Poage Bankshares (PBSK) 10-Q 2016 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended September 30, 2016

¨ 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, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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 November 8, 2016, the number of shares of the Registrant’s common stock, par value $.01 per share, was 3,713,513.

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	31
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4.	CONTROLS AND PROCEDURES	41
	PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	42
ITEM 1A.	RISK FACTORS	42
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	42
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	43
ITEM 4.	MINE SAFETY DISCLOSURES	43
ITEM 5.	OTHER INFORMATION	43
ITEM 6.	EXHIBITS	43
SIGNATURES		44

2

PART I

ITEM 1.     FINANCIAL STATEMENTS

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)

	September 30,			December 31,
	2016			2015
ASSETS
Cash and due from financial institutions	$	19,493		$	23,876
Interest-bearing deposits in other financial institutions		1,992			1,992
Securities available for sale		57,799			63,975
Loans held for sale		710			367
Loans, net of allowance of $2,317 and $1,858		339,616			314,143
Restricted stock, at cost		3,276			3,276
Other real estate owned, net		988			1,306
Premises and equipment, net		11,426			11,514
Company owned life insurance		7,076			6,941
Accrued interest receivable		1,395			1,340
Goodwill		1,277			1,277
Other intangible assets, net		1,092			1,353
Deferred tax asset		918			1,617
Other assets		1,835			2,111
Total assets	$	448,893		$	435,088
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing	$	50,287		$	49,222
Interest bearing		309,508			293,908
Total deposits		359,795			343,130
Federal Home Loan Bank advances		12,793			15,803
Subordinated debenture		2,809			2,761
Accrued interest payable		101			38
Other liabilities		3,642			2,115
Total liabilities		379,140			363,847
Commitments and contingent liabilities		-			-
Shareholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized, 3,713,695 and 3,894,282 issued and outstanding at September 30, 2016 and December 31, 2015, respectively		37			39
Additional paid-in-capital		35,856			38,673
Retained earnings		35,059			34,270
Unearned Employee Stock Ownership Plan (ESOP) shares		(2,023	)		(2,125	)
Accumulated other comprehensive income		824			384
Total shareholders' equity		69,753			71,241
Total liabilities and shareholders' equity	$	448,893		$	435,088

See notes to unaudited consolidated financial statements.

3

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands except per share data)

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016			2015
Interest and dividend income
Loans, including fees	$	4,455	$	4,380	$	13,134		$	12,770
Taxable securities		207		253		703			758
Tax exempt securities		115		104		336			311
Federal funds sold and other		49		35		149			102
		4,826		4,772		14,322			13,941
Interest expense
Deposits		501		454		1,459			1,351
Federal Home Loan Bank advances and other		101		93		292			298
		602		547		1,751			1,649
Net interest income		4,224		4,225		12,571			12,292
Provision for loan losses		352		-		812			485
Net interest income after provision for loan losses		3,872		4,225		11,759			11,807
Non-interest income
Service charges on deposits		525		529		1,531			1,461
Other service charges		13		13		40			35
Loan servicing fees		151		113		357			379
Gains on mortgage banking activity		64		28		161			179
Net gains (losses) on securities		-		12		(3	)		12
Income from company owned life insurance		45		45		135			135
Bargain purchase gain		-		35		-			1,590
Other		2		5		14			51
		800		780		2,235			3,842
Non-interest expense
Salaries and employee benefits		1,865		1,853		5,586			5,566
Occupancy and equipment		509		457		1,381			1,248
Data processing		668		615		1,991			1,711
Federal deposit insurance		60		62		176			181
Loan processing and collection		108		69		268			230
Foreclosed assets, net		191		111		306			280
Advertising		114		42		230			126
Professional fees		137		238		395			676
Other taxes		106		217		320			400
Director fees and expenses		44		69		136			180
Amortization of intangible assets		87		93		261			253
Early termination fee and conversion costs		-		85		-			503
Other		297		390		812			951
		4,186		4,301		11,862			12,305
Income before income taxes		486		704		2,132			3,344
Income tax expense		122		174		581			512
Net income	$	364	$	530	$	1,551		$	2,832
Earnings per common share:
Basic	$	0.10	$	0.14	$	0.43		$	0.78
Dilutive		0.10		0.14	$	0.43		$	0.78
Dividend per share	$	0.08	$	0.06	$	0.20		$	0.17

See notes to unaudited consolidated financial statements.

4

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands except per share data)

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Net income	$	364		$	530		$	1,551		$	2,832
Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities		(135	)		367			664			39
Reclassification adjustments for (gains) losses recognized in income		-			(12	)		3			(12	)
Net unrealized holding gains (losses) on available for sale securities		(135	)		355			667			27
Tax effect		46			(121	)		(227	)		(9	)
Other comprehensive income (loss)		(89	)		234			440			18
Comprehensive income	$	275		$	764		$	1,991		$	2,850

See notes to unaudited consolidated financial statements.

5

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, 2016	$	39		$	38,673		$	34,270		$	(2,125	)	$	384	$	71,241
Net income		-			-			1,551			-			-		1,551
Stock repurchases, 179,757 shares repurchased		(2	)		(3,193	)		-			-			-		(3,195	)
Dividends paid ($0.20/share)		-			-			(762	)		-			-		(762	)
ESOP compensation earned		-			75			-			102			-		177
Stock based compensation expense, net of 2,156 forfeited shares		-			301			-			-			-		301
Other comprehensive income		-			-			-			-			440		440
Balances, September 30, 2016	$	37		$	35,856		$	35,059		$	(2,023	)	$	824	$	69,753

See notes to unaudited consolidated financial statements.

6

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands except per share data)

	Nine months ended
	September 30,
	2016			2015
CASH FLOW FROM OPERATING ACTIVITIES:
Net income	$	1,551		$	2,832
Adjustments to reconcile net income to net cash from operating activities:
Bargain purchase gain		-			(1,590	)
Depreciation		583			532
Provision for loan losses		812			485
ESOP compensation expense		177			155
Stock based compensation expense		301			293
(Gain) Loss on securities		3			(12	)
Gain on sale of premises and equipment		(92	)		-
Loss on sale and write-downs of other real estate owned		182			166
(Gain) Loss on sale of repossessed assets		5			(1	)
Amortization of core deposit intangible		261			253
Accretion of fair value adjustments related to loans		(594	)		(901	)
Accretion of fair value adjustments related to deposits		(49	)		(54	)
Amortization of fair value related to subordinated debenture		48			48
Net amortization on securities		209			390
Deferred income tax expense		472			82
Net gain on mortgage banking activities		(161	)		(179	)
Origination of loans held for sale		(6,067	)		(5,854	)
Proceeds from loans held for sale		5,885			6,630
Increase in cash value of life insurance		(135	)		(135	)
Change in asset and liabilities, net assets and liabilities acquired:
Accrued interest receivable		(55	)		12
Other assets		311			411
Accrued interest payable		63			86
Other liabilities		1,533			855
Net cash from operating activities		5,243			4,504
CASH FLOW FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits with other institutions		-			(1,494	)
Securities available for sale:
Proceeds from sales		-			2,017
Proceeds from calls		6,655			1,010
Proceeds from maturities		-			655
Purchases		(5,565	)		(9,543	)
Principal payments received		5,541			5,201
Purchase of restricted stock		-			(56	)
Cash paid for acquisition, net of cash acquired		-			2,355
Loan originations and principal payments on loans, net		(26,785	)		5,754
Proceeds from the sale of other real estate owned		1,184			436
Proceeds from the sale of repossessed assets		-			52
Purchase of properties and equipment, net		(403	)		(744	)
Net cash from investing activities		(19,373	)		5,643
CASH FLOW FROM FINANCING ACTIVITIES
Net change in deposits		16,714			(3,095	)
Proceeds from Federal Home Loan Bank borrowings		80,500			28,000
Payments on Federal Home Loan Bank borrowings		(83,510	)		(35,865	)
Cash dividend paid		(762	)		(657	)
Proceeds from issuance of common stock, net of costs		-			1,675
Stock repurchases		(3,195	)		(1,630	)
Net cash from financing activities		9,747			(11,572	)
CHANGE IN CASH AND CASH EQUIVALENTS		(4,383	)		(1,425	)
Cash and cash equivalents at beginning of period		23,876			16,967
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	19,493		$	15,542
Additional cash flows and supplementary information:
Cash paid during the year for:
Interest on deposits and debt	$	1,689		$	1,547
Income taxes (refund) payment		(450	)		350
Real estate acquired in settlement of loans	$	1,196		$	1,335
Loans provided for sales of real estate owned	$	142		$	500

See notes to unaudited consolidated financial statements

7

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”) 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 September 30, 2016 and December 31, 2015 and the results of operations and cash flows for the interim periods ended September 30, 2016 and 2015. 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 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Newly Issued Accounting Standards Not Yet Effective

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.” This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss model, which is referred to as the “current expected credit loss” or “(CECL)” model. The standard pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other contracts. The largest impact will be on the allowance for loan and lease losses. The update is effective for public entities for fiscal years beginning after December 15. 2019, including interim periods within, which will apply to March 31, 2020, interim financial statements for calendar year-ends. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statements of Cash Flows – Classification of Certain Cash Receipts and Cash Payments.” This update is designed to address the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard also provides guidance on when an entity should separate cash flows and classify them into more than one class and when an entity should classify the aggregate of those cash flows into a single class based on the predominance principle. The update is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, which first applies to March 31, 2018, interim financial statements for calendar year-end public business entities. We do not believe this update will have a significant impact on our consolidated financial statements.

8

NOTE 2 – SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value of securities available for sale at September 30, 2016 and December 31, 2015 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
September 30, 2016
States and political subdivisions	$	19,893	$	618	$	(4	)	$	20,507
U.S. Government agencies and sponsored entities		3,500		13		(3	)		3,510
Government sponsored entities residential mortgage-backed:
FHLMC		10,653		283		-			10,936
FNMA		9,869		219		-			10,088
Collateralized mortgage obligations		5,977		10		(11	)		5,976
SBA loan pools		6,658		124		-			6,782
Total securities	$	56,550	$	1,267	$	(18	)	$	57,799
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
December 31, 2015
States and political subdivisions	$	17,398	$	567	$	(5	)	$	17,960
U.S. Government agencies and sponsored entities		9,750		-		(112	)		9,638
Government sponsored entities residential mortgage-backed:
FHLMC		11,499		156		(11	)		11,644
FNMA		11,657		91		(21	)		11,727
Collateralized mortgage obligations		7,720		-		(86	)		7,634
SBA loan pools		5,370		17		(15	)		5,372
Total securities	$	63,394	$	831	$	(250	)	$	63,975

The proceeds from sales and calls of securities and the associated gains and losses are listed below (in thousands):

	Three months ended					Nine months ended
	September 30,					September 30,
	2016		2015			2016			2015
Proceeds	$	3,000	$	2,027		$	6,655		$	3,027
Gross gains		-		14			-			14
Gross losses		-		(2	)		(3	)		(2	)

The amortized cost and fair value of the securities portfolio at September 30, 2016 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):

	September 30,
	2016
	Amortized		Fair
	Cost		Value
					��
Within one year	$	438	$	437
One to five years		10,047		10,169
Five to ten years		9,413		9,827
Beyond ten years		3,495		3,584
Mortgage-backed securities and collateralized mortgage obligations		26,499		27,000
SBA loan pools		6,658		6,782
Total	$	56,550	$	57,799

9

The following table summarizes the securities with unrealized losses at September 30, 2016 and December 31, 2015, 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
September 30, 2016
States and political subdivisions	$	2,693	$	(4	)	$	-	$	-		$	2,693	$	(4	)
U.S. Government agencies and sponsored entities		2,498		(3	)		-		-			2,498		(3	)
Collateralized mortgage obligations		695		(3	)		2,283		(8	)		2,978		(11	)
Total available-for-sale securities	$	5,886	$	(10	)	$	2,283	$	(8	)	$	8,169	$	(18	)
	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
December 31, 2015
States and political subdivisions	$	1,357	$	(5	)	$	-	$	-		$	1,357	$	(5	)
U.S. Government agencies and sponsored entities		4,212		(39	)		5,426		(73	)		9,638		(112	)
Government sponsored entities residential mortgage backed:
FHLMC		1,429		(11	)		-		-			1,429		(11	)
FNMA		2,529		(21	)		-		-			2,529		(21	)
Collateralized mortgage obligations		5,387		(35	)		2,247		(51	)		7,634		(86	)
SBA loan pools		1,845		(15	)		-		-			1,845		(15	)
Total available-for-sale securities	$	16,759	$	(126	)	$	7,673	$	(124	)	$	24,432	$	(250	)

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.

10

NOTE 3 – LOANS

Loans at September 30, 2016 and December 31, 2015 were as follows (in thousands):

	September 30,		December 31,
	2016		2015
Real estate:
One to four family	$	183,229	$	184,613
Multi-family		5,636		4,521
Commercial real estate		70,735		62,726
Construction and land		16,336		6,282
		275,936		258,142
Commercial and industrial		37,871		31,841
Consumer
Home equity loans and lines of credit		10,088		8,287
Motor vehicle		10,696		10,735
Other		7,783		7,347
		28,567		26,369
Total		342,374		316,352
Less: Net deferred loan fees		441		351
Allowance for loan losses		2,317		1,858
	$	339,616	$	314,143

11

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 September 30, 2016 and December 31, 2015. 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):

September 30, 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	$	11	$	-	$	1,959	$	1,970	$	3,787	$	2,003	$	270,146	$	275,936
Commercial and industrial		-		-		189	$	189		1,001		-		36,870		37,871
Consumer		-		-		158	$	158		40		2		28,525		28,567
Unallocated		-		-		-		-		-		-		-		-
Total	$	11	$	-	$	2,306	$	2,317	$	4,828	$	2,005	$	335,541	$	342,374
December 31, 2015
	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	$	2	$	-	$	1,674	$	1,676	$	1,497	$	2,624	$	254,021	$	258,142
Commercial and industrial		-		-		77		77		449		-		31,392		31,841
Consumer		13		-		92		105		23		16		26,330		26,369
Unallocated		-		-		-		-		-		-		-		-
Total	$	15	$	-	$	1,843	$	1,858	$	1,969	$	2,640	$	311,743	$	316,352

12

The following table presents information related to impaired loans by class of loans as of September 30, 2016 and December 31, 2015 (in thousands):

	September 30, 2016						December 31, 2015
					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	$	640	$	640	$	-	$	1,416	$	1,100	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		3,089		3,089		-		183		183		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		1,144		1,001		-		582		449		-
Consumer:
Home equity and lines of credit		40		40		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Subtotal	$	4,913	$	4,770	$	-	$	2,181	$	1,732	$	-
With an allowance recorded:
Real Estate:
One to four family	$	58	$	58	$	11	$	-	$	-	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		-		-		-		214		214		2
Construction and land		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer:
Home equity and lines of credit		-		-		-		23		23		13
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Subtotal		58		58		11		237		237		15
Total	$	4,971	$	4,828	$	11	$	2,418	$	1,969	$	15

For the purpose of this disclosure, the unpaid balance is not reduced for partial charge-offs.

13

The following tables present the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three and nine months ended September 30, 2016 and 2015 (in thousands):

	Three months ended September 30, 2016						Three months ended September 30, 2015
	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	$	698	$	1	$	-	$	952	$	-	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		3,089		32		-		323		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		1,001		6		-		335		-		-
Consumer:
Home equity and lines of credit		40		-		-		7		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total	$	4,828	$	39	$	-	$	1,617	$	-	$	-
	Nine months ended September 30, 2016						Nine months ended September 30, 2015
	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	$	854	$	7	$	-	$	952	$	-	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		1,287		101		-		671		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		499		31		-		366		-		-
Consumer:
Home equity and lines of credit		23		1		-		7		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total	$	2,663	$	140	$	-	$	1,996	$	-	$	-

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.

14

The following tables sets forth an analysis of our allowance for loan losses for the three and nine months ended September 30, 2016 and 2015 (in thousands):

Three months ended				Commercial
September 30, 2016	Real Estate			and Industrial			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,797		$	126		$	144		$	-	$	2,067
Provision for loan losses		249			58			45			-		352
Loans charged-off		(83	)		-			(51	)		-		(134	)
Recoveries		7			5			20			-		32
Total ending allowance balance	$	1,970		$	189		$	158		$	-	$	2,317
Three months ended				Commercial
September 30, 2015	Real Estate			and Industrial			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,900		$	89		$	84		$	-	$	2,073
Provision for loan losses		(38	)		(7	)		24			21		-
Loans charged-off		(52	)		(12	)		(49	)		-		(113	)
Recoveries		18			5			30			-		53
Total ending allowance balance	$	1,828		$	75		$	89		$	21	$	2,013
Nine months ended				Commercial
September 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		527			151			134			-		812
Loans charged-off		(250	)		(77	)		(165	)		-		(492	)
Recoveries		17			38			84			-		139
Total ending allowance balance	$	1,970		$	189		$	158		$	-	$	2,317
Nine months ended				Commercial
September 30, 2015	Real Estate			and Industrial			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,806		$	43		$	62		$	-	$	1,911
Provision for loan losses		240			54			170			21		485
Loans charged-off		(370	)		(64	)		(195	)		-		(629	)
Recoveries		152			42			52			-		246
Total ending allowance balance	$	1,828		$	75		$	89		$	21	$	2,013

15

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 September 30, 2016 and December 31, 2015 (in thousands):

	September 30, 2016				December 31, 2015
			Loans Past Due				Loans Past Due
			Over 90 Days				Over 90 Days
	Nonaccrual		Still Accruing		Nonaccrual		Still Accruing
Real estate:
One to four family	$	2,671	$	-	$	2,967	$	-
Multi-family		-		-		-		-
Commercial real estate		885		-		773		-
Construction and land		-		-		259		-
Commercial and industrial		152		-		449		-
Consumer:
Home equity loans and lines of credit		123		-		23		-
Motor vehicle		-		-		-		-
Other		5		-		31		-
Total	$	3,836	$	-	$	4,502	$	-

16

The following tables present the aging of the recorded investment in past due loans as of September 30, 2016 and December 31, 2015 by class of loans. As of September 30, 2016, consumer residential properties in process of foreclosure was $800,000 compared to $863,000 at December 31, 2015. Non-accrual loans of $3.8 million as of September 30, 2016 and $4.5 million at December 31, 2015 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
September 30, 2016
Real estate:
One to four family	$	1,462	$	727	$	830	$	3,019	$	1,128	$	179,082	$	183,229
Multi-family		-		-		-		-		-		5,636		5,636
Commercial real estate		486		399		216		1,101		875		68,759		70,735
Construction and land		-		-		-		-		-		16,336		16,336
Commercial and industrial		90		8		146		244		-		37,627		37,871
Consumer:
Home equity loans and lines of credit		-		79		123		202		-		9,886		10,088
Motor vehicle		35		16		-		51		-		10,645		10,696
Other		4		2		-		6		2		7,775		7,783
Total	$	2,077	$	1,231	$	1,315	$	4,623	$	2,005	$	335,746	$	342,374
	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, 2015
Real estate:
One to four family	$	1,152	$	35	$	1,226	$	2,413	$	1,305	$	180,895	$	184,613
Multi-family		-		-		-		-		-		4,521		4,521
Commercial real estate		44		-		214		258		1,061		61,407		62,726
Construction and land		-		-		-		-		258		6,024		6,282
Commercial and industrial		3		19		362		384		-		31,457		31,841
Consumer:
Home equity loans and lines of credit		-		-		23		23		-		8,264		8,287
Motor vehicle		21		1		-		22		4		10,709		10,735
Other		25		2		1		28		12		7,307		7,347
Total	$	1,245	$	57	$	1,826	$	3,128	$	2,640	$	310,584	$	316,352

17

Troubled Debt Restructurings:

As of September 30, 2016, the Company has a recorded investment in six TDRs which totaled $3.4 million. There were three TDRs which totaled $307,000 at December 31, 2015. A less than market rate and extended term was granted as concessions for TDRs. No additional charge-off or provision has been made for the loan relationships. No additional commitments to lend have been made to the borrower.

September 30, 2016	TDRs on
(in thousands)	Non-accrual		Other TDRs		Total TDRs
Real Estate:
One to four family	$	17	$	104	$	121
Multi-family		-		-		-
Commercial real estate		166		2,204		2,370
Construction and land		-		-		-
Commercial and industrial		19		849		868
Consumer:
Home equity loans and lines of credit		-		-		-
Motor vehicle		-		-		-
Other		-		-		-
Total	$	202	$	3,157	$	3,359
December 31, 2015	TDRs on
(in thousands)	Non-accrual		Other TDRs		Total TDRs
Real Estate:
One to four family	$	-	$	105	$	105
Multi-family		-		-		-
Commercial real estate		183		-		183
Construction and land		-		-		-
Commercial and industrial		19		-		19
Consumer:
Home equity loans and lines of credit		-		-		-
Motor vehicle		-		-		-
Other		-		-		-
Total	$	202	$	105	$	307

There were two TDRs, one commercial real estate loan and one commercial and industrial loan, which occurred during the three months ended September 30, 2016. There were three TDRs, one commercial real estate loan, one commercial and industrial loan and one residential real estate loan, which occurred during the nine months ended September 30, 2016. There was one TDR, a residential real estate loan, which occurred during the three and nine months ended September 30, 2015.

The modifications did not include a permanent reduction of the recorded investment in the loans and did not increase the allowance for loan losses during the three and nine months ended September 30, 2016 and 2015. There were no TDRs that subsequently defaulted within twelve months of modification during the three and nine months ended September 30, 2016 and 2015.

18

The following table presents TDRs that occurred during the nine months ended September 30, 2016 and September 30, 2015 (dollars in thousands):

	Nine months ended September 30, 2016						Nine months ended September 30, 2015
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	$	17	$	17		1	$	105	$	105
Multi-family		-		-		-		-		-		-
Commercial real estate		1		2,204		2,204		-		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		1		849		849		-		-		-
Consumer:
Home equity loans and lines of credit		-		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total		3	$	3,070	$	3,070		1	$	105	$	105

19

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
September 30, 2016	Pass		Mention		Substandard		Doubtful		Loss		Total
One to four family	$	176,514	$	2,148	$	4,567	$	-	$	-	$	183,229
Multi family		5,636		-		-		-		-		5,636
Commercial real estate		64,897		1,597		4,241		-		-		70,735
Construction and land		16,336		-		-		-		-		16,336
Commercial and industrial		33,937		2,226		1,708		-		-		37,871
Home equity loans and lines of credit		9,902		6		180		-		-		10,088
Motor vehicle		10,664		9		23		-		-		10,696
Other		7,776		2		5		-		-		7,783
Total	$	325,662	$	5,988	$	10,724	$	-	$	-	$	342,374
			Special
December 31, 2015	Pass		Mention		Substandard		Doubtful		Loss		Total
One to four family	$	176,824	$	2,716	$	5,073	$	-	$	-	$	184,613
Multi family		4,521		-		-		-		-		4,521
Commercial real estate		60,544		107		2,075		-		-		62,726
Construction and land		6,023		0		259		-		-		6,282
Commercial and industrial		30,551		5		1,285		-		-		31,841
Home equity loans and lines of credit		8,262		0		25		-		-		8,287
Motor vehicle		10,703		0		32		-		-		10,735
Other		7,306		8		33		-		-		7,347
Total	$	304,734	$	2,836	$	8,782	$	-	$	-	$	316,352

There were $1.8 million and $2.3 million purchased credit impaired (“PCI”) loans included in substandard loans at September 30, 2016 and December 31, 2015, respectively.

20

The Company holds purchased loans without evidence of credit quality deterioration and 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:

Purchased Loans as of September 30, 2016	Non-impaired		Credit-impaired
	Purchased		Purchased
(in thousands)	Loans		Loans
Real estate:
One to four family	$	32,485	$	1,128
Commercial real estate		22,112		875
Construction and land		874		-
Commercial and Industrial		3,578		-
Consumer loans:
Home equity loans and lines of credit		1,487		-
Motor vehicle		252		-
Other		752		2
Total loans	$	61,540	$	2,005
Purchased Loans as of December 31, 2015	Non-impaired		Credit-impaired
	Purchased		Purchased
(in thousands)	Loans		Loans
Real estate:
One to four family	$	37,557	$	1,305
Commercial real estate		28,322		1,061
Construction and land		1,058		258
Commercial and Industrial		7,122		-
Consumer loans:
Home equity loans and lines of credit		1,660		-
Motor vehicle		605		4
Other		1,107		12
Total loans	$	77,431	$	2,640

For the purchased loans disclosed above, the Company did not increase the allowance for loan losses for the three and nine months ended September 30, 2016 and September 30, 2015.

21

The following table presents the composition of the acquired loans at September 30, 2016:

As of September 30, 2016
	Contractual		Fair Value
(in thousands)	Amount		Adjustments			Fair Value
Real estate:
One to four family	$	34,237	$	(624	)	$	33,613
Commercial Real Estate		23,372		(385	)		22,987
Construction and land		882		(8	)		874
Commercial and Industrial		3,611		(33	)		3,578
Consumer loans:
Home equity loans and lines of credit		1,502		(15	)		1,487
Motor vehicle		255		(3	)		252
Other		761		(7	)		754
Total loans	$	64,620	$	(1,075	)	$	63,545

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 September 30, 2016 and December 31, 2015.

(in thousands)	September 30, 2016		December 31, 2015
Carrying Amount	$	2,005	$	2,640
Non-Accretable difference		285		349
Accretable yield		164		292
Contractually-required principal and interest payments	$	2,454	$	3,281

The Company adjusted interest income to recognize $42,000, and $128,000 of accretable yield on credit-impaired purchased loans for the three and nine months ended September 30, 2016. The Company adjusted interest income to recognize $40,000, and $189,000 of accretable yield on credit-impaired purchased loans for the three and nine months ended September 30, 2015.

(in thousands)	September 30, 2016		December 31, 2015
Real Estate:
One to four family	$	1,128	$	1,305
Commercial real estate		875		1,061
Construction and land		-		258
Commercial and industrial		-		-
Consumer:
Home equity loans and lines of credit		-		-
Motor vehicle		-		4
Other		2		12
Outstanding balance	$	2,005	$	2,640
Carrying amount, net of allowance of $0 and $0	$	2,005	$	2,640

22

Accretable yield, or income expected to be collected, is as follows for the nine months ended September 30, 2016 and 2015 (in thousands):

	2016			2015
Balance at January 1,	$	292		$	625
New Loans Purchased		-			-
Accretion of income		(128	)		(189	)
Reclassifications from nonaccretable difference		-			-
Disposals		-			-
Balance at September 30,	$	164		$	436

NOTE 4 – FEDERAL HOME LOAN BANK ADVANCES

Advances from the FHLB at September 30, 2016 and December 31, 2015 were as follows (in thousands):

	September 30, 2016		December 31, 2015
Maturities October 2016 through January 2029, fixed rate at rates from 0.45% to 6.86%, weighted average rate of 1.50% at September 30, 2016 and 1.52% at December 31, 2015	$	12,793	$	15,803

Payments contractually required over the next five years are as follows as of September 30, 2016 (in thousands):

September 30,
2017	$	10,106
2018		1,565
2019		632
2020		93
2021		79
Thereafter		318
Total	$	12,793

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.

23

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 costs to sell, an impairment loss is recognized.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

	Fair Value Measurements at
	September 30, 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	$	20,507	$	-	$	20,507	$	-
U.S. Government agencies and sponsored entities		3,510		-		3,510		-
Mortgage backed securities: residential		21,024		-		21,024		-
Collateralized mortgage obligations		5,976		-		5,976		-
SBA loan pools		6,782		-		6,782		-
Total securities	$	57,799	$	-	$	57,799	$	-
	Fair Value Measurements at
	December 31, 2015 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	$	17,960	$	-	$	17,960	$	-
U.S. Government agencies and sponsored entities		9,638		-		9,638		-
Mortgage backed securities: residential		23,371		-		23,371		-
Collateralized mortgage obligations		7,634		-		7,634		-
SBA loan pools		5,372		-		5,372		-
Total securities	$	63,975	$	-	$	63,975	$	-

There were no transfers between Level 1 and Level 2 during 2016 or 2015.

24

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

	Fair Value Measurements at
	September 30, 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	$	150	$	-	$	-	$	150
Other real estate owned
Residential real estate, net	$	70	$	-	$	-	$	70
	Fair Value Measurements at
	December 31, 2015 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
Commercial real estate, net	$	212	$	-	$	-	$	212
Home equity line of credit, net		10		-		-		10

Commercial and residential real estate properties classified as OREO are measured at fair value, less 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 September 30, 2016, impaired loans recorded at fair value had a net carrying amount of $150,000 equal to the outstanding balance of $161,000, net of a valuation allowance of $11,000. There were charge-offs of $0 and $31,000 for the three and nine months ended September 30, 2016, and $200,000 for both the three and nine months ended September 30, 2015. At December 31, 2015, impaired loans recorded at fair value had a net carrying amount of $222,000 equal to the outstanding balance of $237,000, net of a valuation allowance of $15,000.

At September 30, 2016, OREO recorded at fair value had a net carrying amount of $70,000 made up of the outstanding balance of $119,000 net of a valuation allowance of $49,000, which resulted in a write-down of $34,000 and $48,000 for the three and nine months ended September 30, 2016 respectively. There were $95,400 write-downs for both the three and nine months ended September 30, 2015. At December 31, 2015 no OREO was recorded at fair value.

25

The carrying amounts and estimated fair values of financial instruments at September 30, 2016 and December 31, 2015 are as follows (in thousands):

			Fair Value Measurements
	Carrying
September 30, 2016	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	19,493	$	19,493	$	-	$	-	$	19,493
Interest-bearing deposits		1,992		1,992		-		-		1,992
Securities		57,799		-		57,799		-		57,799
Restricted stock		3,276		N/A		N/A		N/A		N/A
Loans held for sale		710		-		710		-		710
Loans, net		339,616		-		-		340,097		340,097
Accrued interest receivable		1,395		-		320		1,075		1,395
Financial liabilities
Deposits	$	359,795	$	169,238	$	170,905	$	-	$	340,143
Federal Home Loan Bank advances		12,793		8,004		4,789		-		12,793
Subordinated debenture		2,809		-		3,128		-		3,128
Accrued interest payable		101		-		101		-		101
			Fair Value Measurements
	Carrying
December 31, 2015	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	23,876	$	23,876	$	-	$	-	$	23,876
Interest bearing deposits		1,992		1,992		-		-		1,992
Securities		63,975		-		63,975		-		63,975
Restricted stock		3,276		N/A		N/A		N/A		N/A
Loans held for sale		367		-		367		-		367
Loans, net		314,143		-		-		356,337		356,337
Accrued interest receivable		1,340		-		294		1,046		1,340
Financial liabilities
Deposits	$	343,130	$	184,284	$	158,328	$	-	$	342,612
Federal Home Loan Bank advances		15,803		9,770		10,943		-		20,713
Subordinated debenture		2,761		-		2,761		-		2,761
Accrued interest payable		38		-		38		-		38

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.

26

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.

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 nine months ended September 30, 2016 and 2015.

Shares held by the ESOP at September 30, 2016 and December 31, 2015 were as follows (dollars in thousands):

	September 30,		December 31,
	2016		2015
Allocated to participants		40,671		42,832
Committed to be released		23,606		-
Unearned		202,347		225,953
Total ESOP shares		266,624		268,785
Fair value of unearned shares	$	3,904	$	3,864

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NOTE 7 – EARNINGS PER SHARE

The factors used in the earnings per share computation for the three and nine months ended September 30, 2016 and 2015, were as follows (dollar amounts in thousands, except per share data):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Basic
Net income	$	364	$	530	$	1,551	$	2,832
Less: Earnings allocated to participating securities		3		9		16		55
Net income available to common shareholders	$	361	$	521		1,535		2,777
Weighted average common shares outstanding		3,764,946		3,938,130		3,808,622		3,876,984
Less: Average unallocated ESOP shares		204,571		225,949		207,922		233,559
Average participating shares		31,098		64,149		39,139		75,896
Average shares		3,529,277		3,648,032		3,561,561		3,567,529
Basic earnings per common share	$	0.10	$	0.14	$	0.43	$	0.78
Diluted
Net income available to common shareholders	$	361	$	521	$	1,535	$	2,777
Weighted average common shares outstanding for basic earnings per common share		3,529,277		3,648,032		3,561,561		3,567,529
Add: Dilutive effects of assumed exercises of stock options		31,012		-		20,744		-
Average shares and dilutive potential common shares		3,560,289		3,648,032		3,582,305		3,567,529
Diluted earnings per common share	$	0.10	$	0.14	$	0.43	$	0.78

Stock options of 200,600 shares of common stock were considered in computing diluted earnings per common share for the three and nine months ended September 30, 2016. No stock options were excluded from the calculation of diluted earnings per common share for September 30, 2016. Stock options of 234,650 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2015 because they were antidilutive.

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.

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The following table summarizes stock option activity for the nine months ended September 30, 2016:

			Weighted Average
	Options		Exercise Price
Outstanding -December 31, 2015		205,500	$	14.92
Granted		-		-
Exercised and settled		-		-
Forfeited		4,900		15.00
Outstanding -September 30, 2016		200,600	$	14.91
Fully vested and exercisable at September 30, 2016		122,100
Fully vested and exercisable at December 31, 2015		76,200
Expected to vest in future periods		78,500

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 September 30, 2016, 200,600 options were outstanding and 122,100 options were fully vested and exercisable with aggregate intrinsic value of $880,000 and $535,000, respectively. At December 31, 2015, 205,500 options were outstanding and 76,200 options were fully vested and exercisable with aggregate intrinsic value of $446,000 and $165,000, respectively. During the nine months ended September 30, 2016, 45,900 options vested. Stock-based compensation expense for stock options included in salaries and benefits for the three and nine months ended September 30, 2016 was $18,000 and $68,000, respectively. Stock-based compensation for stock options included in salaries and benefits for the three and nine months ended September 2015 was ($4,000) and $56,000, respectively. Total unrecognized compensation cost related to non-vested stock options was $130,000 at September 30, 2016 and $208,000 at December 31, 2015 and is expected to be recognized over a period of 2 – 3 years.

The following table summarizes non-vested restricted stock activity for the nine months ended September 30, 2016:

Balance - December 31, 2015	53,947
Granted	-
Forfeited	(2,156)
Vested	(21,185)
Balance - September 30, 2016	30,606

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 nine months ended September 30, 2016 was $55,000 and $233,000, respectively. Stock-based compensation expense for restricted stock included in salaries and benefits for the three and nine months ended September 30, 2015 was $36,000 and $237,000, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $357,000 at September 30, 2016 and $623,000 at December 31, 2015 and is expected to be recognized over a weighted-average period of 2 years.

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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 nine months ended September 30, 2016 and September 30, 2015 (in thousands):

	Unrealized Gains and Losses on Available-for-Sale Securities
	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016		2015
Beginning balance	$	913		$	244		$	384	$	460
Other comprehensive income (loss), net of tax before reclassification		(89	)		246			438		30
Amounts reclassified from accumulated other comprehensive income for loss on call of securities, net of tax benefit (expense) of $0, ($6), $1 and ($6) respectively.		-			(12	)		2		(12	)
Net current period other comprehensive income (loss)		(89	)		234			440		18
Ending Balance	$	824		$	478		$	824	$	478

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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, 2015, 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 expected benefits of the acquisition of Town Square Financial Corporation and Town Square Bank and the acquisition of Commonwealth Bank FSB (“Commonwealth”), including future financial and operating results, cost savings, enhancements to revenue and accretion to reported earnings that may be realized from the acquisition; and

> 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 internal controls;

>  our business may not be integrated successfully with the businesses of Town Square Financial Corporation and Commonwealth, or such integration may take longer to accomplish than expected, if at all;

>  the growth opportunities and cost savings from the acquisitions of Town Square Financial Corporation and Commonwealth may not be fully realized or may take longer to realize than expected, if at all;

>  our ability to manage increased expenses following the acquisitions of Town Square Financial Corporation and Commonwealth, including salary and employee benefit expenses and occupation expenses; 

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>  operating costs, customer losses and business disruption following the acquisitions of Town Square Financial Corporation and Commonwealth, including adverse effects of relationships with employees, may be greater than expected;

>  competition among depository and other financial institutions;

>  our success in increasing our originations of adjustable-rate mortgage loans;

>  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, including as a result of the acquisitions of Town Square Financial Corporation and Commonwealth;

>  our success in introducing new financial products;

>  our ability to attract and maintain deposits, including depositors of the former Town Square Bank and former depositors of Commonwealth Bank;

>  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 and the JOBS 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.

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Comparison of Financial Condition at September 30, 2016 and December 31, 2015

At September 30, 2016, the Company’s assets totaled $448.9 million, an increase of $13.8 million, or 3.2%, from $435.1 million at December 31, 2015. The increase was attributed to growth in real estate loans during the quarter, funded by FHLB advances and non-interest bearing cash.

Cash and Cash equivalents decreased by $4.4 million, or 18.4%, to $19.5 million at September 30, 2016 from $23.9 million at December 31, 2015. The decrease in cash was primarily attributable to loan growth of $25.5 million and a decrease in Federal Home Loan Bank advances of $3.0 million, offset by principal payments on securities of $6.2 million and an increase in deposits of $16.7 million.

Loans held for sale increased $343,000, or 93.5%, to $710,000 at September 30, 2016 from $367,000 at December 31, 2015 due to an increase in mortgage banking activity.

Loans, net, increased $25.5 million, or 8.1%, to $339.6 million at September 30, 2016 from $314.1 million at December 31, 2015. The increase was primarily attributable to an increase in commercial real estate, construction loans and commercial and industrial loans. Real estate secured loans increased $17.8 million, commercial loans increased $6.0 million and consumer loans increased $2.2 million during the nine month period ended September 30, 2016. Non-performing loans decreased $666,000, or 14.8%, to $3.8 million at September 30, 2016 from $4.5 million at December 31, 2015.

Securities available for sale decreased by $6.2 million, or 9.7%, to $57.8 million at September 30, 2016 from $64.0 million at December 31, 2015. This decrease is primarily due to $12.2 million in calls and principal payments, offset by $5.6 million in purchases.

Deposits increased $16.7 million, or 4.9%, to $359.8 million at September 30, 2016 from $343.1 million at December 31, 2015. The increase was attributable to an increase in NOW and money market accounts combined with the $9.0 million in short-term certificates of deposits acquired in the nationwide marketplace.

Federal Home Loan Bank advances decreased $3.0 million, or 19.0%, to $12.8 million at September 30, 2016 from $15.8 million at December 31, 2015. This decrease in borrowings was due to maturities.

Other borrowings increased by $48,000, or 1.7%, to $2.8 million at September 30, 2016 from $2.8 million at December 31, 2015 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 2.68% at September 30, 2016.

Total shareholders’ equity decreased by $1.5 million, or 2.1%, to $69.7 million at September 30, 2016 from $71.2 million at December 31, 2015. The decrease resulted primarily from the repurchase of common stock totaling $3.2 million and the payment of cash dividends totaling $762,000, offset by an increase in accumulated other comprehensive income by $440,000 and net income of $1.6 million.

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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 September 30,
	2016							2015
	Average		Interest and					Average		Interest and
	Balance		Dividends		Yield/ Cost			Balance		Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans	$	344,546	$	4,455		5.14	%	$	317,048	$	4,380		5.48	%
Investment securities		59,414		322		2.16	%		66,606		357		2.13	%
FHLB stock		3,036		30		3.93	%		3,036		30		3.92	%
Other interest-earning assets		13,164		19		0.57	%		14,819		5		0.13	%
Total interest-earning assets		420,160		4,826		4.57	%		401,509		4,772		4.72	%
Noninterest-earning assets		27,677							29,216
Total assets		447,837							430,725
Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other		140,453		62		0.18	%		130,027		57		0.17	%
Certificates of deposit		161,467		439		1.08	%		160,168		397		0.98	%
Total interest bearing deposits		301,920		501		0.66	%		290,195		454		0.62	%
FHLB advances		19,559		58		1.18	%		13,692		55		1.59	%
Subordinated debenture		2,800		43		6.11	%		2,735		38		5.51	%
Total borrowings		22,359		101		1.80	%		16,427		93		2.25	%
Total interest bearing liabilities		324,279		602		0.74	%		306,622		547		0.71	%
Non-interest bearing liabilities:
Non-interest bearing deposits		48,860							48,677
Accrued interest payable		163							231
Other liabilities		3,572							4,090
Total non-interest bearing liabilities		52,595							52,998
Total liabilities		376,874							359,620
Total equity		70,963							71,105
Total liabilities and equity		447,837							430,725
Net interest income				4,224							4,225
Interest rate spread						3.83	%						4.01	%
Net interest margin						4.00	%						4.17	%
Average interest-earning assets to average interest-bearing liabilities						129.57	%						130.95	%

34

	For the Nine Months Ended September 30,
	2016							2015
	Average		Interest and					Average		Interest and
	Balance		Dividends		Yield/ Cost			Balance		Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans	$	333,755	$	13,134		5.26	%	$	309,545	$	12,770		5.52	%
Investment securities		62,622		1,039		2.22	%		67,672		1,069		2.11	%
FHLB stock		3,036		91		4.00	%		2,848		84		3.94	%
Other interest-earning assets		13,339		58		0.58	%		16,289		18		0.15	%
Total interest-earning assets		412,752		14,322		4.63	%		396,354		13,941		4.70	%
Noninterest-earning assets		27,702							27,269
Total assets		440,454							423,623
Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other		138,145		184		0.18	%		124,853		168		0.18	%
Certificates of deposit		160,470		1,275		1.06	%		160,216		1,183		0.99	%
Total interest bearing deposits		298,615		1,459		0.65	%		285,069		1,351		0.63	%
FHLB advances		16,493		167		1.35	%		15,461		184		1.59	%
Subordinated Debenture		2,785		125		6.00	%		2,719		114		5.61	%
Total borrowings		19,278		292		2.02	%		18,180		298		2.19	%
Total interest bearing liabilities		317,893		1,751		0.74	%		303,249		1,649		0.73	%
Non-interest bearing liabilities:
Non-interest bearing deposits		48,414							46,782
Accrued interest payable		143							186
Other liabilities		2,929							4,259
Total non-interest bearing liabilities		51,486							51,227
Total liabilities		369,379							354,476
Total equity		71,075							69,147
Total liabilities and equity		440,454							423,623
Net interest income				12,571							12,292
Interest rate spread						3.89	%						3.97	%
Net interest margin						4.07	%						4.15	%
Average interest-earning assets to average interest-bearing liabilities						129.84	%						130.70	%

35

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 September 30, 2016, we had $12.8 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $101.6 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 September 30, 2016, Poage Bankshares, Inc. (on an unconsolidated basis) had liquid assets of $4.4 million.

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 interest rate on the line of credit is 4.00% with an interest rate equal to the Wall Street Prime plus 0.50%. The line of credit matures June 16, 2018. The line of credit will be used for general working capital purposes. At September 30, 2016, we have $2.0 million 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 asset 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 September 30, 2016, the actual capital conservation buffer for Town Square Bank was 13.43% compared to the capital conservation buffer requirement of 0.625%.

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 September 30, 2016, the capital of the Town Square Bank exceeded all required regulatory guidelines and Town Square Bank was categorized as well-capitalized.

36

The following table reflects the Bank’s current regulatory capital levels in more detail, including comparisons to the regulatory minimums at September 30, 2016 and December 31, 2015 (in thousands).

											To Be Well
											Capitalized Under
						For Capital Adequacy					Prompt Corrective
	Actual					Purposes					Action Regulations
As of  September 30, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Risk-Based Capital
(to Risk-weighted Assets)	$	64,345		21.43	%	$	24,020		8.00	%	$	30,025		10.00	%
Tier I Capital
(to Risk-weighted Assets)		61,982		20.64	%		18,015		6.00	%		24,020		8.00	%
Common Equity
(to Risk-weighted Assets)		61,982		20.64	%		13,511		4.50	%		19,516		6.50	%
Tier I Capital
(to Adjusted Total Assets)		61,982		13.85	%		17,901		4.00	%		22,376		5.00	%
											To Be Well
											Capitalized Under
						For Capital Adequacy					Prompt Corrective
	Actual					Purposes					Action Regulations
As of  December 31, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Risk-Based Capital
(to Risk-weighted Assets)	$	67,705		24.36	%	$	22,237		8.00	%	$	27,796		10.00	%
Tier I Capital
(to Risk-weighted Assets)		65,816		23.68	%		16,678		6.00	%		22,237		8.00	%
Common Equity
(to Risk-weighted Assets)		65,816		23.68	%		12,508		4.50	%		18,067		6.50	%
Tier I Capital
(to Adjusted Total Assets)		65,816		15.31	%		17,190		4.00	%		21,488		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.

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Comparison of Operating Results for the Three and Nine months Ended September 30, 2016 and September 30, 2015

General. Net income for the three months ended September 30, 2016 decreased $166,000 to $364,000 from net income of $530,000 for the three months ended September 30, 2015. The decrease in net income is primarily attributable to an increase in the provision for loan losses of $352,000 to $352,000 for the three months ended September 30, 2016 compared to $0 for the three months ended September 30, 2015, offset by a decrease in professional fees of $101,000 to $137,000 for the three months ended September 30, 2016 from $238,000 for the three months ended September 30, 2015 and a decrease in other taxes of $111,000 to $106,000 for the three months ended September 30, 2016 compared to $217,000 for the three months ended September 30, 2015.

Net income for the nine months ended September 30, 2016 decreased $1.3 million to $1.5 million from net income of $2.8 million for the nine months ended September 30, 2015. The decrease in net income is primarily attributable to a decrease in bargain purchase gain of $1.6 million to $0 for the nine months ended September 30, 2016 compared to $1.6 million for the nine months ended September 30, 2015 and an increase in the provision for loan losses of $327,000 to $812,000 for the nine months ended September 30, 2016 compared to $485,000 for the nine months ended September 30, 2015, offset by a decrease in early termination fee and conversion cost of $503,000 to $0 for the nine months ended September 30, 2016 compared to $503,000 for the nine months ended September 30, 2015.

Interest Income. Interest income remained unchanged at $4.8 million for the three months ended September 30, 2016 and 2015. The average balance of interest-earning assets increased $18.7 million, or 4.6%, to $420.2 million from $401.5 million. The increase is primarily attributable to growth in commercial real estate, construction loans and commercial and industrial loans.

Interest income on loans increased $75,000, or 1.7%, to $4.5 million for the three months ended September 30, 2016 from $4.4 million for the three months ended September 30, 2015. The average yields on loans decreased 34 basis points to 5.14% for the three months ended September 30, 2016, compared to 5.48% for the three months ended September 30, 2015. The average balance of loans increased $27.5 million, or 8.7%, to $344.5 million for the three months ended September 30, 2016 from $317.0 million for the three months ended September 30, 2015. Interest income on investment securities decreased $35,000, or 9.8%, to $322,000 for the three months ended September 30, 2016 from $357,000 for the three months ended September 30, 2015. The average yield on securities increased 3 basis points to 2.16% for the three months ended September 30, 2016, compared to 2.13% for the three months ended September 30, 2015. The average balance of investment securities decreased $7.2 million, or 10.8%, to $59.4 million for the three months ended September 30, 2016 from $66.6 million for the three months ended September 30, 2015.

Interest income on FHLB stock remained unchanged at $30,000 for the three months ended September 30, 2016 and 2015. The average yield on FHLB stock increased 1 basis points to 3.93% for the three months ended September 30, 2016 compared to 3.92% for the three months ended September 30, 2015. The average balance of FHLB stock remained unchanged at $3.0 million for the three months ended September 30, 2016 and 2015. Interest income on other interest-earning assets increased $14,000, or 280.0%, to $19,000 for the three months ended September 30, 2016 from $5,000 for the three months ended September 30, 2015. The average yield on other interest-earning assets increased 44 basis points to 0.57% for the three months ended September 30, 2016 compared to 0.13% for the three months ended September 30, 2016. The average balance of other interest earning assets decreased $1.6 million, or 11.2%, to $13.2 million for the three months ended September 30, 2016 from $14.8 million for the three months ended September 30, 2015.

Interest income increased $381,000, or 2.7%, to $14.3 million for the nine months ended September 30, 2016 from $13.9 million for the nine months ended September 30, 2015. The average balance of interest-earning assets increased $16.4 million, or 4.1%, to $412.8 million from $396.4 million. The increase is primarily attributable to loan growth for the nine months ended September 30, 2016 combined with the acquisition of Commonwealth on May 31, 2015.

Interest income on loans increased $364,000, or 2.9%, to $13.1 million for the nine months ended September 30, 2016 from $12.8 million for the nine months ended September 30, 2015. The average yields on loans decreased 26 basis points to 5.26% for the nine months ended September 30, 2016, compared to 5.52% for the nine months ended September 30, 2015. The average balance of loans increased $24.3 million, or 7.8%, to $333.8 million for the nine months ended September 30, 2016 from $309.5 million for the nine months ended September 30, 2015. Interest income on investment securities decreased $30,000, or 2.8%, to $1.0 million for the nine months ended September 30, 2016 from $1.0 million for the nine months ended September 30, 2015. The average yield on securities increased 11 basis points to 2.22% for the nine months ended September 30, 2016, compared to 2.11% for the nine months ended September 30, 2015. The average balance of investment securities decreased $5.1 million, or 7.5%, to $62.6 million for the nine months ended September 30, 2016 from $67.7 million for the nine months ended September 30, 2015.

Interest income on FHLB stock increased $7,000, or 8.3%, to $91,000 for the nine months ended September 30, 2016 from $84,000 for the nine months ended September 30, 2015. The average yield on FHLB stock increased 6 basis points to 4.00% for the nine months ended September 30, 2016 compared to 3.94% for the nine months ended September 30, 2015. The average balance of FHLB stock increased $188,000, or 6.6%, to $3.0 million for the nine months ended September 30, 2016 from $2.8 million for the nine months ended September 30, 2015 attributable to the acquisition of Commonwealth on May 31, 2015. Interest income on other interest-earning assets increased $40,000, or 222.2%, to $58,000 for the nine months ended September 30, 2016 from $18,000 for the nine months ended September 30, 2015. The average yield on other interest-earning assets increased 43 basis points to 0.58% for the nine months ended September 30, 2016 compared to 0.15% for the nine months ended September 30, 2015. The average balance of other interest earning assets decreased $3.0 million, or 18.1%, to $13.3 million for the nine months ended September 30, 2016 from $16.3 million for the nine months ended September 30, 2015.

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Interest Expense. Interest expense increased $55,000, or 10.1%, to $602,000 for the three months ended September 30, 2016 from $547,000 for the three months ended September 30, 2015. Interest expense on interest bearing deposits increased $47,000, or 10.4% to $501,000 for the three months ended September 30, 2016 from $454,000 for the three months ended September 30, 2015. The average balance of interest bearing deposits increased $11.7 million, or 4.0%, to $301.9 million for the three months ended September 30, 2016 from $290.2 million for the three months ended September 30, 2015 while the average interest rate paid on interest bearing deposits increased 4 basis points to 0.66% for the three months ended September 30, 2016 compared to 0.62% for the three months ended September 30, 2015. The increase in average balance on interest bearing deposits is primarily attributable to an increase in NOW and money market accounts combined with the $9.0 million in short-term certificates of deposits acquired in the nationwide marketplace.

Interest expense on FHLB advances and subordinated debentures increased $8,000, or 8.6%, to $101,000 for the three months ended September 30, 2016 from $93,000 for the three months ended September 30, 2015. The average balance on FHLB advances increased $5.9 million, 42.8%, to $19.6 million for the three months ended September 30, 2016 from $13.7 million for the three months ended September 30, 2015, offset by a 41 basis point decrease in the average rate paid on the FHLB advances to 1.18% from 1.59%. The average balance on subordinated debentures increased $65,000, or 2.4%, to $2.8 million for the three months ended September 30, 2016 from $2.7 million for the three months ended September 30, 2015. The average interest rate paid on subordinated debentures increased 60 basis points to 6.11% for the three months ended September 30, 2016 from 5.51% for the three months ended September 30, 2015.

Interest expense increased $102,000, or 6.2%, to $1.7 million for the nine months ended September 30, 2016 from $1.6 million for the nine months ended September 30, 2015. Interest expense on interest bearing deposits increased $108,000, or 8.0% to $1.4 million for the nine months ended September 30, 2016 from $1.3 million for the nine months ended September 30, 2015. The average balance of interest bearing deposits increased $13.5 million, or 4.8%, to $298.6 million for the nine months ended September 30, 2016 from $285.1 million for the nine months ended September 30, 2015. The average interest rate paid on interest bearing deposits increased 2 basis point to 0.65% for the nine months ended September 30, 2016 from 0.63% for the nine months ended September 30, 2015. The average balance in certificates of deposits remains relatively flat. The increase in average balance on interest bearing deposits is primarily attributable to growth in NOW, savings and money market accounts.

Interest expense on FHLB advances and subordinated debentures decreased $6,000, or 2.0%, to $292,000 for the nine months ended September 30, 2016 from $298,000 for the nine months ended September 30, 2015. The average balance on FHLB advances decreased $1.0 million, or 6.7%, to $16.5 million for the nine months ended September 30, 2016 from $15.5 million for the nine months ended September 30, 2015, combined with a 24 basis point decrease in the average rate paid on the FHLB advances to 1.35% from 1.59%. The average balance on subordinated debentures increased $66,000, or 2.4%, to $2.8 million for the nine months ended September 30, 2016 from $2.7 million for the nine months ended September 30, 2015. The average interest rate paid on subordinated debentures increased 39 basis points to 6.00% for the nine months ended September 30, 2016 from 5.61% for the nine months ended September 30, 2015.

Net Interest Income. Net interest income remained flat at $4.2 million for the three months ended September 30, 2016 and 2015 despite a decrease in the ratio of average interest earning assets to average interest bearing liabilities to 129.57% for the three months ended September 30, 2016 from 130.95% for the three months ended September 30, 2015. The interest rate spread margin decreased 18 basis points to 3.83% for the three months ended September 30, 2016 from 4.01% for the three months ended September 30, 2015. The interest margin decreased 17 basis points to 4.00% for the three months ended September 30, 2016 from 4.17% for the three months ended September 30, 2015.

The interest rate spread and net interest margin for the three months ended September 30, 2016 decreased due to the lower yields on assets for the three months ended September 30, 2016 as compared the three months ended September 30, 2015. Income recognized from purchase discounts attributable to the Town Square and Commonwealth acquisitions decreased $153,000 to $167,000 for the three months ended September 30, 2016 compared to $320,000 for the three months ended September 30, 2015.

Net interest income increased $279,000, or 2.3%, to $12.6 million for the nine months ended September 30, 2016 from $12.3 million for the nine months ended September 30, 2015. Net interest income increased despite a decrease in the ratio of average interest earning assets to average interest bearing liabilities to 129.84% for the nine months ended September 30, 2016 from 130.70% for the nine months ended September 30, 2015. The interest rate spread and interest margin decreased 8 basis points to 3.89% and 4.07% for the nine months ended September 30, 2016 from 3.97% and 4.15% for the nine months ended September 30, 2015, respectively.

The interest rate spread and net interest margin for the nine months ended September 30, 2016 decreased due to the lower yields on assets for the nine months ended September 30, 2016 as compared the nine months ended September 30, 2015. Income recognized from purchase discounts attributable to the Town Square acquisition decreased $307,000 to $594,000 for the nine months ended September 30, 2016 compared to $901,000 for the nine months ended September 30, 2015.

Provision for Loan Losses. We recorded $352,000 in provision for loan losses for the three months ended September 30, 2016 and $0 in provision for loan losses for the three months ended September 30, 2015. The increase in the provision for three months ended September 30, 2016 compared to the three months ended September 30, 2015 was primarily attributable to the increase in classified commercial loans for the three months ended September 30, 2016.

We recorded $812,000 in provision for loan losses for the nine months ended September 30, 2016 and $485,000 provision for loan losses for the nine months ended September 30, 2015. The increase in the provision for nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 was primarily attributable to the increase in classified commercial loans and loan growth for the nine months ended September 30, 2016.

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Noninterest Income. Noninterest income increased $20,000, or 2.6%, to $800,000 for the three months ended September 30, 2016 from $780,000 for the three months ended September 30, 2015. The increase in noninterest income was primarily attributable an increase in loan servicing fees of $38,000, or 33.6%, to $151,000 for the three months ended September 30, 2016 from $113,000 for the three months ended September 30, 2015 and an increase in mortgage banking activity of $36,000, or 128.6%, to $64,000 for the three months ended September 30, 2016 from $28,000 for the three months ended September 30, 2015, offset by a decrease bargain purchase gain of $35,000, or 100%, to $0 for the three months ended September 30, 2016 from $35,000 for the three months ended September 30, 2015.

Noninterest income decreased $1.6 million, or 41.8%, to $2.2 million for the nine months ended September 30, 2016 from $3.8 million for the nine months ended September 30, 2015. The decrease in noninterest income was primarily attributable to the decrease bargain purchase gain of $1.6 million, or 100%, to $0 for the nine months ended September 30, 2016 from $1.6 million for the nine months ended September 30, 2015.

Noninterest Expense. Noninterest expense decreased $115,000, or 2.7%, to $4.2 million for the three months ended September 30, 2016 from $4.3 million for the three months ended September 30, 2015. This decrease was primarily due to the decrease of $101,000, or 42.4%, to $137,000 in professional fees for the three months ended September 30, 2016 from $238,000 for the three months ended September 30, 2015 due to the completion of the Commonwealth acquisition in May 2015. Other taxes decreased $111,000, or 51.2%, to $106,000 for the three months ended September 30, 2016 from $217,000 for the three months ended September 30, 2015 primarily due to business franchise and personal property taxes paid in 2015. Early termination fee decreased $85,000, or 100.0%, to $0 for the three months ended September 30, 2016 from $85,000 for the three months ended September 30, 2015 due to the Commonwealth acquisition in May 2015.

The decreases above are offset by an increase in advertising of $72,000, or 171.4%, to $114,000 for the three months ended September 30, 2016 from $42,000 for the three months ended September 30, 2015 and an increase in foreclosed assets expense of $80,000, or 72.1%, to $191,000 for the three months ended September 30, 2016 from $111,000 for the three months ended September 30, 2015. Advertising expense increased primarily due increased media advertising and our recently developed customer acquisition and growth program. In addition, data processing increased $53,000, or 8.6%, to $668,000 for the three months ended September 30, 2016 from $615,000 for the three months ended September 30, 2015 primarily due to the Commonwealth acquisition in May 2015. Likewise, occupancy and equipment expense increased $52,000, or 11.4%, to $509,000 for the three months ended September 30, 2016 compared to $457,000 for the three months ended September 30, 2015 due to the Commonwealth acquisition in May 2015.

Noninterest expense decreased $443,000, or 3.6%, to $11.9 million for the nine months ended September 30, 2016 from $12.3 million for the nine months ended September 30, 2015. This decrease was primarily due to the decrease of $503,000, or 100%, to $0 in early termination fees for the nine months ended September 30, 2016 from $503,000 for the nine months ended September 30, 2015 combined with a decrease of $281,000, or 41.6%, to $395,000 in professional fees for the nine months ended September 30, 2016 from $676,000 for the nine months ended September 30, 2015 due to the Commonwealth acquisition.

The decreases above are offset by an increase in advertising of $104,000, or 82.5%, to $230,000 for the nine months ended September 30, 2016 from $126,000 for the nine months ended September 30, 2015. Advertising expense increased primarily due increased media advertising and our recently developed customer acquisition and growth program. In addition, data processing increased $280,000, or 16.4%, to $2.0 million for the nine months ended September 30, 2016 from $1.7 million for the nine months ended September 30, 2015 primarily attributable to an increase in the accrual for prepaid data processing of $93,000, the Commonwealth acquisition in May 2015 and one-time charges associated with an upgrade to online banking. Occupancy and equipment increased $133,000, or 10.7%, to $1.4 million for the nine months ended September 30, 2016 from $1.2 million for the nine months ended September 30, 2015 due to the depreciation, utilities and insurance expenses associated with Commonwealth acquisition, the re-opening of the Midtown branch located on Martin Luther King Jr. Boulevard in Ashland, Kentucky and the relocation of the operations center to the previously closed Summit branch.

Income Tax Expense. The provision for income taxes decreased $52,000, or 29.9%, to $122,000 for the three months ended September 30, 2016 compared to a $174,000 tax expense for the three months ended September 30, 2015 due to lower pre-tax income for the three months ended September 30, 2015. Our effective tax rate for the three months ended September 30, 2016 was 25.1% compared to 24.7% for the three months ended September 30, 2015.

The provision for income taxes increased $69,000, or 13.5%, to $581,000 for the nine months ended September 30, 2016 compared to a $512,000 tax expense for the nine months ended September 30, 2015 due to lower pre-tax income, excluding the bargain purchase gain on the Commonwealth acquisition, in the nine months ended September 30, 2015. Our effective tax rate for the nine months ended September 30, 2016 was 27.3% compared to 29.2% for the nine months ended September 30, 2015, excluding the bargain purchase gain on the Commonwealth acquisition.

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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 September 30, 2016, 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.

41

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 July 1, 2016 through September 30, 2016. On September 3, 2016, the Board of Directors of Poage Bankshares, Inc. authorized a program to repurchase of up to 150,000 shares, which represented approximately 3.9% of the shares then outstanding.  The repurchase program was effective upon adoption. Shares were purchased pursuant to repurchase authorizations outlined above and include 3,316 shares net-settled pursuant to Poage Bankshares’ Equity Incentive Plan.

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.

					Shares		May Yet be
					Purchased		Purchased
	Total				as Part of		Under
	Number of		Average		Publicly		Publicly
	Shares		Price Paid		Announced		Announced
	Purchased		Per Share		Plan		Plan
July 1 - July 31, 2016		5,780	$	17.98		5,780		111,147
August 1 - August 31, 2016		26,257		18.42		26,257		84,890
September 1 - September 30, 2016		40,500		18.96		40,500		44,390
Total		72,537	$	18.69		72,537

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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 September 30, 2016, 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)

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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: November 8, 2016
	/s/ Bruce VanHorn
	Bruce VanHorn
	President  & Chief Executive Officer
	/s/ Jane Gilkerson
	Jane Gilkerson
	Chief Financial Officer

44