-----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, K5OWOOmFB6PGizBA9e/gm80QygtEdAZfp6vfzo0lAMEm2QCnQ7+r9clS94FfEiDt 1a+Y7cFk2F8gDA1WnHOWIw== 0000916480-04-000087.txt : 20040816 0000916480-04-000087.hdr.sgml : 20040816 20040816121514 ACCESSION NUMBER: 0000916480-04-000087 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 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: 04977157 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 psb10q63004.txt PSB FORM 10-Q - 6/30/04 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 0-26480 PSB HOLDINGS, INC. (Exact name of registrant as specified in charter) WISCONSIN 39-1804877 (State of incorporation)(I.R.S. Employer Identification Number) 1905 West Stewart Avenue Wausau, Wisconsin 54401 (Address of principal executive office) Registrant's telephone number, including area code: 715-842-2191 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X The number of common shares outstanding at August 9, 2004 was 1,716,330. PSB HOLDINGS, INC. FORM 10-Q Quarter Ended June 30, 2004 Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets June 30, 2004 (unaudited) and December 31, 2003 (derived from audited financial statements) 1 Consolidated Statements of Income Three Months and Six Months Ended June 30, 2004 and 2003 (unaudited) 2 Consolidated Statement of Changes in Stockholders' Equity Six Months Ended June 30, 2004 (unaudited) 3 Consolidated Statements of Cash Flows Six Months Ended June 30, 2004 and 2003 (unaudited) 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 25 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 6. Exhibits and Reports on Form 8-K 27 i
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PSB HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS June 30, 2004 unaudited, December 31, 2003 derived from audited financial statements) June 30, December 31, (dollars in thousands, except per share data) 2004 2003 ASSETS Cash and due from banks $ 15,147 $ 13,754 Interest-bearing deposits and money market funds 2,365 1,214 Federal funds sold - 3,959 Cash and cash equivalents 17,512 18,927 Securities available for sale (at fair value) 71,461 72,472 Federal Home Loan Bank stock (at cost) 2,792 2,444 Loans held for sale - 207 Loans receivable, net of allowance for loan losses of $3,906 and $3,536, respectively 325,320 304,339 Accrued interest receivable 1,724 1,617 Foreclosed assets 46 84 Premises and equipment 10,495 7,557 Mortgage servicing rights, net 803 814 Other assets 1,063 472 TOTAL ASSETS $431,216 $408,933 LIABILITIES Non-interest-bearing deposits $ 46,901 $ 50,563 Interest-bearing deposits 293,375 265,851 Total deposits 340,276 316,414 Federal Home Loan Bank advances 47,000 47,000 Other borrowings 9,394 10,475 Accrued expenses and other liabilities 2,307 2,903 Total liabilities 398,977 376,792 STOCKHOLDERS' EQUITY Common stock - no par value with a stated value of $1 per share: Authorized - 3,000,000 shares Issued - 1,887,179 shares 1,887 1,887 Additional paid-in capital 9,694 9,694 Retained earnings 24,007 22,789 Accumulated other comprehensive income (loss) (4) 844 Treasury stock, at cost - 161,549 and 153,781 shares, respectively (3,345) (3,073) Total stockholders' equity 32,239 32,141 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $431,216 $408,933
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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) 2004 2003 2004 2003 Interest and dividend income: Loans, including fees $ 4,714 $ 4,476 $ 9,268 $ 8,872 Securities: Taxable 453 501 914 1,116 Tax-exempt 245 221 488 444 Other interest and dividends 46 60 92 119 Total interest and dividend income 5,458 5,258 10,762 10,551 Interest expense: Deposits 1,360 1,432 2,651 2,944 FHLB advances 504 506 970 1,014 Other borrowings 77 52 150 93 Total interest expense 1,941 1,990 3,771 4,051 Net interest income 3,517 3,268 6,991 6,500 Provision for loan losses 240 240 480 465 Net interest income after provision for loan losses 3,277 3,028 6,511 6,035 Noninterest income: Service fees 322 325 613 628 Mortgage banking 308 216 468 844 Investment and insurance sales commissions 90 89 181 188 Net gain on sale of securities - - 111 - Other noninterest income 135 96 222 188 Total noninterest income 855 726 1,595 1,848 Noninterest expense: Salaries and employee benefits 1,547 1,387 3,095 2,835 Occupancy and facilities 361 285 662 573 Loss on abandonment of premises and equipment 329 - 329 - Data processing and other office operations 187 148 347 287 Advertising and promotion 64 51 98 88 Other noninterest expenses 426 349 985 754 Total noninterest expense 2,914 2,220 5,516 4,537 Income before provision for income taxes 1,218 1,534 2,590 3,346 Provision for income taxes 436 477 854 1,065 Net income $ 782 $ 1,057 $ 1,736 $ 2,281 Basic earnings per share $ 0.45 $ 0.61 $ 1.00 $ 1.31 Diluted earnings per share $ 0.45 $ 0.60 $ 0.99 $ 1.30
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PSB HOLDINGS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Six months ended June 30, 2004 - unaudited Accumulated Other Additional Comprehensive Common Paid-in Retained Income Treasury (dollars in thousands) Stock Capital Earnings (Loss) Stock Totals Balance January 1, 2004 $1,887 $9,694 $22,789 $844 $(3,073) $32,141 Comprehensive income: Net income 1,736 1,736 Unrealized loss on securities available for sale, net of tax (781) (781) Reclassification adjustment for security gain included in net income, net of tax (67) (67) Total comprehensive income 888 Purchase of treasury stock (280) (280) Distribution of treasury stock in settlement of liability to Company directors 8 8 Cash dividends declared $.30 per share (518) (518) Balance June 30, 2004 $1,887 $9,694 $24,007 $ (4) $(3,345) 32,239
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PSB HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2004 and 2003 - unaudited (dollars in thousands) 2004 2003 Cash flows from operating activities: Net income $ 1,736 $ 2,281 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and net amortization 587 1,017 Provision for loan losses 480 465 Gain on sale of mortgage loans (433) (1,153) Provision for servicing right valuation allowance 48 18 Loss on abandonment of premises and equipment 329 - Gain on sale of foreclosed assets (37) (4) Gain on sale of securities (111) - FHLB stock dividends (77) (100) Changes in operating assets and liabilities: Accrued interest receivable (107) 58 Other assets (119) (68) Other liabilities (588) (561) Net cash provided by operating activities 1,708 1,953 Cash flows from investing activities: Proceeds from sale and maturities of: Securities available for sale 6,688 25,306 Payment for purchase of: Securities available for sale (7,005) (16,834) Purchase of FHLB stock (271) - Net increase in loans (20,962) (18,302) Capital expenditures (3,563) (317) Proceeds from sale of foreclosed assets 7 132 Net cash used in investing activities (25,106) (10,015) Cash flows from financing activities: Net increase (decrease) in non-interest-bearing deposits (3,662) 8,594 Net increase in interest-bearing deposits 27,524 (2,737) Proceeds from long-term FHLB advances 10,000 10,000 Repayments of long-term FHLB advances (10,000) (10,000) Net increase (decrease) in other borrowings (1,081) 1,750 Dividends declared (518) (496) Purchase of treasury stock (280) (538) Net cash provided by financing activities 21,983 6,573 Net decrease in cash and cash equivalents (1,415) (1,489) Cash and cash equivalents at beginning 18,927 21,552 Cash and cash equivalents at end $17,512 $20,063 Supplemental cash flow information: Cash paid during the period for: Interest $ 3,810 $ 4,205 Income taxes 883 1,020 Noncash investing and financing activities: Loans charged off $117 $128 Loans transferred to foreclosed assets - 3 Loans originated on sale of foreclosed assets 70 67 Distribution of treasury stock in settlement of liability to Company directors 8 45
4 PSB Holdings, Inc. Notes to Consolidated Financial Statements - Unaudited NOTE 1 - GENERAL In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly PSB Holdings, Inc.'s ("PSB") financial position, results of its operations, and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in the PSB's 2003 annual report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are susceptible to significant change include the determination of the allowance for loan losses, mortgage servicing right asset, and the valuation of investment securities. NOTE 2 - STOCK-BASED COMPENSATION PSB records expense relative to stock-based compensation using the "intrinsic value method". Since the exercise price is equal to the fair value of PSB's common stock on the date of the award, the intrinsic value of PSB's stock options is "zero" at the time of the award and no expense is recorded. As permitted by generally accepted accounting principles, PSB has not adopted the "fair value method" of expense recognition for stock-based compensation awards. Rather, the effects of the fair value method on PSB's earnings are presented on a pro forma basis. Because no grants of stock options were made during the three months and six months ended June 30, 2004 and 2003, there was no pro forma impact to net income or earnings per share during these periods. Under the terms of an incentive stock option plan adopted during 2001, shares of unissued common stock are reserved for options to officers and key employees at prices not less than the fair market value of the shares at the date of the grant. These options expire 10 years after the grant date with the first options scheduled to expire beginning during 2011. As of June 30, 2004, 28,237 options outstanding were eligible to be exercised at a weighted average exercise price of 5 $16.00 per share. No additional shares of common stock remain reserved for future grants under the option plan approved by the shareholders. NOTE 3 - EARNINGS PER SHARE Basic earnings per share of common stock are based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options. Presented below are the calculations for basic and diluted earnings per share:
Three months ended Six months ended (dollars in thousands, except per share data - unaudited) June 30, June 30, 2004 2003 2004 2003 Net income $ 782 $ 1,057 $ 1,736 $ 2,281 Weighted average shares outstanding 1,729,322 1,744,199 1,731,426 1,746,594 Effect of dilutive stock options outstanding 15,310 13,654 15,221 11,845 Diluted weighted average shares outstanding 1,744,632 1,757,853 1,746,647 1,758,439 Basic earnings per share $ 0.45 $ 0.61 $ 1.00 $ 1.31 Diluted earnings per share $ 0.45 $ 0.60 $ 0.99 $ 1.30
NOTE 4 - COMPREHENSIVE INCOME Comprehensive income as defined by current accounting standards for the three months and six months ended June 30, 2004 and 2003 is as follows:
Three months ended Six months ended June 30, June 30, (dollars in thousands - unaudited) 2004 2003 2004 2003 Net income $ 782 $ 1,057 $ 1,736 $ 2,281 Unrealized gain (loss) on securities available for sale, net of tax (1,259) 283 (781) 175 Reclassification adjustment for security gain included in net income, net of tax - - (67) - Comprehensive income (loss) $ (477) $ 1,340 $ 888 $ 2,456
NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Loans receivable are stated at unpaid principal balances plus net deferred loan origination costs less loans in process and the allowance for loan losses. Interest on loans is credited to income as earned. Interest income is not accrued on loans where management has determined collection of such interest is doubtful or those loans which are past due 90 days or more as to principal or interest payments. When a loan is placed on nonaccrual status, previously accrued but unpaid interest deemed uncollectible is reversed and charged 6 against current income. After being placed on nonaccrual status, additional income is recorded only to the extent that payments are received or the collection of principal becomes reasonably assured. Interest income recognition on loans considered to be impaired under current accounting standards is consistent with the recognition on all other loans. Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual life of the underlying loan. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Management believes the allowance for loan losses is adequate to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. In accordance with current accounting standards, the allowance is provided for losses that have been incurred as of the balance sheet date. The allowance is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. The allowance for loan losses includes specific allowances related to loans which have been judged to be impaired as defined by current accounting standards. A loan is impaired when, based on current information, it is probable that PSB will not collect all amounts due in accordance with the contractual terms of the loan agreement. Management has determined that commercial, financial, agricultural, and commercial real estate loans that have a nonaccrual status or have had their terms restructured meet this definition. Large groups of homogenous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment. Specific allowances are based on discounted cash flows of expected future payments using the loans' initial effective interest rate or the fair value of collateral if the loan is collateral dependent. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the subsidiary Bank to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate and are carried as "Loans held for sale" on the balance sheet. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method using quoted market prices. NOTE 6 - FORECLOSED REAL ESTATE Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value (after deducting estimated costs to sell) at the date of foreclosure, 7 establishing a new cost basis. Costs related to development and improvement of property are capitalized, whereas costs related to holding property are expensed. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in any valuation allowance are included in loss on foreclosed real estate. NOTE 7 - CONTINGENCIES In the normal course of business, PSB is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements. Like many Wisconsin financial institutions, PSB has a Nevada based subsidiary that holds and manages investment assets which has not been subject to Wisconsin tax. The Wisconsin Department of Revenue (the "Department") has instituted an audit program specifically aimed at out-of-state bank subsidiaries that includes PSB's subsidiary bank. The Department has taken the position that a portion of the income of the out-of-state subsidiaries is taxable in Wisconsin. Recently, the Department indicated that it will discuss a settlement of these issues with all Wisconsin banks with out-of-state subsidiaries, including PSB. The Department has also stated that financial institutions who do not utilize the proposed settlement will be issued full deficiency assessments for additional tax including interest and penalties. Based on information available to PSB with respect to the Department's initial position in unrelated cases, PSB believes that a successful claim made by the Department (if not settled under terms made available to other banks) would likely have a material adverse effect on PSB's results of operations for the year in which it was made. Based on such information, PSB also believes that if the Department is successful in its initial position in making out-of-state subsidiaries fully taxable, future earnings may be adversely affected in the range of $.06 to $.07 per share on an annual basis, based on current interest levels on the securities and other assets now held in the Nevada subsidiary's portfolio. PSB intends to meet with the Department during the third quarter to discuss its current proposal to similarly situated Wisconsin banks. In addition, the Internal Revenue Service ("IRS") is currently conducting an audit of PSB's open tax returns. PSB has been assessed approximately $170,000 in taxes, interest and penalties as a result of the IRS audit; however, this assessment is in the process of being appealed. PSB believes all tax returns were filed appropriately and at this time no additional tax expense has been recorded. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is presented to assist in the understanding and evaluation of PSB's financial condition and results of operations. It is intended to complement the unaudited financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10- Q and should be read in conjunction therewith. Dollar amounts are in thousands, except per share amounts. The quarterly report on Form 10-Q describes the business of PSB Holdings, Inc. and its subsidiary Peoples State Bank as in effect on June 30, 2004, and any reference to "PSB" refers to the consolidated or individual operations of PSB Holdings, Inc. and Peoples State Bank. Forward-looking statements have been made in this document that are subject to risks and uncertainties. While PSB believes these forward-looking statements are based on reasonable assumptions, all such statements involve risk and uncertainties that could cause actual results to differ materially from those contemplated in this report. The assumptions, risks, and uncertainties relating to the forward-looking statements in this report include those described under the caption "Cautionary Statements Regarding Forward-Looking Information" in Part I of PSB's Form 10-K for the year ended December 31, 2003 and, from time to time, in PSB's other filings with the Securities and Exchange Commission. BALANCE SHEET At June 30, 2004, total assets were $431,216, an increase of $10,478, or 2.5% (10.0% annualized growth), over March 31, 2004, and an increase of $51,280, or 13.5% over June 30, 2003. Asset growth since March 31, 2004 and June 30, 2003 consisted of:
Three months ended Twelve months ended Increase (decrease) in assets ($000s) June 30, 2004 June 30, 2004 $ % $ % Increase in commercial real estate loans $ 4,112 2.7% $ 29,399 23.0% Increase in residential real estate mortgage loans 6,913 8.9% 19,426 30.0% Increased investment in premises and equipment 1,154 12.4% 4,276 68.8% Decrease in investment securities (1,634) -2.2% (1,270) -1.7% Decrease in cash and cash equivalents (936) -5.1% (2,551) -12.7% Increase in remaining assets (various categories) 869 2,000 Total increase in assets $ 10,478 2.5% $ 51,280 13.5%
The commercial and residential real estate loan portfolio continued to grow at a steady pace during both the three months and twelve months ended June 30, 2004. These types of loans have been and continue to be the primary loan products sold by PSB. The amount of residential real estate mortgages held since June 30, 2003 and December 31, 2003 increased by a substantial amount, and constitutes a higher percentage of the total loan portfolio. Most of the increase in residential mortgages during the past twelve months is from PSB retaining some 15 year fixed rate mortgages rather than selling the principal to the secondary market. These mortgages were 9 retained as part of an asset-liability management strategy during the third quarter of 2003 to maximize net interest margin without a significant increase in interest rate risk due to that quarter's cash and liquidity position in light of interest sensitivity of the entire balance sheet and opportunities for re-investment of investment security cash flows. The amount of 15 year fixed rate mortgages originated by the program during 2003 was approximately $12.0 million with an average yield of 4.95%. Approximately one-half of this production was funded by maturing and prepaid mortgage backed investment securities during this period. This program was discontinued during August 2003 and all 15 year fixed rate mortgage loans currently originated by PSB are sold to other investors on the secondary market to eliminate the associated interest rate risk. Other increases in residential real estate loans are primarily from balloon type mortgages with initial fixed rates periods ranging from 3 to 7 years. As PSB reallocated resources to handle demand for residential real estate loans prompted by historically low interest rates, it experienced substantial repayments of consumer retail installment loans that were not replaced. A portion of these consumer balances were converted to home equity loans. In additional, in its markets, PSB faces substantial competition from credit unions and other financial institutions for retail installment lending such as auto loans. PSB does not expect consumer lending to be a key focus in the near term, and expects consumer loan principal to remain flat or decline slowly. Investment in premises and equipment has also grown during both periods primarily for costs of the 32,000 square foot, $4.8 million new home office building (including furniture and equipment) which was placed in service on June 28, 2004. Construction of the new facility began during July 2003. The decline in investment securities during the three months and twelve months ended June 30, 2004 was primarily from a decline in the unrealized gain on those securities of $1,952 and $2,311, respectively (before income tax effects). These securities are classified as available for sale and changes in unrealized gains and losses are recorded on the balance and in stockholders' equity, net of income tax effects. As PSB experienced strong loan growth with low core deposit growth, available liquidity has tightened. Some overnight funds held as federal funds sold or with the Federal Home Loan Bank or money market funds have declined. This has decreased the amount of cash and cash equivalents for the prior quarter and twelve month periods. 10 Asset growth since March 31, 2004 and June 30, 2003 was funded by the following:
Three months ended Twelve months ended Increase (decrease) in liabilities and equity ($000s) June 30, 2004 June 30,2004 $ % $ % Increase in wholesale certificates of deposit $17,485 36.5% $20,890 46.9% Increase in retail certificates of deposit > $100 6,162 14.1% 9,301 22.9% Increase in FHLB advances - 0.0% 9,000 23.7% Increase (decrease) in core deposits (including MMDA) (1,074) -0.5% 6,397 2.9% Increase (decrease) in other borrowings (383) -4.1% 4,016 179.5% Increase (decrease) in stockholders' equity (1,275) -3.8% 1,470 4.8% Increase (decrease) in federal funds (11,049) -97.1% 833 n/a Increase (decrease) in other liabilities (various categories) 612 (627) Total increase in liabilities and stockholders' equity $10,478 2.5% $51,280 13.5%
While loans increased substantially during the past twelve months, core deposits experienced little growth, and actually declined during the past quarter as shown in the table above. Therefore, to fund loan growth, PSB has substantially increased the portfolio of wholesale brokered certificates of deposit and large retail certificates. During the twelve months ended June 30, 2004, increases in wholesale funding, including growth in FHLB advances (totaling $40,024) has funded 78.0% of asset growth during that period. During the past quarter ended June 30, 2004, PSB converted overnight federal funds purchased used to fund first quarter loan growth to long-term brokered certificates. However, even net of this refinancing, wholesale funding increased $12,598. Core deposits declined $1,074. Other borrowings consist primarily of retail overnight and term repurchase agreements with local customers and are not considered to be wholesale funding. The decline in stockholders' equity during the past quarter ending June 30, 2004 was due primarily to declaration of a dividend of $.30 per share (total payment of $518), and a decline in unrealized gains on securities available for sale, net of tax benefits of $1,259.
Table 1: Period-End Loan Composition June 30, June 30, December 31, 2003 Dollars Dollars Percentage of total Percentage (dollars in thousands) 2004 2003 2004 2003 Dollars of total Commercial, industrial and agricultural $ 70,871 $ 69,526 21.5% 24.9% $ 66,934 21.7% Commercial real estate mortgage 156,964 127,565 47.7% 45.7% 148,685 48.3% Residential real estate mortgage 84,235 64,809 25.6% 23.2% 75,276 24.4% Residential real estate loans held for sale - - 0.0% 0.0% 207 0.1% Consumer home equity 9,791 7,478 3.0% 2.7% 9,252 3.0% Consumer and installment 7,365 9,675 2.2% 3.5% 7,728 2.5% Totals $329,226 $279,053 100.0% 100.0% $308,082 100.0%
The loan portfolio is PSB's primary asset subject to credit risk. PSB's process for monitoring credit risks includes weekly analysis of loan quality, delinquencies, non-performing assets, and potential problem loans. Loans are placed on a nonaccrual status when they become 11 contractually past due 90 days or more as to interest or principal payments. All interest accrued but not collected for loans (including applicable impaired loans) that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due have been collected and there is reasonable assurance that repayment according to the contractual terms will continue. The aggregate amount of nonperforming assets decreased $511 to $3,279 at June 30, 2004 from $3,790 at March 31, 2004, and has decreased $61 from $3,340 at June 30, 2003. Nonperforming loans also include restructured loans until 6 consecutive monthly payments are received under the new loan terms. Total nonperforming assets as a percentage of total assets continues to be stable with .76%, .90%, and .88% at June 30, 2004, March 31, 2004, and June 30, 2003, respectively. PSB also tracks delinquencies on a contractual basis quarter to quarter. Loans contractually delinquent 30 days or more as a percentage of gross loans were .84% at June 30, 2004 compared to .88% at March 31, 2004, and 1.01% at June 30, 2003. The allowance for loan losses was 1.19% of gross loans at June 30, 2004 compared to 1.26% at June 30, 2003.
Table 2: Allowance for Loan Losses Three months ended Six months ended June 30, June 30, (dollars in thousands) 2004 2003 2004 2003 Allowance for loan losses at beginning $3,700 $3,315 $3,536 $3,158 Provision for loan losses 240 240 480 465 Recoveries on loans previously charged-off 11 7 22 Loans charged off (34) (49) (117) (128) Allowance for loan losses at end $3,906 $3,517 $3,906 $3,517
Nonperforming assets include: 1) loans that are either contractually past due 90 days or more as to interest or principal payments, on a nonaccrual status, or the terms of which have been renegotiated to provide a reduction or deferral of interest or principal (restructured loans) and 2) foreclosed assets.
Table 3: Nonperforming Assets June 30, Dec. 31, (dollars in thousands) 2004 2003 2003 Nonaccrual loans $2,660 $2,421 $3,119 Accruing loans past due 90 days or more - 60 - Restructured loans not on nonaccrual 573 478 216 Total nonperforming loans 3,233 2,959 3,335 Foreclosed assets 46 381 84 Total nonperforming assets $3,279 $3,340 $3,419 Nonperforming loans as a % of gross loans receivable 0.98% 1.06% 1.08% Total nonperforming assets as a % of total assets 0.76% 0.88% 0.84%
12 LIQUIDITY Liquidity refers to the ability of PSB to generate adequate amounts of cash to meet PSB's need for cash at a reasonable cost. PSB manages its liquidity to provide adequate funds to support borrowing needs and deposit flow of its customers. Management views liquidity as the ability to raise cash at a reasonable cost or with a minimum of loss and as a measure of balance sheet flexibility to react to marketplace, regulatory, and competitive changes. Deposit growth is the primary source of funding. Retail core and time deposits less than $100,000 as a percentage of total funding sources were 56.7% at June 30, 2004, 58.6% at March 31, 2004, and 63.0% at June 30, 2003. Wholesale borrowings and broker and national certificates of deposit represent a significant portion of PSB's total funding ability, which has increased steadily during the past two years from 23.0% of total funding sources at December 31, 2002, to 23.8% at June 30, 2003, and 28.4% at June 30, 2004.
Table 4: Period-end Deposit Composition June 30, (dollars in thousands) 2004 2003 $ % $ % Non-interest bearing demand $ 46,901 13.8% $ 54,052 17.8% Interest-bearing demand and savings 51,112 15.0% 38,194 12.6% Money market deposits 65,576 19.3% 65,693 21.6% Retail time deposits less than $100 61,335 18.0% 60,588 19.9% Total core deposits $224,924 66.1% $218,527 71.9% Retail time deposits $100 and over 49,929 14.7% 40,628 13.4% Broker & national time deposits less than $100 6,174 1.8% 11,860 3.9% Broker & national time deposits $100 and over 59,249 17.4% 32,673 10.8% Totals $340,276 100.0% $303,688 100.0%
The interest rate paid on money market deposits is adjustable based on PSB's discretion but generally tracks the movements of average bank money market funds. Deposits due to investors as part of PSB's secondary market loan servicing activities included in total non-interest bearing demand deposits were approximately $3,071 at June 30, 2004, compared to $11,928 at June 30, 2003. Excluding these accounts, non-interest bearing demand deposits grew $1,706, or 4.0% during the twelve months ended June 30, 2004.
Table 5: Summary of Changes by Significant Deposit Source June 30, % Change from prior year (dollars in thousands) 2004 2003 2004 2003 Total time deposits $100 and over $109,178 $73,301 48.9% 20.3% Total broker and national time deposits 65,423 44,533 46.9% n/a Total retail time deposits 111,264 101,216 9.9% n/a Core deposits, including money market deposits 224,924 218,527 2.9% 5.2%
13 To fund larger commercial loan originations or acquire other large blocks of funding, PSB actively purchases broker and other national time deposits. PSB manages such deposits to control the potential volatility of such funds while lowering overall deposit borrowing costs. Consequently, broker and national deposits increased substantially over the prior year, while local retail deposits have shown modest growth in comparison. Company policy is to limit broker and national time deposits to 20% of total assets. As of June 30, 2004, broker and national time deposits were 15.2% of total assets compared to 11.4% at March 31, 2004, and 11.7% at June 30, 2003. Prior to September 30, 2002, PSB did not maintain information on brokered certificates separately from all other certificates. Consequently, PSB is unable to indicate the percentage growth over the prior year for the twelve months ended June 30, 2003. The increase in deposits of $36,588 (including broker and national time deposits) has been inadequate to fund asset growth during the twelve months ending June 30, 2004. Consequently, additional FHLB advances of $9,000 were also obtained. During the three months ended June 30, 2004, there was no change in FHLB advance principal. Unused credit advances from the Federal Home Loan Bank of Chicago available to PSB at June 30, 2004 totaled approximately $37.7 million based on an open line of credit and securities available for pledging for advances. Available but unused credit advances from the FHLB at June 30, 2003 were approximately $44.1 million. In addition, PSB had unused commitments from other correspondent banks for federal funds purchased up to $22.2 million as of June 30, 2004. The primary alternative funding sources utilized are Federal Home Loan Bank advances, federal funds purchased, and brokered time deposits. PSB believes its current liquidity position and sources of funds for liquidity management is adequate. Table 6 below presents maturity repricing information as of June 30, 2004. The following repricing methodologies should be noted: 1. Money market deposit accounts are considered fully repriced within 90 days. NOW and savings accounts are considered "core" deposits as they are generally insensitive to interest rate changes. These deposits are generally considered to reprice beyond 5 years. 2. Nonaccrual loans are considered to reprice beyond 5 years. 3. Assets and liabilities with contractual calls or prepayment options are repriced according to the likelihood of the call or prepayment being exercised in the current interest rate environment. 4. Impact of rising or falling interest rates is based on a parallel yield curve change that is fully implemented within a 12 month time horizon. 14
Table 6: Interest Rate Sensitivity Gap Analysis June 30, 2004 (dollars in thousands) 0-90 Days 91-180 days 181-365 days 1-2 yrs. Bynd 2-5 yrs. Beyond 5 yrs. Total Earning assets: Loans $121,638 $ 24,304 $ 35,916 $ 52,677 $ 74,174 $ 20,517 $329,226 Securities 3,124 3,218 5,448 12,268 34,340 13,063 71,461 FHLB stock 2,792 2,792 Other earning assets 2,365 2,365 Total $129,919 $ 27,522 $ 41,364 $ 64,945 $108,514 $ 33,580 $405,844 Cumulative rate sensitive assets $129,919 $157,441 $198,805 $263,750 $372,264 $405,844 Interest-bearing liabilities Interest-bearing Deposits $103,026 $ 29,338 $ 48,532 $ 20,158 $ 43,495 $ 48,826 $293,375 FHLB advances 10,000 - 19,000 - 18,000 - 47,000 Other borrowings 4,988 253 1,347 1,393 1,413 - 9,394 Total $118,014 $ 29,591 $ 68,879 $ 21,551 $ 62,908 $ 48,826 $349,769 Cumulative interest sensitive liabilities $118,014 $147,605 $216,484 $238,035 $300,943 $349,769 Interest sensitivity gap for the individual period $ 11,905 $ (2,069) $(27,515) $ 43,394 $ 45,606 $(15,246) Ratio of rate sensitive assets to rate sensitive liabilities for the individual period 110.1% 93.0% 60.1% 301.4% 172.5% 68.8% Cumulative interest sensitivity gap $ 11,905 $ 9,836 $(17,679) $ 25,715 $ 71,321 $ 56,075 Cumulative ratio of rate sensitive assets to rate sensitive liabilities 110.1% 106.7% 91.8% 110.8% 123.7% 116.0%
At June 30, 2004, if interest rates had risen 200 basis points or had fallen 100 basis points, the 365 day cumulative ratio of rate sensitive assets to rate sensitive liabilities would change from 91.8% to 88.5% (if up 200 basis points) and 95.8% (if down 100 basis points), respectively. At June 30, 2003, if interest rates had risen 200 basis points or had fallen 100 basis points, the 365 day cumulative ratio of rate sensitive assets to rate sensitive liabilities would have changed from 115.1% to 108.2% (if up 200 basis points) and 117.9% (if down 100 basis points), respectively. During the twelve months ended June 30, 2004, PSB has increased the amount of fixed rate commercial and real estate loans held (with original fixed terms generally from 3 to 15 years) which have been funded in part by short-term wholesale borrowings and brokered time deposits of equivalent or shorter terms. In addition, as of June 30, 2004, $19 million of FHLB advances with original long-term maturities will mature within 365 days, which has lowered the cumulative gap ratio to be less asset sensitive than it was twelve months ago and actually changing to be slightly liability sensitive during that time frame as of June 30, 2004. However, the FHLB advances are expected to be refinanced upon maturity at significantly lower rates while also extending maturities in excess of one year. This will have the impact of increasing the cumulative gap ratio while improving the net interest rate margin. The Asset/Liability Committee uses financial modeling techniques that measure the interest rate risk. Policies established by the Bank's Asset/Liability Committee are intended to limit exposure of earnings at risk. A formal liquidity contingency plan exists that directs management to the 15 least expensive liquidity sources to fund sudden and unanticipated liquidity needs. PSB also uses various policy measures to assess adequacy of PSB's liquidity and interest rate risk as described below. Basic Surplus PSB measures basic surplus as the amount of existing net liquid assets (after deducting short-term liabilities and coverage for anticipated deposit funding outflows during the next 30 days) divided by total assets. The basic surplus calculation does not consider unused but available correspondent bank federal funds purchased, as those funds are subject to availability based on the correspondent bank's own liquidity needs and therefore are not guaranteed contractual funds. PSB's basic surplus, including available open line of credit FHLB advances not yet utilized at June 30, 2004 and 2003 was 7.0% and 10.5%, respectively and above the 5% minimum required by policy. The decline in the basic surplus is primarily a result of lower FHLB borrowing capacity due to $9,000 in additional advances taken and fewer securities available for potential FHLB advance pledging (such securities have been pledged for municipal deposits). Interest Rate Risk Limits PSB balances the need for liquidity with the opportunity for increased net interest income available from longer term loans held for investment and securities. To measure the impact on net interest income from interest rate changes, PSB models interest rate simulations on a quarterly basis. Company policy is that projected net interest income over the next 12 months will not be reduced by more than 15% given a change in interest rates of up to 200 basis points. At June 30, 2004, net interest income for the next 12 months was projected to decrease .46% if rates increase 200 basis points, and was projected to decrease .70% if rates decrease 100 basis points, which is less than the 15% required by policy and was considered acceptable by management. At June 30, 2003, net interest income for the next 12 months was projected to increase 2.59% if rates increase 200 basis points, and was projected to decrease 1.67% if rates decrease 100 basis points. Core Funding Utilization To assess whether interest rate sensitivity beyond one year helps mitigate or exacerbate the short-term rate sensitive position, a quarterly measure of core funding utilization is made. Core funding is defined as liabilities with a maturity in excess of 60 months and capital. "Core" deposits including DDA, NOW and non-maturity savings accounts (except money market accounts) are also considered core long-term funding sources. The core funding utilization ratio is defined as assets with a maturity in excess of 60 months divided by core funding. PSB's target for the core funding utilization ratio is to remain at 80% or below given the same 200 basis point changes in rates that apply to the guidelines for interest rate risk limits exposure described previously. At June 30, 2004, PSB's core funding utilization ratio was projected to be 54.11% if rates increase 200 basis points and was therefore within policy requirements. At June 30, 2003, PSB's core funding utilization ratio was projected to be 40.77% if rates increase 200 basis points. 16 CAPITAL RESOURCES Stockholders' equity at June 30, 2004 increased $1,470 to $32,239 or 4.8% from $30,769 at June 30, 2003. Net income retained during the twelve months ended June 30, 2004, net of cash dividends and shareholder stock buybacks was $2,946. Capital decreased $1,485 from a decline in the unrealized gain on securities available for sale (net of tax effects). All other net increases in capital totaled $9. Stockholders' equity included unrealized losses on securities available for sale, net of their tax effect, of $4 at June 30, 2004 compared to unrealized gains of $1,481 at June 30, 2003. The adequacy of PSB's capital is regularly reviewed to ensure sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. As of June 30, 2004 and 2003, the Subsidiary Bank's Tier 1 risk-based capital ratio, total risk-based capital, and Tier 1 leverage ratio were in excess of regulatory minimums and were classified as "well- capitalized". Failure to remain well-capitalized would prevent PSB from obtaining future wholesale broker time deposits which have been an important source of funding during the past several years. Tier 1 capital to average tangible assets was 7.55% during the quarter ended June 2004 compared to 7.89% in the prior year quarter. Management believes PSB to be well capitalized at June 30, 2004 and expects to remain well capitalized during 2004 based on planned asset growth and shareholder dividend payments. PSB maintains an annual, ongoing share repurchase program of up to 1% of outstanding shares per year and 8,000 shares at $35.00 per share were purchased during the second quarter of 2004. During the quarter ended June 30, 2003, PSB repurchased 14,500 shares at an average price of $32.25 per share in its annual buyback program. The remainder of the 2004 buyback program was purchased in early August 2004 with 9,300 shares repurchased at an average price of $34.90 per share. For the remainder of 2004, management anticipates retaining capital to support asset growth while continuing a cash dividend to shareholders.
Table 7: Capital Ratios - Consolidated Holding Company June 30, Dec 31. (dollars in thousands) 2004 2003 2003 Stockholders' equity $ 32,239 $ 30,769 $ 32,141 Disallowed mortgage servicing right assets (80) (69) (81) Unrealized (gain) loss on securities available for sale 4 (1,481) (844) Tier 1 regulatory capital 32,163 29,219 31,216 Add: allowance for loan losses 3,906 3,517 3,536 Total regulatory capital $ 36,069 $ 32,736 $ 34,752 Total assets $431,216 $379,936 $408,933 Disallowed mortgage servicing right assets (80) (69) (81) Unrealized (gain) loss on securities available for sale 4 (1,481) (844) Tangible assets $431,140 $378,386 $408,008 Risk-weighted assets (as defined by current regulations) $337,462 $293,273 $318,005 Tier 1 capital to average tangible assets (leverage ratio) 7.55% 7.89% 7.83% Tier 1 capital to adjusted risk-weighted assets 9.53% 9.96% 9.82% Total capital to adjusted risk-weighted assets 10.69% 11.16% 10.93%
17 A special 5% stock dividend was paid to shareholders on January 29, 2004. All references in the accompanying financial statements and statistical analysis to the number of common shares and per share amounts for 2003 have been restated to reflect the stock dividend. PREMISES AND EQUIPMENT On June 28, 2004, PSB placed into service a new bank and financial services office and administrative headquarters located on property adjacent to the former Wausau, Wisconsin, main office location. The 32,000 square foot office and drive-through canopy had final building project costs including necessary furniture, fixtures, and equipment of approximately $4.8 million. The former Wausau main office which had been used since the Bank opened in 1962 and as most recently expanded during 1992 was razed. Under current accounting rules, demolition of the old home office required the write-off of the remaining cost basis. A one-time charge of approximately $329 ($199 after income tax benefits) was recorded during the second quarter of 2004 when the new home office was occupied. RESULTS OF OPERATIONS Net income for the quarter ended June 30, 2004 was $782, or $.45 for basic and diluted earnings per share. Comparatively, net income for the quarter ended June 30, 2003, was $1,057, or $.61 per share for basic and $.60 per share for diluted earnings per share. Operating results for the second quarter 2004 generated an annualized return on average assets of .73% and an annualized return on average equity of 9.52%, compared to 1.14% and 13.82% for the comparable period in 2003. However, if the net loss on abandonment of the home office were excluded from the second quarter 2004 results, net income would have been $981 and ROA and ROE would have been .92% and 11.91%, respectively. The quarter ended June 30, 2003 included a charge for a change in accounting estimate involving mortgage servicing rights of $143, net of tax benefits. If the change in accounting estimate were excluded from the second quarter 2003 results, net income would have been $1,200 and ROA and ROE would have been 1.29% and 15.65%, respectively. The following Table 8 presents consolidated quarterly summary financial data of PSB Holdings, Inc. and Subsidiary. 18
Table 8: Financial Summary (dollars in thousands, except per share data) Quarter ended June 30, March 31, Dec. 31 Sept. 30, June30, EARNINGS AND DIVIDENDS: 2004 2004 2003 2003 2003 Net interest income $ 3,517 $ 3,474 $ 3,375 $ 3,306 $ 3,268 Provision for loan losses $ 240 $ 240 $ 130 $ 240 $ 240 Other noninterest income $ 855 $ 740 $ 1,120 $ 1,143 $ 726 Other noninterest expense $ 2,914 $ 2,602 $ 2,479 $ 2,335 $ 2,220 Net income $ 782 $ 954 $ 1,290 $ 1,235 $ 1,057 Basic earnings per share (3) $ 0.45 $ 0.55 $ 0.74 $ 0.71 $ 0.61 Diluted earnings per share (3) $ 0.45 $ 0.55 $ 0.74 $ 0.71 $ 0.60 Dividends declared per share (3) $ 0.30 $ - $ 0.29 $ - $ 0.29 Net book value per share $ 18.68 $ 19.33 $ 18.54 $ 18.11 $ 17.74 Semi-annual dividend payout ratio 29.84% n/a 19.88% n/a 21.74% Average common shares outstanding 1,729,322 1,733,531 1,733,398 1,733,828 1,744,199 BALANCE SHEET - AVERAGE BALANCES: Loans receivable, net of allowances for loss $ 320,471 $ 307,109 $ 302,491 $ 288,448 $ 265,863 Assets $ 426,826 $ 407,577 $ 399,351 $ 389,267 $ 371,537 Deposits $ 330,337 $ 312,455 $ 312,376 $ 307,752 $ 292,698 Stockholders' equity $ 32,942 $ 32,878 $ 32,095 $ 31,085 $ 30,670 PERFORMANCE RATIOS: Return on average assets (1) 0.73% 0.94% 1.28% 1.26% 1.14% Return on average stockholders' equity (1) 9.52% 11.64% 15.95% 15.76% 13.82% Average tangible stockholders' equity to average assets 7.61% 7.83% 7.85% 7.70% 7.92% Net loan charge-offs to average loans 0.01% 0.02% 0.09% 0.02% 0.01% Nonperforming loans to gross loans 0.98% 1.17% 1.08% 1.09% 1.06% Allowance for loan losses to gross loans 1.19% 1.16% 1.15% 1.23% 1.26% Net interest rate margin (1)(2) 3.64% 3.73% 3.65% 3.67% 3.83% Net interest rate spread (1)(2) 3.30% 3.38% 3.24% 3.21% 3.34% Service fee revenue as a percent of average demand deposits (1) 2.63% 2.60% 2.70% 2.48% 2.83% Noninterest income as a percent of gross revenue 13.54% 12.24% 17.56% 17.90% 12.13% Efficiency ratio (2) 64.54% 59.73% 53.47% 50.94% 53.86% Noninterest expenses to average assets (1) 2.74% 2.56% 2.46% 2.38% 2.40% STOCK PRICE INFORMATION: High $ 35.60 $ 35.60 $ 36.19 $ 32.61 $ 32.38 Low $ 34.50 $ 33.50 $ 31.43 $ 31.43 $ 28.57 Market value at quarter-end $ 34.50 $ 35.00 $ 33.62 $ 31.90 $ 31.67 (1) Annualized (2) The yield on tax-exempt loans and securities is computed on a tax- equivalent basis using a tax rate of 34%. (3) Due to rounding, cumulative quarterly per share performance may not equal annual per share totals.
NET INTEREST INCOME Net interest income is the most significant component of earnings. Tax adjusted net interest income increased $264 (7.8%) from $3,396 for the quarter ended June 30, 2003 to $3,660 for the current quarter ended June 30, 2004. Quarterly tax-adjusted net interest margin as a percent of average interest earning assets decreased from 3.83% in June 2003 to 3.64% in June 2004. Net interest margin was 3.75% for the year ended December 31, 2003. During the past 12 months, PSB experienced compressed interest rate margins as existing prime rate adjustable and other maturing term loans and securities were repriced at today's significantly lower rates while deposit rates remained near their floor. Earning assets yields have decreased 19 50 basis points from 6.07% at June 2003 to 5.57% at June 2004. However, the cost of liabilities declined only 46 basis points from 2.73% at June 2003 to 2.27% at June 2004. Despite the decline in net interest rate margin, total net interest income has increased due to earning asset growth. During the quarter ended June 2004, net interest margin declined to 3.64% from 3.73% for the prior March 2004 quarter as low cost adjustable rate overnight funds of approximately $11 million used to fund March 2004 loan growth were converted to higher cost long term fixed funding during the June quarter. However, during the past three quarters, loan and other asset yields have leveled and favorable repricing of time deposits has slowed indicating net interest margin in the upcoming quarter will be primarily impacted by the ability to control core deposit rate increases while originating higher yielding loans in light of the cumulative .50% Federal Reserve discount rate increases since June 2004 and anticipated future discount rate increases.
Table 9A: Net Interest Income Analysis (Quarter) (dollars in thousands) Quarter ended June 30, 2004 Quarter ended June 30,2003 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: Loans (1)(2) $324,251 $ 4,731 5.85% $269,259 $ 4,490 6.69% Taxable securities 47,596 453 3.82% 55,008 501 3.65% Tax-exempt securities (2) 24,595 371 6.05% 21,670 335 6.20% FHLB stock 2,679 36 5.39% 2,340 37 6.34% Other 4,190 10 0.96% 7,766 23 1.19% Total (2) 403,311 5,601 5.57% 356,043 5,386 6.07% Non-interest-earning assets: Cash and due from banks 13,840 9,518 Premises and equipment, net 10,246 6,225 Other assets 3,209 3,147 Allowance for loan losses (3,780) (3,396) Total $426,826 $371,537 Liabilities & stockholders' equity Interest-bearing liabilities: Savings and demand deposits $ 53,180 $ 88 0.66% $ 37,393 $ 57 0.61% Money market deposits 64,450 144 0.90% 66,067 175 1.06% Time deposits 163,555 1,128 2.77% 143,135 1,200 3.36% FHLB borrowings 47,000 504 4.30% 38,000 506 5.34% Other borrowings 14,718 77 2.10% 7,690 52 2.71% Total 342,903 1,941 2.27% 292,285 1,990 2.73% Non-interest-bearing liabilities: Demand deposits 49,152 46,103 Other liabilities 1,829 2,479 Stockholders' equity 32,942 30,670 Total $426,826 $371,537 Net interest income 3,660 3,396 Rate spread 3.30% 3.34% Net yield on interest-earning assets 3.64% 3.83% (1) Nonaccrual loans are included in the daily average loan balances outstanding. (2) The yield on tax-exempt loans and securities is computed on a tax- equivalent basis using a tax rate of 34%.
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Table 9B: Net Interest Income Analysis (Six Months) (dollars in thousands) Six months ended June 30, 2004 Six months ended June 30, 2003 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: Loans (1)(2) $317,485 $ 9,302 5.88% $264,619 $ 8,901 6.78% Taxable securities 47,738 914 3.84% 56,601 1,116 3.98% Tax-exempt securities (2) 24,617 739 6.02% 21,626 673 6.28% FHLB stock 2,575 76 5.92% 2,322 73 6.34% Other 3,572 16 0.90% 7,916 46 1.17% Total (2) 395,987 11,047 5.59% 353,084 10,809 6.17% Non-interest-earning assets: Cash and due from banks 12,657 9,571 Premises and equipment, net 9,267 6,193 Other assets 2,986 3,194 Allowance for loan losses (3,695) (3,305) Total $417,202 $368,737 Liabilities & stockholders' equity Interest-bearing liabilities: Savings and demand deposits $ 52,500 $ 173 0.66% $ 37,560 $ 119 0.64% Money market deposits 65,760 298 0.91% 68,004 359 1.06% Time deposits 156,395 2,180 2.80% 142,013 2,466 3.50% FHLB borrowings 46,808 970 4.16% 38,000 1,014 5.38% Other borrowings 14,137 150 2.13% 6,878 93 2.73% Total 335,600 3,771 2.25% 292,455 4,051 2.79% Non-interest-bearing liabilities: Demand deposits 46,992 43,598 Other liabilities 1,868 2,424 Stockholders' equity 32,742 30,260 Total $417,202 $368,737 Net interest income 7,276 6,758 Rate spread 3.34% 3.38% Net yield on interest-earning assets 3.68% 3.86% (1) Nonaccrual loans are included in the daily average loan balances outstanding. (2) The yield on tax-exempt loans and securities is computed on a tax- equivalent basis using a tax rate of 34%.
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Table 10: Interest Expense and Expense Volume and Rate Analysis Six months ended June 30, 2004 2004 compared to 2003 increase (decrease) due to (1) (dollars in thousands) Volume Rate Net Interest earned on: Loans (2) $ 1,787 $ (1,386) $ 401 Taxable securities (176) (26) (202) Tax-exempt securities (2) 94 (28) 66 FHLB stock 8 (5) 3 Other interest income (25) (5) (30) Total 1,688 (1,450) 238 Interest paid on: Savings and demand deposits 48 6 54 Money market deposits (12) (49) (61) Time deposits 251 (537) (286) FHLB borrowings 236 (280) (44) Other borrowings 99 (42) 57 Total 622 (902) (280) Net interest earnings $ 1,066 $ (548) $ 518 (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) The yield on tax-exempt loans and investment securities has been adjusted to its fully taxable equivalent using a 34% tax rate.
PROVISION FOR LOAN LOSSES Management determines the adequacy of the provision for loan losses based on past loan experience, current economic conditions, and composition of the loan portfolio. Accordingly, the amount charged to expense is based on management's evaluation of the loan portfolio. It is PSB's policy that when available information confirms that specific loans and leases, or portions thereof, including impaired loans, are uncollectible, these amounts are promptly charged off against the allowance. The provision for loan losses was $240 for the three months ended June 30, 2004, and June 30, 2003. Net charge-offs as a percentage of average loans outstanding were .01% during the three months ended June 30, 2004 and 2003. Non-performing loans are reviewed to determine exposure for potential loss within each loan category. The adequacy of the allowance for loan losses is assessed based on credit quality and other pertinent loan portfolio information. The adequacy of the allowance and the provision for loan losses is consistent with the composition of the loan portfolio and recent credit quality history. 22 NONINTEREST INCOME Noninterest income increased by $129 in the June 2004 quarter to $855 compared to $726 in 2003. However, the prior year June 2003 quarter included a cumulative change in accounting estimate related to mortgage servicing that lowered noninterest income by $236. After accounting for the prior year adjustment, the decline in June 2004 income of $107 is due primarily to lower mortgage banking income of $144. A valuation allowance on mortgage servicing rights continues to be maintained and was $138 as of June 30, 2004. As mortgage interest rates increase, this valuation allowance is expected to be taken back into income as customers are less likely to refinance their existing mortgages. During the June 2004 quarter, $12 of the valuation allowance was recaptured. For all of 2004, PSB expects mortgage banking income to be approximately 50% to 60% of the level seen during 2003. PSB serviced $156.1 million of mortgage principal for other investors at June 30, 2004 compared to $137.5 million at June 30, 2003. Peoples Insurance Services LLC, a commercial property and casualty insurance agency and brokerage started by Peoples during September 2003, continues to build relationships in the Wausau area. The agency's net loss during the quarter and six months ended June 2004 was $37 and $75, respectively. Since opening during September 2003, cumulative net losses have been in line with initial projections despite revenue growth significantly less than expectation. Lower revenue has been partially offset with lower operating expenses. During June 2003, additional expense from a change in accounting estimate related to accounting for mortgage servicing rights of $236 was recorded, as well as an $18 provision for impairment of servicing rights reducing gain on sale and servicing of loans by $254 in total. During June 2003, PSB contracted with an outside consultant for monthly mortgage servicing right (MSR) accounting services due to continued growth in serviced mortgage loans. PSB began servicing mortgage loans for other investors in November 2000. PSB adopted new estimates related to customer mortgage payment activity as part of the new accounting model. Serviced loans were broken down into a greater number of "pools" with amortization and impairment calculated based on individual customer activity within each pool. Initial servicing rights are based on national prepayment estimates at the time of origination. The new accounting model provides an estimated original MSR cost lower than that using the previous estimates, and amortizes that cost faster than under the Company's previous model. The change in accounting estimate reduced gain on sale and servicing of loans by $236 ($143 after tax benefits, or approximately $.08 per diluted earnings per share).
Table 11 - Mortgage Servicing Rights Activity Six months ended June 30, 2004 Originated Valuation MSR Allowance Total January 1, 2004 $ 904 $ (90) $ 814 Originated servicing 209 209 Amortization charged to earnings (172) (172) Valuation adjustment charged to earnings (48) (48) June 30, 2004 $ 941 $ (138) $ 803
23 As a FHLB Mortgage Partnership Finance loan servicer, PSB has provided a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of the original loan principal sold to the FHLB on an aggregate pool basis. At June 30, 2004, the maximum Company obligation on the entire servicing portfolio for such guarantees would be approximately $594 (.38% of the serviced principal) up from $428 (.31% of the serviced principal) at June 30, 2003. Due to historical strength of mortgage borrowers in our markets, the original 1% of principal loss pool provided by the FHLB, and current economic conditions, management believes the possibility of losses under guarantees to the FHLB to be remote. Accordingly, no provision for a recourse liability has been made for this recourse obligation on loans currently serviced by PSB. NONINTEREST EXPENSE Noninterest operating expenses increased $694 to $2,914 in the quarter ended June 2004 compared to $2,220 during the quarter ended June 2003, but included a one-time charge for abandonment of premises and equipment (the prior home office on the same property as the new home office and principal banking center was abandoned on June 28) of $329 before tax benefits. Excluding this one-time charge operating expenses increased $365, or 16.4%. As the new home office and principal customer financial center was occupied on June 28, the 32,000 square foot $4.8 million dollar facility (including furniture and equipment) was placed in service. Depreciation of the investment in the new facility, along with the depreciation costs of the new Minocqua branch and the item processing imaging system increased occupancy expenses for the June 2004 quarter by approximately $30. Annual depreciation expense is estimated to increase $186 ($113 after income tax benefits) from the new investment in the home office. Excluding the one-time charge for abandonment of premises and equipment, operating expenses as a percent of average assets were 2.43% during the June 2004 quarter compared to 2.40% during the June 2003 quarter. Also excluding this charge, the expense efficiency ratio was 57.25% during June 2004 compared to 53.86% in June 2003. The principal subsidiary of PSB is being audited by the Wisconsin Department of Revenue with respect to income attributable to the bank's Nevada subsidiary. Please see Note 7, Contingencies, for a discussion of the status and possible material adverse effect of an adverse result of the audit. 24 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the information provided in response to Item 7A of the Company's Form 10-K for the year ended December 31, 2003. ITEM 4. INTERNAL CONTROLS AND PROCEDURES As of the end of the period covered by this report, management, under the supervision, and with the participation, of the Company's President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15(c) under the Securities Exchange Act of 1934. Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in all material respects. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation, nor were there any significant deficiencies or material weaknesses identified which required any corrective action to be taken. 25 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities Maximum number Total number (or approximate of shares (or dollar value) of Total number units) purchased shares (or units) of shares Average price as part of publicly that may yet be (or units) paid per share announced plans purchased under the purchased (or unit) or programs plans or programs Period (a) (b) (c) (d) April 2004 May 2004 8,000 $35.00 8,000 9,300 June 2004 Total 8,000 $35.00 8,000 9,300
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS The annual meeting of shareholders of the Company was held on April 20, 2004. The only matter voted upon was the election of directors. The number of votes cast for, or withheld, were as follows: ELECTION OF DIRECTORS For Withheld Gordon P. Connor 958,344 1,641 Patrick L. Crooks 958,326 1,659 William J. Fish 959,163 822 Charles A. Ghidorzi 945,543 14,442 Gordon P. Gullickson 937,681 22,304 David K. Kopperud 959,163 822 Thomas R. Polzer 958,974 1,011 William M. Reif 959,058 927 Thomas A. Riiser 959,163 822 John H. Sonnentag 876,554 83,431 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits. Exhibits required by Item 601 of Regulation S-K. Exhibit Number Description 31.1 Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 31.2 Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: Form 8-K dated April 28, 2004. The Company filed a current report on Form 8-K on April 28, 2004, reporting earnings for the quarter ended March 31, 2004, under Item 5 and additional related disclosure under Item 12. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PSB HOLDINGS, INC. August 16, 2004 SCOTT M. CATTANACH Scott M. Cattanach Treasurer (On behalf of the Registrant and as Principal Financial Officer) 28 EXHIBIT INDEX TO FORM 10-Q OF PSB HOLDINGS, INC. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 PURSUANT TO SECTION 102(D) OF REGULATION S-T (17 C.F.R. Section 232.102(D)) The following exhibits are filed as part this report: 31.1 Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 31.2 Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002 EX-31.1 3 psbex31163004.txt PSB EXHIBIT 31.1 - CERTIFICATION 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 16, 2004 DAVID K. KOPPERUD David K. Kopperud President and Chief Executive Officer EX-31.2 4 psbex31263004.txt PSB EXHIBIT 31.2 - CERTIFICATION 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 16, 2004 SCOTT M. CATTANACH Scott M. Cattanach Treasurer (Principal Financial Officer) EX-32.1 5 psbex32163004.txt PSB EXHIBIT 32.1 - SARBANES-OXLEY CERTIFICATION 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 June 30, 2004 (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 16, 2004 DAVID K. KOPPERUD David K. Kopperud President and CEO SCOTT M. CATTANACH Scott M. Cattanach Treasurer (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----