FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number:
PSB HOLDINGS, INC.
(Exact name of registrant as specified in charter)
WISCONSIN 39-1804877
(State of incorporation) (I.R.S Employer Identification
Number)
1905 West Stewart Avenue
Wausau, Wisconsin 54401
(Address of principal executive office)
Registrant's telephone number, including area code: 715-842-2191
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of common shares outstanding at June 30, 2002 was 839,416.
PSB HOLDINGS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2002
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31,
2001 (derived from audited financial statements) 1
Condensed Consolidated Statements of Income
Three Months and Six Months Ended June 30, 2002
and 2001 (unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended June 30, 2002 (unaudited) 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 (unaudited) 4
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSB HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(June 30, 2002 unaudited, December 31, 2001 derived from audit financial
statements)
June 30, December 31,
(dollars in thousands, except per share data) 2002 2001
ASSETS
Cash and due from banks $ 9,474 $ 16,736
Interest-bearing deposits and money market funds 1,691 3,539
Federal funds sold 2,400 5,275
Securities:
Held to maturity (fair values of $21,500 and $20,355, respectively) 20,821 20,287
Available for sale (at fair value) 49,856 50,157
Federal Home Loan Bank stock (at cost) 2,209 2,151
Loans held for sale 358 1,403
Loans receivable, net of allowance for loan losses of $3,254
and $2,969, respectively 246,684 236,574
Accrued interest receivable 1,861 1,873
Foreclosed assets, net 337 421
Premises and equipment 5,372 4,755
Other assets 1,041 1,125
TOTAL ASSETS $342,104 $344,296
LIABILITIES
Non-interest bearing deposits $ 36,947 $ 41,507
Interest-bearing deposits 234,141 232,128
Total deposits 271,088 273,635
Short-term borrowings 3,194 4,327
Long-term Federal Home Loan Bank advances 38,000 38,000
Accrued expenses and other liabilities 2,389 2,984
Total liabilities 314,671 318,946
STOCKHOLDERS' EQUITY
Common stock - no par value with a stated value of $2 per share:
Authorized - 1,000,000 shares
Issued - 902,425 shares 1,805 1,805
Additional paid-in capital 7,159 7,159
Retained earnings 19,848 18,186
Unrealized gain on securities available for sale, net of tax 922 491
Treasury stock, at cost - 63,009 and 62,720 shares, respectively (2,301) (2,291)
Total stockholders' equity 27,433 25,350
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 342,104 $ 344,296
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PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
(dollars in thousands, JUNE 30, JUNE 30,
except per share data - unaudited) 2002 2001 2002 2001
Interest income:
Interest and fees on loans $ 4,448 $ 4,910 $ 8,839 $ 9,931
Interest on securities:
Taxable 678 710 1,368 1,458
Tax-exempt 227 192 451 351
Other interest and dividends 52 167 117 284
Total interest income 5,405 5,979 10,775 12,024
Interest expense:
Deposits 1,696 2,629 3,462 5,490
Short-term borrowings 34 150 80 305
Long-term FHLB advances 571 570 1,135 1,112
Total interest expense 2,301 3,349 4,677 6,907
Net interest income 3,104 2,630 6,098 5,117
Provision for loan losses 180 150 360 300
Net interest income after provision for loan losses 2,924 2,480 5,738 4,817
Noninterest income:
Service fees 321 252 556 498
Gain on sale of loans 134 83 332 112
Investment and insurance sales commissions 51 74 96 120
Other noninterest income 96 46 183 180
Total noninterest income 602 455 1,167 910
Noninterest expense:
Salaries and employee benefits 1,170 1,016 2,415 2,028
Occupancy 325 227 565 463
Data processing and other office operations 128 120 260 242
Advertising and promotion 115 104 191 169
Other noninterest expenses 308 271 627 540
Total noninterest expense 2,046 1,738 4,058 3,442
Income before provision for income taxes 1,480 1,197 2,847 2,285
Provision for income taxes 456 358 865 677
Net income $ 1,024 $ 839 $ 1,982 $ 1,608
Basic and diluted earnings per share $ 1.22 $ 1.00 $ 2.36 $ 1.91
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PSB HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six months ended June 30, 2002 - unaudited
Unrealized
Gain on
Additional Securities
Common Paid-in Retained Available Treasury
(dollars in thousands) STOCK CAPITAL EARNINGS FOR SALE STOCK TOTALS
Balance January 1, 2002 $ 1,805 $ 7,159 $18,186 $ 491 $(2,291) $25,350
Comprehensive income:
Net income 1,982 1,982
Unrealized gain on securities
available for sale, net of tax 431 431
Total comprehensive income 2,413
Purchase of treasury stock (70) (70)
Distribution of treasury stock in
settlement of liability to Company
directors 60 60
Cash dividends declared $.38 per share (320) (320)
Balance June 30, 2002 $ 1,805 $ 7,159 $19,848 $ 922 $ (2,301) $27,433
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PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2002 and 2001 - unaudited
2002 2001
Cash flows from operating activities:
Net income $ 1,982 $ 1,608
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net amortization 331 310
Provision for loan losses 360 300
Gain on sale of loans held for sale (332) (112)
(Gain) loss on sale of premises and equipment 30 (54)
Gain on sale of foreclosed assets (27) -
FHLB stock dividends (58) (76)
Changes in operating assets and liabilities:
Accrued interest receivable 12 131
Other assets (112) (446)
Other liabilities (535) (190)
Net cash provided by operating activities 1,651 1,471
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits
and money market funds 1,848 (715)
Net (increase) decrease in federal funds sold 2,875 (9,507)
Proceeds from sale and maturities of:
Securities held to maturity 579 930
Securities available for sale 5,989 19,664
Payment for purchase of:
Securities held to maturity (1,120) (5,805)
Securities available for sale (5,009) (17,457)
Purchase of FHLB stock - -
Net (increase) decrease in loans (9,294) 5,590
Capital expenditures (945) (264)
Proceeds from sale of premises and equipment 29 31
Proceeds from sale of foreclosed assets 205 -
Net cash used in investing activities (4,843) (7,533)
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CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Cash flows from financing activities:
2002 2001
Net decrease in non-interest-bearing deposits (4,560) (5,695)
Net increase in interest-bearing deposits 2,013 5,038
Net decrease in short-term borrowings (1,133) (2,468)
Proceeds from long-term FHLB advances - 10,000
Dividends paid (320) (319)
Purchase of treasury stock (70) -
Net cash provided by (used in) financing activities (4,070) 6,556
Net increase (decrease) in cash and due from banks (7,262) 494
Cash and due from banks at beginning 16,736 9,226
Cash and due from banks at end $ 9,474 $ 9,720
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 4,878 $ 6,860
Income taxes 770 760
Noncash investing and financing activities:
Loans charged off $ 123 $ 26
Loans transferred to foreclosed assets 273 533
Loans originated on sale of foreclosed assets 217 -
Distribution of treasury stock in settlement of
liability to Company directors 60 -
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PSB Holdings, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - GENERAL
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
PSB Holdings, Inc.'s ("Company") financial position, results of its
operations, and cash flows for the periods presented, and all such
adjustments are of a normal recurring nature. The consolidated financial
statements include the accounts of all subsidiaries. All material
intercompany transactions and balances are eliminated. The results of
operations for the interim periods are not necessarily indicative of the
results to be expected for the full year.
These interim consolidated financial statements have been prepared
according to the rules and regulations of the Securities and Exchange
Commission and, therefore, certain information and footnote disclosures
normally presented in accordance with generally accepted accounting
principles have been omitted or abbreviated. The information contained in
the consolidated financial statements and footnotes in the Company's 2001
annual report on Form 10-K, should be referred to in connection with the
reading of these unaudited interim financial statements.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Actual results could differ significantly
from those estimates. Estimates that are susceptible to significant
change include the determination of the allowance for loan losses and the
valuations of investments.
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLE
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires the use of the purchase method
of accounting for business combinations initiated after June 30, 2001.
SFAS No. 142 addresses how intangible assets acquired outside of a
business combination should be accounted for upon acquisition and how
goodwill and other intangible assets should be accounted for after they
have been initially recognized. SFAS No. 142 eliminates the amortization
for goodwill and other intangible assets with indefinite lives. Other
intangible assets with a finite life will be amortized over their useful
life. Goodwill and other intangible assets with indefinite useful lives
shall be tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset may be impaired. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001.
The Corporation's adoption of SFAS No. 142 on January 1, 2002 had no
impact on the consolidated financial statements as of the date of
adoption.
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NOTE 3 - EARNINGS PER SHARE
Basic earnings per share of common stock are based on the weighted average
number of common shares outstanding during the period. Diluted earnings
per share is calculated by dividing net income by the weighted average
number of shares adjusted for the dilutive effect of outstanding stock
options. Presented below are the calculations for basic and diluted
earnings per share:
Three months ended Six months ended
(dollars in thousands, except per share data) JUNE 30, JUNE 30,
2002 2001 2002 2001
Net income available to common stockholders $ 1,024 $ 839 $ 1,982 $ 1,608
Weighted average shares outstanding 839,416 839,705 839,515 839,705
Effect of dilutive stock options outstanding 1,655 - 1,080 -
Diluted weighted average shares outstanding 841,071 839,705 840,595 839,705
Basic earnings per share $ 1.22 $ 1.00 $ 2.36 $ 1.91
Diluted earnings per share $ 1.22 $ 1.00 $ 2.36 $ 1.91
NOTE 4 - COMPREHENSIVE INCOME
Generally accepted accounting principles require comprehensive income and
its components, as recognized under the accounting standards, to be
displayed in a financial statement with the same prominence as other
financial statements. The disclosure requirements with respect to the
Form 10-Q have been included in the Company's consolidated statement of
changes in stockholders' equity. Comprehensive income totaled the
following for the periods indicated:
(dollars in thousands - unaudited) Three months ended Six months ended
JUNE 30, JUNE 30,
2002 2001 2002 2001
Net income $ 1,024 $ 839 $ 1,982 $ 1,608
Change in net unrealized gain on
securities available for sale, net of tax 553 72 431 504
Comprehensive income $ 1,577 $ 911 $ 2,413 $ 2,112
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis is presented to assist in the
understanding and evaluation of the Company's financial condition and
results of operations. It is intended to complement the unaudited
financial statements, footnotes, and supplemental financial data appearing
elsewhere in this Form 10-Q and should be read in conjunction therewith.
Dollar amounts are in thousands, except per share amounts.
Forward-looking statements have been made in this document that are
subject to risks and uncertainties. While the Company believes these
forward-looking statements are based on reasonable assumptions, all such
statements involve risk and uncertainties that could cause actual results
to differ materially from those contemplated in this report. The
assumptions, risks, and uncertainties relating to the forward-looking
statements in this report include those described under the caption
"Cautionary Statements Regarding Forward-Looking Information" in Part I of
the Company's Form 10-K for the year ended December 31, 2001 and, from
time to time, in the Company's other filings with the Securities and
Exchange Commission.
BALANCE SHEET
At June 30, 2002, total assets were $342,104, an increase of $27,387, or
8.7%, over June 30, 2001, while assets decreased $2,192 from December 31,
2001. Gross loans (including loans held for sale and unamortized direct
loan origination costs) were $250,296 at June 30, 2002, growing $28,328
over second quarter 2001 and increasing $9,350 over year-end 2001.
Because total assets since December 31, 2001 have remained nearly the
same, the recent loan growth has been funded by short-term investments,
cash holdings, and overnight funds held at December 31, 2001.
Table 1: Period-End Loan Composition
June 30, June 30, December 31, 2001
DOLLARS DOLLARS PERCENTAGE OF TOTAL Percentage
(dollars in thousands) 2002 2001 2002 2001 DOLLARS OF TOTAL
Commercial, industrial and agricultural $ 69,165 $ 63,551 27.6% 28.6% $ 55,363 23.0%
Commercial real estate mortgage 99,917 62,365 39.9% 28.1% 98,554 40.9%
Residential real estate mortgage 63,898 76,580 25.5% 34.5% 67,723 28.1%
Residential real estate loans held for sale 358 986 0.1% 0.4% 1,403 0.6%
Consumer home equity 5,771 4,295 2.3% 1.9% 4,576 1.9%
Consumer and installment 11,187 14,191 4.6% 6.5% 13,327 5.5%
Totals $250,296 $221,968 100.0% 100.0% $240,946 100.0%
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The decline in overall long-term real estate loan interest rates during
2001 and early 2002 contributed to a reallocation of the Bank's loans held
for investment. As part of the Company's strategic and asset liability
management plan, long-term residential real estate customer refinancing
loans were subsequently sold to investors in the secondary market, and
commercial real estate loans were increased to continue asset growth.
During the past quarter, the Company has also aggressively sought high
quality adjustable rate commercial and industrial loans to match short-
term liabilities during anticipated future increases in short-term
interest rates.
The loan portfolio is the Company's primary asset subject to credit risk.
The Company's process for monitoring credit risks includes weekly analysis
of loan quality, delinquencies, non-performing assets, and potential
problem loans. Loans are placed on a nonaccrual status when they become
contractually past due 90 days or more as to interest or principal
payments. All interest accrued but not collected for loans (including
applicable impaired loans) that are placed on nonaccrual or charged off is
reversed to interest income. The interest on these loans is accounted for
on the cash basis until qualifying for return to accrual status. Loans
are returned to accrual status when all the principal and interest amounts
contractually due have been collected and there is reasonable assurance
that repayment will continue within a reasonable time frame.
The term "impaired loan" refers to certain commercial loans with respect
to which, based on current information, it is probable that the Company
will not be able to collect all amounts due in accordance with the
contractual terms of the loan agreement. Impairment is based on
discounted cash flows of expected future payments using the loan's
effective interest rate or the fair value of the collateral if repayment
of the loan is collateral-dependent.
The aggregate amount of nonperforming assets increased $1,016 to $3,399 at
June 30, 2002 from $2,383 at June 30, 2001, primarily because of
additional loans going on nonaccrual status. However, nonperforming
assets have decreased $1,057 from $4,456 at December 31, 2001.
Approximately $815 of the nonaccrual loans at June 30, 2002 and December
31, 2001 is related to one commercial loan relationship. The Company
holds a first lien mortgage on the property of this operating business
which was sold on June 27, 2002. Bankruptcy court approval of the sale is
anticipated to occur before September 30, 2002 with no loss of principal
to the Company. The Company anticipates providing first lien mortgage
financing to the new owners under normal collateral and down payment
equity terms.
-9-
Table 2: Allowance for Loan Losses
Three Months Ended Six Months Ended
(dollars in thousands, JUNE 30, JUNE 30,
except per share data - unaudited) 2002 2001 2002 2001
Allowance for loan losses at beginning $3,155 $2,536 $2,969 $2,407
Provision for loan losses 180 150 360 300
Recoveries on loans previously charged-off 19 48 1
Loans charged off (100) (4) (123) (26)
Allowance for loan losses at end $3,254 $2,682 $3,254 $2,682
Nonperforming assets include: 1) loans that are either contractually past
due 90 days or more as to interest or principal payments, on a nonaccrual
status, or the terms of which have been renegotiated to provide a
reduction or deferral of interest or principal (restructured loans) and 2)
foreclosed assets.
Table 3: Nonperforming Assets
JUNE 30, Dec. 31,
(dollars in thousands) 2002 2001 2001
Nonaccrual loans $ 2,355 $ 1,167 $ 3,036
Accruing loans past due 90 days or more 13 23 -
Restructured loans 694 795 999
Total non-performing loans 3,062 1,985 4,035
Foreclosed assets 337 398 421
Total non-performing assets $ 3,399 $ 2,383 $ 4,456
Non-performing loans as a % of gross
loans receivable 1.23% 0.90% 1.68%
Total non-performing assets as a % of total
assets 0.99% 0.76% 1.29%
LIQUIDITY
Liquidity refers to the ability of the Company to generate adequate
amounts of cash to meet the Company's need for cash. The Company manages
its liquidity to provide adequate funds to support borrowing needs and
deposit flow of its customers. Management views liquidity as the ability
to raise cash at a reasonable cost or with a minimum of loss and as a
measure of balance sheet flexibility to react to marketplace, regulatory,
and competitive changes. Deposit growth is the primary source of
liquidity. Retail consumer deposits as a percentage of total funding
sources were 79.2% at June 30, 2002, and 78.2% at June 30, 2001.
Wholesale funding and broker certificates of deposit represent the balance
of the Company's total funding needs.
-10-
Table 4: Period-end Deposit Composition
June 30, June 30, December 31, 2001
DOLLARS DOLLARS PERCENTAGE OF TOTAL Percentage
(dollars in thousands) 2002 2001 2002 2001 DOLLARS OF TOTAL
Noninterest bearing demand $ 36,947 $ 29,497 13.6% 12.2% $ 41,508 15.2%
Interest bearing demand and savings 30,526 24,486 11.3% 10.2% 33,691 12.3%
Money market deposits 69,467 78,034 25.6% 32.4% 76,973 28.1%
Time deposits 76,361 65,211 28.2% 27.1% 68,233 24.9%
Time deposits $100 and over 57,787 43,649 21.3% 18.1% 53,230 19.5%
Totals $271,088 $240,877 100.0% 100.0% $273,635 100.0%
The interest rate paid on money market deposits is adjustable based on the
Company's discretion but generally tracks the movements of national money
market funds. As short-term interest rates have decreased during 2001 and
2002, the yield on this account has declined substantially. At the same
time, the Company has offered long term (three years or longer)
certificate of deposits rates to stabilize deposit funding cost during a
rising rate interest market. Some customers appear to have moved money
market funds into time deposits to secure a higher yield.
The Company's retail deposit offices are in locations that during the past
year have demanded consumer retail deposit rates generally greater than
national rates for equivalent certificate of deposit terms. To lower
deposit funding costs, the Company does use brokers to accumulate national
funds generally in excess of $100 per account. Broker deposits totaled
$23,720 at June 20, 2002 compared to $15,698 at June 30, 2001. Excluding
broker deposits, retail certificates of deposit increased $17,266 to
$110,428 at June 30, 2002 from $93,162 in June 30, 2001.
As of June 30, 2002, federal funds sold and short-term investments, loan
principal, and investment securities maturing within one year totaled
$164,671, while certificates of deposit, short-term borrowings and long-
term borrowings maturing within one year totaled $98,421. Unused credit
advances from the Federal Home Loan Bank available to the Company at June
30, 2002 totaled approximately $7,343. The primary funding sources
utilized are Federal Home Loan Bank advances, federal funds purchased,
repurchase agreements from a base of individuals, businesses and public
entities, and brokered time deposits.
Table 5 below presents maturity repricing information as of June 30, 2002.
The following repricing methodologies should be noted:
1. Money market deposit accounts are considered fully repriced within
90 days. NOW and savings accounts are considered "core" deposits as
they are generally insensitive to interest rate changes. These
deposits are considered to reprice beyond 5 years.
2. Nonaccrual loans are considered to reprice beyond 5 years.
3. The likelihood of the call or prepayment being exercised in the
current interest rate environment may be a factor in the repricing of
contractual calls or prepayment options.
4. The impact of rising or falling interest rate is based on a parallel
yield curve change that is fully implemented within a 12 month time
horizon.
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Table 5: Interest Rate Sensitivity Gap Analysis
JUNE 30, 2002
(dollars in thousands) 0-90 DAYS 91-180 DAYS 181-365 DAYS 1-2 YRS. BEYOND 2 YRS. BEYOND 5 YRS TOTAL
Earning assets:
Loans $ 85,944 $ 28,079 $ 28,916 $ 53,165 $ 47,811 $ 6,381 $250,296
Securities 2,941 6,611 5,880 12,664 26,319 16,262 70,677
FHLB stock 2,209 2,209
Other earning assets 4,091 4,091
Total $ 95,185 $ 34,690 $ 34,796 $ 65,829 $ 74,130 $ 22,643 $327,273
Cumulative rate
sensitive assets $ 95,185 $129,875 $164,671 $230,500 $304,630 $327,273
Interest-bearing liabilities
Interest-bearing deposits $ 99,159 $ 16,587 $ 40,584 $ 24,208 $ 21,364 $ 32,239 $234,141
Short-term borrowings 302 545 1,481 104 762 3,194
Long-term FHLB
advances 10,000 6,000 19,000 3,000 38,000
Total $ 99,461 $ 17,132 $ 52,065 $ 30,312 $ 41,126 $ 35,239 $275,335
Cumulative interest
sensitive liabilities $ 99,461 $116,593 $168,658 $198,970 $240,096 $275,335
Interest sensitivity gap for
the individual period $ (4,276) $ 17,558 $(17,269) $ 35,517 $ 33,004 $(12,596)
Ratio of rate sensitive assets
to rate sensitive liabilities
for the individual period 96% 202% 67% 217% 180% 64%
Cumulative interest
sensitivity gap $ 4,276 $ 13,282 $ (3,987) $ 31,530 $ 64,534 $ 51,938
Cumulative ratio of rate
sensitive assets to rate
sensitive liabilities 96% 111% 98% 116% 127% 119%
CUMULATIVE RATIO OF RATE SENSITIVE ASSETS TO RATE SENSITIVE LIABILITIES
No change in interest rates 96% 111% 98% 116% 127% 119%
Interest rates down 1.0% 96% 112% 100% 122% 128% 119%
Interest rates up 2.0% 95% 108% 94% 113% 125% 119%
The Asset/Liability Committee uses financial modeling techniques that
measure the interest rate risk. Policies established by the Bank's
Asset/Liability Committee are intended to limit exposure of earnings at
risk. Management considers that an acceptable range for the cumulative
rate sensitivity ratio is 70-150%.
-12-
CAPITAL RESOURCES
Stockholders' equity at June 30, 2002 increased $3,365, or 14.0% from June
2001 to $27,433. Stockholders' equity included unrealized gains on
securities available for sale, net of their tax effect, of $922 at June
30, 2002 compared to unrealized gains of $379 at June 30, 2001.
The adequacy of the Company's capital is regularly reviewed to ensure
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. As of June 30, 2002, the
Subsidiary Bank's tier 1 risk-based capital ratio, total risk-based
capital, and tier 1 leverage ratio were well in excess of regulatory
minimums.
On July 12, 2002, the Company announced an ongoing share repurchase
program of up to 1% of outstanding shares per year. The Company
anticipates to purchase on the open market and hold as treasury
approximately 8,400 shares during the remainder of 2002.
Table 6: Capital Ratios - Consolidated Holding Company
Tier 1 Total Risk-
Leverage Based
CAPITAL CAPITAL
June 30, 2002 7.8% 11.4%
December 31, 2001 7.2% 11.2%
June 30, 2001 7.5% 12.0%
Regulatory minimum for capital adequacy 4.0% 8.0%
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 2002 totaled $1,024, or $1.22
per share for basic and diluted earnings per share. Comparatively, net
income for the quarter ended June 30, 2001 was $839, or $1.00 per share
for basic and diluted earnings per share. Operating results for the
second quarter 2002 generated an annualized return on average assets of
1.22% and an annualized return on average equity of 15.23%, compared to
1.06% and 14.22% for the comparable period in 2001. The net interest
margin for the second quarter 2002 was 4.04% compared to 3.64% for the
comparable quarter in 2001.
The following Table 7 presents consolidated quarterly summary financial
data of PSB Holdings, Inc. and Subsidiary.
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Table 7: Financial Summary
(dollars in thousands, except per share data) QUARTER ENDED
June 30, March 31, Dec. 31, Sept. 30, June 30,
EARNINGS AND DIVIDENDS: 2002 2002 2001 2001 2001
Net interest income $ 3,104 $ 2,994 $ 2,934 $ 2,909 $ 2,630
Provision for loan losses $ 180 $ 180 $ 440 $ 150 $ 150
Other noninterest income $ 602 $ 565 $ 798 $ 357 $ 455
Other noninterest expense $ 2,046 $ 2,012 $ 2,006 $ 1,868 $ 1,738
Net income $ 1,024 $ 958 $ 873 $ 885 $ 839
Basic earnings per share $ 1.22 $ 1.14 $ 1.04 $ 1.05 $ 1.00
Diluted earnings per share $ 1.22 $ 1.14 $ 1.04 $ 1.05 $ 1.00
Dividends declared per share $ 0.38 $ - $ 0.70 $ - $ 0.38
Net book value per share $ 32.68 $ 31.18 $ 30.19 $ 30.25 $ 28.65
Dividend payout ratio 31.15% 0.00% 67.31% 0.00% 38.00%
Average common shares outstanding 839,416 839,615 839,705 839,705 839,705
BALANCE SHEET - AVERAGE BALANCES:
Loans receivable, net $ 240,602 $ 238,284 $ 229,994 $ 219,793 $ 220,837
Assets $ 336,125 $ 336,879 $ 331,381 $ 316,592 $ 317,740
Deposits $ 265,931 $ 267,050 $ 261,556 $ 245,177 $ 244,422
Stockholders' equity $ 26,972 $ 25,924 $ 25,671 $ 24,737 $ 23,772
PERFORMANCE RATIOS:
Return on average assets (1) 1.22% 1.14% 1.05% 1.12% 1.06%
Return on average stockholders' 15.23% 14.78% 13.60% 14.31% 14.12%
equity (1)
Average tangible stockholders'
equity to average assets 7.87% 7.59% 7.61% 7.57% 7.53%
Net loan charge-offs to average loans 0.03% 0.00% 0.11% 0.02% 0.01%
Nonperforming loans to gross loans 1.23% 1.62% 1.68% 0.96% 0.90%
Allowance for loan losses to gross
loans 1.30% 1.31% 1.24% 1.24% 1.21%
Net interest rate margin (1)(2) 4.04% 3.87% 3.89% 4.03% 3.64%
Net interest rate spread (1)(2) 3.53% 3.35% 3.38% 3.41% 2.96%
Service fee revenue as a percent of
average demand deposits (1) 3.76% 2.65% 2.91% 3.21% 3.30%
Noninterest income as a percent
of gross revenue 10.02% 9.52% 12.56% 5.77% 7.07%
Efficiency ratio 53.23% 54.54% 52.20% 55.39% 54.59%
Noninterest expenses to average
assets (1) 2.44% 2.39% 2.42% 2.36% 2.19%
STOCK PRICE INFORMATION:
High $ 39.25 $ 36.00 $ 33.40 $ 31.75 $ 40.00
Low $ 35.00 $ 33.25 $ 30.75 $ 29.00 $ 29.00
Market value at quarter-end $ 38.50 $ 35.50 $ 33.40 $ 31.75 $ 30.00
(1) Annualized
(2) The yield on tax-exempt loans and securities is computed on a tax-
equivalent basis using a tax rate of 34%.
NET INTEREST INCOME
Net interest income is the most significant component of earnings. Net
interest income increased $474 from $2,630 for the quarter ended June 30,
2001 to $3,104 for the current quarter ended June 30, 2002. Tax-adjusted
net interest margin as a percent of average interest earning assets also
increased from 3.64 percent in June 2001 to 4.04 percent in June 2002.
Net interest margin
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was 3.73 percent for the year ended December 31, 2001. Since June 2001, the
Company has benefited from a falling interest rate environment as deposits and
short-term borrowings have repriced faster at lower rates than loans with
longer terms. In addition to the increase in tax-adjusted net interest margin
percentage, net interest income included income earned from additional loans
originated since June 30, 2001. Since June 2001, average loans receivable
increased $19,765, or 9.0%.
Yield on earning assets decreased 119 basis points to 6.91% compared to
8.10% at June 30, 2001. Similarly, the costs for interest-bearing
liabilities decreased 176 basis points to 3.38% from 5.14%. The majority
of the decline in interest-bearing deposits is a result of declines in the
index used to determine the yield paid on the Company's money market
account, which was 25.6% of total deposits at June 30, 2002. Since June
30, 2001, the money market yield has declined from 3.54% to 1.46% at June
30, 2002.
Through June 30, 2002, the Company positioned liabilities for an
anticipated rising interest rate market by offering long-term certificate
of deposit yields in the top 25% in each of the local markets served by
the bank. In addition, loans are originated with terms as short as
acceptable in the local market and the Company is accepting lower loan
yields for the benefit of faster repricing in the event of an increase in
interest rates. Although the Company believes short-term interest rates
during the next 12 months are unlikely to increase substantially, the
benefits of longer-term (three to five years) fixed rate funding and
increasing long-term net interest margins outweigh the impact of higher
funding rates on short-term profits. As of June 30, 2002, certificate of
deposit funding with remaining maturities in excess of 3 years was $18,324
representing 13.7% of total certificates of deposit with an average rate
of 4.89%.
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Table 8: Net Interest Income Analysis
(dollars in thousands) QUARTER ENDED JUNE 30, 2002 SIX MONTHS ENDED JUNE 30, 2002
Average Yield/ Average Yield/
BALANCE INTEREST RATE BALANCE INTEREST RATE
Assets
Interest earning assets:
Loans (1)(2) $243,797 $ 4,469 7.35% $242,564 $ 8,875 7.38%
Taxable securities 49,189 678 5.53% 49,506 1,368 5.57%
Tax-exempt securities (2) 20,723 344 6.66% 20,385 683 6.76%
FHLB stock 2,202 28 5.10% 2,189 54 4.97%
Other 5,771 24 1.67% 7,452 63 1.70%
Total (2) 321,682 5,543 6.91% 322,096 11,043 6.91%
Non-interest earning assets:
Cash and due from banks 9,389 9,274
Premises and equipment, net 5,127 4,989
Other assets 3,122 3,207
Allowance for loan losses (3,195) (3,116)
Total $336,125 $336,450
Liabilities & stockholders' equity
Interest bearing liabilities:
Savings and demand
deposits $ 30,353 $ 86 1.14% $ 30,955 $ 179 1.17%
Money market deposits 71,764 267 1.49% 73,739 551 1.51%
Time deposits 129,551 1,343 4.16% 126,981 2,732 4.34%
Short-term borrowings 3,324 34 4.10% 3,602 80 4.48%
Long-term borrowings 38,000 571 6.03% 38,000 1,135 6.02%
Total 272,992 2,301 3.38% 273,277 4,677 3.45%
Non-interest bearing liabilities:
Demand deposits 34,263 34,840
Other liabilities 1,898 1,909
Stockholders' equity 26,972 26,424
Total $ 336,125 $ 336,450
Net interest income 3,242 6,366
Rate spread 3.53% 3.46%
Net yield on interest earning assets 4.04% 3.99%
(1) Non-accrual loans are included in the daily average loan balances
outstanding.
(2) The yield on tax-exempt loans and securities is computed on a tax-
equivalent basis using a tax rate of 34%.
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PROVISION FOR LOAN LOSSES
Management determines the adequacy of the provision for loan losses based
on past loan experience, current economic conditions, composition of the
loan portfolio, and the potential for future loss. Accordingly, the
amount charged to expense is based on management's evaluation of the loan
portfolio. It is the Company's policy that when available information
confirms that specific loans and leases, or portions thereof, including
impaired loans, are uncollectible, these amounts are promptly charged off
against the allowance. The provision for loan losses was $180 for the
three months ended June 30, 2002, and $150 for the three months ended June
30, 2001. Net charge-offs as a percentage of average loans outstanding
were .03% and .01% during the three months ended June 30, 2002 and 2001,
respectively.
Nonperforming loans are reviewed to determine exposure for potential loss
within each loan category. The adequacy of the allowance for loan losses
is assessed based on credit quality and other pertinent loan portfolio
information. The adequacy of the reserve and the provision for loan
losses is consistent with the composition of the loan portfolio and recent
credit quality history.
NONINTEREST INCOME
Noninterest income increased 32.3% to $602 during the three months ended
June 30, 2002, from the comparable second quarter of 2001. There were no
gains or losses on securities during the three months ended June 30, 2002
and 2001. Service fees on deposit accounts increased $69, or 27.4%, for
the three months ended June 30, 2002 from the three months ended June 30,
2001. During the first quarter 2002, the Bank began to offer a new
overdraft protection product that increased the level of collected service
fees. In addition, commercial deposit account service charges have
increased due to reduced customer "earnings credits" which are based on
the declining short-term deposit interest rates experienced by the market
as whole.
The Company continued to earn a significant amount of income from the sale
of long-term fixed rate mortgage loans to outside investors. The Bank
does not retain such fixed rate loans as part of its asset liability
management strategy. Gain on sale of such loans was $134 in June 2002
compared to $83 during June 2001. The majority of loans sold to outside
investors continue to be serviced by the Bank directly with the customer.
At June 30, 2002, the Bank serviced $50,114 of loans for outside investors
compared to $9,605 serviced at June 30, 2001. The Bank has seen customer
demand for fixed rate mortgages increase as long-term fixed interest rates
in the overall market reached the lowest point in 40 years. The gain on
sale of loans during the quarter ended June 30, 2002 was increased $63
from capitalization of originated mortgage servicing rights. At June 30,
2002, mortgage servicing rights totaled $391, which were carried at
amortized cost. There were no mortgage servicing rights recorded at June
30, 2001. Growth in loan sale income has come primarily from new
customers and not refinancing of loans already serviced by the Bank for
others. As of July 31, 2002, almost 97% of the $36 million of sold loans
originated during 2001 with servicing rights retained are still
outstanding and serviced by the bank.
Total service fee and noninterest income, including gain on sale of loans,
was 10.0 percent of gross income during June 2002 compared to 7.1 percent
of gross income during June 2001.
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NONINTEREST EXPENSE
Noninterest operating expenses increased $308, or 17.7% to $2,046 in June
2002 compared to $1,738 during June 2001. In addition, operating costs as
a percentage of average assets increased from 2.19 percent in June 2001 to
2.44 percent in the current quarter. The majority of the increase in
operating expenses was from additional salaries, wages, and benefits paid
to employees. As part of the Bank's strategic growth plan, additional
employees have joined the Company since June 2001 at Bank locations in
Wausau and Eagle River, Wisconsin. Separate from salaries and wages,
noninterest expenses increased $154, or 21.3%. Of this total, occupancy
expenses increased $98 compared to the prior quarter due to operating a
new branch location in Eagle River, Wisconsin and building and equipment
maintenance required by the Bank's home office facility. These additional
wage and other operating costs have been offset by increased revenue, as
the expense efficiency ratio has improved from 54.6% in June 2001, to
53.2% in the current quarter.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the information provided in response
to Item 7A of the Company's Form 10-K for the year ended December 31,
2001.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits.
The following exhibits have been filed with the Securities and Exchange
Commission. Exhibits filed as part of this report, and listed below, are
set forth on the Exhibit Index which follows the signature page.
Exhibit
NUMBER DESCRIPTION
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 2000)
4.1 Articles of Incorporation and Bylaws (see Exhibits 3.1 and 3.2)
10.1 Bonus Plan of Directors of the Bank (incorporated by reference
to Exhibit 10.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000)
10.2 Non-Qualified Retirement Plan for Directors of the Bank
(incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 2000)
10.3 Senior Management Incentive Compensation Plan (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2000)*
10.4 Consulting Agreement with Chairman of the Board (incorporated by
reference to Exhibit 10.4 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000)*
10.5 2001 Stock Option Plan (incorporated by reference to Exhibit
10.5 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2001)*
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21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
21.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000)
99.1 Certification under Section 906 of Sarbanes-Oxley Act of 2002.
*Denotes Executive Compensation Plans and Arrangements.
(b) Reports on Form 8-K:
FORM 8-K DATED APRIL 15, 2002. The Company filed a current report on Form
8-K on April 15, 2002, reporting earnings for the quarter ended March 31,
2002 under Item 5 and additional related disclosure under Item 9,
Regulation FD Disclosure.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSB HOLDINGS, INC.
August 14, 2002 SCOTT M. CATTANACH
Scott M. Cattanach
Treasurer and Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer)
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EXHIBIT INDEX
to
FORM 10-Q
of
PSB HOLDINGS, INC.
for the quarterly period ended June 30, 2002
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. Section 232.102(d))
The following exhibits are filed as part this report:
99.1 Certification under Section 906 of Sarbanes-Oxley Act of 2002.
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