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PSBH > SEC Filings for PSBH > Form 10-Q on 14-Feb-2014All Recent SEC Filings

Show all filings for PSB HOLDINGS, INC.

Form 10-Q for PSB HOLDINGS, INC.


14-Feb-2014

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 December 31, 2013 and June 30, 2013 and results of operations for the three and six months ended December 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 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 $240,000 or $0.04 per basic and diluted share for the quarter ended December 31, 2013 compared to net income of $181,000 or $0.03 per basic and diluted share for the quarter ended December 31, 2012. During the quarters ended December 31, 2013 and 2012, the Company recorded non-cash OTTI charges of $4,000 and $312,000, respectively, on non-agency mortgage-backed securities which resulted in non-interest income increasing $32,000 during the quarter ended December 31, 2013 compared to the quarter ended December 31, 2012. Offsetting the decline in OTTI charges was a decrease in gains on securities available-for-sale of $206,000. Net interest income decreased $161,000 during the quarter ended December 31, 2013 compared to the quarter ended December 31, 2012. The net interest margin decreased from 2.51% for the quarter ended December 31, 2012 to 2.33% for the quarter ended December 31, 2013. In addition, non-interest expense increased $104,000 during the quarter ended December 31, 2013 compared to the quarter ended December 31, 2012. The provision for loan losses decreased $295,000 during the quarter ended December 31, 2013 as compared to the quarter ended December 31, 2012.

Net income amounted to $483,000 or $0.08 per basic and diluted share for the six months ended December 31, 2013 compared to net income of $684,000 or $0.11 per basic and diluted share for the six months ended December 31, 2012. During the six months ended December 31, 2013 and 2012, the Company recorded non-cash OTTI charges of $7,000 and $401,000, respectively, on non-agency mortgage-backed securities. Non-interest income decreased $72,000 during the six months ended December 31, 2013 compared to the six months ended December 31, 2012, due primarily to a $176,000 non-taxable death benefit from bank-owned life insurance received in 2012 and a $206,000 decrease in gains on securities available-for-sale offset by the aforementioned decline in OTTI charges. Net interest income decreased $542,000 during the six months ended December 31, 2013 compared to the six months ended December 31, 2012. The net interest margin decreased from 2.56% for the six months ended December 31, 2012 to 2.29% for the six months ended December 31, 2013. In addition, non-interest expense increased $157,000 during the six months ended December 31, 2013 compared to the six months ended December 31, 2012. The provision for loan losses decreased $525,000 during the six months ended December 31, 2013 as compared to the six months ended December 31, 2012.

Comparison of Financial Condition at December 31, 2013 and June 30, 2013

Assets

Total assets decreased to $454.3 million at December 31, 2013 from $454.4 million at June 30, 2013. Cash and cash equivalents decreased $754,000 and totaled $12.0 million or 2.7% of total assets at December 31, 2013. Investments in available-for-sale securities increased $11.2 million and totaled $49.7 million or 10.9% of total assets at December 31, 2013. Investments in held-to-maturity securities decreased $4.9 million and totaled $130.1 million or 28.6% of total assets at December 31, 2013. Net loans decreased $4.6 million and totaled $227.6 million or 50.1% of total assets at December 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 December 31, 2013
and June 30, 2013. For additional information, see "Comparison of Operating
Results for the three and six months ended December 31, 2013 and 2012 -
Provision for loan losses."

                                     December 31,      June 30,
                                         2013            2013
                                       (Dollars in thousands)

Allowance for loan losses           $        2,609     $   2,693
Gross loans outstanding                    230,203       234,864
Non-performing loans                         5,459         6,342

Allowance/gross loans outstanding             1.13 %        1.15 %
Allowance/non-performing loans                47.8 %        42.5 %

Liabilities

Total liabilities decreased to $404.1 million at December 31, 2013 from $404.3 million at June 30, 2013. Total deposits decreased to $335.9 million at December 31, 2013 from $341.3 million at June 30, 2013, a decrease of $5.4 million or 1.6%. Federal Home Loan Bank advances totaled $53.5 million at December 31, 2013 and June 30, 2013. Securities sold under agreements to repurchase increased to $10.1 million at December 31, 2013 from $4.8 million at June 30, 2013, an increase of $5.3 million or 109.0%.

Stockholders' Equity

Stockholders' equity increased to $50.2 million at December 31, 2013 from $50.1 million at June 30, 2013, primarily due to net income of $483,000 for the six months ended December 31, 2013. This was partially offset by an increase of $391,000 in accumulated other comprehensive loss during the six months ended December 31, 2013.

Comparison of Operating Results for the Three and Six Months ended December 31, 2013 and 2012

Interest and Dividend Income

Interest and dividend income amounted to $3.5 million for the quarter ended December 31, 2013 compared to $3.9 million for the quarter ended December 31, 2012, a decrease of $407,000 or 10.4%. This was primarily due to a decrease in yield on earning assets of 42 basis points to 3.27% for the quarter ended December 31, 2013 compared to 3.69% for the quarter ended December 31, 2012. Average investment securities increased $19.6 million to $185.4 million for the quarter ended December 31, 2013 compared to $165.8 million for the quarter ended December 31, 2012. The yield on investment securities decreased 30 basis points to 1.95% for the quarter ended December 31, 2013 compared to 2.25% for the quarter ended December 31, 2012. Average loans decreased by $16.2 million to $231.9 million for the quarter ended December 31, 2013 compared to $248.1 million for the quarter ended December 31, 2012. The yield on loans decreased 32 basis points to 4.40% for the quarter ended December 31, 2013 compared to 4.72% for the quarter ended December 31, 2012.

Interest and dividend income amounted to $7.0 million for the six months ended December 31, 2013 compared to $8.0 million for the six months ended December 31, 2012, a decrease of $1.0 million or 13.0%. This was primarily due to a decrease in yield on earning assets of 52 basis points to 3.25% for the six months ended December 31, 2013 compared to 3.77% for the six months ended December 31, 2012. Average investment securities increased $20.2 million to $185.2 million for the six months ended December 31, 2013 compared to $165.0 million for the six months ended December 31, 2012. The yield on investment securities decreased 50 basis points to 1.87% for the six months ended December 31, 2013 compared to 2.37% for the six months ended December 31, 2012. Average loans decreased by $16.0 million to $233.7 million for the six months ended December 31, 2013 compared to $249.7 million for the six months ended December 31, 2012. The yield on loans decreased 36 basis points to 4.41% for the six months ended December 31, 2013 compared to 4.77% for the six months ended December 31, 2012.

Interest Expense

Interest expense amounted to $1.0 million for the quarter ended December 31, 2013 compared to $1.3 million for the quarter ended December 31, 2012, a decrease of $246,000 or 19.6%. 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 1.14% for the quarter ended December 31, 2013 from 1.41% for the quarter ended December 31, 2012. The average rate on interest-bearing deposits decreased by 22 basis points to 0.84% for the quarter ended December 31, 2013 compared to 1.06% for the quarter ended December 31, 2012. The average rate on borrowed money decreased by 58 basis points to 2.54% for the quarter ended December 31, 2013 compared to 3.12% for the quarter ended December 31, 2012.

Interest expense amounted to $2.1 million for the six months ended December 31, 2013 compared to $2.6 million for the six months ended December 31, 2012, a decrease of $496,000 or 19.4%. 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 1.16% for the six months ended December 31, 2013 from 1.43% for the six months ended December 31, 2012. The average rate on interest-bearing deposits decreased by 22 basis points to 0.87% for the six months ended December 31, 2013 compared to 1.09% for the six months ended December 31, 2012. The average rate on borrowed money decreased by 58 basis points to 2.53% for the six months ended December 31, 2013 compared to 3.11% for the six months ended December 31, 2012.

Net Interest and Dividend Income

Net interest and dividend income amounted to $2.5 million for the quarter ended December 31, 2013 compared to $2.6 million for the quarter ended December 31, 2012, a decrease of $161,000 or 6.1%. Net interest rate spread decreased by 15 basis points to 2.13% for the quarter ended December 31, 2013 from 2.28% for the quarter ended December 31, 2012. Net interest margin decreased 18 basis points to 2.33% from 2.51% when comparing the quarters ended December 31, 2013 and 2012, respectively. Net interest-earning assets increased $5.8 million to $71.6 million for the quarter ended December 31, 2013 compared to $65.8 million for the quarter ended December 31, 2012.

Net interest and dividend income amounted to $4.9 million for the six months ended December 31, 2013 compared to $5.4 million for the six months ended December 31, 2012, a decrease of $542,000 or 10.0%. Net interest rate spread decreased by 25 basis points to 2.09% for the six months ended December 31, 2013 from 2.34% for the six months ended December 31, 2012. Net interest margin decreased 27 basis points to 2.29% from 2.56% when comparing the six months ended December 31, 2013 and 2012, respectively. Net interest-earning assets increased $5.5 million to $70.5 million for the six months ended December 31, 2013 compared to $65.0 million for the six months ended December 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 $20,000 for the quarter ended December 31, 2013 compared to $315,000 for the quarter ended December 31, 2012, a decrease of $295,000 or 93.7%. This was primarily due to a reduction in non-performing loans and an improvement in 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 1.13% as of December 31, 2013 and 1.15% as of June 30, 2013. Net recoveries were $16,000 for the quarter ended December 31, 2013 compared to net charge-offs of $407,000 for the quarter ended December 31, 2012.

The provision for loan losses amounted to $40,000 for the six months ended December 31, 2013 compared to $565,000 for the six months ended December 31, 2012, a decrease of $525,000 or 92.9%. This was primarily due to a reduction in non-performing loans and an improvement in 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. Net charge-offs were $124,000 for the six months ended December 31, 2013 compared to net charge-offs of $543,000 for the six months ended December 31, 2012.

For more information, see "Note 7 - Loans" of the Notes to the Consolidated Financial Statements.

Non-interest Income

Non-interest income totaled $629,000 for the quarter ended December 31, 2013 compared to $597,000 for the quarter ended December 31, 2012, an increase of $32,000 or 5.4%. This was primarily due to a decrease in other-than-temporary impairment charges on available-for-sale securities of $308,000 to $4,000 for the quarter ended December 31, 2013 compared to $312,000 for the quarter ended December 31, 2012. The impairment charges for the three months ended December 31, 2013 and December 31, 2012 were the result of credit losses on non-agency mortgage-backed securities. There were no gains or losses on sales of available-for-sale securities for the quarter ended December 31, 2013 compared to a net gain of $206,000 for the quarter ended December 31, 2012. Mortgage banking activities decreased by $83,000 to $12,000 for the quarter ended December 31, 2013 compared to $95,000 for the quarter ended December 31, 2012.

Non-interest income totaled $1.2 million for the six months ended December 31, 2013 compared to $1.3 million for the six months ended December 31, 2012, a decrease of $72,000 or 5.5%. This was primarily due to a decrease in income from bank-owned life insurance of $185,000. This decrease included a $176,000 non-taxable death benefit realized during the six months ended December 31, 2012. There were no gains or losses on sales of available-for-sale securities for the six months ended December 31, 2013 compared to a net gain of $206,000 for the six months ended December 31, 2012. This was partially offset by a decrease in other-than-temporary impairment charges on available-for-sale securities of $394,000 to $7,000 for the six months ended December 31, 2013 compared to $401,000 for the six months ended December 31, 2012. The impairment charges for the six months ended December 31, 2013 and December 31, 2012 were the result of credit losses on non-agency mortgage-backed securities. Mortgage banking activities income decreased $95,000 to $39,000 for the six months ended December 31, 2013 compared to $134,000 for the six months ended December 31, 2012.

Non-interest Expense

Non-interest expense increased $104,000 to $2.8 million for the quarter ended December 31, 2013 compared to $2.7 million for the quarter ended December 31, 2012. Compensation and benefits expense increased $32,000 or 2.2%. Occupancy and equipment expense decreased $41,000 or 12.5%. All other non-interest expenses increased $113,000 or 12.4% to $1.0 million for the quarter ended December 31, 2013 compared to $910,000 for the quarter ended December 31, 2012.

Non-interest expense increased $157,000 to $5.5 million for the six months ended December 31, 2013 compared to $5.4 million for the six months ended December 31, 2012. Compensation and benefits expense increased $42,000 or 1.4%. Occupancy and equipment expense decreased $53,000 or 8.2%. All other non-interest expenses increased $168,000 or 9.2% to $2.0 million for the six months ended December 31, 2013 compared to $1.8 million for the six months ended December 31, 2012

Provision for Income Taxes

Income tax expense amounted to $32,000 for the quarter ended December 31, 2013 compared to $29,000 for the quarter ended December 31, 2012. The effective tax rate was 11.8% for the quarter ended December 31, 2013 and 13.8% for the quarter ended December 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 $62,000 for the six months ended December 31, 2013 compared to $107,000 for the six months ended December 31, 2012. The effective tax rate was 11.4% for the six months ended December 31, 2013 and 13.5% for the six months ended December 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.

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 December 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       $  185,425     $            911           1.95 %   $  165,814     $            939           2.25 %
 Loans                          231,945                2,575           4.40 %      248,125                2,955           4.72 %
 Other earning assets             5,306                    3           0.22 %        4,519                    2           0.18 %
 Total interest-earning
assets                          422,676                3,489           3.27 %      418,458                3,896           3.69 %
 Non-interest-earning
assets                           30,689                                             31,643
 Total assets                $  453,365                                         $  450,101

 Interest-bearing
liabilities:
 NOW accounts                $   88,585                  111           0.50 %   $   91,588                  127           0.55 %
 Savings accounts                59,956                   22           0.15 %       55,658                   27           0.19 %
 Money market accounts           15,652                   15           0.38 %       13,824                   13           0.37 %
 Time deposits                  125,548                  465           1.47 %      132,112                  617           1.85 %
 Borrowed money                  61,353                  393           2.54 %       59,465                  468           3.12 %
 Total interest-bearing
liabilities                     351,094                1,006           1.14 %      352,647                1,252           1.41 %
 Non-interest-bearing
demand deposits                  47,805                                             42,982
 Other
non-interest-bearing
liabilities                       4,001                                              4,433
 Capital accounts                50,465                                             50,039
 Total liabilities and
capital accounts             $  453,365                                         $  450,101

 Net interest income                        $          2,483                                   $          2,644
 Interest rate spread                                                  2.13 %                                             2.28 %
 Net interest-earning
assets                       $   71,582                                         $   65,811
 Net interest margin                                                   2.33 %                                             2.51 %
 Average earning assets to

average interest-bearing liabilities 120.39 % 118.66 %

                                                 For the Six Months Ended December 31,
                                             2013                                       2012
                                                        (Dollars in thousands)

                           Average       Interest/       Yield/        Average       Interest/       Yield/
 Interest-earning
assets:                    Balance       Dividends        Cost         Balance       Dividends        Cost
 Investment securities    $ 185,266     $     1,748          1.87 %   $ 165,019     $     1,971          2.37 %
 Loans                      233,650           5,194          4.41 %     249,661           6,009          4.77 %
 Other earning assets         4,631               5          0.21 %       5,366               5          0.18 %
 Total interest-earning
assets                      423,547           6,947          3.25 %     420,046           7,985          3.77 %
 Non-interest-earning
assets                       28,929                                      29,932
 Total assets             $ 452,476                                   $ 449,978

 Interest-bearing
liabilities:
 NOW accounts             $  90,261             224          0.49 %   $  92,946             277          0.59 %
 Savings accounts            59,319              44          0.15 %      54,609              53          0.19 %
 Money market accounts       15,294              29          0.38 %      14,566              30          0.41 %
 Time deposits              126,566             981          1.54 %     132,969           1,262          1.88 %
 Borrowed money              61,594             786          2.53 %      59,908             938          3.11 %
 Total interest-bearing
liabilities                 353,034           2,064          1.16 %     354,998           2,560          1.43 %
 Non-interest-bearing
demand deposits              46,643                                      43,041
 Other
non-interest-bearing
liabilities                   2,450                                       2,535
 Capital accounts            50,349                                      49,404
 Total liabilities and
capital accounts          $ 452,476                                   $ 449,978

 Net interest income                    $     4,883                                 $     5,425
 Interest rate spread                                        2.09 %                                      2.34 %
 Net interest-earning
assets                    $  70,513                                   $  65,048
 Net interest margin                                         2.29 %                                      2.56 %
 Average earning assets
to
  average
interest-bearing
liabilities                                                119.97 %                                    118.32 %

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 December 31, 2013
                                                              Compared to the Three Months Ended December 31, 2012
. . .
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