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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 4, 2004 was 1,716,330.
PSB HOLDINGS, INC.
FORM 10-Q
Quarter Ended September 30, 2004
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2004 (unaudited) and December 31,
2003 (derived from audited financial statements) 1
Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 2004
and 2003 (unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 2004 (unaudited) 3
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 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 29
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 6. Exhibits 30
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSB HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2004 unaudited, December 31, 2003 (derived from audited financial statements)
Sept. 30, December 31,
(dollars in thousands, except per share data) 2004 2003
ASSETS
Cash and due from banks $ 10,927 $ 13,754
Interest-bearing deposits and money market funds 2,004 1,214
Federal funds sold 5,617 3,959
Cash and cash equivalents 18,548 18,927
Securities available for sale (at fair value) 74,481 72,472
Federal Home Loan Bank stock (at cost) 2,834 2,444
Loans held for sale 62 207
Loans receivable, net of allowance for loan losses of $4,107
and $3,536, respectively 333,200 304,339
Accrued interest receivable 1,795 1,617
Foreclosed assets 52 84
Premises and equipment 12,028 7,557
Mortgage servicing rights, net 807 814
Other assets 796 472
TOTAL ASSETS $ 444,603 $ 408,933
LIABILITIES
Non-interest-bearing deposits $ 52,076 $ 50,563
Interest-bearing deposits 300,432 265,851
Total deposits 352,508 316,414
Federal Home Loan Bank advances 50,000 47,000
Other borrowings 6,807 10,475
Accrued expenses and other liabilities 1,973 2,903
Total liabilities 411,288 376,792
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 9,690 9,694
Retained earnings 24,754 22,789
Accumulated other comprehensive income 662 844
Treasury stock, at cost - 170,849 and 153,781 shares, respectively (3,678) (3,073)
Total stockholders' equity 33,315 32,141
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 444,603 $ 408,933
1
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(dollars in thousands, September 30, September 30,
except per share data - unaudited) 2004 2003 2004 2003
Interest and dividend income:
Loans, including fees $ 4,882 $ 4,594 $ 14,150 $ 13,466
Securities:
Taxable 454 359 1,368 1,475
Tax-exempt 247 232 735 676
Other interest and dividends 55 56 147 175
Total interest and dividend income 5,638 5,241 16,400 15,792
Interest expense:
Deposits 1,543 1,368 4,194 4,312
FHLB advances 515 506 1,485 1,520
Other borrowings 59 61 209 154
Total interest expense 2,117 1,935 5,888 5,986
Net interest income 3,521 3,306 10,512 9,806
Provision for loan losses 195 240 675 705
Net interest income after provision for loan losses 3,326 3,066 9,837 9,101
Noninterest income:
Service fees 320 323 933 951
Mortgage banking 187 655 655 1,499
Investment and insurance sales commissions 164 115 345 303
Net gain (loss) on sale of securities - (19) 111 (19)
Other noninterest income 93 69 315 257
Total noninterest income 764 1,143 2,359 2,991
Noninterest expense:
Salaries and employee benefits 1,718 1,508 4,813 4,343
Occupancy and facilities 445 286 1,107 859
Loss on abandonment of premises and equipment - - 329 -
Data processing and other office operations 155 131 502 418
Advertising and promotion 97 45 195 133
Other noninterest expenses 418 365 1,403 1,119
Total noninterest expense 2,833 2,335 8,349 6,872
Income before provision for income taxes 1,257 1,874 3,847 5,220
Provision for income taxes 510 639 1,364 1,704
Net income $ 747 $ 1,235 $ 2,483 $ 3,516
Basic earnings per share $ 0.43 $ 0.71 $ 1.44 $ 2.02
Diluted earnings per share $ 0.43 $ 0.71 $ 1.42 $ 2.00
2
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine months ended September 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 2,483 2,483
Unrealized loss on securities
available for sale, net of tax (115) (115)
Reclassification adjustment for
security gain included in net
income, net of tax (67) (67)
Total comprehensive income 2,301
Purchase of treasury stock (628) (628)
Proceeds from stock options
issued out of treasury (4) 15 11
Distribution of treasury stock in
settlement
of liability to Company directors 8 8
Cash dividends declared $.30 per
share (518) (518)
Balance September 30, 2004 $ 1,887 $ 9,690 $ 24,754 $ 662 $ (3,678) $ 33,315
3
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2004 and 2003 - unaudited
2004 2003
Cash flows from operating activities:
Net income $ 2,483 $ 3,516
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net amortization 885 1,495
Provision for loan losses 675 705
Gain on sale of mortgage loans (542) (1,871)
Provision for servicing right valuation allowance 32 28
Loss on abandonment of premises and equipment 329 -
(Gain) loss on sale of foreclosed assets (37) 37
(Gain) loss on sale of securities (111) 19
FHLB stock dividends (119) (138)
Changes in operating assets and liabilities:
Accrued interest receivable (178) 32
Other assets (218) 95
Other liabilities (922) (957)
Net cash provided by operating activities 2,277 2,961
Cash flows from investing activities:
Proceeds from sale and maturities of:
Securities available for sale 11,591 40,016
Payment for purchase of:
Securities available for sale (13,955) (30,122)
Purchase of FHLB stock (271) -
Net increase in loans (29,050) (40,345)
Capital expenditures (5,269) (702)
Proceeds from sale of foreclosed assets 7 280
Net cash used in investing activities (36,947) (30,873)
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Cash flows from financing activities:
Net increase in non-interest-bearing deposits 1,513 1,242
Net increase in interest-bearing deposits 34,581 11,032
Proceeds from long-term FHLB advances 13,000 15,000
Repayments of long-term FHLB advances (10,000) (10,000)
Net increase (decrease) in other borrowings (3,668) 7,181
Dividends declared (518) (496)
Proceeds from issuance of stock options 11 -
Purchase of treasury stock (628) (553)
Net cash provided by financing activities 34,291 23,406
Net decrease in cash and cash equivalents (379) (4,506)
Cash and cash equivalents at beginning 18,927 21,552
Cash and cash equivalents at end $ 18,548 $ 17,046
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 5,814 $ 6,205
Income taxes 1,520 1,650
Noncash investing and financing activities:
Loans charged off $ 126 $ 206
Loans transferred to foreclosed assets - 178
Loans originated on sale of foreclosed assets 70 251
Distribution of treasury stock in settlement of liability
to Company directors 8 46
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 ("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. Any
reference to "PSB" refers to the consolidated or individual operations of PSB
Holdings, Inc. and its subsidiary Peoples State Bank.
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 and nine months ended September 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
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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 in the year 2011. As of September 30, 2004, 27,536 options
outstanding were eligible to be exercised at a 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 Nine months ended
September 30, September 30,
(dollars in thousands, except per share data-unaudited)
2004 2003 2004 2003
Net income $ 747 $ 1,235 $ 2,483 $ 3,516
Weighted average shares outstanding 1,720,436 1,733,828 1,727,736 1,742,292
Effect of dilutive stock options outstanding 15,052 14,021 15,158 12,487
Diluted weighted average shares outstanding 1,735,488 1,747,849 1,742,894 1,754,779
Basic earnings per share $ 0.43 $ 0.71 $ 1.44 $ 2.02
Diluted earnings per share $ 0.43 $ 0.71 $ 1.42 $ 2.00
NOTE 4 - COMPREHENSIVE INCOME
Comprehensive income as defined by current accounting standards for the three
months and nine months ended September 30, 2004 and 2003 is as follows:
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands - unaudited) 2004 2003 2004 2003
Net income $ 747 $ 1,235 $ 2,483 $ 3,516
Unrealized gain (loss) on securities
available for sale, net of tax 666 (602) (115) (427)
Reclassification adjustment for security
(gain) loss included in net income, net of tax - 12 (67) 12
Comprehensive income $ 1,413 $ 645 $ 2,301 $ 3,101
7
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
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 loan's
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.
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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, 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 - INCOME TAXES
During the quarter ended September 30, 2004, PSB resolved a Wisconsin state
franchise tax audit initiated during 2003. 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. The
Department has taken the position that a portion of the income of the out-of-
state subsidiaries is taxable in Wisconsin. After consideration of the cost to
litigate and the potential risk of a substantial loss in litigation, PSB
decided to accept a standardized settlement offered by the Department to
Wisconsin banks with out-of-state subsidiaries with no admission of wrongdoing.
Although the settlement decreased quarterly net income by $150,000 ($.09 per
share), PSB retained the ability to operate the subsidiary providing efficient
and tax-effective management of the securities portfolio.
NOTE 8 - 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.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is presented to assist in the
understanding and evaluation of 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 September 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 September 30, 2004, total assets were $444,603, an increase of $13,387, or
3.1%, over June 30, 2004, and an increase of $35,670, or 8.7%, over December
31, 2003. Asset growth since June 30, 2004 and December 31, 2003 consisted of:
Three months ended Nine months ended
Increase (decrease) in assets ($000s) September 30, 2004 September 30, 2004
$ % $ %
Increase in residential real estate mortgage loans $ 4,242 5.0% $ 13,201 17.5%
Increase in commercial real estate loans 3,204 2.0% 11,483 7.7%
Increase in investment securities 3,020 4.2% 2,009 2.8%
Increased investment in premises and equipment 1,533 14.6% 4,471 59.2%
Increase (decrease) in cash and cash equivalents 1,036 5.9% (379) -2.0%
Increase in commercial, industrial and agricultural loans 454 0.6% 4,391 6.6%
Net change in remaining assets (various categories) (102) -0.5% 494 2.6%
Total increase in assets $ 13,387 3.1% $ 35,670 8.7%
The commercial and residential real estate loan portfolio continued to grow at
a steady pace during both the three months and nine months ended September 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, 2004 and December 31, 2003 increased by a substantial amount,
and constitutes a higher percentage of the total loan portfolio. As long-term
mortgage
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rates increased slightly from past historical lows, customers have become more
sensitive to higher long-term fixed rates, and PSB has begun to originate
balloon type mortgages held on the balance sheet. The balloon maturity dates
range from 3 to 7 years, with the initial rate fixed until the balloon maturity
date. Most of the balloon loans are based on amortization periods ranging from
15 to 30 years. PSB expects commercial real estate and other commercial
lending to increase during the coming quarter while seeing a reduction in the
growth of retained on balance sheet residential mortgages.
PSB has allocated and structured resources to be a leader in real-estate based
lending, both residential and commercial. At the same time, PSB is subject to
substantial competition from credit unions and other financial institutions for
retail installment lending such as auto loans. A portion of PSB's consumer
installment loans were converted to home equity loans during past quarters.
Combined retail installment and home equity loans were $17,337 at September 30,
2004 and $16,980 at December 31, 2003. PSB does not expect consumer
installment lending to be a key focus in the near term, and expects consumer
installment loan principal to remain flat or decline slowly.
Investment in premises and equipment grew dramatically during the three months
and nine months ended September 30, 2004 primarily for costs of the 32,000
square foot, $4,800 new home office building (including furniture and
equipment) which was placed in service on June 28, 2004. Final home office and
campus area construction costs were capitalized during the September 2004
quarter totaling approximately $1,000. In addition, investment in real estate
and construction in progress at the Weston, Wisconsin branch location to be
opened early in 2005, and purchase of vacant land in a neighboring community
for another potential future branch location increased premises and equipment
approximately $500 during the past quarter. In connection with current
construction on the new branch in Weston, Wisconsin, PSB has approximately $689
in outstanding construction cost commitments at September 30, 2004 that have
not yet been paid.
Asset growth since June 30, 2004 and December 31, 2003 was funded by the
following:
Three months ended Nine months ended
Increase (decrease) in liabilities and equity ($000s) September 30, 2004 September 30, 2004
$ % $ %
Increase in core deposits (including MMDA) $ 11,815 5.3% $ 9,078 4.0%
Increase in retail certificates of deposit > $100 4,655 9.3% 14,551 36.3%
Increase in FHLB advances 3,000 6.4% 3,000 6.4%
Increase in stockholders' equity 1,076 3.3% 1,174 3.7%
Net decrease in other liabilities (various categories) (660) -25.1% (930) -32.0%
Decrease in other borrowings (2,261) -24.9% (3,668) -35.0%
Increase (decrease) in wholesale certificates of deposit (4,238) -6.5% 12,465 25.6%
Total increase in liabilities and stockholders' equity $ 13,387 3.1% $ 35,670 8.7%
Although available liquidity has tightened during 2004 as PSB experienced
strong loan growth with little core deposit growth, core deposits increased
substantially during the quarter ended
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September 30, 2004 increasing $11,815. This growth allowed PSB to let some
wholesale certificates of deposit run-off upon maturity and decreased wholesale
certificates by $4,238 during the quarter. Despite recent growth however, the
majority of 2004 funding during the nine months ended September 30, 2004 has
been from an increase in retail certificates greater than $100, and wholesale
certificates, accounting for 75.7% of the asset growth. PSB does not expect to
see continued core deposit growth at levels seen during the September 2004
quarter.
The September 2004 quarter earnings press release filed on Form 8-K dated
October 27, 2004 incorrectly stated that core deposits increased $22,900,
wholesale borrowings (including FHLB advances) increased $10,200 and jumbo
retail certificates of deposit increased $16,300 during the 12 months ended
September 2004. The release further incorrectly stated that during the quarter
ended September 2004, wholesale funds decreased $11,000 and that retail
deposits and local borrowings comprised 69.2% of total asset funding.
The earnings press release should have stated that core deposits increased
$14,855 (not $22,900), wholesale borrowings increased $19,932 (not $10,200),
and jumbo retail certificates increased $14,616 (not $16,300) during the 12
months ended September 2004. Likewise, the release should have stated that
wholesale funds decreased $1,238 (not $11,000) during the quarter ended
September 2004, and that retail deposits and local borrowings comprised 67.1%
of total asset funding (not 69.2%). The errors were inadvertent, did not
affect reported earnings, and wholesale funding was available in sufficient
amounts at September 30, 2004. Management of PSB does not consider the error
to be material to an understanding of PSB's financial condition or operations
as a whole as presented in the October 27, 2004 earnings press release.
Table 1: Period-End Loan Composition
September 30, September 30, December 31, 2003
Dollars Dollars Percentage of total Percentage
(dollars in thousands) 2004 2003 2004 2003 Dollars of Total
Commercial, industrial and agricultural $ 71,325 $ 70,928 21.1% 23.5% $ 66,934 21.7%
Commercial real estate mortgage 160,168 140,266 47.6% 46.5% 148,685 48.3%
Residential real estate mortgage 88,477 73,291 26.2% 24.3% 75,276 24.4%
Residential real estate loans held for sale 62 179 0.0% 0.1% 207 0.1%
Consumer home equity 10,557 8,637 3.1% 2.9% 9,252 3.0%
Consumer and installment 6,780 8,225 2.0% 2.7% 7,728 2.5%
Totals $ 337,369 $ 301,526 100.0% 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
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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 $41 to $3,238 at
September 30, 2004 from $3,279 at June 30, 2004, and has decreased $181 from
$3,419 at December 31, 2003. Nonperforming loans also include restructured
loans until six consecutive monthly payments are received under the new loan
terms. Total nonperforming assets as a percentage of total assets continues to
decline slightly at .73%, .76%, and .84% at September 30, 2004, June 30, 2004,
and December 31, 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 .71% at September 30, 2004 compared
to .84% at June 30, 2004, and .63% at December 31, 2003. The allowance for
loan losses increased to 1.22% of gross loans at September 30, 2004 compared to
1.15% at December 31, 2003.
Table 2: Allowance for Loan Losses
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 2004 2003 2004 2003
Allowance for loan losses at beginning $ 3,906 $ 3,517 $ 3,536 $ 3,158
Provision for loan losses 195 240 675 705
Recoveries on loans previously charged-off 15 13 22 35
Loans charged off (9) (78) (126) (206)
Allowance for loan losses at end $ 4,107 $ 3,692 $ 4,107 $ 3,692
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.
13
Table 3: Nonperforming Assets
September 30, Dec. 31,
(dollars in thousands) 2004 2003 2003
Nonaccrual loans $ 2,594 $ 2,775 $ 3,119
Accruing loans past due 90 days or more - 7 -
Restructured loans not on nonaccrual 592 490 216
Total nonperforming loans 3,186 3,272 3,335
Foreclosed assets 52 183 84
Total nonperforming assets $ 3,238 $ 3,455 $ 3,419
Nonperforming loans as a % of gross
loans receivable 0.94% 1.09% 1.08%
Total nonperforming assets as a % of total
assets 0.73% 0.87% 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
less than $100 as a percentage of total funding sources were 57.8% at
September 30, 2004, 56.7%% at June 30, 2004, and 60.9% at December 31, 2003.
Federal Home Loan Bank advances 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 25.6% at December 31, 2003, to 28.4% at June
30, 2004 and 27.2% at September 30, 2004.
14
Table 4: Period-end Deposit Composition
September 30,
2004 2003
(dollars in thousands) $ % $ %
Non-interest bearing demand $ 52,076 14.8% $ 46,700 15.1%
Interest-bearing demand and savings 55,024 15.6% 45,257 14.6%
Money market deposits 65,816 18.7% 70,747 22.8%
Retail time deposits less than $100 63,823 18.0% 59,180 19.0%
Total core deposits 236,739 67.1% 221,884 71.5%
Retail time deposits $100 and over 54,584 15.5% 39,968 12.9%
Broker and national time deposits
less than $100 4,889 1.4% 11,011 3.6%
Broker and national time deposits
$100 and over 56,296 16.0% 37,242 12.0%
Totals $ 352,508 100.0% $ 310,105 100.0%
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 $1,859 at September 30, 2004, compared to $3,071 at June 30,
2004 and $2,344 at December 31, 2003. Excluding these accounts, non-interest
bearing demand deposits grew $1,998, or 4.1% during the nine months ended
September 30, 2004.
PSB originates retail certificates of deposit with local depositors under a
program known as the Certificate of Deposit Account Registry System (CDARS) in
which PSB customer deposits (with participation of other banks in the CDARS
network) are able to obtain levels of FDIC deposit insurance coverage in
amounts greater than traditional limits. For purposes of Table 4 above, these
certificates are included in retail time deposits $100 and over and totaled
$8,026 at September 30, 2004 and $300 at September 30, 2003. Although
classified as retail time deposits in the table above, these balances are
required to be classified as broker deposits on PSB's quarterly regulatory call
reports.
15
Table 5: Summary of Changes by Significant Deposit Source
September 30, % Change from prior year
(dollars in thousands) 2004 2003 2004 2003
Total time deposits $100 and over $ 110,880 $ 77,210 43.6% 19.3%
Total broker and national time deposits 61,185 48,253 26.8% 19.9%
Total retail time deposits 118,407 99,148 19.4% 1.1%
Core deposits, including money market
deposits 236,739 221,884 6.7% 8.3%
The increase in deposits of $36,094 (including broker and national time
deposits) has been inadequate to fund asset growth during the nine months
ending September 30, 2004. The primary alternative funding sources utilized
are Federal Home Loan Bank advances, federal funds purchased, and brokered time
deposits. Due to loan growth in excess of core deposit growth, 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. PSB policy is to limit broker and national
time deposits to 20% of total assets. As of September 30, 2004, broker and
national time deposits were 13.8% of total assets compared to 15.2% at June 30,
2004, and 11.9% at December 31, 2003.
Net additional FHLB advances of $3,000 were also obtained. The net increase in
advances of $3,000 occurred during the three months ended September 30, 2004.
Unused credit advances from the Federal Home Loan Bank of Chicago available to
PSB at September 30, 2004 totaled approximately $35,400 based on an open
line of credit and securities available for pledging for advances. Available
but unused credit advances from the FHLB were approximately $37,700 at
June 30, 2004 and $33,600 million at December 31, 2003. In addition, PSB had
unused commitments from other correspondent banks for overnight federal funds
purchased up to $22,500 million as of September 30, 2004. PSB believes its
current liquidity position and sources of funds for liquidity management is
adequate.
Table 6 below presents maturity repricing information as of September 30, 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 five years.
2. Nonaccrual loans are considered to reprice beyond five years.
16
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.
Table 6: Interest Rate Sensitivity Gap Analysis
September 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 $ 127,342 $ 21,932 $ 40,318 $ 56,739 $ 73,107 $ 17,931 $337,369
Securities 5,602 4,049 9,944 16,286 24,298 14,302 74,481
FHLB stock 2,834 2,834
Other earning assets 7,621 7,621
Total $ 143,399 $ 25,981 $ 50,262 $ 73,025 $ 97,405 $ 32,233 $422,305
Cumulative rate
sensitive assets $ 143,399 $ 169,380 $ 219,642 $ 292,667 $ 390,072 $ 422,305
Interest-bearing
liabilities
Interest-bearing $ 111,323 $ 25,451 $ 52,856 $ 25,729 $ 40,427 $ 44,646 $300,432
deposits
FHLB advances 5,000 13,000 6,000 26,000 50,000
Other borrowings 2,327 1,011 344 1,400 1,725 6,807
Total $ 118,650 $ 39,462 $ 59,200 $ 27,129 $ 68,152 $ 44,646 $ 357,239
Cumulative interest
sensitive liabilities $ 118,650 $ 158,112 $ 217,312 $ 244,441 $ 312,593 $ 357,239
Interest sensitivity gap
for the individual period $ 24,749 $ (13,481) $ (8,938) $ 45,896 $ 29,253 $ (12,413)
Ratio of rate sensitive
assets to rate sensitive
liabilities for the
individual period 120.9% 65.8% 84.9% 269.2% 142.9% 72.2%
Cumulative interest
sensitivity gap $ 24,749 $ 11,268 $ 2,330 $ 48,226 $ 77,479 $ 65,066
Cumulative ratio of
rate sensitive assets
to rate sensitive
liabilities 120.9% 107.1% 101.1% 119.7% 124.8% 118.2%
At September 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 have changed from approximately 101% to 92%
(if up 200 basis points) and 104% (if down 100 basis points), respectively. 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
17
would have changed from approximately 92% to 89% (if up 200 basis points)
and 96% (if down 100 basis points), respectively. At December 31, 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 approximately 110% to 102% (if up 200 basis points) and
112% (if down 100 basis points), respectively.
During the nine months ended September 30, 2004, PSB has increased the amount
of fixed rate commercial and real estate loans held (with original fixed terms
generally from 3 to 7 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 September 30, 2004, $19,000 of FHLB advances with
original long-term maturities and a weighted average rate of 6.16% will mature
within 365 days, which has lowered the cumulative gap ratio to be less asset
sensitive than it was nine months ago. However, these 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 decreasing funding costs. During the
quarter ended September 30, 2004, the cumulative gap ratio increased from 92%
to 101% (more asset sensitive), in part due to acquiring a new $3,000 five
year fixed rate FHLB advance and conversion of a $5,000 monthly maturity
FHLB advance to a five year fixed rate maturity.
The Asset/Liability Committee uses financial modeling techniques that measure
the interest rate risk. Policies established by PSB'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 uses various policy measures to assess the 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 September 30, 2004, June 30, 2004, and
December 31, 2003, was 6.6%, 7.0%, and 8.0%, respectively and above the 5%
minimum required by policy. The decline in the basic surplus is primarily a
result of fewer securities available for potential pledging (such securities
have been pledged for new 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.
18
At September 30, 2004, June 30, 2004, and December 31, 2003, net
interest income for the next 12 months was projected to increase .83%, decrease
..46%, and increase 3.17%, respectively, if rates increase 200 basis points. At
September 30, 2004, June 30, 2004, and December 31, 2003, net interest income
for the next 12 months was projected to decrease 2.46%, decrease .70%, and
decrease 2.50%, respectively, if rates decrease 100 basis points. These
changes are within policy requirements and considered acceptable by management.
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
September 30, 2004, June 30, 2004, and December 31, 2003, PSB's core funding
utilization ratio was projected to be 52.62%, 54.11% and 46.53%, respectively,
after a rate increase of 200 basis points and was therefore within policy
requirements.
CAPITAL RESOURCES
Stockholders' equity at September 30, 2004 increased $1,174 to $33,315 or 3.7%
from $32,141 at December 31, 2003. Net income retained during the nine months
ended September 30, 2004, net of cash dividends of $518 and shareholder stock
buybacks of $628 was $1,337. Capital decreased $182 since December 31, 2003
from a decline in the unrealized gain on securities available for sale (net of
tax effects). All other net increases in capital totaled $19. Stockholders'
equity included unrealized gains on securities available for sale, net of their
tax effect, of $662 at September 30, 2004 compared to unrealized gains of $844
at December 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 September 30, 2004 and December 31, 2003, PSB's
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 capital to average assets was 7.46% during the September 2004 quarter,
7.61% during the June 2004 quarter, and 7.85% during the December 31, 2003
quarter. Regulatory capital has decreased during 2004 as asset growth has
exceeded Tier 1 capital growth from retained net income. Management believes
PSB to be well capitalized at September 30, 2004 and expects to remain well
capitalized during 2004 based on planned asset growth and shareholder dividend
payments.
19
PSB maintains an annual, ongoing share repurchase program of up to 1% of
outstanding shares per year and 9,300 shares at $34.90 per share were purchased
under this program during the third quarter of 2004 which completed the annual
buyback program for 2004. During the nine months ended September 30, 2004, PSB
repurchased a total of 18,001 shares (17,300 shares for the buyback program,
and 701 shares to fund an employee stock option exercise) at an average price
of $34.91 per share. For the remainder of 2004, management anticipates
retaining capital to support asset growth while continuing a cash dividend to
shareholders.
During the September 2004 quarter, 701 shares of common stock were repurchased
and re-issued to an employee exercising stock options previously held. The
option share price was $15.83 per share. The shares repurchased to fund this
option exercise were $34.00 per share.
Table 7: Capital Ratios - Consolidated Holding Company
September 30, Dec 31,
(dollars in thousands) 2004 2003 2003
Stockholders' equity $ 33,315 $ 31,400 $ 32,141
Disallowed mortgage servicing right assets (81) (75) (81)
Unrealized gain on securities available for sale (662) (891) (844)
Tier 1 regulatory capital 32,572 30,434 31,216
Add: allowance for loan losses 4,107 3,692 3,536
Total regulatory capital $ 36,679 $ 34,126 $ 34,752
Total assets $ 444,603 $ 397,018 $ 408,933
Disallowed mortgage servicing right assets (81) (75) (81)
Unrealized gain on securities available for sale (662) (891) (844)
Tangible assets $ 443,860 $ 396,052 $ 408,008
Risk-weighted assets (as defined by current regulations) $ 347,014 $ 310,999 $ 318,005
Tier 1 capital to average tangible assets (leverage ratio) 7.42% 7.84% 7.83%
Tier 1 capital to adjusted risk-weighted assets 9.39% 9.79% 9.82%
Total capital to adjusted risk-weighted assets 10.57% 10.97% 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.
20
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 2004 was $747, or $.43 for basic
and diluted earnings per share. Comparatively, net income for the quarter
ended September 30, 2003, was $1,235, or $.71 per share for basic and diluted
earnings per share. Operating results for the third quarter 2004 generated an
annualized return on average assets of .67% and an annualized return on average
equity of 8.98%, compared to 1.26% and 15.76% for the comparable period in
2003. However, results from operations were significantly impacted (for
income) by mortgage banking income from customer refinancings in September 2003
and (for expense) settlement of a Wisconsin franchise tax audit during
September 2004.
Due to historically low long-term mortgage interest rates during 2003, mortgage
banking income was unusually high from large numbers of customers refinancing
existing mortgages. The mortgage refinancing boom increased 2003 net income by
$284 (after tax impacts), or $.16 per share compared to 2004 mortgage banking
activity. In addition, PSB settled an income tax audit with the Wisconsin
Department of Revenue during 2004 which reduced earnings by $150 (after tax
benefits), or $.09 per share. Excluding the impact of prior year mortgage
refinancing income over 2004 and the tax settlement, PSB earned $897, or $.52
per share in the third quarter 2004 compared to $951, or $.55 per share in the
third quarter 2003.
For the nine months ended September 30, 2004 and 2003, net income was $2,483
and $3,516, respectively. Similar to the discussion of one-time charges to
income discussed above, 2003 benefited from an ongoing mortgage banking income
boom while 2004 has incurred one-time charges for settlement of the Wisconsin
tax audit, and abandonment of the previous home office following construction
of the new primary banking facility. The decrease in mortgage banking in 2004
compared to 2003 has been $511 (after tax impacts). The tax settlement cost of
$150 described previously and loss on abandonment of home office cost of $199
(after tax benefits) totaled $349. If net income was adjusted to account for
these factors, net income for the nine months ended September 30, 2004, and
2003 would have been $2,832 and $3,005, respectively.
The following Table 8 presents PSB's consolidated quarterly summary financial
data.
21
Table 8: Financial Summary
(dollars in thousands, except per share data) Quarter ended
Sept. 30, June 30, March 31, Dec. 31 Sept. 30,
EARNINGS AND DIVIDENDS: 2004 2004 2004 2003 2003
Net interest income $ 3,521 $ 3,517 $ 3,474 $ 3,375 $ 3,306
Provision for loan losses $ 195 $ 240 $ 240 $ 130 $ 240
Other noninterest income $ 764 $ 855 $ 740 $ 1,120 $ 1,143
Other noninterest expense $ 2,833 $ 2,914 $ 2,602 $ 2,479 $ 2,335
Net income $ 897 $ 981 $ 954 $ 1,290 $ 1,235
Basic earnings per share (3) $ 0.43 $ 0.45 $ 0.55 $ 0.74 $ 0.71
Diluted earnings per share (3) $ 0.43 $ 0.45 $ 0.55 $ 0.74 $ 0.71
Dividends declared per share (3) $ - $ 0.300 $ - $ 0.286 $ -
Net book value per share $ 19.41 $ 18.68 $ 19.33 $ 18.54 $ 18.11
Semi-annual dividend payout ratio n/a 29.84% n/a 19.88% n/a
Average common shares outstanding 1,720,436 1,729,322 1,733,531 1,733,398 1,733,828
BALANCE SHEET - AVERAGE BALANCES:
Loans receivable, net of allowances $ 331,167 $ 320,471 $ 307,109 $ 302,491 $ 288,448
for loss
Assets $ 439,177 $ 426,826 $ 407,577 $ 399,351 $ 389,267
Deposits $ 347,015 $ 330,337 $ 312,455 $ 312,376 $ 307,752
Stockholders' equity $ 33,010 $ 32,942 $ 32,878 $ 32,095 $ 31,085
PERFORMANCE RATIOS:
Return on average assets (1) 0.67% 0.73% 0.94% 1.28% 1.26%
Return on average stockholders' 8.98% 9.52% 11.64% 15.95% 15.76%
equity (1)
Average tangible stockholders'
equity to average assets 7.46% 7.61% 7.83% 7.85% 7.70%
Net loan charge-offs to average loans 0.00% 0.01% 0.02% 0.09% 0.02%
Nonperforming loans to gross loans 0.94% 0.98% 1.17% 1.08% 1.09%
Allowance for loan losses to gross 1.22% 1.19% 1.16% 1.15% 1.23%
loans
Net interest rate margin (1)(2) 3.51% 3.64% 3.73% 3.65% 3.67%
Net interest rate spread (1)(2) 3.17% 3.30% 3.38% 3.24% 3.21%
Service fee revenue as a percent of
average demand deposits (1) 2.52% 2.63% 2.60% 2.70% 2.48%
Noninterest income as a percent
of gross revenue 11.93% 13.54% 12.24% 17.56% 17.90%
Efficiency ratio (2) 63.95% 64.54% 59.73% 53.47% 50.94%
Noninterest expenses to average assets 2.56% 2.74% 2.56% 2.46% 2.38%
(1)
STOCK PRICE INFORMATION:
High $ 35.25 $ 35.60 $ 35.60 $ 36.19 $ 32.61
Low $ 33.00 $ 34.50 $ 33.50 $ 31.43 $ 31.43
Market value at quarter-end $ 33.00 $ 34.50 $ 35.00 $ 33.62 $ 31.90
(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.
22
NET INTEREST INCOME
Net interest income is the most significant component of earnings. Tax adjusted
net interest income increased $225 (6.5%) from $3,441 for the quarter ended
September 30, 2003 to $3,666 for the current quarter ended September 30, 2004.
For the nine months ended September 30, 2004, tax adjusted net interest income
increased $746 (7.3%) to $10,943 compared to $10,197 for September 2003.
Quarterly tax-adjusted net interest margin as a percent of average interest
earning assets decreased from 3.67% in September 2003 to 3.51% in September
2004. Net interest margin for the nine months ended September 30, 2004 and
2003 was 3.63% and 3.79%, respectively.
During the past several quarters, PSB experienced a trend of compressed
interest rate margins as maturing and prepaid loans and securities were
repriced at significantly lower rates while deposit rates remained near their
floor. Earning asset yields have decreased 19 basis points from 5.73% for the
September 2003 quarter to 5.54% for the September 2004 quarter. However, the
cost of liabilities declined only 15 basis points from 2.52% for the September
2003 quarter to 2.37% for the September 2004 quarter. Net interest margin
during the September 2004 quarter declined as increases to the prime rate on
adjustable rate commercial loans has not outweighed increases in time deposit
rates paid to both local and wholesale depositors. The majority of time
deposits originated by PSB are from 12 to 24 months and have increased as
short-term rates have increased since June 2004. Approximately $73 million of
commercial purpose loans, or 22% of gross loans, are tied to prime, short-term
LIBOR or other adjustable rates. Despite the decline in net interest rate
margin, total net interest income has increased due to earning asset growth.
PSB expects prime rates to increase in coming periods as the Federal Open
Markets Committee (FOMC) increases the discount rate. In light of PSB's low
interest rate risk sensitivity as discussed previously, net interest margin is
expected to remain at levels similar to that seen during the past several
quarters.
Despite an increase in short-term rates of .75% since June 2004 through
September 2004, the PSB has not yet increased core savings, NOW, and
discretionary money market rates. The rates continue to be .50%, .30%, and
..85%, respectively. These rates continue to be competitive in PSB's market
area. However, if further discount rate increases are made by the FOMC, these
core rates will likely experience pressure to increase. These products which
carry the standard earnings rate represent approximately $88 million in
deposits currently at a weighted average rate of .65%. Changes in net interest
margin in future quarters will be significantly impacted by the ability to
control core deposit rate increases while originating higher yielding loans
in light of past discount rate increases since June 2004 and anticipated future
discount rate increases.
23
Table 9A: Net Interest Income Analysis (Quarter)
(dollars in thousands) Quarter ended September 30, 2004 Quarter ended September 30, 2003
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning assets:
Loans (1)(2) $ 335,157 $ 4,900 5.80% $ 292,023 $ 4,609 6.26%
Taxable securities 47,388 454 3.80% 48,500 359 2.94%
Tax-exempt securities (2) 24,575 374 6.04% 22,744 352 6.14%
FHLB stock 2,821 42 5.91% 2,391 38 6.31%
Other 3,972 13 1.30% 6,457 18 1.11%
Total (2) 413,913 5,783 5.54% 372,115 5,376 5.73%
Non-interest-earning assets:
Cash and due from banks 14,645 11,439
Premises and equipment,
net 11,230 6,302
Other assets 3,379 2,986
Allowance for loan
losses (3,990) (3,575)
Total $ 439,177 $ 389,267
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and demand
deposits $ 51,053 $ 86 0.67% $ 42,589 $ 63 0.59%
Money market deposits 66,946 152 0.90% 69,230 161 0.92%
Time deposits 178,575 1,305 2.90% 144,298 1,144 3.15%
FHLB borrowings 47,413 515 4.31% 38,707 506 5.19%
Other borrowings 10,105 59 2.32% 9,684 61 2.50%
Total 354,092 2,117 2.37% 304,508 1,935 2.52%
Non-interest-bearing liabilities:
Demand deposits 50,441 51,635
Other liabilities 1,634 2,039
Stockholders' equity 33,010 31,085
Total $ 439,177 $ 389,267
Net interest income 3,666 3,441
Rate spread 3.17% 3.21%
Net yield on interest-earning assets 3.51% 3.67%
(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%.
24
Table 9B: Net Interest Income Analysis (Nine Months)
(dollars in thousands) Nine months ended Sept. 30, 2004 Nine months ended Sept. 30, 2003
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning assets:
Loans (1)(2) $ 323,418 $ 14,202 5.85% $ 273,854 $ 13,509 6.60%
Taxable securities 47,619 1,368 3.83% 53,871 1,475 3.66%
Tax-exempt securities (2) 24,603 1,114 6.03% 22,003 1,024 6.22%
FHLB stock 2,658 118 5.91% 2,345 111 6.33%
Other 3,706 29 1.04% 7,424 64 1.15%
Total (2) 402,004 16,831 5.58% 359,497 16,183 6.02%
Non-interest-earning assets:
Cash and due from banks 13,325 10,200
Premises and equipment,
net 9,926 6,229
Other assets 3,118 3,125
Allowance for loan
losses (3,794) (3,396)
Total $ 424,579 $ 375,655
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and demand
deposits $ 52,014 $ 259 0.66% $ 39,255 $ 182 0.62%
Money market deposits 65,880 450 0.91% 68,449 520 1.02%
Time deposits 163,842 3,485 2.83% 142,783 3,610 3.38%
FHLB borrowings 47,011 1,485 4.21% 38,238 1,520 5.31%
Other borrowings 12,783 209 2.18% 7,823 154 2.63%
Total 341,530 5,888 2.30% 296,548 5,986 2.70%
Non-interest-bearing liabilities:
Demand deposits 48,150 46,307
Other liabilities 1,796 2,265
Stockholders' equity 33,103 30,535
Total $ 424,579 $ 375,655
Net interest income 10,943 10,197
Rate spread 3.28% 3.32%
Net yield on interest-earning assets 3.63% 3.79%
(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%.
25
Table 10: Interest Expense and Expense Volume and Rate Analysis
Nine months ended September 30, 2004
2004 compared to 2003
increase (decrease) due to (1)
(dollars in thousands) Volume Rate Net
Interest earned on:
Loans (2) $ 2,456 $ (1,763) $ 693
Taxable securities (172) 65 (107)
Tax-exempt securities (2) 121 (31) 90
FHLB stock 15 (8) 7
Other interest income (32) (3) (35)
Total 2,388 (1,740) 648
Interest paid on:
Savings and demand deposits 59 18 77
Money market deposits (20) (50) (70)
Time deposits 534 (659) (125)
FHLB borrowings 350 (385) (35)
Other borrowings 98 (43) 55
Total 1,021 (1,119) (98)
Net interest earnings $ 1,367 $ (621) $ 746
(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 $195 for the
three months ended September 30, 2004, and $240 for the three months ended
September 30, 2003. Net charge-offs as a percentage of average loans
outstanding were .00% and .02% during the three months ended September 30, 2004
and 2003, respectively. During the past several quarters, PSB has seen an
improvement in the credit quality of existing loans and has decreased the
amount of provision made to the allowance to reflect this improvement.
26
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.
NONINTEREST INCOME
Noninterest income decreased $379 in the September 2004 quarter to $764
compared to $1,143 in 2003. However, $468 of the decline was in mortgage
banking as substantial mortgage refinancing activity in 2003 did not recur in
2004 due to higher national mortgage rates. PSB serviced $157,800
of mortgage principal for other investors at September 30, 2004
compared to $148,700 at September 30, 2003. Separate from mortgage
banking, noninterest income increased $89 during the quarter, in part from
additional retail investment sales and insurance product commissions of $49 up
42% from the 2003 quarter.
For the nine months ended September 30, noninterest income has declined $632 in
2004 compared to 2003. During this period, mortgage banking declined $844,
which was offset partially by an increase in the gain on sale of securities of
$130. Separate from these items, noninterest income increased $82, most of
which is represented by an increase in investment and insurance sales
commissions of $42.
Peoples Insurance Services LLC, a commercial property and casualty insurance
agency and brokerage started by PSB during September 2003, continues to build
relationships in the Wausau area. The agency's net loss during the quarter and
nine months ended September 2004 was $44 and $119, respectively (including
inter-company cost allocations). Initial net losses have been in excess of
original projections due to significantly lower than expected revenue growth.
The reduction in consolidated PSB net income for the nine months ended
September 30, 2004 from Peoples Insurance Services direct costs, net of tax
benefits (excluding inter-company cost allocations) was approximately $94.
Table 11: Mortgage Servicing Rights Activity
Nine months ended September 30, 2004
Originated Valuation
MSR Allowance Total
January 1, 2004 $ 904 $ (90) $ 814
Originated servicing 263 263
Amortization charged to earnings (238) (238)
Valuation adjustment charged to earnings (32) (32)
September 30, 2004 $ 929 $ (122) $ 807
27
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 September 30, 2004, the maximum obligation on the entire servicing portfolio
for such guarantees was approximately $649 (.41% of the serviced
principal) up from $493 (.33% of the serviced principal) at September 30, 2003,
and $554 (.36% of the serviced principal) at December 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.
NONINTEREST EXPENSE
Noninterest operating expenses increased $498 to $2,833 in the quarter ended
September 2004 compared to $2,335 during the quarter ended September 2003. Of
that total, salaries and benefits increased $210, or 13.9% over 2003 from a 9%
increase in employees since September 2003. In addition, occupancy and
facilities costs increased $159, or 55.6% over 2003 but included one-time
charges for moving into the new home office of $23 and settlement of a sales
tax audit related largely to premises and equipment investment and maintenance
of $52. Excluding these charges, occupancy and facilities costs increased $84,
or 29.4% during the quarter, primarily from additional depreciation expense.
Operating expense as a percent of average assets was 2.56% during the quarter
ended September 2004 compared to 2.38% for the similar quarter during 2003. In
addition, the September 2004 efficiency ratio was 63.95% compared to 50.94%
during the same quarter in 2003. However, excluding the one-time charges
outlined in the previous paragraph, operating expenses as a percent of average
assets would have been 2.49% and the efficiency ratio would have been 62.26%
during the September 2004 quarter.
For the nine months ended September 30, 2004, operating expenses increased
$1,477, or 21.5% due primarily to increased salaries and benefits of $470, or
10.8%. As mentioned previously, the number of employees has increased
approximately 9% since September 30, 2003 while base salary increases for 2004
were modest at 2.9% of base pay. Abandonment of the prior home office during
the June 2004 quarter increased expenses by $329, as that property was razed as
part of the new home office and financial center project. Separately from that
non-recurring charge, other occupancy expenses increased $248 over 2003 due to
additional depreciation and the one-time September 2004 quarter charges
discussed previously totaling $75. Other noninterest expenses included $127 of
collection fees written off during January 2004 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.
28
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 which could
significantly affect internal controls subsequent to the date PSB carried out
its evaluation, nor were there any significant deficiencies or material
weaknesses identified which required any corrective action to be taken.
29
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY 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)
July 2004 0 0 0 9,300
August 2004 9,481(1) $34.90 9,300 0
September 2004 701(2) 34.00 0 0
Total 10,182 $34.84 9,300 0
(1)Includes purchases of 181 shares at an average price of $34.84 by affiliates
in transactions unrelated to PSB's corporate buy back program.
(2)Represents purchases made in connection with the issuance of a like number
of shares pursuant to the exercise of a stock option.
ITEM 6. 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
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSB HOLDINGS, INC.
November 15, 2004 SCOTT M. CATTANACH
Scott M. Cattanach
Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
31
EXHIBIT INDEX
TO
FORM 10-Q
OF
PSB HOLDINGS, INC.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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