at June 30, 2017 and December 31, 2016 were as follows (dollars in thousands):

	June 30,		December 31,
	2017		2016
Allocated to participants		64,527		54,165
Committed to be released		6,768		13,501
Unearned		192,190		198,958
Total ESOP shares		263,485		266,624

Fair value of unearned shares	$	3,661	$	3,740

NOTE 7 – EARNINGS PER SHARE

The factors used in the earnings per share computation for the three and six months ended June 30, 2017 and 2016, were as follows (dollar amounts in thousands, except per share data):

	Three months ended				Six months ended
	June 30,				June 30,
	2017		2016		2017		2016
Basic
Net income	$	367	$	688	$	830	$	1,187
Less: Earnings allocated to participating securities		2		6		5		13
Net income available to common shareholders	$	365	$	682		825		1,174

Weighted average common shares outstanding		3,663,708		3,813,989		3,680,448		3,830,699
Less: Average unallocated ESOP shares		194,409		207,930		196,091		209,616
Average participating shares		17,848		35,431		24,125		43,204
Average shares		3,451,451		3,570,628		3,460,232		3,577,879

Basic earnings per common share	$	0.11	$	0.19	$	0.24	$	0.33

Diluted
Net income available to common shareholders	$	365	$	682	$	825	$	1,174

Weighted average common shares outstanding for basic earnings per common share		3,451,451		3,570,628		3,460,232		3,577,879
Add: Dilutive effects of assumed exercises of stock options		29,740		9,579		30,321		13,973
Average shares and dilutive potential common shares		3,481,191		3,580,207		3,490,553		3,591,852

Diluted earnings per common share	$	0.11	$	0.19	$	0.24	$	0.33

There were no stock options considered antidilutive for the three and six months ended June 30, 2017 and 2016.

NOTE 8 – 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 market 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. An additional 5,000 stock option shares were issued on May 31, 2015 to employees. All stock options and restricted stock awards vest ratably over five years. Stock options expire ten years after issuance. 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 six months ended June 30, 2017:

				Weighted Average
	Options			Exercise Price

Outstanding -December 31, 2016		179,900		$	14.92
Granted		-			-
Exercised and settled		(37,050	)		14.99
Forfeited		-			-
Outstanding -June 30, 2017		142,850		$	14.91

Fully vested and exercisable at June 30, 2017		99,600
Fully vested and exercisable at December 31, 2016		101,400
Expected to vest in future periods		43,250

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 June 30, 2017, 142,850 options were outstanding and 99,600 options were fully vested and exercisable with intrinsic value of $591,000 and $412,000, respectively. At December 31, 2016, 179,900 options were outstanding and 101,400 options were fully vested and exercisable with intrinsic value of $698,000 and $393,000, respectively.

During the six months ended June 30, 2017, 35,250 options vested. Stock-based compensation expense for stock options included in salaries and benefits for the three and six months ended June 30, 2017 and 2016 was $18,000, $36,000, $19,000 and $50,000, respectively. Total unrecognized compensation cost related to non-vested stock options was $76,000 at June 30, 2017 and $112,000 at December 31, 2016 and is expected to be recognized over a period of 2.9 years. During the six months ended June 30, 2017, the aggregate intrinsic value of the options exercised under the plan was $132,000 determined as of the date of the option exercise.

The following table summarizes non-vested restricted stock activity for the six months ended June 30, 2017:

Balance -December 31, 2016	30,471
Granted	-
Forfeited	-
Vested	(15,114	)
Balance -June 30, 2017	15,357

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 restricted stock included in salaries and benefits for the three and six months ended June 30, 2017 and 2016 was $57,000, $115,000, $60,000 and $178,000, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $184,000 at June 30, 2017 and $299,000 at December 31, 2016 and is expected to be recognized over a weighted-average period of 1.4 years.

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table is changes in Accumulated Other Comprehensive Income by component, net of tax, for the three and six months ended June 30, 2017 and 2016 (in thousands):

	Unrealized Gains and Losses on Available-for-Sale Securities
	Three months ended				Six months ended
	June 30,				June 30,
	2017		2016		2017			2016
Beginning balance	$	132	$	643	$	(153	)	$	384

Other comprehensive income, net of tax before reclassification		184		268		469			527

Amounts reclassified from accumulated other comprehensive income for loss on call of securities, net of tax expense of $0, $1, $0 and $1 respectively		-		2		-			2

Net current period other comprehensive income		184		270		469			529

Ending Balance	$	316	$	913	$	316		$	913

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

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for Poage Bankshares, Inc. for the year ended December 31, 2016, as filed with the Securities and Exchange Commission.

Forward-Looking Statements

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

	>	statements of our goals, intentions and expectations;
	>	statements regarding our business plans and prospects and growth and operating strategies;
	>	statements regarding the asset quality of our loan and investment portfolios;
	>	estimates of our risks and future costs and benefits;
	>	statements about the financial condition, results of operations and business of Poage Bankshares.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Except as may be required by law, we do not take any obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q. You should not place undue reliance on such forward-looking statements.

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

our ability to manage our operations under the current adverse economic conditions (including real estate values, loan demand, inflation, commodity prices and unemployment levels) nationally and in our market area;

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

significant increases in our loan losses, including as a result of our inability to resolve classified assets, and management’s assumptions in determining the adequacy of the allowance for loan losses;

credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

our ability to successfully enhance and maintain internal controls;

competition among depository and other financial institutions;

our success in increasing our commercial business and commercial real estate loans;

our ability to improve our asset quality even as we increase our commercial business, commercial real estate and multi-family lending;

our success in introducing new financial products;

our ability to attract and maintain deposits;

decreases in our asset quality;

changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;

changes in consumer spending, borrowing and savings habits;

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

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

the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements (particularly the new capital regulations), regulatory fees and compliance costs and the resources we have available to address such changes;

changes in the level of government support of housing finance;

our ability to enter new markets successfully and capitalize on growth opportunities

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

changes in our organization, compensation and benefit plans and our ability to retain key members of our senior management team;

loan delinquencies and changes in the underlying cash flows of our borrowers;

the failure or security breaches of computer systems on which we depend;

the ability of key third-party providers to perform their obligations to us; and

changes in the financial condition or future prospects of issuers of securities that we own.

Comparison of Financial Condition at June 30, 2017 and December 31, 2016

Total assets at June 30, 2017 decreased $784,000, or 0.2%, to $457.7 million from $458.5 million at December 31, 2016. The decrease was attributed to the repurchase of common stock totaling $3.6 million, a decrease of $7.6 million in loans and a decrease of $2.6 million in deposits, offset by an increase of $4.7 in securities available for sale, an increase of $2.0 million in FHLB advances and an increase of $1.5 million in other borrowings.

Cash and Cash equivalents increased by $3.0 million, or 12.3%, to $27.4 million at June 30, 2017 from $24.4 million at December 31, 2016. The increase in cash was primarily attributable to an increase in FHLB advances and other borrowing.

Interest-bearing deposits in other financial institutions increased $249,000, or 12.5%, to $2.2 million at June 30, 2017 from $2.0 million at December 31, 2016 due to the purchase of a certificate of deposit.

Securities available for sale increased by $4.7 million, or 8.0%, to $62.9 million at June 30, 2017 from $58.2 million at December 31, 2016. This increase is primarily due to $7.8 million in purchases and an increase in unrealized gain on securities held for sale, offset by maturities, calls and principal payments of $3.8 million.

Loans held for sale decreased $395,000, or 64.6%, to $216,000 at June 30, 2017 from $611,000 at December 31, 2016 due to a decrease in secondary market mortgage lending activity.

Loans, net, decreased $7.6 million, or 2.2%, to $336.3 million at June 30, 2017 from $343.9 million at December 31, 2016. The decrease was primarily attributable to a decrease in one to four family, commercial real estate and commercial and industrial loans. Non-performing loans increased $1.1 million, or 23.6%, to $5.8 million at June 30, 2017 from $4.7 million at December 31, 2016.

Deposits decreased $2.6 million, or 0.7%, to $372.1 million at June 30, 2017 from $374.7 million at December 31, 2016. The decrease was attributable to a decrease of $12.0 million in certificates of deposits, offset by an increase of $9.4 million in savings accounts and money market accounts.

Federal Home Loan Bank advances increased $2.0 million, or 21.1%, to $11.3 million at June 30, 2017 from $9.3 million at December 31, 2016.

Other borrowings increased by $1.5 million, or 100%, at June 30, 2017 from $0 at December 31, 2016 for general working capital purposes. On June 16, 2016, Poage Bankshares, Inc. executed a $2.0 million commercial line of credit secured with Town Square Bank common stock, with an unaffiliated lender. On June 30, 2017, the interest rate on the line of credit was 4.50%.

Subordinated debenture increased by $32,000, or 1.1%, and remained unchanged at $2.8 million at June 30, 2017 and at December 31, 2016 due to the amortization of the fair value related to the subordinated debenture assumed in conjunction with acquisition of Town Square Financial Corporation. In December 2006, Town Square Statutory Trust I, a trust formed by Town Square Financial Corporation, closed a pooled private offering of 4,124 trust preferred securities with a liquidation amount of $1,000 per security. The subordinated debt of $2.8 million is shown as a liability because the Company is not considered the primary beneficiary of the Trust. The investment in common stock of the trust is $124,000 and is included in other assets. The subordinated debt has a variable rate of interest equal to the three month London Interbank Offered Rate (LIBOR) plus 1.83%, which was 3.08% at June 30, 2017.

Total shareholders’ equity decreased by $2.5 million, or 3.6%, to $66.2 million at June 30, 2017 from $68.7 million at December 31, 2016. The decrease resulted from the repurchase of common stock totaling $3.6 million and the payment of cash dividends totaling $442,000, offset by net income of $830,000, an increase in accumulated other comprehensive income of $469,000 and an increase in additional paid-in capital of $283,000 related to the stock based compensation plans.

Average Balances and Yields

The following table sets forth average balances, average yields and costs, and certain other information at the dates and for the periods indicated. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income. Interest income and rates exclude the effects of a tax equivalent adjustment to adjust tax exempt investment income on tax exempt investment securities to a fully taxable basis due to immateriality (dollars in thousands).

	For the Three Months Ended June 30,
	2017							2016
	Average		Interest and					Average		Interest and
	Balance		Dividends		Yield/ Cost			Balance		Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans	$	339,489	$	4,262		5.04	%	$	336,441	$	4,361		5.21	%
Investment securities		61,433		363		2.37	%		63,445		352		2.23	%
Restricted Stock		3,276		36		4.41	%		3,276		30		3.68	%
Other interest-earning assets		27,618		63		0.91	%		12,165		19		0.63	%
Total interest-earning assets		431,816		4,724		4.39	%		415,327		4,762		4.61	%

Noninterest-earning assets		25,121							27,535
Total assets		456,937							442,862

Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other		152,961		104		0.27	%		137,927		61		0.18	%
Certificates of deposit		167,549		493		1.18	%		160,301		424		1.06	%
Total interest bearing deposits		320,510		597		0.75	%		298,228		485		0.65	%

FHLB advances		8,402		36		1.72	%		18,912		58		1.23	%
Subordinated debenture		2,848		47		6.62	%		2,787		42		6.06	%
Other borrowings		181		2		4.43	%		-		-		-
Total borrowings		11,431		85		2.98	%		21,699		100		1.85	%

Total interest bearing liabilities		331,941		682		0.82	%		319,927		585		0.74	%

Non-interest bearing liabilities:
Non-interest bearing deposits		52,506							48,794
Accrued interest payable		132							151
Other liabilities		3,361							3,209
Total non-interest bearing liabilities		55,999							52,154
Total liabilities		387,940							372,081

Total equity		68,997							70,781
Total liabilities and equity		456,937							442,862

Net interest income				4,042							4,177
Interest rate spread						3.57	%						3.87	%
Net interest margin						3.75	%						4.04	%
Average interest-earning assets to average interest-bearing liabilities						130.09	%						129.82	%

	For the Six Months Ended June 30,
	2017							2016
	Average		Interest and					Average		Interest and
	Balance		Dividends		Yield/ Cost			Balance		Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans	$	340,965	$	8,580		5.07	%	$	328,301	$	8,678		5.32	%
Investment securities		60,197		703		2.36	%		64,244		718		2.25	%
Restricted Stock		3,276		70		4.31	%		3,276		61		3.74	%
Other interest-earning assets		28,258		119		0.85	%		13,067		39		0.60	%
Total interest-earning assets		432,696		9,472		4.41	%		408,888		9,496		4.67	%

Noninterest-earning assets		25,441							27,834
Total assets		458,137							436,722

Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other		149,941		194		0.26	%		136,977		121		0.18	%
Certificates of deposit		171,977		985		1.15	%		159,967		836		1.05	%
Total interest bearing deposits		321,918		1,179		0.74	%		296,944		957		0.65	%

FHLB advances		8,667		75		1.75	%		14,943		109		1.47	%
Subordinated debenture		2,841		92		6.53	%		2,778		82		5.94	%
Other borrowings		91		2		4.43	%		-		-		-
Total borrowings		11,599		169		2.94	%		17,721		191		2.17	%

Total interest bearing liabilities		333,517		1,348		0.82	%		314,665		1,148		0.73	%

Non-interest bearing liabilities:
Non-interest bearing deposits		52,313							48,188
Accrued interest payable		131							133
Other liabilities		3,129							3,022
Total non-interest bearing liabilities		55,573							51,343
Total liabilities		389,090							366,008

Total equity		69,047							70,714
Total liabilities and equity		458,137							436,722

Net interest income				8,124							8,348
Interest rate spread						3.59	%						3.94	%
Net interest margin						3.79	%						4.11	%
Average interest-earning assets to average interest-bearing liabilities						129.74	%						129.94	%

Liquidity and Capital Resources

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

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term investment securities. If we require funds beyond our ability to generate them internally we have additional borrowing capacity with the Federal Home Loan Bank of Cincinnati. At June 30, 2017, we had $11.3 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $72.8 million.

Poage Bankshares, Inc. is a separate legal entity from Town Square Bank and must provide its own liquidity to pay dividends, repurchase stock and to fund other general corporate activities. Poage Bankshares, Inc.’s primary source of liquidity is dividend payments from Town Square Bank. The ability of Town Square Bank to pay dividends is subject to regulatory requirements. At June 30, 2017, Poage Bankshares, Inc. (on an unconsolidated basis) had liquid assets of $800,000.

On June 16, 2016, Poage Bankshares, Inc. executed a $2.0 million commercial line of credit secured with Town Square Bank common stock, with an unaffiliated lender. The variable interest rate on the line of credit is 4.50% with an interest rate equal to the Wall Street Prime plus 0.50% adjusting monthly. The line of credit matures June 16, 2018. The line of credit will be used for general working capital purposes. At June 30, 2017, we had $500,000 available on the line of credit.

Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common shareholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). We have exercised the AOCI opt-out. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one- to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. When fully implemented, the capital conservation buffer will be 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and Total Capital to risk weighted assets. The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company. At June 30, 2017, the actual capital conservation buffer for Town Square Bank was 13.83% compared to the capital conservation buffer requirement of 1.25%.

In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions when deemed necessary.

As of June 30, 2017, the capital of the Town Square Bank exceeded all required regulatory guidelines and Town Square Bank was categorized as well-capitalized.

The following table reflects the Bank’s current regulatory capital levels in more detail, including comparisons to the regulatory minimums at June 30, 2017 and December 31, 2016 (in thousands).

											To Be Well
											Capitalized Under
						For Capital Adequacy					Prompt Corrective
	Actual					Purposes					Action Regulations
As of June 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Risk-Based Capital
(to Risk-weighted Assets)	$	66,539		21.83	%	$	24,390		8.00	%	$	30,487		10.00	%
Tier I Capital
(to Risk-weighted Assets)		63,783		20.92			18,292		6.00			24,390		8.00
Common Equity
(to Risk-weighted Assets)		63,783		20.92			13,719		4.50			19,817		6.50
Tier I Capital
(to Adjusted Total Assets)		63,783		14.02			18,201		4.00			22,751		5.00

											To Be Well
											Capitalized Under
						For Capital Adequacy					Prompt Corrective
	Actual					Purposes					Action Regulations
As of December 31, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Risk-Based Capital
(to Risk-weighted Assets)	$	64,925		21.01	%	$	24,722		8.00	%	$	30,903		10.00	%
Tier I Capital
(to Risk-weighted Assets)		62,513		20.23			18,542		6.00			24,722		8.00
Common Equity
(to Risk-weighted Assets)		62,513		20.23			13,906		4.50			20,087		6.50
Tier I Capital
(to Adjusted Total Assets)		62,513		13.52			18,501		4.00			23,126		5.00

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

Comparison of Operating Results for the Three and Six Months Ended June 30, 2017 and June 30, 2016

General. Net income for the three months ended June 30, 2017 decreased $321,000, or 46.7%, to $367,000 from net income of $688,000 for the three months ended June 30, 2016. The decrease in net income is attributable to a decrease in net interest income of $135,000 to $4.0 million for the three months ended June 30, 2017 from $4.2 million for the three months ended June 30, 2016, a decrease in non-interest income of $50,000 to $718,000 for the three months ended June 30, 2017 from $768,000 for the three months ended June 30, 2016 and an increase in the provision for loan losses of $261,000 to $346,000 for the three months ended June 30, 2017 from $85,000 for the three months ended June 30, 2016. The decreases in income are offset by a decrease in non-interest expense of $87,000 to $3.8 million for the three months ended June 30, 2017 from $3.9 million for the three months ended June 30, 2016, and a decrease of $38,000 in income taxes to $245,000 for the three months ended June 30, 2017 compared to $283,000 for the three months ended June 30, 2016.

Net income decreased $357,000, or 30.1%, to $830,000 for the six months ended June 30, 2017 from net income of $1.2 million for the six months ended June 30, 2016. The decrease in net income is attributable to a decrease in net interest income of $224,000 to $8.1 million for the six months ended June 30, 2017 from $8.3 million for the six months ended June 30, 2016, a decrease in non-interest income of $155,000 to $1.4 million for the six months ended June 30, 2017 from $1.5 million for the six months ended June 30, 2016 and in increase in the provision for loan losses of $239,000 to $699,000 for the six months ended June 30, 2017 from $460,000 for the six months ended June 30, 2016. The decreases in income are offset by a decrease in non-interest expense of $190,000 to $7.6 million for the six months ended June 30, 2017 from $7.8 million for the six months ended June 30, 2016, and a decrease of $71,000 in income taxes to $389,000 for the six months ended June 30, 2017 compared to $460,000 for the six months ended June 30, 2016.

Interest Income. Interest income decreased $38,000, or 0.8%, to $4.7 million for the three months ended June 30, 2017 from $4.8 million for the three months ended June 30, 2016. The average balance of interest-earning assets increased $16.5 million, or 4.0%, to $431.8 million from $415.3 million.

Interest income on loans decreased $99,000, or 2.3%, to $4.3 million for the three months ended June 30, 2017 from $4.4 million for the three months ended June 30, 2016. The average yields on loans decreased 17 basis points to 5.04% for the three months ended June 30, 2017 compared to 5.21% for the three months ended June 30, 2016. The average balance of loans increased $3.1 million, or 0.9%, to $339.5 million for the three months ended June 30, 2017 from $336.4 million for the three months ended June 30, 2016. Income recognized from purchase discounts attributable to the Town Square and Commonwealth acquisitions decreased $95,000, or 47.5%, to $109,000 for the three months ended June 30, 2017 from $204,000 for the three months ended June 30, 2016 and contributed to the decrease in the average yields on loans.

Interest income on investment securities increased $11,000, or 3.1%, to $363,000 for the three months ended June 30, 2017 from $352,000 for the three months ended June 30, 2016. The average yield on securities increased 14 basis points to 2.37% for the three months ended June 30, 2017, compared to 2.23% for the three months ended June 30, 2016. The average balance of investment securities decreased $2.0 million, or 3.2%, to $61.4 million for the three months ended June 30, 2017 from $63.4 million for the three months ended June 30, 2016.

Interest income on restricted stock increased $6,000, or 20.0%, to $36,000 for the three months ended June 30, 2017 from $30,000 for the three months ended June 30, 2016. The average yield on restricted stock increased 73 basis points to 4.41% for the three months ended June 30, 2017 compared to 3.68% for the three months ended June 30, 2016. The average balance of restricted stock remained constant at $3.3 million for the three months ended June 30, 2017 and 2016. Interest income on other interest-earning assets increased $44,000, or 231.6%, to $63,000 for the three months ended June 30, 2017 from $19,000 for the three months ended June 30, 2016. The average yield on other interest-earning assets increased 28 basis points to 0.91% for the three months ended June 30, 2017 compared to 0.63% for the three months ended June 30, 2016. The average balance of other interest earning assets increased $15.4 million, or 127.0%, to $27.6 million for the three months ended June 30, 2017 from $12.2 million for the three months ended June 30, 2016.

Interest income decreased $24,000, or 0.3%, to remain unchanged at $9.5 million for the six months ended June 30, 2017 and 2016. The average balance of interest-earning assets increased $23.8 million, or 5.8%, to $432.7 million from $408.9 million.

Interest income on loans decreased $98,000, or 1.1%, to $8.6 million for the six months ended June 30, 2017 from $8.7 million for the six months ended June 30, 2016. The average yields on loans decreased 25 basis points to 5.07% for the six months ended June 30, 2017 compared to 5.32% for the six months ended June 30, 2016. The average balance of loans increased $12.7 million, or 3.9%, to $341.0 million for the six months ended June 30, 2017 from $328.3 million for the six months ended June 30, 2016. Income recognized from purchase discounts attributable to the Town Square and Commonwealth acquisitions decreased $208,000, or 48.7%, to $219,000 for the six months ended June 30, 2017 from $427,000 for the six months ended June 30, 2016 and contributed to the decrease in the average yields on loans.

Interest income on investment securities decreased $15,000, or 2.1%, to $703,000 for the six months ended June 30, 2017 from $718,000 for the six months ended June 30, 2016. The average yield on securities increased 11 basis points to 2.36% for the six months ended June 30, 2017, compared to 2.25% for the six months ended June 30, 2016. The average balance of investment securities decreased $4.0 million, or 6.3%, to $60.2 million for the six months ended June 30, 2017 from $64.2 million for the six months ended June 30, 2016.

Interest income on restricted stock increased $9,000, or 14.8%, to $70,000 for the six months ended June 30, 2017 from $61,000 for the six months ended June 30, 2016. The average yield on restricted stock increased 57 basis points to 4.31% for the six months ended June 30, 2017 compared to 3.74% for the six months ended June 30, 2016. The average balance of restricted stock remained constant at $3.3 million for the six months ended June 30, 2017 and 2016. Interest income on other interest-earning assets increased $80,000, or 205.1%, to $119,000 for the six months ended June 30, 2017 from $39,000 for the six months ended June 30, 2016. The average yield on other interest-earning assets increased 25 basis points to 0.85% for the six months ended June 30, 2017 compared to 0.60% for the six months ended June 30, 2016. The average balance of other interest earning assets increased $15.2 million, or 116.3%, to $28.3 million for the six months ended June 30, 2017 from $13.1 million for the six months ended June 30, 2016.

Interest Expense. Interest expense increased $97,000, or 16.6%, to $682,000 for the three months ended June 30, 2017 from $585,000 for the three months ended June 30, 2016. Interest expense on interest bearing deposits increased $112,000, or 23.1% to $597,000 for the three months ended June 30, 2017 from $485,000 for the three months ended June 30, 2016. The average balance of interest bearing deposits increased $22.3 million, or 7.5%, to $320.5 million for the three months ended June 30, 2017 from $298.2 million for the three months ended June 30, 2016. The average interest rate paid on interest bearing deposits increased 10 basis points to 0.75% for the three months ended June 30, 2017 compared to 0.65% for the three months ended June 30, 2016. The increase in average balance on interest bearing deposits is primarily attributable to an increase in NOW and money market accounts combined with an increase of $7.9 million in short-term non-brokered deposits acquired in the national market.

Interest expense on FHLB advances, subordinated debentures and other borrowings decreased $15,000, or 15.0%, to $85,000 for the three months ended June 30, 2017 from $100,000 for the three months ended June 30, 2016. The average balance on FHLB advances decreased $10.5 million, or 55.6%, to $8.4 million for the three months ended June 30, 2017 from $18.9 million for the three months ended June 30, 2016. The average interest rate paid on FHLB advances increased 49 basis points to 1.72% from 1.23%. The average balance on subordinated debentures increased $61,000, or 2.2%, to remain unchanged at $2.8 million for the three months ended June 30, 2017 and 2016. The average interest rate paid on subordinated debentures increased 56 basis points to 6.62% for the three months ended June 30, 2017 from 6.06% for the three months ended June 30, 2016. The average balance on other borrowings increased $181,000, or 100.0%, to $181,000 for the three months ended June 30, 2017 from $0 for the three months ended June 30, 2016. The average interest rate paid on other borrowings increased 443 basis points to 4.43% for the three months ended June 30, 2017 from 0.00% for the three months ended June 30, 2016.

Interest expense increased $200,000, or 17.4%, to $1.3 million for the six months ended June 30, 2017 from $1.1 million for the six months ended June 30, 2016. Interest expense on interest bearing deposits increased $222,000, or 23.2% to $1.2 million for the six months ended June 30, 2017 from $957,000 for the six months ended June 30, 2016. The average balance of interest bearing deposits increased $25.0 million, or 8.4%, to $321.9 million for the six months ended June 30, 2017 from $296.9 million for the six months ended June 30, 2016. The average interest rate paid on interest bearing deposits increased 9 basis point to 0.74% for the six months ended June 30, 2017 from 0.65% for the six months ended June 30, 2016. The increase in average balance on interest bearing deposits is primarily attributable to an increase in NOW and money market accounts combined with an increase of $7.9 million in short-term non-brokered deposits acquired in the national market.

Interest expense on FHLB advances, subordinated debentures and other borrowings decreased $22,000, or 11.5%, to $169,000 for the six months ended June 30, 2017 from $191,000 for the six months ended June 30, 2016. The average balance on FHLB advances decreased $6.3 million, or 42.0%, to $8.7 million for the six months ended June 30, 2017 from $14.9 million for the six months ended June 30, 2016. The average interest rate paid on FHLB advances increased 28 basis points to 1.75% for the six months ended June 30, 2017 from 1.47% for the six months ended June 30, 2016. The average balance on subordinated debentures increased $63,000, or 2.3%, to remain at $2.8 million for the six months ended June 30, 2017 and 2016. The average interest rate paid on subordinated debentures increased 59 basis points to 6.53% for the six months ended June 30, 2017 from 5.94% for the six months ended June 30, 2016. The average balance on other borrowings increased $91,000, or 100.0%, to $91,000 for the six months ended June 30, 2017 from $0 for the six months ended June 30, 2016. The average interest rate paid on other borrowings increased 443 basis points to 4.43% for the six months ended June 30, 2017 from 0.00% for the six months ended June 30, 2016.

Net Interest Income . Net interest income decreased $135,000, or 3.2%, to $4.0 million for the three months ended June 30, 2017 from $4.2 million for the three months ended June 30, 2016. The ratio of average interest earning assets to average interest bearing liabilities increased to 130.09% for the three months ended June 30, 2017 from 129.82% for the three months ended June 30, 2016. The interest rate spread decreased 30 basis points to 3.57% for the three months ended June 30, 2017 from 3.87% for the three months ended June 30, 2016. Net interest margin decreased 29 basis points to 3.75% for the three months ended June 30, 2017 from 4.04% for the three months ended June 30, 2016.

Net interest income decreased $224,000, or 2.7%, to $8.1 million for the six months ended June 30, 2017 from $8.3 million for the six months ended June 30, 2016. The ratio of average interest earning assets to average interest bearing liabilities decreased to 129.74% for the six months ended June 30, 2017 from 129.94% for the six months ended June 30, 2016. The interest rate spread decreased 35 basis points to 3.59% for the six months ended June 30, 2017 from 3.94% for the six months ended June 30, 2016. Net interest margin decreased 32 basis points to 3.79% for the six months ended June 30, 2017 from 4.11% for the six months ended June 30, 2016.

Provision for Loan Losses. We recorded $346,000 in provision for loan losses for the three months ended June 30, 2017 compared to $85,000 in provision for loan losses for the three months ended June 30, 2016. The increase in the provision is primarily attributable to charge-offs and the establishment of an allowance of $149,000 on an individual one to four family residential real estate loan.

We recorded $699,000 in provision for loan losses for the six months ended June 30, 2017 and $460,000 provision for loan losses for the six months ended June 30, 2016 primarily due to charge-offs and the establishment of an allowance of $149,000 on an individual one to four family residential real estate loan.

Noninterest Income. Noninterest income decreased $50,000, or 6.5%, to $718,000 for the three months ended June 30, 2017 from $768,000 for the three months ended June 30, 2016. The decrease in noninterest income was primarily attributable to a decrease in loan servicing fees associated with mortgage banking activities of $57,000, or 41.0%, to $82,000 for the three months ended June 30, 2017 from $139,000 for the three months ended June 30, 2016, offset by an increase in service charges on deposits of $10,000, or 1.9%, to $523,000 for the three months ended June 30, 2017 from $513,000 for the three months ended June 30, 2016.

Noninterest income decreased $155,000, or 10.2%, to $1.4 million for the six months ended June 30, 2017 from $1.5 million for the six months ended June 30, 2016. The decrease in noninterest income was attributable to a decrease in loan servicing fees associated with mortgage banking activities of $41,000, or 20.0%, to $164,000 for the six months ended June 30, 2017 from $205,000 for the six months ended June 30, 2016, a decrease in net gains on mortgage loans sold of $24,000, or 24.7%, to $73,000 for the six months ended June 30, 2017 from $97,000 for the six months ended June 30, 2016 and a decrease in net gain on disposal of land and equipment of $76,000 or 82.6%, to $16,000 for the six months ended June 30, 2017 from $92,000 for the six months ended June 30, 2016.

Noninterest Expense. Noninterest expense decreased $87,000, or 2.2%, to $3.8 million for the three months ended June 30, 2017 from $3.9 million for the three months ended 2016. This decrease was primarily attributable to the decrease in salaries and employee benefits of $111,000, or 6.0%, to $1.7 million for the three months ended June 30, 2017 from $1.8 million for the three months ended June 30, 2016, a decrease in professional fees of $54,000, or 39.4%, to $83,000 for the three months ended June 30, 2017 from $137,000 for the three months ended June 30, 2016 and a decrease in occupancy expense of $37,000, or 7.3%, to $471,000 for the three months ended June 30, 2017 from $508,000 for the three months ended June 30, 2016, offset by an increase in data processing of $75,000, or 12.2%, to $691,000 for the three months ended June 30, 2017 from $616,000 for the three months ended June 30, 2016 and an increase in advertising of $33,000, or 48.5% to $101,000 for the three months ended June 30, 2017 from $68,000 for the three months ended June 30, 2016. Advertising expense increased primarily due increased media advertising and target marketing.

Noninterest expense decreased $190,000, or 2.4%, to $7.6 million for the six months ended June 30, 2017 from $7.8 million for the six months ended June 30, 2016. This decrease was primarily due to a decrease of $164,000, or 4.4%, to $3.6 million in salaries and employee benefits for the six months ended June 30, 2017 from $3.7 million for the six months ended June 30, 2016 and a decrease in professional fees of $96,000, or 37.2%, to $162,000 for the six months ended June 30, 2017 from $258,000 for the six months ended June 30, 2016. In addition, federal deposit insurance decreased $49,000, or 42.2%, to $67,000 for the six months ended June 30, 2017 from $116,000 for the six months ended June 30, 2016 due to reduced assessment rates effective July 1, 2016.

The decreases above are offset by an increase in advertising of $99,000, or 85.3%, to $215,000 for the six months ended June 30, 2017 from $116,000 for the six months ended June 30, 2016, an increase in expenses related to foreclosed assets of $32,000, or 27.8%, to $147,000 for the six months ended June 30, 2017 from $115,000 for the six months ended June 30, 2016 and an increase in loan processing and collection of $30,000, or 18.8%, to $190,000 for the six months ended June 30, 2017 from $160,000 for the six months ended June 30, 2016. Advertising expense increased primarily due increased media advertising.

Income Tax Expense. The provision for income taxes decreased $38,000, or 13.4%, to $245,000 for the three months ended June 30, 2017 compared to a $283,000 tax expense for the three months ended June 30, 2016 due to lower pre-tax income for the three months ended June 30, 2017. Our effective tax rate for the three months ended June 30, 2017 was 40.0% compared to 29.1% for the three months ended June 30, 2016 due to tax expense related to nondeductible incentive stock options.

The provision for income taxes decreased $71,000, or 15.4%, to $389,000 for the six months ended June 30, 2017 compared to a $460,000 tax expense for the six months ended June 30, 2016 due to lower pre-tax income for the six months ended June 30, 2016. Our effective tax rate for the six months ended June 30, 2016 was 31.9% compared to 27.9% for the six months ended June 30, 2016.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosures of quantitative and qualitative market risk are not required by smaller reporting companies, such as the Company.

ITEM 4. CONTROLS AND PROCEDURES

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

During the quarter ended June 30, 2017, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Disclosures of risk factors are not required by smaller reporting companies, such as the Company.

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

(a)

None.

(b)

Not applicable.

(c)

Issuer repurchases. The following table sets forth information in connection with repurchases of the Company’s common stock for the period April 1, 2017 through June 30, 2017. On June 2, 2016, Poage Bankshares, Inc. commenced a stock repurchase program. The Board of Directors of Poage Bankshares, Inc. authorized program to repurchase up to 150,000 shares, which represented approximately 3.9% of the Company’s then issued and outstanding shares of common stock through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The Company repurchased 125,681 shares at a weighted average price of $18.18 per share and there remained 24,319 shares to be repurchased under this plan at June 30, 2017.

On December 20, 2016, the Board of Directors of Poage Bankshares, Inc. authorized a new program to repurchase up to 185,000 shares, which represents approximately 5% of the Company’s then issued and outstanding shares of common stock through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. On June 26, 2017, the Company completed the stock program for up to 185,000 shares of common stock at a weighted average price of $19.07 per share.

The Company’s stock repurchases pursuant to the repurchase programs are dependent on certain factors, including but not limited to, market conditions and prices, available funds and alternative uses of capital. The repurchase program may be carried out through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Any repurchased shares will be treated by the Company as authorized but unissued shares.

					Total Number		Number of Shares
					of Shares		That May Yet
	Total				Purchased as		Be Purchased
	Number of		Average		Part of		Under Publicly
	Shares		Price Paid		Publicly		Announced
	Purchased		Per Share		Announced Plan		Plan
April 1 - April 30, 2017		2,675	$	18.69		2,675		181,687
May 1 - May 31, 2017		7,218		19.32		7,218		174,469
June 1 - June 30, 2017		150,150		19.04		150,150		24,319
Total		160,043	$	19.05		160,043

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit
number		Description

3.1		Articles of Incorporation of Poage Bankshares, Inc. ⁽¹⁾

3.2		Bylaws of Poage Bankshares, Inc. ⁽²⁾

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

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

32.1		Certification of President and Chief Executive Officer, and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following material from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Income, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statement of Shareholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements.

(1) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-172192, originally filed on February 11, 2011, and as subsequently amended)

(2) Incorporated by reference to the Current Report on Form 8-K (File No. 001-35295, filed on September 21, 2016)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Poage Bankshares, Inc.
Date: August 4, 2017

	/s/ Bruce VanHorn
	Bruce VanHorn
	President & Chief Executive Officer

	/s/ Jane Gilkerson
	Jane Gilkerson
	Chief Financial Officer