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

Show all filings for TECHE HOLDING CO

Form 10-Q for TECHE HOLDING CO


14-Feb-2014

Quarterly Report


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

GENERAL

The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believe", "anticipates", "contemplates", "expects", and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Those risks and uncertainties include financial market volatility, changes in interest rates, risk associated with the effect of opening new branches, the ability to control costs and expenses, potential changes in regulation which could result in increased expenses and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. The Company is a "smaller reporting company" as defined by Item 10 of Regulation S-K and its financial statements were prepared in accordance with instructions applicable for such companies.

The Company's consolidated results of operations are primarily dependent on the Bank's net interest income, or the difference between the interest income earned on its loan, mortgage-backed securities and investment securities portfolios, and the interest expense paid on its savings deposits and other borrowings. Net interest income is affected not only by the difference between the yields earned on interest-earning assets and the costs incurred on interest-bearing liabilities, but also by the relative amounts of such interest-earning assets and interest-bearing liabilities.

Other components of net income include: provisions for loan losses; non-interest income (primarily, service charges on deposit accounts and other fees, net rental income, and gains and losses on investment activities); non-interest expenses (primarily, compensation and employee benefits, federal insurance premiums, office occupancy expense, marketing expense and expenses associated with foreclosed real estate) and income taxes.

Earnings of the Company also are significantly affected by economic and competitive conditions, particularly changes in interest rates, government policies and regulations of regulatory authorities. References to the "Bank" herein, unless the context requires otherwise, refer to the Company on a consolidated basis.

COMPARISON OF FINANCIAL CONDITION

The Company's total assets at December 31, 2013 amounted to $876.7 million, an increase of $20.0 million or 2.3% as compared to $856.7 million at September 30, 2013. The increase was primarily due to increases in commercial, consumer, and mortgage loans offset somewhat by decreases in cash balances and security balances.

Securities available-for-sale totaled $13.3 million and securities held to maturity totaled $68.0 million at December 31, 2013, which, combined, represented a decrease of $0.8 million or 1.0% as compared to September 30, 2013. The decrease was primarily due to the normal principal repayments on the existing portfolio offset somewhat by the increase in certificates of deposits at other banks.

Loans receivable, net of allowance for loan losses, totaled $696.0 million at December 31, 2013, which represented an increase of $19.5 million or 2.9% compared to September 30, 2013. The increase was primarily due to increases in all loan categories with residential real estate loans having the most growth at $7.4 million.

FHLB stock increased $0.7 million due to stock purchases.

Total deposits, after interest credited, at December 31, 2013 were $648.5 million, which represented a decrease of $2.3 million or 0.4% as compared to September 30, 2013. The decrease was due to decreases in savings, money market, and time deposit accounts offset somewhat by an increase in interest bearing checking and non-interest bearing checking. The weighted average remaining maturity on our time deposit portfolio is approximately 17 months.


Advances increased $20.1 million or 18.4% as compared to the amount at September 30, 2013. The increase was due to new advances totaling $40.0 million offset by normal principal payments on existing advances and $19.4 million in maturities.

Stockholders' equity was $91.7 million at December 31, 2013 and $89.1 million at September 30, 2013. The increase was due primarily to net income and stock option exercises less dividend payments of $0.8 million.

COMPARISON OF EARNINGS FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 AND 2012

Net Income. The Company had net income of $2.4 million or $1.15 per diluted share for the three months ended December 31, 2013 as compared to net income of $3.1 million or $1.49 per diluted share for the three months ended December 31, 2012. The first quarter of fiscal year 2013 had included a sale of mortgage loans totaling $46.3 million, generating a one-time after-tax gain of $1.3 million. There was no similar sale during the first quarter of fiscal year 2014. The changes affecting net income for the quarter ended December 31, 2013 are discussed in the following paragraphs by category.

Total Interest Income. Total interest income decreased approximately $0.1 million or 1.0% for the three months ended December 31, 2013. The average yield on loans decreased to 5.24% for the three months ended December 31, 2013, from 5.45% for the same period in 2012. Loan yields have trended downward because of the low interest rate environment.

Total Interest Expense. Total interest expense decreased approximately $0.2 million or 13.6% for the three month period ended December 31, 2013 as compared to the same period in the prior fiscal year. The decrease was due mainly to the average cost of deposits decreasing to 0.40% for the three months ended December 31, 2013 compared to 0.53% for the same period in 2012. Interest rates have steadily decreased affecting the Bank's pricing of deposits.

Net Interest Income. Net interest income increased approximately $0.2 million or 2.0% for the three month period ended December 31, 2013, as compared to the same period ended December 31, 2012. The increase for the three month period ended December 31, 2013 in net interest income was primarily due to a decrease in rates on interest bearing liabilities.

Provision for Loan Losses. Management recorded no provision for the first quarter of fiscal year 2014 as compared to a provision of $150 thousand for the first three months of fiscal 2013, due primarily to management's assessment of the loan portfolio for probable losses. The ratio of the allowance for loan losses to total loans at December 31, 2013 was 1.10% compared to 1.15% at September 30, 2013 and 1.28% at December 31, 2012.

The calculation that supports the adequacy of the Allowance for Loan Losses (ALLL) includes management's best estimates that are applied to known portfolio elements. The Bank employs a 9-point grading system to track as accurately as possible the inherent quality of the loan portfolio. The application of a nine point system is used on all accounts in the commercial loan portfolio. Values of "1" or "2" are considered to be substantially risk free. Average and acceptable risk loans are assigned point values of "3" and "4", Loans with some document deficiencies or are of modest financial strength are assigned a rating of "5". Point values of 6, 7, 8, and 9 are assigned, respectively, to loans classified as special mention, substandard, doubtful, and loss. Consumer loans are only assigned risk ratings of "6" or worse, based on payment history. In addition, management considers other trends such as local economic conditions, the risk rating of the loan portfolios as discussed above, amounts and trends in non-performing assets and concentration factors.

Management regularly estimates the likely level of losses to determine whether the allowance for loan losses is adequate to absorb probable losses in the existing portfolio. Based on these estimates, an amount is charged or credited to the provision for loan losses and credited or charged to the allowance for loan losses in order to adjust the allowance to a level determined to be adequate to absorb probable losses. There have been no significant changes in the Company's estimation methods during the current period.

Management's judgment as to the level of the allowance for loan losses involves the consideration of current economic conditions and their potential effects on specific borrowers, an evaluation of the existing relationships among loans, known and inherent risks in the loan portfolio and the present level of the allowance, results of examination of the loan portfolio by regulatory agencies and management's internal review of the loan portfolio. In


determining the collectability of impaired loans, management also considers the fair value of any underlying collateral. In addition, management considers changes in loan concentrations, the level of and trends in non-performing loans during the period, the Bank's historical loss experience and historical charge-off percentages for state and national savings associations for similar types of loans in determining the appropriate amount of the allowance for loan losses. Because certain types of loans have higher credit risk, greater concentrations of such loans may result in an increase to the allowance. For this reason, management segregates the loan portfolio by type of loan and number of days loans are past due. Non-performing loans as a percent of total loans plus real estate owned were 0.48% at December 31, 2013, compared to 0.38% at September 30, 2013 and 1.48% at December 31, 2012. Non-performing assets at December 31, 2012 had included a $3.8 million commercial credit relationship involving a residential land development in the Baton Rouge market area, the borrower of which filed for protection under Chapter 11 Bankruptcy. This loan represented 37.62% of non-performing assets at December 31, 2012. This loan has subsequently been paid off.

Non-Interest Income. Total non-interest income decreased $1.8 million for the three month period ended December 31, 2013 as compared to the same period in 2012. The decrease from a year ago was attributable to a $2.0 million before tax gain on the sale of $46.3 million in mortgage loans realized during the prior year. There was no similar sale during the first quarter of fiscal year 2014.

Non-Interest Expense. Total non-interest expense decreased approximately $0.3 million for the three months ended December 31, 2013, as compared to the same period in 2012. The decrease was primarily due to decreases in compensation, marketing and professional expenses offset by increases in occupancy expense.

Income Tax Expense. Income tax expense decreased approximately $0.5 million for the three months ended December 31, 2013 as compared to the same period in 2012. The decrease in tax expense for the three months was due to income before taxes being lower. The Company's effective tax rate was 30.39% for the three months ended December 31, 2013 as compared to 33.92% for the comparable 2012 period.


Average Balance Sheet. The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expenses by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from daily average balances.

                                                       Three Months Ended December 31,
                                              2013                                      2012

                                Average                   Average       Average                    Average
                                Balance     Interest    Yield/Cost      Balance       Interest    Yield/Cost
                                                           (Dollars in thousands)
Assets
Interest-Earning Assets
Securities (1)(7)              $  33,726   $      242         2.88 %   $  47,186     $      344         2.92 %
Loans Receivable (2) (3)(7)      695,696        9,113         5.24 %     667,191          9,098         5.45 %
Other Interest-Earning
Assets (4)                        59,806          120         0.80 %      64,215            129         0.80 %
Total Interest-Earning
Assets                           789,228   $    9,475         4.80 %     778,592     $    9,571         4.92 %
Non-Interest Earning Assets       77,799                                  72,534
Total Assets                   $ 867,027                               $ 851,126
Liabilities and
Stockholders' Equity
Interest-Bearing Liabilities
NOW Accounts                   $ 148,451   $       44         0.12 %   $ 128,492     $       70         0.22 %
Statement & Regular Savings
Accounts                         200,626           53         0.11 %     203,181            167         0.33 %
Money Funds Accounts              49,639            8         0.06 %      54,445             21         0.15 %
Certificates of Deposit          150,046          553         1.47 %     141,358            572         1.62 %
  Total Deposits                 548,762          658         0.48 %     527,476            830         0.63 %
FHLB Advances                    113,744          924         3.25 %     131,845          1,002         3.04 %
Total Interest-Bearing
Liabilities                      662,506   $    1,582         0.96 %     659,321     $    1,832         1.11 %
Non-Interest-Bearing
Liabilities                      112,454                                 105,092

  Total Liabilities              774,960                                 764,414
Stockholders' Equity              92,067                                  86,713
Total Liabilities and
Stockholders' Equity           $ 867,027                               $ 851,126
Net Interest Income/Interest
Rate Spread (5)                            $    7,893         3.85 %                 $    7,739         3.81 %
Net Interest Margin (6)                                       4.00 %                                   3.98  %
Interest-Earning Assets/
Interest-Bearing Liabilities                                119.13 %                                 118.09  %

(1) Includes securities and Federal Home Loan Bank (FHLB) stock.

(2) Amount is net of deferred loan fees, loan discounts and premiums and loans-in-process and includes non-accruing loans.

(3) Interest income includes loan fees of approximately $166,000 in 2013 and $148,000 in 2012.

(4) Amount includes certificates of deposit and other interest-bearing deposits.

(5) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(6) Net interest margin represents net interest income divided by average interest-earning assets.

(7) Tax exempt securities and loans are shown at their contractual yields and are not shown at a tax equivalent yield.


LIQUIDITY AND CAPITAL RESOURCES

Risk-based capital regulations adopted by the Board of Governors of the FRB and the FDIC require bank holding companies and banks, respectively, to achieve and maintain specified ratios of capital to risk-weighted assets. The risk-based capital rules are designed to measure Tier 1 Capital and Total Capital in relation to the credit risk of both on -and off-balance sheet items. Under the guidelines, one of four risk weights is applied to the different on-balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk-weighting after conversion to balance sheet equivalent amounts. All bank holding companies and banks must maintain a minimum total capital to total risk-weighted assets ratio of 8.00%, at least half of which must be in the form of core, Tier 1, capital (consisting of common equity, retained earnings, and a limited amount of qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other intangible assets and accumulated other comprehensive income). These guidelines also specify that bank holding companies that are experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels.

Under current Office of Financial Institutions regulations, the Bank is required to maintain certain levels of capital. At December 31, 2013 the Bank was in compliance with its regulatory capital requirements as follows:

(000's)

                                          Required    Required to
                                          Minimum       be Well
                                           Ratio      Capitalized      Bank      Company

Tier 1 risk-based capital                  4.00%         6.00%        13.09%      14.49%
Total risk-based capital                   8.00%        10.00%        14.34%      15.75%
Leverage Ratio                             4.00%         5.00%        9.13%       10.11%

For the Bank to be well capitalized under current risk-based capital standards, it is required to have Tier I capital of at least 6% and total risk-based capital of 10%. Based on these standards, the Bank is categorized as well capitalized at December 31, 2013. Management believes that under current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. Events beyond the control of the Bank, such as increased interest rates or a downturn in the economy in areas in which the Bank operates could adversely affect future earnings and as a result, the ability of the Bank to meet its future minimum capital requirements.

The Bank's liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost effective manner. The Bank's primary sources of funds are deposits, scheduled amortization and prepayments on loan and mortgage-backed securities, and advances from the FHLB. As of December 31, 2013, FHLB borrowed funds totaled $129.1 million. FHLB advances are collateralized by a blanket-floating lien on the Company's residential real estate first mortgage loans. Additional borrowing capacity of approximately $169.1 million is available from the FHLB based on current collateral levels. The Bank, if the need arises, may also access a line of credit in the amount of $61.3 million provided by two banks to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Loan repayments, maturing investments and mortgage-backed securities prepayments are greatly influenced by general interest rates and economic conditions.

The Bank is required to maintain sufficient liquidity for its safe and sound operation. The Bank believes that it maintains sufficient liquidity to operate the Bank in a safe and sound manner.


ADDITIONAL KEY RATIOS


                                            At or For the
                                         Three Months Ended
                                             December 31
                                        2013(1)        2012(1)

Return on average assets                    1.11 %        1.44 %
Return on average equity                   10.49 %       14.17 %
Average interest rate spread                3.85 %        3.80 %
Nonperforming assets to total assets        0.44 %        1.20 %
Nonperforming loans to total loans          0.48 %        1.48 %
Average net interest margin                 4.00 %        3.98 %

(1) Annualized where appropriate.

INTEREST RATE SENSITIVITY

At December 31, 2013 the Company was in a slightly liability sensitive position. Generally, a liability sensitive position will be detrimental to earnings in a rising interest rate environment and will enhance earnings in a falling interest rate environment. Conversely, an asset sensitive position will result in enhanced earnings in a rising interest rate environment and declining earnings in a falling interest rate environment because larger volumes of assets than liabilities will reprice.

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