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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 September 30, 2003
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: 0-26480
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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X
The number of common shares outstanding at October 23, 2003 was 1,651,069.
PSB HOLDINGS, INC.
FORM 10-Q
Quarter Ended September 30, 2003
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2003 (unaudited) and December 31,
2002 (derived from audited financial statements) 1
Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 2003
and 2002 (unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 2003 (unaudited) 3
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002 (unaudited) 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSB HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2003 unaudited, December 31, 2002 derived from audited financial statements)
Sept. 30, December 31,
(dollars in thousands, except per share data) 2003 2002
ASSETS
Cash and due from banks $ 12,377 $ 15,890
Interest-bearing deposits and money market funds 4,669 5,490
Federal funds sold - 172
Cash and cash equivalents 17,046 21,552
Securities available for sale (at fair value) 69,988 81,056
Federal Home Loan Bank stock (at cost) 2,402 2,264
Loans held for sale 179 949
Loans receivable, net of allowance for loan losses of $3,692
and $3,158, respectively 297,655 256,015
Accrued interest receivable 1,700 1,732
Foreclosed assets, net 183 573
Premises and equipment 6,481 6,158
Mortgage servicing rights, net 749 697
Other assets 635 472
TOTAL ASSETS $ 397,018 $ 371,468
LIABILITIES
Non-interest-bearing deposits $ 46,700 $ 45,458
Interest-bearing deposits 263,405 252,373
Total deposits 310,105 297,831
Federal Home Loan Bank advances 43,000 38,000
Other borrowings 10,483 3,302
Accrued expenses and other liabilities 2,030 3,033
Total liabilities 365,618 342,166
STOCKHOLDERS' EQUITY
Common stock - no par value with a stated value of $1 per share:
Authorized - 3,000,000 shares
Issued - 1,804,850 shares 1,805 1,805
Additional paid-in capital 7,150 7,150
Retained earnings 24,627 21,607
Unrealized gain on securities available for sale, net of tax 891 1,306
Treasury stock, at cost - 153,781 and 138,748 shares, respectively (3,073) (2,566)
Total stockholders' equity 31,400 29,302
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 397,018 $ 371,468
1
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(dollars in thousands, September 30, September 30,
except per share data - unaudited) 2003 2002 2003 2002
Interest income:
Interest and fees on loans $ 4,594 $ 4,627 $ 13,466 $ 13,466
Interest on securities:
Taxable 359 665 1,475 2,033
Tax-exempt 232 223 676 674
Other interest and dividends 56 86 175 203
Total interest income 5,241 5,601 15,792 16,376
Interest expense:
Deposits 1,368 1,733 4,312 5,195
FHLB advances 506 577 1,520 1,712
Other borrowings 61 35 154 115
Total interest expense 1,935 2,345 5,986 7,022
Net interest income 3,306 3,256 9,806 9,354
Provision for loan losses 240 450 705 810
Net interest income after provision for loan losses 3,066 2,806 9,101 8,544
Noninterest income:
Service fees 323 334 951 890
Gain on sale of mortgage loans 718 310 1,871 642
Mortgage loan servicing, net (63) 17 (372) 36
Investment and insurance sales commissions 115 93 303 189
Net loss on sale of securities (19) - (19) -
Other noninterest income 69 87 257 251
Total noninterest income 1,143 841 2,991 2,008
Noninterest expense:
Salaries and employee benefits 1,508 1,320 4,343 3,735
Occupancy 286 267 859 832
Data processing and other office operations 131 153 418 413
Advertising and promotion 45 63 133 254
Other noninterest expenses 365 294 1,119 921
Total noninterest expense 2,335 2,097 6,872 6,155
Income before provision for income taxes 1,874 1,550 5,220 4,397
Provision for income taxes 639 499 1,704 1,364
Net income $ 1,235 $ 1,051 $ 3,516 $ 3,033
Basic earnings per share $ 0.75 $ 0.63 $ 2.12 $ 1.81
Diluted earnings per share $ 0.74 $ 0.63 $ 2.10 $ 1.81
2
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine months ended September 30, 2003 - unaudited
Unrealized
Gain (Loss)
Additional on Securities
Common Paid-in Retained Available Treasury
(dollars in thousands) Stock Capital Earnings For Sale Stock Totals
Balance January 1, 2003 $ 1,805 $ 7,150 $ 21,607 $ 1,306 $ (2,566) $ 29,302
Comprehensive income:
Net income 3,516 3,516
Unrealized loss on securities
available for sale, net of tax (427) (427)
Reclassification adjustment
for security loss included
in net income, net of tax 12 12
Total comprehensive income 3,101
Purchase of treasury stock (553) (553)
Distribution of treasury stock in
settlement of liability to
Company directors 46 46
Cash dividends declared $.30
per share (496) (496)
Balance September 30, 2003 $ 1,805 $ 7,150 $ 24,627 $ 891 $ (3,073) $ 31,400
3
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003 and 2002 - unaudited
2003 2002
Cash flows from operating activities:
Net income $ 3,516 $ 3,033
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net amortization 1,495 500
Provision for loan losses 705 810
Gain on sale of mortgage loans (1,871) (642)
Provision for servicing right valuation allowance 28 -
Loss on sale of premises and equipment - 30
(Gain) loss on sale of foreclosed assets 37 (27)
Loss on sale of securities 19 -
FHLB stock dividends (138) (85)
Changes in operating assets and liabilities:
Accrued interest receivable 32 (33)
Other assets 95 (129)
Other liabilities (957) (815)
Net cash provided by operating activities 2,961 2,642
Cash flows from investing activities:
Proceeds from sale and maturities of:
Securities held to maturity - 682
Securities available for sale 40,016 8,848
Payment for purchase of:
Securities held to maturity - (1,537)
Securities available for sale (30,122) (12,857)
Net increase in loans (40,345) (14,919)
Capital expenditures (702) (1,638)
Proceeds from sale of premises and equipment - 29
Proceeds from sale of foreclosed assets 280 278
Net cash used in investing activities (30,873) (21,114)
4
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Cash flows from financing activities:
Net increase in non-interest-bearing deposits 1,242 1,809
Net increase in interest-bearing deposits 11,032 13,148
Proceeds from long-term FHLB advances 15,000 -
Repayments of long-term FHLB advances (10,000)
Net increase (decrease) in other borrowings 7,181 (813)
Dividends paid (496) (320)
Proceeds from issuance of stock options - 52
Purchase of treasury stock (553) (329)
Net cash provided by financing activities 23,406 13,547
Net decrease in cash and cash equivalents (4,506) (4,925)
Cash and cash equivalents at beginning 21,552 25,550
Cash and cash equivalents at end $ 17,046 $ 20,625
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 6,205 $ 7,330
Income taxes 1,650 1,300
Noncash investing and financing activities:
Loans charged off $ 206 $ 321
Loans transferred to foreclosed assets 178 397
Loans originated on sale of foreclosed assets 251 331
Distribution of treasury stock in settlement of liability
to Company directors 46 60
5
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 2002 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, mortgage servicing right asset, and the
valuation of investment securities.
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.
6
NOTE 3 - STOCK-BASED COMPENSATION
The Company records expense relative to stock-based compensation using the
"intrinsic value method". Since the exercise price is equal to the fair value
of the Company's common stock on the date of the award, the intrinsic value of
the Company's stock options is "zero" at the time of the award and no expense
is recorded.
As permitted by generally accepted accounting principles, the Company has not
adopted the "fair value method" of expense recognition for stock-based
compensation awards. Rather, the effects of the fair value method on the
Company's earnings are presented on a pro forma basis. Because no grants of
stock options were made during the three months and nine months ended September
30, 2003, there was no pro forma impact to net income or earnings per share
during these periods. However, there were grants of 4,614 stock options (with
an exercise price of $17.65 per share) during the quarter ended June 30, 2002.
Had compensation cost for the option grants been determined in accordance with
the "fair value method", net income would have decreased approximately $9,228
during the nine months ended September 30, 2002, and reduced earnings per share
by less than $.01 per share.
Under the terms of an incentive stock option plan adopted during 2001, shares
of unissued common stock are reserved for options to officers and key employees
at prices not less than the fair market value of the shares at the date of the
grant. These options expire 10 years after the grant date. As of September
30, 2003, 26,892 options outstanding were eligible to be exercised at a
weighted average exercise price of $16.80 per share. No additional shares of
common stock remain reserved for future grants under the option plan approved
by the shareholders.
NOTE 4 - 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 Nine months ended
(dollars in thousands, except per share data) September 30, September 30,
(unaudited) 2003 2002 2003 2002
Net income $ 1,235 $ 1,051 $ 3,516 $ 3,033
Weighted average shares outstanding 1,651,265 1,672,836 1,659,326 1,676,942
Effect of dilutive stock options outstanding 13,353 4,712 11,892 3,108
Diluted weighted average shares outstanding 1,664,618 1,677,548 1,671,218 1,680,050
Basic earnings per share $ 0.75 $ 0.63 $ 2.12 $ 1.81
Diluted earnings per share $ 0.74 $ 0.63 $ 2.10 $ 1.81
7
NOTE 5 - 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:
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands - unaudited) 2003 2002 2003 2002
Net income $ 1,235 $ 1,051 $ 3,516 $ 3,033
Unrealized loss on securities
available for sale, net of tax (602) (187) (427) 244
Reclassification adjustment for security 12 12
loss included in net income, net of tax
Comprehensive income $ 645 $ 864 $ 3,101 $ 3,277
NOTE 6 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable are stated at unpaid principal balances plus net deferred loan
origination costs less loans in process and the allowance for loan losses.
Interest on loans is credited to income as earned. Interest income is not
accrued on loans where management has determined collection of such interest is
doubtful or those loans which are past due 90 days or more as to principal or
interest payments. When a loan is placed on nonaccrual status, previously
accrued but unpaid interest deemed uncollectible is reversed and charged
against current income. After being placed on nonaccrual status, additional
income is recorded only to the extent that payments are received or the
collection of principal becomes reasonably assured. Interest income
recognition on loans considered to be impaired under current accounting
standards is consistent with the recognition on all other loans.
Loan origination fees and certain direct loan origination costs are deferred
and amortized to income over the contractual life of the underlying loan.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. Management believes the allowance for loan losses is adequate to
cover probable credit losses relating to specifically identified loans, as well
as probable credit losses inherent in the balance of the loan portfolio. In
accordance with current accounting standards, the allowance is provided for
losses that have been incurred as of the balance sheet date. The allowance is
based on past events and current economic conditions, and does not include the
effects of expected losses on specific loans or groups of loans that are
related to future events or expected changes in economic conditions. While
management uses
8
the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions.
The allowance for loan losses includes specific allowances related to
commercial loans which have been judged to be impaired as defined by current
accounting standards. A loan is impaired when, based on current information,
it is probable that the Company will not collect all amounts due in accordance
with the contractual terms of the loan agreement. Management has determined
that commercial, financial, agricultural, and commercial real estate loans that
have a nonaccrual status or have had their terms restructured meet this
definition. Large groups of homogenous loans, such as residential mortgage and
consumer loans, are collectively evaluated for impairment. Specific allowances
are based on discounted cash flows of expected future payments using the loans'
initial effective interest rate or the fair value of collateral if the loan is
collateral dependent.
In addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require the subsidiary Bank to make additions
to the allowance for loan losses based on their judgments of collectibility
based on information available to them at the time of their examination.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate and are
carried as "Loans held for sale" on the balance sheet. Net unrealized losses
are recognized through a valuation allowance by charges to income. Gains and
losses on the sale of loans held for sale are determined using the specific
identification method using quoted market prices.
NOTE 7 - FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value (after deducting estimated
costs to sell) at the date of foreclosure, establishing a new cost basis.
Costs related to development and improvement of property are capitalized,
whereas costs related to holding property are expensed. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less estimated costs to
sell. Revenue and expenses from operations and changes in any valuation
allowance are included in loss on foreclosed real estate.
9
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, 2002 and, from time to time, in the Company's other filings with
the Securities and Exchange Commission.
BALANCE SHEET
At September 30, 2003, total assets were $397,018, an increase of $36,713, or
10.2%, over September 30, 2002. Gross loans (including loans held for sale and
unamortized direct loan origination costs) were $301,526 at September 30, 2003,
growing $45,846 over September 30, 2002 for an increase of 17.9%. Book value
of investment securities was $69,988 at September 30, 2003, a decrease of
$5,685 or 7.5% from September 30, 2002. The decline in securities was due
primarily to prepayments of principal on mortgage-backed securities prompted by
historically low long-term mortgage rates seen during the second quarter of
2003. Asset growth since September 30, 2002 was funded by an increase in
deposits of $21,513, or 7.5%, an increase in other short-term borrowings of
$6,969, or 298.3%, and an additional FHLB advance of $5 million, or 13.2%.
Table 1: Period-End Loan Composition
September 30, September 30, December 31, 2002
Dollars Dollars Percentage of total Percentage
(dollars in thousands) 2003 2002 2003 2002 Dollars of total
Commercial, industrial and agricultural $ 70,928 $ 66,463 23.5% 26.0% $ 64,529 24.8%
Commercial real estate mortgage 140,266 106,902 46.5% 41.7% 114,982 44.2%
Residential real estate mortgage 73,291 64,823 24.3% 25.4% 61,948 23.8%
Residential real estate loans held for sale 179 - 0.1% 0.0% 949 0.4%
Consumer home equity 8,637 6,601 2.9% 2.6% 7,274 2.8%
Consumer and installment 8,225 10,891 2.7% 4.3% 10,440 4.0%
Totals $ 301,526 $ 255,680 100.0% 100.0% $ 260,122 100.0%
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The amount of residential real estate mortgages held increased from the year
earlier period and prior quarter by a substantial amount, but continues to
reflect a lower percentage of the total loan portfolio. The increase in
residential mortgages during 2003 is from the Company retaining some 15 year
fixed rate mortgages rather than selling the principal to the secondary market.
These mortgages were retained as part of an asset-liability management strategy
to maximize net interest margin without a significant increase in interest rate
risk due to the current cash and projected liquidity position in light of
interest sensitivity of the entire balance sheet and opportunities for re-
investment of investment security cash flows into loans or other new
securities. The amount of 15 year fixed rate mortgages originated by the
program during 2003 was approximately $12.0 million with an average yield of
4.95%. Approximately one-half of this production was funded by maturing and
prepaid mortgage backed investment securities during this period. This program
was discontinued during August 2003 and all 15 year fixed rate mortgage loans
originated by the Company are currently sold to other investors on the
secondary market to eliminate the associated interest rate risk.
As the Company reallocated resources to handle demand for residential real
estate loans prompted by historically low interest rates, it experienced
substantial repayments of consumer retail installment loans that were not
replaced. In its markets, the Company faces substantial competition from
credit unions and other financial institutions for retail installment lending
such as auto loans. The Company renewed efforts during 2003 to retain some
market share in consumer lending by educating a wider range of bank staff
eligible to originate consumer loans and changing the primary delivery channel
from traditional loan officers to personal bankers and other retail customer
contact staff. Home equity loans are actively promoted to high quality
individual borrowers with low interest rates as compared to local competitors.
During 2003, commercial real estate mortgages increased primarily from new
commercial construction and financing owner occupied commercial retail
buildings, factories, and warehouses. Non-real estate commercial and
industrial loans have experienced a shift in which personal property and
equipment secured loans have declined while cash flow business lines of credit
have increased.
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 against 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 according to the contractual terms will
continue.
The aggregate amount of nonperforming assets decreased $1,280 to $3,455 at
September 30, 2003 from $4,735 at September 30, 2002, primarily because of
fewer loans on nonaccrual status. However, nonperforming assets have increased
$449 from $3,006 at December 31, 2002. Total
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nonperforming assets as a percentage of total assets continues to be favorable
with .87% and .81% at September 30, 2003 and December 31, 2002, respectively.
The Company ceases to accrue interest on loans which are 90 days past due and
considers them nonperforming loans until the borrower has made up any late
payments and is able to continue required payments in the future.
Nonperforming loans also include restructured loans until 6 consecutive monthly
payments are received under the new loan terms. The Company continues to
aggressively manage past due customers and lowered the level of nonperforming
loans to gross loans from 1.74% at September 2002 to 1.09% at September 2003.
The Company also tracks delinquencies on a contractual basis quarter to
quarter. Loans contractually delinquent 30 days or more as a percentage of
gross loans were 1.02% at September 2003 compared to .87% at December 2002 and
1.24% at September 2002. The allowance for loan losses was 1.23% of gross
loans at September 2003 compared to 1.33% at September 2002. Management
reviews the activity in individual identified problem loans weekly and adjusts
for the adequacy of loan loss reserves quarterly.
At September 30, 2002 nonaccrual loans included $587 of loan principal to a
borrower secured by non real-estate commercial collateral. During September
2002, the Company was notified of the borrower's bankruptcy. The Bank was not
the lead lender in the commercial relationship, and due to inadequate
collateral protection, an additional $270 of loan loss provisions were recorded
during the quarter ended September 30, 2002 to cover estimated principal losses
not specifically identified and reserved previously. During October 2002, a
charge-off of $376 was authorized and recorded. The remaining principal
balance on this relationship was fully reserved in the allowance for loan
losses from provisions made prior to September 30, 2002.
Table 2: Allowance for Loan Losses
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 2003 2002 2003 2002
Allowance for loan losses at beginning $ 3,517 $ 3,254 $ 3,158 $ 2,969
Provision for loan losses 240 450 705 810
Recoveries on loans previously charged-off 13 11 35 59
(78) (321) (206) (444)
Loans charged off
Allowance for loan losses at end $ 3,692 $ 3,394 $ 3,692 $ 3,394
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
12
renegotiated to provide a reduction or deferral of interest or principal
(restructured loans) and 2) foreclosed assets.
Table 3: Nonperforming Assets
Sept. 30, Dec. 31,
(dollars in thousands) 2003 2002 2002
Nonaccrual loans $ 2,775 $ 3,784 $ 1,786
Accruing loans past due 90 days or more 7 - -
Restructured loans not on nonaccrual 490 655 647
Total nonperforming loans 3,272 4,439 2,433
Foreclosed assets 183 296 573
Total nonperforming assets $ 3,455 $ 4,735 $ 3,006
Nonperforming loans as a % of gross
loans receivable 1.09% 1.74% 0.94%
Total nonperforming assets as a % of total
Assets 0.87% 1.31% 0.81%
LIQUIDITY
Liquidity refers to the ability of the Company to generate adequate amounts of
cash to meet the Company's need for cash at a reasonable cost. 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 funding. Retail core and
time deposits as a percentage of total funding sources were 72.0% at September
30, 2003, and 75.2% at September 30, 2002. Wholesale funding and broker and
national certificates of deposit represent the balance of the Company's total
funding needs. Company use of brokered jumbo deposits has increased since
September 2002 and accounted for 2.2% of the decline in retail deposits as a
percentage of total funding sources.
13
Table 4: Period-end Deposit Composition
September 30,
2003 2002
(dollars in thousands) $ % $ %
Non-interest bearing demand $ 46,700 15.1% $ 43,316 15.0%
Interest-bearing demand and savings 45,257 14.6% 32,848 11.4%
Money market deposits 70,747 22.8% 74,119 25.6%
Retail time deposits less than $100 59,180 19.0% 60,656 21.0%
Retail time deposits $100 and over 39,968 12.9% 37,424 13.0%
Broker & national time deposits
less than $100 11,011 3.6% 12,946 4.5%
Broker & national time deposits $100
and over 37,242 12.0% 27,283 9.5%
Totals $ 310,105 100.0% $ 288,592 100.0%
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 2002 and
2003, the yield on this account has declined substantially. Deposits due to
investors as part of the Company's secondary market loan servicing activities
included in total non-interest bearing deposits was approximately $2.4 million
at September 30, 2003 compared to $4.5 million at September 30, 2002. As a
source of low cost long-term deposits and in connection with a new full service
retail location in Rhinelander, Wisconsin, the Company is aggressively seeking
commercial non-interest bearing deposits as well as consumer core deposits.
Table 5: Summary of Changes by Significant Deposit Source
September 30, Change from prior year
(dollars in thousands) 2003 2002 $ %
Total time deposits $100 and over $ 77,210 $ 64,707 $ 12,503 19.3%
Total broker and national time deposits 48,253 40,229 8,024 19.9%
Total retail time deposits 99,148 98,080 1,068 1.1%
Core deposits, including money market
Deposits 162,704 150,283 12,421 8.3%
The Company's retail deposit offices are in locations that demand consumer
retail deposit rates generally greater than national rates for equivalent
certificate of deposit terms. To fund larger commercial loan originations or
acquire other large blocks of funding, the Company actively
14
purchases broker and other national time deposits. The Company actively
manages such deposits to control the potential volatility of such funds while
lowering overall deposit borrowing costs. Consequently, broker and national
deposits increased substantially over the prior year, while local retail
deposits have shown modest growth in comparison. Company policy is to limit
broker and national time deposits to 20% of total assets. As of September
30, 2003 broker and national time deposits were 12.2% of total assets.
Unused credit advances from the Federal Home Loan Bank of Chicago available to
the Company at September 30, 2003 totaled approximately $34 million based on an
open line of credit and securities available for pledging for advances. In
addition, the Company had unused commitments from other correspondent banks for
federal funds purchased up to $19.9 million. The primary alternative 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. The Company believes its current
liquidity position and sources of funds for liquidity management is adequate.
Table 6 below presents maturity repricing information as of September 30, 2003.
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. Assets and liabilities with contractual calls or prepayment options are
repriced according to the likelihood of the call or prepayment being
exercised in the current interest rate environment.
4. Impact of rising or falling interest rates is based on a parallel yield
curve change that is fully implemented within a 12 month time horizon.
15
Table 6: Interest Rate Sensitivity Gap Analysis
September 30, 2003
(dollars in thousands) 0-90 Days 91-180 days 181-365 days 1-2 yrs. Bynd 2-5 yrs. Beyond 5 yrs. Total
Earning assets:
Loans $ 110,354 $ 21,297 $ 42,432 $ 51,038 $ 61,331 $ 15,074 $ 301,526
Securities 3,780 4,658 9,004 18,126 18,067 16,353 69,988
FHLB stock 2,402 - - - - - 2,402
Other earning assets 4,669 - - - - - 4,669
Total $ 121,205 $ 25,955 $ 51,436 $ 69,164 $ 79,398 $ 31,427 $ 378,585
Cumulative rate
sensitive assets $ 121,205 $ 147,160 $ 198,596 $ 267,760 $ 347,158 $ 378,585
Interest-bearing liabilities
Interest-bearing $ 91,698 $ 17,351 $ 48,178 $ 22,974 $ 33,691 $ 49,513 $ 263,405
deposits
FHLB advances 16,000 - - 19,000 8,000 - 43,000
Other borrowings 2,907 1,644 3,728 - 2,204 - 10,483
Total $ 110,605 $ 18,995 $ 51,906 $ 41,974 $ 43,895 $ 49,513 $ 316,888
Cumulative interest
sensitive liabilities $ 110,605 $ 129,600 $ 181,506 $ 223,480 $ 267,375 $ 316,888
Interest sensitivity gap for
the individual period $ 10,600 $ 6,960 $ (470) $ 27,190 $ 35,503 $ (18,086)
Ratio of rate sensitive assets
to rate sensitive
liabilities for
the individual period 109.6% 136.6% 99.1% 164.8% 180.9% 63.5%
Cumulative interest
sensitivity gap $ 10,600 $ 17,560 $ 17,090 $ 44,280 $ 79,783 $ 61,697
Cumulative ratio of rate
sensitive assets
to rate sensitive 109.6 113.5% 109.4% 119.8% 129.8% 119.5%
liabilities
If interest rates rose 200 basis points or fell 100 basis points, the 365 day
cumulative ratio of rate sensitive assets to rate sensitive liabilities would
change from 109.4% to 103.7% (if up 200 basis points) and 113.3% (if down 100
basis points), respectively. 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. A formal liquidity contingency plan exists that directs
management to the least expensive liquidity sources to fund sudden and
unanticipated liquidity needs. The Company also uses various policy measures
to assess adequacy of the Company's liquidity and interest rate risk as
described below.
16
Basic Surplus
The Company measures basic surplus as the amount of existing net liquid assets
(after deducting short-term liabilities and coverage for anticipated deposit
funding outflows during the next 30 days) divided by total assets. The basic
surplus calculation does not consider unused but available correspondent bank
federal funds purchased, as those funds are subject to availability based on
the correspondent bank's own liquidity needs and therefore are not guaranteed
contractual funds. The Company's basic surplus, including available open line
of credit FHLB advances not yet utilized at September 30, 2003 and 2002 was
7.4% and 14.0%, respectively and above the 5% minimum required by policy.
Interest Rate Risk Limits
The Company balances the need for liquidity with the opportunity for increased
net interest income available from longer term loans held for investment and
securities. To measure the impact on net interest income from interest rate
changes, the Company models interest rate simulations on a quarterly basis.
Company policy is that projected net interest income over the next 12 months
will not be reduced by more than 15% given a change in interest rates of up to
200 basis points. At September 30, 2003, net interest income for the next 12
months was projected to increase 1.64% if rates increased 200 basis points, and
was projected to decrease 1.55% if rates decreased 100 basis points, which is
less than the 15% required by policy and was considered acceptable by
management. At September 30, 2002, net interest income for the next 12 months
was projected to decrease 1.88% if rates increased 200 basis points, and was
projected to decrease 1.75% if rates decreased 100 basis points.
Core Funding Utilization
To assess whether interest rate sensitivity beyond one year helps mitigate or
exacerbate the short-term rate sensitive position, a quarterly measure of core
funding utilization is made. Core funding is defined as liabilities with a
maturity in excess of 60 months and capital. "Core" deposits including DDA,
NOW and non-maturity savings accounts (except money market accounts) are also
considered core long-term funding sources. The core funding utilization ratio
is defined as assets with a maturity in excess of 60 months divided by core
funding. The Company's target for the core funding utilization ratio is to
remain at 80% or below given the same 200 basis point changes in rates that
apply to the guidelines for interest rate risk limits exposure described
previously. At September 30, 2003, the Company's core funding utilization
ratio was projected to be 44.6% if rates increased 200 basis points and was
therefore within policy requirements. At September 30, 2002, the Company's
core funding utilization ratio was projected to be 42.0% if rates increased 200
basis points.
CAPITAL RESOURCES
Stockholders' equity at September 30, 2003 increased $3,310 to $31,400, or
11.8% from $28,090 at September 30, 2002. Stockholders' equity included
unrealized gains on securities available for sale, net of their tax effect, of
$891 at September 30, 2003 compared to unrealized gains of $735 at September
30, 2002.
17
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 September 30, 2003, and 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 and were
classified as "well-capitalized". Management expects the Company to remain
well-capitalized during the remainder of 2003 based on planned asset growth.
The Company maintains an annual, ongoing share repurchase program of up to 1%
of outstanding shares per year. During the quarter ended September 30, 2003,
the Company completed the annual repurchase program and repurchased 400 shares
at an average price of $34.00 per share. For all of 2003, 16,700 shares were
repurchased at an average price of $33.10 per share. For the remainder of
2003, management anticipates retaining capital to support asset growth while
continuing a cash dividend to shareholders.
Effective with the $.30 dividend declared June 17, 2003, the Company intends to
equalize the amounts of the semi-annual cash dividends. Accordingly, under the
dividend policy, the Company expects that the dividend to be paid in January,
2004 may be less than the January 2003 dividend, but that the total dividends
to be paid in July 2003 and January 2004 will exceed the $.565 per share total
dividends paid in July 2002 and January 2003. The Company also reaffirmed its
goal of increasing its shareholder dividend on an annual basis subject to
operating results and financial condition of the Company.
Table 7: Capital Ratios - Consolidated Holding Company
September 30, Dec 31.
2003 2002 2002
Tier 1 capital to period end tangible assets (leverage ratio) 7.68% 7.59% 7.55%
Tier 1 capital to adjusted risk-weighted assets 9.79% 10.33% 10.25%
Total capital to adjusted risk-weighted assets 10.97% 11.58% 11.41%
On November 19, 2002, the Company's shareholders approved an increase in
authorized shares from 1,000,000 to 3,000,000, allowing the Board of Directors
to effect a 2 for 1 stock split paid on December 2, 2002. All references in
the accompanying financial statements and statistical analysis to the number of
common shares and per share amounts for 2002 have been restated to reflect the
split.
PREMISES AND EQUIPMENT
The Company announced during July 2003 the construction of a new bank and
financial services office and administrative headquarters located on property
adjacent to the existing Wausau, Wisconsin, main office location. Construction
of the 32,000 square foot office and drive-through canopy began during August
with completion anticipated by the end of the second quarter 2004. The
existing Wausau main office which has been used since the Bank opened in 1962
and as most recently expanded during 1992 will be razed. Building project
costs including necessary
18
furniture, fixtures, and equipment are estimated to be $4.4 million. Annual
depreciation expense after this investment in fixed assets and equipment is
estimated to increase $165 ($100 after income tax benefits). As of November 6,
2003, approximately $749 had been spent on the project ($451 was spent by
September 30, 2003). The amount of interest capitalized as project costs by
September 30, 2003 was insignificant.
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 2003 totaled $1,235, or $.75 for
basic earnings per share, and $.74 for diluted earnings per share.
Comparatively, net income for the quarter ended September 30, 2002 was $1,051,
or $.63 per share for basic and diluted earnings per share. Operating results
for the third quarter 2003 generated an annualized return on average assets of
1.26% and an annualized return on average equity of 15.76%, compared to 1.17%
and 15.00% for the comparable period in 2002.
The following Table 8 presents consolidated quarterly summary financial data of
PSB Holdings, Inc. and Subsidiary.
19
Table 8: Financial Summary
(dollars in thousands, except per share data) Quarter ended
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
EARNINGS AND DIVIDENDS: 2003 2003 2003 2002 2002
Net interest income $ 3,306 $ 3,268 $ 3,232 $ 3,288 $ 3,256
Provision for loan losses $ 240 $ 240 $ 225 $ 300 $ 450
Other noninterest income $ 1,143 $ 726 $ 1,122 $ 1,040 $ 841
Other noninterest expense $ 2,335 $ 2,220 $ 2,317 $ 2,072 $ 2,097
Net income $ 1,235 $ 1,057 $ 1,224 $ 1,332 $ 1,051
Basic earnings per share $ 0.75 $ 0.64 $ 0.73 $ 0.80 $ 0.63
Diluted earnings per share $ 0.74 $ 0.63 $ 0.73 $ 0.80 $ 0.63
Dividends declared per share $ - $ 0.300 $ - $ 0.375 $ -
Net book value per share $ 19.02 $ 18.63 $ 18.24 $ 17.59 $ 16.83
Dividend payout ratio 0.00% 46.88% 0.00% 46.88% 0.00%
Average common shares outstanding 1,651,265 1,661,142 1,665,729 1,667,341 1,672,836
BALANCE SHEET - AVERAGE BALANCES:
Loans receivable, net of
allowances for loss $ 288,448 $ 265,863 $ 256,715 $ 255,591 $ 249,691
Assets $ 389,267 $ 371,537 $ 365,906 $ 363,507 $ 355,224
Deposits $ 307,752 $ 292,698 $ 289,635 $ 291,049 $ 283,889
Stockholders' equity $ 31,085 $ 30,670 $ 29,848 $ 28,677 $ 27,792
PERFORMANCE RATIOS:
Return on average assets (1) 1.26% 1.14% 1.36% 1.45% 1.17%
Return on average stockholders'
equity (1) 15.76% 13.82% 16.63% 18.43% 15.00%
Average tangible stockholders'
equity to average assets 7.70% 7.92% 7.84% 7.71% 7.61%
Net loan charge-offs to average
loans 0.02% 0.01% 0.03% 0.21% 0.12%
Nonperorming loans to gross loans 1.09% 1.06% 1.13% 0.94% 1.74%
Allowance for loan losses to gross
loans 1.23% 1.26% 1.28% 1.22% 1.33%
Net interest rate margin (1)(2) 3.67% 3.83% 3.89% 3.89% 3.95%
Net interest rate spread (1)(2) 3.21% 3.34% 3.42% 3.36% 3.43%
Service fee revenue as a percent
of average demand deposits (1) 2.48% 2.83% 2.99% 2.98% 3.41%
Noninterest income as a percent
of gross revenue 17.90% 12.13% 17.49% 15.81% 13.05%
Efficiency ratio (2) 50.94% 53.86% 51.67% 46.42% 49.52%
Noninterest expenses to average
assets (1) 2.38% 2.40% 2.57% 2.26% 2.34%
STOCK PRICE INFORMATION:
High $ 34.24 $ 34.00 $ 27.25 $ 25.00 $ 21.05
Low $ 33.00 $ 30.00 $ 23.75 $ 20.55 $ 19.18
Market value at quarter-end $ 33.50 $ 33.25 $ 27.25 $ 25.00 $ 20.58
(1) Annualized
(2) The yield on tax-exempt loans and securities is computed on a tax-equivalent
basis using a tax rate of 34%.
20
NET INTEREST INCOME
Net interest income is the most significant component of earnings. Tax adjusted
net interest income increased $47 from $3,394 for the quarter ended September
30, 2002 to $3,441 for the current quarter ended September 30, 2003. For the
comparable 9-month periods ending September 30, 2003 and 2002, tax adjusted net
interest income increased $437, comprised of an increased $1,213 from
additional asset volume, but decreased $776 due to declining net interest
margin. Quarterly tax-adjusted net interest margin as a percent of average
interest earning assets decreased from 3.95 % in September 2002 to 3.67 % in
September 2003. Net interest margin was 3.95 % for the year ended December 31,
2002.
During 2002, the Company benefited from a falling interest rate environment as
deposits and short-term borrowings repriced faster at lower rates than loans
with longer terms and maturities. However, the prolonged low interest rate
environment through September 30, 2003 has put more pressure on loan and asset
yields than on already low cost of funds. In addition, the Company has
positioned itself for an eventual increase in interest rates by extending
maturities of certain liabilities at a higher cost. The Company continues to be
asset sensitive as seen in Table 6 with a 365 day cumulative ratio of rate
sensitive assets to rate sensitive liabilities of 109.4%. In the near term, the
Company expects net interest margin to stabilize as loan and security assets
have received the majority of anticipated prepayments due to declining interest
rates. In addition, the Company expects the prime to remain the same in the
near term.
Quarterly yield on earning assets decreased 95 basis points to 5.73% compared
to 6.68% at September 30, 2002. Similarly, the costs for interest-bearing
liabilities decreased 73 basis points to 2.52% from 3.25% at September 30,
2002. Management believes short-term term interest rates to be at the bottom of
the current interest rate cycle. In addition, long-term interest rates are
expected to increase modestly as the national economy improves growth
prospects. Management believes it is well positioned for future rate increases,
as well as continued stable rate environments relative to competitors. Refer to
the previous discussion on management of net interest margin and the liquidity
for the Company's strategies and positions in this area.
21
Table 9A: Net Interest Income Analysis (Quarter)
(dollars in thousands) Quarter ended Sept. 30, 2003 Quarter ended Sept. 30, 2002
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning assets:
Loans (1)(2) $ 292,023 $ 4,609 6.26% $ 252,879 $ 4,650 7.30%
Taxable securities 48,500 359 2.94% 50,678 665 5.21%
Tax-exempt securities (2) 22,744 352 6.14% 20,431 338 6.56%
FHLB stock 2,391 38 6.31% 2,234 27 4.79%
Other 6,457 18 1.11% 14,698 59 1.59%
Total (2) 372,115 5,376 5.73% 340,920 5,739 6.68%
Non-interest-earning assets:
Cash and due from banks 11,439 8,529
Premises and equipment,
net 6,302 5,692
Other assets 2,986 3,271
Allowance for loan
losses (3,575) (3,188)
Total $ 389,267 $ 355,224
Liabilities & stockholders' equity
Interest-bearing liabilities:
Savings and demand
deposits $ 42,589 $ 63 0.59% $ 34,110 $ 88 1.02%
Money market deposits 69,230 161 0.92% 72,555 267 1.46%
Time deposits 144,298 1,144 3.15% 138,413 1,378 3.95%
FHLB borrowings 38,707 506 5.19% 38,000 577 6.02%
Other borrowings 9,684 61 2.50% 3,363 35 4.13%
Total 304,508 1,935 2.52% 286,441 2,345 3.25%
Non-interest-bearing liabilities:
Demand deposits 51,635 38,811
Other liabilities 2,039 2,180
Stockholders' equity 31,085 27,792
Total $ 389,267 $ 355,224
Net interest income 3,441 3,394
Rate spread 3.21% 3.43%
Net yield on interest-earning assets 3.67% 3.95%
(1) Nonaccrual 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%.
22
Table 9B: Net Interest Income Analysis (YTD)
(dollars in thousands) Nine months ended Sept 30, 2003 Nine months ended Sept. 30, 2002
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning assets:
Loans (1)(2) $ 273,854 $ 13,509 6.60% $ 246,040 $ 13,525 7.35%
Taxable securities 53,871 1,475 3.66% 49,901 2,033 5.45%
Tax-exempt securities (2) 22,003 1,024 6.22% 20,400 1,021 6.69%
FHLB stock 2,345 111 6.33% 2,204 81 4.91%
Other 7,424 64 1.15% 9,893 122 1.65%
Total (2) 359,497 16,183 6.02% 328,438 16,782 6.83%
Non-interest-earning assets:
Cash and due from banks 10,200 9,023
Premises and equipment,
Net 6,229 5,226
Other assets 3,125 3,231
Allowance for loan
Losses (3,396) (3,140)
Total $ 375,655 $ 342,778
Liabilities & stockholders' equity
Interest-bearing liabilities:
Savings and demand
Deposits $ 39,255 $ 182 0.62% $ 32,018 $ 267 1.11%
Money market deposits 68,449 520 1.02% 73,312 818 1.49%
Time deposits 142,783 3,610 3.38% 130,834 4,110 4.20%
FHLB borrowings 38,238 1,520 5.31% 38,000 1,712 6.02%
Other borrowings 7,823 154 2.63% 3,521 115 4.37%
Total 296,548 5,986 2.70% 277,685 7,022 3.38%
Non-interest-bearing liabilities:
Demand deposits 46,307 36,178
Other liabilities 2,265 2,009
Stockholders' equity 30,535 26,906
Total $ 375,655 $ 342,778
Net interest income 10,197 9,760
Rate spread 3.32% 3.45%
Net yield on interest-earning assets 3.79% 3.97%
(1) Nonaccrual 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%.
23
Table 10: Interest Expense and Expense Volume and Rate Analysis
Nine months ended September 30, 2003
2003 compared to 2002
increase (decrease) due to (1)
(dollars in thousands) Volume Rate Net
Interest earned on:
Loans (2) $ 1,529 $ (1,545) $ (16)
Taxable securities 162 (720) (558)
Tax-exempt securities (2) 80 (77) 3
FHLB stock 5 25 30
Other interest income (30) (28) (58)
Total 1,746 (2,345) (599)
Interest paid on:
Savings and demand deposits 60 (145) (85)
Money market deposits (54) (244) (298)
Time deposits 375 (875) (500)
FHLB borrowings 11 (203) (192)
Other borrowings 141 (102) 39
Total 533 (1,569) (1,036)
Net interest earnings $ 1,213 $ (776) $ 437
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes
in proportion to the relationship of the absolute dollar amounts of the change in each.
(2) The yield on tax-exempt loans and investment securities has been adjusted to its fully taxable
Equivalent using a 34% tax rate.
PROVISION FOR LOAN LOSSES
Management determines the adequacy of the provision for loan losses based on
past loan experience, current economic conditions, and composition of the loan
portfolio. 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
$240 for the three months ended September 30, 2003, and $450 for the three
months ended September 30, 2002. Net charge-offs as a percentage of average
loans outstanding were .02% and .12% during the three months ended September
30, 2003 and 2002, respectively. Refer to the discussion of a large problem
loan relationship at September 2002 under the Balance Sheet discussion
following Table 1: Period-End Loan Composition.
24
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 allowance and the provision for loan losses
is consistent with the composition of the loan portfolio and recent credit
quality history.
NONINTEREST INCOME
Noninterest income grew $302 in the third quarter 2003 to $1,143 compared to
$841 in 2002. Virtually all of this growth ($328) was from an increase of
income from the sale of long-term fixed rate mortgage loans, net of servicing
right amortization and provision for impairment. The majority of loans sold to
outside investors continue to be serviced by the Bank directly with the
customer. Gain on sale and servicing of such loans during the quarter was $655
in September 2003 compared to $327 during September 2002. For the nine months
ended September 30, gain on sale and servicing fixed rate mortgages was $1,499
and $678 in 2003 and 2002, respectively. During June 2003, additional expense
from a change in accounting estimate related to accounting for mortgage
servicing rights of $236 was recorded which reduced second quarter diluted
earnings by approximately $.09 per share.
Through September 30, 2003, the gain on sale and servicing of loans is more
than double the prior year's activity through September 30, 2002, and has
substantially enhanced income as interest margins declined during 2003.
Management does not expect the current level of mortgage refinancing income to
continue during the fourth quarter 2003. The Company intends to replace this
fee income with ongoing servicing fees of the existing mortgage portfolio and
additional investment and insurance sales income. During 2003, the Bank
increased the number of commissioned investment sales professionals on staff.
Investment and insurance sales commissions were $303 during the nine months
ended September 2003 compared to $189 in the same period ended September 2002.
On September 3, 2003, the Company announced formation of Peoples Insurance
Services LLC, a commercial property and casualty insurance agency and
brokerage. The Company believes the commercial insurance products are a good
fit with the existing commercial loan customer base in addition to
opportunities available with non-customers in the local market area. Mr. Jeff
Cole has been named President of Peoples Insurance Services and brings
experience in pricing insurance products in addition to experience in managing
and selling such insurance products.
At September 30, 2003, the Company serviced $148,738 of loans for outside
investors compared to $64,780 serviced at September 30, 2002. The following
table summarizes the activity in mortgage servicing rights for the nine-month
period ended September 30, 2003. The valuation allowance was recorded to
recognize impairment of the mortgage servicing right asset due to declines in
interest rates that may cause borrowers to prepay mortgage principal much
faster than estimated at the time the mortgage was originated.
25
Table 11: Mortgage Servicing Rights Activity
Nine months ended September 30, 2003
Originated Valuation
(dollars in thousands) MSR Allowance Total
January 1, 2003 $ 812 $ (115) $ 697
Originated servicing 714 714
Amortization charged to earnings (634) (634)
Valuation adjustment charged to earnings (28) (28)
September 30, 2003 $ 892 $ (143) $ 749
As a FHLB Mortgage Partnership Finance loan servicer, the Company has provided
a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in
excess of 1% of the original loan principal sold to the FHLB on an aggregate
pool basis. At September 30, 2003, the maximum Company obligation on the
entire servicing portfolio for such guarantees would be approximately $493
(.33% of the serviced principal). Due to historical strength of mortgage
borrowers in our markets, the original 1% of principal loss pool provided by
the FHLB, and current economic conditions, management believes the possibility
of losses under guarantees to the FHLB to be remote. Accordingly, no provision
for a recourse liability has been made for this recourse obligation on loans
currently serviced by the Company.
NONINTEREST EXPENSE
Noninterest operating expenses increased $238 to $2,335 in September 2003
compared to $2,097 during September 2002, an increase of 11.3%. Increases in
employee salaries and benefits totaled $188 during the quarter ended September
30, 2003 compared to the prior year quarter, as bank employees were granted
inflationary and merit increases effective January 1, 2003 averaging 6.1%. In
addition, the Company hired additional lenders in our Rhinelander market and
investment and insurance sales representatives during 2003 that have had a
significant impact. Operating expenses as a percent of average assets
increased slightly to 2.38% during the third quarter September 2003 compared to
2.34% during September 2002. Year to date, additional operating costs have
been offset by increased revenue, as the expense efficiency ratio improved to
52.11% for the nine months ended September 2003 compared to 52.30% in the prior
year.
26
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, 2002.
ITEM 4. INTERNAL CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, under the
supervision, and with the participation, of the Company's President and Chief
Executive Officer and the Chief Financial Officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15(c) under the Securities Exchange Act of 1934. Based
upon, and as of the date of such evaluation, the President and Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective in all material respects. There have
been no significant changes in the Company's internal controls or in other
factors which could significantly affect internal controls subsequent to the
date the Company carried out its evaluation, nor were there any significant
deficiencies or material weaknesses identified which required any corrective
action to be taken.
27
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits.
Exhibits required by Item 601 of Regulation S-K.
Exhibit
Number Description
31.1 Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
Form 8-K dated September 3, 2003. The Company filed a current report on
Form 8-K on September 3, 2003, to announce the commencement of commercial
insurance sales through a wholly-owned subsidiary, Peoples Insurance Services
LLC under Item 9.
Form 8-K dated July 23, 2003. The Company filed a current report on Form
8-K on July 23, 2003, reporting earnings for the second quarter ended June 30,
2003, under Item 5 and additional related disclosure under Items 9 and 12.
Form 8-K dated July 14, 2003. The Company filed a current report on Form
8-K on July 14, 2003, to announce the construction of a new regional financial
services office and administrative headquarters under Item 9.
28
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.
November 12, 2003 SCOTT M. CATTANACH
Scott M. Cattanach
Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
29
EXHIBIT INDEX
TO
FORM 10-Q
OF
PSB HOLDINGS, INC.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
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:
31.1 Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002