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

Show all filings for PSB HOLDINGS, INC.

Form 10-Q for PSB HOLDINGS, INC.


13-Nov-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 September 30, 2013 and June 30, 2013 and results of operations for the three months ended September 30, 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 2013 Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the SEC on September 25, 2013.

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, effect of shutdown of the federal government, 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 $243,000 or $0.04 per basic and diluted share for the quarter ended September 30, 2013 compared to net income of $503,000 or $0.08 per basic and diluted share for the quarter ended September 30, 2012. During the quarters ended September 30, 2013 and 2012, the Company recorded non-cash OTTI charges of $3,000 and $89,000, respectively, on non-agency mortgage-backed securities. Non-interest income decreased $104,000 during the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012, primarily the result of non-interest income for the three months ended September 30, 2012 included a $176,000 non-taxable death benefit from bank-owned life insurance. Net interest income decreased $381,000 during the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012. The net interest margin decreased from 2.62% for the quarter ended September 30, 2012 to 2.24% for the quarter ended September 30, 2013. In addition, non-interest expense increased $54,000 during the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012. The provision for loan losses decreased $230,000 during the quarter ended September 30, 2013 as compared to the quarter ended September 30, 2012.

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

Assets

Total assets decreased to $452.3 million at September 30, 2013 from $454.4 million at June 30, 2013. Cash and cash equivalents decreased $5.3 million and totaled $7.4 million or 1.7% of total assets at September 30, 2013. Investments in available-for-sale securities increased $13.8 million and totaled $52.3 million or 11.6% of total assets at September 30, 2013. Investments in held-to-maturity securities decreased $7.8 million and totaled $127.2 million or 28.1% of total assets at September 30, 2013. Net loans decreased $1.7 million and totaled $230.4 million or 51.0% of total assets at September 30, 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 September 30, 2013
and June 30, 2013. For additional information, see "Comparison of Operating
Results for the three months ended September 30, 2013 and 2012 - Provision for
loan losses."

                                     September 30,      June 30,
                                         2013             2013
                                       (Dollars in thousands)

Allowance for loan losses           $         2,573     $   2,693
Gross loans outstanding                     233,017       234,864
Non-performing loans                          5,824         6,342

Allowance/gross loans outstanding              1.10 %        1.15 %
Allowance/non-performing loans                 44.2 %        42.5 %

Liabilities

Total liabilities decreased to $401.9 million at September 30, 2013 from $404.3 million at June 30, 2013. Total deposits decreased to $336.0 million at September 30, 2013 from $341.3 million at June 30, 2013, a decrease of $5.3 million or 1.5%. Federal Home Loan Bank advances increased to $56.5 million at September 30, 2013 from $53.5 million at June 30, 2013. Securities sold under agreements to repurchase increased to $5.9 million at September 30, 2013 from $4.8 million at June 30, 2013, an increase of $1.1 million or 22.2%.

Stockholders' Equity

Stockholders' equity increased to $50.4 million at September 30, 2013 from $50.1 million at June 30, 2013, primarily due to net income of $243,000 for the three months ended September 30, 2013.

Comparison of Operating Results for the Three Months ended September 30, 2013 and 2012

General

Net income amounted to $243,000 or $0.04 per basic and diluted share for the quarter ended September 30, 2013 compared to $503,000 or $0.08 per basic and diluted share for the quarter ended September 30, 2012. Other-than-temporarily impaired investment write-downs decreased $86,000 to $3,000 for the quarter ended September 30, 2013 compared to $89,000 for the quarter ended September 30, 2012. The provision for loan loss decreased by $230,000 to $20,000 for the quarter ended September 30, 2013 compared to $250,000 for the quarter ended September 30, 2012. Total non-interest expense increased by $54,000 to $2.7 million for the quarters ended September 30, 2013 and 2012. Net interest income decreased $381,000 to $2.4 million for the quarter ended September 30, 2013 compared to $2.8 million for the quarter ended September 30, 2012. Income tax expense was $30,000 for the quarter ended September 30, 2013 compared to $79,000 for the quarter ended September 30, 2012. These changes are described in more detail below.

Interest and Dividend Income

Interest and dividend income amounted to $3.5 million for the quarter ended September 30, 2013 compared to $4.1 million for the quarter ended September 30, 2012, a decrease of $631,000 or 15.4%. This was primarily due to a decrease in yield on earning assets of 62 basis points to 3.23% for the quarter ended September 30, 2013 compared to 3.85% for the quarter ended September 30, 2012. Average investment securities increased $20.9 million to $185.1 million for the quarter ended September 30, 2013 compared to $164.2 million for the quarter ended September 30, 2012. The yield on investment securities decreased 70 basis points to 1.79% for the quarter ended September 30, 2013 compared to 2.49% for the quarter ended September 30, 2012. Average loans decreased by $15.8 million to $235.4 million for the quarter ended September 30, 2013 compared to $251.2 million for the quarter ended September 30, 2012. The yield on loans decreased 41 basis points to 4.41% for the quarter ended September 30, 2013 compared to 4.82% for the quarter ended September 30, 2012.

Interest Expense

Interest expense amounted to $1.1 million for the quarter ended September 30, 2013 compared to $1.3 million for the quarter ended September 30, 2012, a decrease of $250,000 or 19.1%. The decrease was primarily due to changes in rates of interest-bearing liabilities. The cost of average interest-bearing liabilities decreased 27 basis points to 1.18% for the quarter ended September 30, 2013 from 1.45% for the quarter ended September 30, 2012. The average rate on interest-bearing deposits decreased by 22 basis points to 0.90% for the quarter ended September 30, 2013 compared to 1.12% for the quarter ended September 30, 2012. The average rate on borrowed money decreased by 56 basis points to 2.52% for the quarter ended September 30, 2013 compared to 3.08% for the quarter ended September 30, 2012.

Net Interest and Dividend Income

Net interest and dividend income amounted to $2.4 million for the quarter ended September 30, 2013 compared to $2.8 million for the quarter ended September 30, 2012, a decrease of $381,000 or 13.7%. Net interest rate spread decreased by 35 basis points to 2.05% for the quarter ended September 30, 2013 from 2.40% for the quarter ended September 30, 2012. Net interest margin decreased 38 basis points to 2.24% from 2.62% when comparing the quarters ended September 30, 2013 and 2012, respectively. Net interest-earning assets increased $5.1 million to $69.4 million for the quarter ended September 30, 2013 compared to $64.3 million for the quarter ended September 30, 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 $20,000 for the quarter ended September 30, 2013 compared to $250,000 for the quarter ended September 30, 2012, a decrease of $230,000 or 92.0%. This was primarily due to a reduction in non-performing loans and an improvement in reported delinquencies and charge-offs. 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 1.10% as of September 30, 2013 and 1.15% as of June 30, 2013. Net charge-offs were $140,000 for the quarter ended September 30, 2013 compared to net charge-offs of $136,000 for the quarter ended September 30, 2012.

Non-interest Income

Non-interest income totaled $607,000 for the quarter ended September 30, 2013 compared to $711,000 for the quarter ended September 30, 2012, a decrease of $104,000 or 14.6%. This was primarily due to a decrease in income from bank-owned life insurance of $180,000. This decrease included a $176,000 non-taxable death benefit realized during the three months ended September 30, 2012. This was partially offset by a decrease in other-than-temporary impairment charges on available-for-sale securities of $86,000 to $3,000 for the quarter ended September 30, 2013 compared to $89,000 for the quarter ended September 30, 2012. The impairment charges for the three months ended September 30, 2013 and September 30, 2012 were the result of credit losses on non-agency mortgage-backed securities.

Non-interest Expense

Non-interest expense increased $54,000 to $2.7 million for the quarter ended September 30, 2013 compared to the same period in the prior year. Compensation and benefits expense increased $11,000 or 0.8%. Occupancy and equipment expense decreased $11,000 or 3.5%. All other non-interest expenses increased $54,000 or 5.9% to $963,000 for the quarter ended September 30, 2013 compared to $909,000 for the quarter ended September 30, 2012.

Provision for Income Taxes

Income tax expense amounted to $30,000 for the quarter ended September 30, 2013 compared to $79,000 for the quarter ended September 30, 2012. The effective tax rate was 11.0% for the quarter ended September 30, 2013 and 13.6% for the quarter ended September 30, 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.

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 September 30,
                                                     2013                                              2012
                                                                    (Dollars in thousands)

                                Average           Interest           Yield/        Average           Interest           Yield/
 Interest-earning assets:       Balance        Income/Expense         Cost         Balance        Income/Expense         Cost
 Investment securities         $  185,106     $            837           1.79 %   $  164,225     $          1,032           2.49 %
 Loans                            235,355                2,619           4.41 %      251,196                3,054           4.82 %
 Other earning assets               3,957                    2           0.20 %        6,213                    3           0.19 %
 Total interest-earning                                                       %                                                  %
assets                            424,418                3,458           3.23        421,634                4,089           3.85
 Non-interest-earning
assets                             28,807                                             30,191
 Total assets                  $  453,225                                         $  451,825

 Interest-bearing
liabilities:
 NOW accounts                  $   91,937                  113           0.49 %   $   94,304                  150           0.63 %
 Savings accounts                  58,681                   22           0.15 %       53,560                   27           0.20 %
 Money market accounts             14,937                   14           0.37 %       15,308                   17           0.44 %
 Time deposits                    127,584                  516           1.60 %      133,825                  645           1.91 %
 Borrowed money                    61,835                  393           2.52 %       60,350                  469           3.08 %
 Total interest-bearing                                                       %                                                  %
liabilities                       354,974                1,058           1.18        357,347                1,308           1.45
 Non-interest-bearing
demand deposits                    45,482                                             43,101
 Other non-interest-bearing
liabilities                         2,536                                              2,608
 Capital accounts                  50,233                                             48,769
 Total liabilities and
capital accounts               $  453,225                                         $  451,825

 Net interest income                          $          2,400                                   $          2,781
 Interest rate spread                                                    2.05 %                                             2.40 %
 Net interest-earning
assets                         $   69,444                                         $   64,287
 Net interest margin                                                     2.24 %                                             2.62 %
 Average earning assets to

average interest-bearing liabilities 119.56 % 117.99 %

The following tables set forth the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of these tables, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

                                                               For the Three Months Ended September 30, 2013
                                                           Compared to the Three Months Ended September 30, 2012
                                                                         Increase (Decrease) Due to
 INTEREST INCOME                                             Rate                         Volume                 Net
                                                                               (In thousands)

 Investment securities                               $                (851 )         $            656         $    (195 )
 Loans                                                                (249 )                     (186 )            (435 )
 Other interest-earning assets                                           1                         (2 )              (1 )
 TOTAL INTEREST INCOME                                              (1,099 )                      468              (631 )

 INTEREST EXPENSE

 NOW accounts                                                          (33 )                       (4 )             (37 )
 Savings accounts                                                      (19 )                       14                (5 )
 Money Market accounts                                                  (3 )                        -                (3 )
 Time deposits                                                        (100 )                      (29 )            (129 )
 Borrowed money                                                       (148 )                       72               (76 )
 TOTAL INTEREST EXPENSE                                               (303 )                       53              (250 )
 CHANGE IN NET INTEREST INCOME                       $                (796 )         $            415         $    (381 )

Market Risk, Liquidity and Capital Resources

Market Risk

The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk ("IRR"). Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and other borrowings. As a result, a principal part of our business strategy is to manage IRR and reduce the exposure of our net interest income ("NII") to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Management Committee which is responsible for evaluating the IRR inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. With the assistance of an IRR management consultant, the committee monitors the level of IRR on a regular basis and generally meets at least on a quarterly basis to review our asset/liability policies and IRR position.

We have sought to manage our IRR in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset/liability management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances from the Federal Home Loan Bank of Boston, to "match fund" certain investments and/or loans; (ii) continued emphasis on increasing core deposits; (iii) offering adjustable rate and shorter-term home equity loans, commercial real estate loans, construction loans and commercial and industrial loans; (iv) offering a variety of consumer loans, which typically have shorter-terms; (v) investing in mortgage-backed securities with variable rates or fixed rates with shorter durations. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our NII to changes in market interest rates.

Net interest income at-risk measures the risk of a decline in earnings due to potential short-term and long- term changes in interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in NII, resulting from an instantaneous and sustained parallel shift in the yield curve (+100 and +200 basis points) at September 30, 2013 and June 30, 2013.

                               Net Interest Income At-Risk

                            Estimated Increase (Decrease)   Estimated Increase (Decrease)
Change in Interest Rates               in NII                          in NII
     (Basis Points)              September 30, 2013                 June 30, 2013

         Stable
          + 100                         0.21%                           0.29%
          + 200                        -2.87%                          -2.99%

The preceding income simulation analysis does not represent a forecast of NII and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary prepayment/refinancing levels will likely deviate from those assumed, the varying impact of interest rate changes on caps and floors embedded in adjustable rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables.

Net Portfolio Value Simulation Analysis. We compute the amounts by which the net present value of our cash flow from assets, liabilities and off-balance sheet items (the institution's net portfolio value or "NPV") would change in the event of a range of assumed changes in market interest rates. Given the current low level of market interest rates, we do not prepare a net portfolio value calculation for an interest rate decrease of greater than 100 basis points. A basis point equals one-hundredth of one percent, and 200 basis points equals two percent, an increase in interest rates from 3% to 5% would mean, for example, a 200 basis point increase in the "Change in Interest Rates" column below.

The tables below set forth, at September 30, 2013, the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve based on information produced by an external consultant. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. This data is for Putnam Bank only and does not include any yield curve changes in the assets of PSB Holdings, Inc.

                                                                                                         NPV as a Percentage of Present
                                                                                                              Value of Assets (3)
                                                           Estimated Increase (Decrease) in
              Change in                                                   NPV                                                   Increase
           Interest Rates                Estimated                                                                             (Decrease)
         (basis points) (1)               NPV (2)            Amount                 Percent          NPV Ratio (4)           (basis points)
                                                           (Dollars in thousands)

                +300                    $    25,781     $         (20,381 )              -44.15 %               6.37 %                  -396
                +200                    $    35,822     $         (10,340 )              -22.40 %               8.53 %                  -180
                +100                    $    42,537     $          (3,625 )               -7.85 %               9.81 %                   -53
                  0                     $    46,162     $               -                  0.00 %              10.34 %                     0
                -100                    $    49,031     $           2,869                  6.21 %              10.74 %                    41



(1) Assumes an instantaneous uniform change in interest rates at all maturities.

(2) NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

. . .

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