FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) | ||
T | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
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 (State of incorporation) |
39-1804877 (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 | o |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes | x | No | o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o | |||
Non-accelerated filer | o | Smaller reporting company | x | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Exchange Act).
Yes | o | No | x |
The number of common shares outstanding at November 14, 2012 was 1,663,472.
FORM 10-Q
Quarter Ended September 30, 2012
-i- |
PSB Holdings, Inc.
September 30, 2012 unaudited, December 31, 2011 derived from audited financial statements
September 30, | December 31, | |||||||
(dollars in thousands, except per share data) | 2012 | 2011 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 21,120 | $ | 14,805 | ||||
Interest-bearing deposits and money market funds | 1,863 | 1,829 | ||||||
Federal funds sold | 11,173 | 21,571 | ||||||
Cash and cash equivalents | 34,156 | 38,205 | ||||||
Securities available for sale (at fair value) | 77,732 | 59,383 | ||||||
Securities held to maturity (fair value of $71,361 and $50,751, respectively) | 68,730 | 49,294 | ||||||
Bank certificates of deposit | 2,484 | 2,484 | ||||||
Loans held for sale | 303 | 39 | ||||||
Loans receivable, net | 473,249 | 437,557 | ||||||
Accrued interest receivable | 2,505 | 2,068 | ||||||
Foreclosed assets | 2,349 | 2,939 | ||||||
Premises and equipment, net | 10,275 | 9,928 | ||||||
Mortgage servicing rights, net | 1,091 | 1,205 | ||||||
Federal Home Loan Bank stock (at cost) | 2,761 | 3,250 | ||||||
Cash surrender value of bank-owned life insurance | 11,710 | 11,406 | ||||||
Other assets | 5,218 | 5,109 | ||||||
TOTAL ASSETS | $ | 692,563 | $ | 622,867 | ||||
Liabilities | ||||||||
Non-interest-bearing deposits | $ | 79,201 | $ | 75,298 | ||||
Interest-bearing deposits | 468,637 | 406,211 | ||||||
Total deposits | 547,838 | 481,509 | ||||||
Federal Home Loan Bank advances | 50,124 | 50,124 | ||||||
Other borrowings | 19,273 | 19,691 | ||||||
Senior subordinated notes | 7,000 | 7,000 | ||||||
Junior subordinated debentures | 7,732 | 7,732 | ||||||
Accrued expenses and other liabilities | 6,801 | 6,449 | ||||||
Total liabilities | 638,768 | 572,505 | ||||||
Stockholders’ equity | ||||||||
Preferred stock – no par value: | ||||||||
Authorized – 30,000 shares; no shares issued or outstanding | — | — | ||||||
Common stock – no par value with a stated value of $1 per share: | ||||||||
Authorized – 3,000,000 shares; Issued – 1,830,266 shares | ||||||||
Outstanding – 1,663,472 and 1,654,639 shares, respectively | 1,830 | 1,830 | ||||||
Additional paid-in capital | 6,994 | 7,140 | ||||||
Retained earnings | 47,924 | 44,215 | ||||||
Accumulated other comprehensive income, net of tax | 1,564 | 1,934 | ||||||
Treasury stock, at cost – 166,794 and 175,627 shares, respectively | (4,517 | ) | (4,757 | ) | ||||
Total stockholders’ equity | 53,795 | 50,362 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 692,563 | $ | 622,867 |
-1- |
PSB Holdings, Inc.
Consolidated Statements of Income
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(dollars in thousands, except per share data – unaudited) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans, including fees | $ | 5,965 | $ | 6,140 | $ | 17,591 | $ | 18,296 | ||||||||
Securities: | ||||||||||||||||
Taxable | 578 | 658 | 1,725 | 2,041 | ||||||||||||
Tax-exempt | 372 | 280 | 934 | 858 | ||||||||||||
Other interest and dividends | 18 | 17 | 57 | 56 | ||||||||||||
Total interest and dividend income | 6,933 | 7,095 | 20,307 | 21,251 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 1,037 | 1,375 | 3,259 | 4,200 | ||||||||||||
FHLB advances | 356 | 464 | 1,061 | 1,380 | ||||||||||||
Other borrowings | 150 | 162 | 447 | 494 | ||||||||||||
Senior subordinated notes | 141 | 142 | 425 | 425 | ||||||||||||
Junior subordinated debentures | 86 | 85 | 256 | 255 | ||||||||||||
Total interest expense | 1,770 | 2,228 | 5,448 | 6,754 | ||||||||||||
Net interest income | 5,163 | 4,867 | 14,859 | 14,497 | ||||||||||||
Provision for loan losses | — | 360 | 325 | 1,150 | ||||||||||||
Net interest income after provision for loan losses | 5,163 | 4,507 | 14,534 | 13,347 | ||||||||||||
Noninterest income: | ||||||||||||||||
Service fees | 424 | 436 | 1,239 | 1,223 | ||||||||||||
Mortgage banking | 462 | 278 | 1,213 | 984 | ||||||||||||
Investment and insurance sales commissions | 186 | 198 | 562 | 470 | ||||||||||||
Increase in cash surrender value of life insurance | 102 | 103 | 304 | 311 | ||||||||||||
Gain on bargain purchase | — | — | 851 | — | ||||||||||||
Other noninterest income | 270 | 352 | 840 | 973 | ||||||||||||
Total noninterest income | 1,444 | 1,367 | 5,009 | 3,961 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | 2,329 | 2,210 | 6,709 | 6,311 | ||||||||||||
Occupancy and facilities | 408 | 384 | 1,210 | 1,249 | ||||||||||||
Loss on foreclosed assets | 330 | 66 | 567 | 639 | ||||||||||||
Data processing and other office operations | 892 | 375 | 1,724 | 1,001 | ||||||||||||
Advertising and promotion | 71 | 90 | 235 | 205 | ||||||||||||
FDIC insurance premiums | 123 | 59 | 335 | 397 | ||||||||||||
Other noninterest expenses | 707 | 651 | 2,263 | 1,855 | ||||||||||||
Total noninterest expense | 4,860 | 3,835 | 13,043 | 11,657 | ||||||||||||
Income before provision for income taxes | 1,747 | 2,039 | 6,500 | 5,651 | ||||||||||||
Provision for income taxes | 521 | 645 | 2,176 | 1,746 | ||||||||||||
Net income | $ | 1,226 | $ | 1,394 | $ | 4,324 | $ | 3,905 | ||||||||
Basic earnings per share | $ | 0.74 | $ | 0.85 | $ | 2.60 | $ | 2.36 | ||||||||
Diluted earnings per share | $ | 0.74 | $ | 0.84 | $ | 2.60 | $ | 2.36 |
-2- |
PSB Holdings, Inc.
Consolidated Statements of Comprehensive Income
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(dollars in thousands – unaudited) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Net income | $ | 1,226 | $ | 1,394 | $ | 4,324 | $ | 3,905 | ||||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Unrealized gain (loss) on securities available for sale | 14 | (23 | ) | (60 | ) | 261 | ||||||||||
Amortization of unrealized gain on securities available for sale | ||||||||||||||||
transferred to securities held to maturity included in net income | (66 | ) | (112 | ) | (210 | ) | (275 | ) | ||||||||
Unrealized loss on interest rate swap | (64 | ) | (283 | ) | (177 | ) | (412 | ) | ||||||||
Reclassification adjustment of interest rate swap | ||||||||||||||||
settlements included in earnings | 26 | 29 | 77 | 84 | ||||||||||||
Comprehensive income | $ | 1,136 | $ | 1,005 | $ | 3,954 | $ | 3,563 |
PSB Holdings, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
Nine months ended September 30, 2012
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Additional | Comprehensive | |||||||||||||||||||||||
Common | Paid-in | Retained | Income | Treasury | ||||||||||||||||||||
(dollars in thousands – unaudited) | Stock | Capital | Earnings | (Loss) | Stock | Totals | ||||||||||||||||||
Balance January 1, 2012 | $ | 1,830 | $ | 7,140 | $ | 44,215 | $ | 1,934 | $ | (4,757 | ) | $ | 50,362 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | 4,324 | 4,324 | ||||||||||||||||||||||
Unrealized loss on securities | ||||||||||||||||||||||||
available for sale, net of tax | (60 | ) | (60 | ) | ||||||||||||||||||||
Amortization of unrealized gain on securities | ||||||||||||||||||||||||
available for sale transferred to securities | ||||||||||||||||||||||||
held to maturity included in net income, net of tax | (210 | ) | (210 | ) | ||||||||||||||||||||
Unrealized loss on interest rate swap, net of tax | (177 | ) | (177 | ) | ||||||||||||||||||||
Reclassification of interest rate swap settlements | ||||||||||||||||||||||||
included in earnings, net of tax | 77 | 77 | ||||||||||||||||||||||
Total comprehensive income | 3,954 | |||||||||||||||||||||||
Purchase of treasury stock | (5 | ) | (5 | ) | ||||||||||||||||||||
Exercise of stock options | (6 | ) | 15 | 9 | ||||||||||||||||||||
Issuance of new restricted stock grants | (230 | ) | 230 | — | ||||||||||||||||||||
Vesting of existing restricted stock grants | 90 | 90 | ||||||||||||||||||||||
Fractional cash dividends paid with 5% stock dividend | (10 | ) | (10 | ) | ||||||||||||||||||||
Cash dividends declared $.36 per share | (591 | ) | (591 | ) | ||||||||||||||||||||
Cash dividends declared on unvested restricted stock grants | (14 | ) | (14 | ) | ||||||||||||||||||||
Balance September 30, 2012 | $ | 1,830 | $ | 6,994 | $ | 47,924 | $ | 1,564 | $ | (4,517 | ) | $ | 53,795 |
-3- |
PSB Holdings, Inc.
Consolidated Statements of Cash Flows
Nine months ended September 30, 2012 and 2011
(dollars in thousands – unaudited) | 2012 | 2011 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 4,324 | $ | 3,905 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for depreciation and net amortization | 1,976 | 1,598 | ||||||
Provision for loan losses | 325 | 1,150 | ||||||
Deferred net loan origination costs | (321 | ) | (229 | ) | ||||
Gain on sale of loans | (1,384 | ) | (697 | ) | ||||
Provision for (recapture of) servicing right valuation allowance | 250 | (43 | ) | |||||
Loss on sale of foreclosed assets | 438 | 458 | ||||||
Increase in cash surrender value of life insurance | (304 | ) | (311 | ) | ||||
Gain on bargain purchase | (851 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
Accrued interest receivable | (35 | ) | 135 | |||||
Other assets | 315 | (119 | ) | |||||
Other liabilities | (7 | ) | (304 | ) | ||||
Net cash provided by operating activities | 4,726 | 5,543 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from sale and maturities of: | ||||||||
Securities available for sale | 35,841 | 11,615 | ||||||
Securities held to maturity | 9,203 | 2,704 | ||||||
Payment for purchase of: | ||||||||
Securities available for sale | (20,839 | ) | (17,357 | ) | ||||
Securities held to maturity | (8,860 | ) | (831 | ) | ||||
Cash acquired on purchase of Marathon State Bank | 14,950 | — | ||||||
Redemption of FHLB stock | 489 | — | ||||||
Net increase in loans | (4,245 | ) | (1,324 | ) | ||||
Capital expenditures | (437 | ) | (129 | ) | ||||
Proceeds from sale of foreclosed assets | 580 | 832 | ||||||
Purchase of bank-owned life insurance | — | (93 | ) | |||||
Net cash provided by (used in) investing activities | 26,682 | (4,583 | ) | |||||
-4- |
PSB Holdings, Inc.
Consolidated Statements of Cash Flows
Nine months ended September 30, 2012 and 2011
(continued)
(dollars in thousands – unaudited) | 2012 | 2011 | ||||||
Cash flows from financing activities: | ||||||||
Net increase (decrease) in non-interest-bearing deposits | (20,520 | ) | 9,486 | |||||
Net decrease in interest-bearing deposits | (13,908 | ) | (10,520 | ) | ||||
Net decrease in FHLB advances | — | (2,310 | ) | |||||
Net decrease in other borrowings | (418 | ) | (9,766 | ) | ||||
Dividends declared | (615 | ) | (586 | ) | ||||
Proceeds from exercise of stock options | 9 | 24 | ||||||
Purchase of treasury stock | (5 | ) | — | |||||
Net cash used in financing activities | (35,457 | ) | (13,672 | ) | ||||
Net decrease in cash and cash equivalents | (4,049 | ) | (12,712 | ) | ||||
Cash and cash equivalents at beginning | 38,205 | 40,331 | ||||||
Cash and cash equivalents at end | $ | 34,156 | $ | 27,619 | ||||
Supplemental cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 5,470 | $ | 6,876 | ||||
Income taxes | 1,756 | 1,650 | ||||||
Noncash investing and financing activities: | ||||||||
Loans charged off | $ | 852 | $ | 1,268 | ||||
Loans transferred to foreclosed assets | 568 | 845 | ||||||
Loans originated on sale of foreclosed assets | 140 | 1,075 | ||||||
Issuance of unvested restricted stock grants at fair value | 200 | 200 | ||||||
Vesting of restricted stock grants | 90 | 65 |
-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 and, where applicable, its subsidiary Marathon State Bank, which, as described in Note 2 below, was acquired by PSB on June 14, 2012. Dollar amounts are in thousands, except per share amounts.
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 Annual Report on Form 10-K for the year ended December 31, 2011 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 – PSB HOLDINGS, INC. ACQUISITION OF MARATHON STATE BANK
On June 14, 2012, PSB completed its purchase of Marathon State Bank, a privately owned bank with $107 million in total assets located in the Village of Marathon City, Wisconsin (“Marathon”). Under the terms of the agreement, PSB paid $5,505 in cash, which was equal to 100% of Marathon’s tangible net book value following a special dividend by Marathon to its shareholders to reduce its book equity ratio to 6% of total assets. The following table outlines the fair value of Marathon assets and liabilities acquired including determination of the gain on bargain purchase using an accounting date of June 1, 2012. A core deposit intangible was not recorded on the purchase as the fair value calculation determined it was insignificant.
Cash purchase price | $ | 5,505 | ||
Fair value of assets acquired: | ||||
Cash and due from banks | 20,392 | |||
Securities available for sale | 50,547 | |||
Loans receivable | 23,760 | |||
Short-term commercial paper and bankers’ acceptances | 11,713 | |||
Foreclosed assets | — | |||
Premises and equipment | 402 | |||
Core deposit intangible | — | |||
Accrued interest receivable and other assets | 550 | |||
Total fair value of assets acquired | 107,364 | |||
Fair value of liabilities assumed: | ||||
Non-interest bearing deposits | 23,255 | |||
Interest-bearing deposits | 77,611 | |||
Accrued interest payable and other liabilities | 142 | |||
Total fair value of liabilities assumed | 101,008 | |||
Fair value of net assets acquired | 6,356 | |||
Gain on bargain purchase | $ | 851 |
-6- |
PSB recorded a total credit mark down of $490 on Marathon’s loan portfolio on the purchase date, or 1.52% of purchased loan principal (including non-rated commercial paper and bankers’ acceptances). Purchased impaired loan principal totaled $310 on which a $21 credit write-down was recorded. Due to the insignificant amount of total purchased impaired loans, the entire $490 credit mark down will be accreted to income as a yield adjustment based on contractual cash flows over the remaining life of the purchased loans.
Pro forma combined results of operations as if the combination occurred at the beginning of the quarterly and year to date periods ended September 30, 2012:
Quarter ended September 30, 2012 (pro forma combined at beginning of period) | ||||||||||||||||
Net interest | Noninterest | Net | Earnings | |||||||||||||
($000s) | income | income | income | per share | ||||||||||||
PSB Holdings, Inc. | $ | 4,813 | $ | 1,436 | $ | 1,358 | $ | 0.82 | ||||||||
Marathon State Bank | 350 | 8 | (132 | ) | (0.08 | ) | ||||||||||
Pro forma Totals | $ | 5,163 | $ | 1,444 | $ | 1,226 | $ | 0.74 |
Nine months ended September 30, 2012 (pro forma combined at beginning of period) | ||||||||||||||||
Net interest | Noninterest | Net | Earnings | |||||||||||||
($000s) | income | income | income | per share | ||||||||||||
PSB Holdings, Inc. | $ | 14,376 | $ | 4,147 | $ | 3,902 | $ | 2.35 | ||||||||
Marathon State Bank | 1,158 | 880 | 468 | 0.28 | ||||||||||||
Pro forma Totals | $ | 15,534 | $ | 5,027 | $ | 4,370 | $ | 2.63 |
Pro forma combined results of operations as if the combination occurred at the beginning of the quarterly and year to date periods ended September 30, 2011:
Quarter ended September 30, 2011 (pro forma combined at beginning of period) | ||||||||||||||||
Net interest | Noninterest | Net | Earnings | |||||||||||||
($000s) | income | income | income | per share | ||||||||||||
PSB Holdings, Inc. | $ | 4,867 | $ | 1,367 | $ | 1,394 | $ | 0.84 | ||||||||
Marathon State Bank | 437 | 9 | 122 | 0.08 | ||||||||||||
Pro forma Totals | $ | 5,304 | $ | 1,376 | $ | 1,516 | $ | 0.92 |
Nine months ended September 30, 2011 (pro forma combined at beginning of period) | ||||||||||||||||
Net interest | Noninterest | Net | Earnings | |||||||||||||
($000s) | income | income | income | per share | ||||||||||||
PSB Holdings, Inc. | $ | 14,497 | $ | 3,961 | $ | 3,905 | $ | 2.36 | ||||||||
Marathon State Bank | 1,316 | 35 | 411 | 0.25 | ||||||||||||
Pro forma Totals | $ | 15,813 | $ | 3,996 | $ | 4,316 | $ | 2.61 |
-7- |
NOTE 3 – SECURITIES
The amortized cost and estimated fair value of investment securities are as follows:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
September 30, 2012 | Cost | Gains | Losses | Value | ||||||||||||
Securities available for sale | ||||||||||||||||
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 16,505 | $ | 39 | $ | 4 | $ | 16,540 | ||||||||
U.S. agency issued residential mortgage-backed securities | 15,240 | 1,045 | — | 16,285 | ||||||||||||
U.S. agency issued residential collateralized mortgage obligations | 43,959 | 733 | 26 | 44,666 | ||||||||||||
Privately issued residential collateralized mortgage obligations | 187 | 7 | — | 194 | ||||||||||||
Other equity securities | 47 | — | — | 47 | ||||||||||||
Totals | $ | 75,938 | $ | 1,824 | $ | 30 | $ | 77,732 | ||||||||
Securities held to maturity | ||||||||||||||||
Obligations of states and political subdivisions | $ | 66,827 | $ | 2,707 | $ | 30 | $ | 69,504 | ||||||||
Nonrated trust preferred securities | 1,501 | 32 | 84 | 1,449 | ||||||||||||
Nonrated senior subordinated notes | 402 | 6 | — | 408 | ||||||||||||
Totals | $ | 68,730 | $ | 2,745 | $ | 114 | $ | 71,361 | ||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
December 31, 2011 | Cost | Gains | Losses | Value | ||||||||||||
Securities available for sale | ||||||||||||||||
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 501 | $ | 17 | $ | — | $ | 518 | ||||||||
U.S. agency issued residential mortgage-backed securities | 18,754 | 1,068 | 6 | 19,816 | ||||||||||||
U.S. agency issued residential collateralized mortgage obligations | 37,774 | 806 | 7 | 38,573 | ||||||||||||
Privately issued residential collateralized mortgage obligations | 418 | 11 | — | 429 | ||||||||||||
Other equity Securities | 47 | — | — | 47 | ||||||||||||
Totals | $ | 57,494 | $ | 1,902 | $ | 13 | $ | 59,383 | ||||||||
Securities held to maturity | ||||||||||||||||
Obligations of states and political subdivisions | $ | 47,404 | $ | 1,636 | $ | 30 | $ | 49,010 | ||||||||
Nonrated trust preferred securities | 1,487 | 40 | 195 | 1,332 | ||||||||||||
Nonrated senior subordinated notes | 403 | 6 | — | 409 | ||||||||||||
Totals | $ | 49,294 | $ | 1,682 | $ | 225 | $ | 50,751 |
Securities with a fair value of $43,614 and $56,659 at September 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, other borrowings, and for other purposes required by law.
-8- |
NOTE 4 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans
Loans that management has the intent to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. 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 and the collection of principal becomes reasonably assured. Interest income recognition on loans considered to be impaired is consistent with the recognition on all other loans. Loan origination fees and certain direct loan origination costs are deferred and recognized as an adjustment of the related loan yield using the interest method.
Allowance for Loan Losses
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 the collectability of the principal is unlikely.
Management maintains the allowance for loan losses at a level 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 based on events that have occurred 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. 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 impaired loans include nonaccrual loans, loans identified as restructurings of troubled debt, and loans accruing interest with elevated risk of default in the near term based on a variety of credit factors. Specific allowances on impaired loans are based on discounted cash flows of expected future payments using the loan’s initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.
In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require PSB to make additions to the allowance for loan losses based on their judgments of collectability resulting from information available to them at the time of their examination.
The composition of loans, categorized by the type of the loan, is as follows:
September 30, 2012 | December 31, 2011 | |||||||
Commercial, industrial, and municipal | $ | 138,021 | $ | 127,192 | ||||
Commercial real estate mortgage | 184,183 | 184,360 | ||||||
Commercial construction and development | 25,544 | 20,078 | ||||||
Residential real estate mortgage | 97,687 | 78,114 | ||||||
Residential construction and development | 13,514 | 13,419 | ||||||
Residential real estate home equity | 22,883 | 23,193 | ||||||
Consumer and individual | 5,302 | 3,732 | ||||||
Subtotals – Gross loans | 487,134 | 450,088 | ||||||
Loans in process of disbursement | (6,676 | ) | (4,787 | ) | ||||
Subtotals – Disbursed loans | 480,458 | 445,301 | ||||||
Net deferred loan costs | 222 | 197 | ||||||
Allowance for loan losses | (7,431 | ) | (7,941 | ) | ||||
Net loans receivable | $ | 473,249 | $ | 437,557 |
-9- |
The following is a summary of information pertaining to impaired loans at period-end:
September 30, 2012 | December 31, 2011 | |||||||
Impaired loans without a valuation allowance | $ | 8,199 | $ | 5,474 | ||||
Impaired loans with a valuation allowance | 9,055 | 11,745 | ||||||
Total impaired loans before valuation allowances | 17,254 | 17,219 | ||||||
Valuation allowance related to impaired loans | 2,537 | 3,178 | ||||||
Net impaired loans | $ | 14,717 | $ | 14,041 |
Activity in the allowance for loans losses during the nine months ended September 30, 2012 follows:
Allowance for loan losses: | Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Unallocated | Total | ||||||||||||||||||
Beginning Balance | $ | 3,406 | $ | 3,175 | $ | 1,242 | $ | 118 | $ | — | $ | 7,941 | ||||||||||||
Provision | 233 | (458 | ) | 530 | 20 | — | 325 | |||||||||||||||||
Recoveries | 6 | 4 | 3 | 4 | — | 17 | ||||||||||||||||||
Charge offs | (105 | ) | (234 | ) | (462 | ) | (51 | ) | — | (852 | ) | |||||||||||||
Ending balance | $ | 3,540 | $ | 2,487 | $ | 1,313 | $ | 91 | $ | — | $ | 7,431 | ||||||||||||
Individually evaluated for impairment | $ | 1,625 | $ | 570 | $ | 336 | $ | 6 | $ | — | $ | 2,537 | ||||||||||||
Collectively evaluated for impairment | $ | 1,915 | $ | 1,917 | $ | 977 | $ | 85 | $ | — | $ | 4,894 | ||||||||||||
Loans receivable (gross): | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 5,741 | $ | 8,955 | $ | 2,543 | $ | 15 | $ | — | $ | 17,254 | ||||||||||||
Collectively evaluated for impairment | $ | 132,280 | $ | 200,772 | $ | 131,541 | $ | 5,287 | $ | — | $ | 469,880 |
Activity in the allowance for loans losses during the nine months ended September 30, 2011, follows:
Allowance for loan losses: | Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Unallocated | Total | ||||||||||||||||||
Beginning Balance | $ | 3,862 | $ | 3,674 | $ | 211 | $ | 213 | $ | — | $ | 7,960 | ||||||||||||
Provision | 604 | (468 | ) | 1,016 | (2 | ) | — | 1,150 | ||||||||||||||||
Recoveries | 166 | 6 | — | 5 | — | 177 | ||||||||||||||||||
Charge offs | (808 | ) | (132 | ) | (224 | ) | (104 | ) | — | (1,268 | ) | |||||||||||||
Ending balance | $ | 3,824 | $ | 3,080 | $ | 1,003 | $ | 112 | $ | — | $ | 8,019 | ||||||||||||
Individually evaluated for impairment | $ | 2,020 | $ | 970 | $ | 456 | $ | 22 | $ | — | $ | 3,468 | ||||||||||||
Collectively evaluated for impairment | $ | 1,804 | $ | 2,110 | $ | 547 | $ | 90 | $ | — | $ | 4,551 | ||||||||||||
Loans receivable (gross): | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 6,947 | $ | 8,418 | $ | 2,093 | $ | 75 | $ | — | $ | 17,533 | ||||||||||||
Collectively evaluated for impairment | $ | 125,311 | $ | 188,029 | $ | 108,133 | $ | 3,509 | $ | — | $ | 424,982 |
-10- |
PSB maintains an independent credit administration staff that continually monitors aggregate commercial loan portfolio and individual borrower credit quality trends. All commercial purpose loans are assigned a credit grade upon origination, and credit grades for nonproblem borrowers with aggregate credit in excess of $500 are reviewed annually. In addition, all past due, restructured, or identified problem loans, both commercial and consumer purpose, are reviewed and assigned an up-to-date credit grade quarterly.
PSB uses a seven point grading scale to estimate credit risk with risk rating 1, representing the high credit quality, and risk rating 7, representing the lowest credit quality. The assigned credit grade takes into account several credit quality components which are assigned a weight and blended into the composite grade. The factors considered and their assigned weight for the final composite grade is as follows:
Cash flow (30% weight) – Considers earnings trends and debt service coverage levels.
Collateral (25% weight) – Considers loan to value and other measures of collateral coverage.
Leverage (15% weight) – Considers balance sheet debt and capital ratios compared to Robert Morris & Associates (RMA) industry medians.
Liquidity (10% weight) – Considers balance sheet current, quick, and other working capital ratios compared to RMA industry medians.
Management (5% weight) – Considers the past performance, character, and depth of borrower management.
Guarantor (5% weight) – Considers the existence of a guarantor along with a bank’s past experience with the guarantor and his related liquidity and credit score.
Financial reporting (5% weight) – Considers the relative level of independent financial review obtained by the borrower on its financial statements, from audited financial statements down to existence of only tax returns or potentially unreliable financial information.
Industry (5% weight) – Considers the borrower’s industry and whether it is stable or subject to cyclical or seasonal factors.
Nonclassified loans are assigned a risk rating of 1 to 4 and have credit quality that ranges from well above average to some inherent industry weaknesses that may present higher than average risk due to conditions affecting the borrower, the borrower’s industry, or economic development.
Special mention and watch loans are assigned a risk rating of 5 when potential weaknesses exist that deserve management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of repayment prospects or in credit position at some future date. Substandard loans are assigned a risk rating of 6 and are inadequately protected by the current worth and borrowing capacity of the borrower. Well-defined weaknesses exist that may jeopardize the liquidation of the debt. There is a possibility of some loss if the deficiencies are not corrected. At this point, the loan may still be performing and accruing interest.
Impaired and other doubtful loans assigned a risk rating of 7 have all of the weaknesses of a substandard credit plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of current facts, conditions, and collateral values highly questionable and improbable. Impaired loans include all nonaccrual loans and all restructured loans including restructured loans performing according to the restructured terms. In special situations, an impaired loan with a risk rating of 7 could still be maintained on accrual status such as in the case of restructured loans performing according to restructured terms.
-11- |
The commercial credit exposure based on internally assigned credit grade at September 30, 2012, follows:
Commercial | Construction | |||||||||||||||||||||||
Commercial | Real Estate | & Development | Agricultural | Government | Total | |||||||||||||||||||
High quality (risk rating 1) | $ | 38 | $ | — | $ | — | $ | — | $ | — | $ | 38 | ||||||||||||
Minimal risk (2) | 24,317 | 21,524 | 307 | 517 | 1,640 | 48,305 | ||||||||||||||||||
Average risk (3) | 53,364 | 102,052 | 18,877 | 2,305 | 12,224 | 188,822 | ||||||||||||||||||
Acceptable risk (4) | 29,153 | 43,189 | 2,762 | 344 | — | 75,448 | ||||||||||||||||||
Watch risk (5) | 7,700 | 7,979 | 1,758 | — | — | 17,437 | ||||||||||||||||||
Substandard risk (6) | 678 | 1,723 | 601 | — | — | 3,002 | ||||||||||||||||||
Impaired loans (7) | 5,713 | 7,716 | 1,239 | 28 | — | 14,696 | ||||||||||||||||||
Total | $ | 120,963 | $ | 184,183 | $ | 25,544 | $ | 3,194 | $ | 13,864 | $ | 347,748 |
The commercial credit exposure based on internally assigned credit grade at December 31, 2011, follows:
Commercial | Construction | |||||||||||||||||||||||
Commercial | Real Estate | & Development | Agricultural | Government | Total | |||||||||||||||||||
High quality (risk rating 1) | $ | 65 | $ | — | $ | — | $ | — | $ | — | $ | 65 | ||||||||||||
Minimal risk (2) | 10,404 | 21,922 | 205 | 534 | 1,660 | 34,725 | ||||||||||||||||||
Average risk (3) | 54,387 | 103,614 | 12,981 | 1,088 | 6,153 | 178,223 | ||||||||||||||||||
Acceptable risk (4) | 38,381 | 42,435 | 2,401 | 307 | — | 83,524 | ||||||||||||||||||
Watch risk (5) | 7,054 | 7,972 | 2,903 | — | — | 17,929 | ||||||||||||||||||
Substandard risk (6) | 675 | 1,005 | 937 | — | — | 2,617 | ||||||||||||||||||
Impaired loans (7) | 6,456 | 7,412 | 651 | 28 | — | 14,547 | ||||||||||||||||||
Total | $ | 117,422 | $ | 184,360 | $ | 20,078 | $ | 1,957 | $ | 7,813 | $ | 331,630 |
The consumer credit exposure based on payment activity and internally assigned credit grade at September 30, 2012, follows:
Residential- | Residential- | Construction and | ||||||||||||||||||
Prime | HELOC | Development | Consumer | Total | ||||||||||||||||
Performing | $ | 95,478 | $ | 22,702 | $ | 13,361 | $ | 5,287 | $ | 136,828 | ||||||||||
Impaired loans | 2,209 | 181 | 153 | 15 | 2,558 | |||||||||||||||
Total | $ | 97,687 | $ | 22,883 | $ | 13,514 | $ | 5,302 | $ | 139,386 |
The consumer credit exposure based on payment activity and internally assigned credit grade at December 31, 2011, follows:
Residential- | Residential- | Construction and | ||||||||||||||||||
Prime | HELOC | Development | Consumer | Total | ||||||||||||||||
Performing | $ | 75,923 | $ | 22,925 | $ | 13,275 | $ | 3,663 | $ | 115,786 | ||||||||||
Impaired loans | 2,191 | 268 | 144 | 69 | 2,672 | |||||||||||||||
Total | $ | 78,114 | $ | 23,193 | $ | 13,419 | $ | 3,732 | $ | 118,458 |
-12- |
The payment age analysis of loans receivable disbursed at September 30, 2012, follows:
30-59 | 60-89 | 90+ | Total | Total | 90+ and | |||||||||||||||||||||||
Loan Class | Days | Days | Days | Past Due | Current | Loans | Accruing | |||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 660 | $ | 281 | $ | 1,478 | $ | 2,419 | $ | 118,544 | $ | 120,963 | $ | — | ||||||||||||||
Agricultural | — | — | — | — | 3,194 | 3,194 | — | |||||||||||||||||||||
Government | — | — | — | — | 13,864 | 13,864 | — | |||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Commercial real estate | 705 | 160 | 1,354 | 2,219 | 181,964 | 184,183 | — | |||||||||||||||||||||
Commercial construction and development | 20 | 909 | 127 | 1,056 | 20,475 | 21,530 | — | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
Residential – Prime | 297 | 159 | 1,359 | 1,815 | 95,872 | 97,687 | — | |||||||||||||||||||||
Residential – HELOC | 148 | 42 | 111 | 301 | 22,582 | 22,883 | — | |||||||||||||||||||||
Residential – construction and development | 14 | — | 132 | 146 | 10,706 | 10,852 | — | |||||||||||||||||||||
Consumer | 26 | 3 | 3 | 32 | 5,270 | 5,302 | — | |||||||||||||||||||||
Total | $ | 1,870 | $ | 1,554 | $ | 4,564 | $ | 7,988 | $ | 472,471 | $ | 480,458 | $ | — |
The payment age analysis of loans receivable disbursed at December 31, 2011, follows:
30-59 | 60-89 | 90+ | Total | Total | 90+ and | |||||||||||||||||||||||
Loan Class | Days | Days | Days | Past Due | Current | Loans | Accruing | |||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 670 | $ | 25 | $ | 2,041 | $ | 2,736 | $ | 114,686 | $ | 117,422 | $ | — | ||||||||||||||
Agricultural | — | — | — | — | 1,957 | 1,957 | — | |||||||||||||||||||||
Government | — | — | — | — | 7,813 | 7,813 | — | |||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Commercial real estate | 542 | — | 1,229 | 1,771 | 182,589 | 184,360 | — | |||||||||||||||||||||
Commercial construction and development | — | — | 145 | 145 | 17,195 | 17,340 | — | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
Residential – prime | 1,127 | 173 | 1,144 | 2,444 | 75,670 | 78,114 | — | |||||||||||||||||||||
Residential – HELOC | 255 | 5 | 129 | 389 | 22,804 | 23,193 | — | |||||||||||||||||||||
Residential – construction and development | — | 35 | 77 | 112 | 11,258 | 11,370 | — | |||||||||||||||||||||
Consumer | 11 | — | 54 | 65 | 3,667 | 3,732 | — | |||||||||||||||||||||
Total | $ | 2,605 | $ | 238 | $ | 4,819 | $ | 7,662 | $ | 437,639 | $ | 445,301 | $ | — |
-13- |
Impaired loans as of September 30, 2012, and during the nine months then ended, by loan class, follows:
Unpaid | Average | Interest | ||||||||||||||||||
Principal | Related | Recorded | Recorded | Income | ||||||||||||||||
Balance | Allowance | Investment | Investment | Recognized | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial & industrial | $ | 1,657 | $ | — | $ | 1,657 | $ | 1,632 | $ | 55 | ||||||||||
Commercial real estate | 4,814 | — | 4,814 | 4,260 | 184 | |||||||||||||||
Commercial construction & development | 1,035 | — | 1,035 | 518 | — | |||||||||||||||
Agricultural | — | — | — | — | — | |||||||||||||||
Government | — | — | — | — | — | |||||||||||||||
Residential – prime | 673 | — | 673 | 418 | 6 | |||||||||||||||
Residential – HELOC | 20 | — | 20 | 10 | 3 | |||||||||||||||
Residential construction & development | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial & industrial | $ | 4,056 | $ | 1,599 | $ | 2,457 | $ | 2,836 | $ | 44 | ||||||||||
Commercial real estate | 2,902 | 550 | 2,352 | 2,682 | 85 | |||||||||||||||
Commercial construction & development | 204 | 20 | 184 | 322 | 18 | |||||||||||||||
Agricultural | 28 | 26 | 2 | 1 | — | |||||||||||||||
Government | — | — | — | — | — | |||||||||||||||
Residential – prime | 1,536 | 278 | 1,258 | 1,420 | 8 | |||||||||||||||
Residential – HELOC | 161 | 54 | 107 | 122 | — | |||||||||||||||
Residential construction & development | 153 | 4 | 149 | 129 | 5 | |||||||||||||||
Consumer | 15 | 6 | 9 | 32 | 1 | |||||||||||||||
Totals: | ||||||||||||||||||||
Commercial & industrial | $ | 5,713 | $ | 1,599 | $ | 4,114 | $ | 4,468 | $ | 99 | ||||||||||
Commercial real estate | 7,716 | 550 | 7,166 | 6,942 | 269 | |||||||||||||||
Commercial construction & development | 1,239 | 20 | 1,219 | 840 | 18 | |||||||||||||||
Agricultural | 28 | 26 | 2 | 1 | — | |||||||||||||||
Government | — | — | — | — | — | |||||||||||||||
Residential – prime | 2,209 | 278 | 1,931 | 1,838 | 14 | |||||||||||||||
Residential – HELOC | 181 | 54 | 127 | 132 | 3 | |||||||||||||||
Residential construction & development | 153 | 4 | 149 | 129 | 5 | |||||||||||||||
Consumer | 15 | 6 | 9 | 32 | 1 |
-14- |
The impaired loans at December 31, 2011, and during the year then ended, by loan class, follows:
Unpaid | Average | Interest | ||||||||||||||||||
Principal | Related | Recorded | Recorded | Income | ||||||||||||||||
Balance | Allowance | Investment | Investment | Recognized | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial and industrial | $ | 1,606 | $ | — | $ | 1,606 | $ | 2,409 | $ | 51 | ||||||||||
Commercial real estate | 3,706 | — | 3,706 | 4,515 | 204 | |||||||||||||||
Commercial construction and development | — | — | — | 120 | — | |||||||||||||||
Agricultural | — | — | — | 150 | — | |||||||||||||||
Government | — | — | — | — | — | |||||||||||||||
Residential – Prime | 162 | — | 162 | 396 | 1 | |||||||||||||||
Residential – HELOC | — | — | — | 23 | — | |||||||||||||||
Residential construction and development | — | — | — | 12 | — | |||||||||||||||
Consumer | — | — | — | 11 | — | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial and industrial | $ | 4,850 | $ | 1,635 | $ | 3,215 | $ | 2,050 | $ | 93 | ||||||||||
Commercial real estate | 3,706 | 694 | 3,012 | 1,637 | 154 | |||||||||||||||
Commercial construction and development | 651 | 191 | 460 | 386 | 23 | |||||||||||||||
Agricultural | 28 | 28 | — | 5 | 2 | |||||||||||||||
Government | — | — | — | — | — | |||||||||||||||
Residential – Prime | 2,029 | 448 | 1,581 | 1,041 | 53 | |||||||||||||||
Residential – HELOC | 268 | 131 | 137 | 99 | 9 | |||||||||||||||
Residential construction and development | 144 | 36 | 108 | 74 | 5 | |||||||||||||||
Consumer | 69 | 15 | 54 | 37 | 2 | |||||||||||||||
Totals: | ||||||||||||||||||||
Commercial and industrial | $ | 6,456 | $ | 1,635 | $ | 4,821 | $ | 4,459 | $ | 144 | ||||||||||
Commercial real estate | 7,412 | 694 | 6,718 | 6,152 | 358 | |||||||||||||||
Commercial construction and development | 651 | 191 | 460 | 506 | 23 | |||||||||||||||
Agricultural | 28 | 28 | — | 155 | 2 | |||||||||||||||
Government | — | — | — | — | — | |||||||||||||||
Residential – Prime | 2,191 | 448 | 1,743 | 1,437 | 54 | |||||||||||||||
Residential – HELOC | 268 | 131 | 137 | 122 | 9 | |||||||||||||||
Residential construction and development | 144 | 36 | 108 | 86 | 5 | |||||||||||||||
Consumer | 69 | 15 | 54 | 48 | 2 |
-15- |
Loans on nonaccrual status at period-end, follows:
September 30, 2012 | December 31, 2011 | |||||||
Commercial: | ||||||||
Commercial and industrial | $ | 3,748 | $ | 4,309 | ||||
Agricultural | 27 | — | ||||||
Commercial real estate: | ||||||||
Commercial real estate | 1,903 | 1,585 | ||||||
Commercial construction and development | 129 | 148 | ||||||
Residential real estate: | ||||||||
Residential – prime | 2,033 | 1,640 | ||||||
Residential – HELOC | 161 | 159 | ||||||
Residential construction and development | 133 | 78 | ||||||
Consumer | 6 | 55 | ||||||
Total | $ | 8,140 | $ | 7,974 |
During the quarter and nine months ended September 30, 2012, the contracts identified below were modified to convert from amortizing principal payments to interest only payments, extend payment amortization periods, or to capitalize unpaid property taxes, and were categorized as troubled debt restructurings. During the quarter and nine months ended September 30, 2011, the commercial related contracts identified below were modified to defer principal payments due while converting to interest only payments, or to lower the interest rate. Specific loan reserves maintained in connection with loans restructured during the year to date period totaled $262 at September 30, 2012 and $526 at September 30, 2011. All modified or restructured loans are classified as impaired loans. Recorded investment as presented in the tables below concerning modified loans represents principal outstanding before specific reserves.
The following table presents information concerning modifications of troubled debt made during the quarter ended September 30, 2012 before specific reserves:
Pre-modification | Post-modification | |||||||||||
Number of | outstanding recorded | outstanding recorded | ||||||||||
As of September 30, 2012 ($000s) | contracts | investment | investment at period-end | |||||||||
Commercial & industrial | 3 | $ | 481 | $ | 475 | |||||||
Residential real estate | 1 | $ | 121 | $ | 89 |
The following table presents information concerning modifications of troubled debt made during the nine months ended September 30, 2012 before specific reserves:
Pre-modification | Post-modification | |||||||||||
Number of | outstanding recorded | outstanding recorded | ||||||||||
As of September 30, 2012 ($000s) | contracts | investment | investment at period-end | |||||||||
Commercial & industrial | 6 | $ | 661 | $ | 637 | |||||||
Commercial real estate | 2 | $ | 527 | $ | 508 | |||||||
Residential real estate | 1 | $ | 121 | $ | 89 |
-16- |
The following table presents information concerning modifications of troubled debt made during the quarter ended September 30, 2011 before specific reserves:
Pre-modification | Post-modification | |||||||||||
Number of | outstanding recorded | outstanding recorded | ||||||||||
As of September 30, 2011 ($000s) | contracts | investment | investment at period-end | |||||||||
Commercial real estate | 1 | $ | 89 | $ | 89 |
The following table presents information concerning modifications of troubled debt made during the nine months ended September 30, 2011 before specific reserves:
Pre-modification | Post-modification | |||||||||||
Number of | outstanding recorded | outstanding recorded | ||||||||||
As of September 30, 2011 ($000s) | contracts | investment | investment at period-end | |||||||||
Commercial & industrial | 6 | $ | 1,157 | $ | 1,123 | |||||||
Commercial real estate | 7 | $ | 4,371 | $ | 4,363 | |||||||
Commercial construction & development | 1 | $ | 74 | $ | 73 |
The following table outlines past troubled debt restructurings that subsequently defaulted within twelve months of the last restructuring date. For purposes of this table, default is defined as 90 days or more past due on restructured payments.
Default during the quarter ended | Number of | Recorded | ||||||
September 30, 2012 ($000s) | contracts | investment | ||||||
Commercial real estate | 1 | $ | 45 |
Default during the nine months ended | Number of | Recorded | ||||||
September 30, 2012 ($000s) | contracts | investment | ||||||
Commercial & industrial | 1 | $ | — | |||||
Commercial real estate | 1 | $ | 45 |
Default during the quarter and nine months ended | Number of | Recorded | ||||||
September 30, 2011 ($000s) | contracts | investment | ||||||
Commercial real estate | 2 | $ | 267 |
NOTE 5 – FORECLOSED ASSETS
Real estate and other property 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 or other property is carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations of foreclosed assets and changes in any valuation allowance are included in loss on foreclosed assets.
-17- |
A summary of activity in foreclosed assets is as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Balance at beginning of period | $ | 2,642 | $ | 4,339 | $ | 2,939 | $ | 4,967 | ||||||||
Transfer of loans at net realizable value to foreclosed assets | 160 | 710 | 568 | 845 | ||||||||||||
Sale proceeds | (172 | ) | (502 | ) | (580 | ) | (832 | ) | ||||||||
Loans made on sale of foreclosed assets | — | (1,075 | ) | (140 | ) | (1,075 | ) | |||||||||
Net gain (loss) from sale of foreclosed assets | (1 | ) | (25 | ) | 47 | (1 | ) | |||||||||
Provision for write-down charged to operations | (280 | ) | — | (485 | ) | (457 | ) | |||||||||
Balance at end of period | $ | 2,349 | $ | 3,447 | $ | 2,349 | $ | 3,447 |
NOTE 6 – DEPOSITS
The distribution of deposits at period end is as follows:
September 30, 2012 | December 31, 2011 | |||||||
Non-interest bearing demand | $ | 79,201 | $ | 75,298 | ||||
Interest bearing demand (NOWs) | 114,031 | 108,894 | ||||||
Savings | 52,169 | 28,056 | ||||||
Money market | 112,816 | 102,993 | ||||||
Retail and local time | 126,105 | 91,702 | ||||||
Broker and national time | 63,516 | 74,566 | ||||||
Total deposits | $ | 547,838 | $ | 481,509 |
NOTE 7 – OTHER BORROWINGS
Other borrowings consist of the following obligations at September 30, 2012, and December 31, 2011:
September 30, 2012 | December 31, 2011 | |||||||
Short-term repurchase agreements | $ | 5,773 | $ | 6,191 | ||||
Wholesale structured repurchase agreements | 13,500 | 13,500 | ||||||
Total other borrowings | $ | 19,273 | $ | 19,691 |
PSB pledges various securities available for sale as collateral for repurchase agreements. The fair value of securities pledged for repurchase agreements totaled $21,490 at September 30, 2012 and $22,977 at December 31, 2011.
The following information relates to securities sold under repurchase agreements and other borrowings:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
As of end of period – weighted average rate | 3.04% | 2.90% | 3.04% | 2.90% | ||||||||||||
For the period: | ||||||||||||||||
Highest month-end balance | $ | 19,273 | $ | 21,746 | $ | 19,934 | $ | 32,644 | ||||||||
Daily average balance | $ | 18,725 | $ | 21,745 | $ | 19,166 | $ | 26,172 | ||||||||
Weighted average rate | 3.19% | 2.96% | 3.12% | 2.52% |
-18- |
NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
PSB is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate risk associated with PSB’s variable rate junior subordinated debentures. Accounting standards require PSB to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. PSB designates its interest rate swap associated with the junior subordinated debentures as a cash flow hedge of variable-rate debt. For derivative financial instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
From time to time, PSB will also enter into fixed interest rate swaps with customers in connection with their floating rate loans to PSB. When fixed rate swaps are originated with customers, an identical offsetting swap is also entered into by PSB with a correspondent bank. These swap arrangements are intended to offset each other as “back to back” swaps and allow PSB’s loan customer to obtain fixed rate loan financing via the swap while PSB exchanges these fixed payments with a correspondent bank. In these arrangements, PSB’s net cash flows and interest income are equal to the floating rate loan originated in connection with the swap. These customer swaps are not designated as hedging instruments and are accounted for at fair value with changes in fair value recognized in the income statement during the current period.
PSB is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. PSB controls the credit risk of its financial contracts through credit approvals, limits, and monitoring procedures, and does not expect any counterparties to fail their obligations. PSB swaps originated with correspondent banks are over-the-counter (OTC) contracts. Negotiated OTC derivative contracts are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amounts, exercise prices, and maturity.
At period end, the following interest rate swaps to hedge variable-rate debt were outstanding:
September 30, 2012 | December 31, 2011 | |
Notional amount | $ 7,500 | $ 7,500 |
Pay fixed rate | 2.72% | 2.72% |
Receive variable rate | 0.39% | 0.55% |
Maturity | September 2017 | September 2017 |
Unrealized gain (loss) fair value | $ (739) | $ (576) |
This agreement provides for PSB to receive payments at a variable rate determined by the three-month LIBOR in exchange for making payments at a fixed rate. Actual maturities may differ from scheduled maturities due to call options and/or early termination provisions. No interest rate swap agreements were terminated prior to maturity during the nine months ended September 30, 2012 or 2011. Risk management results for the nine months ended September 30, 2012 related to the balance sheet hedging of variable rate debt indicates that the hedge was 100% effective, and no component of the derivative instrument’s gain or loss was excluded from the assessment of hedge effectiveness.
As of September 30, 2012, approximately $180 of losses ($109 after tax impacts) reported in other comprehensive income related to the interest rate swap are expected to be reclassified into interest expense as a yield adjustment of the hedged borrowings during the 12-month period ending September 30, 2013. The interest rate swap agreement was secured by cash and cash equivalents of $850 at September 30, 2012, and by $680 at December 31, 2011.
PSB maintains outstanding interest rate swaps with customers and correspondent banks associated with its lending activities that are not designated as hedges. At period end, the following floating interest rate swaps were outstanding with customers:
September 30, 2012 | December 31, 2011 | |
Notional amount | $ 15,139 | $ 14,324 |
Receive fixed rate (average) | 1.99% | 2.05% |
Pay variable rate (average) | 0.23% | 0.29% |
Maturity | March 2015 – Oct. 2021 | March 2015 – Oct. 2021 |
Weighted average remaining term | 4.1 years | 4.9 years |
Unrealized gain (loss) fair value | $ 735 | $ 555 |
-19- |
At period end, the following offsetting fixed interest rate swaps were outstanding with correspondent banks:
September 30, 2012 | December 31, 2011 | |
Notional amount | $ 15,139 | $ 14,324 |
Pay fixed rate (average) | 1.99% | 2.05% |
Receive variable rate (average) | 0.23% | 0.29% |
Maturity | March 2015 – Oct. 2021 | March 2015 – Oct. 2021 |
Weighted average remaining term | 4.1 years | 4.9 years |
Unrealized gain (loss) fair value | $ (735) | $ (555) |
NOTE 9 – INCOME TAX EFFECTS ON ITEMS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2012 | September 30, 2012 | |||||||||||||||
Periods ended September 30, 2012 | Pre-tax | Income Tax | Pre-tax | Income Tax | ||||||||||||
(dollars in thousands) | Inc. (Exp.) | Exp. (Credit) | Inc. (Exp.) | Exp. (Credit) | ||||||||||||
Unrealized gain (loss) on securities available for sale | $ | 27 | $ | 13 | $ | (94 | ) | $ | (34 | ) | ||||||
Amortization of unrealized gain on securities available for sale | ||||||||||||||||
transferred to securities held to maturity included in net income | (110 | ) | (44 | ) | (346 | ) | (136 | ) | ||||||||
Unrealized loss on interest rate swap | (106 | ) | (42 | ) | (292 | ) | (115 | ) | ||||||||
Reclassification adjustment of interest rate swap | ||||||||||||||||
settlements included in earnings | 43 | 17 | 127 | 50 | ||||||||||||
Totals | $ | (146 | ) | $ | (56 | ) | $ | (605 | ) | $ | (235 | ) |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2011 | September 30, 2011 | |||||||||||||||
Periods ended September 30, 2011 | Pre-tax | Income Tax | Pre-tax | Income Tax | ||||||||||||
(dollars in thousands) | Inc. (Exp.) | Exp. (Credit) | Inc. (Exp.) | Exp. (Credit) | ||||||||||||
Unrealized gain (loss) on securities available for sale | $ | (37 | ) | $ | (14 | ) | $ | 432 | $ | 171 | ||||||
Amortization of unrealized gain on securities available for sale | ||||||||||||||||
transferred to securities held to maturity included in net income | (128 | ) | (16 | ) | (397 | ) | (122 | ) | ||||||||
Unrealized loss on interest rate swap | (467 | ) | (184 | ) | (680 | ) | (268 | ) | ||||||||
Reclassification adjustment of interest rate swap | ||||||||||||||||
settlements included in earnings | 48 | 19 | 139 | 55 | ||||||||||||
Totals | $ | (584 | ) | $ | (195 | ) | $ | (506 | ) | $ | (164 | ) |
NOTE 10 – STOCK-BASED COMPENSATION
Under the terms of an incentive stock option plan adopted during 2001, shares of unissued common stock were 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. No additional shares of common stock remain reserved for future grants under the option plan approved by the shareholders, and the last outstanding option shares were exercised during the quarter ended June 30, 2012. As of December 31, 2011, 588 options were outstanding and eligible to be exercised at a price of $16.03 per share which were exercised during the quarter ended June 30, 2012. During the nine months ended September 30, 2011, 1,464 options were exercised at $15.83 per share.
PSB granted restricted stock to certain employees having an initial market value of $200 during the three months ended March 31, 2012 and 2011. Restricted shares vest to employees based on continued PSB service over a six-year period and are recognized as compensation expense over the vesting period. Cash dividends are paid on unvested shares at the same time and amount as paid to PSB common shareholders. Cash dividends paid on unvested restricted stock shares are charged to retained earnings as significantly all restricted shares are expected to vest to employees. Unvested shares are subject to forfeiture upon employee termination. During the nine months ended September 30, compensation expense recorded from amortization of restricted shares expected to vest to employees was $79 and $65 during 2012 and 2011, respectively.
-20- |
The following tables summarize information regarding restricted stock outstanding at September 30, 2012 and 2011 including activity during the nine months then ended.
Weighted | ||||||||
Average | ||||||||
Shares | Grant Price | |||||||
January 1, 2011 | 19,452 | $ | 15.68 | |||||
Restricted stock granted | 9,130 | 21.90 | ||||||
Restricted stock legally vested | (3,010 | ) | (16.62 | ) | ||||
September 30, 2011 | 25,572 | $ | 17.79 | |||||
January 1, 2012 | 25,572 | $ | 17.79 | |||||
Restricted stock granted | 8,895 | 22.48 | ||||||
Restricted stock legally vested | (4,058 | ) | (16.08 | ) | ||||
September 30, 2012 | 30,409 | $ | 19.39 |
Scheduled compensation expense per calendar year assuming all restricted shares eventually vest to employees would be as follows:
2012 | $ | 105 | ||
2013 | 125 | |||
2014 | 125 | |||
2015 | 95 | |||
2016 | 80 | |||
Thereafter | 40 | |||
Totals | $ | 570 |
NOTE 11 – EARNINGS PER SHARE
Basic earnings per share of common stock are based on the weighted average number of common shares outstanding during the period. Unvested but issued restricted shares are considered to be outstanding shares and used to calculate the weighted average number of shares outstanding and determine net book value per share. 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. On June 19, 2012, the Company declared a 5% stock dividend to shareholders of record July 16, 2012, which was paid in the form of additional common stock on July 30, 2012. All references in the accompanying consolidated financial statements and footnotes to the number of common shares and per share amounts have been restated to reflect the 5% stock dividend.
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) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Net income | $ | 1,226 | $ | 1,394 | $ | 4,324 | $ | 3,905 | ||||||||
Weighted average shares outstanding | 1,663,472 | 1,653,179 | 1,663,221 | 1,652,439 | ||||||||||||
Effect of dilutive stock options outstanding | — | 768 | 76 | 998 | ||||||||||||
Diluted weighted average shares outstanding | 1,663,472 | 1,653,947 | 1,663,297 | 1,653,437 | ||||||||||||
Basic earnings per share | $ | 0.74 | $ | 0.85 | $ | 2.60 | $ | 2.36 | ||||||||
Diluted earnings per share | $ | 0.74 | $ | 0.84 | $ | 2.60 | $ | 2.36 |
-21- |
NOTE 12 – 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.
NOTE 13 – FAIR VALUE MEASUREMENTS
Certain assets and liabilities are recorded or disclosed at fair value to provide financial statement users additional insight into PSB’s quality of earnings. Under current accounting guidance, PSB groups assets and liabilities which are recorded at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). All transfers between levels are recognized as occurring at the end of the reporting period.
Following is a brief description of each level of the fair value hierarchy:
Level 1 – Fair value measurement is based on quoted prices for identical assets or liabilities in active markets.
Level 2 – Fair value measurement is based on (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; or (3) valuation models and methodologies for which all significant assumptions are or can be corroborated by observable market data.
Level 3 – Fair value measurement is based on valuation models and methodologies that incorporate at least one significant assumption that cannot be corroborated by observable market data. Level 3 measurements reflect PSB’s estimates about assumptions market participants would use in measuring fair value of the asset or liability.
Some assets and liabilities, such as securities available for sale, loans held for sale, mortgage rate lock commitments, and interest rate swaps, are measured at fair value on a recurring basis under GAAP. Other assets and liabilities, such as impaired loans, foreclosed assets, and mortgage servicing rights are measured at fair value on a nonrecurring basis.
Following is a description of the valuation methodology used for each asset and liability measured at fair value on a recurring or nonrecurring basis, as well as the classification of the asset or liability within the fair value hierarchy.
Securities available for sale – Securities available for sale may be classified as Level 1, Level 2, or Level 3 measurements within the fair value hierarchy and are measured on a recurring basis. Level 1 securities include equity securities traded on a national exchange. The fair value measurement of a Level 1 security is based on the quoted price of the security. Level 2 securities include U.S. government and agency securities, obligations of states and political subdivisions, corporate debt securities, and mortgage-related securities. The fair value measurement of a Level 2 security is obtained from an independent pricing service and is based on recent sales of similar securities and other observable market data and represents a market approach to fair value.
At September 30, 2012 and December 31, 2011, Level 3 securities include a common stock investment in Bankers’ Bank, Madison, Wisconsin that is not traded on an active market. Historical cost of the common stock is assumed to approximate fair value of this investment.
Loans held for sale – Loans held for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value and are measured on a recurring basis. The fair value measurement of a loan held for sale is based on current secondary market prices for similar loans, which is considered a Level 2 measurement and represents a market approach to fair value.
Impaired loans – Loans are not measured at fair value on a recurring basis. Carrying value of impaired loans that are not collateral dependent are based on the present value of expected future cash flows discounted at the applicable effective interest rate and, thus, are not fair value measurements. However, impaired loans considered to be collateral dependent are measured at fair value on a nonrecurring basis. The fair value measurement of an impaired loan that is collateral dependent is based on the fair value of the underlying collateral. Fair value measurements of underlying collateral that utilize observable market data, such as independent appraisals reflecting recent comparable sales, are considered Level 2 measurements. Other fair value measurements that incorporate internal collateral appraisals or broker price opinions, net of selling costs, or estimated assumptions market participants would use to measure fair value, such as discounted cash flow measurements, are considered Level 3 measurements and represent a market approach to fair value.
-22- |
In the absence of a recent independent appraisal, collateral dependent impaired loans are valued based on a recent broker price opinion generally discounted by 10% plus estimated selling costs. In the absence of a broker price opinion, collateral dependent impaired loans are valued at the lower of last appraisal value or the current real estate tax value discounted by 20% to 50%, depending on internal judgments on the condition of the property, plus estimated selling costs. Property values are impacted by many macroeconomic factors. In general, a declining economy or rising interest rates would be expected to lower fair value of collateral dependent impaired loans while an improving economy or falling interest rates would be expected to increase fair value of collateral dependent impaired loans.
Foreclosed assets – Real estate and other property acquired through, or in lieu of, loan foreclosure are not measured at fair value on a recurring basis. Initially, foreclosed assets are recorded at fair value less estimated costs to sell at the date of foreclosure. Valuations are periodically performed by management, and the real estate or other property is carried at the lower of carrying amount or fair value less estimated costs to sell. Fair value measurements are based on current formal or informal appraisals of property value compared to recent comparable sales of similar property. Independent appraisals reflecting comparable sales are considered Level 2 measurements, while internal assessments of appraised value based on current market activity, including broker price opinions, are considered Level 3 measurements and represent a market approach to fair value. Property values are impacted by many macroeconomic factors. In general, a declining economy or rising interest rates would be expected to lower fair value of foreclosed assets while an improving economy or falling interest rates would be expected to increase fair value of foreclosed assets.
Mortgage servicing rights – Mortgage servicing rights are not measured at fair value on a recurring basis. However, mortgage servicing rights that are impaired are measured at fair value on a nonrecurring basis. Serviced loan pools are stratified by year of origination and term of the loan, and a valuation model is used to calculate the present value of expected future cash flows for each stratum. When the carrying value of a stratum exceeds its fair value, the stratum is measured at fair value. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, custodial earnings rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value. As a result, the fair value measurement of mortgage servicing rights is considered a Level 3 measurement and represents an income approach to fair value. When market mortgage rates decline, borrowers may have the opportunity to refinance their existing mortgage loans at lower rates, increasing the risk of prepayment of loans on which we maintain mortgage servicing rights. Therefore, declining long term interest rates would decrease the fair value of mortgage servicing rights. Significant unobservable inputs at September 30, 2012 used to measure fair value included:
Direct annual servicing cost per loan | $ | 50 | ||
Direct annual servicing cost per loan in process of foreclosure | $ | 500 | ||
Weighted average prepayment speed: CPR | 54.29% | |||
Weighted average prepayment speed: PSA | 1361% | |||
Weighted average discount rate | 8.21% | |||
Asset reinvestment rate | 4.00% | |||
Short-term cost of funds | 0.25% | |||
Escrow inflation adjustment | 1.00% | |||
Servicing cost inflation adjustment | 1.00% |
Mortgage rate lock commitments – The fair value of mortgage rate lock commitments is measured on a recurring basis. Fair value is based on current secondary market pricing for delivery of similar loans and the value of originated mortgage servicing rights on loans expected to be delivered, which is considered a Level 2 fair value measurement.
-23- |
Interest rate swap agreements – Fair values for interest rate swap agreements are based on the amounts required to settle the contracts based on valuations provided by third-party dealers in the contracts, which is considered a Level 2 fair value measurement, and are measured on a recurring basis.
Recurring Fair Value Measurements Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(dollars in thousands) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets measured at fair value on a recurring basis at September 30, 2012: | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
U.S. Treasury and agency debentures | $ | 16,540 | $ | — | $ | 16,540 | $ | — | ||||||||
U.S. agency issued residential MBS and CMO | 60,951 | — | 60,951 | — | ||||||||||||
Privately issued residential MBS and CMO | 194 | — | 194 | — | ||||||||||||
Other equity securities | 47 | — | — | 47 | ||||||||||||
Total securities available for sale | 77,732 | — | 77,685 | 47 | ||||||||||||
Loans held for sale | 303 | — | 303 | — | ||||||||||||
Mortgage rate lock commitments | 102 | — | 102 | — | ||||||||||||
Interest rate swap agreements | 735 | — | 735 | — | ||||||||||||
Total assets | $ | 78,872 | $ | — | $ | 78,825 | $ | 47 | ||||||||
Liabilities – Interest rate swap agreements | $ | 1,474 | $ | — | $ | 1,474 | $ | — | ||||||||
Assets measured at fair value on a recurring basis at December 31, 2011: | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
U.S. Treasury and agency debentures | $ | 518 | $ | — | $ | 518 | $ | — | ||||||||
U.S. agency issued residential MBS and CMO | 58,389 | — | 58,389 | — | ||||||||||||
Privately issued residential MBS and CMO | 429 | — | 429 | — | ||||||||||||
Other equity securities | 47 | — | — | 47 | ||||||||||||
Total securities available for sale | 59,383 | — | 59,336 | 47 | ||||||||||||
Loans held for sale | 39 | — | 39 | — | ||||||||||||
Mortgage rate lock commitments | 60 | — | 60 | — | ||||||||||||
Interest rate swap agreements | 555 | — | 555 | — | ||||||||||||
Total assets | $ | 60,037 | $ | — | $ | 59,990 | $ | 47 | ||||||||
Liabilities – Interest rate swap agreements | $ | 1,131 | $ | — | $ | 1,131 | $ | — |
-24- |
Reconciliation of fair value measurements using significant unobservable inputs:
Securities | ||||
Available | ||||
(dollars in thousands) | For Sale | |||
Balance at January 1, 2011: | $ | 51 | ||
Total realized/unrealized gains and (losses): | ||||
Included in earnings | — | |||
Included in other comprehensive income | — | |||
Purchases, maturities, and sales | (4 | ) | ||
Transferred from Level 2 to Level 3 | — | |||
Transferred to held to maturity classification | — | |||
Balance at December 31, 2011 | $ | 47 | ||
Total gains or (losses) for the period included in earnings attributable to the | ||||
change in unrealized gains or losses relating to assets still held at December 31, 2011 | $ | — | ||
Balance at January 1, 2012 | $ | 47 | ||
Total realized/unrealized gains and (losses): | ||||
Included in earnings | — | |||
Included in other comprehensive income | — | |||
Purchases, maturities, and sales | — | |||
Transferred from Level 2 to Level 3 | — | |||
Transferred to held to maturity classification | — | |||
Balance at September 30, 2012 | $ | 47 | ||
Total gains or (losses) for the period included in earnings attributable to the | ||||
change in unrealized gains or losses relating to assets still held at September 30, 2012 | $ | — |
Nonrecurring Fair Value Measurements Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
($000s) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets measured at fair value on a nonrecurring basis at September 30, 2012: | ||||||||||||||||
Impaired loans | $ | 3,357 | $ | — | $ | — | $ | 3,357 | ||||||||
Foreclosed assets | 2,349 | — | 450 | 1,899 | ||||||||||||
Mortgage servicing rights | 1,091 | — | — | 1,091 | ||||||||||||
Total assets | $ | 6,797 | $ | — | $ | 450 | $ | 6,347 | ||||||||
Assets measured at fair value on a nonrecurring basis at December 31, 2011: | ||||||||||||||||
Impaired loans | $ | 4,086 | $ | — | $ | — | $ | 4,086 | ||||||||
Foreclosed assets | 2,939 | — | 587 | 2,352 | ||||||||||||
Mortgage servicing rights | 1,205 | — | — | 1,205 | ||||||||||||
Total assets | $ | 8,230 | $ | — | $ | 587 | $ | 7,643 |
-25- |
At September 30, 2012, loans with a carrying amount of $3,835 were considered impaired and were written down to their estimated fair value of $3,357 net of a valuation allowance of $478. At December 31, 2011, loans with a carrying amount of $5,306 were considered impaired and were written down to their estimated fair value of $4,086, net of a valuation allowance of $1,220. Changes in the valuation allowances are reflected through earnings as a component of the provision for loan losses or as a charge-off against the allowance for loan losses.
At September 30, 2012, mortgage servicing rights with a carrying amount of $1,422 were considered impaired and were written down to their estimated fair value of $1,091, resulting in an impairment allowance of $331. At December 31, 2011, mortgage servicing rights with a carrying amount of $1,286 were considered impaired and were written down to their estimated fair value of $1,205, resulting in an impairment allowance of $81. Changes in the impairment allowances are reflected through earnings as a component of mortgage banking income.
PSB estimates fair value of all financial instruments regardless of whether such instruments are measured at fair value. The following methods and assumptions were used by PSB to estimate fair value of financial instruments not previously discussed.
Cash and cash equivalents – Fair value reflects the carrying value of cash, which is a Level 1 measurement.
Securities held to maturity – Fair value of securities held to maturity is based on dealer quotations on similar securities near period-end, which is considered a Level 2 measurement. Certain debt issued by banks or bank holding companies purchased by PSB as securities held to maturity is valued on a cash flow basis discounted using market rates reflecting credit risk of the borrower, which is considered a Level 3 measurement.
Bank certificates of deposit – Fair value of fixed rate certificates of deposit included in other investments is estimated by discounting future cash flows using current rates at which similar certificates could be purchased, which is a Level 3 measurement.
Loans – Fair value of variable rate loans that reprice frequently are based on carrying values. Loans with an active sale market, such as one- to four-family residential mortgage loans, estimate fair value based on sales of loans with similar structure and credit quality. Fair value of other loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. Fair value of impaired and other nonperforming loans are estimated using discounted expected future cash flows or the fair value of underlying collateral, if applicable. Except for collateral dependent impaired loans valued using an independent appraisal of collateral value, reflecting a Level 2 fair value measurement, fair value of loans is considered to be a Level 3 measurement due to internally developed discounted cash flow measurements.
Federal Home Loan Bank stock – Fair value is the redeemable (carrying) value based on the redemption provisions of the Federal Home Loan Bank, which is considered a Level 3 fair value measurement.
Accrued interest receivable and payable – Fair value approximates the carrying value, which is considered a Level 3 fair value measurement.
Cash value of life insurance – Fair value is based on reported values of the assets by the issuer which are redeemable to the insured, which is considered a Level 1 fair value measurement.
Deposits – Fair value of deposits with no stated maturity, such as demand deposits, savings, and money market accounts, by definition, is the amount payable on demand on the reporting date. Fair value of fixed rate time deposits is estimated using discounted cash flows applying interest rates currently offered on issue of similar time deposits. Use of internal discounted cash flows provides a Level 3 fair value measurement.
FHLB advances and other borrowings – Fair value of fixed rate, fixed term borrowings is estimated by discounting future cash flows using the current rates at which similar borrowings would be made as calculated by the lender or correspondent. Fair value of borrowings with variable rates or maturing within 90 days approximates the carrying value of these borrowings. Fair values based on lender provided settlement provisions are considered a Level 2 fair value measurement. Other borrowings with local customers in the form of repurchase agreements are estimated using internal assessments of discounted future cash flows, which is a Level 3 measurement.
Senior subordinated notes and junior subordinated debentures – Fair value of fixed rate, fixed term notes and debentures are estimated internally by discounting future cash flows using the current rates at which similar borrowings would be made, which is a Level 3 fair value measurement.
-26- |
The carrying amounts and fair values of PSB’s financial instruments consisted of the following:
September 30, 2012 | ||||||||||||||||||||
Carrying | Estimated | Fair Value Hierarchy Level | ||||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets ($000s): | ||||||||||||||||||||
Cash and cash equivalents | $ | 34,156 | $ | 34,156 | $ | 34,156 | $ | — | $ | — | ||||||||||
Securities | 146,462 | 149,093 | — | 147,189 | 1,904 | |||||||||||||||
Other investments | 2,484 | 2,556 | — | — | 2,556 | |||||||||||||||
Net loans receivable and loans held for sale | 473,552 | 480,133 | — | 624 | 479,509 | |||||||||||||||
Accrued interest receivable | 2,505 | 2,505 | — | — | 2,505 | |||||||||||||||
Mortgage servicing rights | 1,091 | 1,091 | — | — | 1,091 | |||||||||||||||
Mortgage rate lock commitments | 102 | 102 | — | 102 | — | |||||||||||||||
FHLB stock | 2,761 | 2,761 | — | — | 2,761 | |||||||||||||||
Cash surrender value of life insurance | 11,710 | 11,710 | 11,710 | — | — | |||||||||||||||
Interest rate swap agreements | 735 | 735 | — | 735 | — | |||||||||||||||
Financial liabilities ($000s): | ||||||||||||||||||||
Deposits | $ | 547,838 | $ | 550,534 | $ | — | $ | — | $ | 550,534 | ||||||||||
FHLB advances | 50,124 | 51,878 | — | 51,878 | — | |||||||||||||||
Other borrowings | 19,273 | 19,273 | — | 15,015 | 4,258 | |||||||||||||||
Senior subordinated notes | 7,000 | 7,049 | — | — | 7,049 | |||||||||||||||
Junior subordinated debentures | 7,732 | 4,988 | — | — | 4,988 | |||||||||||||||
Interest rate swap agreements | 1,474 | 1,474 | — | 1,474 | — | |||||||||||||||
Accrued interest payable | 675 | 675 | — | — | 675 |
The carrying amounts and fair values of PSB’s financial instruments consisted of the following at December 31, 2011:
December 31, 2011 | ||||||||||||||||||||
Carrying | Estimated | Fair Value Hierarchy Level | ||||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets ($000s): | ||||||||||||||||||||
Cash and cash equivalents | $ | 38,205 | $ | 38,205 | $ | 38,205 | $ | — | $ | — | ||||||||||
Securities | 108,677 | 110,134 | — | 108,346 | 1,788 | |||||||||||||||
Other investments | 2,484 | 2,577 | — | — | 2,577 | |||||||||||||||
Net loans receivable and loans held for sale | 437,596 | 444,799 | — | 39 | 444,760 | |||||||||||||||
Accrued interest receivable | 2,068 | 2,068 | — | — | 2,068 | |||||||||||||||
Mortgage servicing rights | 1,205 | 1,205 | — | — | 1,205 | |||||||||||||||
Mortgage rate lock commitments | 60 | 60 | — | 60 | — | |||||||||||||||
FHLB stock | 3,250 | 3,250 | — | — | 3,250 | |||||||||||||||
Cash surrender value of life insurance | 11,406 | 11,406 | 11,406 | — | — | |||||||||||||||
Interest rate swap agreements | 555 | 555 | — | 555 | — | |||||||||||||||
Financial liabilities ($000s): | ||||||||||||||||||||
Deposits | $ | 481,509 | $ | 484,640 | $ | — | $ | — | $ | 484,640 | ||||||||||
FHLB advances | 50,124 | 52,547 | — | 52,547 | — | |||||||||||||||
Other borrowings | 19,691 | 21,454 | — | 15,163 | 6,291 | |||||||||||||||
Senior subordinated notes | 7,000 | 7,120 | — | — | 7,120 | |||||||||||||||
Junior subordinated debentures | 7,732 | 4,849 | — | — | 4,849 | |||||||||||||||
Interest rate swap agreements | 1,131 | 1,131 | — | 1,131 | — | |||||||||||||||
Accrued interest payable | 623 | 623 | — | — | 623 |
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NOTE 14 – CURRENT YEAR AND COMPARABLE PRIOR YEAR PERIOD ACCOUNTING CHANGES
FASB ASC Topic 220, “Comprehensive Income.” In June 2011, new authoritative accounting guidance was approved that required changes to the presentation of comprehensive net income. Effective during the quarter ended March 31, 2012, PSB began to present comprehensive income as a separate financial statement directly after the basic income statement. Adoption of the new presentation standards for comprehensive income did not have any financial impact to PSB’s financial results or operations. The requirements to disclose on the face of the income statement on a line by line basis the impact to current net income on reclassification of items coming out of comprehensive net income was deferred.
FASB ASC Topic 820, “Fair Value Measurements.” In May 2011, new authoritative accounting guidance concerning fair value measurements was issued. Significant provisions of the new guidance now require both domestic and international companies to follow existing United States guidance in measuring fair value. In addition, certain Level 3 unobservable inputs and impacts to fair value from sensitivity of these inputs to changes must be disclosed. Lastly, the level of fair value hierarchy used to estimate fair value of financial instruments not accounted for at fair value on the balance sheet (such as loans receivable and deposits) must be disclosed. These new disclosures were adopted during the quarter ended March 31, 2012 and did not have a significant impact to PSB financial reporting or operations.
FASB ASC Topic 310, “Receivables.” New authoritative accounting guidance issued in July 2010 under ASC Topic 310, “Receivables,” required extensive new disclosures surrounding the allowance for loan losses although it did not change any credit loss recognition or measurement rules. The new rules require disclosures to include a breakdown of allowance for loan loss activity by portfolio segment as well as problem loan disclosures by detailed class of loan. In addition, disclosures on internal credit grading metrics and information on impaired, nonaccrual, and restructured loans are also required. The period-end disclosures were effective for financial periods ending December 31, 2010 but deferred presentation of loan loss allowance by loan portfolio segment until the quarter ended March 31, 2011. PSB adopted the rules for loan loss allowance disclosures by loan segment effective March 31, 2011.
NOTE 15 – FUTURE ACCOUNTING CHANGES
FASB ASC Topic 210, “Balance Sheet.” In December 2011, new authoritative accounting guidance concerning disclosure of information about offsetting and related arrangements associated with derivative instruments was issued. New requirements will require additional disclosures associated with offsetting and collateral arrangements with derivative instruments to enable users of PSB’s financial statements to understand the effect of those arrangements on its financial position. These new disclosures are effective during the quarter ended March 31, 2013 and are not expected to have significant impact to PSB’s financial results or operations upon adoption.
NOTE 16 – SUBSEQUENT EVENTS
Management has reviewed PSB’s operations for potential disclosure of information or financial statement impacts related to events occurring after September 30, 2012 but prior to the release of these financial statements. Based on the results of this review, no subsequent event disclosures or financial statement impacts to the recently completed quarter are required as of the release date.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis (“MD&A”) reviews significant factors with respect to our financial condition as of September 30, 2012 compared to December 31, 2011 and results of our operations for the three months and nine months ended September 30, 2012 compared to the results of operations for the three months and nine months ended September 30, 2011. The following MD&A concerning our operations is intended to satisfy three principal objectives:
• | Provide a narrative explanation of our financial statements that enables investors to see the company through the eyes of management. |
• | Enhance the overall financial disclosure and provide the context within which our financial information should be analyzed. |
• | Provide information about the quality of, and potential variability of, our earnings and cash flow, so that investors can ascertain the likelihood that past performance is, or is not, indicative of future performance. |
Management’s discussion and analysis, like other portions of this Quarterly Report on Form 10-Q, includes forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, our anticipated future financial performance involves risks and uncertainties that may cause actual results to differ materially from those described in our forward-looking statements. A cautionary statement regarding forward-looking statements is set forth under the caption “Forward-Looking Statements” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, and, from time to time, in our other filings with the Securities Exchange Commission. We do not intend to update forward-looking statements. This discussion and analysis should be considered in light of that cautionary statement. Additional risk factors relating to an investment in our common stock are also described under Item 1A of the 2011 Annual Report on Form 10-K.
This discussion should be read in conjunction with the consolidated financial statements, notes, tables, and the selected financial data presented elsewhere in this report. All figures are in thousands, except per share data and per employee data.
EXECUTIVE OVERVIEW
Results of Operations
September 2012 quarterly earnings were $1,226, or $.74 per diluted share, compared to $1,394, or $.84 per diluted share, during the September 2011 quarter. Year to date earnings for the nine months ended September 30, 2012 were $4,324, or $2.60 per diluted share, compared to $3,905, or $2.36 per diluted share, during the nine months ended September 30, 2011. Both the quarterly and year to date periods were significantly impacted by activity associated with our purchase of Marathon State Bank (“Marathon”). Refer to Table 1 of this MD&A for the nature and impact of these special Marathon income and expense items on consolidated net income. Before the special Marathon items, earnings per share were $.90 during the September 2012 quarter and $2.57 during the nine months ended September 30, 2012, an increase of 7.1% and 8.9% over the prior year periods, respectively.
Prior to the special Marathon expenses, September 2012 quarterly net income increased over September 2011 from increased net interest income despite a .16% decline in quarterly net interest margin due to 12.6% growth in average earning assets (primarily from the Marathon acquisition). In addition, there was no recognition of a September 2012 quarterly provision for loan losses, and mortgage banking increased $184 (66.2%) on heightened customer residential mortgage refinance activity. These income items were offset by a $280 write-down to our largest foreclosed asset following acceptance of an offer to purchase, and a $319 increase in other operating expenses, up 8.3%, led by higher salaries and employee benefits and data processing costs.
Year to date prior to the special Marathon income and expense items, net income during the nine months ended September 30, 2012 increased over 2011 from a 5.5% increase in average earning assets despite a .09% decline in year to date interest margin. 2012 also experienced an $825 decline in provision for loan losses (72% decline), and a $229 increase in mortgage banking income on refinance activity (up 23.3%). These additional income items offset salaries and benefit expense growth including new costs related to Marathon staff, and higher data processing expenses following phase out of special conversion contractual cost reductions during 2011 associated with our 2010 data conversion.
Including all merger and data conversion expenses, Marathon added $422 to our consolidated net income since the June 2012 acquisition, increasing our net income during the nine months ended September 30, 2012 by 10.8%. However, excluding the merger related gain and expenses, Marathon added $182 to consolidated net income, increasing income by 4.7%. Refer to Note 2 of the Notes to Consolidated Financial Statements for additional pro-forma information on the results of operations during the quarters and nine months ended September 30, 2012 and 2011 for PSB and Marathon as if the acquisition had occurred at the beginning of the periods reported.
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Looking ahead to calendar 2013, net income growth will be challenged by continued downward pressure on net interest margin, an expected decline in mortgage banking refinance activity income, and stable provisions for loan losses. Declining credit costs, including provision for loan losses and loss on foreclosed assets, have been an important driver to net income growth during 2012 compared to 2011 which is not expected to recur during 2013.
Credit Quality
Total nonperforming assets of $17,191 at September 30, 2012 declined from $17,360 at June 30, 2012 (down $169), and $17,883 at December 31, 2011 (down $692). The declines were due primarily to a reduction in foreclosed assets which declined $293 during the September 2012 quarter and declined $590 since December 31, 2011. Total nonperforming assets were 2.48% and 2.87% of total assets at September 30, 2012 and December 31, 2011, respectively. Excluding a $750 nonaccrual trust preferred investment security issued by Johnson Financial Group, Racine, Wisconsin, and all performing restructured loans, total nonperforming assets would have been 1.51% and 1.75% of total assets at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012, the allowance for loan losses was $7,431, or 1.55% of total loans (53% of nonperforming loans), compared to $7,941, or 1.78% of total loans (56% of nonperforming loans) at December 31, 2011. A 73% reduction in the amount of new problem loans added to nonperforming assets during the nine months ended September 30, 2012 compared 2011 has pointed to improving credit quality. Higher credit quality and low organic net loan growth allowed us to reduce provision for loan losses during 2012 compared to 2011, and no provision was recorded during the September 2012 quarter. We expect further reduction to nonperforming assets during the upcoming December 2012 quarter due to positive resolution of a $1,578 nonperforming loan and expected sale of a $1,000 foreclosed asset.
Asset Growth and Liquidity
Total assets were $692,563 at September 30, 2012, down $16,461, or 2.3%, during the September 2012 quarter compared to June 30, 2012, but up $69,696, or 11.2%, since December 31, 2011 due to acquisition of Marathon. During the September 2012 quarter, Marathon’s substantial liquidity and cash flow from maturing investment securities and short-term commercial paper were used to pay down $10,916 of wholesale funding. In addition, PSB used excess liquidity to fund purchase of the remaining $4,753 of Marathon common stock (out of the original $5,505 purchase price) which was previously reflected as a liability at June 30, 2012. Commercial real estate and other commercial related loans increased $8,197 during the September 2012 quarter compared to June 30, 2012, which was also funded by maturing securities and short-term investments in Marathon’s security portfolio. Total net loans receivable were $473,249 at September 30, 2012, compared to $466,300 at June 30, 2012, up $6,949, or 1.5%.
Local core deposits and retail deposits $100 and greater declined $3,653, or .7%, during the September 2012 quarter compared to June 30, 2012, but increased $77,379, or 19.0% since December 31, 2011 from the Marathon acquisition. Marathon local deposit retention has met expectations following the acquisition, as Marathon local deposits increased $5,090 to $90,279 compared to $85,189 at the June 14, 2012 purchase date. Purchase date deposits exclude the $14,510 Marathon special shareholder dividend paid prior to the acquisition and reflected as a Marathon noninterest-bearing deposit on the acquisition date. Many former Marathon shareholders deposited a portion of their special dividend and stock purchase payment into their Marathon deposit account, which accounted for a significant portion of the increase in Marathon deposits since the acquisition date. During the December 2012 quarter, we could see a decline in Marathon deposits from balances held at September 30, 2012, from typical deposit attrition following the merger of Marathon into Peoples State Bank on October 13, 2012.
Our liquidity position has benefited from the Marathon acquisition. Wholesale funding, including brokered and national certificates of deposits, FHLB advances, and other borrowings, was $132,913 at September 30, 2012, compared to $144,381 at December 31, 2011, down $11,468, or 7.9%. Wholesale funding was 19.2% of total assets at September 30, 2012 compared to 23.2% of total assets at December 31, 2011. We expect to see wholesale funding as a percentage of total assets continue to decline during the December 2012 quarter as maturing wholesale funding is repaid from cash and cash equivalents held at September 30, 2012. Repayment of wholesale funding with existing cash has a de-leveraging effect on the balance sheet and total assets may decline during the December 2012 quarter compared to September 30, 2012. At September 30, 2012, unused (but available) wholesale funding was approximately $258 million, or 37% of total assets, compared to $238 million, or 38% of total assets at December 31, 2011. Marathon accounted for 88% of the increase in available liquidity compared to December 31, 2011.
Capital Resources
During the nine months ended September 30, 2012, stockholders’ equity increased $3,433, or 6.8%, primarily from $3,709 in retained net income after deducting $615 of cash dividends paid. Net book value per share at September 30, 2012 was $32.34 compared to $30.44 at December 31, 2011, up 6.2%. Net book value and other references to per share information reflect the impact of our 5% dividend paid in common stock declared June 19, 2012 and paid July 30, 2012. Common stockholders’ equity was 7.77% of total assets at September 30, 2012 compared to 7.42% of assets at June 30, 2012 and 8.09% of assets at December 31, 2011. Our equity to assets ratio has declined since the beginning of the year due to the cash purchase of Marathon in the June 2012 quarter.
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For regulatory purposes, the $7 million 8% senior subordinated notes maturing July 2019 and $7.7 million junior subordinated debentures maturing September 2035 reflected as debt on the Consolidated Balance Sheet are reclassified as Tier 2 and Tier 1 regulatory equity capital, respectively. PSB was considered “well capitalized” under banking regulations at September 30, 2012. PSB holds the right to prepay its $7 million in 8% senior subordinated notes on a monthly basis. After considering total regulatory capital needs for loan growth, regulatory changes impacting capital minimums, and merger and acquisition activities, we may prepay some or all of the 8% notes during 2013. Repayment of these debentures in their entirety would reduce interest expense $140 and increase net income by approximately $85 per quarter.
Approximately 20% of our total regulatory capital at September 30, 2012 is comprised of debt instruments including junior and senior debentures and notes which, unlike common stock, require quarterly payments of interest aggregating $223 (before tax benefits). Therefore, although no current plans exist, future capital needs during the next several years would likely be met by issuance of our authorized common or preferred stock as needed. Due to relatively high cost of capital options, our desire to prepay our 8% senior subordinated notes, the cash purchase acquisition of Marathon State Bank, and potential future merger and acquisition activities requiring capital, we do not expect to buy back significant treasury stock shares during the next several quarters. We do expect to continue to pay our traditional semi-annual cash dividend assuming continued profitable operations and projections of adequate future capital levels for growth.
During the June 2012 quarter, the banking regulatory agencies, including the Board of Governors of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), issued two new regulatory capital proposals that are likely to have a significant impact on our regulatory capital needs if finalized. Among other significant changes, the proposal would phase out our current $7.7 million of junior subordinated debentures from Tier 1 capital and move them to Tier 2 capital classification over a 10 year period beginning in 2013. This change would reduce our leverage capital ratio and our Tier 1 risk adjusted capital ratio. Separately, proposed changes to the calculation of risk weighted assets would increase the denominator of risk adjusted capital ratios, including the Tier 1 capital and Tier 2 (“Total”) capital ratio, which would reduce our risk adjusted capital ratios. The regulatory agencies have estimated that industry wide total risk adjusted assets are likely to increase an average of 20% due to the proposed changes. Lastly, under the proposal, minimum capital ratios to be considered well capitalized, including the impact of the proposed “capital buffer,” would be 6.50% for the leverage ratio, 8.50% for the Tier 1 to risk adjusted capital ratio, and 10.50% for the total risk adjusted capital ratio, up from 5.00%, 6.00%, and 10.00%, respectively.
We continue to internally review the timing and extent of the proposed changes on our regulatory capital position. As a reference for this discussion, assuming the immediate loss of junior subordinated debentures as Tier 1 capital and a 20% increase in total risk adjusted assets, our pro forma September 30, 2012 leverage ratio would have been 7.50% instead of 8.58%, our Tier 1 risk adjusted capital ratio would have been 8.78% instead of 12.05%, and our total risk adjusted capital ratio would have been 12.47% instead of 14.72%. Increased regulatory capital requirements could impact our ability to pay shareholder cash dividends of profits, repurchase shares of treasury stock, or the pace of which we could grow in assets, both organically and via merger and acquisition activities.
Off Balance –Sheet Arrangements and Contractual Obligations
Our largest volume off-balance sheet activity involves our servicing of payments and related collection activities on approximately $266 million of residential 1 to 4 family mortgages sold to FHLB and FNMA at September 30, 2012. At September 30, 2012, we provided a credit enhancement against FHLB loss under five separate “master commitments” associated with 14% of the total serviced principal (down from 20% at December 31, 2011), up to a maximum guarantee of $1.9 million in the aggregate. However, we would incur such loss only if the FHLB first lost $1.8 million on this remaining loan pool of approximately $39 million as part of their “First Loss Account” (discussed here in the aggregate, although the guarantee is applied on an individual master commitment basis). Since inception of our guarantees to the FHLB beginning in 2000, only $0.4 million of $425 million of loans originated with guarantees have represented a principal loss, all of which has been borne by the FHLB within their First Loss Account. No loans have been sold by us to the FHLB with our Credit Enhancement Guarantee of principal since October 2008 and we do not intend to originate future loans with the guarantee.
We also utilize interest rate swaps to hedge costs associated with certain variable rate debt (notional amount of $7,500 at September 30, 2012) and as a tool for our customers to obtain long-term fixed rate commercial loan financing (offsetting notional amounts of $15,139). These arrangements and related off balance sheet commitments are outlined in Note 8 in the Notes to Consolidated Financial Statements. Aggregate net unrealized losses on fair value of all interest rate swaps determined by offsetting all swap positions were $739 and $576 at September 30, 2012 and December 31, 2011, respectively before tax benefits.
We provide various commitments to extend credit for both commercial and consumer purposes totaling approximately $102 million at September 30, 2012 compared to $99 million at December 31, 2011. These lending commitments are a traditional and customary part of lending operations and many of the commitments are expected to expire without being drawn upon.
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RESULTS OF OPERATIONS
Earnings
Quarter ended September 30, 2012 compared to September 30, 2011
September 2012 quarterly earnings were $1,226, or $.74 per diluted share compared to $1,394, or $.84 per diluted share during September 2011, a decrease of $168, or $.10 per share, down 11.9%. The decrease was due primarily to $383 of data conversion costs ($232 after tax benefits) recorded in the September 2012 quarter related to integration of Marathon State Bank into Peoples State Bank. We purchased Marathon during the June 2012 quarter as disclosed in Note 2 to the Notes to Consolidated Financial Statements. During the September 2012 quarter, we also incurred $43 of legal expenses related to the Marathon acquisition and charter consolidation ($41 after tax benefits). The Marathon data system and banking charter were merged into Peoples State Bank on October 13, 2012. Before these Marathon special costs, net income would have been $1,499 in the September 2012 quarter compared to $1,394 in the September 2011 quarter. Earnings per share would have been $.90 in September 2012 compared to $.84 in September 2011, an increase of 7.1%. Table 1 below outlines the Marathon special items and the impact to net income and earnings per share during the September 2012 and 2011 quarters.
Prior to the special Marathon expenses, September 2012 quarterly net income grew from a $361 increase in tax adjusted net interest income ($219 after tax expense) from an increase in average earning assets, despite a .16% decline in quarterly net interest margin. In addition, no provision for loan losses was recorded in the September 2012 quarter while $360 was recorded during the prior year quarter ($218 after tax expense). A decline in U.S. Treasury long-term interest rates prompted a wave of customer residential fixed rate mortgage loan refinance activity during the September 2012 quarter and mortgage banking income increased $278 ($168 after tax expense). These items of increased income were offset by a $280 write-down ($170 after tax benefits) to our largest foreclosed asset following acceptance of an offer to purchase, and a $319 increase ($193 after tax benefits) in other operating expenses, up 8.3%, led by higher salaries and employee benefits and data processing costs.
Nine months ended September 30, 2012 compared to September 30, 2011
Year to date earnings for the nine months ended September 2012 were $4,324, or $2.60 per diluted share compared to $3,905, or $2.36 per diluted share during September 2011, an increase of $419, or $.24 per share, up 10.2%. As in the September 2012 quarter, special income and expense items related to the Marathon acquisition impacted year to date net income. Offsetting the significant data integration expenses in September 2012 previously discussed was a $851 gain on bargain purchase of Marathon ($515 after tax benefits) recorded in the June 2012 quarter. During the year to date period, $235 of professional expenses ($233 after tax benefits) related to Marathon were recorded during 2012. Before these Marathon special items, net income would have been $4,274 during the nine months ended September 30, 2012 compared to $3,905 during 2011. Earnings per share would have been $2.57 year to date during 2012 compared to $2.36 during 2011, an increase of 8.9%. Table 1 below outlines the Marathon special items and the impact to net income and earnings per share during the nine months ended September 30, 2012 and 2011.
Prior to the special Marathon expenses, net income during the nine months ended September 30, 2012 increased $431 ($261 after tax expense) over 2011 from an increase in tax adjusted net interest income on an increase in average earning assets, despite a .09% decline in quarterly net interest margin. In addition, 2012 provision for loan losses declined $825 from 2011 ($500 after tax expense) on identification of fewer new problem loan relationships. Although 2011 also experienced a high level of residential mortgage refinance activity, 2012 mortgage banking income increased $229 ($139 after tax expense) over 2011. These items of increased income were offset by increased operating expenses before loss on foreclosed assets of $840 ($509 after tax benefits), or 7.6%, over 2011 operating expenses before loss on foreclosed assets. The increased operating expenses were led by salaries and employee benefits, up $398, and data processing and office operations, up $340.
During 2013, each of the factors behind increased 2012 earnings as discussed above are expected to decline or be negatively impacted. Net interest margin is expected to be pressured lower while total earning assets may grow at inflationary levels. In addition, provision for loan losses may be recorded at levels similar to that recorded during 2012. Reductions in provision for loan losses were a significant driver in increased earnings during 2012 compared to 2011. Lastly, mortgage refinance volume is likely to drop significantly as new customer refinance applications diminish, reducing mortgage banking income. The combination of these factors during 2013 is likely to challenge earnings growth and earnings per share during 2013 could decline compared to 2012.
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Table 1: Impact of Special Income and Expense Items on Continuing Operations (a non-GAAP measure)
Quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
($000s, net of income tax effects) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Net income from continuing operations before credit costs | $ | 1,699 | $ | 1,652 | $ | 4,815 | $ | 4,989 | ||||||||
Less: Credit costs | (200 | ) | (258 | ) | (541 | ) | (1,084 | ) | ||||||||
Net income from continuing operations after credit costs | 1,499 | 1,394 | 4,274 | 3,905 | ||||||||||||
Add: Gain on bargain purchase | — | — | 515 | — | ||||||||||||
Less: Merger data processing conversion | (232 | ) | — | (232 | ) | — | ||||||||||
Less: Merger related expenses | (41 | ) | — | (233 | ) | — | ||||||||||
Net income | $ | 1,226 | $ | 1,394 | $ | 4,324 | $ | 3,905 | ||||||||
Quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
(per diluted share, net of income tax effects) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Net income from continuing operations before credit costs | $ | 1.02 | $ | 1.00 | $ | 2.89 | $ | 3.02 | ||||||||
Less: Credit costs | (0.12 | ) | (0.16 | ) | (0.32 | ) | (0.66 | ) | ||||||||
Net income from continuing operations after credit costs | 0.90 | 0.84 | 2.57 | 2.36 | ||||||||||||
Add: Gain on bargain purchase | — | — | 0.31 | — | ||||||||||||
Less: Merger data processing conversion | (0.14 | ) | — | (0.14 | ) | — | ||||||||||
Less: Merger related expenses | (0.02 | ) | — | (0.14 | ) | — | ||||||||||
Net income | $ | 0.74 | $ | 0.84 | $ | 2.60 | $ | 2.36 |
Return on average assets was .70% (.85% before the Marathon merger related items) and .92% during the quarters ended September 30, 2012 and 2011, respectively. Return on average stockholders’ equity was 9.13% (11.13% before the merger items) and 11.20% during the quarters ended September 30, 2012 and 2011, respectively.
Return on average assets was .89% (.88% before the Marathon merger related items) and .86% during the nine months ended September 30, 2012 and 2011, respectively. Return on average stockholders’ equity was 11.02% (10.89% before the merger items) and 10.75% during the nine months ended September 30, 2012 and 2011, respectively.
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The following Table 2 presents PSB’s consolidated quarterly summary financial data.
Table 2: Financial Summary
(dollars in thousands, except per share data) | Quarter ended | |||||||||||||||||||||
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||||
Earnings and dividends: | 2012 | 2012 | 2012 | 2011 | 2011 | |||||||||||||||||
Net interest income | $ | 5,163 | $ | 4,880 | $ | 4,816 | $ | 5,060 | $ | 4,867 | ||||||||||||
Provision for loan losses | $ | — | $ | 165 | $ | 160 | $ | 240 | $ | 360 | ||||||||||||
Other noninterest income | $ | 1,444 | $ | 2,323 | $ | 1,242 | $ | 1,376 | $ | 1,367 | ||||||||||||
Other noninterest expense | $ | 4,860 | $ | 4,064 | $ | 4,119 | $ | 4,121 | $ | 3,835 | ||||||||||||
Net income | $ | 1,226 | $ | 1,918 | $ | 1,180 | $ | 1,400 | $ | 1,394 | ||||||||||||
Basic earnings per share(3) | $ | 0.74 | $ | 1.15 | $ | 0.70 | $ | 0.85 | $ | 0.85 | ||||||||||||
Diluted earnings per share(3) | $ | 0.74 | $ | 1.15 | $ | 0.70 | $ | 0.85 | $ | 0.84 | ||||||||||||
Dividends declared per share(3) | $ | — | $ | 0.36 | $ | — | $ | 0.35 | $ | — | ||||||||||||
Net book value per share | $ | 32.34 | $ | 31.64 | $ | 30.96 | $ | 30.44 | $ | 30.10 | ||||||||||||
Semi-annual dividend payout ratio | n/a | 19.44% | n/a | 20.86% | n/a | |||||||||||||||||
Average common shares outstanding | 1,663,472 | 1,663,410 | 1,663,138 | 1,654,111 | 1,653,179 | |||||||||||||||||
Balance sheet – average balances: | ||||||||||||||||||||||
Loans receivable, net of allowances for loss | $ | 460,697 | $ | 447,886 | $ | 436,907 | $ | 440,737 | $ | 434,031 | ||||||||||||
Assets | $ | 698,103 | $ | 639,404 | $ | 607,917 | $ | 604,216 | $ | 602,088 | ||||||||||||
Deposits | $ | 550,564 | $ | 493,349 | $ | 466,121 | $ | 457,916 | $ | 452,225 | ||||||||||||
Stockholders’ equity | $ | 53,440 | $ | 52,835 | $ | 51,016 | $ | 50,910 | $ | 49,369 | ||||||||||||
Performance ratios: | ||||||||||||||||||||||
Return on average assets(1) | 0.70% | 1.21% | 0.78% | 0.92% | 0.92% | |||||||||||||||||
Return on average stockholders’ equity(1) | 9.13% | 14.60% | 9.30% | 10.91% | 11.20% | |||||||||||||||||
Average stockholders’ equity less | ||||||||||||||||||||||
accumulated other comprehensive income | ||||||||||||||||||||||
(loss) to average assets | 7.44% | 8.01% | 8.10% | 8.11% | 7.84% | |||||||||||||||||
Net loan charge-offs to average loans(1) | 0.19% | 0.24% | 0.31% | 0.28% | 0.14% | |||||||||||||||||
Nonperforming loans to gross loans | 2.93% | 2.95% | 3.38% | 3.19% | 3.26% | |||||||||||||||||
Allowance for loan losses to gross loans | 1.55% | 1.61% | 1.75% | 1.78% | 1.82% | |||||||||||||||||
Nonperforming assets to tangible equity | ||||||||||||||||||||||
plus the allowance for loan losses(4) | 28.59% | 29.34% | 32.44% | 31.32% | 32.82% | |||||||||||||||||
Net interest rate margin(1)(2) | 3.37% | 3.42% | 3.50% | 3.64% | 3.53% | |||||||||||||||||
Net interest rate spread(1)(2) | 3.21% | 3.20% | 3.27% | 3.38% | 3.28% | |||||||||||||||||
Service fee revenue as a percent of | ||||||||||||||||||||||
average demand deposits(1) | 2.17% | 2.41% | 2.66% | 2.49% | 2.95% | |||||||||||||||||
Noninterest income as a percent of gross revenue | 17.24% | 25.81% | 15.65% | 16.31% | 16.15% | |||||||||||||||||
Efficiency ratio(2) | 70.89% | 54.85% | 66.04% | 62.34% | 59.75% | |||||||||||||||||
Noninterest expenses to average assets(1) | 2.77% | 2.56% | 2.73% | 2.71% | 2.53% | |||||||||||||||||
Stock price information: | ||||||||||||||||||||||
High | $ | 29.20 | $ | 26.67 | $ | 24.76 | $ | 23.57 | $ | 23.81 | ||||||||||||
Low | $ | 24.50 | $ | 21.81 | $ | 21.86 | $ | 22.43 | $ | 22.05 | ||||||||||||
Last trade value at quarter-end | $ | 28.75 | $ | 25.24 | $ | 24.76 | $ | 22.48 | $ | 22.62 |
(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.
(4)Tangible stockholders’ equity excludes intangible assets and any preferred stock capital elements.
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Net Interest Income
Quarter ended September 30, 2012 compared to September 30, 2011
Net interest income is the most significant component of earnings. Tax adjusted net interest income totaled $5,412 during the September 2012 quarter compared to $5,051 during the September 2011 quarter, an increase of $361, or 7.1%. Increased net interest income was due to an increase in average earning assets during the September 2012 quarter, which increased $71,528, or 12.6% compared to September 2011. Earning assets (primarily investments securities) acquired with Marathon provided $61,708, or 86% of the quarterly increase over September 2011. However, Marathon’s large asset allocation to securities and significant cash and cash equivalent holdings contributed to lower net margin during the September 2012 quarter which fell to 3.37% compared to 3.53% compared to the September 2011 quarter.
Compared to the linked June 2012 quarter, September 2012 quarterly loan yields declined .04% (to 5.11%) while the average deposit cost declined .12% (to .75%). However, net interest margin was negatively impacted by holding short-term excess funds associated with the Marathon acquisition pending merger into Peoples State Bank. Excluding the net increase in other interest earning assets in September 2012 compared to June 2012 (primarily federal funds sold) due to excess Marathon liquidity, September net interest margin would have increased .04% to 3.41% compared to 3.42% in the June 2012 quarter. A decline in tax adjusted investment security yields accounted for the remainder of the decline in net margin during September 2012 compared to June 2012.
Reinvestment yields for investment security cash flows remain very low and taxable securities yields are expected to continue to decline throughout the December 2012 quarter and 2013. In addition, loan yields may decline significantly due to competitive pressures as competitors seek to increase loan originations while quality credit demand remains weak, in addition to domestic and global economic actions which have lowered long-term rates. With average cost of deposits (representing 79% of total average assets) at .75% during the September 2012 quarter, further reduction of deposit costs to offset lower loan yields may be difficult. A significant portion of interest-bearing liabilities (11.5%) at September 30, 2012 include $63,624 of long-term FHLB advances and structured repurchase agreements with a weighted average fixed rate of 3.08% and a weighted average remaining term of 22 months to maturity. Prepayment of these instruments carries substantial monetary penalties which generally outweigh the long-term benefit of refinancing the debt. Asset yields are expected to continue to decline faster than funding costs during the next several quarters and net interest income may decline if earning assets do not grow from existing levels. A portion of the decline in earning asset rates will be offset by further declines in deposit cost, and December 2012 quarterly net interest margin is anticipated to fall within a range of 3.35% to 3.40%.
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Nine months ended September 30, 2012 compared to September 30, 2011
Tax adjusted net interest income totaled $15,493 during the nine months ended September 30, 2012 compared to $15,062 during the nine months ended September 30, 2011, an increase of $431, or 2.9%. As during the September 2012 quarter, year to date net interest income benefited from addition of Marathon’s earning assets despite a decline in net margin from 3.52% during 2011 to 3.43% during 2012. The year to date increase in net interest income from higher earning assets (volume) was $1,111 while the reduction to income from lower margin was $680 compared to 2011.
While year to date average loan yield has declined .38% compared to 2011, cost of interest bearing liabilities has also declined .41%. However, average tax adjusted yield on investment securities and other short-term investments has declined significantly compared to 2011, resulting in the decrease in net margin. Tax adjusted yield on securities and other short-term earnings assets (representing 24% of average 2012 earning assets) was 2.94% during the nine months ended September 2012 compared to 3.56% during 2011, down .62%. Ongoing strategies under consideration to maintain current interest margin and grow net interest income include using existing cash and cash equivalents to repay higher cost maturing wholesale funds, repayment of higher cost $7 million 8% senior subordinated notes, restructuring FHLB advances from fixed to floating rate for lower net interest cost, investment in short-term nonrated commercial paper and other investments with minimal credit risk, and origination of fully amortizing 15 year fixed rate residential first mortgages to retain on our balance sheet.
Our floating rate loan portfolio includes a substantial amount of loans with rates above the normal floating coupon rate due to existence of in the money interest rate floors. At September 30, 2012, approximately 81% of our $133 million in adjustable rate loans carried a contractual interest rate floor. At September 30, 2012, substantially all loans with floors were in the money with a current loan yield in excess of the normal adjustable rate coupon. Interest rate floors increased the adjustable rate between 100 basis points and 200 basis points on 69% of loans with in the money floors. If current interest rate levels were assumed to remain the same, the annualized increase to net interest income and net interest margin would be approximately $1,240 and .21%, respectively, based on those existing loan floors and average quarterly earning assets at September 30, 2012. During a period of rising short-term interest rates, we expect average funding costs (which are not currently subject to contractual caps on the interest rate) to rise while the yield on loans with interest rate floors would remain the same until those loans’ adjustable rate index caused coupon rates to exceed the loan rate floor. This mismatch compared to rising funding costs is likely to lower net interest margin and possibly period over period net interest income. The speed in which short-term interest rates increase is expected to have a significant impact on net interest income from loans with interest rate floors. Quickly rising short-term rates would allow adjustable rate loans with floors to reprice to rates higher than the existing floor more quickly, impacting net interest income less adversely than if short-term rates rose slowly or deliberately.
During the September 2011 quarter, the Dodd-Frank Wall Street Reform Act repealed the prohibition on paying interest on commercial checking accounts. We currently provide an earnings credit against account fees in lieu of an interest payment and do not expect costs to increase because of this change in the near term. Despite the law change, we do not sell or promote an interest bearing commercial checking account at this time. However, the change could have greater long-term implications as competitor banks begin to use premium interest rate levels on commercial deposits in attempts to raise deposits in coming years, particularly in a rising rate environment as the banking industry competes with equity markets and other investments for customer deposits.
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The following Tables present a schedule of yields and costs for the quarter and nine months ended September 30, 2012 compared to the prior year periods ended September 30, 2011 and the interest income and expense volume and rate analysis for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.
Table 3: Net Interest Income Analysis (Quarter)
(dollars in thousands) | Quarter ended September 30, 2012 | Quarter ended September 30, 2011 | ||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans(1)(2) | $ | 468,437 | $ | 6,022 | 5.11% | $ | 441,889 | $ | 6,180 | 5.55% | ||||||||||||||
Taxable securities | 100,617 | 578 | 2.29% | 79,329 | 658 | 3.29% | ||||||||||||||||||
Tax-exempt securities(2) | 49,764 | 564 | 4.51% | 32,431 | 424 | 5.19% | ||||||||||||||||||
FHLB stock | 2,761 | 2 | 0.29% | 3,250 | 1 | 0.12% | ||||||||||||||||||
Other | 17,392 | 16 | 0.37% | 10,544 | 16 | 0.60% | ||||||||||||||||||
Total(2) | 638,971 | 7,182 | 4.47% | 567,443 | 7,279 | 5.09% | ||||||||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 33,635 | 8,650 | ||||||||||||||||||||||
Premises and equipment, net | 10,179 | 10,158 | ||||||||||||||||||||||
Cash surrender value insurance | 11,648 | 11,238 | ||||||||||||||||||||||
Other assets | 11,410 | 12,457 | ||||||||||||||||||||||
Allowance for loan losses | (7,740 | ) | (7,858 | ) | ||||||||||||||||||||
Total | $ | 698,103 | $ | 602,088 | ||||||||||||||||||||
Liabilities & stockholders’ equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings and demand deposits | $ | 168,067 | $ | 206 | 0.49% | $ | 122,878 | $ | 292 | 0.94% | ||||||||||||||
Money market deposits | 111,203 | 131 | 0.47% | 96,702 | 202 | 0.83% | ||||||||||||||||||
Time deposits | 193,719 | 700 | 1.44% | 174,069 | 881 | 2.01% | ||||||||||||||||||
FHLB borrowings | 51,700 | 356 | 2.74% | 58,646 | 464 | 3.14% | ||||||||||||||||||
Other borrowings | 18,725 | 150 | 3.19% | 21,745 | 162 | 2.96% | ||||||||||||||||||
Senior subordinated notes | 7,000 | 141 | 8.01% | 7,000 | 142 | 8.05% | ||||||||||||||||||
Junior subordinated debentures | 7,732 | 86 | 4.42% | 7,732 | 85 | 4.36% | ||||||||||||||||||
Total | 558,146 | 1,770 | 1.26% | 488,772 | 2,228 | 1.81% | ||||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 77,575 | 58,576 | ||||||||||||||||||||||
Other liabilities | 8,942 | 5,371 | ||||||||||||||||||||||
Stockholders’ equity | 53,440 | 49,369 | ||||||||||||||||||||||
Total | $ | 698,103 | $ | 602,088 | ||||||||||||||||||||
Net interest income | $ | 5,412 | $ | 5,051 | ||||||||||||||||||||
Rate spread | 3.21% | 3.28% | ||||||||||||||||||||||
Net yield on interest-earning assets | 3.37% | 3.53% |
(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%.
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Table 4: Net Interest Income Analysis (Nine Months)
(dollars in thousands) | Nine months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2011 | ||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans(1)(2) | $ | 456,375 | $ | 17,744 | 5.19% | $ | 441,970 | $ | 18,419 | 5.57% | ||||||||||||||
Taxable securities | 91,062 | 1,725 | 2.53% | 79,709 | 2,041 | 3.42% | ||||||||||||||||||
Tax-exempt securities(2) | 38,965 | 1,415 | 4.85% | 33,080 | 1,300 | 5.25% | ||||||||||||||||||
FHLB stock | 2,878 | 6 | 0.28% | 3,250 | 3 | 0.12% | ||||||||||||||||||
Other | 14,934 | 51 | 0.46% | 14,518 | 53 | 0.49% | ||||||||||||||||||
Total(2) | 604,214 | 20,941 | 4.63% | 572,527 | 21,816 | 5.09% | ||||||||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 19,188 | 8,356 | ||||||||||||||||||||||
Premises and equipment, net | 10,003 | 10,279 | ||||||||||||||||||||||
Cash surrender value insurance | 11,546 | 11,119 | ||||||||||||||||||||||
Other assets | 11,383 | 12,811 | ||||||||||||||||||||||
Allowance for loan losses | (7,881 | ) | (7,799 | ) | ||||||||||||||||||||
Total | $ | 648,453 | $ | 607,293 | ||||||||||||||||||||
Liabilities & stockholders’ equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings and demand deposits | $ | 149,816 | $ | 631 | 0.56% | $ | 126,571 | $ | 877 | 0.93% | ||||||||||||||
Money market deposits | 109,171 | 452 | 0.55% | 101,877 | 640 | 0.84% | ||||||||||||||||||
Time deposits | 175,203 | 2,176 | 1.66% | 171,806 | 2,683 | 2.09% | ||||||||||||||||||
FHLB borrowings | 51,215 | 1,061 | 2.77% | 57,327 | 1,380 | 3.22% | ||||||||||||||||||
Other borrowings | 19,166 | 447 | 3.12% | 26,172 | 494 | 2.52% | ||||||||||||||||||
Senior subordinated notes | 7,000 | 425 | 8.11% | 7,000 | 425 | 8.12% | ||||||||||||||||||
Junior subordinated debentures | 7,732 | 256 | 4.42% | 7,732 | 255 | 4.41% | ||||||||||||||||||
Total | 519,303 | 5,448 | 1.40% | 498,485 | 6,754 | 1.81% | ||||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 69,524 | 55,492 | ||||||||||||||||||||||
Other liabilities | 7,201 | 4,768 | ||||||||||||||||||||||
Stockholders’ equity | 52,425 | 48,548 | ||||||||||||||||||||||
Total | $ | 648,453 | $ | 607,293 | ||||||||||||||||||||
Net interest income | $ | 15,493 | $ | 15,062 | ||||||||||||||||||||
Rate spread | 3.23% | 3.28% | ||||||||||||||||||||||
Net yield on interest-earning assets | 3.43% | 3.52% |
(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%.
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Table 5: Interest Income and Expense Volume and Rate Analysis (Year to Date)
2012 compared to 2011 | ||||||||||||
increase (decrease) due to (1) | ||||||||||||
(dollars in thousands) | Volume | Rate | Net | |||||||||
Interest earned on: | ||||||||||||
Loans(2) | $ | 560 | $ | (1,235 | ) | $ | (675 | ) | ||||
Taxable securities | 215 | (531 | ) | (316 | ) | |||||||
Tax-exempt securities(2) | 214 | (99 | ) | 115 | ||||||||
FHLB stock | (1 | ) | 4 | 3 | ||||||||
Other interest income | 1 | (3 | ) | (2 | ) | |||||||
Total | 989 | (1,864 | ) | (875 | ) | |||||||
Interest paid on: | ||||||||||||
Savings and demand deposits | 97 | (343 | ) | (246 | ) | |||||||
Money market deposits | 30 | (218 | ) | (188 | ) | |||||||
Time deposits | 42 | (549 | ) | (507 | ) | |||||||
FHLB borrowings | (127 | ) | (192 | ) | (319 | ) | ||||||
Other borrowings | (164 | ) | 117 | (47 | ) | |||||||
Senior subordinated notes | — | — | — | |||||||||
Junior subordinated debentures | — | 1 | 1 | |||||||||
Total | (122 | ) | (1,184 | ) | (1,306 | ) | ||||||
Net interest earnings | $ | 1,111 | $ | (680 | ) | $ | 431 |
(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. |
Interest Rate Sensitivity
We incur market risk primarily from interest-rate risk inherent in our lending and deposit taking activities. Market risk is the risk of loss from adverse changes in market prices and rates. We actively monitor and manage our interest-rate risk exposure. The measurement of the market risk associated with financial instruments (such as loans and deposits) is meaningful only when all related and offsetting on- and off-balance sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments that reflect changes in market prices and rates can be found in Note 13 of the Notes to Consolidated Financial Statements.
Our primary objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on net interest income and capital, while adjusting the asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure reflected on the Consolidated Balance Sheets to control interest-rate risk. In general, longer-term earning assets are funded by shorter-term funding sources allowing us to earn net interest income on both the credit risk taken on assets and the yield curve of market interest rates. However, a sudden and substantial change in interest rates may adversely impact earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. We do not engage in significant trading activities to enhance earnings or for hedging purposes.
Our overall strategy is to coordinate the volume of rate sensitive assets and liabilities to minimize the impact of interest rate movement on the net interest margin. The following Table represents our earnings sensitivity to changes in interest rates at September 30, 2012. It is a static indicator which does not reflect various repricing characteristics and may not indicate the sensitivity of net interest income in a changing interest rate environment, particularly during periods when the interest yield curve is flattening or steepening. The following repricing methodologies should be noted:
1. Public or government fund MMDA and NOW accounts are considered fully repriced within 60 days. Higher yielding retail and non-governmental money market and NOW deposit accounts are considered fully repriced within 90 days. Rewards Checking NOW accounts and other money market deposit accounts are considered fully repriced within one year. Other NOW and savings accounts are considered “core” deposits as they are generally insensitive to interest rate changes. These core deposits are generally considered to reprice beyond five years.
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2. Nonaccrual loans are considered to reprice beyond 5 years.
3. Assets and liabilities with contractual calls or prepayment options are repriced according to the likelihood of the call or prepayment being exercised in the current interest rate environment.
4. Measurements taking into account the impact of rising or falling interest rates are based on a parallel yield curve change that is fully implemented within a 12-month time horizon.
5. Bank owned life insurance is considered to reprice beyond 5 years.
The gap analysis reflects an asset sensitive gap position during the next year, with a cumulative negative one-year gap ratio at September 30, 2012 of 90.3% compared to a positive gap of 107.9% at December 31, 2011. In general, a current negative gap would be favorable in a falling interest rate environment but unfavorable in a rising rate environment. However, net interest income is impacted not only by the timing of product repricing, but the extent of the change in pricing which could be severely limited from local competitive pressures. The existence of our significant “in the money” floating rate loan floors could also lessen the impact of an asset sensitive gap position in a rising interest rate environment. These factors can result in change to net interest income from changing interest rates different than expected from review of the gap table.
Table 6: Interest Rate Sensitivity Gap Analysis
September 30, 2012 | ||||||||||||||||||||||||||||
(dollars in thousands) | 0-90 Days | 91-180 days | 181-365 days | 1-2 yrs. | 2-5 yrs. | Beyond 5 yrs. | Total | |||||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||||||
Loans | $ | 179,390 | $ | 32,419 | $ | 55,288 | $ | 74,760 | $ | 93,728 | $ | 45,398 | $ | 480,983 | ||||||||||||||
Securities | 10,252 | 7,901 | 12,539 | 19,717 | 54,285 | 41,768 | 146,462 | |||||||||||||||||||||
FHLB stock | — | — | — | — | — | 2,761 | 2,761 | |||||||||||||||||||||
CSV bank-owned life insurance | — | — | — | — | — | 11,710 | 11,710 | |||||||||||||||||||||
Other earning assets | 13,036 | — | 248 | 500 | 1,736 | — | 15,520 | |||||||||||||||||||||
Total | $ | 202,678 | $ | 40,320 | $ | 68,075 | $ | 94,977 | $ | 149,749 | $ | 101,637 | $ | 657,436 | ||||||||||||||
Cumulative rate sensitive assets | $ | 202,678 | $ | 242,998 | $ | 311,073 | $ | 406,050 | $ | 555,799 | $ | 657,436 | ||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||
Interest-bearing deposits | $ | 89,751 | $ | 32,856 | $ | 194,166 | $ | 27,498 | $ | 48,069 | $ | 76,297 | $ | 468,637 | ||||||||||||||
FHLB advances | 11,000 | 2,000 | 2,000 | 28,584 | 6,540 | — | 50,124 | |||||||||||||||||||||
Other borrowings | 5,773 | — | — | — | 8,000 | 5,500 | 19,273 | |||||||||||||||||||||
Senior subordinated notes | — | — | 7,000 | — | — | — | 7,000 | |||||||||||||||||||||
Junior subordinated debentures | — | — | — | — | — | 7,732 | 7,732 | |||||||||||||||||||||
Total | $ | 106,524 | $ | 34,856 | $ | 203,166 | $ | 56,082 | $ | 62,609 | $ | 89,529 | $ | 552,766 | ||||||||||||||
Cumulative interest | ||||||||||||||||||||||||||||
sensitive liabilities | $ | 106,524 | $ | 141,380 | $ | 344,546 | $ | 400,628 | $ | 463,237 | $ | 552,766 | ||||||||||||||||
Interest sensitivity gap for | ||||||||||||||||||||||||||||
the individual period | $ | 96,154 | $ | 5,464 | $ | (135,091 | ) | $ | 38,895 | $ | 87,140 | $ | 12,108 | |||||||||||||||
Ratio of rate sensitive assets to | ||||||||||||||||||||||||||||
rate sensitive liabilities for | ||||||||||||||||||||||||||||
the individual period | 190.3% | 115.7% | 33.5% | 169.4% | 239.2% | 113.5% | ||||||||||||||||||||||
Cumulative interest | ||||||||||||||||||||||||||||
sensitivity gap | $ | 96,154 | $ | 101,618 | $ | (33,473 | ) | $ | 5,422 | $ | 92,562 | $ | 104,670 | |||||||||||||||
Cumulative ratio of rate sensitive | ||||||||||||||||||||||||||||
assets to rate sensitive liabilities | 190.3% | 171.9% | 90.3% | 101.4% | 120.0% | 118.9% |
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We use financial modeling techniques that measure interest rate risk. These policies are intended to limit exposure of earnings to risk. A formal liquidity contingency plan exists that directs management to the least expensive liquidity sources to fund sudden and unanticipated liquidity needs. We also use various policy measures to assess interest rate risk as described below.
We balance 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, we model interest rate simulations on a quarterly basis. Our 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. The following table presents the projected impact to net interest income by certain rate change scenarios and the change to the one year cumulative ratio of rate sensitive assets to rate sensitive liabilities.
Table 7: Net Interest Margin Rate Simulation Impacts
Period Ended: | September 2012 | December 2011 | September 2011 | |||||||||
Cumulative 1 year gap ratio | ||||||||||||
Base | 90% | 108% | 109% | |||||||||
Up 200 | 88% | 104% | 104% | |||||||||
Down 100 | 92% | 111% | 110% | |||||||||
Change in Net Interest Income – Year 1 | ||||||||||||
Up 200 during the year | -3.6% | -2.1% | -1.9% | |||||||||
Down 100 during the year | 0.7% | -0.7% | -0.6% | |||||||||
Change in Net Interest Income – Year 2 | ||||||||||||
No rate change (base case) | -2.2% | -5.1% | -3.4% | |||||||||
Following up 200 in year 1 | -4.6% | -3.5% | -1.2% | |||||||||
Following down 100 in year 1 | -2.3% | -9.8% | -7.8% |
Note: Simulations after March 2008 reflect net interest income changes from a down 100 basis point scenario, rather than a down 200 basis point scenario as dictated by internal policy due to the currently low level of relative short-term rates.
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 stockholders’ equity capital. Core deposits including DDA, lower yielding NOW, and non-maturity savings accounts (not including high yield NOW such as Rewards Checking deposits and money market accounts) are also considered core long-term funding sources. The core funding utilization ratio is defined as assets that reprice in excess of 60 months divided by core funding. Our 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. Our core funding utilization ratio after a projected 200 basis point increase in rates was 63.5% at September 30, 2012 compared to 61.9%% at December 31, 2011.
At September 30, 2012, internal interest rate simulations that project interest rate changes that maintain the current shape of the yield curve (often referred to as “parallel yield curve shifts”) and those which assume a flattening of the yield curve all point to decreased net interest income from a static balance sheet compared to the September 30, 2012 “base case.” If market rates decline, net interest income is negatively impacted by falling asset yields while funding costs currently near 0% have little room to decline. If market rates increase, net interest income is negatively impacted by existing interest rate floors on floating rate loans. As funding costs rise, these floating rate loans could remain at the same yield for several periods, reducing net interest margin and net interest income. During a period of rising interest rates, net interest income is also negatively impacted by a flattening yield curve. When the yield curve flattens, repriced short-term funding cost, such as for terms of 1 year or less increases, while maturing fixed rate balloon loans, such as with terms from 3 to 5 years, increase much less. During flattening periods, assets and liabilities may reprice at the same time but to a much different extent.
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The table below summarizes the percentage change to current “base case” net interest income as a result of certain interest simulations:
Table 8: Projected Changes to Net Interest Income Under Alternative Rate Simulations
Delayed (12M) | ||||||
Down 100 bp | Up 400 bp 24M | Flat up 500 bp | ||||
Year 1 | 0.7% | -3.4% | -6.5% | |||
Year 2 | -0.2% | -8.4% | -12.8% | |||
Year 3 | -1.8% | -12.4% | -15.5% | |||
Year 4 | -4.1% | 4.3% | 5.4% | |||
Year 5 | -5.5% | 19.1% | 23.8% |
Current negative domestic and global economic trends, including potential sovereign debt defaults by industrialized nations, are expected to continue interest rate volatility and raise the potential for further declines in market interest rates. Current indications by the Board of Governors of the Federal Reserve call for the existing very low rate environment to continue through the middle of 2015. We regularly monitor our asset-liability position in light of this potential long-term risk to net interest income levels from such a protracted low interest rate environment.
Noninterest Income
Quarter ended September 30, 2012 compared to September 30, 2011
Total noninterest income for the quarter ended September 30, 2012 was $1,444, compared to $1,367 earned during the September 2011 quarter, an increase of $77, or 5.6%. A $184 increase in mortgage banking (up 66%) on a surge of customer mortgage refinance applications offset a $100 reduction in other noninterest income from lower customer swap fee sale commissions (down 100%) during 2012 compared to 2011. During 2011, new regulation went into effect to limit bank debit card interchange and overdraft fees. These types of fee income, net of vendor processing costs, declined $25, or 5.5%, to $427 during the September 2012 quarter compared to $452 during September 2011. Although the upcoming December 2012 quarter is expected to see continued high mortgage banking fee income, we expect refinance activity to decline sharply during 2013. The mortgage banking decline combined with stagnant or declining debit card and overdraft fee income could lead to lower noninterest income during 2013 compared to 2012.
Nine months ended September 30, 2012 compared to September 30, 2011
During the nine months ended September 30, 2012, noninterest income was $5,009 compared to $3,961 during 2011. However, 2012 includes a $851 gain on bargain purchase of Marathon State Bank. Absent this special income item, noninterest income would have been $4,158 during 2012 compared to $3,961 during 2011, an increase of $197, or 5.0%. The change was led by a $229 increase in mortgage banking income and a $92 increase in retail investment sales commissions. These gains were offset by a $181 reduction in customer swap sale commissions during 2012 compared to 2011.
Noninterest Expense
Quarter ended September 30, 2012 compared to September 30, 2011
Noninterest expenses totaled $4,860 during the September 2012 quarter compared to $3,835 during September 2011, an increase of $1,025. However, September 2012 included significant non-recurring expenses related to the integration of Marathon State Bank into Peoples State Bank, which was completed on October 13, 2012. The special Marathon items included $383 in data conversion expenses and $43 in merger and acquisition legal fees. In addition, loss on foreclosed assets included a $280 write-down to our largest foreclosed asset after accepting an offer to purchase. Excluding the special Marathon costs and the loss on foreclosed assets for both 2012 and 2011, September 2012 quarterly noninterest expense would have been $4,104 compared to $3,769 during September 2011, an increase of $335, or 8.9%.
Marathon operating expenses, primarily wage and benefit expense, led the increase in expenses, adding $228 in normal recurring expenses. Excluding Marathon data processing expenses, our data processing and other office operations increased $73, or 19.5% over September 2011 due to higher costs associated with PSB’s outsourced information processing system. Data processing expense increased as special conversion contractual cost reductions associated with our June 2010 data system conversion were fully phased out during the September 2011 quarter. On a linked quarter basis, our data processing system and office operations costs (excluding Marathon) were $441 during the September 2012 quarter and $402 during the June 2012 quarter.
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During the September 2012 quarter, we capitalized $150 of Marathon data conversion expenses as premises and equipment related to customized system programming, which will be amortized as data processing expense over the remaining term of the outsourced data processing contract. While the most significant Marathon merger and integration costs have been previously expensed, PSB will incur final costs associated with the October 13, 2012 technology conversion and a potential loss on sale of the prior and now vacated Peoples Marathon branch location based on market and sale conditions for the real estate during the December 2012 quarter. The remaining branch premises and equipment is held for sale with a remaining cost basis of approximately $190. Integration of Peoples’ prior Marathon branch with Marathon State Bank is expected to generate annual run-rate expense savings of approximately $250 to be fully phased in by the end of 2013.
Nine months ended September 30, 2012 compared to September 30, 2011
Noninterest expense was $13,043 during the nine months ended September 30, 2012 compared to $11,657 during 2011, an increase of $1,386. However, the year to date period also included significant Marathon merger and conversion expenses including $383 in data conversion costs and $235 in professional fees. Excluding these non-recurring Marathon expenses and the loss on foreclosed assets during 2012 and 2011, noninterest expense would have totaled $11,858 during 2012 and $11,018 during 2011, an increase of $840, or 7.6%.
Marathon operating expenses, primarily wage and benefit expense, led the increase in expenses, adding $317 in normal recurring expenses. Excluding Marathon data processing expenses, data processing and other office operations increased $245, or 24.5%, over 2011 due to higher costs associated with PSB’s outsourced information processing system. Separate from Marathon, our base salaries and wages increased $264, or 5.8%, from inflationary wage increases and slight employee growth year to date during 2012 compared to 2011.
CREDIT QUALITY
The loan portfolio is our primary asset subject to credit risk. Our process for monitoring credit risk includes quarterly 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 status or charged off is reversed against interest income. Nonaccrual loans and restructured loans maintained on accrual status remain classified as nonperforming loans until the uncertainty surrounding the credit is eliminated. In general, uncertainty surrounding the credit is eliminated when the borrower has displayed a history of regular loan payments using a market interest rate that is expected to continue as if a typical performing loan. Some borrowers continue to make loan payments while maintained on non-accrual status. We apply all payments received on nonaccrual loans to principal until the loan is returned to accrual status or repaid. Total nonperforming assets as a percentage of total tangible common equity including the allowance for loan losses was 28.59%, 31.32%, and 32.82% at September 30, 2012, December 31, 2011, and September 30, 2011, respectively (refer to Table 24). For the purpose of this measurement, tangible common equity is equal to total common stockholders’ equity less mortgage servicing right assets.
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), (2) investment securities in default as to principal or interest, and (3) foreclosed assets.
Table 9: Nonperforming Assets
September 30, | December 31, | |||||||||||
(dollars in thousands) | 2012 | 2011 | 2011 | |||||||||
Nonaccrual loans (excluding restructured loans) | $ | 5,951 | $ | 5,931 | $ | 5,893 | ||||||
Nonaccrual restructured loans | 2,189 | 2,098 | 2,081 | |||||||||
Restructured loans not on nonaccrual | 5,952 | 6,357 | 6,220 | |||||||||
Accruing loans past due 90 days or more | — | — | — | |||||||||
Total nonperforming loans | 14,092 | 14,386 | 14,194 | |||||||||
Nonaccrual trust preferred investment security | 750 | 750 | 750 | |||||||||
Foreclosed assets | 2,349 | 3,447 | 2,939 | |||||||||
Total nonperforming assets | $ | 17,191 | $ | 18,583 | $ | 17,883 | ||||||
Nonperforming loans as a % of gross loans receivable | 2.93% | 3.26% | 3.19% | |||||||||
Total nonperforming assets as a % of total assets | 2.48% | 3.04% | 2.87% |
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Total September 30, 2012 nonperforming assets of $17,191 decreased $692, or 3.9%, since December 31, 2011, led by a $590 decrease in foreclosed assets. The pace of new restructured debt has slowed, with $8,141 of restructured non-performing loans at September 30, 2012 compared to $8,301 of restructured non-performing loans at December 31, 2011. In certain situations, particularly for loans supported by collateral with depressed valuations or with borrowers undergoing what could be temporary financial difficulties, we will consider restructuring existing debt in an attempt to protect as much of our loan principal as possible. Typical restructured terms will convert a loan from amortizing payments to interest only payments, or lower the interest rate to a level less than market rates for the borrower’s risk profile. Existing restructurings have not forgiven borrower loan principal and have been associated with commercial related loans, not residential mortgage loans. At September 30, 2012, 73% of restructured loan principal shown in the table above remained on accrual status compared to 75% at December 31, 2011.
While the general credit quality and the economy in our local markets has stabilized, some borrowers continue to manage fragile cash flows and debt servicing ability as the economy has yet to sustain a significant recovery. Such conditions are seen in the level of problem borrowers with restructured loan terms. The longer significant recovery is delayed, the more difficult it will be for some borrowers to continue scheduled debt payments as previously unencumbered collateral is pledged for new working capital and balance sheet equity is drawn down, potentially increasing future provisions for loan losses. In light of these conditions, we could see an increase in borrowers requiring restructured loan terms which would increase our level of nonperforming loans. Although we expect to sell an existing $1 million foreclosed asset during the December 2012 quarter under a sales contract, ongoing collection and foreclosure actions will add to foreclosed assets during the next several quarters. A continued slow local economy impacts the value of collateral and foreclosed assets, potentially increasing losses on foreclosed borrowers and properties during the coming quarters.
At September 30, 2012, all nonperforming assets aggregating to $500 or more measured by gross principal outstanding per credit relationship are summarized in the following table and represented 42% of all nonperforming assets compared to 52% of nonperforming assets at December 31, 2011. In the table, loans presented as “Accrual TDR” represent troubled debt restructured loans maintained on accrual status.
Table 10: Largest Nonperforming Assets at September 30, 2012 ($000s)
Gross | Specific | |||||||||
Collateral Description | Asset Type | Principal | Reserves | |||||||
Northern Wisconsin hotel | Accrual TDR | $ | 1,764 | $ | — | |||||
Cranberry producing agricultural real estate | Accrual TDR | 1,578 | — | |||||||
Vacation home/recreational properties (three) | Foreclosed | 1,000 | n/a | |||||||
Owner occupied cabinetry contractor real estate and equipment | Accrual TDR | 755 | 28 | |||||||
Johnson Financial Group (WI) Capital Trust III debentures | Nonaccrual | 750 | — | |||||||
Owner occupied restaurant real estate and business assets | Nonaccrual | 698 | 293 | |||||||
Owner occupied multi use, multi-tenant real estate | Accrual TDR | 671 | 189 | |||||||
Total listed nonperforming assets | $ | 7,216 | $ | 510 | ||||||
Total bank wide nonperforming assets | $ | 17,191 | $ | 2,189 | ||||||
Listed assets as a percent of total nonperforming assets | 42% | 23% |
No large nonperforming assets in excess of $500 were added to Table 10 during the September 2012 quarter. At March 31, 2012, Table 10 included a large nonperforming loan with $1,233 in outstanding principal and $295 in specific reserves secured by multi-family rental apartment units and vacant land. However, during the June 2012 quarter, the majority of this accruing troubled debt restructured loan was settled with the borrower in which we received a payment of $833 on the sale of the property and recorded a $34 charge-off. We continue to have a $268 loan receivable outstanding with the borrower on which $188 in specific reserves are maintained at September 30, 2012. Our settlement with the borrower decreased our required specific reserves on the relationship by $71, net of the charge-off incurred.
Subsequent to September 30, 2012, the $1,578 accrual TDR loan secured by cranberry producing agricultural real estate shown in Table 10 above was repaid in full on sale of collateral by the borrower. In addition, we wrote down the value of the vacation home/recreational properties in Table 10 above by $280 to a new basis of $1,000 after acceptance of an offer to sell the property during the September 2012 quarter. We expect the property to be removed from foreclosed assets before December 31, 2012. Positive resolution of these two nonperforming assets are expected to significantly improve credit quality ratios over those seen during the past several years. However, the nonperforming assets to total assets ratio is expected to remain above 2.00% at December 31, 2012.
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During March 2011, we were informed by Johnson Financial Capital Trust of its intent to defer payment of interest on its 7% trust preferred capital debentures. Johnson Financial Group is the holding company for Johnson Bank, headquartered in Racine, Wisconsin. Our investment in the $750 debentures was placed on nonaccrual status at March 31, 2011 and all accrued but uncollected interest was reversed against income. Our internal evaluation has determined this investment is not other than temporarily impaired and no charge against net income for impairment has been recorded. During the March 2012 quarter, Johnson Financial Group received a significant new capital injection from its shareholders and is expected to return to profitability within the next several years. We expect to be repaid all interest due on the debentures in future years. Total Johnson Financial Capital Trust interest not accrued totaled $92 at September 30, 2012. Similar bank holding company investments held in our portfolio (identified by name of the operating bank subsidiary) include $800 par value to McFarland State Bank (Madison, WI), and $500 par value to River Valley Bank (Wausau, WI). These other investments are supported by the continued profitable operations and reasonable credit quality metrics represented within their portfolios and are expected to continue to remit scheduled quarterly payments of interest.
In addition to nonperforming loans, we have classified some performing loans as impaired loans under accounting standards due to heightened risk of nonperformance within the next year or other factors. Impaired loans maintained on accrual status that have not been restructured are not reported as nonperforming loans. At September 30, 2012, all impaired but performing loans aggregating to $500 or more measured by gross principal outstanding per credit relationship are summarized in the following table.
Table 11: Largest Performing, but Impaired Loans at September 30, 2012 ($000s)
Gross | Specific | |||||||||
Collateral Description | Asset Type | Principal | Reserves | |||||||
Undeveloped real estate | Impaired | $ | 909 | $ | — | |||||
Owner occupied cabinetry contractor real estate and equipment | Impaired | 629 | — | |||||||
Owner occupied manufacturer real estate & equipment | Impaired | 543 | — | |||||||
Total listed performing, but impaired loans | $ | 2,081 | $ | — | ||||||
Total performing, but impaired loans | $ | 3,059 | $ | 348 | ||||||
Listed assets as a percent of total performing, but impaired loans | 68% | 0% |
The $909 loan collateralized by undeveloped real estate shown in Table 11 is a participation loan purchased from another community bank in Wisconsin involving credit issued to a Wisconsin limited partnership in which one of our directors has an ownership interest. The borrower is currently negotiating the sale of the collateral supporting this loan, and other loans, which is expected to be completed by the end of 2012. The loan is well secured and interest due is held in escrow by the participating lead lender pending resolution of the sale agreement.
Provision for Loan Losses and Loss of Foreclosed Assets
We determine the adequacy of the provision for loan losses based on past loan loss 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 our policy that when available information confirms that specific loans, or portions thereof, including impaired loans, are uncollectible, these amounts are promptly charged off against the allowance.
Due to a 73% decline in newly identified nonperforming loans during the nine months ended September 30, 2012 compared to the same period during 2011, and a reduction in weighted net charge-offs used to estimate inherent loan loss needs on performing loans, we did not provide any provision for loan losses during the September 2012 compared to $360 provided in the September 2011 quarter. Year to date, provision for loan losses was $325 during the nine months ended September 2012 compared to $1,150 provision during the September 2011 year to date period. Although provision for loan losses has declined, we continue to see partial write-downs to foreclosed assets due to declines in value and recorded a $280 write-down during the September 2012 quarter compared to no write-down during the September 2011 quarter. Year to date, partial foreclosed property write-downs were $485 during the nine months ended September 30, 2012 compared to $457 during the same period during 2011, representing 86% and 72% of the total loss on foreclosed assets during 2012 and 2011, respectively. Refer to Note 5 in the Notes to Consolidated Financial Statements for more information on foreclosed asset activity during the three months and nine months ended September 30, 2012 and 2011.
A reduction in credit costs, including provision for loan losses and loss on foreclosed assets, has been an important driver of increased 2012 earnings compared to 2011. Total credit costs were $330 in the September 2012 quarter compared to $426 in the September 2011 quarter. Likewise, total credit costs were $892 during the nine months ended September 30, 2012 compared to $1,789 during the year to date period in 2011, a 50% reduction compared to 2011. Refer to Table 1 in this MD&A for a comparison of net income and earnings per share during the quarters and nine months ended September 2012 and 2011 for the impact of declining credit costs on net income.
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Nonperforming loans are reviewed to determine exposure for potential loss within each loan category. The adequacy of the allowance for loan losses is assessed based on credit quality and other pertinent loan portfolio information. The adequacy of the allowance and the provision for loan losses is consistent with the composition of the loan portfolio and recent internal credit quality assessments. We maintain our headquarters and one branch location in the City of Wausau, Wisconsin, and maintain the majority of our deposits (including six of our nine locations, including Marathon State Bank), and loan customers in Marathon County, Wisconsin. During the September 2012 quarter, the 7.2% unemployment rate in Marathon County (not seasonally adjusted) increased from 7.1% at June 2012 and remained above the 6.5% measured during December 2011 due to two separate large manufacturing employers who announced plant closures cutting approximately 1,000 Marathon County jobs during the March 2012 quarter. However, the current 7.2% Marathon County rate compares favorably to the national level of 7.6% (not seasonally adjusted) but is higher than Wisconsin’s overall level of 6.2% (not seasonally adjusted). Outside of these plant closures in the paper and window industries, the local economies in our markets are seeing slow but consistent improvement, including recent growth in housing and construction. Because of these and other factors, we expect the provision for loan losses during the December 2012 quarter to be similar to the $240 provision during the December 2011 quarter. However, future provisions will be impacted by the actual amount of impaired and other problem loans identified by internal procedures or regulatory agencies.
Table 12: Allowance for Loan Losses
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(dollars in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Allowance for loan losses at beginning | $ | 7,648 | $ | 7,817 | $ | 7,941 | $ | 7,960 | ||||||||
Provision for loan losses | — | 360 | 325 | 1,150 | ||||||||||||
Recoveries on loans previously charged-off | 4 | 27 | 17 | 177 | ||||||||||||
Loans charged off | (221 | ) | (185 | ) | (852 | ) | (1,268 | ) | ||||||||
Allowance for loan losses at end | $ | 7,431 | $ | 8,019 | $ | 7,431 | $ | 8,019 |
Net charge-offs of loan principal were $217 and $835 during the quarter and nine months ended September 30, 2012 respectively. Net loan charge-offs were $158 and $1,091 during the quarter and nine months ended September 30, 2011, respectively. During the September 2012 quarter, four borrowers represented 77% of all charge-offs. During the nine months ended September 30, 2012, approximately 55% of year to date net loan charge-offs have been related to residential real estate loans and approximately 28% have been related to commercial real estate. During the nine months ended September 30, 2011, approximately 59% of year to date net loan charge-offs were related to commercial lending and 21% were related to residential real estate loans. Annualized net loan charge offs were .19% during the September 2012 quarter and .14% during the September 2011 quarter. Annualized net loan charge-offs were 0.24% and 0.33% during the nine months ended September 30, 2012 and 2011, respectively.
ASSET GROWTH AND LIQUIDITY
Balance Sheet Changes and Analysis
At September 30, 2012, total assets were $692,563, compared to $709,024 at June 30, 2012, and $622,867 at December 31, 2011, a decrease of $16,461 (2.3%) and an increase of $69,696 (11.2%), respectively. The increase in total assets since December 31, 2011 was due to the acquisition of Marathon State Bank during the June 2012 quarter, which added $107,364 in total assets at the acquisition date as described in Note 2 to the Notes to Consolidated Financial Statements. However, assets declined during the September 30, 2012 quarter compared to June 30, 2012 as Marathon’s short-term and maturing investments and cash were used to pay down maturing wholesale funding and to support commercial related loan growth. Changes in assets during the three months and nine months ended September 30, 2012 are described in Table 13 below.
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Table 13: Change in Balance Sheet Assets Composition
Three months ended | Nine months ended | |||||||||||||||
Increase (decrease) in assets ($000s) | September 30, 2012 | September 30, 2012 | ||||||||||||||
$ | % | $ | % | |||||||||||||
Commercial real estate mortgage loans | $ | 7,858 | 4.0% | $ | 4,038 | 2.0% | ||||||||||
Commercial, industrial and agricultural loans | 339 | 0.2% | 10,973 | 8.6% | ||||||||||||
Foreclosed assets | 119 | 4.5% | (178 | ) | -6.1% | |||||||||||
Bank-owned life insurance | 102 | 0.9% | 304 | 2.7% | ||||||||||||
Other assets (various categories) | (369 | ) | -1.7% | 1,948 | 9.8% | |||||||||||
Residential real estate mortgage and home equity loans | (1,369 | ) | -1.0% | 18,875 | 16.7% | |||||||||||
Cash and cash equivalents | (5,595 | ) | -14.1% | (4,049 | ) | -10.6% | ||||||||||
Investment securities | (17,546 | ) | -10.7% | 37,785 | 34.8% | |||||||||||
Total increase (decrease) in assets | $ | (16,461 | ) | -2.3% | $ | 69,696 | 11.2% |
Marathon’s largest asset classes were agency and municipal investment securities ($50,547 at the acquisition date), loans receivable ($23,760), and cash and due from banks ($20,392) which made up 88% of total fair value of assets acquired and contributed to the increases categorized in Table 13 for the nine months ended September 30, 2012.
Changes in net assets during the three months and nine months ended September 30, 2012 impacted funding sources as shown in Table 14 below.
Table 14: Change in Balance Sheet Liabilities and Equity Composition
Three months ended | Nine months ended | |||||||||||||||
Increase (decrease) in liabilities and equity ($000s) | September 30, 2012 | September 30, 2012 | ||||||||||||||
$ | % | $ | % | |||||||||||||
Retail certificates of deposit > $100 | $ | 3,770 | 6.5% | $ | 15,304 | 33.2% | ||||||||||
Other borrowings | 1,187 | 6.6% | (418 | ) | -2.1% | |||||||||||
Stockholders’ equity | 1,163 | 2.2% | 3,433 | 6.8% | ||||||||||||
Other liabilities and debt (various categories) | (4,242 | ) | -16.5% | 352 | 1.7% | |||||||||||
FHLB advances | (5,000 | ) | -9.1% | — | 0.0% | |||||||||||
Wholesale and national deposits | (5,916 | ) | -8.5% | (11,050 | ) | -14.8% | ||||||||||
Core deposits (including MMDA) | (7,423 | ) | -1.7% | 62,075 | 17.2% | |||||||||||
Total increase (decrease) in liabilities and stockholders' equity | $ | (16,461 | ) | -2.3% | $ | 69,696 | 11.2% |
Marathon contributed $100,866 of deposits on the acquisition date, which included $1,559 of brokered certificates of deposit. These new deposits contributed to the increase in core deposits and certificates seen during the nine months ended September 30, 2012. Included in Marathon acquisition deposits was $14,510 of special dividends payable to former Marathon shareholders paid immediately before the sale of Marathon to PSB Holdings, Inc. which were reflected as noninterest demand deposits due to payment via official bank check. This “float” amount was redeemed by shareholders before September 30, 2012 and is no longer included in demand deposits. Excluding the special dividend demand deposits, acquisition deposits would have been $86,356. Payment of the special dividend demand deposit led the decrease in core deposits as shown in Table 14. Marathon total deposits were $91,679 at September 30, 2012 as some shareholders appear to have deposited a portion of their special dividend and cash payment on sale of Marathon common stock into their Marathon deposit account, which increased Marathon total deposits above that seen at the acquisition date. During the December 2012 quarter, we could see a decline in Marathon deposits from balances held at September 30, 2012 from typical deposit attrition following the merger of Marathon into Peoples State Bank on October 13, 2012.
Because the Marathon purchase date occurred close to the June 30, 2012 quarter end, $4,753 of the $5,505 cash due to Marathon shareholders was reflected as a liability at June 30, 2012. Payment of this remaining consideration to Marathon shareholders during the September 2012 quarter was the primary driver of the decline in other liabilities during the September 2012 quarter.
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Loans Receivable
Table 15: Period-End Loan Composition
September 30, | September 30, | December 31, 2011 | ||||||||||||||||||||||
Dollars | Dollars | Percentage of total | Percentage | |||||||||||||||||||||
(dollars in thousands) | 2012 | 2011 | 2012 | 2011 | Dollars | of total | ||||||||||||||||||
Commercial, industrial and agricultural | $ | 138,164 | $ | 132,258 | 28.7% | 30.0% | $ | 127,191 | 28.5% | |||||||||||||||
Commercial real estate mortgage | 205,936 | 195,898 | 42.9% | 44.4% | 201,898 | 45.4% | ||||||||||||||||||
Residential real estate mortgage | 108,455 | 85,124 | 22.5% | 19.3% | 89,484 | 20.1% | ||||||||||||||||||
Residential real estate loans held for sale | 303 | 274 | 0.1% | 0.1% | 39 | 0.0% | ||||||||||||||||||
Consumer home equity | 22,833 | 23,913 | 4.7% | 5.4% | 23,193 | 5.2% | ||||||||||||||||||
Consumer and installment | 5,292 | 3,584 | 1.1% | 0.8% | 3,732 | 0.8% | ||||||||||||||||||
Totals | $ | 480,983 | $ | 441,051 | 100.0% | 100.0% | $ | 445,537 | 100.0% |
Loans held for investment continue to consist primarily of commercial related loans, including commercial and industrial and commercial real estate loans, representing 72% of total loans at September 30, 2012 and 74% of total loans at December 31, 2011. Refer to Note 4 of the Notes to Consolidated Financial Statements for more information on the composition of loans at period-end.
Loans for the purpose of construction, land development, and other land loans (including residential construction and development) were $39,058 at September 30, 2012, $34,421 at June 30, 2012, and $33,497 at December 31, 2011 (including loan principal in process of disbursement) and represented 8% of total gross loans at September 30, 2012. The increase in construction and development loans during the September 2012 quarter compared to June 30, 2012 was led by a new construction loan for a trucking equipment sales facility of which $1.9 million of the $3.8 million total loan commitment was disbursed in the September 2012 quarter.
Our markets have traditionally supplied opportunities for loan growth. Loan participations purchased were $21,144 and $12,196 at September 30, 2012 and December 31, 2011, respectively. During the September 2012 quarter, purchased loan participations increased $8,217 from a loan participation purchased from BMO Harris Bank with a customer operating in our market collateralized by local commercial real estate. The majority of our purchased loan participations are arrangements with other community banks in Wisconsin that work together to meet the credit needs of each other’s largest credit customers. These loans are underwritten in the same manner as loans originated solely for our own portfolio. At September 30, 2012, only $541 of loan participations were purchased from sources other than traditional banks with substantial operations in Wisconsin.
Since 2010, local loan growth opportunities have been limited resulting in sporadic net loan growth and periodic quarter to quarter loan declines. Competition from larger banks in our markets is becoming stronger as such banks with higher capital levels and substantial deposit growth look to lending for higher yielding assets as investment security returns remain very low. Banks including BMO Harris Bank (the acquirer of M&I Bank and the bank having the largest deposit market share in our markets), U.S. Bank, Associated Bank, and Chase Bank appear to have relaxed credit terms for high credit quality borrowers and lowered lending interest rate spreads in an effort to aggressively increase their loan market share. We expect strong competition to continue during the next several quarters which could impact the pace of future loan growth and could negatively impact net interest margin and net interest income. To support loan growth, we may increase purchased loan participations from other banks in Wisconsin during 2013.
To support loan growth and invest deposits previously held in low yielding overnight funds, we maintained a temporary program to originate 15-year fully amortizing fixed rate residential first mortgage loans and retain those loans on our balance sheet rather than selling them to secondary market investors as is our normal practice. The loans were fully underwritten and the majority of loans conforming to secondary market standards. However, if the property was located in a rural area in which an adequate number of recent comparable sales were not available, some of the mortgages may not have been underwritten with a qualifying secondary market appraisal, although a current appraisal was obtained on each loan. We do not intend to securitize these loans for sale on the secondary market. The program originated approximately $14.0 million in residential mortgage loans at a 3.12% weighted average interest rate during the nine months ended September 30, 2012 of which $13.8 million of principal remains outstanding at September 30, 2012. This in-house fixed rate mortgage program contributed to the increase in residential mortgage loans in Table 15 above. We expect to continue to originate loans under this program during the December 2012 quarter to invest available liquidity and promote loan growth and increased net interest income. Retaining residential mortgage loans on the balance sheet instead of selling them to the secondary market increases potential interest rate risk in a rising rate environment and adds credit risk from potential problem loan defaults. However, we believe both interest rate and credit risk are mitigated by limiting the program to conforming borrowers able to support the significantly faster 15 year principal amortization compared to a traditional 30 year amortizing loan.
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Deposits and Wholesale Funding Sources
Liquidity refers to the ability to generate adequate amounts of cash to meet our need for cash at a reasonable cost. We manage our liquidity to provide adequate funds to support borrowing needs and deposit flow of our customers. We also view 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. Retail and local deposits and repurchase agreements are the primary source of funding. Retail and local deposits and repurchase agreements were 70.8% of total assets at September 30, 2012 compared to 66.3% of total assets at December 31, 2011 and 64.7% of total assets at September 30, 2011.
Table 16: Period-end Deposit Composition
September 30, | December 31, | |||||||||||||||||||||||
(dollars in thousands) | 2012 | 2011 | 2011 | |||||||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||||||||
Non-interest bearing demand | $ | 79,201 | 14.5% | $ | 67,418 | 14.5% | $ | 75,298 | 15.6% | |||||||||||||||
Interest-bearing demand and savings | 166,200 | 30.3% | 129,493 | 27.8% | 136,950 | 28.4% | ||||||||||||||||||
Money market deposits | 112,816 | 20.6% | 93,541 | 20.2% | 102,993 | 21.4% | ||||||||||||||||||
Retail and local time deposits less than $100 | 64,752 | 11.8% | 47,451 | 10.2% | 45,653 | 9.5% | ||||||||||||||||||
Total core deposits | 422,969 | 77.2% | 337,903 | 72.7% | 360,894 | 74.9% | ||||||||||||||||||
Retail and local time deposits $100 and over | 61,353 | 11.2% | 49,524 | 10.7% | 46,049 | 9.6% | ||||||||||||||||||
Broker & national time deposits less than $100 | 738 | 0.1% | 834 | 0.2% | 835 | 0.2% | ||||||||||||||||||
Broker & national time deposits $100 and over | 62,778 | 11.5% | 75,962 | 16.4% | 73,731 | 15.3% | ||||||||||||||||||
Totals | $ | 547,838 | 100.0% | $ | 464,223 | 100.0% | $ | 481,509 | 100.0% |
The acquisition of Marathon State Bank increased demand deposits and savings balance as these deposit types added $100,866 at the acquisition date (including $14,510 of non-interest bearing demand deposits representing a special dividend payment to Marathon shareholders just prior to the sale), $95,905 at June 30, 2012, and $91,679 at September 30, 2012. Excluding September 30, 2012 Marathon deposits, total deposits declined $25,350, or 5.3%, since December 31, 2011 from a $11,050 reduction in broker and national time deposits and a $11,209 reduction in seasonal municipal real estate tax revenue deposits held at December 31, 2011.
Separate from the new Marathon deposits, we continue to experience ongoing retail time deposit quarterly declines that began during the March 2009 quarter as wholesale funding rates for various funding types began to be lower than local retail certificates of deposit. Certificate balances have also been replaced by higher interest bearing demand account balances and money market accounts as customers have moved certificate funds into liquid, short-term deposit vehicles as certificate rates locally have moved to very low levels relative to certain non-maturity deposit accounts. In a rising environment, balances in non-maturity accounts may shift back into higher yielding time deposits, increasing interest expense and negatively impacting net interest income.
We discontinued sale of our Rewards Checking account effective October 1, 2011. Balances in Rewards Checking totaled $48,850 at September 30, 2011 and continued at $42,845 at September 30, 2012. Peoples Rewards Checking paid a premium interest rate and reimbursement of ATM fees to depositors who meet account usage requirements including minimum debit card purchases, acceptance of electronic account statements, and direct deposit activity. The average interest cost of Reward Checking balances (excluding debit card interchange fee income, savings from delivery of electronic periodic statements, customer reimbursement of ATM fees, and vendor software costs of maintaining the program) was 1.59% during the year ended December 31, 2011 and was 1.08% during the nine months ended September 30, 2012. Existing Rewards Checking customers at October 1, 2011 were allowed to remain in this account which effective October 1, 2012 paid a premium 1.01% yield up to $15 in balances. Balances above $15 earn a yield of .25%. Participation in the account requires customers to receive their periodic statement via email and complete monthly ACH or direct deposit activity within the account.
We originate retail certificates of deposit with local depositors under the CDARS program, in which our 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 the Period-end Deposit Composition Table above, these certificates are included in retail time deposits $100 and over and totaled $14,582 at September 30, 2012 compared to $11,825 at December 31, 2011. Although classified as retail time deposits $100 and over in the table above, we are required to report these balances as broker deposits on our quarterly regulatory call reports. We also originate certificates of deposit obtained through a national rate listing service and held $3,931 and $3,840 of such deposits at September 30, 2012 and December 31, 2011, respectively. These national certificates are classified with broker deposits in the table above.
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Wholesale funding often carries higher interest rates than local core deposit funding, so loan growth supported by wholesale funds can generate lower net interest spreads than loan growth supported by local funds. However, wholesale funds provide us the ability to quickly raise large funding blocks and to match loan terms to minimize interest rate risk and avoid the higher incremental cost to existing deposits from simply increasing retail rates to raise local deposits. Rates paid on local deposits are significantly impacted by competitor interest rates and the local economy’s ability to grow in a way that supports the deposit needs of all local financial institutions. Current brokered certificate of deposit rates available to us are less costly than equivalent local deposits due to very low rates of return available on the most conservative fixed income investments and as national wholesale funds place a premium on FDIC insurance available on their large deposit when placed with brokers in amounts less than current FDIC insurance limits. Due to large demand through brokers for these types of deposits, brokered deposit rates for well performing banks are historically low. In addition, declines in profitability and capital at some banks and regulatory pressure to reduce wholesale funding levels have reduced their access to wholesale funding or otherwise increased its cost. In many cases, these institutions with reduced wholesale funding access have increased their retail interest rates to gather funds through local depositors. Consequently, local certificate of deposit rates in many markets are priced higher than equivalent wholesale brokered deposits due to a limited supply of retail deposits. We expect this difference in pricing between wholesale and local certificates of deposit to be removed by the wholesale funding market as the banking industry becomes well capitalized and regains consistent profits. An improving national economy will likely increase wholesale rates relative to local core deposit rates which could increase the volatility of our interest expense due to a significant portion of our funding coming from wholesale sources.
Our internal policy is to limit broker and national time deposits (not including CDARS) to 20% of total assets. Broker and national deposits as a percentage of total assets were 9.2%, 12.0%, and 12.6% at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. During the remainder of 2012, we do not expect to increase our usage of brokered deposits due to limited loan growth opportunities and liquidity added by our acquisition of Marathon State Bank. Beyond the use of brokered and national time deposits, secondary wholesale sources also include FHLB advances, Federal Reserve Discount Window advances, and pledging of investment securities against wholesale repurchase agreements.
Table 17: Summary of Balance by Significant Deposit Source
September 30, | December 31, | |||||||||||
(dollars in thousands) | 2012 | 2011 | 2011 | |||||||||
Total time deposits $100 and over | $ | 124,131 | $ | 125,486 | $ | 119,780 | ||||||
Total broker and national deposits | 63,516 | 76,796 | 74,566 | |||||||||
Total retail and local time deposits | 126,105 | 96,975 | 91,702 | |||||||||
Core deposits, including money market deposits | 422,969 | 337,903 | 360,894 |
Table 18: September 30, 2012 Change in Deposit Balance since Period Ended:
September 30, 2011 | December 31, 2011 | |||||||||||||||
(dollars in thousands) | $ | % | $ | % | ||||||||||||
Total time deposits $100 and over | $ | (1,355 | ) | -1.1% | $ | 4,351 | 3.6% | |||||||||
Total broker and national deposits | (13,280 | ) | -17.3% | (11,050 | ) | -14.8% | ||||||||||
Total retail and local time deposits | 29,130 | 30.0% | 34,403 | 37.5% | ||||||||||||
Core deposits, including money market deposits | 85,066 | 25.2% | 62,075 | 17.2% |
As a supplement to local deposits, we use short-term and long-term funding sources other than retail deposits including federal funds purchased from other correspondent banks, advances from the FHLB, use of wholesale and national time deposits, advances taken from the Federal Reserve’s Discount Window, and repurchase agreements from security pledging. Table 20 below outlines the available and unused portion of these funding sources (based on collateral and/or company policy limitations) as of September 30, 2012 and December 31, 2011. Currently unused but available funding sources at September 30, 2012 are considered sufficient to fund anticipated asset growth and meet contingency funding needs during the next several quarters. We also maintain formal policies to address liquidity contingency needs and to manage a liquidity crisis. The following Table 19 provides a summary of how the wholesale funding sources normally available to us would be impacted by various operating conditions.
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Table 19: Environmental Impacts on Availability of Wholesale Funding Sources:
Normal | Moderately | Highly | |
Operating | Stressed | Stressed | |
Environment | Environment | Environment | |
Repurchase Agreements | Yes | Likely* | Not Likely |
FHLB (primary 1-4 REM collateral) | Yes | Yes* | Less Likely* |
FHLB (secondary loan collateral) | Yes | Likely* | Not Likely |
Brokered CDs | Yes | Likely* | Not Likely |
National CDs | Yes | Likely* | Not Likely |
Federal Funds Lines | Yes | Less Likely* | Not Likely |
FRB (Borrow-In-Custody) | Yes | Yes | Less Likely* |
FRB (Discount Window securities) | Yes | Yes | Yes |
Holding Company line of credit | Yes | Yes | Less Likely* |
* May be available but subject to restrictions
Table 20 summarizes the availability of various wholesale funding sources at September 30, 2012 and December 31, 2011.
Table 20: Available but Unused Funding Sources other than Retail Deposits
September 30, 2012 | December 31, 2011 | |||||||||||||||
Unused, but | Amount | Unused, but | Amount | |||||||||||||
(dollars in thousands) | Available | Used | Available | Used | ||||||||||||
Overnight federal funds purchased | $ | 35,000 | $ | — | $ | 28,000 | $ | — | ||||||||
Federal Reserve discount window advances | 79,478 | — | 100,000 | — | ||||||||||||
FHLB advances under blanket mortgage lien | 27,395 | 50,124 | 22,559 | 50,124 | ||||||||||||
Repurchase agreements and other FHLB advances | 38,083 | 19,273 | 34,416 | 19,691 | ||||||||||||
Wholesale and national deposits | 74,997 | 63,516 | 50,007 | 74,566 | ||||||||||||
Holding company secured line of credit | 3,000 | — | 3,000 | — | ||||||||||||
Totals | $ | 257,953 | $ | 132,913 | $ | 237,982 | $ | 144,381 | ||||||||
Funding as a percent of total assets | 37.2% | 19.2% | 38.2% | 23.2% |
The following discussion examines each of the available but unused funding sources listed in the table above and the factors that may directly or indirectly influence the timing or the amount ultimately available to us.
September 30, 2012 compared to December 31, 2011
Overnight federal funds purchased
Our consolidated federal funds purchase availability of $35,000 is from $28,000 of agreements with Peoples State Bank from three correspondent banks and $7,000 of agreements with Marathon State Bank from two correspondent banks. Following conversion of Marathon State Bank into a branch of Peoples State Bank on October 13, 2012, the two correspondent bank lines with Marathon were eliminated resulting in consolidated federal funds purchase availability of $28,000 during the December 2012 quarter. The most significant portion of the total is $15,000 from our primary correspondent bank, Bankers’ Bank located in Madison, Wisconsin. We make regular use of the Bankers’ Bank line as part of our normal daily cash settlement procedures, but rarely have used the lines offered by the other two correspondent banks. Federal funds must be repaid each day and borrowings may be renewed for up to 14 consecutive business days. To unilaterally draw on the existing federal funds line, we need to maintain a “composite ratio” as defined by Bankers’ Bank of 40% or less. Bankers’ Bank defines the composite ratio to be nonaccrual loans and foreclosed assets divided by tangible capital including the allowance for loan losses calculated at our subsidiary bank level. Due to existence of the composite ratio, an increase in nonaccrual loans or foreclosed assets could impact availability of the line or subject us to further review. In addition, a rising composite ratio could cause our other two correspondent banks to reconsider their federal funds line with us since they do not also serve as our primary correspondent bank. Our subsidiary bank’s composite ratio was approximately 16% at September 30, 2012 and December 31, 2011, and less than the 40% benchmark used by Bankers’ Bank.
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Federal Reserve discount window advances
We have a $100,000 line of credit with the Federal Reserve Discount Window supported by both commercial and commercial real estate collateral provided to the Federal Reserve under their Borrower in Custody (“BIC”) program. During 2011 and as of September 30, 2012, the annualized interest rate applicable to Discount Window advances was .75%. Under the BIC program, we provide a monthly listing of detailed loan information on the loans provided as collateral. We are subject to annual review and certification by the Federal Reserve to retain participation in the program. The Discount Window represents the primary source of liquidity on a daily basis following our federal funds purchased lines of credit discussed above. We were limited to a maximum advance of $79,478 and $100,000 at September 30, 2012 and December 31, 2011, respectively, based on the BIC loan collateral pledged. Discount Window advances must be repaid or renewed each day. No Discount Window advances were used during the nine months ended September 30, 2012.
Only performing loans are permitted as collateral under the BIC and each individual loan is subject to a haircut to collateral value based on the Federal Reserve’s review of the listing each month. In general, approximately 75% of the loan principal offered as collateral is able to support Discount Window advances. Similar to the federal funds purchased lines of credit, an increase in nonperforming loans would decrease the amount of collateral available for Discount Window advances.
Federal Home Loan Bank (FHLB) advances under blanket mortgage lien and other FHLB advances
We maintain an available line of credit with the FHLB of Chicago based on a pledge of 1 to 4 family mortgage loan collateral, both first and secondary lien positions. We may borrow on the line to the lesser of the blanket mortgage lien collateral provided, or 20 times our existing FHLB capital stock investment. Based on our existing $2,761 capital stock investment, total FHLB advances in excess of $55,220 require us to purchase additional FHLB stock equal to 5% of the advance amount. At September 30, 2012, we could have drawn an FHLB advance up to $5,096 of the $27,395 available without the purchase of FHLB stock. At December 31, 2011, we could have drawn an FHLB advance up to $14,876 of the $22,559 available without the purchase of FHLB stock. Further advances of the remaining $22,299 available at September 30, 2012 would have required us to purchase additional FHLB stock totaling $1,115. FHLB stock currently pays an annualized dividend of .35% with expectations of continuing this dividend level. Therefore, additional FHLB advances carry additional cost relative to other wholesale borrowing alternatives due to the requirement to hold relatively low yielding FHLB stock.
Similar to the Discount Window, only performing residential mortgage loans may be pledged to the FHLB under the blanket lien. In addition, we are subject to a haircut of approximately 36% on first mortgage collateral and 60% on secondary lien collateral at September 30, 2012 and December 31, 2011. The FHLB also conducts periodic audits of collateral identification and submission procedures and adjusts the collateral haircuts higher in response to negative exam findings. The FHLB also assigns a credit risk grade to each member based on a quarterly review of the member’s regulatory CALL report. Our current credit risk is within the normal range for a healthy member bank. Negative financial performance trends such as reduced capital levels, increased nonperforming assets, net operating losses, and other factors can increase a member’s credit risk grade. Higher risk grades can require a member to provide detailed loan collateral listings (rather than a blanket lien), physical collateral, and other restrictions on the maximum line usage. FHLB advances are available on a daily basis and along with Discount Window advances represent a primary source of liquidity following our federal funds purchased lines of credit.
FHLB advances carry substantial penalties for early prepayment that are generally not recovered from the lower interest rates in refinancing. The amount of early prepayment penalty is a function of the difference between the current borrowing rate, and the rate currently available for refinancing. Under a new collateral and pledging agreement we maintain with the FHLB effective April 12, 2011, we are also permitted to pledge commercial related collateral for advances. However, we did not pledge any commercial loan collateral to the FHLB at September 30, 2012 or December 31, 2011.
In connection with the lifting of their regulatory consent order, the FHLB of Chicago announced a capital stock conversion plan and $106 of our FHLB stock was repurchased during the June 2012 quarter after $383 was repurchased during the March 2012 quarter. A member must continue to hold capital stock no less than 5% of outstanding FHLB advances. Our FHLB capital stock shares are considered “B-2” capital shares. Excess holdings of B-2 shares may be redeemed by the FHLB at the request of a member following a five year redemption period. Due to anticipated declines in FHLB borrowing needs, we expect to offer more of our FHLB stock for repurchase if offered by the FHLB in upcoming quarters.
Repurchase agreements and FHLB advances collateralized by investment securities
Wholesale repurchase agreements may be available from a correspondent bank counterparty for both overnight and longer terms. Such arrangements typically call for the agreement to be collateralized by us at 110% of the repurchase principal. In the current market, repurchase counterparty providers are extremely limited and would likely require a minimum $10 million transaction. Repurchase agreements could require up to several business days to receive funding. Due to the lack of availability of counterparties offering the product, wholesale repurchase agreements are not a reliable source of liquidity. At September 30, 2012, $13,500 of our repurchase agreements are wholesale agreements with correspondent banks and $5,773 are overnight repurchase agreements with local customers using our treasury management services. At December 31, 2011, $13,500 of our repurchase agreements were wholesale agreements with correspondent banks and $6,191 were overnight repurchase agreements with local customers.
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In addition to availability of FHLB advances under the blanket mortgage lien, we also have the ability to pledge investment securities as collateral against FHLB advances. Advances secured by investments are also subject to the FHLB stock ownership requirement as described previously. Due to the need to purchase additional FHLB member stock, FHLB advances secured by investments are not considered a primary source of liquidity. At September 30, 2012, $38,083 of additional FHLB advances were available based on pledging of securities if an additional $1,904 of member capital stock were purchased. At December 31, 2011, $34,416 of additional FHLB advances were available based on pledging of securities if an additional $1,721 of member capital stock were purchased.
Wholesale market deposits
Due to the strength of our capital position, balance sheet, and ongoing earnings, we enjoy the lowest possible costs when purchasing wholesale certificates of deposit on the brokered market. We have an internal policy that limits use of brokered deposits to 20% of total assets, which gave availability of $74,997 at September 30, 2012 and $50,007 at December 31, 2011. Brokered and national certificates were 9.2% and 12.0% of assets at September 30, 2012 and December 31, 2011, respectively. Increased brokered deposit availability came with increased asset size following the Marathon purchase. Due to a limited number of providers of repurchase agreement funding as well as our desire to retain unencumbered securities for liquidity purposes and adverse impacts from holding additional FHLB capital stock, loan growth in past years was often funded with brokered certificate of deposit funding. Following our purchase of Marathon State Bank, we expect our reliance on brokered deposits to decline during the next several quarters.
Participants in the brokered certificate market must be considered “well capitalized” under current regulatory capital standards to acquire brokered deposits without approval of their primary federal regulator. We regularly acquire brokered deposits from three market providers and maintain relationships with other providers to obtain required funds at the lowest possible cost. Ten business days are typically required between the request for brokered funding and settlement. Therefore, brokered deposits are a reliable, but not daily, source of liquidity. Brokered deposits represent our largest source of wholesale funding and we would see significant negative impacts if capital levels or earnings were to decline to levels not considered to be well capitalized. In addition to the requirement to be considered well-capitalized, banks under regulatory consent orders are not permitted to participate in the brokered deposit market without approval of their primary federal regulator even if they maintain a well-capitalized capital classification.
Holding company unsecured line of credit
We maintained a $3,000 line of credit with Bankers’ Bank in Madison, Wisconsin as a contingency liquidity source at September 30, 2012 and December 31, 2011. No amounts were drawn on the line at September 30, 2012 or December 31, 2011. Although our bank subsidiary has in the past provided the holding company’s liquidity needs through semi-annual upstream cash dividend of profits, losses or other negative performance trends could prevent the bank from providing these dividends as cash flow. Because our bank holding company has approximately $892 of financing payments per year as well as approximately $150 of other expenses (before tax benefits), the holding company line of credit is a critical source of potential liquidity.
We were subject to financial covenants associated with the line which require our bank subsidiary to:
· | Maintain Tier 1 leverage, Tier 1 risk based capital, and Tier 2 risk based capital ratios above 8%, 10%, and 12%, respectively. |
· | Maintain nonperforming assets (excluding accruing troubled debt restructured loans) as a percentage of tangible equity plus the allowance for loan losses to less than 20%. |
At September 30, 2012 and December 31, 2011, we were not in violation of any of the line of credit covenants. A violation of any covenant could prevent us from utilizing the unused balance of the line of credit. The line of credit expires during December 2012.
If liquidity needs persist after exhausting all available funds from the sources described above, we would consider more drastic methods to raise funds including, but not limited to, sale of investment securities at a loss, cessation of lending to new or existing customers, sale of branch real estate in a sale-leaseback transaction, surrender of bank owned life insurance to obtain the cash surrender value net of taxes due, packaging and sale of residential mortgage loan pools held in our portfolio, sale of foreclosed assets at a loss, and sale of mortgage servicing rights. Such actions could generate undesirable sale losses or income tax impacts. While sale of additional common stock or issuance of other types of capital could provide additional liquidity, the ability to find significant buyers of such capital issues during a liquidity crisis would be difficult making such a source of funding unlikely or unreliable if the liquidity crisis was caused by our deteriorating financial condition.
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Liquidity Measurements and Contingency Plan
Our liquidity management and contingency plan calls for quarterly measurement of key funding, capital, problem loan, and liquidity contingency ratios at our banking subsidiary level. The measurements are compared to various risk levels that direct management to further responses to declining liquidity measurements as outlined below:
Risk Level 1 is defined as circumstances that create the potential for elevated liquidity risk, thus requiring an assessment of possible funding deficiencies. Normal business operations, plans and strategies are not anticipated to be immediately impacted.
Risk Level 2 is defined as circumstances that point to an increased potential for disruptions in the Bank’s funding plans, needs and/or resources. Assessment of the probability of a liquidity crisis is more urgent, and identification and prioritization of pre-emptive alternatives and actions may be both warranted and time sensitive.
Risk Level 3 is defined as circumstances that create a likely funding problem, or are symptomatic of circumstances that are highly correlated with impending funding problems; and, therefore, are expected to require some level of immediate action depending upon the situation.
These risk parameters and other qualitative and environmental factors are considered to determine whether a “Stress Level” response is required. Identification of a risk trigger does not automatically call for a stress level response. The following summarizes our response plans to various degrees of liquidity stress:
Stress Level A – Management provides a written summary evaluating the warning indicators and why it is deemed unlikely that there will be a resulting liquidity challenge.
Stress Level B – Management provides an assessment of the probability of a liquidity crisis and completes a sources and uses of funds report to estimate the impact on pro forma liquidity. Liquidity stress tests will be reviewed to ensure the scenarios being simulated are sufficiently robust and that there is adequate funding to satisfy potential demands for cash. Various pre-emptive actions will be considered and acted on as needed.
Stress Level C – Management has determined a funding crisis is likely and documents detailed assessments of the current liquidity situation and future liquidity needs. The Board approved action plan is carried out with vigor and may call for one or all of the following steps, among others, to mitigate the liquidity concern: sale of loans, intensify local deposit gathering programs, transferring unencumbered securities and loans to the Federal Reserve for Discount Window borrowings, curtail all lending except for specifically approved loans, reduce or suspend stock dividends, and investigate opportunities to raise new capital.
No Risk Level triggers were exceeded at September 30, 2012 or December 31, 2011 and no liquidity stress levels were considered to exist in either period.
As part of our formal quarterly asset-liability management projections, we also measure 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. However, basic surplus does include unused but available FHLB advances under the open line of credit supported by a blanket lien on mortgage collateral. Basic surplus does not include available brokered certificate of deposit funding as those funds generally may not be obtained within one business day following the request for funding. Our policy is to maintain a basic surplus of at least 5%. Basic surplus was 13.5% and 7.9% at September 30, 2012 and December 31, 2011, respectively. Basic surplus increased significantly with the acquisition of Marathon due to its large holdings of U.S. Agency securities (its largest class of assets) and cash and due from banks.
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CAPITAL RESOURCES
During the nine months ended September 30, 2012, stockholders’ equity increased $3,433 primarily from $3,709 in retained net income, net of $615 in cash dividends paid. Net book value per share at September 30, 2012 was $32.34 compared to $30.44 at December 31, 2011. The stockholders’ equity ratio declined during 2012 to 7.77% at September 30, 2012 compared to 8.09% at December 31, 2011 due to the purchase of Marathon State Bank which resulted in increased total assets without the issuance of additional common stock. In addition, our regulatory leverage ratio declined at September 30, 2012, although the ratio is still significantly higher than the regulatory well-capitalized minimum of 5%.
We declared a 5% stock dividend to shareholders on June 19, 2012 to celebrate the 50th anniversary of our subsidiary Peoples State Bank, which was paid in additional shares of our common stock on July 30, 2012 to shareholders of record on July 16, 2012. All references to per share information in this Quarterly Report on Form 10-Q have been updated to reflect the 5% stock dividend.
For regulatory purposes, the $7 million 8% senior subordinated notes maturing July 2019 and $7.7 million junior subordinated debentures maturing September 2035 reflected as debt on the Consolidated Balance Sheet are reclassified as Tier 2 and Tier 1 regulatory equity capital, respectively. The floating rate payments required by the junior subordinated debentures have been hedged with a fixed rate interest rate swap resulting in a total interest cost of 4.42% through September 2017. PSB was considered “well capitalized” under banking regulations at September 30, 2012. The senior subordinated notes will phase out of qualifying Tier 2 capital beginning July 1, 2014 equal to 20% of the original note principal per year. We have the right to prepay all or a portion of the 8% senior subordinated notes on a monthly basis. To the extent Tier 2 capital is not required for asset growth, changing regulatory requirements, or merger and acquisition activities in the near term, we may consider prepayment of the debt to reduce our level of interest expense, subject to regulatory approval. In addition, proposed new regulatory rules would phase the $7.7 million junior subordinated debentures out of Tier 1 capital and into Tier 2 capital over a 10 year period beginning in 2013.
Unrealized gains on securities available for sale, net of tax, reflected as accumulated other comprehensive income represented approximately $1.21, or 3.7% of total net book value per share at September 30, 2012 compared to $1.38, or 4.5% of total net book value per share at December 31, 2011. The decline in market interest rates since September 30, 2008 has increased the fair value of the fixed rate debt securities held in our investment portfolio and classified as available for sale, which is recorded as an increase to equity. If market rates were to increase in the future, existing unrealized gains on our fixed rate investment portfolio would decline, negatively impacting net book value per share.
During the March 2012 quarter, we issued 8,897 shares of restricted stock having a grant date value of $200 to certain key employees as a retention tool and to align employee performance with shareholder interests. The shares vest over the service period using a straight-line method and unvested shares are forfeited if, prior to vesting, the employee is no longer employed with the Bank. Refer to Footnote 10 of the Notes to Consolidated Financial Statements for more information on the restricted shares.
We purchased 200 shares of our common stock on the open market at a price of $23.25 per share during the quarter ended March 31, 2012. No shares were repurchased during 2011 as we sought to conserve capital for growth, merger and acquisition activity, repayment of our 8% senior subordinated notes, and increased regulatory capital ratio minimums. Industry wide, the cost of capital has increased significantly compared to prior years and many sources of previously low cost capital such as pooled trust preferred offerings are no longer available. The banking industry continues to place a premium on capital and we expect to refrain from significant treasury stock repurchases during the remainder of 2012.
The adequacy of our 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, 2012 and December 31, 2011, the Bank’s Tier 1 risk-weighted capital ratio, total risk-weighted capital, and Tier 1 leverage ratio were in excess of regulatory minimums and were classified as “well-capitalized.” Refer to Table 21 for specific regulatory capital ratios at period-end. Failure to remain well-capitalized could prevent us from obtaining future whole sale brokered time deposits which are an important source of funding.
As discussed earlier in the Executive Summary section of this Quarterly Report on Form 10-Q, banking regulators recently issued two proposals that would substantially change how regulatory capital is calculated and the minimum capital to be retained. While we do not expect to be required to raise common stock capital solely to meet these new requirements, the new rules would increase the likelihood we would need capital through the issuance of new common stock if we continued merger and acquisition activity for growth. Because the market price of our stock currently trades at less than our book value, issuance of new common stock shares, such as for an acquisition, could dilute the book value per share of existing shareholders.
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Table 21: Capital Ratios – PSB Holdings, Inc. – Consolidated
September 30, | December 31, | |||||||||||
(dollars in thousands) | 2012 | 2011 | 2011 | |||||||||
Stockholders’ equity | $ | 53,795 | $ | 49,756 | $ | 50,362 | ||||||
Junior subordinated debentures, net | 7,500 | 7,500 | 7,500 | |||||||||
Disallowed mortgage servicing right assets | (109 | ) | (115 | ) | (121 | ) | ||||||
Accumulated other comprehensive (income) loss | (1,564 | ) | (2,186 | ) | (1,934 | ) | ||||||
Tier 1 regulatory capital | 59,622 | 54,955 | 55,807 | |||||||||
Senior subordinated notes | 7,000 | 7,000 | 7,000 | |||||||||
Allowance for loan losses | 6,201 | 5,697 | 5,745 | |||||||||
Total regulatory capital | $ | 72,823 | $ | 67,652 | $ | 68,552 | ||||||
Total quarterly average assets (as defined by current regulations) | $ | 696,624 | $ | 601,356 | $ | 604,252 | ||||||
Disallowed mortgage servicing right assets | (109 | ) | (122 | ) | (121 | ) | ||||||
Accumulated other comprehensive (income) loss | (1,564 | ) | (2,381 | ) | (2,060 | ) | ||||||
Quarterly average tangible assets (as defined by current regulations) | $ | 694,951 | $ | 598,853 | $ | 602,071 | ||||||
Risk-weighted assets (as defined by current regulations) | $ | 494,848 | $ | 453,461 | $ | 457,443 | ||||||
Tier 1 capital to average tangible assets (leverage ratio) | 8.58% | 9.18% | 9.27% | |||||||||
Tier 1 capital to risk-weighted assets | 12.05% | 12.12% | 12.20% | |||||||||
Total capital to risk-weighted assets | 14.72% | 14.92% | 14.99% |
Table 22: Capital Ratios – Peoples State Bank – Subsidiary
Tier 1 capital to average tangible assets (leverage ratio) | 9.60% | 10.02% | 9.99% | |||||||||
Tier 1 capital to risk-weighted assets | 12.49% | 13.24% | 13.13% | |||||||||
Total capital to risk-weighted assets | 13.75% | 14.50% | 14.39% |
Table 23: Capital Ratios – Marathon State Bank – Subsidiary
Tier 1 capital to average tangible assets (leverage ratio) | 5.91% | |||
Tier 1 capital to risk-weighted assets | 17.71% | |||
Total capital to risk-weighted assets | 17.73% |
As a measurement of the adequacy of a bank’s capital base related to its level of nonperforming assets, many investors use a “non-GAAP” measure commonly referred to as the “Texas Ratio.” We also track changes in our Texas Ratio against our internal capital and liquidity risk parameters to highlight negative capital trends that could impact our ability for future growth, payment of dividends to shareholders, or other factors. As noted previously, correspondent bank providers of our daily federal funds purchased line of credit and the holding company operating line of credit use similar measures that impact our ability to continued use of those lines of credit if our level of nonperforming assets to capital were to rise above prescribed levels. The following Table 24 presents the calculation of our Texas Ratio.
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Table: 24: Calculation of “Texas Ratio” (a non-GAAP measure)
As of Quarter End | ||||||||||||||||||||
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
(dollars in thousands) | 2012 | 2012 | 2012 | 2011 | 2011 | |||||||||||||||
Total nonperforming assets | $ | 17,191 | $ | 17,360 | $ | 18,850 | $ | 17,883 | $ | 18,583 | ||||||||||
Total stockholders’ equity | $ | 53,795 | $ | 52,632 | $ | 51,502 | $ | 50,362 | $ | 49,756 | ||||||||||
Less: Mortgage servicing rights, net (intangible assets) | (1,091 | ) | (1,110 | ) | (1,151 | ) | (1,205 | ) | (1,154 | ) | ||||||||||
Add: Allowance for loan losses | 7,431 | 7,648 | 7,755 | 7,941 | 8,019 | |||||||||||||||
Total tangible common stockholders’ equity and reserves | $ | 60,135 | $ | 59,170 | $ | 58,106 | $ | 57,098 | $ | 56,621 | ||||||||||
Total nonperforming assets as a percentage of | ||||||||||||||||||||
total tangible common stockholders’ equity and reserves | 28.59% | 29.34% | 32.44% | 31.32% | 32.82% | |||||||||||||||
OFF BALANCE-SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Off Balance Sheet Arrangements
We service residential mortgage loans originated by our lenders and sold to the FHLB and FNMA. As a FHLB Mortgage Partnership Finance (“MPF”) loan servicer, we provide a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of the original loan principal sold to the FHLB prior to November 2008. These first mortgage loans are underwritten using standardized criteria we consider to be conservative on residential properties in our local communities. We believe loans serviced for the FHLB will realize minimal foreclosure losses in the future and that we will experience no loan losses related to charge-offs in excess of the FHLB 1% First Loss Account. The north central Wisconsin residential real estate market is experiencing similar home value declines as the state of Wisconsin as a whole, which are moderate when compared to other states in the country. The average residential first mortgage originated by us under the FHLB program which required a credit enhancement was approximately $154 in 2008 and $140 during 2007, the last two years of the program.
Under bank regulatory capital rules, this FHLB recourse obligation to the FHLB is risk-weighted for the purposes of the total capital to risk-weighted assets capital calculation. Total risk-based capital required to be held for the recourse obligations under the FHLB MPF programs for capital adequacy purposes was $1,859 at September 30, 2012 and December 31, 2011. During October 2008, we ceased origination and sale of loans to the FHLB that required a credit enhancement and no additional risk-based capital will be required to support such loans. More information on all loans serviced for other investors, including FHLB and FNMA, is outlined in Table 25.
During 2011, we began sale of a new product that allowed certain adjustable rate commercial loan customers to fix their interest rate with an interest rate swap. Refer to Note 8 of the Notes to Consolidated Financial Statements for details on the program. There were $15,139 and $14,324 in interest rate swaps outstanding under the program at September 30, 2012 and December 31, 2011, respectively.
Residential Mortgage Loan Servicing
We service $266,488 and $261,811 of residential real estate loans which have been sold to the FHLB and FNMA at September 30, 2012 and December 31, 2011, respectively. Loans sold to FHLB and FNMA are not reflected on our Consolidated Balance Sheets. An annualized servicing fee equal to .25% of outstanding principal is retained from payments collected from the customer as compensation for servicing the loan for the FHLB and FNMA. We recognize a mortgage servicing right asset due to the substantial volume of loans serviced for the FHLB and FNMA. Despite our program to keep approximately $13.8 million of fixed rate 15 year fully amortizing mortgage originations during 2012 year to date in our on-balance loan portfolio rather than selling those loans and retaining servicing, total serviced loans increased slightly compared to December 31, 2011 due to higher level of customer refinance activity. However, continuing the in-house mortgage program in future quarters could lower the amount of principal serviced for other investors.
For loans originated and sold to the FHLB prior to November 2008 under the MPF 100 and MPF 125 programs, we are also paid an annualized “credit enhancement” fee of .07% to .10% of outstanding serviced principal in addition to the .25% collected for servicing the loan for the FHLB impacting $38,615, or 14%, of serviced loans at September 30, 2012 compared to $51,518, or 20%, at December 31, 2011. Losses incurred by the FHLB on loans in the MPF 100 and MPF 125 programs are absorbed by the FHLB in their First Loss Account. If cumulative losses were to exceed the First Loss Account, we would reimburse the FHLB for any excess losses up to the extent of our Credit Enhancement Guarantee. Ten years after the original pool master commitment date, the First Loss Account and the Credit Enhancement Guarantee are reset to current levels based on loans remaining in the pool. These factors are further reset every subsequent five years until the pool is repaid. During 2010, the MPF 100 program reached its ten year anniversary and the First Loss Account and Credit Enhancement Guarantee associated with that program were reset to the new level shown in Table 25. The next First Loss Account reset date for any individual master commitment containing our Credit Enhancement Guarantee is scheduled for August 18, 2013.
-57- |
Due to historical strength of mortgage borrowers in our markets and relative stability of collateral home values, and the original 1% of principal First Loss Account provided by the FHLB, we believe the possibility of losses under guarantees to the FHLB to be remote. Since inception of our pools containing guarantees to the FHLB in 2000, only $0.4 million of $425 million of loans originated with guarantees have incurred a principal loss, all of which has been borne by the FHLB within their First Loss Account. Accordingly, no provision for a recourse liability has been made for this recourse obligation on loans currently serviced by us. Loans originated and sold to the FHLB under their XTRA program do not require credit enhancement and PSB has no risk of principal loss on such loans properly underwritten and sold. Under the MPF 100 and MPF 125 credit enhancement programs, the FHLB is reimbursed for any incurred principal losses in its First Loss Account by withholding the monthly credit enhancement fee normally paid to us until their principal loss is recovered. We recognize credit enhancement income on a cash basis if received from the FHLB.
All loans sold to FHLB or FNMA in which we retain the loan servicing are subject to underwriting representations and warranties made by us as the originator and we are subject to annual underwriting audits from both entities. Our representations and warranties would allow FHLB or FNMA to require us to repurchase inadequately underwritten loans for any number of underwriting violations. During 2011, we were required to repurchase a foreclosed loan and incur a $37 loss related to underwriting violations related to private mortgage guarantee insurance. During the December 2012 quarter, we will be required to repurchase a foreclosed loan and incur a loss of approximately $83 for failure to obtain private mortgage insurance due to high loan to value. We have reviewed our serviced loan portfolio for these issues and do not believe this is a recurring issue, and that these losses were subject to the individual loan circumstances. We have originated loans to these secondary market providers since 2000 with the loans listed above representing the only serviced loans ever required to be repurchased for underwriting or servicing violations.
The following tables summarize loan principal serviced for the FHLB under various MPF programs and for FNMA as of September 30, 2012 and December 31, 2011.
Table 25: Residential Mortgage Loans Serviced for Others as of September 30, 2012 ($000s)
Weighted | Average Monthly | PSB Credit | Agency | Mortgage | ||||||||||||||||||||||||||||
Agency | Principal | Loan | Average | Payment | Enhancement | Funded First | Servicing Right, net | |||||||||||||||||||||||||
Program | Serviced | Count | Coupon Rate | Seasoning | Guarantee | Loss Account | $ | % | ||||||||||||||||||||||||
FHLB MPF 100 | $ | 13,465 | 263 | 5.38% | 113 | $ | 94 | $ | 353 | $ | 23 | 0.17% | ||||||||||||||||||||
FHLB MPF 125 | 25,150 | 284 | 5.75% | 73 | 1,851 | 1,474 | 64 | 0.25% | ||||||||||||||||||||||||
FHLB XTRA | 194,784 | 1,507 | 4.13% | 20 | n/a | n/a | 835 | 0.43% | ||||||||||||||||||||||||
FNMA | 33,089 | 237 | 3.63% | 14 | n/a | n/a | 169 | 0.51% | ||||||||||||||||||||||||
Totals | $ | 266,488 | 2,291 | 4.28% | 29 | $ | 1,945 | $ | 1,827 | $ | 1,091 | 0.41% |
Table 26: Residential Mortgage Loans Serviced for Others as of December 31, 2011 ($000s)
Weighted | Average Monthly | PSB Credit | Agency | Mortgage | ||||||||||||||||||||||||||||
Agency | Principal | Loan | Average | Payment | Enhancement | Funded First | Servicing Right, net | |||||||||||||||||||||||||
Program | Serviced | Count | Coupon Rate | Seasoning | Guarantee | Loss Account | $ | % | ||||||||||||||||||||||||
FHLB MPF 100 | $ | 18,132 | 329 | 5.38% | 104 | $ | 94 | $ | 353 | $ | 46 | 0.25% | ||||||||||||||||||||
FHLB MPF 125 | 33,386 | 350 | 5.75% | 66 | 1,851 | 1,587 | 131 | 0.39% | ||||||||||||||||||||||||
FHLB XTRA | 191,421 | 1,451 | 4.50% | 18 | n/a | n/a | 931 | 0.49% | ||||||||||||||||||||||||
FNMA | 18,872 | 146 | 4.00% | 13 | n/a | n/a | 97 | 0.51% | ||||||||||||||||||||||||
Totals | $ | 261,811 | 2,276 | 4.68% | 30 | $ | 1,945 | $ | 1,940 | $ | 1,205 | 0.46% |
-58- |
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 our Form 10-K for the year ended December 31, 2011.
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 our President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) pursuant to Exchange Act Rule 13a 15. Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
-59- |
In addition to the other information set forth in this report, this report should be considered in light of the risk factors referenced in Part I of PSB’s Annual Report on Form 10-K for the year ended December 31, 2011, under the caption “Forward-Looking Statements.” These and other risk factors could materially affect PSB’s business, financial condition, or future results of operations. The risks referenced in PSB’s Annual Report on Form 10-K are not the only risks facing PSB. Additional risks and uncertainties not currently known to PSB or that it currently deems to be immaterial also may materially adversely affect PSB’s business, financial condition, and/or operating results.
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 |
101.INS* | XBRL Instance Document |
101.SCH* | XBRL Taxonomy Extension Schema Document |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | XBRL Taxonomy Definition Linkbase Document |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
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 14, 2012 | SCOTT M. CATTANACH |
Scott M. Cattanach | |
Treasurer | |
(On behalf of the Registrant and as Principal Financial Officer) |
-60- |
EXHIBIT INDEX
to
FORM 10-Q
of
PSB HOLDINGS, INC.
for the quarterly period ended September 30, 2012
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. §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 |
101.INS* | XBRL Instance Document |
101.SCH* | XBRL Taxonomy Extension Schema Document |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | XBRL Taxonomy Definition Linkbase Document |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
-61- |
Exhibit 31.1
Certification Under Section 302
of Sarbanes-Oxley Act of 2002
I, Peter W. Knitt, certify that:
1. have reviewed this quarterly report on Form 10-Q of PSB Holdings, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 14, 2012
PETER W. KNITT | |
Peter W. Knitt | |
President and Chief Executive Officer |
Exhibit 31.2
Certification Under Section 302
of Sarbanes-Oxley Act of 2002
I, Scott M. Cattanach, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PSB Holdings, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 14, 2012
SCOTT M. CATTANACH | |
Scott M. Cattanach | |
Treasurer (Principal Financial Officer) |
Exhibit 32.1
Certification
of
PSB Holdings, Inc.
under Section 906 of Sarbanes-Oxley Act of 2002
The undersigned Chief Executive Officer and Chief Financial Officer of PSB Holdings, Inc. (the “Company”) certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that (1) the quarterly report on Form 10-Q of the Company for the quarterly period ended September 30, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. 78m or 78o(d), and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: November 14, 2012
PETER W. KNITT | |
Peter W. Knitt | |
President and CEO | |
SCOTT M. CATTANACH | |
Scott M. Cattanach | |
Treasurer | |
(Chief Financial Officer) |
SECURITIES (Details Narrative) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Securities Details Narrative | ||
Securities Pledged as Collateral | $ 43,614 | $ 56,659 |
OTHER BORROWINGS (Details 1) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Other Borrowings Details 1 | ||||
Weighted average rate | 3.04% | 2.90% | 3.04% | 2.90% |
Highest month-end balance | $ 19,273 | $ 21,746 | $ 19,934 | $ 32,644 |
Daily average balance | $ 18,725 | $ 21,745 | $ 19,166 | $ 26,172 |
Weighted average rate | 3.19% | 2.96% | 3.12% | 2.52% |
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Details 7) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
Sep. 30, 2011
|
---|---|---|---|
Loans on nonaccrual status | $ 8,140 | $ 7,974 | |
Specific loan reserves | 262 | 526 | |
Commercial and Industrial
|
|||
Loans on nonaccrual status | 3,748 | 4,309 | |
Agricultural
|
|||
Loans on nonaccrual status | 27 | ||
Commercial Real Estate
|
|||
Loans on nonaccrual status | 1,903 | 1,585 | |
Residential Prime
|
|||
Loans on nonaccrual status | 2,033 | 1,640 | |
Residential Heloc
|
|||
Loans on nonaccrual status | 161 | 159 | |
Consumer
|
|||
Loans on nonaccrual status | 6 | 55 | |
Commercial construction and development
|
|||
Loans on nonaccrual status | 129 | 148 | |
Residential construction and development
|
|||
Loans on nonaccrual status | $ 133 | $ 78 |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Details Narrative) (USD $)
|
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Derivative Instruments And Hedging Activities Details Narrative | ||
Variable rate debt, hedge effectiveness | 100.00% | |
Interest Rate Swap Loss Gross | $ 180 | |
Interest Rate Swaps Collateral Cash | 850 | 680 |
Interest Rate Swap Loss Net of Tax | $ 109 |
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Details 5) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
30-59 Days | $ 1,870 | $ 2,605 |
60-89 Days | 1,554 | 238 |
90+ Days | 4,564 | 4,819 |
Total Past Due | 7,988 | 7,662 |
Current | 472,471 | 437,639 |
Total Loans | 480,458 | 445,301 |
90+ And Accruing | ||
Commercial and Industrial
|
||
30-59 Days | 660 | 670 |
60-89 Days | 281 | 25 |
90+ Days | 1,478 | 2,041 |
Total Past Due | 2,419 | 2,736 |
Current | 118,544 | 114,686 |
Total Loans | 120,963 | 117,422 |
90+ And Accruing | ||
Agricultural
|
||
30-59 Days | ||
60-89 Days | ||
90+ Days | ||
Total Past Due | ||
Current | 3,194 | 1,957 |
Total Loans | 3,194 | 1,957 |
90+ And Accruing | ||
Government
|
||
30-59 Days | ||
60-89 Days | ||
90+ Days | ||
Total Past Due | ||
Current | 13,864 | 7,813 |
Total Loans | 13,864 | 7,813 |
90+ And Accruing | ||
Commercial Real Estate
|
||
30-59 Days | 705 | 542 |
60-89 Days | 160 | |
90+ Days | 1,354 | 1,229 |
Total Past Due | 2,219 | 1,771 |
Current | 181,964 | 182,589 |
Total Loans | 184,183 | 184,360 |
90+ And Accruing | ||
Commercial Construction and Development
|
||
30-59 Days | 20 | |
60-89 Days | 909 | |
90+ Days | 127 | 145 |
Total Past Due | 1,056 | 145 |
Current | 20,475 | 17,195 |
Total Loans | 21,530 | 17,340 |
90+ And Accruing | ||
Residential Prime
|
||
30-59 Days | 297 | 1,127 |
60-89 Days | 159 | 173 |
90+ Days | 1,359 | 1,144 |
Total Past Due | 1,815 | 2,444 |
Current | 95,872 | 75,670 |
Total Loans | 97,687 | 78,114 |
90+ And Accruing | ||
Residential Heloc
|
||
30-59 Days | 148 | 255 |
60-89 Days | 42 | 5 |
90+ Days | 111 | 129 |
Total Past Due | 301 | 389 |
Current | 22,582 | 22,804 |
Total Loans | 22,883 | 23,193 |
90+ And Accruing | ||
Construction and Development
|
||
30-59 Days | 14 | |
60-89 Days | 35 | |
90+ Days | 132 | 77 |
Total Past Due | 146 | 112 |
Current | 10,706 | 11,258 |
Total Loans | 10,852 | 11,370 |
90+ And Accruing | ||
Consumer Loan
|
||
30-59 Days | 26 | 11 |
60-89 Days | 3 | 0 |
90+ Days | 3 | 54 |
Total Past Due | 32 | 65 |
Current | 5,270 | 3,667 |
Total Loans | 5,302 | 3,732 |
90+ And Accruing |
STOCK-BASED COMPENSATION (Tables)
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2012
|
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Stock-Based Compensation Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share Based Compensation Restricted Stock Awards Activity | The following tables summarize information regarding restricted stock outstanding at September 30, 2012 and 2011 including activity during the nine months then ended.
|
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Compensation Expense Schedule Assuming all Restricted Stock Shares Vest | Scheduled compensation expense per calendar year assuming all restricted shares eventually vest to employees would be as follows:
|
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Details1) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2012
|
Dec. 31, 2011
|
|
Receive fixed rate (average): | 1.99% | 2.05% |
Pay variable rate (average): | 0.23% | 0.29% |
Interest Rate Swap Customers
|
||
Notional amount: | $ 7,500 | $ 7,500 |
Not Designated as Hedging Instrument | Interest Rate Swap Customers
|
||
Notional amount: | 15,139 | 14,324 |
Receive fixed rate (average): | 1.99% | 2.05% |
Pay variable rate (average): | 0.23% | 0.29% |
Derivative Maturity Date Low End | 2015-03-31 | 2015-03-31 |
Derivative Maturity Date High End | 2021-10-31 | 2021-10-31 |
Weighted average remaining term | 4 years 1 month | 4 years 11 months |
Unrealized gain (loss) fair value: | $ 735 | $ 555 |
PSB HOLDINGS, INC. ACQUISITION OF MARATHON STATE BANK (Tables)
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2012
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Psb Holdings Inc. Acquisition Of Marathon State Bank Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Acquisition |
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Pro Forma Summary Financial Information Including Acquisition of Marathon State Bank | Pro forma combined results of operations as if the combination occurred at the beginning of the quarterly and year to date periods ended September 30, 2012:
Pro forma combined results of operations as if the combination occurred at the beginning of the quarterly and year to date periods ended September 30, 2011:
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FORECLOSED ASSETS (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2012
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Sep. 30, 2011
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Sep. 30, 2012
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Sep. 30, 2011
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Foreclosed Assets Details | ||||
Balance at beginning of period | $ 2,642 | $ 4,339 | $ 2,939 | $ 4,967 |
Transfer of loans at net realizable value to foreclosed assets | 160 | 710 | 568 | 845 |
Sale proceeds | (172) | (502) | (580) | (832) |
LoansOriginatedOnSaleOfForeclosedAssets | (1,075) | (140) | (1,075) | |
Net gain from sale of foreclosed assets | (1) | (25) | 47 | (1) |
Provision for write-down charged to operations | (280) | (485) | (457) | |
Balance at end of period | $ 2,349 | $ 3,447 | $ 2,349 | $ 3,447 |
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Details 1) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
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Dec. 31, 2011
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Loans Receivable And Allowance For Loan Losses Details 1 | ||
Impaired loans without a valuation allowance | $ 8,199 | $ 5,474 |
Impaired loans with a valuation allowance | 9,055 | 11,745 |
Total impaired loans before valuation allowances | 17,254 | 17,219 |
Valuation allowance related to impaired loans | 2,537 | 3,178 |
Net impaired loans | $ 14,717 | $ 14,041 |
PSB HOLDINGS, INC. ACQUISITION OF MARATHON STATE BANK (Details) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended | ||
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Sep. 30, 2012
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Dec. 31, 2011
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Sep. 30, 2012
Marathon State Bank
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Accounting date | Jun. 01, 2012 | ||
Cash purchase price | $ 5,505 | ||
Cash and due from banks | 21,120 | 14,805 | 20,392 |
Securities | 50,547 | ||
Loans receivable | 473,249 | 437,557 | |
Short-term commercial paper and bankers' acceptances | 11,713 | ||
Foreclosed assets | |||
Premises and equipment, net | 10,275 | 9,928 | 402 |
Core deposit intangible asset | |||
Accrued interest receivable and other assets | 550 | ||
Total fair value of assets acquired | 107,000 | 107,364 | |
Non-interest-bearing | 79,201 | 75,298 | 23,255 |
Interest-bearing | 468,637 | 406,211 | 77,611 |
Accrued expenses and other liabilities | 6,801 | 6,449 | 142 |
Total fair value of liabilities assumed | 101,008 | ||
Fair value of net assets acquired | 6,356 | ||
Gain on bargain purchase | $ 851 |
OTHER BORROWINGS (Details Narrative) (USD $)
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Sep. 30, 2012
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Dec. 31, 2011
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Other Borrowings Details Narrative | ||
Securities Pledged for Repurchase Agreements at June 30, 2012 | $ 21,490 | $ 22,977 |
STOCK-BASED COMPENSATION (Details) (USD $)
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9 Months Ended | |
---|---|---|
Sep. 30, 2012
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Sep. 30, 2011
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Stock-Based Compensation Details | ||
Restricted Stock Balance, beginning | 25,572 | 19,452 |
Restricted stock granted | 8,895 | 9,130 |
Restricted stock legally vested | (4,058) | (3,010) |
Restricted Stock Balance, ending | 30,409 | 25,572 |
Weighted Average Grant Price, beginning | $ 17.79 | $ 15.68 |
Weighted Average Grant Price, granted | $ 22.48 | $ 21.90 |
Weighted Average Grant Price, legally vested | $ (16.08) | $ (16.62) |
Weighted Average Grant Price, ending | $ 19.39 | $ 17.79 |
GENERAL
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9 Months Ended |
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Sep. 30, 2012
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General | |
GENERAL | 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 and, where applicable, its subsidiary Marathon State Bank, which, as described in Note 2 below, was acquired by PSB on June 14, 2012. Dollar amounts are in thousands, except per share amounts.
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 PSBs Annual Report on Form 10-K for the year ended December 31, 2011 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. |
STOCK-BASED COMPENSATION (Details 1) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended | 12 Months Ended | ||||||
---|---|---|---|---|---|---|---|---|
Sep. 30, 2012
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Sep. 30, 2011
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Dec. 31, 2017
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Dec. 31, 2016
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Dec. 31, 2015
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Dec. 31, 2014
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Dec. 31, 2013
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Dec. 31, 2012
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Compensation Expense | $ 79 | $ 65 | $ 40 | $ 80 | $ 95 | $ 125 | $ 125 | $ 105 |
Total
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Compensation Expense | $ 570 |