Back to GetFilings.com
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 9, 2004 was 1,716,330.
PSB HOLDINGS, INC.
FORM 10-Q
Quarter Ended June 30, 2004
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2004 (unaudited) and December 31,
2003 (derived from audited financial statements) 1
Consolidated Statements of Income
Three Months and Six Months Ended June 30, 2004
and 2003 (unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended June 30, 2004 (unaudited) 3
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003 (unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSB HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2004 unaudited, December 31, 2003 derived from audited financial
statements)
June 30, December 31,
(dollars in thousands, except per share data) 2004 2003
ASSETS
Cash and due from banks $ 15,147 $ 13,754
Interest-bearing deposits and money market funds 2,365 1,214
Federal funds sold - 3,959
Cash and cash equivalents 17,512 18,927
Securities available for sale (at fair value) 71,461 72,472
Federal Home Loan Bank stock (at cost) 2,792 2,444
Loans held for sale - 207
Loans receivable, net of allowance for loan losses of $3,906
and $3,536, respectively 325,320 304,339
Accrued interest receivable 1,724 1,617
Foreclosed assets 46 84
Premises and equipment 10,495 7,557
Mortgage servicing rights, net 803 814
Other assets 1,063 472
TOTAL ASSETS $431,216 $408,933
LIABILITIES
Non-interest-bearing deposits $ 46,901 $ 50,563
Interest-bearing deposits 293,375 265,851
Total deposits 340,276 316,414
Federal Home Loan Bank advances 47,000 47,000
Other borrowings 9,394 10,475
Accrued expenses and other liabilities 2,307 2,903
Total liabilities 398,977 376,792
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 24,007 22,789
Accumulated other comprehensive income (loss) (4) 844
Treasury stock, at cost - 161,549 and 153,781 shares, respectively (3,345) (3,073)
Total stockholders' equity 32,239 32,141
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $431,216 $408,933
1
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
(dollars in thousands, June 30, June 30,
except per share data - unaudited) 2004 2003 2004 2003
Interest and dividend income:
Loans, including fees $ 4,714 $ 4,476 $ 9,268 $ 8,872
Securities:
Taxable 453 501 914 1,116
Tax-exempt 245 221 488 444
Other interest and dividends 46 60 92 119
Total interest and dividend income 5,458 5,258 10,762 10,551
Interest expense:
Deposits 1,360 1,432 2,651 2,944
FHLB advances 504 506 970 1,014
Other borrowings 77 52 150 93
Total interest expense 1,941 1,990 3,771 4,051
Net interest income 3,517 3,268 6,991 6,500
Provision for loan losses 240 240 480 465
Net interest income after provision for loan losses 3,277 3,028 6,511 6,035
Noninterest income:
Service fees 322 325 613 628
Mortgage banking 308 216 468 844
Investment and insurance sales commissions 90 89 181 188
Net gain on sale of securities - - 111 -
Other noninterest income 135 96 222 188
Total noninterest income 855 726 1,595 1,848
Noninterest expense:
Salaries and employee benefits 1,547 1,387 3,095 2,835
Occupancy and facilities 361 285 662 573
Loss on abandonment of premises and equipment 329 - 329 -
Data processing and other office operations 187 148 347 287
Advertising and promotion 64 51 98 88
Other noninterest expenses 426 349 985 754
Total noninterest expense 2,914 2,220 5,516 4,537
Income before provision for income taxes 1,218 1,534 2,590 3,346
Provision for income taxes 436 477 854 1,065
Net income $ 782 $ 1,057 $ 1,736 $ 2,281
Basic earnings per share $ 0.45 $ 0.61 $ 1.00 $ 1.31
Diluted earnings per share $ 0.45 $ 0.60 $ 0.99 $ 1.30
2
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six months ended June 30, 2004 - unaudited
Accumulated
Other
Additional Comprehensive
Common Paid-in Retained Income Treasury
(dollars in thousands) Stock Capital Earnings (Loss) Stock Totals
Balance January 1, 2004 $1,887 $9,694 $22,789 $844 $(3,073) $32,141
Comprehensive income:
Net income 1,736 1,736
Unrealized loss on securities
available for sale, net of tax (781) (781)
Reclassification adjustment for security gain
included in net income, net of tax (67) (67)
Total comprehensive income 888
Purchase of treasury stock (280) (280)
Distribution of treasury stock in settlement
of liability to Company directors 8 8
Cash dividends declared $.30 per share (518) (518)
Balance June 30, 2004 $1,887 $9,694 $24,007 $ (4) $(3,345) 32,239
3
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2004 and 2003 - unaudited (dollars in thousands)
2004 2003
Cash flows from operating activities:
Net income $ 1,736 $ 2,281
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net amortization 587 1,017
Provision for loan losses 480 465
Gain on sale of mortgage loans (433) (1,153)
Provision for servicing right valuation allowance 48 18
Loss on abandonment of premises and equipment 329 -
Gain on sale of foreclosed assets (37) (4)
Gain on sale of securities (111) -
FHLB stock dividends (77) (100)
Changes in operating assets and liabilities:
Accrued interest receivable (107) 58
Other assets (119) (68)
Other liabilities (588) (561)
Net cash provided by operating activities 1,708 1,953
Cash flows from investing activities:
Proceeds from sale and maturities of:
Securities available for sale 6,688 25,306
Payment for purchase of:
Securities available for sale (7,005) (16,834)
Purchase of FHLB stock (271) -
Net increase in loans (20,962) (18,302)
Capital expenditures (3,563) (317)
Proceeds from sale of foreclosed assets 7 132
Net cash used in investing activities (25,106) (10,015)
Cash flows from financing activities:
Net increase (decrease) in non-interest-bearing deposits (3,662) 8,594
Net increase in interest-bearing deposits 27,524 (2,737)
Proceeds from long-term FHLB advances 10,000 10,000
Repayments of long-term FHLB advances (10,000) (10,000)
Net increase (decrease) in other borrowings (1,081) 1,750
Dividends declared (518) (496)
Purchase of treasury stock (280) (538)
Net cash provided by financing activities 21,983 6,573
Net decrease in cash and cash equivalents (1,415) (1,489)
Cash and cash equivalents at beginning 18,927 21,552
Cash and cash equivalents at end $17,512 $20,063
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 3,810 $ 4,205
Income taxes 883 1,020
Noncash investing and financing activities:
Loans charged off $117 $128
Loans transferred to foreclosed assets - 3
Loans originated on sale of foreclosed assets 70 67
Distribution of treasury stock in settlement of
liability to Company directors 8 45
4
PSB Holdings, Inc.
Notes to Consolidated Financial Statements - Unaudited
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 ("PSB") 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 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 and six months ended June 30, 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 with the first
options scheduled to expire beginning during 2011. As of June 30, 2004, 28,237
options outstanding were eligible to be exercised at a weighted average
exercise price of
5
$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 Six months ended
(dollars in thousands, except per share data - unaudited) June 30, June 30,
2004 2003 2004 2003
Net income $ 782 $ 1,057 $ 1,736 $ 2,281
Weighted average shares outstanding 1,729,322 1,744,199 1,731,426 1,746,594
Effect of dilutive stock options outstanding 15,310 13,654 15,221 11,845
Diluted weighted average shares outstanding 1,744,632 1,757,853 1,746,647 1,758,439
Basic earnings per share $ 0.45 $ 0.61 $ 1.00 $ 1.31
Diluted earnings per share $ 0.45 $ 0.60 $ 0.99 $ 1.30
NOTE 4 - COMPREHENSIVE INCOME
Comprehensive income as defined by current accounting standards for the three
months and six months ended June 30, 2004 and 2003 is as follows:
Three months ended Six months ended
June 30, June 30,
(dollars in thousands - unaudited) 2004 2003 2004 2003
Net income $ 782 $ 1,057 $ 1,736 $ 2,281
Unrealized gain (loss) on securities
available for sale, net of tax (1,259) 283 (781) 175
Reclassification adjustment for security
gain included in net income, net of tax - - (67) -
Comprehensive income (loss) $ (477) $ 1,340 $ 888 $ 2,456
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.
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
6
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.
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,
7
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 has 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 that includes PSB's subsidiary bank. The Department has taken the
position that a portion of the income of the out-of-state subsidiaries is
taxable in Wisconsin. Recently, the Department indicated that it will discuss
a settlement of these issues with all Wisconsin banks with out-of-state
subsidiaries, including PSB. The Department has also stated that financial
institutions who do not utilize the proposed settlement will be issued full
deficiency assessments for additional tax including interest and penalties.
Based on information available to PSB with respect to the Department's initial
position in unrelated cases, PSB believes that a successful claim made by the
Department (if not settled under terms made available to other banks) 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 initial position in making out-of-state
subsidiaries fully taxable, 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 intends to meet with the Department during the third quarter to
discuss its current proposal to similarly situated Wisconsin banks.
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.
8
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 June 30, 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 June 30, 2004, total assets were $431,216, an increase of $10,478, or 2.5%
(10.0% annualized growth), over March 31, 2004, and an increase of $51,280, or
13.5% over June 30, 2003. Asset growth since March 31, 2004 and June 30, 2003
consisted of:
Three months ended Twelve months ended
Increase (decrease) in assets ($000s) June 30, 2004 June 30, 2004
$ % $ %
Increase in commercial real estate loans $ 4,112 2.7% $ 29,399 23.0%
Increase in residential real estate mortgage loans 6,913 8.9% 19,426 30.0%
Increased investment in premises and equipment 1,154 12.4% 4,276 68.8%
Decrease in investment securities (1,634) -2.2% (1,270) -1.7%
Decrease in cash and cash equivalents (936) -5.1% (2,551) -12.7%
Increase in remaining assets (various categories) 869 2,000
Total increase in assets $ 10,478 2.5% $ 51,280 13.5%
The commercial and residential real estate loan portfolio continued to grow at
a steady pace during both the three months and twelve months ended June 30,
2004. These types of loans have been and continue to be the primary loan
products sold by PSB. The amount of residential real estate mortgages held
since June 30, 2003 and December 31, 2003 increased by a substantial amount,
and constitutes a higher percentage of the total loan portfolio. Most of 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
9
retained as part of an asset-liability management strategy during the third
quarter of 2003 to maximize net interest margin without a significant increase
in interest rate risk due to that quarter's cash and liquidity position in
light of interest sensitivity of the entire balance sheet and opportunities for
re-investment of investment security cash flows. 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 remain flat or decline slowly.
Investment in premises and equipment has also grown during both periods
primarily for costs of the 32,000 square foot, $4.8 million new home office
building (including furniture and equipment) which was placed in service on
June 28, 2004. Construction of the new facility began during July 2003.
The decline in investment securities during the three months and twelve months
ended June 30, 2004 was primarily from a decline in the unrealized gain on
those securities of $1,952 and $2,311, respectively (before income tax
effects). These securities are classified as available for sale and changes in
unrealized gains and losses are recorded on the balance and in stockholders'
equity, net of income tax effects.
As PSB experienced strong loan growth with low core deposit growth, available
liquidity has tightened. Some overnight funds held as federal funds sold or
with the Federal Home Loan Bank or money market funds have declined. This has
decreased the amount of cash and cash equivalents for the prior quarter and
twelve month periods.
10
Asset growth since March 31, 2004 and June 30, 2003 was funded by the
following:
Three months ended Twelve months ended
Increase (decrease) in liabilities and equity ($000s) June 30, 2004 June 30,2004
$ % $ %
Increase in wholesale certificates of deposit $17,485 36.5% $20,890 46.9%
Increase in retail certificates of deposit > $100 6,162 14.1% 9,301 22.9%
Increase in FHLB advances - 0.0% 9,000 23.7%
Increase (decrease) in core deposits (including MMDA) (1,074) -0.5% 6,397 2.9%
Increase (decrease) in other borrowings (383) -4.1% 4,016 179.5%
Increase (decrease) in stockholders' equity (1,275) -3.8% 1,470 4.8%
Increase (decrease) in federal funds (11,049) -97.1% 833 n/a
Increase (decrease) in other liabilities (various categories) 612 (627)
Total increase in liabilities and stockholders' equity $10,478 2.5% $51,280 13.5%
While loans increased substantially during the past twelve months, core
deposits experienced little growth, and actually declined during the past
quarter as shown in the table above. Therefore, to fund loan growth, PSB has
substantially increased the portfolio of wholesale brokered certificates of
deposit and large retail certificates. During the twelve months ended June 30,
2004, increases in wholesale funding, including growth in FHLB advances
(totaling $40,024) has funded 78.0% of asset growth during that period.
During the past quarter ended June 30, 2004, PSB converted overnight federal
funds purchased used to fund first quarter loan growth to long-term brokered
certificates. However, even net of this refinancing, wholesale funding
increased $12,598. Core deposits declined $1,074. Other borrowings consist
primarily of retail overnight and term repurchase agreements with local
customers and are not considered to be wholesale funding.
The decline in stockholders' equity during the past quarter ending June 30,
2004 was due primarily to declaration of a dividend of $.30 per share (total
payment of $518), and a decline in unrealized gains on securities available for
sale, net of tax benefits of $1,259.
Table 1: Period-End Loan Composition
June 30, June 30, December 31, 2003
Dollars Dollars Percentage of total Percentage
(dollars in thousands) 2004 2003 2004 2003 Dollars of total
Commercial, industrial and agricultural $ 70,871 $ 69,526 21.5% 24.9% $ 66,934 21.7%
Commercial real estate mortgage 156,964 127,565 47.7% 45.7% 148,685 48.3%
Residential real estate mortgage 84,235 64,809 25.6% 23.2% 75,276 24.4%
Residential real estate loans held for sale - - 0.0% 0.0% 207 0.1%
Consumer home equity 9,791 7,478 3.0% 2.7% 9,252 3.0%
Consumer and installment 7,365 9,675 2.2% 3.5% 7,728 2.5%
Totals $329,226 $279,053 100.0% 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
11
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 $511 to $3,279 at June
30, 2004 from $3,790 at March 31, 2004, and has decreased $61 from $3,340 at
June 30, 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 .76%, .90%, and .88% at June 30, 2004, March 31, 2004, and June 30, 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 .84% at June 30, 2004 compared to .88% at March 31, 2004, and
1.01% at June 30, 2003. The allowance for loan losses was 1.19% of gross loans
at June 30, 2004 compared to 1.26% at June 30, 2003.
Table 2: Allowance for Loan Losses
Three months ended Six months ended
June 30, June 30,
(dollars in thousands) 2004 2003 2004 2003
Allowance for loan losses at beginning $3,700 $3,315 $3,536 $3,158
Provision for loan losses 240 240 480 465
Recoveries on loans previously charged-off 11 7 22
Loans charged off (34) (49) (117) (128)
Allowance for loan losses at end $3,906 $3,517 $3,906 $3,517
Nonperforming assets include: 1) loans that are either contractually past due
90 days or more as to interest or principal payments, on a nonaccrual status,
or the terms of which have been renegotiated to provide a reduction or deferral
of interest or principal (restructured loans) and 2) foreclosed assets.
Table 3: Nonperforming Assets
June 30, Dec. 31,
(dollars in thousands) 2004 2003 2003
Nonaccrual loans $2,660 $2,421 $3,119
Accruing loans past due 90 days or more - 60 -
Restructured loans not on nonaccrual 573 478 216
Total nonperforming loans 3,233 2,959 3,335
Foreclosed assets 46 381 84
Total nonperforming assets $3,279 $3,340 $3,419
Nonperforming loans as a % of gross loans receivable 0.98% 1.06% 1.08%
Total nonperforming assets as a % of total assets 0.76% 0.88% 0.84%
12
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
less than $100,000 as a percentage of total funding sources were 56.7% at June
30, 2004, 58.6% at March 31, 2004, and 63.0% at June 30, 2003. Wholesale
borrowings and broker and national certificates of deposit represent a
significant portion of PSB's total funding ability, which has increased
steadily during the past two years from 23.0% of total funding sources at
December 31, 2002, to 23.8% at June 30, 2003, and 28.4% at June 30, 2004.
Table 4: Period-end Deposit Composition
June 30,
(dollars in thousands) 2004 2003
$ % $ %
Non-interest bearing demand $ 46,901 13.8% $ 54,052 17.8%
Interest-bearing demand and savings 51,112 15.0% 38,194 12.6%
Money market deposits 65,576 19.3% 65,693 21.6%
Retail time deposits less than $100 61,335 18.0% 60,588 19.9%
Total core deposits $224,924 66.1% $218,527 71.9%
Retail time deposits $100 and over 49,929 14.7% 40,628 13.4%
Broker & national time deposits less than $100 6,174 1.8% 11,860 3.9%
Broker & national time deposits $100 and over 59,249 17.4% 32,673 10.8%
Totals $340,276 100.0% $303,688 100.0%
The interest rate paid on money market deposits is adjustable based on PSB's
discretion but generally tracks the movements of average bank money market
funds. Deposits due to investors as part of PSB's secondary market loan
servicing activities included in total non-interest bearing demand deposits
were approximately $3,071 at June 30, 2004, compared to $11,928 at June 30,
2003. Excluding these accounts, non-interest bearing demand deposits grew
$1,706, or 4.0% during the twelve months ended June 30, 2004.
Table 5: Summary of Changes by Significant Deposit Source
June 30, % Change from prior year
(dollars in thousands) 2004 2003 2004 2003
Total time deposits $100 and over $109,178 $73,301 48.9% 20.3%
Total broker and national time deposits 65,423 44,533 46.9% n/a
Total retail time deposits 111,264 101,216 9.9% n/a
Core deposits, including money market
deposits 224,924 218,527 2.9% 5.2%
13
To fund larger commercial loan originations or acquire other large blocks of
funding, PSB actively purchases broker and other national time deposits. PSB
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 June 30, 2004,
broker and national time deposits were 15.2% of total assets compared to 11.4%
at March 31, 2004, and 11.7% at June 30, 2003. Prior to September 30, 2002,
PSB did not maintain information on brokered certificates separately from all
other certificates. Consequently, PSB is unable to indicate the percentage
growth over the prior year for the twelve months ended June 30, 2003.
The increase in deposits of $36,588 (including broker and national time
deposits) has been inadequate to fund asset growth during the twelve months
ending June 30, 2004. Consequently, additional FHLB advances of $9,000 were
also obtained. During the three months ended June 30, 2004, there was no
change in FHLB advance principal.
Unused credit advances from the Federal Home Loan Bank of Chicago available to
PSB at June 30, 2004 totaled approximately $37.7 million based on an open line
of credit and securities available for pledging for advances. Available but
unused credit advances from the FHLB at June 30, 2003 were approximately $44.1
million. In addition, PSB had unused commitments from other correspondent
banks for federal funds purchased up to $22.2 million as of June 30, 2004. The
primary alternative funding sources utilized are Federal Home Loan Bank
advances, federal funds purchased, 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 June 30, 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 generally 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.
14
Table 6: Interest Rate Sensitivity Gap Analysis
June 30, 2004
(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 $121,638 $ 24,304 $ 35,916 $ 52,677 $ 74,174 $ 20,517 $329,226
Securities 3,124 3,218 5,448 12,268 34,340 13,063 71,461
FHLB stock 2,792 2,792
Other earning assets 2,365 2,365
Total $129,919 $ 27,522 $ 41,364 $ 64,945 $108,514 $ 33,580 $405,844
Cumulative rate
sensitive assets $129,919 $157,441 $198,805 $263,750 $372,264 $405,844
Interest-bearing
liabilities
Interest-bearing
Deposits $103,026 $ 29,338 $ 48,532 $ 20,158 $ 43,495 $ 48,826 $293,375
FHLB advances 10,000 - 19,000 - 18,000 - 47,000
Other borrowings 4,988 253 1,347 1,393 1,413 - 9,394
Total $118,014 $ 29,591 $ 68,879 $ 21,551 $ 62,908 $ 48,826 $349,769
Cumulative interest
sensitive liabilities $118,014 $147,605 $216,484 $238,035 $300,943 $349,769
Interest sensitivity
gap for
the individual period $ 11,905 $ (2,069) $(27,515) $ 43,394 $ 45,606 $(15,246)
Ratio of rate sensitive
assets to rate sensitive
liabilities for
the individual period 110.1% 93.0% 60.1% 301.4% 172.5% 68.8%
Cumulative interest
sensitivity gap $ 11,905 $ 9,836 $(17,679) $ 25,715 $ 71,321 $ 56,075
Cumulative ratio of rate
sensitive assets to rate
sensitive liabilities 110.1% 106.7% 91.8% 110.8% 123.7% 116.0%
At June 30, 2004, if interest rates had risen 200 basis points or had fallen
100 basis points, the 365 day cumulative ratio of rate sensitive assets to rate
sensitive liabilities would change from 91.8% to 88.5% (if up 200 basis points)
and 95.8% (if down 100 basis points), respectively. At June 30, 2003, if
interest rates had risen 200 basis points or had fallen 100 basis points, the
365 day cumulative ratio of rate sensitive assets to rate sensitive liabilities
would have changed from 115.1% to 108.2% (if up 200 basis points) and 117.9%
(if down 100 basis points), respectively. During the twelve months ended June
30, 2004, PSB has increased the amount of fixed rate commercial and real estate
loans held (with original fixed terms generally from 3 to 15 years) which have
been funded in part by short-term wholesale borrowings and brokered time
deposits of equivalent or shorter terms. In addition, as of June 30, 2004, $19
million of FHLB advances with original long-term maturities will mature within
365 days, which has lowered 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 June 30, 2004. However, the FHLB
advances are expected to be refinanced upon maturity at significantly lower
rates while also extending maturities in excess of one year. This will have
the impact of increasing the cumulative gap ratio while improving the net
interest rate margin.
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
15
least expensive liquidity sources to fund sudden and unanticipated liquidity
needs. PSB also 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 June 30, 2004 and 2003 was 7.0% and
10.5%, respectively and above the 5% minimum required by policy. The decline
in the basic surplus is primarily a result of lower FHLB borrowing capacity due
to $9,000 in additional advances taken and fewer securities available for
potential FHLB advance pledging (such securities have been pledged for
municipal deposits).
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 June 30, 2004, net interest income for the next 12 months was
projected to decrease .46% if rates increase 200 basis points, and was
projected to decrease .70% if rates decrease 100 basis points, which is less
than the 15% required by policy and was considered acceptable by management.
At June 30, 2003, net interest income for the next 12 months was projected to
increase 2.59% if rates increase 200 basis points, and was projected to
decrease 1.67% if rates decrease 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
June 30, 2004, PSB's core funding utilization ratio was projected to be 54.11%
if rates increase 200 basis points and was therefore within policy
requirements. At June 30, 2003, PSB's core funding utilization ratio was
projected to be 40.77% if rates increase 200 basis points.
16
CAPITAL RESOURCES
Stockholders' equity at June 30, 2004 increased $1,470 to $32,239 or 4.8% from
$30,769 at June 30, 2003. Net income retained during the twelve months ended
June 30, 2004, net of cash dividends and shareholder stock buybacks was $2,946.
Capital decreased $1,485 from a decline in the unrealized gain on securities
available for sale (net of tax effects). All other net increases in capital
totaled $9. Stockholders' equity included unrealized losses on securities
available for sale, net of their tax effect, of $4 at June 30, 2004 compared to
unrealized gains of $1,481 at June 30, 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 June 30, 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. Tier 1 capital to
average tangible assets was 7.55% during the quarter ended June 2004 compared
to 7.89% in the prior year quarter. Management believes PSB to be well
capitalized at June 30, 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 and 8,000 shares at $35.00 per share were purchased
during the second quarter of 2004. During the quarter ended June 30, 2003, PSB
repurchased 14,500 shares at an average price of $32.25 per share in its annual
buyback program. The remainder of the 2004 buyback program was purchased in
early August 2004 with 9,300 shares repurchased at an average price of $34.90
per share. 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
June 30, Dec 31.
(dollars in thousands) 2004 2003 2003
Stockholders' equity $ 32,239 $ 30,769 $ 32,141
Disallowed mortgage servicing right assets (80) (69) (81)
Unrealized (gain) loss on securities available for sale 4 (1,481) (844)
Tier 1 regulatory capital 32,163 29,219 31,216
Add: allowance for loan losses 3,906 3,517 3,536
Total regulatory capital $ 36,069 $ 32,736 $ 34,752
Total assets $431,216 $379,936 $408,933
Disallowed mortgage servicing right assets (80) (69) (81)
Unrealized (gain) loss on securities available for sale 4 (1,481) (844)
Tangible assets $431,140 $378,386 $408,008
Risk-weighted assets (as defined by current regulations) $337,462 $293,273 $318,005
Tier 1 capital to average tangible assets (leverage ratio) 7.55% 7.89% 7.83%
Tier 1 capital to adjusted risk-weighted assets 9.53% 9.96% 9.82%
Total capital to adjusted risk-weighted assets 10.69% 11.16% 10.93%
17
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
On June 28, 2004, PSB placed into service a new bank and financial services
office and administrative headquarters located on property adjacent to the
former Wausau, Wisconsin, main office location. The 32,000 square foot office
and drive-through canopy had final building project costs including necessary
furniture, fixtures, and equipment of approximately $4.8 million. The former
Wausau main office which had been used since the Bank opened in 1962 and as
most recently expanded during 1992 was razed. Under current accounting rules,
demolition of the old home office required the write-off of the remaining cost
basis. A one-time charge of approximately $329 ($199 after income tax
benefits) was recorded during the second quarter of 2004 when the new home
office was occupied.
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 2004 was $782, or $.45 for basic and
diluted earnings per share. Comparatively, net income for the quarter ended
June 30, 2003, was $1,057, or $.61 per share for basic and $.60 per share for
diluted earnings per share. Operating results for the second quarter 2004
generated an annualized return on average assets of .73% and an annualized
return on average equity of 9.52%, compared to 1.14% and 13.82% for the
comparable period in 2003.
However, if the net loss on abandonment of the home office were excluded from
the second quarter 2004 results, net income would have been $981 and ROA and
ROE would have been .92% and 11.91%, respectively. The quarter ended June 30,
2003 included a charge for a change in accounting estimate involving mortgage
servicing rights of $143, net of tax benefits. If the change in accounting
estimate were excluded from the second quarter 2003 results, net income would
have been $1,200 and ROA and ROE would have been 1.29% and 15.65%,
respectively.
The following Table 8 presents consolidated quarterly summary financial data of
PSB Holdings, Inc. and Subsidiary.
18
Table 8: Financial Summary
(dollars in thousands, except per share data) Quarter ended
June 30, March 31, Dec. 31 Sept. 30, June30,
EARNINGS AND DIVIDENDS: 2004 2004 2003 2003 2003
Net interest income $ 3,517 $ 3,474 $ 3,375 $ 3,306 $ 3,268
Provision for loan losses $ 240 $ 240 $ 130 $ 240 $ 240
Other noninterest income $ 855 $ 740 $ 1,120 $ 1,143 $ 726
Other noninterest expense $ 2,914 $ 2,602 $ 2,479 $ 2,335 $ 2,220
Net income $ 782 $ 954 $ 1,290 $ 1,235 $ 1,057
Basic earnings per share (3) $ 0.45 $ 0.55 $ 0.74 $ 0.71 $ 0.61
Diluted earnings per share (3) $ 0.45 $ 0.55 $ 0.74 $ 0.71 $ 0.60
Dividends declared per share (3) $ 0.30 $ - $ 0.29 $ - $ 0.29
Net book value per share $ 18.68 $ 19.33 $ 18.54 $ 18.11 $ 17.74
Semi-annual dividend payout ratio 29.84% n/a 19.88% n/a 21.74%
Average common shares outstanding 1,729,322 1,733,531 1,733,398 1,733,828 1,744,199
BALANCE SHEET - AVERAGE BALANCES:
Loans receivable, net of allowances for loss $ 320,471 $ 307,109 $ 302,491 $ 288,448 $ 265,863
Assets $ 426,826 $ 407,577 $ 399,351 $ 389,267 $ 371,537
Deposits $ 330,337 $ 312,455 $ 312,376 $ 307,752 $ 292,698
Stockholders' equity $ 32,942 $ 32,878 $ 32,095 $ 31,085 $ 30,670
PERFORMANCE RATIOS:
Return on average assets (1) 0.73% 0.94% 1.28% 1.26% 1.14%
Return on average stockholders' equity (1) 9.52% 11.64% 15.95% 15.76% 13.82%
Average tangible stockholders' equity to
average assets 7.61% 7.83% 7.85% 7.70% 7.92%
Net loan charge-offs to average loans 0.01% 0.02% 0.09% 0.02% 0.01%
Nonperforming loans to gross loans 0.98% 1.17% 1.08% 1.09% 1.06%
Allowance for loan losses to gross loans 1.19% 1.16% 1.15% 1.23% 1.26%
Net interest rate margin (1)(2) 3.64% 3.73% 3.65% 3.67% 3.83%
Net interest rate spread (1)(2) 3.30% 3.38% 3.24% 3.21% 3.34%
Service fee revenue as a percent of
average demand deposits (1) 2.63% 2.60% 2.70% 2.48% 2.83%
Noninterest income as a percent of gross revenue 13.54% 12.24% 17.56% 17.90% 12.13%
Efficiency ratio (2) 64.54% 59.73% 53.47% 50.94% 53.86%
Noninterest expenses to average assets (1) 2.74% 2.56% 2.46% 2.38% 2.40%
STOCK PRICE INFORMATION:
High $ 35.60 $ 35.60 $ 36.19 $ 32.61 $ 32.38
Low $ 34.50 $ 33.50 $ 31.43 $ 31.43 $ 28.57
Market value at quarter-end $ 34.50 $ 35.00 $ 33.62 $ 31.90 $ 31.67
(1) Annualized
(2) The yield on tax-exempt loans and securities is computed on a tax-
equivalent basis using a tax rate of 34%.
(3) Due to rounding, cumulative quarterly per share performance may not equal
annual per share totals.
NET INTEREST INCOME
Net interest income is the most significant component of earnings. Tax adjusted
net interest income increased $264 (7.8%) from $3,396 for the quarter ended
June 30, 2003 to $3,660 for the current quarter ended June 30, 2004. Quarterly
tax-adjusted net interest margin as a percent of average interest earning
assets decreased from 3.83% in June 2003 to 3.64% in June 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
19
50 basis points from 6.07% at June 2003 to 5.57% at June 2004. However, the
cost of liabilities declined only 46 basis points from 2.73% at June 2003 to
2.27% at June 2004. Despite the decline in net interest rate margin, total net
interest income has increased due to earning asset growth.
During the quarter ended June 2004, net interest margin declined to 3.64% from
3.73% for the prior March 2004 quarter as low cost adjustable rate overnight
funds of approximately $11 million used to fund March 2004 loan growth were
converted to higher cost long term fixed funding during the June quarter.
However, during the past three quarters, loan and other asset yields have
leveled and favorable repricing of time deposits has slowed indicating net
interest margin in the upcoming quarter will be primarily impacted by the
ability to control core deposit rate increases while originating higher
yielding loans in light of the cumulative .50% Federal Reserve discount rate
increases since June 2004 and anticipated future discount rate increases.
Table 9A: Net Interest Income Analysis (Quarter)
(dollars in thousands) Quarter ended June 30, 2004 Quarter ended June 30,2003
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning assets:
Loans (1)(2) $324,251 $ 4,731 5.85% $269,259 $ 4,490 6.69%
Taxable securities 47,596 453 3.82% 55,008 501 3.65%
Tax-exempt securities (2) 24,595 371 6.05% 21,670 335 6.20%
FHLB stock 2,679 36 5.39% 2,340 37 6.34%
Other 4,190 10 0.96% 7,766 23 1.19%
Total (2) 403,311 5,601 5.57% 356,043 5,386 6.07%
Non-interest-earning assets:
Cash and due from banks 13,840 9,518
Premises and equipment, net 10,246 6,225
Other assets 3,209 3,147
Allowance for loan losses (3,780) (3,396)
Total $426,826 $371,537
Liabilities & stockholders' equity
Interest-bearing liabilities:
Savings and demand deposits $ 53,180 $ 88 0.66% $ 37,393 $ 57 0.61%
Money market deposits 64,450 144 0.90% 66,067 175 1.06%
Time deposits 163,555 1,128 2.77% 143,135 1,200 3.36%
FHLB borrowings 47,000 504 4.30% 38,000 506 5.34%
Other borrowings 14,718 77 2.10% 7,690 52 2.71%
Total 342,903 1,941 2.27% 292,285 1,990 2.73%
Non-interest-bearing liabilities:
Demand deposits 49,152 46,103
Other liabilities 1,829 2,479
Stockholders' equity 32,942 30,670
Total $426,826 $371,537
Net interest income 3,660 3,396
Rate spread 3.30% 3.34%
Net yield on interest-earning assets 3.64% 3.83%
(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%.
20
Table 9B: Net Interest Income Analysis (Six Months)
(dollars in thousands) Six months ended June 30, 2004 Six months ended June 30, 2003
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning assets:
Loans (1)(2) $317,485 $ 9,302 5.88% $264,619 $ 8,901 6.78%
Taxable securities 47,738 914 3.84% 56,601 1,116 3.98%
Tax-exempt securities (2) 24,617 739 6.02% 21,626 673 6.28%
FHLB stock 2,575 76 5.92% 2,322 73 6.34%
Other 3,572 16 0.90% 7,916 46 1.17%
Total (2) 395,987 11,047 5.59% 353,084 10,809 6.17%
Non-interest-earning assets:
Cash and due from banks 12,657 9,571
Premises and equipment, net 9,267 6,193
Other assets 2,986 3,194
Allowance for loan losses (3,695) (3,305)
Total $417,202 $368,737
Liabilities & stockholders'
equity
Interest-bearing liabilities:
Savings and demand deposits $ 52,500 $ 173 0.66% $ 37,560 $ 119 0.64%
Money market deposits 65,760 298 0.91% 68,004 359 1.06%
Time deposits 156,395 2,180 2.80% 142,013 2,466 3.50%
FHLB borrowings 46,808 970 4.16% 38,000 1,014 5.38%
Other borrowings 14,137 150 2.13% 6,878 93 2.73%
Total 335,600 3,771 2.25% 292,455 4,051 2.79%
Non-interest-bearing liabilities:
Demand deposits 46,992 43,598
Other liabilities 1,868 2,424
Stockholders' equity 32,742 30,260
Total $417,202 $368,737
Net interest income 7,276 6,758
Rate spread 3.34% 3.38%
Net yield on interest-earning assets 3.68% 3.86%
(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%.
21
Table 10: Interest Expense and Expense Volume and Rate Analysis
Six months ended June 30, 2004
2004 compared to 2003
increase (decrease) due to (1)
(dollars in thousands) Volume Rate Net
Interest earned on:
Loans (2) $ 1,787 $ (1,386) $ 401
Taxable securities (176) (26) (202)
Tax-exempt securities (2) 94 (28) 66
FHLB stock 8 (5) 3
Other interest income (25) (5) (30)
Total 1,688 (1,450) 238
Interest paid on:
Savings and demand deposits 48 6 54
Money market deposits (12) (49) (61)
Time deposits 251 (537) (286)
FHLB borrowings 236 (280) (44)
Other borrowings 99 (42) 57
Total 622 (902) (280)
Net interest earnings $ 1,066 $ (548) $ 518
(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 June 30, 2004, and June 30, 2003. Net charge-offs as a
percentage of average loans outstanding were .01% during the three months ended
June 30, 2004 and 2003.
Non-performing 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.
22
NONINTEREST INCOME
Noninterest income increased by $129 in the June 2004 quarter to $855 compared
to $726 in 2003. However, the prior year June 2003 quarter included a
cumulative change in accounting estimate related to mortgage servicing that
lowered noninterest income by $236. After accounting for the prior year
adjustment, the decline in June 2004 income of $107 is due primarily to lower
mortgage banking income of $144. A valuation allowance on mortgage servicing
rights continues to be maintained and was $138 as of June 30, 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. During the June 2004 quarter, $12 of the valuation allowance was
recaptured. For all of 2004, PSB expects mortgage banking income to be
approximately 50% to 60% of the level seen during 2003. PSB serviced
$156.1 million of mortgage principal for other investors at June 30, 2004
compared to $137.5 million at June 30, 2003.
Peoples Insurance Services LLC, a commercial property and casualty insurance
agency and brokerage started by Peoples during September 2003, continues to
build relationships in the Wausau area. The agency's net loss during the
quarter and six months ended June 2004 was $37 and $75, respectively. Since
opening during September 2003, cumulative net losses have been in line with
initial projections despite revenue growth significantly less than expectation.
Lower revenue has been partially offset with lower operating expenses.
During June 2003, additional expense from a change in accounting estimate
related to accounting for mortgage servicing rights of $236 was recorded, as
well as an $18 provision for impairment of servicing rights reducing gain on
sale and servicing of loans by $254 in total. During June 2003, PSB contracted
with an outside consultant for monthly mortgage servicing right (MSR)
accounting services due to continued growth in serviced mortgage loans. PSB
began servicing mortgage loans for other investors in November 2000. PSB
adopted new estimates related to customer mortgage payment activity as part of
the new accounting model. Serviced loans were broken down into a greater
number of "pools" with amortization and impairment calculated based on
individual customer activity within each pool. Initial servicing rights are
based on national prepayment estimates at the time of origination. The new
accounting model provides an estimated original MSR cost lower than that using
the previous estimates, and amortizes that cost faster than under the Company's
previous model. The change in accounting estimate reduced gain on sale and
servicing of loans by $236 ($143 after tax benefits, or approximately $.08 per
diluted earnings per share).
Table 11 - Mortgage Servicing Rights Activity
Six months ended June 30, 2004
Originated Valuation
MSR Allowance Total
January 1, 2004 $ 904 $ (90) $ 814
Originated servicing 209 209
Amortization charged to earnings (172) (172)
Valuation adjustment charged to earnings (48) (48)
June 30, 2004 $ 941 $ (138) $ 803
23
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 June 30, 2004, the maximum Company obligation on the entire servicing
portfolio for such guarantees would be approximately $594 (.38% of the serviced
principal) up from $428 (.31% of the serviced principal) at June 30, 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.
NONINTEREST EXPENSE
Noninterest operating expenses increased $694 to $2,914 in the quarter ended
June 2004 compared to $2,220 during the quarter ended June 2003, but included a
one-time charge for abandonment of premises and equipment (the prior home
office on the same property as the new home office and principal banking center
was abandoned on June 28) of $329 before tax benefits. Excluding this one-time
charge operating expenses increased $365, or 16.4%.
As the new home office and principal customer financial center was occupied on
June 28, the 32,000 square foot $4.8 million dollar facility (including
furniture and equipment) was placed in service. Depreciation of the investment
in the new facility, along with the depreciation costs of the new Minocqua
branch and the item processing imaging system increased occupancy expenses for
the June 2004 quarter by approximately $30. Annual depreciation expense is
estimated to increase $186 ($113 after income tax benefits) from the new
investment in the home office.
Excluding the one-time charge for abandonment of premises and equipment,
operating expenses as a percent of average assets were 2.43% during the June
2004 quarter compared to 2.40% during the June 2003 quarter. Also excluding
this charge, the expense efficiency ratio was 57.25% during June 2004 compared
to 53.86% in June 2003.
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.
24
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, 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 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.
25
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities
Maximum number
Total number (or approximate
of shares (or dollar value) of
Total number units) purchased shares (or units)
of shares Average price as part of publicly that may yet be
(or units) paid per share announced plans purchased under the
purchased (or unit) or programs plans or programs
Period (a) (b) (c) (d)
April 2004
May 2004 8,000 $35.00 8,000 9,300
June 2004
Total 8,000 $35.00 8,000 9,300
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
The annual meeting of shareholders of the Company was held on April 20, 2004.
The only matter voted upon was the election of directors. The number of votes
cast for, or withheld, were as follows:
ELECTION OF DIRECTORS
For Withheld
Gordon P. Connor 958,344 1,641
Patrick L. Crooks 958,326 1,659
William J. Fish 959,163 822
Charles A. Ghidorzi 945,543 14,442
Gordon P. Gullickson 937,681 22,304
David K. Kopperud 959,163 822
Thomas R. Polzer 958,974 1,011
William M. Reif 959,058 927
Thomas A. Riiser 959,163 822
John H. Sonnentag 876,554 83,431
26
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 April 28, 2004. The Company filed a current report on
Form 8-K on April 28, 2004, reporting earnings for the quarter ended March 31,
2004, under Item 5 and additional related disclosure under Item 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.
August 16, 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 JUNE 30, 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