-----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, BcXMFTan3y85cSjaY+cNsjLT9yWBSrVaxK8FSTUOXKWb3Y/8EmPqwTl3vVQLhP3P M1cWkVV3CfZ4lVR0t0GDOA== 0000916480-04-000120.txt : 20041115 0000916480-04-000120.hdr.sgml : 20041115 20041115171557 ACCESSION NUMBER: 0000916480-04-000120 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 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: 041146747 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 psb10q93004.txt PSB FORM 10-Q - 9/30/04 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 September 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 0-26480 PSB HOLDINGS, INC. (Exact name of registrant as specified in charter) WISCONSIN 39-1804877 (State of incorporation) (I.R.S. Employer Identification Number) 1905 West Stewart Avenue Wausau, Wisconsin 54401 (Address of principal executive office) Registrant's telephone number, including area code: 715-842-2191 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X The number of common shares outstanding at November 4, 2004 was 1,716,330. PSB HOLDINGS, INC. FORM 10-Q Quarter Ended September 30, 2004 Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets September 30, 2004 (unaudited) and December 31, 2003 (derived from audited financial statements) 1 Consolidated Statements of Income Three Months and Nine Months Ended September 30, 2004 and 2003 (unaudited) 2 Consolidated Statement of Changes in Stockholders' Equity Nine Months Ended September 30, 2004 (unaudited) 3 Consolidated Statements of Cash Flows Nine Months Ended September 30, 2004 and 2003 (unaudited) 4 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 Item 4. Controls and Procedures 29 PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30 Item 6. Exhibits 30 i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
PSB HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS September 30, 2004 unaudited, December 31, 2003 (derived from audited financial statements) Sept. 30, December 31, (dollars in thousands, except per share data) 2004 2003 ASSETS Cash and due from banks $ 10,927 $ 13,754 Interest-bearing deposits and money market funds 2,004 1,214 Federal funds sold 5,617 3,959 Cash and cash equivalents 18,548 18,927 Securities available for sale (at fair value) 74,481 72,472 Federal Home Loan Bank stock (at cost) 2,834 2,444 Loans held for sale 62 207 Loans receivable, net of allowance for loan losses of $4,107 and $3,536, respectively 333,200 304,339 Accrued interest receivable 1,795 1,617 Foreclosed assets 52 84 Premises and equipment 12,028 7,557 Mortgage servicing rights, net 807 814 Other assets 796 472 TOTAL ASSETS $ 444,603 $ 408,933 LIABILITIES Non-interest-bearing deposits $ 52,076 $ 50,563 Interest-bearing deposits 300,432 265,851 Total deposits 352,508 316,414 Federal Home Loan Bank advances 50,000 47,000 Other borrowings 6,807 10,475 Accrued expenses and other liabilities 1,973 2,903 Total liabilities 411,288 376,792 STOCKHOLDERS' EQUITY Common stock - no par value with a stated value of $1 per share: Authorized - 3,000,000 shares Issued - 1,887,179 shares 1,887 1,887 Additional paid-in capital 9,690 9,694 Retained earnings 24,754 22,789 Accumulated other comprehensive income 662 844 Treasury stock, at cost - 170,849 and 153,781 shares, respectively (3,678) (3,073) Total stockholders' equity 33,315 32,141 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 444,603 $ 408,933
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PSB HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended (dollars in thousands, September 30, September 30, except per share data - unaudited) 2004 2003 2004 2003 Interest and dividend income: Loans, including fees $ 4,882 $ 4,594 $ 14,150 $ 13,466 Securities: Taxable 454 359 1,368 1,475 Tax-exempt 247 232 735 676 Other interest and dividends 55 56 147 175 Total interest and dividend income 5,638 5,241 16,400 15,792 Interest expense: Deposits 1,543 1,368 4,194 4,312 FHLB advances 515 506 1,485 1,520 Other borrowings 59 61 209 154 Total interest expense 2,117 1,935 5,888 5,986 Net interest income 3,521 3,306 10,512 9,806 Provision for loan losses 195 240 675 705 Net interest income after provision for loan losses 3,326 3,066 9,837 9,101 Noninterest income: Service fees 320 323 933 951 Mortgage banking 187 655 655 1,499 Investment and insurance sales commissions 164 115 345 303 Net gain (loss) on sale of securities - (19) 111 (19) Other noninterest income 93 69 315 257 Total noninterest income 764 1,143 2,359 2,991 Noninterest expense: Salaries and employee benefits 1,718 1,508 4,813 4,343 Occupancy and facilities 445 286 1,107 859 Loss on abandonment of premises and equipment - - 329 - Data processing and other office operations 155 131 502 418 Advertising and promotion 97 45 195 133 Other noninterest expenses 418 365 1,403 1,119 Total noninterest expense 2,833 2,335 8,349 6,872 Income before provision for income taxes 1,257 1,874 3,847 5,220 Provision for income taxes 510 639 1,364 1,704 Net income $ 747 $ 1,235 $ 2,483 $ 3,516 Basic earnings per share $ 0.43 $ 0.71 $ 1.44 $ 2.02 Diluted earnings per share $ 0.43 $ 0.71 $ 1.42 $ 2.00
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PSB HOLDINGS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Nine months ended September 30, 2004 - unaudited Accumulated Other Additional Comprehensive Common Paid-in Retained Income Treasury (dollars in thousands) Stock Capital Earnings (Loss) Stock Totals Balance January 1, 2004 $ 1,887 $ 9,694 $ 22,789 $ 844 $ (3,073) $ 32,141 Comprehensive income: Net income 2,483 2,483 Unrealized loss on securities available for sale, net of tax (115) (115) Reclassification adjustment for security gain included in net income, net of tax (67) (67) Total comprehensive income 2,301 Purchase of treasury stock (628) (628) Proceeds from stock options issued out of treasury (4) 15 11 Distribution of treasury stock in settlement of liability to Company directors 8 8 Cash dividends declared $.30 per share (518) (518) Balance September 30, 2004 $ 1,887 $ 9,690 $ 24,754 $ 662 $ (3,678) $ 33,315
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PSB HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 2004 and 2003 - unaudited 2004 2003 Cash flows from operating activities: Net income $ 2,483 $ 3,516 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and net amortization 885 1,495 Provision for loan losses 675 705 Gain on sale of mortgage loans (542) (1,871) Provision for servicing right valuation allowance 32 28 Loss on abandonment of premises and equipment 329 - (Gain) loss on sale of foreclosed assets (37) 37 (Gain) loss on sale of securities (111) 19 FHLB stock dividends (119) (138) Changes in operating assets and liabilities: Accrued interest receivable (178) 32 Other assets (218) 95 Other liabilities (922) (957) Net cash provided by operating activities 2,277 2,961 Cash flows from investing activities: Proceeds from sale and maturities of: Securities available for sale 11,591 40,016 Payment for purchase of: Securities available for sale (13,955) (30,122) Purchase of FHLB stock (271) - Net increase in loans (29,050) (40,345) Capital expenditures (5,269) (702) Proceeds from sale of foreclosed assets 7 280 Net cash used in investing activities (36,947) (30,873)
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Cash flows from financing activities: Net increase in non-interest-bearing deposits 1,513 1,242 Net increase in interest-bearing deposits 34,581 11,032 Proceeds from long-term FHLB advances 13,000 15,000 Repayments of long-term FHLB advances (10,000) (10,000) Net increase (decrease) in other borrowings (3,668) 7,181 Dividends declared (518) (496) Proceeds from issuance of stock options 11 - Purchase of treasury stock (628) (553) Net cash provided by financing activities 34,291 23,406 Net decrease in cash and cash equivalents (379) (4,506) Cash and cash equivalents at beginning 18,927 21,552 Cash and cash equivalents at end $ 18,548 $ 17,046 Supplemental cash flow information: Cash paid during the period for: Interest $ 5,814 $ 6,205 Income taxes 1,520 1,650 Noncash investing and financing activities: Loans charged off $ 126 $ 206 Loans transferred to foreclosed assets - 178 Loans originated on sale of foreclosed assets 70 251 Distribution of treasury stock in settlement of liability to Company directors 8 46
5 PSB Holdings, Inc. Notes to Consolidated Financial Statements NOTE 1 - GENERAL In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly PSB Holdings, Inc.'s ("PSB") financial position, results of its operations, and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Any reference to "PSB" refers to the consolidated or individual operations of PSB Holdings, Inc. and its subsidiary Peoples State Bank. These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in PSB's 2003 annual report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are susceptible to significant change include the determination of the allowance for loan losses, mortgage servicing right asset, and the valuation of investment securities. NOTE 2 - STOCK-BASED COMPENSATION PSB records expense relative to stock-based compensation using the "intrinsic value method". Since the exercise price is equal to the fair value of PSB's common stock on the date of the award, the intrinsic value of PSB's stock options is "zero" at the time of the award and no expense is recorded. As permitted by generally accepted accounting principles, PSB has not adopted the "fair value method" of expense recognition for stock-based compensation awards. Rather, the effects of the fair value method on PSB's earnings are presented on a pro forma basis. Because no grants of stock options were made during the three months and nine months ended September 30, 2004 and 2003, there was no pro forma impact to net income or earnings per share during these periods. Under the terms of an incentive stock option plan adopted during 2001, shares of unissued common stock are reserved for options to officers and key employees at prices not less than the 6 fair market value of the shares at the date of the grant. These options expire 10 years after the grant date with the first options scheduled to expire beginning in the year 2011. As of September 30, 2004, 27,536 options outstanding were eligible to be exercised at a weighted average exercise price of $16.00 per share. No additional shares of common stock remain reserved for future grants under the option plan approved by the shareholders. NOTE 3 - EARNINGS PER SHARE Basic earnings per share of common stock are based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options. Presented below are the calculations for basic and diluted earnings per share:
Three months ended Nine months ended September 30, September 30, (dollars in thousands, except per share data-unaudited) 2004 2003 2004 2003 Net income $ 747 $ 1,235 $ 2,483 $ 3,516 Weighted average shares outstanding 1,720,436 1,733,828 1,727,736 1,742,292 Effect of dilutive stock options outstanding 15,052 14,021 15,158 12,487 Diluted weighted average shares outstanding 1,735,488 1,747,849 1,742,894 1,754,779 Basic earnings per share $ 0.43 $ 0.71 $ 1.44 $ 2.02 Diluted earnings per share $ 0.43 $ 0.71 $ 1.42 $ 2.00
NOTE 4 - COMPREHENSIVE INCOME Comprehensive income as defined by current accounting standards for the three months and nine months ended September 30, 2004 and 2003 is as follows:
Three months ended Nine months ended September 30, September 30, (dollars in thousands - unaudited) 2004 2003 2004 2003 Net income $ 747 $ 1,235 $ 2,483 $ 3,516 Unrealized gain (loss) on securities available for sale, net of tax 666 (602) (115) (427) Reclassification adjustment for security (gain) loss included in net income, net of tax - 12 (67) 12 Comprehensive income $ 1,413 $ 645 $ 2,301 $ 3,101
7 NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Loans receivable are stated at unpaid principal balances plus net deferred loan origination costs less loans in process and the allowance for loan losses. Interest on loans is credited to income as earned. Interest income is not accrued on loans where management has determined collection of such interest is doubtful or those loans which are past due 90 days or more as to principal or interest payments. When a loan is placed on nonaccrual status, previously accrued but unpaid interest deemed uncollectible is reversed and charged against current income. After being placed on nonaccrual status, additional income is recorded only to the extent that payments are received or the collection of principal becomes reasonably assured. Interest income recognition on loans considered to be impaired under current accounting standards is consistent with the recognition on all other loans. Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual life of the underlying loan. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Management believes the allowance for loan losses is adequate to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. In accordance with current accounting standards, the allowance is provided for losses that have been incurred as of the balance sheet date. The allowance is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. The allowance for loan losses includes specific allowances related to loans which have been judged to be impaired as defined by current accounting standards. A loan is impaired when, based on current information, it is probable that PSB will not collect all amounts due in accordance with the contractual terms of the loan agreement. Management has determined that commercial, financial, agricultural, and commercial real estate loans that have a nonaccrual status or have had their terms restructured meet this definition. Large groups of homogenous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment. Specific allowances are based on discounted cash flows of expected future payments using the loan's initial effective interest rate or the fair value of collateral if the loan is collateral dependent. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the subsidiary Bank to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination. 8 Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate and are carried as "Loans held for sale" on the balance sheet. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method using quoted market prices. NOTE 6 - FORECLOSED REAL ESTATE Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value (after deducting estimated costs to sell) at the date of foreclosure, establishing a new cost basis. Costs related to development and improvement of property are capitalized, whereas costs related to holding property are expensed. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in any valuation allowance are included in loss on foreclosed real estate. NOTE 7 - INCOME TAXES During the quarter ended September 30, 2004, PSB resolved a Wisconsin state franchise tax audit initiated during 2003. Like many Wisconsin financial institutions, PSB has a Nevada based subsidiary that holds and manages investment assets which has not been subject to Wisconsin tax. The Wisconsin Department of Revenue (the "Department") has instituted an audit program specifically aimed at out-of-state bank subsidiaries that includes PSB. The Department has taken the position that a portion of the income of the out-of- state subsidiaries is taxable in Wisconsin. After consideration of the cost to litigate and the potential risk of a substantial loss in litigation, PSB decided to accept a standardized settlement offered by the Department to Wisconsin banks with out-of-state subsidiaries with no admission of wrongdoing. Although the settlement decreased quarterly net income by $150,000 ($.09 per share), PSB retained the ability to operate the subsidiary providing efficient and tax-effective management of the securities portfolio. NOTE 8 - CONTINGENCIES In the normal course of business, PSB is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements. In addition, the Internal Revenue Service ("IRS") is currently conducting an audit of PSB's open tax returns. PSB has been assessed approximately $170,000 in taxes, interest and penalties as a result of the IRS audit; however, this assessment is in the process of being appealed. PSB believes all tax returns were filed appropriately and at this time no additional tax expense has been recorded. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is presented to assist in the understanding and evaluation of PSB's financial condition and results of operations. It is intended to complement the unaudited financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10- Q and should be read in conjunction therewith. Dollar amounts are in thousands, except per share amounts. The quarterly report on Form 10-Q describes the business of PSB Holdings, Inc. and its subsidiary Peoples State Bank as in effect on September 30, 2004, and any reference to "PSB" refers to the consolidated or individual operations of PSB Holdings, Inc. and Peoples State Bank. Forward-looking statements have been made in this document that are subject to risks and uncertainties. While PSB believes these forward-looking statements are based on reasonable assumptions, all such statements involve risk and uncertainties that could cause actual results to differ materially from those contemplated in this report. The assumptions, risks, and uncertainties relating to the forward-looking statements in this report include those described under the caption "Cautionary Statements Regarding Forward-Looking Information" in Part I of PSB's Form 10-K for the year ended December 31, 2003 and, from time to time, in PSB's other filings with the Securities and Exchange Commission. BALANCE SHEET At September 30, 2004, total assets were $444,603, an increase of $13,387, or 3.1%, over June 30, 2004, and an increase of $35,670, or 8.7%, over December 31, 2003. Asset growth since June 30, 2004 and December 31, 2003 consisted of:
Three months ended Nine months ended Increase (decrease) in assets ($000s) September 30, 2004 September 30, 2004 $ % $ % Increase in residential real estate mortgage loans $ 4,242 5.0% $ 13,201 17.5% Increase in commercial real estate loans 3,204 2.0% 11,483 7.7% Increase in investment securities 3,020 4.2% 2,009 2.8% Increased investment in premises and equipment 1,533 14.6% 4,471 59.2% Increase (decrease) in cash and cash equivalents 1,036 5.9% (379) -2.0% Increase in commercial, industrial and agricultural loans 454 0.6% 4,391 6.6% Net change in remaining assets (various categories) (102) -0.5% 494 2.6% Total increase in assets $ 13,387 3.1% $ 35,670 8.7%
The commercial and residential real estate loan portfolio continued to grow at a steady pace during both the three months and nine months ended September 30, 2004. These types of loans have been and continue to be the primary loan products sold by PSB. The amount of residential real estate mortgages held since June 30, 2004 and December 31, 2003 increased by a substantial amount, and constitutes a higher percentage of the total loan portfolio. As long-term mortgage 10 rates increased slightly from past historical lows, customers have become more sensitive to higher long-term fixed rates, and PSB has begun to originate balloon type mortgages held on the balance sheet. The balloon maturity dates range from 3 to 7 years, with the initial rate fixed until the balloon maturity date. Most of the balloon loans are based on amortization periods ranging from 15 to 30 years. PSB expects commercial real estate and other commercial lending to increase during the coming quarter while seeing a reduction in the growth of retained on balance sheet residential mortgages. PSB has allocated and structured resources to be a leader in real-estate based lending, both residential and commercial. At the same time, PSB is subject to substantial competition from credit unions and other financial institutions for retail installment lending such as auto loans. A portion of PSB's consumer installment loans were converted to home equity loans during past quarters. Combined retail installment and home equity loans were $17,337 at September 30, 2004 and $16,980 at December 31, 2003. PSB does not expect consumer installment lending to be a key focus in the near term, and expects consumer installment loan principal to remain flat or decline slowly. Investment in premises and equipment grew dramatically during the three months and nine months ended September 30, 2004 primarily for costs of the 32,000 square foot, $4,800 new home office building (including furniture and equipment) which was placed in service on June 28, 2004. Final home office and campus area construction costs were capitalized during the September 2004 quarter totaling approximately $1,000. In addition, investment in real estate and construction in progress at the Weston, Wisconsin branch location to be opened early in 2005, and purchase of vacant land in a neighboring community for another potential future branch location increased premises and equipment approximately $500 during the past quarter. In connection with current construction on the new branch in Weston, Wisconsin, PSB has approximately $689 in outstanding construction cost commitments at September 30, 2004 that have not yet been paid. Asset growth since June 30, 2004 and December 31, 2003 was funded by the following:
Three months ended Nine months ended Increase (decrease) in liabilities and equity ($000s) September 30, 2004 September 30, 2004 $ % $ % Increase in core deposits (including MMDA) $ 11,815 5.3% $ 9,078 4.0% Increase in retail certificates of deposit > $100 4,655 9.3% 14,551 36.3% Increase in FHLB advances 3,000 6.4% 3,000 6.4% Increase in stockholders' equity 1,076 3.3% 1,174 3.7% Net decrease in other liabilities (various categories) (660) -25.1% (930) -32.0% Decrease in other borrowings (2,261) -24.9% (3,668) -35.0% Increase (decrease) in wholesale certificates of deposit (4,238) -6.5% 12,465 25.6% Total increase in liabilities and stockholders' equity $ 13,387 3.1% $ 35,670 8.7%
Although available liquidity has tightened during 2004 as PSB experienced strong loan growth with little core deposit growth, core deposits increased substantially during the quarter ended 11 September 30, 2004 increasing $11,815. This growth allowed PSB to let some wholesale certificates of deposit run-off upon maturity and decreased wholesale certificates by $4,238 during the quarter. Despite recent growth however, the majority of 2004 funding during the nine months ended September 30, 2004 has been from an increase in retail certificates greater than $100, and wholesale certificates, accounting for 75.7% of the asset growth. PSB does not expect to see continued core deposit growth at levels seen during the September 2004 quarter. The September 2004 quarter earnings press release filed on Form 8-K dated October 27, 2004 incorrectly stated that core deposits increased $22,900, wholesale borrowings (including FHLB advances) increased $10,200 and jumbo retail certificates of deposit increased $16,300 during the 12 months ended September 2004. The release further incorrectly stated that during the quarter ended September 2004, wholesale funds decreased $11,000 and that retail deposits and local borrowings comprised 69.2% of total asset funding. The earnings press release should have stated that core deposits increased $14,855 (not $22,900), wholesale borrowings increased $19,932 (not $10,200), and jumbo retail certificates increased $14,616 (not $16,300) during the 12 months ended September 2004. Likewise, the release should have stated that wholesale funds decreased $1,238 (not $11,000) during the quarter ended September 2004, and that retail deposits and local borrowings comprised 67.1% of total asset funding (not 69.2%). The errors were inadvertent, did not affect reported earnings, and wholesale funding was available in sufficient amounts at September 30, 2004. Management of PSB does not consider the error to be material to an understanding of PSB's financial condition or operations as a whole as presented in the October 27, 2004 earnings press release.
Table 1: Period-End Loan Composition September 30, September 30, December 31, 2003 Dollars Dollars Percentage of total Percentage (dollars in thousands) 2004 2003 2004 2003 Dollars of Total Commercial, industrial and agricultural $ 71,325 $ 70,928 21.1% 23.5% $ 66,934 21.7% Commercial real estate mortgage 160,168 140,266 47.6% 46.5% 148,685 48.3% Residential real estate mortgage 88,477 73,291 26.2% 24.3% 75,276 24.4% Residential real estate loans held for sale 62 179 0.0% 0.1% 207 0.1% Consumer home equity 10,557 8,637 3.1% 2.9% 9,252 3.0% Consumer and installment 6,780 8,225 2.0% 2.7% 7,728 2.5% Totals $ 337,369 $ 301,526 100.0% 100.0% $ 308,082 100.0%
The loan portfolio is PSB's primary asset subject to credit risk. PSB's process for monitoring credit risks includes weekly analysis of loan quality, delinquencies, non-performing assets, and potential problem loans. Loans are placed on a nonaccrual status when they become contractually past due 90 days or more as to interest or principal payments. All interest accrued but not collected for loans (including applicable impaired loans) that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis until qualifying for return to accrual status. Loans are returned to accrual status 12 when all the principal and interest amounts contractually due have been collected and there is reasonable assurance that repayment according to the contractual terms will continue. The aggregate amount of nonperforming assets decreased $41 to $3,238 at September 30, 2004 from $3,279 at June 30, 2004, and has decreased $181 from $3,419 at December 31, 2003. Nonperforming loans also include restructured loans until six consecutive monthly payments are received under the new loan terms. Total nonperforming assets as a percentage of total assets continues to decline slightly at .73%, .76%, and .84% at September 30, 2004, June 30, 2004, and December 31, 2003, respectively. PSB also tracks delinquencies on a contractual basis quarter to quarter. Loans contractually delinquent 30 days or more as a percentage of gross loans were .71% at September 30, 2004 compared to .84% at June 30, 2004, and .63% at December 31, 2003. The allowance for loan losses increased to 1.22% of gross loans at September 30, 2004 compared to 1.15% at December 31, 2003.
Table 2: Allowance for Loan Losses Three months ended Nine months ended September 30, September 30, (dollars in thousands) 2004 2003 2004 2003 Allowance for loan losses at beginning $ 3,906 $ 3,517 $ 3,536 $ 3,158 Provision for loan losses 195 240 675 705 Recoveries on loans previously charged-off 15 13 22 35 Loans charged off (9) (78) (126) (206) Allowance for loan losses at end $ 4,107 $ 3,692 $ 4,107 $ 3,692
Nonperforming assets include: 1) loans that are either contractually past due 90 days or more as to interest or principal payments, on a nonaccrual status, or the terms of which have been renegotiated to provide a reduction or deferral of interest or principal (restructured loans), and 2) foreclosed assets. 13
Table 3: Nonperforming Assets September 30, Dec. 31, (dollars in thousands) 2004 2003 2003 Nonaccrual loans $ 2,594 $ 2,775 $ 3,119 Accruing loans past due 90 days or more - 7 - Restructured loans not on nonaccrual 592 490 216 Total nonperforming loans 3,186 3,272 3,335 Foreclosed assets 52 183 84 Total nonperforming assets $ 3,238 $ 3,455 $ 3,419 Nonperforming loans as a % of gross loans receivable 0.94% 1.09% 1.08% Total nonperforming assets as a % of total assets 0.73% 0.87% 0.84%
LIQUIDITY Liquidity refers to the ability of PSB to generate adequate amounts of cash to meet PSB's need for cash at a reasonable cost. PSB manages its liquidity to provide adequate funds to support borrowing needs and deposit flow of its customers. Management views liquidity as the ability to raise cash at a reasonable cost or with a minimum of loss and as a measure of balance sheet flexibility to react to marketplace, regulatory, and competitive changes. Deposit growth is the primary source of funding. Retail core and time deposits less than $100 as a percentage of total funding sources were 57.8% at September 30, 2004, 56.7%% at June 30, 2004, and 60.9% at December 31, 2003. Federal Home Loan Bank advances and broker and national certificates of deposit represent a significant portion of PSB's total funding ability, which has increased steadily during the past two years from 23.0% of total funding sources at December 31, 2002, to 25.6% at December 31, 2003, to 28.4% at June 30, 2004 and 27.2% at September 30, 2004. 14
Table 4: Period-end Deposit Composition September 30, 2004 2003 (dollars in thousands) $ % $ % Non-interest bearing demand $ 52,076 14.8% $ 46,700 15.1% Interest-bearing demand and savings 55,024 15.6% 45,257 14.6% Money market deposits 65,816 18.7% 70,747 22.8% Retail time deposits less than $100 63,823 18.0% 59,180 19.0% Total core deposits 236,739 67.1% 221,884 71.5% Retail time deposits $100 and over 54,584 15.5% 39,968 12.9% Broker and national time deposits less than $100 4,889 1.4% 11,011 3.6% Broker and national time deposits $100 and over 56,296 16.0% 37,242 12.0% Totals $ 352,508 100.0% $ 310,105 100.0%
The interest rate paid on money market deposits is adjustable based on PSB's discretion but generally tracks the movements of average bank money market funds. Deposits due to investors as part of PSB's secondary market loan servicing activities included in total non-interest bearing demand deposits were approximately $1,859 at September 30, 2004, compared to $3,071 at June 30, 2004 and $2,344 at December 31, 2003. Excluding these accounts, non-interest bearing demand deposits grew $1,998, or 4.1% during the nine months ended September 30, 2004. PSB originates retail certificates of deposit with local depositors under a program known as the Certificate of Deposit Account Registry System (CDARS) in which PSB customer deposits (with participation of other banks in the CDARS network) are able to obtain levels of FDIC deposit insurance coverage in amounts greater than traditional limits. For purposes of Table 4 above, these certificates are included in retail time deposits $100 and over and totaled $8,026 at September 30, 2004 and $300 at September 30, 2003. Although classified as retail time deposits in the table above, these balances are required to be classified as broker deposits on PSB's quarterly regulatory call reports. 15
Table 5: Summary of Changes by Significant Deposit Source September 30, % Change from prior year (dollars in thousands) 2004 2003 2004 2003 Total time deposits $100 and over $ 110,880 $ 77,210 43.6% 19.3% Total broker and national time deposits 61,185 48,253 26.8% 19.9% Total retail time deposits 118,407 99,148 19.4% 1.1% Core deposits, including money market deposits 236,739 221,884 6.7% 8.3%
The increase in deposits of $36,094 (including broker and national time deposits) has been inadequate to fund asset growth during the nine months ending September 30, 2004. The primary alternative funding sources utilized are Federal Home Loan Bank advances, federal funds purchased, and brokered time deposits. Due to loan growth in excess of core deposit growth, to fund larger commercial loan originations or acquire other large blocks of funding, PSB actively purchases broker and other national time deposits. PSB manages such deposits to control the potential volatility of such funds while lowering overall deposit borrowing costs. Consequently, broker and national deposits increased substantially over the prior year, while local retail deposits have shown modest growth in comparison. PSB policy is to limit broker and national time deposits to 20% of total assets. As of September 30, 2004, broker and national time deposits were 13.8% of total assets compared to 15.2% at June 30, 2004, and 11.9% at December 31, 2003. Net additional FHLB advances of $3,000 were also obtained. The net increase in advances of $3,000 occurred during the three months ended September 30, 2004. Unused credit advances from the Federal Home Loan Bank of Chicago available to PSB at September 30, 2004 totaled approximately $35,400 based on an open line of credit and securities available for pledging for advances. Available but unused credit advances from the FHLB were approximately $37,700 at June 30, 2004 and $33,600 million at December 31, 2003. In addition, PSB had unused commitments from other correspondent banks for overnight federal funds purchased up to $22,500 million as of September 30, 2004. PSB believes its current liquidity position and sources of funds for liquidity management is adequate. Table 6 below presents maturity repricing information as of September 30, 2004. The following repricing methodologies should be noted: 1. Money market deposit accounts are considered fully repriced within 90 days. NOW and savings accounts are considered "core" deposits as they are generally insensitive to interest rate changes. These deposits are generally considered to reprice beyond five years. 2. Nonaccrual loans are considered to reprice beyond five years. 16 3. Assets and liabilities with contractual calls or prepayment options are repriced according to the likelihood of the call or prepayment being exercised in the current interest rate environment. 4. Impact of rising or falling interest rates is based on a parallel yield curve change that is fully implemented within a 12 month time horizon.
Table 6: Interest Rate Sensitivity Gap Analysis September 30, 2004 (dollars in thousands) 0-90 Days 91-180 Days 181-365 Days 1-2 Yrs. Bynd 2-5 Yrs. Beyond 5 Yrs. Total Earning assets: Loans $ 127,342 $ 21,932 $ 40,318 $ 56,739 $ 73,107 $ 17,931 $337,369 Securities 5,602 4,049 9,944 16,286 24,298 14,302 74,481 FHLB stock 2,834 2,834 Other earning assets 7,621 7,621 Total $ 143,399 $ 25,981 $ 50,262 $ 73,025 $ 97,405 $ 32,233 $422,305 Cumulative rate sensitive assets $ 143,399 $ 169,380 $ 219,642 $ 292,667 $ 390,072 $ 422,305 Interest-bearing liabilities Interest-bearing $ 111,323 $ 25,451 $ 52,856 $ 25,729 $ 40,427 $ 44,646 $300,432 deposits FHLB advances 5,000 13,000 6,000 26,000 50,000 Other borrowings 2,327 1,011 344 1,400 1,725 6,807 Total $ 118,650 $ 39,462 $ 59,200 $ 27,129 $ 68,152 $ 44,646 $ 357,239 Cumulative interest sensitive liabilities $ 118,650 $ 158,112 $ 217,312 $ 244,441 $ 312,593 $ 357,239 Interest sensitivity gap for the individual period $ 24,749 $ (13,481) $ (8,938) $ 45,896 $ 29,253 $ (12,413) Ratio of rate sensitive assets to rate sensitive liabilities for the individual period 120.9% 65.8% 84.9% 269.2% 142.9% 72.2% Cumulative interest sensitivity gap $ 24,749 $ 11,268 $ 2,330 $ 48,226 $ 77,479 $ 65,066 Cumulative ratio of rate sensitive assets to rate sensitive liabilities 120.9% 107.1% 101.1% 119.7% 124.8% 118.2%
At September 30, 2004, if interest rates had risen 200 basis points or had fallen 100 basis points, the 365 day cumulative ratio of rate sensitive assets to rate sensitive liabilities would have changed from approximately 101% to 92% (if up 200 basis points) and 104% (if down 100 basis points), respectively. At June 30, 2004, if interest rates had risen 200 basis points or had fallen 100 basis points, the 365 day cumulative ratio of rate sensitive assets to rate sensitive liabilities 17 would have changed from approximately 92% to 89% (if up 200 basis points) and 96% (if down 100 basis points), respectively. At December 31, 2003, if interest rates had risen 200 basis points or had fallen 100 basis points, the 365 day cumulative ratio of rate sensitive assets to rate sensitive liabilities would have changed from approximately 110% to 102% (if up 200 basis points) and 112% (if down 100 basis points), respectively. During the nine months ended September 30, 2004, PSB has increased the amount of fixed rate commercial and real estate loans held (with original fixed terms generally from 3 to 7 years) which have been funded in part by short-term wholesale borrowings and brokered time deposits of equivalent or shorter terms. In addition, as of September 30, 2004, $19,000 of FHLB advances with original long-term maturities and a weighted average rate of 6.16% will mature within 365 days, which has lowered the cumulative gap ratio to be less asset sensitive than it was nine months ago. However, these FHLB advances are expected to be refinanced upon maturity at significantly lower rates while also extending maturities in excess of one year. This will have the impact of increasing the cumulative gap ratio while decreasing funding costs. During the quarter ended September 30, 2004, the cumulative gap ratio increased from 92% to 101% (more asset sensitive), in part due to acquiring a new $3,000 five year fixed rate FHLB advance and conversion of a $5,000 monthly maturity FHLB advance to a five year fixed rate maturity. The Asset/Liability Committee uses financial modeling techniques that measure the interest rate risk. Policies established by PSB's Asset/Liability Committee are intended to limit exposure of earnings at risk. A formal liquidity contingency plan exists that directs management to the least expensive liquidity sources to fund sudden and unanticipated liquidity needs. PSB also uses various policy measures to assess the adequacy of PSB's liquidity and interest rate risk as described below. Basic Surplus PSB measures basic surplus as the amount of existing net liquid assets (after deducting short-term liabilities and coverage for anticipated deposit funding outflows during the next 30 days) divided by total assets. The basic surplus calculation does not consider unused but available correspondent bank federal funds purchased, as those funds are subject to availability based on the correspondent bank's own liquidity needs and therefore are not guaranteed contractual funds. PSB's basic surplus, including available open line of credit FHLB advances not yet utilized at September 30, 2004, June 30, 2004, and December 31, 2003, was 6.6%, 7.0%, and 8.0%, respectively and above the 5% minimum required by policy. The decline in the basic surplus is primarily a result of fewer securities available for potential pledging (such securities have been pledged for new municipal deposits). Interest Rate Risk Limits PSB balances the need for liquidity with the opportunity for increased net interest income available from longer term loans held for investment and securities. To measure the impact on net interest income from interest rate changes, PSB models interest rate simulations on a quarterly basis. Company policy is that projected net interest income over the next 12 months will not be reduced by more than 15% given a change in interest rates of up to 200 basis points. 18 At September 30, 2004, June 30, 2004, and December 31, 2003, net interest income for the next 12 months was projected to increase .83%, decrease ..46%, and increase 3.17%, respectively, if rates increase 200 basis points. At September 30, 2004, June 30, 2004, and December 31, 2003, net interest income for the next 12 months was projected to decrease 2.46%, decrease .70%, and decrease 2.50%, respectively, if rates decrease 100 basis points. These changes are within policy requirements and considered acceptable by management. Core Funding Utilization To assess whether interest rate sensitivity beyond one year helps mitigate or exacerbate the short-term rate sensitive position, a quarterly measure of core funding utilization is made. Core funding is defined as liabilities with a maturity in excess of 60 months and capital. "Core" deposits including DDA, NOW and non-maturity savings accounts (except money market accounts) are also considered core long-term funding sources. The core funding utilization ratio is defined as assets with a maturity in excess of 60 months divided by core funding. PSB's target for the core funding utilization ratio is to remain at 80% or below given the same 200 basis point changes in rates that apply to the guidelines for interest rate risk limits exposure described previously. At September 30, 2004, June 30, 2004, and December 31, 2003, PSB's core funding utilization ratio was projected to be 52.62%, 54.11% and 46.53%, respectively, after a rate increase of 200 basis points and was therefore within policy requirements. CAPITAL RESOURCES Stockholders' equity at September 30, 2004 increased $1,174 to $33,315 or 3.7% from $32,141 at December 31, 2003. Net income retained during the nine months ended September 30, 2004, net of cash dividends of $518 and shareholder stock buybacks of $628 was $1,337. Capital decreased $182 since December 31, 2003 from a decline in the unrealized gain on securities available for sale (net of tax effects). All other net increases in capital totaled $19. Stockholders' equity included unrealized gains on securities available for sale, net of their tax effect, of $662 at September 30, 2004 compared to unrealized gains of $844 at December 31, 2003. The adequacy of PSB's capital is regularly reviewed to ensure sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. As of September 30, 2004 and December 31, 2003, PSB's subsidiary bank's Tier 1 risk-based capital ratio, total risk-based capital, and Tier 1 leverage ratio were in excess of regulatory minimums and were classified as "well-capitalized". Failure to remain well-capitalized would prevent PSB from obtaining future wholesale broker time deposits which have been an important source of funding during the past several years. Average tangible capital to average assets was 7.46% during the September 2004 quarter, 7.61% during the June 2004 quarter, and 7.85% during the December 31, 2003 quarter. Regulatory capital has decreased during 2004 as asset growth has exceeded Tier 1 capital growth from retained net income. Management believes PSB to be well capitalized at September 30, 2004 and expects to remain well capitalized during 2004 based on planned asset growth and shareholder dividend payments. 19 PSB maintains an annual, ongoing share repurchase program of up to 1% of outstanding shares per year and 9,300 shares at $34.90 per share were purchased under this program during the third quarter of 2004 which completed the annual buyback program for 2004. During the nine months ended September 30, 2004, PSB repurchased a total of 18,001 shares (17,300 shares for the buyback program, and 701 shares to fund an employee stock option exercise) at an average price of $34.91 per share. For the remainder of 2004, management anticipates retaining capital to support asset growth while continuing a cash dividend to shareholders. During the September 2004 quarter, 701 shares of common stock were repurchased and re-issued to an employee exercising stock options previously held. The option share price was $15.83 per share. The shares repurchased to fund this option exercise were $34.00 per share.
Table 7: Capital Ratios - Consolidated Holding Company September 30, Dec 31, (dollars in thousands) 2004 2003 2003 Stockholders' equity $ 33,315 $ 31,400 $ 32,141 Disallowed mortgage servicing right assets (81) (75) (81) Unrealized gain on securities available for sale (662) (891) (844) Tier 1 regulatory capital 32,572 30,434 31,216 Add: allowance for loan losses 4,107 3,692 3,536 Total regulatory capital $ 36,679 $ 34,126 $ 34,752 Total assets $ 444,603 $ 397,018 $ 408,933 Disallowed mortgage servicing right assets (81) (75) (81) Unrealized gain on securities available for sale (662) (891) (844) Tangible assets $ 443,860 $ 396,052 $ 408,008 Risk-weighted assets (as defined by current regulations) $ 347,014 $ 310,999 $ 318,005 Tier 1 capital to average tangible assets (leverage ratio) 7.42% 7.84% 7.83% Tier 1 capital to adjusted risk-weighted assets 9.39% 9.79% 9.82% Total capital to adjusted risk-weighted assets 10.57% 10.97% 10.93%
A special 5% stock dividend was paid to shareholders on January 29, 2004. All references in the accompanying financial statements and statistical analysis to the number of common shares and per share amounts for 2003 have been restated to reflect the stock dividend. 20 RESULTS OF OPERATIONS Net income for the quarter ended September 30, 2004 was $747, or $.43 for basic and diluted earnings per share. Comparatively, net income for the quarter ended September 30, 2003, was $1,235, or $.71 per share for basic and diluted earnings per share. Operating results for the third quarter 2004 generated an annualized return on average assets of .67% and an annualized return on average equity of 8.98%, compared to 1.26% and 15.76% for the comparable period in 2003. However, results from operations were significantly impacted (for income) by mortgage banking income from customer refinancings in September 2003 and (for expense) settlement of a Wisconsin franchise tax audit during September 2004. Due to historically low long-term mortgage interest rates during 2003, mortgage banking income was unusually high from large numbers of customers refinancing existing mortgages. The mortgage refinancing boom increased 2003 net income by $284 (after tax impacts), or $.16 per share compared to 2004 mortgage banking activity. In addition, PSB settled an income tax audit with the Wisconsin Department of Revenue during 2004 which reduced earnings by $150 (after tax benefits), or $.09 per share. Excluding the impact of prior year mortgage refinancing income over 2004 and the tax settlement, PSB earned $897, or $.52 per share in the third quarter 2004 compared to $951, or $.55 per share in the third quarter 2003. For the nine months ended September 30, 2004 and 2003, net income was $2,483 and $3,516, respectively. Similar to the discussion of one-time charges to income discussed above, 2003 benefited from an ongoing mortgage banking income boom while 2004 has incurred one-time charges for settlement of the Wisconsin tax audit, and abandonment of the previous home office following construction of the new primary banking facility. The decrease in mortgage banking in 2004 compared to 2003 has been $511 (after tax impacts). The tax settlement cost of $150 described previously and loss on abandonment of home office cost of $199 (after tax benefits) totaled $349. If net income was adjusted to account for these factors, net income for the nine months ended September 30, 2004, and 2003 would have been $2,832 and $3,005, respectively. The following Table 8 presents PSB's consolidated quarterly summary financial data. 21
Table 8: Financial Summary (dollars in thousands, except per share data) Quarter ended Sept. 30, June 30, March 31, Dec. 31 Sept. 30, EARNINGS AND DIVIDENDS: 2004 2004 2004 2003 2003 Net interest income $ 3,521 $ 3,517 $ 3,474 $ 3,375 $ 3,306 Provision for loan losses $ 195 $ 240 $ 240 $ 130 $ 240 Other noninterest income $ 764 $ 855 $ 740 $ 1,120 $ 1,143 Other noninterest expense $ 2,833 $ 2,914 $ 2,602 $ 2,479 $ 2,335 Net income $ 897 $ 981 $ 954 $ 1,290 $ 1,235 Basic earnings per share (3) $ 0.43 $ 0.45 $ 0.55 $ 0.74 $ 0.71 Diluted earnings per share (3) $ 0.43 $ 0.45 $ 0.55 $ 0.74 $ 0.71 Dividends declared per share (3) $ - $ 0.300 $ - $ 0.286 $ - Net book value per share $ 19.41 $ 18.68 $ 19.33 $ 18.54 $ 18.11 Semi-annual dividend payout ratio n/a 29.84% n/a 19.88% n/a Average common shares outstanding 1,720,436 1,729,322 1,733,531 1,733,398 1,733,828 BALANCE SHEET - AVERAGE BALANCES: Loans receivable, net of allowances $ 331,167 $ 320,471 $ 307,109 $ 302,491 $ 288,448 for loss Assets $ 439,177 $ 426,826 $ 407,577 $ 399,351 $ 389,267 Deposits $ 347,015 $ 330,337 $ 312,455 $ 312,376 $ 307,752 Stockholders' equity $ 33,010 $ 32,942 $ 32,878 $ 32,095 $ 31,085 PERFORMANCE RATIOS: Return on average assets (1) 0.67% 0.73% 0.94% 1.28% 1.26% Return on average stockholders' 8.98% 9.52% 11.64% 15.95% 15.76% equity (1) Average tangible stockholders' equity to average assets 7.46% 7.61% 7.83% 7.85% 7.70% Net loan charge-offs to average loans 0.00% 0.01% 0.02% 0.09% 0.02% Nonperforming loans to gross loans 0.94% 0.98% 1.17% 1.08% 1.09% Allowance for loan losses to gross 1.22% 1.19% 1.16% 1.15% 1.23% loans Net interest rate margin (1)(2) 3.51% 3.64% 3.73% 3.65% 3.67% Net interest rate spread (1)(2) 3.17% 3.30% 3.38% 3.24% 3.21% Service fee revenue as a percent of average demand deposits (1) 2.52% 2.63% 2.60% 2.70% 2.48% Noninterest income as a percent of gross revenue 11.93% 13.54% 12.24% 17.56% 17.90% Efficiency ratio (2) 63.95% 64.54% 59.73% 53.47% 50.94% Noninterest expenses to average assets 2.56% 2.74% 2.56% 2.46% 2.38% (1) STOCK PRICE INFORMATION: High $ 35.25 $ 35.60 $ 35.60 $ 36.19 $ 32.61 Low $ 33.00 $ 34.50 $ 33.50 $ 31.43 $ 31.43 Market value at quarter-end $ 33.00 $ 34.50 $ 35.00 $ 33.62 $ 31.90 (1) Annualized (2) The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%. (3) Due to rounding, cumulative quarterly per share performance may not equal annual per share totals.
22 NET INTEREST INCOME Net interest income is the most significant component of earnings. Tax adjusted net interest income increased $225 (6.5%) from $3,441 for the quarter ended September 30, 2003 to $3,666 for the current quarter ended September 30, 2004. For the nine months ended September 30, 2004, tax adjusted net interest income increased $746 (7.3%) to $10,943 compared to $10,197 for September 2003. Quarterly tax-adjusted net interest margin as a percent of average interest earning assets decreased from 3.67% in September 2003 to 3.51% in September 2004. Net interest margin for the nine months ended September 30, 2004 and 2003 was 3.63% and 3.79%, respectively. During the past several quarters, PSB experienced a trend of compressed interest rate margins as maturing and prepaid loans and securities were repriced at significantly lower rates while deposit rates remained near their floor. Earning asset yields have decreased 19 basis points from 5.73% for the September 2003 quarter to 5.54% for the September 2004 quarter. However, the cost of liabilities declined only 15 basis points from 2.52% for the September 2003 quarter to 2.37% for the September 2004 quarter. Net interest margin during the September 2004 quarter declined as increases to the prime rate on adjustable rate commercial loans has not outweighed increases in time deposit rates paid to both local and wholesale depositors. The majority of time deposits originated by PSB are from 12 to 24 months and have increased as short-term rates have increased since June 2004. Approximately $73 million of commercial purpose loans, or 22% of gross loans, are tied to prime, short-term LIBOR or other adjustable rates. Despite the decline in net interest rate margin, total net interest income has increased due to earning asset growth. PSB expects prime rates to increase in coming periods as the Federal Open Markets Committee (FOMC) increases the discount rate. In light of PSB's low interest rate risk sensitivity as discussed previously, net interest margin is expected to remain at levels similar to that seen during the past several quarters. Despite an increase in short-term rates of .75% since June 2004 through September 2004, the PSB has not yet increased core savings, NOW, and discretionary money market rates. The rates continue to be .50%, .30%, and ..85%, respectively. These rates continue to be competitive in PSB's market area. However, if further discount rate increases are made by the FOMC, these core rates will likely experience pressure to increase. These products which carry the standard earnings rate represent approximately $88 million in deposits currently at a weighted average rate of .65%. Changes in net interest margin in future quarters will be significantly impacted by the ability to control core deposit rate increases while originating higher yielding loans in light of past discount rate increases since June 2004 and anticipated future discount rate increases. 23
Table 9A: Net Interest Income Analysis (Quarter) (dollars in thousands) Quarter ended September 30, 2004 Quarter ended September 30, 2003 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: Loans (1)(2) $ 335,157 $ 4,900 5.80% $ 292,023 $ 4,609 6.26% Taxable securities 47,388 454 3.80% 48,500 359 2.94% Tax-exempt securities (2) 24,575 374 6.04% 22,744 352 6.14% FHLB stock 2,821 42 5.91% 2,391 38 6.31% Other 3,972 13 1.30% 6,457 18 1.11% Total (2) 413,913 5,783 5.54% 372,115 5,376 5.73% Non-interest-earning assets: Cash and due from banks 14,645 11,439 Premises and equipment, net 11,230 6,302 Other assets 3,379 2,986 Allowance for loan losses (3,990) (3,575) Total $ 439,177 $ 389,267 Liabilities and stockholders' equity Interest-bearing liabilities: Savings and demand deposits $ 51,053 $ 86 0.67% $ 42,589 $ 63 0.59% Money market deposits 66,946 152 0.90% 69,230 161 0.92% Time deposits 178,575 1,305 2.90% 144,298 1,144 3.15% FHLB borrowings 47,413 515 4.31% 38,707 506 5.19% Other borrowings 10,105 59 2.32% 9,684 61 2.50% Total 354,092 2,117 2.37% 304,508 1,935 2.52% Non-interest-bearing liabilities: Demand deposits 50,441 51,635 Other liabilities 1,634 2,039 Stockholders' equity 33,010 31,085 Total $ 439,177 $ 389,267 Net interest income 3,666 3,441 Rate spread 3.17% 3.21% Net yield on interest-earning assets 3.51% 3.67% (1) Nonaccrual loans are included in the daily average loan balances outstanding. (2) The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.
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Table 9B: Net Interest Income Analysis (Nine Months) (dollars in thousands) Nine months ended Sept. 30, 2004 Nine months ended Sept. 30, 2003 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: Loans (1)(2) $ 323,418 $ 14,202 5.85% $ 273,854 $ 13,509 6.60% Taxable securities 47,619 1,368 3.83% 53,871 1,475 3.66% Tax-exempt securities (2) 24,603 1,114 6.03% 22,003 1,024 6.22% FHLB stock 2,658 118 5.91% 2,345 111 6.33% Other 3,706 29 1.04% 7,424 64 1.15% Total (2) 402,004 16,831 5.58% 359,497 16,183 6.02% Non-interest-earning assets: Cash and due from banks 13,325 10,200 Premises and equipment, net 9,926 6,229 Other assets 3,118 3,125 Allowance for loan losses (3,794) (3,396) Total $ 424,579 $ 375,655 Liabilities and stockholders' equity Interest-bearing liabilities: Savings and demand deposits $ 52,014 $ 259 0.66% $ 39,255 $ 182 0.62% Money market deposits 65,880 450 0.91% 68,449 520 1.02% Time deposits 163,842 3,485 2.83% 142,783 3,610 3.38% FHLB borrowings 47,011 1,485 4.21% 38,238 1,520 5.31% Other borrowings 12,783 209 2.18% 7,823 154 2.63% Total 341,530 5,888 2.30% 296,548 5,986 2.70% Non-interest-bearing liabilities: Demand deposits 48,150 46,307 Other liabilities 1,796 2,265 Stockholders' equity 33,103 30,535 Total $ 424,579 $ 375,655 Net interest income 10,943 10,197 Rate spread 3.28% 3.32% Net yield on interest-earning assets 3.63% 3.79% (1) Nonaccrual loans are included in the daily average loan balances outstanding. (2) The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.
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Table 10: Interest Expense and Expense Volume and Rate Analysis Nine months ended September 30, 2004 2004 compared to 2003 increase (decrease) due to (1) (dollars in thousands) Volume Rate Net Interest earned on: Loans (2) $ 2,456 $ (1,763) $ 693 Taxable securities (172) 65 (107) Tax-exempt securities (2) 121 (31) 90 FHLB stock 15 (8) 7 Other interest income (32) (3) (35) Total 2,388 (1,740) 648 Interest paid on: Savings and demand deposits 59 18 77 Money market deposits (20) (50) (70) Time deposits 534 (659) (125) FHLB borrowings 350 (385) (35) Other borrowings 98 (43) 55 Total 1,021 (1,119) (98) Net interest earnings $ 1,367 $ (621) $ 746 (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) The yield on tax-exempt loans and investment securities has been adjusted to its fully taxable equivalent using a 34% tax rate.
PROVISION FOR LOAN LOSSES Management determines the adequacy of the provision for loan losses based on past loan experience, current economic conditions, and composition of the loan portfolio. Accordingly, the amount charged to expense is based on management's evaluation of the loan portfolio. It is PSB's policy that when available information confirms that specific loans and leases, or portions thereof, including impaired loans, are uncollectible, these amounts are promptly charged off against the allowance. The provision for loan losses was $195 for the three months ended September 30, 2004, and $240 for the three months ended September 30, 2003. Net charge-offs as a percentage of average loans outstanding were .00% and .02% during the three months ended September 30, 2004 and 2003, respectively. During the past several quarters, PSB has seen an improvement in the credit quality of existing loans and has decreased the amount of provision made to the allowance to reflect this improvement. 26 Non-performing loans are reviewed to determine exposure for potential loss within each loan category. The adequacy of the allowance for loan losses is assessed based on credit quality and other pertinent loan portfolio information. The adequacy of the allowance and the provision for loan losses is consistent with the composition of the loan portfolio and recent credit quality history. NONINTEREST INCOME Noninterest income decreased $379 in the September 2004 quarter to $764 compared to $1,143 in 2003. However, $468 of the decline was in mortgage banking as substantial mortgage refinancing activity in 2003 did not recur in 2004 due to higher national mortgage rates. PSB serviced $157,800 of mortgage principal for other investors at September 30, 2004 compared to $148,700 at September 30, 2003. Separate from mortgage banking, noninterest income increased $89 during the quarter, in part from additional retail investment sales and insurance product commissions of $49 up 42% from the 2003 quarter. For the nine months ended September 30, noninterest income has declined $632 in 2004 compared to 2003. During this period, mortgage banking declined $844, which was offset partially by an increase in the gain on sale of securities of $130. Separate from these items, noninterest income increased $82, most of which is represented by an increase in investment and insurance sales commissions of $42. Peoples Insurance Services LLC, a commercial property and casualty insurance agency and brokerage started by PSB during September 2003, continues to build relationships in the Wausau area. The agency's net loss during the quarter and nine months ended September 2004 was $44 and $119, respectively (including inter-company cost allocations). Initial net losses have been in excess of original projections due to significantly lower than expected revenue growth. The reduction in consolidated PSB net income for the nine months ended September 30, 2004 from Peoples Insurance Services direct costs, net of tax benefits (excluding inter-company cost allocations) was approximately $94. Table 11: Mortgage Servicing Rights Activity Nine months ended September 30, 2004
Originated Valuation MSR Allowance Total January 1, 2004 $ 904 $ (90) $ 814 Originated servicing 263 263 Amortization charged to earnings (238) (238) Valuation adjustment charged to earnings (32) (32) September 30, 2004 $ 929 $ (122) $ 807
27 As a FHLB Mortgage Partnership Finance loan servicer, PSB has provided a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of the original loan principal sold to the FHLB on an aggregate pool basis. At September 30, 2004, the maximum obligation on the entire servicing portfolio for such guarantees was approximately $649 (.41% of the serviced principal) up from $493 (.33% of the serviced principal) at September 30, 2003, and $554 (.36% of the serviced principal) at December 31, 2003. Due to historical strength of mortgage borrowers in our markets, the original 1% of principal loss pool provided by the FHLB, and current economic conditions, management believes the possibility of losses under guarantees to the FHLB to be remote. Accordingly, no provision for a recourse liability has been made for this recourse obligation on loans currently serviced by PSB. NONINTEREST EXPENSE Noninterest operating expenses increased $498 to $2,833 in the quarter ended September 2004 compared to $2,335 during the quarter ended September 2003. Of that total, salaries and benefits increased $210, or 13.9% over 2003 from a 9% increase in employees since September 2003. In addition, occupancy and facilities costs increased $159, or 55.6% over 2003 but included one-time charges for moving into the new home office of $23 and settlement of a sales tax audit related largely to premises and equipment investment and maintenance of $52. Excluding these charges, occupancy and facilities costs increased $84, or 29.4% during the quarter, primarily from additional depreciation expense. Operating expense as a percent of average assets was 2.56% during the quarter ended September 2004 compared to 2.38% for the similar quarter during 2003. In addition, the September 2004 efficiency ratio was 63.95% compared to 50.94% during the same quarter in 2003. However, excluding the one-time charges outlined in the previous paragraph, operating expenses as a percent of average assets would have been 2.49% and the efficiency ratio would have been 62.26% during the September 2004 quarter. For the nine months ended September 30, 2004, operating expenses increased $1,477, or 21.5% due primarily to increased salaries and benefits of $470, or 10.8%. As mentioned previously, the number of employees has increased approximately 9% since September 30, 2003 while base salary increases for 2004 were modest at 2.9% of base pay. Abandonment of the prior home office during the June 2004 quarter increased expenses by $329, as that property was razed as part of the new home office and financial center project. Separately from that non-recurring charge, other occupancy expenses increased $248 over 2003 due to additional depreciation and the one-time September 2004 quarter charges discussed previously totaling $75. Other noninterest expenses included $127 of collection fees written off during January 2004 in response to regulatory requirements to account for collection fees as expense until collected, despite PSB's expectation that these fees will be collected from the borrower in the future as part of the loan agreement or from SBA loan guarantee reimbursements. 28 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the information provided in response to Item 7A of PSB's Form 10-K for the year ended December 31, 2003. ITEM 4. INTERNAL CONTROLS AND PROCEDURES As of the end of the period covered by this report, management, under the supervision, and with the participation, of PSB's President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of PSB's disclosure controls and procedures pursuant to Rule 13a-15(c) under the Securities Exchange Act of 1934. Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that PSB's disclosure controls and procedures were effective in all material respects. There have been no significant changes in PSB's internal controls or in other factors which could significantly affect internal controls subsequent to the date PSB carried out its evaluation, nor were there any significant deficiencies or material weaknesses identified which required any corrective action to be taken. 29 PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Purchases of Equity Securities Maximum number Total number (or approximate of shares (or dollar value) of Total number units) purchased shares (or units) of shares Average price as part of publicly that may yet be (or units) paid per share announced plans purchased under the purchased (or unit) or programs plans or programs Period (a) (b) (c) (d) July 2004 0 0 0 9,300 August 2004 9,481(1) $34.90 9,300 0 September 2004 701(2) 34.00 0 0 Total 10,182 $34.84 9,300 0 (1)Includes purchases of 181 shares at an average price of $34.84 by affiliates in transactions unrelated to PSB's corporate buy back program. (2)Represents purchases made in connection with the issuance of a like number of shares pursuant to the exercise of a stock option.
ITEM 6. EXHIBITS Exhibits required by Item 601 of Regulation S-K. Exhibit Number Description 31.1 Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 31.2 Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PSB HOLDINGS, INC. November 15, 2004 SCOTT M. CATTANACH Scott M. Cattanach Treasurer (On behalf of the Registrant and as Principal Financial Officer) 31 EXHIBIT INDEX TO FORM 10-Q OF PSB HOLDINGS, INC. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 PURSUANT TO SECTION 102(D) OF REGULATION S-T (17 C.F.R. Section 232.102(D)) The following exhibits are filed as part this report: 31.1 Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 31.2 Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002 EX-31.1 3 psbex31110q93004.txt PSB EXHIBIT 31.1 - CERTIFICATION OF CEO 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: November 15, 2004 DAVID K. KOPPERUD David K. Kopperud President and Chief Executive Officer EX-31.2 4 psbex31210q93004.txt PSB EXHIBIT 31.2 - CERTIFICATION OF CFO 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: November 15, 2004 SCOTT M. CATTANACH Scott M. Cattanach Treasurer (Principal Financial Officer) EX-32.1 5 psbex32110q93004.txt PSB EXHIBIT 32.1 - CERTIFICATION UNDER SARBANES-OXLEY Exhibit 32.1 CERTIFICATION OF PSB HOLDINGS, INC. UNDER SECTION 906 OF SARBANES-OXLEY ACT OF 2002 The undersigned Chief Executive Officer and Chief Financial Officer of PSB Holdings, Inc. (the "Company") certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that (1) the quarterly report on Form 10-Q of the Company for the quarterly period ended September 30, 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: November 15, 2004 DAVID K. KOPPERUD David K. Kopperud President and CEO SCOTT M. CATTANACH Scott M. Cattanach Treasurer (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----