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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 March 31, 2004
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 May 4, 2004 was 1,733,630.
PSB HOLDINGS, INC.
FORM 10-Q
Quarter Ended March 31, 2004
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2004 (unaudited) and December 31,
2003 (derived from audited financial statements) 1
Consolidated Statements of Income
Three Months Ended March 31, 2004 and 2003 (unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended March 31, 2004 (unaudited) 3
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003 (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. Internal Controls and Procedures 27
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
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
March 31, 2004 unaudited, December 31, 2003 derived from audited financial
statements)
March 31, December 31,
(dollars in thousands, except per share data) 2004 2003
ASSETS
Cash and due from banks $ 13,024 $ 13,754
Interest-bearing deposits and money market funds 5,424 1,214
Federal funds sold - 3,959
Cash and cash equivalents 18,448 18,927
Securities available for sale (at fair value) 73,095 72,472
Federal Home Loan Bank stock (at cost) 2,484 2,444
Loans held for sale 140 207
Loans receivable, net of allowance for loan losses of $3,700
and $3,536, respectively 314,310 304,339
Accrued interest receivable 1,716 1,617
Foreclosed assets 82 84
Premises and equipment 9,341 7,557
Mortgage servicing rights, net 753 814
Other assets 369 472
TOTAL ASSETS $420,738 $408,933
LIABILITIES
Non-interest-bearing deposits $ 45,281 $ 50,563
Interest-bearing deposits 272,422 265,851
Total deposits 317,703 316,414
Federal Home Loan Bank advances 47,000 47,000
Other borrowings 20,826 10,475
Accrued expenses and other liabilities 1,695 2,903
Total liabilities 387,224 376,792
STOCKHOLDERS' EQUITY
Common stock - no par value with a stated value of $1 per share:
Authorized - 3,000,000 shares
Issued - 1,887,179 shares 1,887 1,887
Additional paid-in capital 9,694 9,694
Retained earnings 23,743 22,789
Accumulated other comprehensive income 1,255 844
Treasury stock, at cost - 153,549 and 153,781 shares, respectively (3,065) (3,073)
Total stockholders' equity 33,514 32,141
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $420,738 $408,933
1
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(dollars in thousands, except per share data - unaudited) March 31,
2004 2003
Interest income:
Interest and fees on loans $4,554 $4,396
Interest on securities:
Taxable 461 615
Tax-exempt 243 223
Other interest and dividends 46 59
Total interest income 5,304 5,293
Interest expense:
Deposits 1,291 1,512
FHLB advances 466 508
Other borrowings 73 41
Total interest expense 1,830 2,061
Net interest income 3,474 3,232
Provision for loan losses 240 225
Net interest income after provision for loan losses 3,234 3,007
Noninterest income:
Service fees 291 303
Mortgage banking 160 628
Investment and insurance sales commissions 91 99
Net gain on sale of securities 111 -
Other noninterest income 87 92
Total noninterest income 740 1,122
Noninterest expense:
Salaries and employee benefits 1,548 1,448
Occupancy and facilities 301 288
Data processing and other office operations 160 139
Advertising and promotion 34 37
Other noninterest expenses 559 405
Total noninterest expense 2,602 2,317
Income before provision for income taxes 1,372 1,812
Provision for income taxes 418 588
Net income $ 954 $1,224
Basic earnings per share $ 0.55 $ 0.70
Diluted earnings per share $ 0.55 $ 0.70
2
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three months ended March 31, 2004 - unaudited
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
(dollars in thousands) Stock Capital Earnings Income Stock Totals
Balance January 1, 2004 $1,887 $9,694 $22,789 $844 $(3,073) $32,141
Comprehensive income:
Net income 954 954
Unrealized gain (loss) on securities
available for sale, net of tax 478 478
Reclassification adjustment for security
gain included in net income, net of tax (67) (67)
Total comprehensive income 1,365
Distribution of treasury stock in settlement
of liability to Company directors 8 8
Balance March 31, 2004 $1,887 $9,694 $23,743 $1,255 $(3,065) $33,514
3
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2004 and 2003 - unaudited
2004 2003
Cash flows from operating activities:
Net income $ 954 $ 1,224
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net amortization 244 317
Provision for loan losses 240 225
Gain on sale of mortgage loans (154) (606)
Provision for servicing right valuation allowance 60 -
Gain on sale of foreclosed assets (17) -
Gain on sale of securities (111) -
FHLB stock dividends (40) (63)
Changes in operating assets and liabilities:
Accrued interest receivable (99) (146)
Other assets (118) 363
Other liabilities (1,200) (882)
Net cash provided by (used in) operating activities (241) 432
Cash flows from investing activities:
Proceeds from sale and maturities of:
Securities available for sale 3,808 12,687
Payment for purchase of:
Securities available for sale (3,749) (7,848)
Net (increase) decrease in loans (10,029) 1,158
Capital expenditures (1,908) (100)
Proceeds from sale of foreclosed assets - 5
Net cash provided by (used in) investing activities (11,878) 5,902
Cash flows from financing activities:
Net increase (decrease) in non-interest-bearing deposits (5,282) 592
Net increase (decrease) in interest-bearing deposits 6,571 (5,843)
Proceeds from long-term FHLB advances 10,000 -
Repayments of long-term FHLB advances (10,000) -
Net increase in other borrowings 10,351 1,399
Purchase of treasury stock - (48)
Net cash provided by (used in) financing activities 11,640 (3,900)
4
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Net increase (decrease) in cash and cash equivalents (479) 2,434
Cash and cash equivalents at beginning 18,927 21,552
Cash and cash equivalents at end $18,448 $23,986
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 1,825 $ 2,124
Income taxes 408 45
Noncash investing and financing activities:
Loans charged off $ 83 $ 79
Loans transferred to foreclosed assets - 4
Loans originated on sale of foreclosed assets 17 67
Distribution of treasury stock in settlement of liability
to Company directors 8 -
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 PSB's 2003 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 - STOCK-BASED COMPENSATION
PSB records expense relative to stock-based compensation using the "intrinsic
value method". Since the exercise price is equal to the fair value of PSB's
common stock on the date of the award, the intrinsic value of PSB's stock
options is "zero" at the time of the award and no expense is recorded.
As permitted by generally accepted accounting principles, PSB has not adopted
the "fair value method" of expense recognition for stock-based compensation
awards. Rather, the effects of the fair value method on PSB's earnings are
presented on a pro forma basis. Because no grants of stock options were made
during the three months ended March 31, 2004 and 2003, there was no pro forma
impact to net income or earnings per share during these periods.
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 March 31,
2004, 28,237 options outstanding were eligible to be exercised at a
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weighted average exercise price of $16.00 per share. No additional shares of
common stock remain reserved for future grants under the option plan approved
by the shareholders.
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
(dollars in thousands, except per share data) March 31,
2004 2003
Net income $ 954 $1,224
Weighted average shares outstanding 1,733,531 1,749,015
Effect of dilutive stock options outstanding 15,130 9,677
Diluted weighted average shares outstanding 1,748,661 1,758,692
Basic earnings per share $ 0.55 $ 0.70
Diluted earnings per share $ 0.55 $ 0.70
NOTE 4 - COMPREHENSIVE INCOME
Comprehensive income as defined by current accounting standards for the three
months ended March 31, 2004 and 2003 is as follows:
(dollars in thousands - unaudited) Three months ended
March 31,
2004 2003
Net income $ 954 $1,224
Unrealized gain (loss) on securities
available for sale, net of tax 478 (108)
Reclassification adjustment for security
gain included in net income, net of tax (67) -
Comprehensive income $1,365 $1,116
NOTE 5 - 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.
7
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 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 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 PSB 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.
8
NOTE 6 - 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.
NOTE 7 - CONTINGENCIES
In the normal course of business, PSB is involved in various legal proceedings.
In the opinion of management, any liability resulting from such proceedings
would not have a material adverse effect on the consolidated financial
statements.
Like many Wisconsin financial institutions, PSB has a Nevada based subsidiary
that holds and manages investment assets which have not been subject to
Wisconsin tax. The Wisconsin Department of Revenue (the "Department") has
instituted an audit program specifically aimed at out-of-state bank
subsidiaries and has indicated it will withdraw favorable rulings previously
issued in connection with such subsidiaries. As a result of these
developments, the Department is taking the position that a portion of the
income of the out-of-state subsidiaries is taxable in Wisconsin and has or
intends to seek settlements from Wisconsin chartered banks for taxes on income
related to these subsidiaries. PSB's subsidiary bank is currently under audit
by the Department, although no demand for additional taxes from the Department
has been received as of the date of the filing of this report. Based on
information available to PSB with respect to the Department's position in
unrelated cases, PSB believes that a successful claim made by the Departments
would likely have a material adverse effect on PSB's results of operations for
the year in which it was made. Based on such information, PSB also believes
that if the Department is successful in its position, future earnings may be
adversely affected in the range of $.06 to $.07 per share on an annual basis,
based on current interest levels on the securities and other assets now held in
the Nevada subsidiary's portfolio. PSB believes that it complied with
Wisconsin law and the private ruling received from the Department and that it
is not liable for any taxes or interest that the Department may claim.
Should an assessment be forthcoming, PSB intends to defend its position
vigorously through the normal administrative appeals process in place at the
Department and through other judicial channels should they become necessary.
PSB has not recorded any additional tax expense in connection with this audit.
In addition, the Internal Revenue Service ("IRS") is currently conducting an
audit of PSB's open tax returns. PSB has been assessed approximately $170,000
in taxes, interest and penalties as a result of the IRS audit; however, this
assessment is in the process of being appealed. PSB believes all tax returns
were filed appropriately and at this time no additional tax expense has been
recorded.
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 PSB'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. The quarterly report on Form 10-Q
describes the business of PSB Holdings, Inc. and its subsidiary Peoples State
Bank as in effect on March 31, 2004, and any reference to "PSB" refers to the
consolidated or individual operations of PSB Holdings, Inc. and Peoples State
Bank.
Forward-looking statements have been made in this document that are subject to
risks and uncertainties. While PSB 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 PSB's Form 10-K for the year ended December 31, 2003
and, from time to time, in PSB's other filings with the Securities and Exchange
Commission.
BALANCE SHEET
At March 31, 2004, total assets were $420,738, an increase of $52,936, or
14.4%, over March 31, 2003. Asset growth since March 31, 2003 consisted of:
$ %
Increase in commercial real estate loans $34,428 29.1%
Increase in residential real estate mortgage loans 19,520 33.8%
Increased investment in premises and equipment 3,208 52.3%
Decrease in investment securities (2,800) (3.7%)
Decrease in remaining assets (various categories) (1,420) (1.3%)
Total increase in assets $52,936 14.4%
During the twelve months ended March 31, 2004, commercial real estate mortgages
increased primarily from new commercial construction and financing owner
occupied commercial retail buildings, office space, 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 amount of residential real estate mortgages held increased since March 31,
2003 and since December 31, 2003 by a substantial amount, and constitutes a
higher percentage of the total loan portfolio. The increase in residential
mortgages during the past twelve months is from PSB 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
10
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
currently originated by PSB are sold to other investors on the secondary market
to eliminate the associated interest rate risk. Other increases in residential
real estate loans are primarily from balloon type mortgages with initial fixed
rates periods ranging from 3 to 7 years.
As PSB 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. A
portion of these consumer balances were converted to home equity loans. In
additional, in its markets, PSB faces substantial competition from credit
unions and other financial institutions for retail installment lending such as
auto loans. PSB does not expect consumer lending to be a key focus in the near
term, and expects consumer loan principal to continue to decline slowly.
The increase in premises and equipment is due to ongoing construction of PSB's
home office and financial center to be located on the same property as the
current home office. Work on the new building began during August 2003 and is
expected to be completed by June 30, 2004. As of March 31, 2004, approximately
$3 million of the expected $4.6 million final cost was spent on the project.
Asset growth since December 31, 2003 of $11,805 has consisted primarily of
gross loan growth totaling $10,135. The make-up of these loans is similar to
that seen during the twelve months ended March 31, 2004 and is outlined in
Table 1 below. This growth was funded via short-term (primarily overnight
borrowings) since December 31, 2003 with net growth totaling $10,351.
Asset growth since March 31, 2003 was funded by the following:
$ %
Increase in core deposits (including MMDA deposits) $14,852 9.81%
Increase in wholesale overnight borrowings 11,375 n/a
Increase in FHLB advances 9,000 23.7%
Increase in wholesale certificates of deposit 7,098 17.4%
Increase in stockholders' equity 3,144 10.4%
Increase in overnight retail repurchase agreements 2,205 n/a
Increase in other liabilities (various categories) 5,262 4.9%
Total increase in liabilities and stockholders' equity $52,936 14.4%
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Table 1: Period-End Loan Composition
March 31, March 31, December 31, 2003
Dollars Dollars Percentage of total Percentage
(dollars in thousands) 2004 2003 2004 2003 Dollars of total
Commercial, industrial and agricultural $ 70,995 $ 65,537 22.3% 25.3% $ 66,934 21.7%
Commercial real estate mortgage 152,852 118,424 48.1% 45.7% 148,685 48.3%
Residential real estate mortgage 77,322 57,802 24.3% 22.3% 75,276 24.4%
Residential real estate loans held for sale 140 - 0.0% 0.0% 207 0.1%
Consumer home equity 9,591 7,364 3.0% 2.8% 9,252 3.0%
Consumer and installment 7,250 10,137 2.3% 3.9% 7,728 2.5%
Totals $318,150 $259,264 100.0% 100.0% $308,082 100.0%
The loan portfolio is PSB's primary asset subject to credit risk. PSB'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 increased $366 to $3,790 at March
31, 2004 from $3,424 at March 31, 2003. Although restructured loans decreased,
total nonaccrual loans increased $1,189. Nonperforming assets also increased
$371 from $3,419 at December, 31, 2003. Nonperforming loans also include
restructured loans until 6 consecutive monthly payments are received under the
new loan terms. Total nonperforming assets as a percentage of total assets
continues to be stable with .90% and .93% at March 31, 2004 and 2003,
respectively. PSB also tracks delinquencies on a contractual basis quarter to
quarter. Loans contractually delinquent 30 days or more as a percentage of
gross loans were .88% at March 31, 2004 compared to .63% at December 2003 and
..85% at March 31, 2003. The allowance for loan losses was 1.16% of gross loans
at March 2004 compared to 1.28% at March 2003.
Table 2: Allowance for Loan Losses
Three months ended
March 31,
(dollars in thousands) 2004 2003
Allowance for loan losses at beginning $3,536 $3,158
Provision for loan losses 240 225
Recoveries on loans previously charged-off 7 11
Loans charged off (83) (79)
Allowance for loan losses at end $3,700 $3,315
12
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
March 31, December 31,
(dollars in thousands) 2004 2003 2003
Nonaccrual loans $3,225 $2,036 $3,119
Accruing loans past due 90 days or more 270 - -
Restructured loans not on nonaccrual 213 883 216
Total nonperforming loans 3,708 2,919 3,335
Foreclosed assets 82 505 84
Total nonperforming assets $3,790 $3,424 $3,419
Nonperforming loans as a % of gross
loans receivable 1.17% 1.13% 1.08%
Total nonperforming assets as a % of total
assets 0.90% 0.93% 0.84%
LIQUIDITY
Liquidity refers to the ability of PSB to generate adequate amounts of cash to
meet PSB's need for cash at a reasonable cost. PSB 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 70.0% at March 31, 2004, and
75.1% at March 31, 2003. Wholesale borrowings and broker and national
certificates of deposit represent the balance of PSB's total funding needs,
which has increased steadily during the past two years.
13
Table 4: Period-end Deposit Composition
March 31,
2004 2003
(dollars in thousands) $ % $ %
Non-interest bearing demand $ 45,281 14.3% $ 46,050 15.7%
Interest-bearing demand and savings 54,253 17.1% 38,236 13.1%
Money market deposits 66,711 20.9% 67,107 23.0%
Retail time deposits less than $100 59,753 18.8% 61,805 21.1%
Retail time deposits $100 and over 43,767 13.8% 38,542 13.2%
Broker & national time deposits less than $100 9,728 3.1% 12,055 4.1%
Broker & national time deposits $100 and over 38,210 12.0% 28,785 9.8%
Totals $317,703 100.0% $292,580 100.0%
The interest rate paid on money market deposits is adjustable based on PSB's
discretion but generally tracks the movements of national money market funds.
PSB also offered a new overnight retail repurchase agreement to commercial
customers that provided $2,205 of short-term borrowed funds as of March 31,
2004. Deposits due to investors as part of PSB's secondary market loan
servicing activities included in total non-interest bearing demand deposits
were approximately $5.1 million at March 31, 2004, compared to $7.1 million at
March 31, 2003.
Table 5: Summary of Changes by Significant Deposit Source
March 31, % Change from prior year
(dollars in thousands) 2004 2003 2004 2003
Total time deposits $100 and over $81,977 $ 67,327 21.8% 15.7%
Total broker and national time deposits 47,938 40,840 17.4% 36.4%
Total retail time deposits 103,520 100,347 3.2% 2.5%
Core deposits, including money market deposits 166,245 151,393 9.8% 11.2%
To fund larger commercial loan originations or acquire other large blocks of
funding, PSB actively purchases broker and other national time deposits. PSB
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 March
31, 2004, broker and national time deposits were 11.4% of total assets compared
to 11.1% at March 31, 2003.
The increase in deposits of $25,123 (including broker and national time
deposits) has been inadequate to fund asset growth during the twelve months
ending March 31, 2004. Consequently wholesale borrowings, both short and long
term totaling $20,375 were also obtained. The change in wholesale borrowings
consisted of:
14
Increase in federal funds purchased $11,375
Net increase in FHLB short-term advances 5,000
Net increase in FHLB long-term advances 4,000
Total increase in wholesale borrowings $20,375
Unused credit advances from the Federal Home Loan Bank of Chicago available to
PSB at March 31, 2004 totaled approximately $34 million based on an open line
of credit and securities available for pledging for advances. In addition, PSB
had unused commitments from other correspondent banks for federal funds
purchased up to $11.1 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. PSB believes its current liquidity
position and sources of funds for liquidity management is adequate.
Table 6 below presents maturity repricing information as of March 31, 2004.
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
March 31, 2004
(dollars in thousands) 0-90 days 91-180 days 181-365 days 1-2 yrs Beyond 2-5 yrs Beyond 5 yrs Total
Earning assets:
Loans $112,357 $ 27,638 $ 34,400 $ 56,487 $ 68,206 $ 19,062 $318,150
Securities 5,075 5,599 7,723 17,446 22,326 14,926 73,095
FHLB stock 2,484 2,484
Other earning assets 5,424 5,424
Total $125,340 $ 33,237 $ 42,123 $ 73,933 $ 90,532 $ 33,988 $399,153
Cumulative rate
sensitive assets $125,340 $158,577 $200,700 $274,633 $365,165 $399,153
Interest-bearing liabilities
Interest-bearing deposits $ 95,624 $ 30,026 $ 36,281 $ 18,880 $ 33,524 $ 58,087 $272,422
FHLB advances 10,000 13,000 6,000 18,000 - 47,000
Other borrowings 15,374 2,909 252 984 1,307 20,826
Total $120,998 $ 32,935 $ 49,533 $ 25,864 $ 52,831 $ 58,087 $340,248
Cumulative interest
sensitive liabilities $120,998 $153,933 $203,466 $229,330 $282,161 $340,248
Interest sensitivity gap for
the individual period $ 4,342 $ 302 $ (7,410) $ 48,069 $ 37,701 $(24,099)
Ratio of rate sensitive assets to
rate sensitive liabilities for
the individual period 103.6% 100.9% 85.0% 285.9% 171.4% 58.5%
Cumulative interest
sensitivity gap $ 4,342 $ 4,644 $ (2,766) $ 45,303 $ 83,004 $ 58,905
Cumulative ratio of rate sensitive
assets to rate sensitive
liabilities 103.6% 103.0% 98.6% 119.8% 129.4% 117.3%
At March 31, 2004, 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 98.6% to 94.0% (if up 200 basis points) and
103.4% (if down 100 basis points), respectively. At March 31, 2003, 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
have changed from 116.4% to 106.6% (if up 200 basis points) and 114.7% (if down
100 basis points), respectively. During the twelve months ended March 31,
2004, PSB has increased the amount of fixed rate commercial loans held (with
original fixed terms generally from 3 to 5 years) which have been funded by
short-term wholesale borrowings. This has had the impact of lowering the
cumulative gap ratio to be less asset sensitive than it was twelve months ago
and actually changing to be slightly liability sensitive during that time frame
as of March 31, 2004.
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.
PSB also
16
uses various policy measures to assess adequacy of PSB's liquidity and
interest rate risk as described below.
Basic Surplus
PSB 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. PSB's basic surplus, including available open line of
credit FHLB advances not yet utilized at March 31, 2004 and 2003 was 5.5% and
14.2%, respectively and above the 5% minimum required by policy. The decline
in the basic surplus is a result of additional FHLB borrowings ($9,000 or an
increase of 23.7%) made since March 31, 2003 and increase of $11,375 in federal
funds purchased (PSB had federal funds sold of $2,771 at March 31, 2003).
Interest Rate Risk Limits
PSB 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, PSB 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 March 31, 2004, net interest income for the next 12 months was
projected to decrease .60% if rates increased 200 basis points, and was
projected to decrease .95% if rates decreased 100 basis points, which is less
than the 15% required by policy and was considered acceptable by management.
At March 31, 2003, net interest income for the next 12 months was projected to
increase 3.17% if rates increased 200 basis points, and was projected to
decrease .89% 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. PSB'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
March 31, 2004, PSB's core funding utilization ratio was projected to be 46.4%
if rates increased 200 basis points and was therefore within policy
requirements. At March 31, 2003, PSB's core funding utilization ratio was
projected to be 38.39% if rates increased 200 basis points.
17
CAPITAL RESOURCES
Stockholders' equity at March 31, 2004 increased $3,144 to $33,514 or 10.4%
from $30,370 at March 31, 2003. Net income during the twelve months ended
March 31, 2004, net of cash dividends and shareholder stock buybacks was $2,985
and all other increases in capital totaled $159. Stockholders' equity included
unrealized gains on securities available for sale, net of their tax effect, of
$1,255 at March 31, 2004 compared to unrealized gains of $1,198 at March 31,
2003.
The adequacy of PSB'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 March 31, 2004 and 2003, the Subsidiary Bank's
Tier 1 risk-based capital ratio, total risk-based capital, and Tier 1 leverage
ratio were in excess of regulatory minimums and were classified as "well-
capitalized". Failure to remain well-capitalized would prevent PSB from
obtaining future wholesale broker time deposits which have been an important
source of funding during the past several years. Average tangible stockholder's
equity was 7.83% during the quarter ended March 2004 compared to 7.84% in the
prior year quarter. Management believes PSB to be well capitalized at March
31, 2004 and expects to remain well capitalized during 2004 based on planned
asset growth and shareholder dividend payments.
PSB maintains an annual, ongoing share repurchase program of up to 1% of
outstanding shares per year although no shares were purchased during the first
quarter of 2004. During the quarter ended March 31, 2003, PSB repurchased
1,890 shares at an average price of $25.46 per share in its annual buyback
program. For the remainder of 2004, management anticipates retaining capital
to support asset growth while continuing a cash dividend to shareholders.
Table 7: Capital Ratios - Consolidated Holding Company
(dollars in thousands) March 31, Dec. 31,
2004 2003 2003
Stockholders' equity $ 33,514 $ 30,370 $ 32,141
Disallowed mortgage servicing right assets (75) (94) (81)
Unrealized gain on securities available for sale (1,255) (1,198) (844)
Tier 1 regulatory capital 32,184 29,078 31,216
Add: allowance for loan losses 3,700 3,315 3,536
Total regulatory capital $ 35,884 $ 32,393 $ 34,752
Total assets $420,738 $367,802 $408,933
Disallowed mortgage servicing right assets (75) (94) (81)
Unrealized gain on securities available for sale (1,255) (1,198) (844)
Tangible assets $419,408 $366,510 $408,008
Risk-weighted assets (as defined by current regulations) $327,563 $276,166 $318,005
18
Tier 1 capital to period end tangible assets (leverage ratio) 7.67% 7.93% 7.65%
Tier 1 capital to adjusted risk-weighted assets 9.83% 10.53% 9.82%
Total capital to adjusted risk-weighted assets 10.95% 11.73% 10.93%
A special 5% stock dividend was paid to shareholders on January 29, 2004. All
references in the accompanying financial statements and statistical analysis to
the number of common shares and per share amounts for 2003 have been restated
to reflect the stock dividend.
PREMISES AND EQUIPMENT
PSB 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. Final building project costs
including necessary furniture, fixtures, and equipment are estimated to be $4.6
million. Annual depreciation expense after this investment in fixed assets and
equipment is estimated to increase approximately $165 ($100 after income tax
benefits). As of March 31, 2004, approximately $3 million had been spent on
the project. The amount of interest capitalized as project costs at March 31,
2004 totaled $17. Under current accounting rules, demolition of the old home
office will require the write-off of the remaining cost basis. The charge of
approximately $340 ($206 after income tax benefits) is expected to be recorded
during the second quarter of 2004 assuming abandonment of the old building
during the quarter.
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 2004 was $954, or $.55 for basic and
diluted earnings per share. Comparatively, net income for the quarter ended
March 31, 2003 was $1,224, or $.70 per share for basic and diluted earnings per
share. Operating results for the first quarter 2004 generated an annualized
return on average assets of .94% and an annualized return on average equity of
11.64%, compared to 1.36% and 16.63% for the comparable period in 2003.
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
March 31, Dec. 31, Sept. 30, June 30, March 31,
EARNINGS AND DIVIDENDS: 2004 2003 2003 2003 2003
Net interest income $3,474 $3,375 $3,306 $3,268 $3,232
Provision for loan losses $ 240 $ 130 $ 240 $ 240 $ 225
Other noninterest income $ 740 $1,120 $1,143 $ 726 $1,122
Other noninterest expense $2,602 $2,479 $2,335 $2,220 $2,317
Net income $ 954 $1,290 $1,235 $1,057 $1,224
Basic earnings per share $ 0.55 $ 0.74 $ 0.71 $ 0.61 $ 0.70
Diluted earnings per share $ 0.55 $ 0.74 $ 0.71 $ 0.60 $ 0.70
Dividends declared per share $ - $0.290 $ - $0.290 $ -
Net book value per share $19.33 $18.54 $18.11 $17.74 $17.37
Dividend payout ratio 0.00% 38.40% 0.00% 46.88% 0.00%
Average common shares outstanding 1,733,531 1,733,398 1,733,828 1,744,199 1,749,015
BALANCE SHEET - AVERAGE BALANCES:
Loans receivable, net of allowances for loss $307,109 $302,491 $288,448 $265,863 $256,715
Assets $407,577 $399,351 $389,267 $371,537 $365,906
Deposits $312,455 $312,376 $307,752 $292,698 $289,635
Stockholders' equity $ 32,878 $ 32,095 $ 31,085 $ 30,670 $ 29,848
PERFORMANCE RATIOS:
Return on average assets (1) 0.94% 1.28% 1.26% 1.14% 1.36%
Return on average stockholders' equity (1) 11.64% 15.95% 15.76% 13.82% 16.63%
Average tangible stockholders' equity to
average assets 7.83% 7.85% 7.70% 7.92% 7.84%
Net loan charge-offs to average loans 0.02% 0.09% 0.02% 0.01% 0.03%
Nonperforming loans to gross loans 1.17% 1.08% 1.09% 1.06% 1.13%
Allowance for loan losses to gross loans 1.16% 1.15% 1.23% 1.26% 1.28%
Net interest rate margin (1)(2) 3.73% 3.65% 3.67% 3.83% 3.89%
Net interest rate spread (1)(2) 3.38% 3.24% 3.21% 3.34% 3.42%
Service fee revenue as a percent of
average demand deposits (1) 2.60% 2.70% 2.48% 2.83% 2.99%
Noninterest income as a percent
of gross revenue 12.24% 17.56% 17.90% 12.13% 17.49%
Efficiency ratio (2) 59.73% 53.47% 50.94% 53.86% 51.67%
Noninterest expenses to average assets (1) 2.56% 2.46% 2.38% 2.40% 2.57%
STOCK PRICE INFORMATION:
High $35.60 $36.19 $32.61 $32.38 $25.95
Low $33.50 $31.43 $31.43 $28.57 $22.62
Market value at quarter-end $35.00 $33.62 $31.90 $31.67 $25.95
(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 $254 (7.6%) from $3,362 for the quarter ended
March 31, 2003 to $3,616 for the current quarter ended March 31, 2004.
Quarterly tax-adjusted net interest margin as a percent of average interest
earning assets decreased from 3.89% in March 2003 to 3.73% in March 2004. Net
interest margin was 3.75% for the year ended December 31, 2003.
During the past 12 months, PSB experienced compressed interest rate margins as
existing prime rate adjustable and other maturing term loans and securities
were repriced at today's significantly lower rates while deposit rates remained
near their floor. Earning assets yields have decreased 66 basis points from
6.28% at March 2003 to 5.62% at March 2004. However, the cost of liabilities
declined only 62 basis points from 2.86% at March 2003 to 2.24% at March 2004.
However, the decline in net interest margin from these factors appears to be
ending as net interest margin was 3.73% during the quarter ended March 2004
compared to the December and September 2003 quarters of 3.65% and 3.67%,
respectively. In addition, yield on earning assets was 5.62% during the
quarter ended March 2004 compared to 5.60% during the quarter ended December
2003.
21
Table 9: Net Interest Income Analysis
(dollars in thousands) Quarter ended March 31, 2004 Quarter ended March 31, 2003
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning assets:
Loans (1)(2) $310,718 $4,571 5.90% $259,927 $4,411 6.88%
Taxable securities 47,878 461 3.86% 58,212 615 4.28%
Tax-exempt securities (2) 24,639 368 5.99% 21,583 338 6.35%
FHLB stock 2,471 40 6.49% 2,304 36 6.34%
Other 2,953 6 0.81% 8,069 23 1.16%
Total (2) 388,659 5,446 5.62% 350,095 5,423 6.28%
Non-interest-earning assets:
Cash and due from banks 11,475 9,625
Premises and equipment,
net 8,288 6,161
Other assets 2,764 3,237
Allowance for loan
losses (3,609) (3,212)
Total $407,577 $365,906
Liabilities & stockholders' equity
Interest-bearing liabilities:
Savings and demand
deposits $51,820 $ 85 0.66% $ 37,728 $ 62 0.67%
Money market deposits 66,568 154 0.93% 69,963 184 1.07%
Time deposits 149,235 1,052 2.83% 140,878 1,266 3.64%
FHLB borrowings 46,615 466 4.01% 38,000 508 5.42%
Other borrowings 13,555 73 2.16% 6,056 41 2.75%
Total 327,793 1,830 2.24% 292,625 2,061 2.86%
Non-interest-bearing liabilities:
Demand deposits 44,832 41,066
Other liabilities 2,074 2,367
Stockholders' equity 32,878 29,848
Total $407,577 $365,906
Net interest income 3,616 3,362
Rate spread 3.38% 3.42%
Net yield on interest-earning assets 3.73% 3.89%
(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 10: Interest Expense and Expense Volume and Rate Analysis
Three months ended March 31, 2004
2004 compared to 2003
(dollars in thousands) increase (decrease) due to (1)
Volume Rate Net
Interest earned on:
Loans (2) $871 $(711) $160
Taxable securities (110) (44) (154)
Tax-exempt securities (2) 48 (18) 30
FHLB stock 3 1 4
Other interest income (15) (2) (17)
Total 797 (774) 23
Interest paid on:
Savings and demand deposits 24 (1) 23
Money market deposits (9) (21) (30)
Time deposits 76 (290) (214)
FHLB borrowings 116 (158) (42)
Other borrowings 51 (19) 32
Total 258 (489) (231)
Net interest earnings $539 $(285) $254
(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 PSB'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 March 31, 2004, and $225 for the three months ended March
31, 2003. Net charge-offs as a percentage of average loans outstanding were
..02% and .03% during the three months ended March 31, 2004 and 2003,
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 allowance and the provision for
23
loan losses is consistent with the composition of the loan portfolio and recent
credit quality history.
NONINTEREST INCOME
Noninterest income fell sharply by $382 in the first quarter 2004 to $740
compared to $1,122 in 2003. The decline was due to $468 less in mortgage
banking income compared to last year. However, this decline was partially
offset by a $111 gain on sale of securities. Separate from these items,
noninterest income declined $25 (5.1%). Mortgage banking results during March
2004 included an additional provision for valuation allowance of $60 against
mortgage servicing rights. The total valuation allowance on servicing rights
was $150 as of March 31, 2004. As mortgage interest rates increase, this
valuation allowance is expected to be taken back into income as customers are
less likely to refinance their existing mortgages. For all of 2004, PSB
expects mortgage banking income to be approximately 2/3 of the level seen
during 2003. PSB serviced $155,606 of mortgage principal for other investors
at March 31, 2004 compared to $118,710 at March 31, 2003.
Table 11: Mortgage Servicing Rights Activity
Three months ended March 31, 2004
Originated Valuation
(dollars in thousands) MSR Allowance Total
January 1, 2004 balances $904 $(90) $814
Originated servicing 58 58
Amortization charged to earnings (59) (59)
Valuation adjustment charged to earnings (60) (60)
March 31, 2004 balances $903 $(150) $753
As a FHLB Mortgage Partnership Finance loan servicer, PSB 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 March 31, 2004, the maximum Company obligation on the entire servicing
portfolio for such guarantees would be approximately $601 (.39% of the serviced
principal) up from $335 (.28% of the serviced principal) at March 31, 2003.
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 PSB.
Peoples Insurance Services LLC, a commercial property and casualty insurance
agency and brokerage owned by Peoples, continues to build relationships in the
Wausau area. The agency's net loss during the quarter ended March 2004 was
$38. Since opening during September 2003, cumulative net losses have been in
line with initial projections.
24
NONINTEREST EXPENSE
Noninterest operating expenses increased $285 to $2,602 in the quarter ended
March 2004 compared to $2,317 during the quarter ended March 2003, an increase
of 12.3%. Increases in employee salaries and benefits totaled $100 during the
quarter, up 6.9% from the prior year. Company employees were granted
inflationary and merit increases effective January 1, 2004 averaging 2.9% of
base pay. Other noninterest expenses included $127 of collection fees written
off in response to regulatory requirements to account for collection fees as
expense until collected, despite PSB's expectation that these fees will be
collected from the borrower in the future as part of the loan agreement or from
SBA loan guarantee reimbursements. Separate from increases in salaries and
benefits and write-off of these collection expenses, operating expenses
increased $58 (6.7%). Operating expenses as a percent of average assets were
2.56% during the first quarter of March 2004 compared to 2.57% during the first
quarter of March 2003. The expense efficiency ratio increased to 59.73% during
2004 compared to 51.67% in 2003 due primarily to a lower net interest margin
and significantly lower mortgage banking fee income compared to the prior year.
The principal subsidiary of PSB is being audited by the Wisconsin Department of
Revenue with respect to income attributable to the bank's Nevada subsidiary.
Please see Note 7, Contingencies, for a discussion of the status and possible
material adverse effect of an adverse result of the audit.
25
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 PSB's Form 10-K for the year ended December 31, 2003.
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 PSB's President and Chief Executive
Officer and the Chief Financial Officer, evaluated the effectiveness of the
design and operation of PSB'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 PSB's disclosure controls and
procedures were effective in all material respects. There have been no
significant changes in PSB's internal controls or in other factors during the
period covered by this report which could significantly affect internal
controls, nor were there any significant deficiencies or material weaknesses
identified which required any corrective action to be taken.
26
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 9, 2004, PSB distributed 232 shares of its common stock (valued for
this purpose at $33.62 per share) to its directors in lieu of cash payments
under the director's incentive compensation plan. Receipt of stock or deferral
of value into the director deferred compensation plan via a previously
committed election was mandatory and no investment decision was made by any
member of the Board.
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 January 29, 2004. PSB filed a current report on Form 8-K
on January 29, 2004, reporting earnings for the fourth quarter and fiscal year
ended December 31, 2003, under Item 5 and additional related disclosure under
Items 9 and 12.
27
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.
May 14, 2004 SCOTT M. CATTANACH
Scott M. Cattanach
Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
28
EXHIBIT INDEX
TO
FORM 10-Q
OF
PSB HOLDINGS, INC.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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