-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CY4Gc59s/oNCKXpeg+0evgRl6kNms3UqtM93ppwHt378ygyRVygM7G9iWHw3sfDl 9r20E4COQusmwtYi9iQMFw== 0000916480-03-000109.txt : 20030814 0000916480-03-000109.hdr.sgml : 20030814 20030814094013 ACCESSION NUMBER: 0000916480-03-000109 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSB HOLDINGS INC /WI/ CENTRAL INDEX KEY: 0000948368 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 391804877 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26480 FILM NUMBER: 03843641 BUSINESS ADDRESS: STREET 1: 1905 WEST STEWART AVE CITY: WAUSAU STATE: WI ZIP: 54401 BUSINESS PHONE: 7158422191 MAIL ADDRESS: STREET 1: P.O. BOX 1686 CITY: WAUSAU STATE: WI ZIP: 54402-1686 FORMER COMPANY: FORMER CONFORMED NAME: PEOPLES STATE BANK /WI/ DATE OF NAME CHANGE: 19950721 10-Q 1 psb106302003.txt PSB HOLDINGS, INC. FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 0-26480 PSB HOLDINGS, INC. (Exact name of registrant as specified in charter) WISCONSIN 39-1804877 (State of incorporation)(I.R.S. Employer Identification Number) 1905 West Stewart Avenue Wausau, Wisconsin 54401 (Address of principal executive office) Registrant's telephone number, including area code: 715-842-2191 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X The number of common shares outstanding at July 21, 2003 was 1,651,469. PSB HOLDINGS, INC. FORM 10-Q Quarter Ended June 30, 2003 Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets June 30, 2003 (unaudited) and December 31, 2002 (derived from audited financial statements) 1 Consolidated Statements of Income Three Months and Six Months Ended June 30, 2003 and 2002 (unaudited) 2 Consolidated Statement of Changes in Stockholders' Equity Six Months Ended June 30, 2003 (unaudited) 3 Consolidated Statements of Cash Flows Six Months Ended June 30, 2003 and 2002 (unaudited) 4 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Item 4. Internal Controls and Procedures 26 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 6. Exhibits and Reports on Form 8-K 28 i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
PSB HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (June 30, 2003 unaudited, December 31, 2002 derived from audit financial statements) June 30, December 31, (dollars in thousands, except per share data) 2003 2002 ASSETS Cash and due from banks $ 14,278 $ 15,890 Interest-bearing deposits and money market funds 5,278 5,490 Federal funds sold 507 172 Cash and cash equivalents 20,063 21,552 Securities available for sale (at fair value) 72,731 81,056 Federal Home Loan Bank stock (at cost) 2,364 2,264 Loans held for sale - 949 Loans receivable, net of allowance for loan losses of $3,517 and $3,158, respectively 275,536 256,015 Accrued interest receivable 1,674 1,732 Foreclosed assets, net 381 573 Premises and equipment 6,219 6,158 Mortgage servicing rights, net 689 697 Other assets 279 472 TOTAL ASSETS $ 379,936 $ 371,468 LIABILITIES Non-interest-bearing deposits $ 54,052 $ 45,458 Interest-bearing deposits 249,636 252,373 Total deposits 303,688 297,831 Federal Home Loan Bank advances 38,000 38,000 Other borrowings 5,052 3,302 Accrued expenses and other liabilities 2,427 3,033 Total liabilities 349,167 342,166 STOCKHOLDERS' EQUITY Common stock - no par value with a stated value of $1 per share: Authorized - 3,000,000 shares Issued - 1,804,850 shares 1,805 1,805 Additional paid-in capital 7,150 7,150 Retained earnings 23,392 21,607 Unrealized gain on securities available for sale, net of tax 1,481 1,306 Treasury stock, at cost - 153,381 and 138,748 shares, respectively (3,059) (2,566) Total stockholders' equity 30,769 29,302 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 379,936 $ 371,468
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PSB HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended (dollars in thousands, June 30, June 30, except per share data - unaudited) 2003 2002 2003 2002 Interest income: Interest and fees on loans $ 4,476 $ 4,448 $ 8,872 $ 8,839 Interest on securities: Taxable 501 678 1,116 1,368 Tax-exempt 221 227 444 451 Other interest and dividends 60 52 119 117 Total interest income 5,258 5,405 10,551 10,775 Interest expense: Deposits 1,432 1,696 2,944 3,462 FHLB advances 506 571 1,014 1,135 Other borrowings 52 34 93 80 Total interest expense 1,990 2,301 4,051 4,677 Net interest income 3,268 3,104 6,500 6,098 Provision for loan losses 240 180 465 360 Net interest income after provision for loan losses 3,028 2,924 6,035 5,738 Noninterest income: Service fees 325 321 628 556 Gain on sale of loans 547 134 1,153 332 Mortgage loan servicing, net (331) 13 (309) 19 Investment and insurance sales commissions 89 51 188 96 Other noninterest income 96 83 188 164 Total noninterest income 726 602 1,848 1,167 Noninterest expense: Salaries and employee benefits 1,387 1,170 2,835 2,415 Occupancy 285 325 573 565 Data processing and other office operations 148 128 287 260 Advertising and promotion 51 115 88 191 Other noninterest expenses 349 308 754 627 Total noninterest expense 2,220 2,046 4,537 4,058 Income before provision for income taxes 1,534 1,480 3,346 2,847 Provision for income taxes 477 456 1,065 865 Net income $ 1,057 $ 1,024 $ 2,281 $ 1,982 Basic earnings per share $ 0.64 $ 0.61 $ 1.37 $ 1.18 Diluted earnings per share $ 0.63 $ 0.61 $ 1.36 $ 1.18
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PSB HOLDINGS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Six months ended June 30, 2003 - unaudited Unrealized Gain (Loss) Additional on Securities Common Paid-in Retained Available Treasury (dollars in thousands) Stock Capital Earnings For Sale Stock Totals Balance January 1, 2003 $ 1,805 $ 7,150 $ 21,607 $ 1,306 $ (2,566) $ 29,302 Comprehensive income: Net income 2,281 2,281 Unrealized gain on securities available for sale, net of tax 175 175 Total comprehensive income 2,456 Purchase of treasury stock (538) (538) Distribution of treasury stock in settlement of liability to Company directors 45 45 Cash dividends declared $.30 per share (496) (496) Balance June 30, 2003 $ 1,805 $ 7,150 $ 23,392 $ 1,481 $ (3,059) $ 30,769
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PSB HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2003 and 2002 - unaudited 2003 2002 Cash flows from operating activities: Net income $ 2,281 $ 1,982 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and net amortization 1,017 331 Provision for loan losses 465 360 Gain on sale of loans (1,153) (332) Provision for servicing right valuation allowance 18 - Loss on sale of premises and equipment - 30 Gain on sale of foreclosed assets (4) (27) FHLB stock dividends (100) (58) Changes in operating assets and liabilities: Accrued interest receivable 58 12 Other assets (68) (112) Other liabilities (561) (535) Net cash provided by operating activities 1,953 1,651 Cash flows from investing activities: Proceeds from sale and maturities of: Securities held to maturity - 579 Securities available for sale 25,306 5,989 Payment for purchase of: Securities held to maturity - (1,120) Securities available for sale (16,834) (5,009) Net increase in loans (18,302) (9,294) Capital expenditures (317) (945) Proceeds from sale of premises and equipment - 29 Proceeds from sale of foreclosed assets 132 205 Net cash used in investing activities (10,015) (9,566)
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CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED Cash flows from financing activities: 2003 2002 Net increase (decrease) in non-interest-bearing deposits 8,594 (4,560) Net increase (decrease) in interest-bearing deposits (2,737) 2,013 Proceeds from FHLB advances 10,000 - Repayments of FHLB advances (10,000) - Net increase (decrease) in other borrowings 1,750 (1,133) Dividends paid (496) (320) Purchase of treasury stock (538) (70) Net cash provided by (used in) financing activities 6,573 (4,070) Net decrease in cash and cash equivalents (1,489) (11,985) Cash and cash equivalents at beginning 21,552 25,550 Cash and cash equivalents at end $ 20,063 $ 13,565 Supplemental cash flow information: Cash paid during the period for: Interest $ 4,205 $ 4,878 Income taxes 1,020 770 Noncash investing and financing activities: Loans charged off $ 128 $ 123 Loans transferred to foreclosed assets 3 273 Loans originated on sale of foreclosed assets 67 217 Distribution of treasury stock in settlement of liability to Company directors 45 60
5 PSB Holdings, Inc. Notes to Consolidated Financial Statements NOTE 1 - GENERAL In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly PSB Holdings, Inc.'s ("Company") financial position, results of its operations, and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in the Company's 2002 annual report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are susceptible to significant change include the determination of the allowance for loan losses, mortgage servicing right asset, and the valuation of investment securities. NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLE In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 addresses how intangible assets acquired outside of a business combination should be accounted for upon acquisition and how goodwill and other intangible assets should be accounted for after they have been initially recognized. SFAS No. 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Other intangible assets with a finite life will be amortized over their useful life. Goodwill and other intangible assets with indefinite useful lives shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Corporation's adoption of SFAS No. 142 on January 1, 2002 had no impact on the consolidated financial statements as of the date of adoption. 6 NOTE 3 - STOCK-BASED COMPENSATION The Company records expense relative to stock-based compensation using the "intrinsic value method". Since the exercise price is equal to the fair value of the Company's common stock on the date of the award, the intrinsic value of the Company's stock options is "zero" at the time of the award and no expense is recorded. As permitted by generally accepted accounting principles, the Company has not adopted the "fair value method" of expense recognition for stock-based compensation awards. Rather, the effects of the fair value method on the Company's earnings are presented on a pro forma basis. Because no grants of stock options were made during the quarter ended June 30, 2003, there was no pro forma impact to net income or earnings per share during this period. However, there were grants of 4,614 stock options (with an exercise price of $17.65 per share) during the quarter ended June 30, 2002. Had compensation cost for the option grants been determined in accordance with the "fair value method", net income would have decreased approximately $9,228 during the quarter and reduced quarterly earnings per share by less than $.01 per share. Under the terms of an incentive stock option plan adopted during 2001, shares of unissued common stock are reserved for options to officers and key employees at prices not less than the fair market value of the shares at the date of the grant. These options expire 10 years after the grant date. As of June 30, 2003, 26,892 options outstanding were eligible to be exercised at a weighted average exercise price of $16.80 per share. No additional shares of common stock remain reserved for future grants under the option plan approved by the shareholders. NOTE 4 - EARNINGS PER SHARE Basic earnings per share of common stock are based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options. Presented below are the calculations for basic and diluted earnings per share:
Three months ended Six months ended (dollars in thousands, except per share data) June 30, June 30, 2003 2002 2003 2002 Net income $ 1,057 $ 1,024 $ 2,281 $ 1,982 Weighted average shares outstanding 1,661,142 1,678,832 1,663,423 1,679,030 Effect of dilutive stock options outstanding 13,004 3,310 11,281 2,160 Diluted weighted average shares outstanding 1,674,146 1,682,142 1,674,704 1,681,190 Basic earnings per share $ 0.64 $ 0.61 $ 1.37 $ 1.18 Diluted earnings per share $ 0.63 $ 0.61 $ 1.36 $ 1.18
7 NOTE 5 - COMPREHENSIVE INCOME Generally accepted accounting principles require comprehensive income and its components, as recognized under the accounting standards, to be displayed in a financial statement with the same prominence as other financial statements. The disclosure requirements with respect to the Form 10-Q have been included in the Company's consolidated statement of changes in stockholders' equity. Comprehensive income totaled the following for the periods indicated:
(dollars in thousands - unaudited Three months ended Six months ended June 30, June 30, 2003 2002 2003 2002 Net income $ 1,057 $ 1,024 $ 2,281 $ 1,982 Change in net unrealized gain on securities available for sale, net of tax 283 553 175 431 Comprehensive income $ 1,340 $ 1,577 $ 2,456 $ 2,413
NOTE 6 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Loans receivable are stated at unpaid principal balances plus net deferred loan origination costs less loans in process and the allowance for loan losses. Interest on loans is credited to income as earned. Interest income is not accrued on loans where management has determined collection of such interest is doubtful or those loans which are past due 90 days or more as to principal or interest payments. When a loan is placed on nonaccrual status, previously accrued but unpaid interest deemed uncollectible is reversed and charged against current income. After being placed on nonaccrual status, additional income is recorded only to the extent that payments are received or the collection of principal becomes reasonably assured. Interest income recognition on loans considered to be impaired under current accounting standards is consistent with the recognition on all other loans. Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual life of the underlying loan. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Management believes the allowance for loan losses is adequate to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. In accordance with current accounting standards, the allowance is provided for losses that have been incurred as of the balance sheet date. The allowance is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are 8 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 commercial loans which have been judged to be impaired as defined by current accounting standards. A loan is impaired when, based on current information, it is probable that the Company will not collect all amounts due in accordance with the contractual terms of the loan agreement. Management has determined that commercial, financial, agricultural, and commercial real estate loans that have a nonaccrual status or have had their terms restructured meet this definition. Large groups of homogenous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment. Specific allowances are based on discounted cash flows of expected future payments using the loans' initial effective interest rate or the fair value of collateral if the loan is collateral dependent. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the subsidiary Bank to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate and are carried as "Loans held for sale" on the balance sheet. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method using quoted market prices. NOTE 7 - FORECLOSED REAL ESTATE Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value (after deducting estimated costs to sell) at the date of foreclosure, establishing a new cost basis. Costs related to development and improvement of property are capitalized, whereas costs related to holding property are expensed. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in any valuation allowance are included in loss on foreclosed real estate. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is presented to assist in the understanding and evaluation of the Company's financial condition and results of operations. It is intended to complement the unaudited financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. Dollar amounts are in thousands, except per share amounts. Forward-looking statements have been made in this document that are subject to risks and uncertainties. While the Company believes these forward-looking statements are based on reasonable assumptions, all such statements involve risk and uncertainties that could cause actual results to differ materially from those contemplated in this report. The assumptions, risks, and uncertainties relating to the forward-looking statements in this report include those described under the caption "Cautionary Statements Regarding Forward- Looking Information" in Part I of the Company's Form 10-K for the year ended December 31, 2002 and, from time to time, in the Company's other filings with the Securities and Exchange Commission. BALANCE SHEET At June 30, 2003, total assets were $379,936, an increase of $37,832, or 11.1%, over June 30, 2002. Gross loans (including loans held for sale and unamortized direct loan origination costs) were $279,053 at June 30, 2003, growing $28,757 over June 30, 2002 for an increase of 11.5%. Book value of investment securities was $72,731 at June 30, 2003, an increase of $2,054 or 2.9% over June 30, 2002. Asset growth since June 30, 2002 was funded primarily by an increase in deposits of $32,600, or 12.0%, from $271,088 at June 30, 2002 to $303,688 at June 30, 2003. Asset growth since January 1, 2003 has included an increase in gross loans of $19,880 but a decline in the book value of investment securities of $8,325. The decline in securities during 2003 was due primarily to prepayments of principal on mortgage-backed securities. Loan growth not funded by prepayments of securities was supplied primarily by an increase in deposits of $5,857.
Table 1: Period-End Loan Composition June 30, June 30, December 31, 2002 Dollars Dollars Percentage of total Percentage (dollars in thousands) 2003 2002 2003 2002 Dollars of total Commercial, industrial and agricultural $ 69,526 $ 69,165 24.9% 27.6% $ 64,529 24.8% Commercial real estate mortgage 127,565 99,917 45.7% 39.9% 114,982 44.2% Residential real estate mortgage 64,809 63,898 23.2% 25.5% 61,948 23.8% Residential real estate loans held for sale - 358 0.0% 0.1% 949 0.4% Consumer home equity 7,478 5,771 2.7% 2.3% 7,274 2.8% Consumer and installment 9,675 11,187 3.5% 4.6% 10,440 4.0% Totals $ 279,053 $ 250,296 100.0% 100.0% $ 260,122 100.0%
10 After several quarters of decline, the amount of residential real estate mortgages held increased from the year earlier period, but continues to reflect a lower percentage of the total loan portfolio. The increase in residential mortgages during 2003 is from the Company retaining some fixed rate 15 year fixed rate mortgages rather than selling the principal to the secondary market. These mortgages were retained as part of an asset-liability management strategy to maximize net interest margin without a significant increase in interest rate risk due to the current cash and projected liquidity position in light of interest sensitivity of the entire balance sheet and opportunities for re- investment of investment security cash flows into loans or other new securities. The amount of 15 year fixed rate mortgages originated by the program and held on the balance sheet at June 30, 2003 was approximately $8.4 million. Under the current asset-liability strategy, this temporary program will originate and hold no more than $15 million of total 15 year fixed rate mortgage production on the balance sheet. Long-term residential mortgages originated by the Company continue to be primarily sold to investors in the secondary market to eliminate the associated interest rate risk. As the Company reallocated resources to handle demand for residential real estate loans, it experienced substantial repayments of consumer retail installment loans that were not replaced. In its markets, the Company faces substantial competition from credit unions and other financial institutions for retail installment lending such as auto loans. The Company renewed efforts during 2003 to retain some market share in consumer lending by educating a wider range of bank staff eligible to originate consumer loans and changing the primary delivery channel from traditional loan officers to personal bankers and other retail customer contact staff. Home equity loans are actively promoted to high quality individual borrowers with low interest rates as compared to local competitors. During 2003, commercial real estate mortgages increased primarily from new commercial construction and additional owner occupied commercial retail buildings, factories, and warehouses. Commercial and industrial loans have experienced a shift in which personal property and equipment secured loans have declined while cash flow business lines of credit have increased. The loan portfolio is the Company's primary asset subject to credit risk. The Company's process for monitoring credit risks includes weekly analysis of loan quality, delinquencies, non-performing assets, and potential problem loans. Loans are placed on a nonaccrual status when they become contractually past due 90 days or more as to interest or principal payments. All interest accrued but not collected for loans (including applicable impaired loans) that are placed on nonaccrual or charged off is reversed to interest income. The interest on these loans is accounted for on the cash basis until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due have been collected and there is reasonable assurance that repayment according to the contractual terms will continue. The aggregate amount of nonperforming assets decreased $59 to $3,340 at June 30, 2003 from $3,399 at June 30, 2002, primarily because of fewer loans with restructured terms. However, nonperforming assets have increased $334 from $3,006 at December 31, 2002. Total 11 nonperforming assets as a percentage of total assets continues to be favorable with .88% and .81% at June 30, 2003 and December 31, 2002, respectively. The Company ceases to accrue interest on loans which are 90 days past due and considers them nonperforming loans until the borrower has made up any late payments and is able to continue required payments in the future. Nonperforming loans also include restructured loans until 6 consecutive monthly payments are received under the new loan terms. The Company continues to aggressively manage past due customers and lowered the level of nonperforming loans to gross loans from 1.23% at June 2002 to 1.06% at June 2003. The Company also tracks delinquencies on a contractual basis quarter to quarter. Loans contractually delinquent 30 days or more as a percentage of gross loans were 1.01% at June 2003 compared to .87% at December 2002 and 1.75% at June 2002. The allowance for loan losses was 1.26% of gross loans at June 2003 compared to 1.30% at June 2002. Management reviews the activity in identified problem loans weekly and recognizes adequate and reasonable loan loss reserves as required.
Table 2: Allowance for Loan Losses Three months ended Six months ended June 30, June 30, (dollars in thousands) 2003 2002 2003 2002 Allowance for loan losses at beginning $ 3,315 $ 3,155 $ 3,158 $ 2,969 Provision for loan losses 240 180 465 360 Recoveries on loans previously charged-off 11 19 22 48 Loans charged off (49) (100) (128) (123) Allowance for loan losses at end $ 3,517 $ 3,254 $ 3,517 $ 3,254
Nonperforming assets include: 1) loans that are either contractually past due 90 days or more as to interest or principal payments, on a nonaccrual status, or the terms of which have been renegotiated to provide a reduction or deferral of interest or principal (restructured loans) and 2) foreclosed assets. 12
Table 3: Nonperforming Assets June 30, Dec. 31, (dollars in thousands) 2003 2002 2002 Nonaccrual loans $ 2,421 $ 2,355 $ 1,786 Accruing loans past due 90 days or more 60 13 - Restructured loans not on nonaccrual 478 694 647 Total nonperforming loans 2,959 3,062 2,433 Foreclosed assets 381 337 573 Total nonperforming assets $ 3,340 $ 3,399 $ 3,006 Nonperforming loans as a % of gross loans receivable 1.06% 1.23% 0.94% Total nonperforming assets as a % of total assets 0.88% 0.99% 0.81%
LIQUIDITY Liquidity refers to the ability of the Company to generate adequate amounts of cash to meet the Company's need for cash at a reasonable cost. The Company manages its liquidity to provide adequate funds to support borrowing needs and deposit flow of its customers. Management views liquidity as the ability to raise cash at a reasonable cost or with a minimum of loss and as a measure of balance sheet flexibility to react to marketplace, regulatory, and competitive changes. Deposit growth is the primary source of funding. Retail core and time deposits as a percentage of total funding sources were 74.7% at June 30, 2003, and 75.2% at June 30, 2002. Wholesale funding and broker and national certificates of deposit represent the balance of the Company's total funding needs.
Table 4: Period-end Deposit Composition June 30, 2003 2002 (dollars in thousands) $ % $ % Non-interest bearing demand $ 54,052 17.8% $ 36,947 13.6% Interest-bearing demand and savings 38,194 12.6% 30,526 11.3% Money market deposits 65,693 21.6% 69,467 25.6% Retail time deposits less than $100 60,588 19.9% 60,070 22.2% Retail time deposits $100 and over 40,628 13.4% 37,709 13.9% Broker & national time deposits less than $100 11,860 3.9% 13,144 4.8% Broker & national time deposits $100 and over 32,673 10.8% 23,225 8.6% Totals $ 303,688 100.0% $ 271,088 100.0%
13 The interest rate paid on money market deposits is adjustable based on the Company's discretion but generally tracks the movements of national money market funds. As short-term interest rates have decreased during 2002 and 2003, the yield on this account has declined substantially. Deposits due to investors as part of the Company's secondary market loan servicing activities contributed to the increase in total non-interest bearing deposits over the prior June 30, 2002. As a source of low cost long-term deposits and in connection with a new full service retail location in Rhinelander, Wisconsin, the Company is aggressively seeking commercial non-interest bearing deposits as well as consumer core deposits.
Table 5: Summary of Changes by Significant Deposit Source June 30, Change from prior year (dollars in thousands) 2003 2002 $ % Total time deposits $100 and over $ 73,301 $ 60,934 $ 12,367 20.3% Total broker and national time deposits 44,533 36,369 8,164 22.4% Total retail time deposits 101,216 97,779 3,437 3.5% Core deposits, including money market deposits 157,939 136,940 20,999 15.3%
The Company's retail deposit offices are in locations that demand consumer retail deposit rates generally greater than national rates for equivalent certificate of deposit terms. To fund larger commercial loan originations or acquire other large blocks of funding, the Company actively purchases broker and other national time deposits. The Company actively manages such deposits to control the potential volatility of such funds while lowering overall deposit borrowing costs. Consequently, broker and national deposits increased substantially over the prior year, while local retail deposits have shown modest growth in comparison. Unused credit advances from the Federal Home Loan Bank of Chicago available to the Company at June 30, 2003 totaled approximately $44 million. In addition, the Company had unused commitments from other correspondent banks for federal funds purchased up to $22.5 million. The primary alternative funding sources utilized are Federal Home Loan Bank advances, federal funds purchased, repurchase agreements from a base of individuals, businesses and public entities, and brokered time deposits. The Company believes its current liquidity position and sources of funds for liquidity management is adequate. Table 6 below presents maturity repricing information as of June 30, 2003. The following repricing methodologies should be noted: 1. Money market deposit accounts are considered fully repriced within 90 days. NOW and savings accounts are considered "core" deposits as they are generally insensitive to interest rate changes. These deposits are considered to reprice beyond 5 years. 2. Nonaccrual loans are considered to reprice beyond 5 years. 14 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.
Table 6: Interest Rate Sensitivity Gap Analysis June 30, 2003 (dollars in thousands) 0-90 Days 91-180 days 181-365 days 1-2 yrs. Bynd 2-5 yrs. Beyond 5 yrs. Total Earning assets: Loans $ 97,970 $ 28,256 $ 33,771 $ 58,382 $ 52,678 $ 7,996 $ 279,053 Securities 8,021 6,458 10,079 17,789 14,958 15,426 72,731 FHLB stock 2,364 2,364 Other earning assets 5,785 5,785 Total $ 114,140 $ 34,714 $ 43,850 $ 76,171 $ 67,636 $ 23,422 $ 359,933 Cumulative rate sensitive assets $ 114,140 $ 148,854 $ 192,704 $ 268,875 $ 336,511 $ 359,933 Interest-bearing liabilities Interest-bearing deposits $ 95,640 $ 19,987 $ 38,022 $ 22,839 $ 32,676 $ 40,472 $ 249,636 FHLB advances 5,000 6,000 19,000 8,000 38,000 Other borrowings 210 329 2,263 400 1,850 5,052 Total $ 100,850 $ 26,316 $ 40,285 $ 42,239 $ 42,526 $ 40,472 $ 292,688 Cumulative interest sensitive liabilities $ 100,850 $ 127,166 $ 167,451 $ 209,690 $ 252,216 $ 292,688 Interest sensitivity gap for the individual period $ 13,290 $ 8,398 $ 3,565 $ 33,932 $ 25,110 $ (17,050) Ratio of rate sensitive assets to rate sensitive liabilities for the individual period 113.2% 131.9% 108.8% 180.3% 159.0% 57.9% Cumulative interest sensitivity gap $ 13,290 $ 21,688 $ 25,253 $ 59,185 $ 84,295 $ 67,245 Cumulative ratio of rate sensitive assets to rate sensitive liabilities 113.2% 117.1% 115.1% 128.2% 133.4% 123.0%
The Asset/Liability Committee uses financial modeling techniques that measure the interest rate risk. Policies established by the Bank's Asset/Liability Committee are intended to limit exposure of earnings at risk. A formal liquidity contingency plan exists that directs management to the least expensive liquidity sources to fund sudden and unanticipated liquidity needs. The Company also uses various policy measures to assess adequacy of the Company's liquidity and interest rate risk as described below. 15 Basic Surplus The Company measures basic surplus as the amount of existing net liquid assets (after deducting short-term liabilities and coverage for anticipated deposit funding outflows during the next 30 days) divided by total assets. The basic surplus calculation does not consider unused but available correspondent bank federal funds purchased, as those funds are subject to availability based on the correspondent bank's own liquidity needs and therefore are not guaranteed contractual funds. At June 30, 2003, the Company's basic surplus, including available FHLB advances not yet utilized was 10.5% and above the 5% minimum required by policy. Interest Rate Risk Limits The Company balances the need for liquidity with the opportunity for increased net interest income available from longer term loans held for investment and securities. To measure the impact on net interest income from interest rate changes, the Company models interest rate simulations on a quarterly basis. Company policy is that projected net interest income over the next 12 months will not be reduced by more than 15% given a change in interest rates of up to 200 basis points. At June 30, 2003, net interest income for the next 12 months was projected to increase 2.59% if rates increase 200 basis points, and was projected to decrease 1.67% if rates decrease 100 basis points, which is less than the 15% required by policy and was considered acceptable by management. Core Funding Utilization To assess whether interest rate sensitivity beyond one year helps mitigate or exacerbate the short-term rate sensitive position, a quarterly measure of core funding utilization is made. Core funding is defined as liabilities with a maturity in excess of 60 months and capital. "Core" deposits including DDA, NOW and non-maturity savings accounts (except money market accounts) are also considered core long-term funding sources. The core funding utilization ratio is defined as assets with a maturity in excess of 60 months divided by core funding. The Company's target for the core funding utilization ratio is to remain at 80% or below given the same 200 basis point changes in rates that apply to the guidelines for interest rate risk limits exposure described previously. At June 30, 2003, the Company's core funding utilization ratio was projected to be 40.8% if rates increase 200 basis points and were therefore within policy requirements. CAPITAL RESOURCES Stockholders' equity at June 30, 2003 increased $3,336 to $30,769, or 12.2% from $27,433 at June 30, 2002. Stockholders' equity included unrealized gains on securities available for sale, net of their tax effect, of $1,481 at June 30, 2003 compared to unrealized gains of $922 at June 30, 2002. The primary reason for the increase in unrealized gains on securities is the continued decline in long-term reinvestment rates in the overall financial markets. This rate decline increases the value of existing securities purchased at previously higher rates. The Company 16 intends to continue to hold securities carrying an unrealized gain as a support to net interest margin rather than sell such securities at a gain due to currently unfavorable reinvestment rates. The adequacy of the Company's capital is regularly reviewed to ensure sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. As of June 30, the Subsidiary Bank's Tier 1 risk-based capital ratio, total risk-based capital, and Tier 1 leverage ratio were well in excess of regulatory minimums and were classified as "well- capitalized". The Company maintains an annual, ongoing share repurchase program of up to 1% of outstanding shares per year. During the quarter ended June 30, 2003, the Company repurchased 14,500 shares at an average price of $33.86 per share. The Company expects to purchase an additional 400 shares during the remainder of 2003. There were no shares repurchased during the quarter ended June 30, 2002. Management anticipates, with the new Rhinelander location, needing existing capital to significantly increase loans held for investment in 2003. Although the Company is currently purchasing treasury shares under the buyback program described above, large scale stock buybacks or significant increases in dividend payments are not anticipated. Effective with the $.30 dividend declared June 17, 2003, the Company intends to equalize the amounts of the semi-annual cash dividends. Accordingly, under the dividend policy, the Company expects that the dividend to be paid in January, 2004 will be less than the January 2003 dividend, but that the total dividends to be paid in July 2003 and January 2004 will exceed the $.565 per share total dividends paid in July 2002 and January 2003. The Company also reaffirmed its goal of increasing its shareholder dividend on an annual basis subject to operating results and financial condition of the Company.
Table 7: Capital Ratios - Consolidated Holding Company June 30, Dec. 31, 2003 2002 2002 Tier 1 capital to period end tangible assets (leverage ratio) 7.72% 7.76% 7.55% Tier 1 capital to adjusted risk-weighted assets 9.96% 10.12% 10.25% Total capital to adjusted risk-weighted assets 11.16% 11.36% 11.41%
On November 19, 2002, the Company's shareholders approved an increase in authorized shares from 1,000,000 to 3,000,000, allowing the Board of Directors to effect a 2 for 1 stock split paid on December 2, 2002. All references in the accompanying financial statements and statistical analysis to the number of common shares and per share amounts for 2002 have been restated to reflect the split. PREMISES AND EQUIPMENT The Company recently announced construction of a new bank and financial services office and administrative headquarters located on property adjacent to the existing Wausau main office location. Construction of the 32,000 square foot office and drive-through canopy is anticipated to begin in August with completion by the end of the second quarter 2004. The existing Wausau 17 main office which has been used since the Bank opened in 1962 and as most recently expanded during 1992 will be razed. Building project costs including necessary furniture, fixtures, and equipment are estimated to be $4.4 million. Annual depreciation expense after this investment in fixed assets and equipment Is estimated to increase $165 ($100 after income tax benefits). As of June 30, 2003 approximately $172 had been spent on the project primarily for architectural design fees and site preparation. The amount of interest capitalized as project costs at quarter-end was insignificant. RESULTS OF OPERATIONS Net income for the quarter ended June 30, 2003 totaled $1,057, or $.64 per basic earnings per share, and $.63 for diluted earnings per share. Comparatively, net income for the quarter ended June 30, 2002 was $1,024, or $.61 per share for basic and diluted earnings per share. Operating results for the second quarter 2003 generated an annualized return on average assets of 1.14% and an annualized return on average equity of 13.82%, compared to 1.22% and 15.23% for the comparable period in 2002. The following Table 8 presents consolidated quarterly summary financial data of PSB Holdings, Inc. and Subsidiary. 18
Table 8: Financial Summary (dollars in thousands, except per share data) Quarter ended June 30, March 31, Dec. 31, Sept. 30, June 30, EARNINGS AND DIVIDENDS: 2003 2003 2002 2002 2002 Net interest income $ 3,268 $ 3,232 $ 3,288 $ 3,256 $ 3,104 Provision for loan losses $ 240 $ 225 $ 300 $ 450 $ 180 Other noninterest income $ 726 $ 1,122 $ 1,040 $ 841 $ 602 Other noninterest expense $ 2,220 $ 2,317 $ 2,072 $ 2,097 $ 2,046 Net income $ 1,057 $ 1,224 $ 1,332 $ 1,051 $ 1,024 Basic earnings per share $ 0.64 $ 0.73 $ 0.80 $ 0.63 $ 0.61 Diluted earnings per share $ 0.63 $ 0.73 $ 0.80 $ 0.63 $ 0.61 Dividends declared per share $ 0.30 $ - $ 0.375 $ - $ 0.19 Net book value per share $ 18.63 $ 18.24 $ 17.59 $ 16.83 $ 16.34 Dividend payout ratio 46.88% 0.00% 46.88% 0.00% 31.15% Average common shares outstanding 1,661,142 1,665,729 1,667,341 1,672,836 1,678,832 BALANCE SHEET - AVERAGE BALANCES: Loans receivable, net of allowances for loss $ 265,863 $ 256,715 $ 255,591 $ 249,691 $ 240,602 Assets $ 371,537 $ 365,906 $ 363,507 $ 355,224 $ 336,125 Deposits $ 292,698 $ 289,635 $ 291,049 $ 283,889 $ 265,931 Stockholders' equity $ 30,670 $ 29,848 $ 28,677 $ 27,792 $ 26,972 PERFORMANCE RATIOS: Return on average assets (1) 1.14% 1.36% 1.45% 1.17% 1.22% Return on average stockholders' equity (1) 13.82% 16.63% 18.43% 15.00% 15.23% Average tangible stockholders' equity to average assets 7.92% 7.84% 7.71% 7.61% 7.87% Net loan charge-offs to average loans 0.01% 0.03% 0.21% 0.12% 0.03% Nonperforming loans to gross loans 1.06% 1.13% 0.94% 1.74% 1.23% Allowance for loan losses to gross loans 1.26% 1.28% 1.22% 1.33% 1.30% Net interest rate margin (1)(2) 3.83% 3.89% 3.89% 3.95% 4.04% Net interest rate spread (1)(2) 3.34% 3.42% 3.36% 3.43% 3.53% Service fee revenue as a percent of average demand deposits (1) 2.83% 2.99% 2.98% 3.41% 3.76% Noninterest income as a percent of gross revenue 12.13% 17.49% 15.81% 13.05% 10.02% Efficiency ratio 53.86% 51.67% 46.42% 49.52% 53.23% Noninterest expenses to average assets (1) 2.40% 2.57% 2.26% 2.34% 2.44% STOCK PRICE INFORMATION: High $ 34.00 $ 27.25 $ 25.00 $ 21.05 $ 19.63 Low $ 30.00 $ 23.75 $ 20.55 $ 19.18 $ 17.50 Market value at quarter-end $ 33.25 $ 27.25 $ 25.00 $ 20.58 $ 19.25 (1) Annualized (2) The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.
19 NET INTEREST INCOME Net interest income is the most significant component of earnings. Tax adjusted net interest income increased $154 from $3,242 for the quarter ended June 30, 2002 to $3,396 for the current quarter ended June 30, 2003. For the comparable 6-month periods ending June 30, 2003 and 2002, tax adjusted net interest income increased $392, comprised of an increased $660 from additional asset volume, but decreased $268 due to changes in interest rates. Tax-adjusted net interest margin as a percent of average interest earning assets decreased from 4.04 % in June 2002 to 3.83 % in June 2003. Net interest margin was 3.95 % for the year ended December 31, 2002. In addition, tax adjusted net interest income of $3,396 for the quarter ended June 30, 2003 increased over $3,362 of tax adjusted net interest income during the prior quarter ended March 2003. However, this level is still less than or similar to the quarters ended December 2002 ($3,424) and September 2002 ($3,394). During 2002, the Company benefited from a falling interest rate environment as deposits and short-term borrowings have repriced faster at lower rates than loans with longer terms and maturities. However, the prolonged low interest rate environment through June 30, 2003 has put more pressure on loan and asset yields than on already low cost of funds. In addition, the Company has positioned itself for an eventual increase in interest rates by extending maturities of certain liabilities at a higher cost. The Company continues to be asset sensitive as seen in Table 6 with a cumulative ratio of rate sensitive assets to rate sensitive liabilities of 115.1%. In the near term, the Company expects continued net interest margin compression due to assets repricing if stable interest rates are assumed. Some primary strategies currently utilized by the Company to increase net interest margin include: 1. Consider national and broker certificate of deposit offering rates when determining local retail certificate pricing. Ensure core deposits are priced appropriately considering existing rates and changes in short-term interest rates in the national markets. 2. Increase interest rate pricing on commercial loans that provide option features to the borrower, such as prepayment without penalty. 3. Leverage existing capital and the new market location in Rhinelander, Wisconsin to originated lower margin asset growth and increase net interest income dollars although net interest margin percentage would likely decline. Yield on earning assets decreased 84 basis points to 6.07% compared to 6.91% at June 30, 2002. Similarly, the costs for interest-bearing liabilities decreased 65 basis points to 2.73% from 3.38% at June 30, 2002. Due to national and global factors, both economic and social, it is difficult to predict whether short-term rates are at the bottom of the rate cycle. Management believes it is well positioned for future rate increases, as well as continued or lower rate environments relative to competitors. Refer to the previous discussion on management of net interest margin and the liquidity for the Company's strategies and positions in this area. Management expects the net interest margin to continue to come under pressure and decrease during the third quarter 2003 by 7 to 10 basis points due to lower reinvestment yields on the investment securities portfolio and the impact of the recent .25% reduction in the federal funds rate on prime rate adjustable loans. 20
Table 9A: Net Interest Income Analysis (Quarter) (dollars in thousands) Quarter ended June 30, 2003 Quarter ended June 30, 2002 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: Loans (1)(2) $ 269,259 $ 4,490 6.69% $ 243,797 $ 4,469 7.35% Taxable securities 55,008 501 3.65% 49,189 678 5.53% Tax-exempt securities (2) 21,670 335 6.20% 20,723 344 6.66% FHLB stock 2,340 37 6.34% 2,202 28 5.10% Other 7,766 23 1.19% 5,771 24 1.67% Total (2) 356,043 5,386 6.07% 321,682 5,543 6.91% Non-interest-earning assets: Cash and due from banks 9,518 9,389 Premises and equipment, net 6,225 5,127 Other assets 3,147 3,122 Allowance for loan losses (3,396) (3,195) Total $371,537 $ 336,125 Liabilities & stockholders' equity Interest-bearing liabilities: Savings and demand deposits $ 37,393 $ 57 0.61% $ 30,353 $ 86 1.14% Money market deposits 66,067 175 1.06% 71,764 267 1.49% Time deposits 143,135 1,200 3.36% 129,551 1,343 4.16% FHLB borrowings 38,000 506 5.34% 38,000 571 6.03% Other borrowings 7,690 52 2.71% 3,324 34 4.10% Total 292,285 1,990 2.73% 272,992 2,301 3.38% Non-interest-bearing liabilities: Demand deposits 46,103 34,263 Other liabilities 2,479 1,898 Stockholders' equity 30,670 26,972 Total $ 371,537 $ 336,125 Net interest income 3,396 3,242 Rate spread 3.34% 3.53% Net yield on interest-earning assets 3.83% 4.04% > (1) Nonaccrual loans are included in the daily average loan balances outstanding. (2) The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.
21
Table 9B: Net Interest Income Analysis (Six Months) (dollars in thousands) Six months ended June 30, 2003 Six months ended June 30, 2002 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: Loans (1)(2) $ 264,619 $ 8,901 6.78% $ 242,564 $ 8,875 7.38% Taxable securities 56,601 1,116 3.98% 49,506 1,368 5.57% Tax-exempt securities (2) 21,626 673 6.28% 20,385 683 6.76% FHLB stock 2,322 73 6.34% 2,189 54 4.97% Other 7,916 46 1.17% 7,452 63 1.70% Total (2) 353,084 10,809 6.17% 322,096 11,043 6.91% Non-interest-earning assets: Cash and due from banks 9,571 9,274 Premises and equipment, net 6,193 4,989 Other assets 3,194 3,207 Allowance for loan losses (3,305) (3,116) Total $ 368,737 $ 336,450 Liabilities & stockholders' equity Interest-bearing liabilities: Savings and demand deposits $ 37,560 $ 119 0.64% $ 30,955 $ 179 1.17% Money market deposits 68,004 359 1.06% 73,739 551 1.51% Time deposits 142,013 2,466 3.50% 126,981 2,732 4.34% FHLB borrowings 38,000 1,014 5.38% 38,000 1,135 6.02% Other borrowings 6,878 93 2.73% 3,602 80 4.48% Total 292,455 4,051 2.79% 273,277 4,677 3.45% Non-interest-bearing liabilities: Demand deposits 43,598 34,840 Other liabilities 2,424 1,909 Stockholders' equity 30,260 26,424 Total $ 368,737 $ 336,450 Net interest income 6,758 6,366 Rate spread 3.38% 3.46% Net yield on interest-earning assets 3.86% 3.99% (1) Nonaccrual loans are included in the daily average loan balances outstanding. (2) The yield on tax-exempt loans and securities is computed on a tax- equivalent basis using a tax rate of 34%.
22
Table 10: Interest Expense and Expense Volume and Rate Analysis Six months ended June 30, 2003 2003 compared to 2002 increase (decrease) due to (1) (dollars in thousands) Volume Rate Net Interest earned on: Loans (2) $ 807 $ (781) $ 26 Taxable securities 196 (448) (252) Tax-exempt securities (2) 42 (52) (10) FHLB stock 3 16 19 Other interest income 4 (21) (17) Total 1,052 (1,286) (234) Interest paid on: Savings and demand deposits 38 (98) (60) Money market deposits (43) (149) (192) Time deposits 324 (590) (266) FHLB borrowings - (121) (121) Other borrowings 73 (60) 13 Total 392 (1,018) (626) Net interest earnings $ 660 $ (268) $ 392 (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) The yield on tax-exempt loans and investment securities has been adjusted to its fully taxable equivalent using a 34% tax rate.
PROVISION FOR LOAN LOSSES Management determines the adequacy of the provision for loan losses based on past loan experience, current economic conditions and composition of the loan portfolio. Accordingly, the amount charged to expense is based on management's evaluation of the loan portfolio. It is the Company's policy that when available information confirms that specific loans and leases, or portions thereof, including impaired loans, are uncollectible, these amounts are promptly charged off against the allowance. The provision for loan losses was $240 for the three months ended June 30, 2003, and $180 for the three months ended June 30, 2002. Net charge-offs as a percentage of average loans outstanding were .01% and .03% during the three months ended June 30, 2003 and 2002, respectively. Nonperforming loans are reviewed to determine exposure for potential loss within each loan category. The adequacy of the allowance for loan losses is assessed based on credit quality and other pertinent loan portfolio information. The adequacy of the allowance and the provision for 23 loan losses is consistent with the composition of the loan portfolio and recent credit quality history. NONINTEREST INCOME Noninterest income increased $124 to $726 during the three months ended June 30, 2003, from $602 in the comparable second quarter of 2002. There were no gains or losses on securities during the three months ended June 30, 2003 and 2002. The majority of this growth ($69) was from an increase of income from the sale of long-term fixed rate mortgage loans, net of servicing right amortization and provision for impairment. The majority of loans sold to outside investors continued to be serviced by the Bank directly with the customer. Gain on sale and servicing of such loans during the quarter was $216 in June 2003 compared to $147 during June 2002. However, during June 2003, additional expense from a change in accounting estimate related to accounting for mortgage servicing rights of $236 was recorded, as well as an $18 provision for impairment of servicing rights reducing gain on sale and servicing of loans by $254 in total. During June, the Company contracted with an outside consultant for monthly mortgage servicing right (MSR) accounting services due to continued growth in serviced mortgage loans. The Company began servicing mortgage loans for other investors in November 2000. The Company adopted new estimates related to customer mortgage payment activity as part of the new accounting model. Serviced loans are now broken down into a greater number of "pools" with amortization and impairment calculated based on individual customer activity within each pool. Initial servicing rights are based on national prepayment estimates at the time of origination. The new accounting model provides an estimated original MSR cost lower than that using the previous estimates, and amortizes that cost faster than under the Company's previous model. The change in accounting estimate reduced gain on sale and servicing of loans by $236 ($143 after tax benefits, or approximately $.09 per diluted earnings per share). Through June 30, 2003, the gain on sale and servicing of loans after the change in estimate is more than double the prior year's activity through June 30, 2002, and has substantially enhanced income as interest margins declined during 2003. Management does not expect the current level of mortgage refinancing income to continue during all of 2003. The Company intends to replace this income with ongoing servicing fees of the existing mortgage portfolio and additional investment and insurance sales income. During 2003, the Bank increased the number of commissioned investment sales professionals on staff. Investment and insurance sales commissions were $188 during the six months ended June 2003 compared to $96 in the same period ended June 2002. At June 30, 2003, the Company serviced $137,476 of loans for outside investors compared to $50,114 serviced at June 30, 2002. The following table summarizes the activity in mortgage servicing rights for the six-month period ended June 30, 2003. The valuation allowance was recorded to recognize impairment of the mortgage servicing right asset due to declines in interest rates that may cause borrowers to prepay mortgage principal much faster than estimated at the time the mortgage was originated. 24
Originated Valuation MSR Allowance Total January 1, 2003 $ 812 $ (115) $ 697 Originated servicing 482 482 Amortization charged to earnings (472) (472) Valuation adjustment charged to earnings (18) (18) June 30, 2003 $ 822 $ (133) $ 689
As a FHLB Mortgage Partnership Finance loan servicer, the Company has provided a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of the original loan principal sold to the FHLB. At June 30, 2003, the maximum Company obligation on the entire servicing portfolio for such guarantees would be approximately $428 (.31% of the serviced principal). Due historical strength of mortgage borrowers in our markets, the original 1% of principal loss pool provided by the FHLB, and current economic conditions, management believes the possibility of losses under guarantees to the FHLB to be remote. NONINTEREST EXPENSE Noninterest operating expenses increased $174 to $2,220 in June 2003 compared to $2,046 during June 2002, an increase of 8.5%. Increases in employee salaries and benefits totaled $217, as bank employees were granted inflationary and merit increases effective January 1, 2003 averaging 6.1%. In addition, the Company hired additional lenders and investment sales representatives during 2003 who are expected to make a significant impact in our new Rhinelander, Wisconsin full service office and other bank locations. In addition, operating expenses as a percent of average assets declined to 2.40% during the second quarter June 2003 compared to 2.44% during June 2002. During 2003, the Company implemented new expenditure review and approval procedures by location or cost/revenue center which have focused employees on cost control and achieving budgeted net income results. Year to date, additional operating costs have been offset by increased revenue, as the expense efficiency ratio improved to 52.72% for the six months ended June 2003 compared to 53.87% in the prior year. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the information provided in response to Item 7A of the Company's Form 10-K for the year ended December 31, 2002. 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 the Company's President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15(c) under the Securities Exchange Act of 1934. Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in all material respects. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation, nor were there any significant deficiencies or material weaknesses identified which required any corrective action to be taken. 26 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On April 1, 2003 and May 22, 2003, the Company distributed a total of 1,667 shares of its common stock (valued for this purpose at $27.25 per share) to its directors in lieu of cash payments under the director's incentive compensation plan. This distribution was exempt from registration under Section 4(2) and 3(a)(11) of the Securities Act of 1933, as amended. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS The annual meeting of shareholders of the Company was held on April 15, 2003. The matters voted upon, including the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as to each such matter were as follows:
Proposal No. 1 - Amendment of Article 5 of Restated Articles of Incorporation Broker For Against Abstain Non-Vote 737,428 242,474 10,976 170,179
Proposal No. 2 - Election of Directors Broker For Withheld Non-Vote Gordon P. Connor 1,135,325 25,662 0 Patrick L. Crooks 1,155,455 5,532 0 William J. Fish 1,155,455 5,532 0 Charles A. Ghidorzi 1,125,825 35,162 0 Gordon P. Gullickson 1,154,835 6,152 0 David K. Kopperud 1,155,455 5,532 0 Thomas R. Polzer 1,155,275 5,712 0 William M. Reif 1,155,455 5,532 0 Thomas A. Riiser 1,155,455 5,532 0 John H. Sonnentag 1,135,135 25,852 0
27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits. Exhibits required by Item 601 of Regulation S-K. Exhibit Number Description 31.1 Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 31.2 Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: Form 8-K dated April 22, 2003. The Company filed a current report on Form 8-K on April 22, 2003, reporting earnings for the first quarter ended March 31, 2003, under Item 5 and additional related disclosure under Items 9 and 12. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PSB HOLDINGS, INC. August 14, 2003 SCOTT M. CATTANACH Scott M. Cattanach Treasurer (On behalf of the Registrant and as Principal Financial Officer) 29 EXHIBIT INDEX TO FORM 10-Q OF PSB HOLDINGS, INC. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 PURSUANT TO SECTION 102(D) OF REGULATION S-T (17 C.F.R. SECTION 232.102(D)) The following exhibits are filed as part this report: 31.1 Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 31.2 Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002 EX-31.1 4 psbex311.txt PSB HOLDINGS, INC. EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION UNDER SECTION 302 OF SARBANES-OXLEY ACT OF 2002 I, David K. Kopperud, 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) 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 (c) 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: August 14, 2003 DAVID K. KOPPERUD David K. Kopperud President and Chief Executive Officer EX-31.2 5 psbex312.txt PSB HOLDINGS, INC. EXHIBIT 31.2 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) 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 (c) 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: August 14, 2003 SCOTT M. CATTANACH Scott M. Cattanach Treasurer (Principal Financial Officer) EX-32.1 6 psbex321.txt PSB HOLDINGS, INC. EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION OF PSB HOLDINGS, INC. UNDER SECTION 906 OF SARBANES-OXLEY ACT OF 2002 The undersigned Chief Executive Officer of PSB Holdings, Inc. (the "Company") certifies 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 June 30, 2003 (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: August 14, 2003 DAVID K. KOPPERUD David K. Kopperud President and CEO SCOTT M. CATTANACH Scott M. Cattanach Treasurer (Chief Financial Officer) A signed original of this written statement required by Section 906 has been provided to PSB Holdings, Inc. and will be retained by PSB Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----