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PSBH > SEC Filings for PSBH > Form 10-Q on 13-May-2013All Recent SEC Filings

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Form 10-Q for PSB HOLDINGS, INC.


13-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following analysis discusses changes in the financial condition at March 31, 2013 and June 30, 2012 and results of operations for the three and nine months ended March 31, 2013 and 2012, and should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report. These financial statements should be read in conjunction with the 2012 Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the SEC on September 28, 2012.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in: interest rates, general economic conditions, legislation and regulations, real estate values, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission.

Except as required by applicable law and regulation, the Company does not undertake - and specifically disclaims any obligation - to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.


Overview

The Company's results of operations depend primarily on net interest and dividend income, which is the difference between the interest and dividend income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income, primarily from fees and service charges. Gains on sales of loans and securities and bank-owned life insurance income are added sources of non-interest income. The Company's non-interest expense primarily consists of employee compensation and benefits, occupancy and equipment expense, advertising, data processing, professional fees and other operating expenses.

Net income amounted to $260,000 or $0.04 per basic and diluted share for the quarter ended March 31, 2013 compared to net income of $36,000 or $0.01 per basic and diluted share for the quarter ended March 31, 2012. During the quarters ended March 31, 2013 and 2012, the Company recorded non-cash OTTI charges of $37,000 and $493,000, respectively, on non-agency mortgage-backed securities. The net interest margin decreased from 2.62% for the quarter ended March 31, 2012 to 2.45% for the quarter ended March 31, 2013. In addition, non-interest expense increased $36,000 during the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012. The provision for loan losses decreased $55,000 during the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012.

Net income amounted to $944,000 or $0.15 per basic and diluted share for the nine months ended March 31, 2013 compared to net income of $852,000 or $0.13 per basic and diluted share for the nine months ended March 31, 2012. During the nine months ended March 31, 2013 and 2012, the Company recorded non-cash OTTI charges of $438,000 and $1.5 million, respectively, on non-agency mortgage-backed securities. The net interest margin increased from 2.51% for the nine months ended March 31, 2012 to 2.53% for the nine months ended March 31, 2013, primarily due to an increase in net earning assets. In addition, non-interest expense decreased $316,000 during the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012. The provision for loan losses decreased $91,000 during the nine months ended March 31, 2013 as compared to the nine months ended March 31, 2012.


Comparison of Financial Condition at March 31, 2013 and June 30, 2012

Assets

Total assets increased to $455.9 million at March 31, 2013 from $452.3 million at June 30, 2012. Cash and cash equivalents increased $3.1 million and totaled $14.5 million or 3.2% of total assets at March 31, 2013. Investments in available-for-sale securities decreased $7.7 million and totaled $39.5 million or 8.7% of total assets at March 31, 2013. Investments in held-to-maturity securities increased $23.1 million and totaled $128.3 million or 28.1% of total assets at March 31, 2013. Net loans decreased $10.8 million and totaled $237.8 million or 52.2% of total assets at March 31, 2013.

Allowance for Loan Losses

The table below indicates the relationships between the allowance for loan
losses, total loans outstanding and non-performing loans at March 31, 2013 and
June 30, 2012. For additional information, see "Comparison of Operating Results
for the three and nine months ended March 31, 2013 and 2012 - Provision for loan
losses."

                                      March 31,       June 30,
                                        2013            2012
                                      (Dollars in thousands)

Allowance for loan losses           $       2,930     $   2,913
Gross loans outstanding                   240,719       251,485
Non-performing loans                        8,075         8,384

Allowance/gross loans outstanding            1.22 %        1.16 %
Allowance/non-performing loans               36.3 %        34.7 %

Liabilities

Total liabilities increased to $404.7 million at March 31, 2013 from $404.2 million at June 30, 2012. Total deposits decreased to $340.9 million at March 31, 2013 from $342.3 million at June 30, 2012, a decrease of $1.4 million or 0.4%. Federal Home Loan Bank advances remained unchanged at $53.5 million. Securities sold under agreements to repurchase increased to $6.5 million at March 31, 2013 from $3.7 million at June 30, 2012, an increase of $2.8 million or 76.6%.

Stockholders' Equity

Stockholders' equity increased to $51.2 million at March 31, 2013 from $48.1 million at June 30, 2012, primarily due to a $2.0 million change in unrealized gains/losses on available-for-sale securities net of tax recorded in accumulated other comprehensive income and net income of $944,000 for the nine months ended March 31, 2013.

Comparison of Operating Results for the Three and Nine Months ended March 31, 2013 and 2012

Net Income

Net income amounted to $260,000 or $0.04 per basic and diluted share for the quarter ended March 31, 2013 compared to net income of $36,000 or $0.01 per basic and diluted share for the quarter ended March 31, 2012. Other-than-temporarily impaired investment write-downs decreased $456,000 to $37,000 for the quarter ended March 31, 2013 compared to $493,000 for the quarter ended March 31, 2012. The provision for loan loss decreased by $55,000 to $135,000 for the quarter ended March 31, 2013 compared to $190,000 for the quarter ended March 31, 2012. Total non-interest expense increased by $36,000 to $2.7 million for the quarter ended March 31, 2013 compared to $2.6 million for the quarter ended March 31, 2012. Net interest income decreased $221,000 to $2.6 million for the quarter ended March 31, 2013 compared to $2.8 million for the quarter ended March 31, 2012. Income tax expense was $68,000 for the quarter ended March 31, 2013 compared to $31,000 for the quarter ended March 31, 2012. This was primarily the result of an increase in pre-tax income and tax preference items.


Net income amounted to $944,000 or $0.15 per basic and diluted share for the nine months ended March 31, 2013 compared to net income of $852,000 or $0.13 per basic and diluted share for the nine months ended March 31, 2012.
Other-than-temporarily impaired investment write-downs decreased $1.1 million to $438,000 for the nine months ended March 31, 2013 compared to $1.5 million for the nine months ended March 31, 2012. This was partially offset by a legal settlement on previously written-down securities of $1.5 million during the nine months ended March 31, 2012. Income from bank-owned life insurance increased $167,000 to $412,000 for the nine months ended March 31, 2013 compared to $245,000 for the nine months ended March 31, 2012. This increase included a $176,000 non-taxable death benefit realized during the nine months ended March 31, 2013. The provision for loan loss decreased by $91,000 to $700,000 for the nine months ended March 31, 2013 compared to $791,000 for the nine months ended March 31, 2012. Total non-interest expense decreased by $316,000 to $8.1 million for the nine months ended March 31, 2013 compared to $8.4 million for the nine months ended March 31, 2012. Net interest income decreased $204,000 to $8.0 million for the nine months ended March 31, 2013 compared to $8.2 million for the nine months ended March 31, 2012. Income tax expense was $175,000 for the nine months ended March 31, 2013 compared to $275,000 for the nine months ended March 31, 2012. This was the result of a decrease in pre-tax income, tax preference items and an increase in non-taxable income from bank-owned life insurance.

These changes are described in more detail below.

Interest and Dividend Income

Interest and dividend income amounted to $3.7 million for the quarter ended March 31, 2013 compared to $4.3 million for the quarter ended March 31, 2012, a decrease of $655,000 or 15.1%. This was primarily due to a decrease in yield on earning assets of 56 basis points to 3.54% for the quarter ended March 31, 2013 compared to 4.10% for the quarter ended March 31, 2012 as well as a decrease in average interest earning assets. Average investment securities increased $8.0 million to $170.1 million for the quarter ended March 31, 2013 compared to $162.1 million for the quarter ended March 31, 2012. The yield on investment securities decreased 73 basis points to 2.14% for the quarter ended March 31, 2013 compared to 2.87% for the quarter ended March 31, 2012. Average loans decreased by $12.0 million to $243.7 million for the quarter ended March 31, 2013 compared to $255.7 million for the quarter ended March 31, 2012. The yield on loans decreased 36 basis points to 4.64% for the quarter ended March 31, 2013 compared to 5.00% for the quarter ended March 31, 2012.

Interest and dividend income amounted to $11.7 million for the nine months ended March 31, 2013 compared to $13.5 million for the nine months ended March 31, 2012, a decrease of $1.8 million or 13.4%. This was primarily due to a decrease in yield on earning assets of 44 basis points to 3.69% for the nine months ended March 31, 2013 compared to 4.13% for the nine months ended March 31, 2012 as well as a decrease in average interest earning assets. Average investment securities decreased $4.4 million to $166.7 million for the nine months ended March 31, 2013 compared to $171.1 million for the nine months ended March 31, 2012. The yield on investment securities decreased 57 basis points to 2.29% for the nine months ended March 31, 2013 compared to 2.86% for the nine months ended March 31, 2012. Average loans decreased by $8.5 million to $247.7 million for the nine months ended March 31, 2013 compared to $256.2 million for the nine months ended March 31, 2012. The yield on loans decreased 36 basis points to 4.73% for the nine months ended March 31, 2013 compared to 5.09% for the nine months ended March 31, 2012.


Interest Expense

Interest expense amounted to $1.1 million for the quarter ended March 31, 2013 compared to $1.6 million for the quarter ended March 31, 2012, a decrease of $434,000 or 27.7%. The decrease was primarily due to changes in rates of interest-bearing liabilities. The cost of average interest-bearing liabilities decreased 42 basis points to 1.28% for the quarter ended March 31, 2013 from 1.70% for the quarter ended March 31, 2012. The average rate on interest-bearing deposits decreased by 22 basis points to 1.02% for the quarter ended March 31, 2013 compared to 1.24% for the quarter ended March 31, 2012. The average rate on borrowed money decreased by 100 basis points to 2.47% for the quarter ended March 31, 2013 compared to 3.47% for the quarter ended March 31, 2012.

Interest expense amounted to $3.7 million for the nine months ended March 31, 2013 compared to $5.3 million for the nine months ended March 31, 2012, a decrease of $1.6 million or 30.3%. The decrease was primarily due to changes in rates of interest-bearing liabilities. The cost of average interest-bearing liabilities decreased 47 basis points to 1.38% for the nine months ended March 31, 2013 from 1.85% for the nine months ended March 31, 2012. The average rate on interest-bearing deposits decreased by 29 basis points to 1.07% for the nine months ended March 31, 2013 compared to 1.36% for the nine months ended March 31, 2012. The average rate on borrowed money decreased by 67 basis points to 2.89% for the nine months ended March 31, 2013 compared to 3.56% for the nine months ended March 31, 2012.

Net Interest and Dividend Income

Net interest and dividend income amounted to $2.6 million for the quarter ended March 31, 2013 compared to $2.8 million for the quarter ended March 31, 2012, a decrease of $221,000 or 8.0%. Net interest rate spread decreased by 14 basis points to 2.26% for the quarter ended March 31, 2013 from 2.40% for the quarter ended March 31, 2012. Net interest margin decreased 17 basis points to 2.45% from 2.62% when comparing the quarters ended March 31, 2013 and 2012, respectively. Net interest-earning assets increased $8.3 million to $64.5 million for the quarter ended March 31, 2013 compared to $56.2 million for the quarter ended March 31, 2012.

Net interest and dividend income amounted to $8.0 million for the nine months ended March 31, 2013 compared to $8.2 million for the nine months ended March 31, 2012, a decrease of $204,000 or 2.5%. Net interest rate spread increased by three basis points to 2.31% for the nine months ended March 31, 2013 from 2.28% for the nine months ended March 31, 2012. Net interest margin increased two basis points to 2.53% from 2.51% when comparing the nine months ended March 31, 2013 and 2012, respectively. Net interest-earning assets increased $10.3 million to $64.9 million for the nine months ended March 31, 2013 compared to $54.6 million for the nine months ended March 31, 2012.

Due to the large portion of fixed rate loans and securities in the Company's asset portfolio, interest rate risk is a concern and the Company continues to monitor and adjust the asset and liability mix as much as possible to take advantage of the benefits and reduce the risks or potential negative effects of a rising rate environment. Management attempts to mitigate the interest rate risk through balance sheet composition. See "Market Risk, Liquidity and Capital Resources - Market Risk."

Provision for Loan Losses

The provision for loan losses amounted to $135,000 for the quarter ended March 31, 2013 compared to $190,000 for the quarter ended March 31, 2012, a decrease of $55,000 or 28.9%. The allowance for loan losses is based on management's estimate of the probable losses inherent in the portfolio, considering the impact of certain internal and external factors. Among the factors management considers are prior loss experience, current economic conditions and their effects on borrowers, the character and size of the portfolio, trends in non-performing loans and delinquency rates and the performance of individual loans in relation to contractual terms. The provision for loan losses reflects adjustments to the allowance based on management's review of the portfolio in light of these factors. The ratio of the allowance to gross loans outstanding was 1.22% as of March 31, 2013 and 1.16% as of June 30, 2012. Net charge-offs were $140,000 for the quarter ended March 31, 2013 compared to net charge-offs of $229,000 for the quarter ended March 31, 2012.


The provision for loan losses amounted to $700,000 for the nine months ended March 31, 2013 compared to $791,000 for the nine months ended March 31, 2012, a decrease of $91,000 or 11.5%. Net charge-offs were $683,000 for the nine months ended March 31, 2013 compared to net charge-offs of $821,000 for the nine months ended March 31, 2012.

Non-interest Income

Non-interest income totaled $583,000 for the quarter ended March 31, 2013 compared to $120,000 for the quarter ended March 31, 2012, an increase of $463,000 or 385.8%. This was primarily due to a decrease in other-than-temporary impairment charges on available-for-sale securities of $456,000 to $37,000 for the quarter ended March 31, 2013 compared to $493,000 for the quarter ended March 31, 2012. The impairment charges for the three months ended March 31, 2013 and March 31, 2012 were the result of credit losses on non-agency mortgage-backed securities.

Non-interest income totaled $1.9 million for the nine months ended March 31, 2013 compared to $2.1 million for the nine months ended March 31, 2012, a decrease of $211,000 or 10.0%. The decrease was primarily due to a legal settlement on previously written-down securities of $1.5 million during the nine months ended March 31, 2012. This was partially offset by a decrease in other-than-temporary impairment charges on available-for-sale securities of $1.1 million to $438,000 for the nine months ended March 31, 2013 compared to $1.5 million for the nine months ended March 31, 2012. The impairment charges for the nine months ended March 31, 2013 and March 31, 2012 were the result of credit losses on non-agency mortgage-backed securities. Income from bank-owned life insurance increased $167,000 to $412,000 for the nine months ended March 31, 2013 compared to $245,000 for the nine months ended March 31, 2012. This increase included a $176,000 non-taxable death benefit realized during the nine months ended March 31, 2013. Mortgage banking activities increased by $122,000 or 171.8% to $193,000 for the nine months ended March 31, 2013 compared to $71,000 for the nine months ended March 31, 2012. This was primarily due to increased loan sales during the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012.

Non-interest Expense

Non-interest expense amounted to $2.7 million for the quarter ended March 31, 2013 compared to $2.6 million for the quarter ended March 31, 2012, an increase of $36,000 or 1.4%. Compensation and benefits expense decreased $8,000 or 0.6%. Occupancy and equipment expense increased $29,000 or 9.5%. All other non-interest expenses increased $15,000 or 1.7% to $909,000 for the quarter ended March 31, 2013 compared to $894,000 for the quarter ended March 31, 2012.

Non-interest expense amounted to $8.1 million for the nine months ended March 31, 2013 compared to $8.4 million for the nine months ended March 31, 2012, a decrease of $316,000 or 3.8%. Compensation and benefits expense decreased $128,000 or 2.9%. Occupancy and equipment expense increased $51,000 or 5.5%. All other non-interest expenses decreased $239,000 or 8.1% to $2.7 million for the nine months ended March 31, 2013 compared to $3.0 million for the nine months ended March 31, 2012.

Provision for Income Taxes

Income tax expense amounted to $68,000 for the quarter ended March 31, 2013 compared to $31,000 for the quarter ended March 31, 2012. The effective tax rate was 20.7% for the quarter ended March 31, 2013 and 46.3% for the quarter ended March 31, 2012. The effective tax rates differed from the statutory tax rate of 34% primarily due to the dividends-received deduction applicable to certain securities in our investment portfolio, tax-exempt municipal income and non-taxable bank-owned life insurance income.

Income tax expense amounted to $175,000 for the nine months ended March 31, 2013 compared to $275,000 for the nine months ended March 31, 2012. The effective tax rates were 15.6% and 24.4%, respectively. The decrease was mainly due to a decrease in pre-tax income, tax preference items and an increase in non-taxable income from bank-owned life insurance. The effective tax rates differed from the statutory tax rate of 34% primarily due to the dividends-received deduction applicable to certain securities in our investment portfolio, tax-exempt municipal income and non-taxable bank-owned life insurance income.


Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table 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 or expense. Yields and costs are annualized.

                                                           For the Three Months Ended March 31,
                                                  2013                                               2012
                                                                  (Dollars in thousands)

                              Average           Interest           Yield/        Average           Interest           Yield/
 Interest-earning assets:     Balance        Income/Expense         Cost         Balance        Income/Expense         Cost
 Investment securities       $  170,094     $            896           2.14 %   $  162,048     $          1,157           2.87 %
 Loans                          243,705                2,786           4.64 %      255,689                3,181           5.00 %
 Other earning assets             9,184                    5           0.22 %        8,357                    4           0.19 %
 Total interest-earning
assets                          422,983                3,687           3.54 %      426,094                4,342           4.10 %
 Non-interest-earning
assets                           30,126                                             31,653
 Total assets                $  453,109                                         $  457,747

 Interest-bearing
liabilities:
 NOW accounts                $   92,709                  118           0.52 %   $   92,263                  154           0.67 %
 Savings accounts                56,950                   27           0.19 %       51,500                   44           0.34 %
 Money market accounts           13,713                   13           0.38 %       15,094                   21           0.56 %
 Time deposits                  131,321                  583           1.80 %      135,454                  692           2.05 %
 Borrowed money                  63,767                  389           2.47 %       75,604                  653           3.47 %
 Total interest-bearing
liabilities                     358,460                1,130           1.28 %      369,915                1,564           1.70 %
 Non-interest-bearing
demand deposits                  40,035                                             38,963
 Other
non-interest-bearing
liabilities                       4,093                                              2,389
 Capital accounts                50,521                                             46,480
 Total liabilities and
capital accounts             $  453,109                                         $  457,747

 Net interest income                        $          2,557                                   $          2,778
 Interest rate spread                                                  2.26 %                                             2.40 %
 Net interest-earning
assets                       $   64,523                                         $   56,179
 Net interest margin                                                   2.45 %                                             2.62 %
 Average earning assets to
  average interest-bearing
liabilities                                                          118.00 %                                           115.19 %


                                                  For the Nine Months Ended March 31,
                                           2013                                        2012
                                                        (Dollars in thousands)

                           Average       Interest/       Yield/        Average       Interest/       Yield/
 Interest-earning
assets:                    Balance       Dividends        Cost         Balance       Dividends        Cost
 Investment securities    $ 166,686     $     2,867          2.29 %   $ 171,143     $     3,672          2.86 %
 Loans                      247,705           8,795          4.73 %     256,151           9,797          5.09 %
 Other earning assets         6,620              10          0.20 %       7,293               8          0.15 %
 Total interest-earning
assets                      421,011          11,672          3.69 %     434,587          13,477          4.13 %
 Non-interest-earning
assets                       29,454                                      31,923
 Total assets             $ 450,465                                   $ 466,510

 Interest-bearing
liabilities:
 NOW accounts             $  92,868             396          0.57 %   $  91,406             545          0.79 %
 Savings accounts            55,378              80          0.19 %      50,131             130          0.35 %
 Money market accounts       14,286              43          0.40 %      14,869              73          0.65 %
 Time deposits              132,427           1,845          1.86 %     138,123           2,260          2.18 %
 Borrowed money              61,175           1,327          2.89 %      85,453           2,284          3.56 %
 Total interest-bearing
liabilities                 356,134           3,691          1.38 %     379,982           5,292          1.85 %
 Non-interest-bearing
demand deposits              42,054                                      37,967
 Other
non-interest-bearing
liabilities                   2,506                                       2,308
. . .
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