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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-26480
PSB HOLDINGS, INC.
(Exact name of registrant as specified in charter)
WISCONSIN 39-1804877
(State of incorporation)(I.R.S. Employer Identification Number)
1905 West Stewart Avenue
Wausau, Wisconsin 54401
(Address of principal executive office)
Registrant's telephone number, including area code: 715-842-2191
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X
The number of common shares outstanding at May 5, 2005 was 1,712,771.
PSB HOLDINGS, INC.
FORM 10-Q
Quarter Ended March 31, 2005
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2005 (unaudited) and December 31,
2004 (derived from audited financial statements) 1
Consolidated Statements of Income
Three Months Ended March 31, 2005 and 2004 (unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended March 31, 2005 (unaudited) 3
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004 (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 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6. Exhibits 26
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSB HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2005 (unaudited), December 31, 2004 (derived from audited financial statements)
(dollars in thousands, except per share data) March 31, December 31,
2005 2004
ASSETS
Cash and due from banks $ 9,301 $ 12,680
Interest-bearing deposits and money market funds 1,877 3,265
Federal funds sold - 7,379
Cash and cash equivalents 11,178 23,324
Securities available for sale (at fair value) 71,083 68,894
Federal Home Loan Bank stock (at cost) 2,913 2,874
Loans held for sale 274 342
Loans receivable, net of allowance for loan losses of $4,303
and $4,157, respectively 361,876 343,923
Accrued interest receivable 1,943 1,744
Foreclosed assets 287 7
Premises and equipment 12,574 12,432
Mortgage servicing rights, net 818 839
Cash surrender value of bank-owned life insurance 4,582 -
Other assets 1,164 595
TOTAL ASSETS $468,692 $454,974
LIABILITIES
Non-interest-bearing deposits $ 48,458 $ 51,635
Interest-bearing deposits 316,926 306,590
Total deposits 365,384 358,225
Federal Home Loan Bank advances 52,000 52,000
Other borrowings 15,044 8,565
Accrued expenses and other liabilities 2,327 2,568
Total liabilities 434,755 421,358
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 9,655 9,672
Retained earnings 26,321 25,281
Accumulated other comprehensive income (loss) (194) 384
Treasury stock, at cost - 170,408 and 167,586 shares, respectively (3,732) (3,608)
Total stockholders' equity 33,937 33,616
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $468,692 $454,974
1
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(dollars in thousands, except per share data - unaudited) March 31,
2005 2004
Interest and dividend income:
Loans, including fees $5,203 $4,554
Securities:
Taxable 452 461
Tax-exempt 241 243
Other interest and dividends 68 46
Total interest and dividend income 5,964 5,304
Interest expense:
Deposits 1,811 1,291
FHLB advances 550 466
Other borrowings 83 73
Total interest expense 2,444 1,830
Net interest income 3,520 3,474
Provision for loan losses 150 240
Net interest income after provision for loan losses 3,370 3,234
Noninterest income:
Service fees 260 291
Mortgage banking 155 160
Investment and insurance sales commissions 170 91
Net gain on sale of securities 6 111
Increase in cash surrender value of life insurance 20 -
Other noninterest income 192 87
Total noninterest income 803 740
Noninterest expense:
Salaries and employee benefits 1,629 1,548
Occupancy and facilities 445 301
Data processing and other office operations 172 160
Advertising and promotion 63 34
Other noninterest expenses 331 559
Total noninterest expense 2,640 2,602
Income before provision for income taxes 1,533 1,372
Provision for income taxes 493 418
Net income $1,040 $ 954
Basic earnings per share $ 0.60 $ 0.55
Diluted earnings per share $ 0.60 $ 0.55
2
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three months ended March 31, 2005 - unaudited
Accumulated
Other
Additional Comprehensive
Common Paid-in Retained Income Treasury
(dollars in thousands) Stock Capital Earnings (Loss) Stock Totals
Balance January 1, 2005 $1,887 $9,672 $25,281 $384 $(3,608) $33,616
Comprehensive income:
Net income 1,040 1,040
Unrealized loss on securities
available for sale, net of tax (576) (576)
Reclassification adjustment for security
gain included in net income, net of tax (2) (2)
Total comprehensive income 462
Purchase of treasury stock (192) (192)
Proceeds from stock options issued out
of treasury (17) 65 48
Distribution of treasury stock in
settlement of liability to Company
directors 3 3
Balance March 31, 2005 $1,887 $9,655 $26,321 $(194) $(3,732) $33,937
3
PSB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2005 and 2004 - unaudited
2005 2004
Cash flows from operating activities:
Net income $ 1,040 $ 954
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net amortization 396 244
Provision for loan losses 150 240
Deferred net loan origination costs (137) -
Gain on sale of mortgage loans (110) (154)
Provision for servicing right valuation allowance 13 60
Gain on sale of premises and equipment (2) -
Gain on sale of foreclosed assets (2) (17)
Gain on sale of securities (6) (111)
Increase in cash surrender value of bank-owned life insurance (20) -
FHLB stock dividends (39) (40)
Changes in operating assets and liabilities:
Accrued interest receivable (199) (99)
Other assets (250) (118)
Other liabilities (238) (1,200)
Net cash provided by (used in) operating activities 596 (241)
Cash flows from investing activities:
Proceeds from sale and maturities of:
Securities available for sale 3,476 3,808
Payment for purchase of:
Securities available for sale (6,598) (3,749)
Net increase in loans (18,210) (10,029)
Capital expenditures (346) (1,908)
Proceeds from sale of premises and equipment 2 -
Proceeds from sale of foreclosed assets 2 -
Purchase of bank-owned life insurance (4,562) -
Net cash used in investing activities (26,236) (11,878)
Cash flows from financing activities:
Net decrease in non-interest-bearing deposits (3,177) (5,282)
Net increase in interest-bearing deposits 10,336 6,571
Proceeds from long-term FHLB advances 8,000 10,000
Repayments of long-term FHLB advances (8,000) (10,000)
Net increase in other borrowings 6,479 10,351
Proceeds from issuance of stock options 48 -
Purchase of treasury stock (192) -
Net cash provided by financing activities 13,494 11,640
4
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Net decrease in cash and cash equivalents (12,146) (479)
Cash and cash equivalents at beginning 23,324 18,927
Cash and cash equivalents at end $ 11,178 $ 18,448
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 2,339 $ 1,825
Income taxes 135 408
Noncash investing and financing activities:
Loans charged off $ 6 $ 83
Loans transferred to foreclosed assets 281 -
Loans originated on sale of foreclosed assets - 17
Distribution of treasury stock in settlement of liability
to Company directors 3 8
5
PSB Holdings, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - GENERAL
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly PSB Holdings,
Inc.'s ("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 2004 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 assets, and the
valuation of investment securities.
NOTE 2 - STOCK-BASED COMPENSATION
PSB records expense relative to stock-based compensation using the "intrinsic
value method." Since the exercise price is equal to the fair value of PSB's
common stock on the date of the award, the intrinsic value of PSB's stock
options is "zero" at the time of the award and no expense is recorded.
As permitted by generally accepted accounting principles, PSB has not adopted
the "fair value method" of expense recognition for stock-based compensation
awards. Rather, the effects of the fair value method on PSB's earnings are
presented on a pro forma basis. Because no grants of stock options were made
during the three months ended March 31, 2005 and 2004, 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
6
grant date with the first options scheduled to expire beginning in the year
2011. As of March 31, 2005, 21,215 options outstanding were eligible to be
exercised at a weighted average exercise price of $16.06 per share. No
additional shares of common stock remain reserved for future grants under the
option plan approved by the shareholders.
NOTE 3 - EARNINGS PER SHARE
Basic earnings per share of common stock are based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is calculated by dividing net income by the weighted average number of
shares adjusted for the dilutive effect of outstanding stock options.
Presented below are the calculations for basic and diluted earnings per share:
Three months ended
(dollars in thousands, except per share data) March 31,
2005 2004
Net income $ 1,040 $ 954
Weighted average shares outstanding 1,721,058 1,733,531
Effect of dilutive stock options outstanding 10,558 15,130
Diluted weighted average shares outstanding 1,731,616 1,748,661
Basic earnings per share $ 0.60 $ 0.55
Diluted earnings per share $ 0.60 $ 0.55
NOTE 4 - COMPREHENSIVE INCOME
Comprehensive income as defined by current accounting standards for the three
months ended March 31, 2005 and 2004 is as follows:
(dollars in thousands - unaudited) Three months ended
March 31,
2005 2004
Net income $ 1,040 $ 954
Unrealized gain (loss) on securities
available for sale, net of tax (576) 478
Reclassification adjustment for security
gain included in net income, net of tax (2) (67)
Comprehensive income $ 462 $ 1,365
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.
8
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
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 for the tax years ending 1999 through 2002 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 for this has been recorded.
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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is presented to assist in the
understanding and evaluation of PSB's financial condition and results of
operations. It is intended to complement the unaudited financial statements,
footnotes, and supplemental financial data appearing elsewhere in this Form 10-
Q and should be read in conjunction therewith. Dollar amounts are in
thousands, except per share amounts. The quarterly report on Form 10-Q
describes the business of PSB Holdings, Inc. and its subsidiary Peoples State
Bank as in effect on March 31, 2005, 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, 2004
and, from time to time, in PSB's other filings with the Securities and Exchange
Commission.
BALANCE SHEET
At March 31, 2005, total assets were $468,692, an increase of $13,718, or 3.0%,
over December 31, 2004. Asset growth since December 31, 2004 consisted of:
Three months ended
Increase (decrease) in assets ($000s) March 31, 2005
$ %
Increase in commercial, industrial and agricultural loans $11,027 15.2%
Increase in commercial real estate mortgage loans 4,577 2.8%
Purchase of bank-owned life insurance 4,562 n/a
Increase in investment securities 2,189 3.2%
Increase in residential real estate mortgage loans 1,995 2.1%
Decrease in federal funds sold (7,379) -100.0%
Decrease in cash and interest-bearing deposits (4,767) -29.9%
Net change in remaining assets (various categories) 1,514 4.6%
Total increase in assets $13,718 3.0%
PSB emphasized non real estate commercial loans during the first quarter 2005,
and growth in this type of loan represented 80.4% of the total net increase in
assets during the quarter. However, one new loan relationship of approximately
$5 million contributed to the significant quarterly increase. Commercial
lending growth is not anticipated to continue at this pace during all of 2005.
10
A decline in cash equivalents of $12,146 including federal funds sold of $7,379
held at December 31, 2004, funded a purchase of bank-owned life insurance of
$4,562 and a significant portion of the $18,099 increase in gross loans during
the quarter ended March 31, 2005.
Net asset growth since December 31, 2004 was funded by the following:
Three months ended
Increase (decrease) in liabilities and equity ($000s) March 31, 2005
$ %
Increase in federal funds purchased $ 5,596 n/a
Increase in core deposits (including MMDA) 5,417 2.2%
Increase in wholesale certificates of deposit 1,317 2.4%
Increase in other borrowings 883 10.3%
Increase in retail certificates of deposit > $100 425 0.8%
Increase in stockholders' equity 321 1.0%
Net decrease in other liabilities (various categories) (241) -9.4%
Total increase in liabilities and stockholders' equity $13,718 3.0%
Available liquidity tightened during the current quarter as PSB experienced
strong loan growth without matching core deposit growth. A significant portion
of net asset growth was funded with increases in short-term funding, both
federal funds purchased and core deposits including NOW and savings accounts.
Table 1: Period-End Loan Composition
March 31, March 31, December 31, 2004
Dollars Dollars Percentage of total Percentage
(dollars in thousands) 2005 2004 2005 2004 Dollars of total
Commercial, industrial, and agricultural $ 83,483 $ 70,995 22.8% 22.3% $ 72,456 20.8%
Commercial real estate mortgage 169,108 152,852 46.2% 48.1% 164,531 47.2%
Residential real estate mortgage 95,006 77,322 25.9% 24.3% 93,011 26.7%
Residential real estate loans held for sale 274 140 0.1% 0.0% 342 0.1%
Consumer home equity 12,203 9,591 3.3% 3.0% 11,620 3.3%
Consumer and installment 6,379 7,250 1.7% 2.3% 6,462 1.9%
Totals $366,453 $318,150 100.0% 100.0% $348,422 100.0%
The loan portfolio is PSB's primary asset subject to credit risk. PSB's
process for monitoring credit risks includes monthly analysis of loan quality,
delinquencies, nonperforming assets, and potential problem loans. Loans are
placed on a nonaccrual status when they become contractually past due 90 days
or more as to interest or principal payments. All interest accrued but not
collected for loans (including applicable impaired loans) that are placed on
nonaccrual or charged off is reversed against interest income. The interest on
these loans is accounted for on the cash basis until qualifying for return to
accrual status. Loans are returned to accrual status when all the principal
and interest amounts contractually due have been collected and there is
reasonable assurance that repayment according to the contractual terms will
continue.
11
The aggregate amount of nonperforming assets increased $202 (7.2%) to $3,011 at
March 31, 2005 from $2,809 at December 31, 2004. 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 increased slightly to .64% from .62% at December 31, 2004, but decreased
from .90% at March 31, 2004. 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 .59% at March 31, 2005 compared to .56% at
December 31, 2004, and .88% at March 31, 2004. The allowance for loan losses
was 1.18% of gross loans at March 31, 2005 compared to 1.19% at December 31,
2004, and 1.16% at March 31, 2004.
Table 2: Allowance for Loan Losses
Three months ended
March 31,
(dollars in thousands) 2005 2004
Allowance for loan losses at beginning $4,157 $3,536
Provision for loan losses 150 240
Recoveries on loans previously charged off 2 7
Loans charged off (6) (83)
Allowance for loan losses at end $4,303 $3,700
Nonperforming assets include: 1) loans that are either contractually past due
90 days or more as to interest or principal payments, on a nonaccrual status,
or the terms of which have been renegotiated to provide a reduction or deferral
of interest or principal (restructured loans), and 2) foreclosed assets.
Table 3: Nonperforming Assets
March 31, December 31,
(dollars in thousands) 2005 2004 2004
Nonaccrual loans $2,148 $3,225 $2,174
Accruing loans past due 90 days or more - 270 -
Restructured loans not on nonaccrual 576 213 628
Total nonperforming loans 2,724 3,708 2,802
Foreclosed assets 287 82 7
Total nonperforming assets $3,011 $3,790 $2,809
Nonperforming loans as a % of gross loans receivable 0.74% 1.17% 0.80%
Total nonperforming assets as a % of total assets 0.64% 0.90% 0.62%
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 and local deposits and
other local borrowings continue to comprise the bulk of asset funding and were
68.2% of total assets at March 31, 2005 compared to 68.8% of total assets at
December 31, 2004 and 66.4% at March 31, 2004. Federal Home Loan Bank advances
and broker and national certificates of deposit continue to represent a
significant portion of PSB's total funding ability, and is expected to grow as
a percentage of assets during the remainder of 2005.
Table 4: Period-end Deposit Composition
March 31,
2005 2004
(dollars in thousands) $ % $ %
Non-interest bearing demand $ 48,458 13.3% $ 45,281 14.3%
Interest bearing demand and savings 72,276 19.8% 54,253 17.1%
Money market deposits 67,576 18.4% 66,711 20.9%
Retail time deposits less than $100 65,975 18.1% 59,753 18.8%
Total core deposits 254,285 69.7% 225,998 71.1%
Retail time deposits $100 and over 55,884 15.3% 43,767 13.8%
Broker & national time deposits less than $100 3,507 1.0% 9,728 3.1%
Broker & national time deposits $100 and over 51,708 14.1% 38,210 12.0%
Totals $365,384 100.0% $317,703 100.0%
A significant portion of the increase in core deposits continues to come from
interest bearing demand (NOW) deposits from local governmental entities. These
deposits are required to be collateralized and carry an interest rate that
moves with the overall market. NOW balances increased $7,702 during the
quarter ended March 31, 2005, the majority of which were deposits from local
governmental entities. Because the local governmental entities within these
categories generally carry their highest annual balances during the first
quarter of the year, this level of growth is not expected to continue.
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
$7,671 at March 31, 2005, $7,666 at December 31, 2004, and $1,747 at March 31,
2004. 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. PSB policy is to limit broker and national
13
time deposits to 20% of total assets. As of March 31, 2005 and December
31, 2004, broker and national time deposits were 11.8% of total assets
compared to 11.4% at March 31, 2004. Early in the second quarter of 2005,
short-term funding in federal funds purchased were refinanced with short-term
priced broker deposits. Broker deposits as a percentage of total assets is
expected to increase during 2005 as loan growth continues to outpace core
deposit growth.
Table 5: Summary of Changes by Significant Deposit Source
March 31, % Change from prior year
(dollars in thousands) 2005 2004 2005 2004
Total time deposits $100 and over $107,592 $81,977 31.2% 21.8%
Total broker and national time deposits 55,215 47,938 15.2% 17.4%
Total retail time deposits 121,859 103,520 17.7% 3.2%
Core deposits, including money market deposits 254,285 225,998 12.5% 6.0%
Table 6 below presents maturity repricing information as of March 31, 2005.
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.
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
March 31, 2005
(dollars in thousands) 0-90 days 91-180 days 181-365 days 1-2 yrs Beyond 2-5 yrs Beyond 5 yrs Total
Earning assets:
Loans $143,663 $ 25,195 $ 38,474 $ 60,819 $ 77,793 $ 20,509 $366,453
Securities 4,083 2,775 5,558 12,927 32,342 13,398 71,083
FHLB stock 2,913 2,913
CSV bank-owned life ins. 4,582 4,582
Other earning assets 1,877 1,877
Total $152,536 $ 27,970 $ 44,032 $ 73,746 $110,135 $ 38,489 $446,908
Cumulative rate
sensitive assets $152,536 $180,506 $224,538 $298,284 $408,419 $446,908
Interest-bearing liabilities
Interest-bearing deposits $137,214 $ 30,458 $ 32,768 $ 38,647 $ 30,581 $ 47,258 $316,926
FHLB advances 14,000 - 6,000 5,000 27,000 52,000
Other borrowings 8,375 - 2,813 1,203 2,653 15,044
Total $159,589 $ 30,458 $ 41,581 $ 44,850 $ 60,234 $ 47,258 $383,970
Cumulative interest
sensitive liabilities $159,589 $190,047 $231,628 $276,478 $336,712 $383,970
Interest sensitivity gap for
the individual period $ (7,053) $ (2,488) $ 2,451 $ 28,896 $49,901 $ (8,769)
Ratio of rate sensitive assets
To rate sensitive liabilities
For the individual period 95.6% 91.8% 105.9% 164.4% 182.8% 81.4%
Cumulative interest
sensitivity gap $ (7,053) $ (9,541) $ (7,090) $ 21,806 $ 71,707 $ 62,938
Cumulative ratio of rate
sensitive assets
to rate sensitive liabilities 95.6% 95.0% 96.9% 107.9% 121.3% 116.4%
At March 31, 2005, 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 97% to 94% (if up
200 basis points) and 102% (if down 100 basis points), respectively. At
December 31, 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 95% (if up
200 basis points) and 105% (if down 100 basis points), respectively. At March
31, 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 99% to 94% (if up 200 basis
points) and 103% (if down 100 basis points), respectively.
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.
15
Basic Surplus
PSB measures basic surplus as the amount of existing net liquid assets (after
deducting short-term liabilities and coverage for anticipated deposit funding
outflows during the next 30 days) divided by total assets. The basic surplus
calculation does not consider unused but available correspondent bank federal
funds purchased, as those funds are subject to availability based on the
correspondent bank's own liquidity needs and therefore are not guaranteed
contractual funds. PSB's basic surplus, including available open line of
credit FHLB advances not yet utilized at March 31, 2005, December 31, 2004, and
March 31, 2004, was 3.5%, 7.1%, and 5.5%. During the quarter ended March 31,
2005, basic surplus declined due in large part to pledging of securities for
deposits from governmental entities, which reduced available net liquid assets.
During the second quarter 2005, PSB has reallocated deposits to free up
available collateral and anticipates presenting a basic surplus near 5% at June
30, 2005.
Interest Rate Risk Limits
PSB balances the need for liquidity with the opportunity for increased net
interest income available from longer term loans held for investment and
securities. To measure the impact on net interest income from interest rate
changes, PSB models interest rate simulations on a quarterly basis. Company
policy is that projected net interest income over the next 12 months will not
be reduced by more than 15% given a change in interest rates of up to 200 basis
points. At March 31, 2005, December 31, 2004, and March 31, 2004, net interest
income for the next 12 months was projected to increase 1.28%, decrease .04%,
and decrease .60%, respectively, if rates increase 200 basis points. At March
31, 2005, December 31, 2004, and March 31, 2004, net interest income for the
next 12 months was projected to decrease .56%, decrease 2.15%, and decrease
..95%, 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
March 31, 2005, December 31, 2004, and March 31, 2004, PSB's core funding
utilization ratio was projected to be 49%, 46% and 46%, respectively, after a
rate increase of 200 basis points and was therefore within policy requirements.
CAPITAL RESOURCES
Stockholders' equity at March 31, 2005 increased $321 to $33,937, or 1.0% from
$33,616 at December 31, 2004. After shareholder stock buybacks of $192, net
income retained during the
16
three months ended March 31, 2005 was $848. However, capital decreased $578
since December 31, 2004 from a decline in the unrealized gain on securities
available for sale (net of tax effects) as increases in short-term rates
reduced the value of fixed rate debt securities. All other net increases in
capital totaled $51. Stockholders' equity included unrealized losses on
securities available for sale, net of their tax effect, of $194 at March 31,
2005, compared to unrealized gains of $384 at December 31, 2004.
The adequacy of PSB's capital is regularly reviewed to ensure sufficient
capital is available for current and future needs and is in compliance with
regulatory guidelines. As of March 31, 2005 and December 31, 2004, 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 7.25% during the March 2005 quarter,
7.49% during the December 2004 quarter, and 7.83% during the March 2004
quarter. Regulatory capital has decreased during 2005 as asset growth has
exceeded Tier 1 capital growth from retained net income. Management expects to
obtain additional capital in 2005 from a pooled trust preferred capital issue
or other non-dilutive capital issue to remain well-capitalized during 2005
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 6,000 shares at $32.00 per share were purchased
under this program during the quarter ended March 31, 2005. 3,058 shares of
the buyback were re-issued to fund an exercise of employee stock options,
exercised at a price of $15.83 per share. During April 2005, PSB repurchased
an additional 4,000 shares at $31.50 per share and anticipates that it will
purchase another 7,200 shares during 2005 on the open market at prices then in
effect.
Table 7: Capital Ratios - Consolidated Holding Company
(dollars in thousands) March 31, Dec. 31,
2005 2004 2004
Stockholders' equity $ 33,937 $ 33,514 $ 33,616
Disallowed mortgage servicing right assets (82) (75) (84)
Unrealized (gain) loss on securities available for sale 194 (1,255) (384)
Tier 1 regulatory capital 34,049 32,184 33,148
Add: allowance for loan losses 4,303 3,700 4,157
Total regulatory capital $ 38,352 $ 35,884 $ 37,305
Total assets $468,692 $420,738 $454,974
Disallowed mortgage servicing right assets (82) (75) (84)
Unrealized (gain) loss on securities available for sale 194 (1,255) (384)
Tangible assets $468,804 $419,408 $454,506
Risk-weighted assets (as defined by current regulations) $368,398 $327,563 $350,224
Tier 1 capital to average tangible assets (leverage ratio) 7.33% 7.67% 7.40%
Tier 1 capital to adjusted risk-weighted assets 9.24% 9.83% 9.46%
Total capital to adjusted risk-weighted assets 10.41% 10.95% 10.65%
17
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 2005 was $1,040, or $.60 for basic
and diluted earnings per share. Comparatively, net income for the quarter
ended March 31, 2004 was $954, or $.55 per share for basic and diluted
earnings per share. The March 2005 quarter saw increased earnings over last
year and 2005 net income is expected to be in a range of $4.3 million to $4.6
million. Operating results for the first quarter 2005 generated an annualized
return on average assets of .91% and an annualized return on average equity of
12.41%, compared to .94% and 11.64% for the March 2004 quarter.
The quarter ended March 31, 2005 benefited from two special items. The first
was a large recovery of collection expenses on a problem loan that increased
net income $61. In addition, a payout of PSB's investment on the sale of the
Pulse ATM system (a cooperative) to Discover Financial Services increased net
income $42. Net income for the quarter ended March 31, 2004 included the
write-off of collection expenses of $127 and a large security gain of $111 as
special items. Quarterly net income before these special collection items and
all gains on sale of investment securities was $933 in 2005 compared to $964 in
2004.
The following Table 8 presents PSB's consolidated quarterly summary financial
data.
18
Table 8: Financial Summary
(dollars in thousands, except per share data) Quarter ended
March 31, Dec. 31, Sept. 30, June 30, March 31,
EARNINGS AND DIVIDENDS: 2005 2004 2004 2004 2004
Net interest income $3,520 $3,577 $3,521 $3,517 $3,474
Provision for loan losses $ 150 $ 180 $ 195 $ 240 $ 240
Other noninterest income $ 803 $ 764 $ 764 $ 855 $ 740
Other noninterest expense $2,640 $2,626 $2,833 $2,914 $2,602
Net income $1,040 $1,043 $ 747 $ 782 $ 954
Basic earnings per share (3) $ 0.60 $ 0.61 $ 0.43 $ 0.45 $ 0.55
Diluted earnings per share (3) $ 0.60 $ 0.60 $ 0.43 $ 0.45 $ 0.55
Dividends declared per share (3) $ - $ 0.30 $ - $ 0.30 $ -
Net book value per share $19.77 $19.55 $19.41 $18.68 $19.33
Semi-annual dividend payout ratio n/a 28.82% n/a 29.84% n/a
Average common shares outstanding 1,721,058 1,717,394 1,720,436 1,729,322 1,733,531
BALANCE SHEET - AVERAGE BALANCES:
Loans receivable, net of allowances for loss $354,136 $341,997 $331,167 $320,471 $307,109
Assets $465,083 $448,591 $439,177 $426,826 $407,577
Deposits $367,394 $353,310 $347,015 $330,337 $312,455
Stockholders' equity $ 33,989 $ 34,076 $ 33,010 $ 32,942 $ 32,878
PERFORMANCE RATIOS:
Return on average assets (1) 0.91% 0.92% 0.67% 0.73% 0.94%
Return on average stockholders' equity (1) 12.41% 12.18% 8.98% 9.52% 11.64%
Average tangible stockholders' equity to
average assets 7.25% 7.49% 7.46% 7.61% 7.83%
Net loan charge-offs to average loans 0.00% 0.04% 0.00% 0.01% 0.02%
Nonperforming loans to gross loans 0.74% 0.80% 0.94% 0.98% 1.17%
Allowance for loan losses to gross loans 1.18% 1.19% 1.22% 1.19% 1.16%
Net interest rate margin (1)(2) 3.40% 3.50% 3.51% 3.64% 3.73%
Net interest rate spread (1)(2) 3.05% 3.12% 3.17% 3.30% 3.38%
Service fee revenue as a percent of
average demand deposits (1) 2.19% 2.22% 2.52% 2.63% 2.60%
Noninterest income as a percent
of gross revenue 11.87% 11.64% 11.93% 13.54% 12.24%
Efficiency ratio (2) 59.11% 58.52% 63.95% 64.54% 59.73%
Noninterest expenses to average assets (1) 2.30% 2.33% 2.56% 2.74% 2.56%
STOCK PRICE INFORMATION:
High $32.20 $33.25 $35.25 $35.60 $35.60
Low $31.85 $32.00 $33.00 $34.50 $33.50
Market value at quarter-end $31.85 $32.10 $33.00 $34.50 $35.00
(1)Annualized
(2)The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.
(3)Due to rounding, cumulative quarterly per share performance may not equal annual per share totals.
19
NET INTEREST INCOME
Net interest income is the most significant component of earnings. Tax
adjusted net interest income increased $47 (1.3%) from $3,616 for the quarter
ended March 31, 2004 to $3,663 for the current quarter ended March 31, 2005,
but declined $60 from $3,723 for the quarter ended December 31, 2004. Net
interest income has been negatively impacted by a flattening yield curve and
competitive pressures on deposit rates while loan growth continued to be funded
with higher cost wholesale funds. Margin on earning assets declined from 3.73%
in the March 2004 quarter, and from 3.50% in the December 2004 quarter to 3.40%
during the March 2005 quarter. Earning asset yields increased slightly and
were 5.66% at March 2005, 5.59% at December 2004, and 5.60% at March 2004.
However, the cost of interest-bearing liabilities increased from 2.24% at March
2004 to 2.47% at December 2004, and 2.61% at March 2005.
PSB updated accounting procedures during March 2005 to improve recognition and
amortization of deferred loan origination fees and costs in accordance with
Statement of Financial Accounting Standard No. 91, Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans ("FAS 91"). This
change is more fully described in this Quarterly Report on From 10-Q under
"Noninterest Expense." Tax-adjusted net interest margin before accounting
adjustments for FAS 91 would have been 3.51% during the March 2005 quarter
(compared to a reported 3.40%), 3.63% during the December 2004 quarter
(compared to a reported 3.50%), and 3.78% in the March 2004 quarter (compared
to a reported 3.73%).
The increase in funding costs has been led by interest-bearing core deposits
(excluding retail certificates of deposit), whose rate increased from .87% at
December 2004 to 1.30% at March 2005, an increase of 43 basis points. This
increase is due to several factors. Prior to the March 2005 quarter, recent
increases in the Federal Reserve discount rate (totaling 125 basis points by
December 31, 2004) were not yet reflected in core deposit rates, as the average
rate for these deposits was .79% in the June 2004 quarter (the initial discount
rate increase occurred in June 2004). Future discount rate increases are
expected to continue to be reflected in the core deposit rates. In addition, a
portion of the commercial loan growth in the March 2005 quarter was funded by
high-yield money market and NOW accounts sold to new large depositors and local
governmental entities earning rates tied to the 30-day LIBOR rate or other
adjustable wholesale rates. Lastly, these core deposits made up a larger base
of our funding, with average quarterly balances growing $20.0 million over the
December 2004 quarter, an increase of 16.2%. As noted previously, because the
local governmental entities within these categories generally carry their
highest annual balances during the first quarter of the year, this level of
average balance growth is not expected to continue.
While PSB's balance sheet remains largely neutral to interest rate changes, to
facilitate retention and growth in core deposits a change in the money market
product to introduce higher tiered rates for higher balances effective April 1,
2005 is expected to continue the margin decline in the coming months.
20
Table 9: Net Interest Income Analysis
(dollars in thousands) Quarter ended March 31, 2005 Quarter ended March 31, 2004
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning assets:
Loans (1)(2) $358,351 $5,222 5.91% $310,718 $4,571 5.90%
Taxable securities 46,739 452 3.92% 47,878 461 3.86%
Tax-exempt securities (2) 24,511 365 6.04% 24,639 368 5.99%
FHLB stock 2,900 40 5.59% 2,471 40 6.49%
Other 4,734 28 2.40% 2,953 6 0.81%
Total (2) 437,235 6,107 5.66% 388,659 5,446 5.62%
Non-interest earning assets:
Cash and due from banks 13,473 11,475
Premises and equipment, net 12,517 8,288
Cash surrender value of
life insurance 2,728 -
Other assets 3,345 2,764
Allowance for loan losses (4,215) (3,609)
Total $465,083 $407,577
Liabilities & stockholders' equity
Interest bearing liabilities:
Savings and demand deposits $72,611 $239 1.33% $51,820 $85 0.66%
Money market deposits 71,681 222 1.26% 66,568 154 0.93%
Time deposits 174,939 1,350 3.13% 149,235 1,052 2.83%
FHLB borrowings 48,889 550 4.56% 46,615 466 4.01%
Other borrowings 12,283 83 2.74% 13,555 73 2.16%
Total 380,403 2,444 2.61% 327,793 1,830 2.24%
Non-interest bearing liabilities:
Demand deposits 48,163 44,832
Other liabilities 2,528 2,074
Stockholders' equity 33,989 32,878
Total $465,083 $407,577
Net interest income 3,663 3,616
Rate spread 3.05% 3.38%
Net yield on interest-earning assets 3.40% 3.73%
(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
Three months ended March 31, 2005
2005 compared to 2004
(dollars in thousands) increase (decrease) due to (1)
Volume Rate Net
Interest earned on:
Loans (2) $ 642 $ 9 $ 651
Taxable securities (11) 2 (9)
Tax-exempt securities (2) (6) 3 (3)
FHLB stock 7 (7) -
Other interest income 4 18 22
Total 636 25 661
Interest paid on:
Savings and demand deposits 34 120 154
Money market deposits 12 56 68
Time deposits 179 119 298
FHLB borrowings 22 62 84
Other borrowings (7) 17 10
Total 240 374 614
Net interest earnings $ 396 $(349) $ 47
(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 $150 for the
three months ended March 31, 2005, and $240 for the three months ended March
31, 2004. Net charge-offs as a percentage of average loans outstanding were
..00% and .02% during the three months ended March 31, 2005 and 2004,
respectively. 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.
Nonperforming loans are reviewed to determine exposure for potential loss
within each loan category. The adequacy of the allowance for loan losses is
assessed based on credit quality and
22
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
Quarterly noninterest income increased $63 in the March 2005 quarter to $803
compared to $740 in 2004. However, a one-time payout of $70 was received
during the March 2005 quarter from Discover Financial Services on the purchase
of the Pulse ATM system (in which PSB was a cooperative member) which increased
noninterest income. A decline of $105 in gain on sale of securities compared
to the March 2004 quarter was offset largely by an increase in investment and
insurance sales commissions of $79 during March 2005. Mortgage banking income
was $155 in March 2005 compared to $160 in March 2004.
Service fee income declined $31 to $260 in March 2005 compared to the prior
year quarter, continuing a quarterly downward trend. However, PSB recently
completed a comprehensive retail and commercial fee review and updated fees to
be effective on April 1 for retail products and June 1 for commercial products.
During February 2005, PSB purchased $4.5 million of bank-owned life insurance
on bank officers in connection with new employee deferred compensation and
incentive plans. The increase in cash surrender value of life insurance was
$20 during the March 2005 quarter. The incremental tax-favored earnings on the
life insurance are intended to offset the cost of the additional compensation
plans. The previously disclosed compensation plans generally provide deferred
compensation with benefits dependent on PSB achieving profit and growth
benchmarks.
Peoples Insurance Services LLC, our commercial property and casualty insurance
agency and brokerage (a September 2003 start-up), incurred a net loss of $24
after tax benefits during March 2005, compared to a net loss of $31 during the
March 2004 quarter (excluding internal cost allocations). Total revenue during
the March 2005 quarter of $16 continues to be less than budgeted. Management
continues to consider changes to agency operations and products to meet budget.
As a FHLB Mortgage Partnership Finance loan servicer, PSB has provided a credit
enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of
1% of the original loan principal sold to the FHLB on an aggregate pool basis.
At March 31, 2005, the maximum obligation on the entire servicing portfolio for
such guarantees was approximately $787 (.49% of the serviced principal) up from
$601 (.39% of the serviced principal) at March 31, 2004, and $743 (.46% of the
serviced principal) at December 31, 2004. 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.
23
NONINTEREST EXPENSE
Noninterest operating expenses increased $38, or 1.5% to $2,640 in the quarter
ended March 2005 compared to $2,602 during the quarter ended March 2004.
Increases in salaries and wages of $81 and in occupancy expenses of $144 were
offset by a decline in other noninterest expenses of $228.
During the March 2005 quarter, a reimbursement of collection fees on a problem
loan were recovered, which decreased other noninterest expenses by $101.
Conversely, the March 2004 quarter included $127 of collection fees written off
to other noninterest expense in response to regulatory requirements to account
for collection fees as expense until collected.
The increase in employee salaries and benefits of $81 previously mentioned was
up 5.2% from the prior year. Company employees were granted inflationary and
merit increases effective January 1, 2005 averaging 3.4% of base pay. However,
salaries and wages were also reduced by $165 during the March 2005 quarter as
PSB implemented a daily automated system to improve accounting for deferred
loan fees and costs (including lender and support personnel salaries) in
accordance with current accounting standards (FAS 91). FAS 91 requires loan
origination fees and direct loan origination costs to be deferred and amortized
as a yield adjustment earned on the loan. Previously, these accounting
adjustments for deferral of costs were made only at year-end and in prior years
had an immaterial impact on the individual quarterly financial statements. The
change in accounting procedure was made to simplify operations and improve the
accuracy of earnings reporting. Excluding the deferral of salaries for FAS 91,
the increase in salaries and benefits was $246, an increase of 15.9%. In
addition to the annual inflationary and merit increases in base pay, the number
of full time equivalent employees increased 15.4% during the 12 months ended
March 31, 2005.
Offsetting the increase to March 2005 income from deferred employee wage
expense related to new loan originations under FAS 91 were decreases to income
from deferral of $28 in fees collected, and amortization of previously
capitalized net loan origination costs of $89 against net interest income.
Taken together, FAS 91 accounting adjustments increased March 2005 net income
by $29 and decreased March 2004 net income by $22.
Total noninterest expenses excluding the special collection expense items and
the impact of deferred loan origination costs (wages) in the March 2005 quarter
were $2,906 compared to $2,475 in March 2004, an increase of 17.4%.
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 PSB's Form 10-K for the year ended December 31, 2004.
ITEM 4. 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.
25
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)
January 2005 0 $ 0 0 0
February 2005 1,189 32.00 0 0
March 2005 6,000 32.00 6,000 11,200
Quarterly Totals 7,189 $32.00 6,000 11,200
Note regarding share purchases made other than through a publicly announced
program
During February 2005, Company officers purchased shares of PSB for their
personal accounts, including 1,189 shares at an average price of $32.00.
ITEM 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K.
Exhibit
Number Description
10.1 Amendment to Executive Deferred Compensation Plan - David K. Kopperud
10.2 Amendment to Executive Deferred Compensation Plan - David A. Svacina
10.3 PSB Holdings, Inc. 2001 Stock Option Plan
10.4 Executive Officer Post Retirement Benefit Plan
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
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSB HOLDINGS, INC.
May 13, 2005 SCOTT M. CATTANACH
Scott M. Cattanach
Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
27
EXHIBIT INDEX
TO
FORM 10-Q
OF
PSB HOLDINGS, INC.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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:
10.1 Amendment to Executive Deferred Compensation Plan - David K. Kopperud
10.2 Amendment to Executive Deferred Compensation Plan - David A. Svacina
10.3 PSB Holdings, Inc. 2001 Stock Option Plan
10.4 Executive Officer Post Retirement Benefit Plan
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