-----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, B1wAzmKj8+6EunYJC841fxlrrKDTEaqKbwWjm/dYUmztdI0jvinWyqxXlPEDVTIh LTr3HB+gBGslyREASrbxiQ== 0000916480-05-000078.txt : 20050513 0000916480-05-000078.hdr.sgml : 20050513 20050513153702 ACCESSION NUMBER: 0000916480-05-000078 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050513 DATE AS OF CHANGE: 20050513 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: 05828970 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 psb10q33105.txt PSB FORM 10-Q - 3/31/05 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 0-26480 PSB HOLDINGS, INC. (Exact name of registrant as specified in charter) WISCONSIN 39-1804877 (State of incorporation)(I.R.S. Employer Identification Number) 1905 West Stewart Avenue Wausau, Wisconsin 54401 (Address of principal executive office) Registrant's telephone number, including area code: 715-842-2191 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X The number of common shares outstanding at May 5, 2005 was 1,712,771. PSB HOLDINGS, INC. FORM 10-Q Quarter Ended March 31, 2005 Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets March 31, 2005 (unaudited) and December 31, 2004 (derived from audited financial statements) 1 Consolidated Statements of Income Three Months Ended March 31, 2005 and 2004 (unaudited) 2 Consolidated Statement of Changes in Stockholders' Equity Three Months Ended March 31, 2005 (unaudited) 3 Consolidated Statements of Cash Flows Three Months Ended March 31, 2005 and 2004 (unaudited) 4 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 25 PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26 Item 6. Exhibits 26 i
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PSB HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS March 31, 2005 (unaudited), December 31, 2004 (derived from audited financial statements) (dollars in thousands, except per share data) March 31, December 31, 2005 2004 ASSETS Cash and due from banks $ 9,301 $ 12,680 Interest-bearing deposits and money market funds 1,877 3,265 Federal funds sold - 7,379 Cash and cash equivalents 11,178 23,324 Securities available for sale (at fair value) 71,083 68,894 Federal Home Loan Bank stock (at cost) 2,913 2,874 Loans held for sale 274 342 Loans receivable, net of allowance for loan losses of $4,303 and $4,157, respectively 361,876 343,923 Accrued interest receivable 1,943 1,744 Foreclosed assets 287 7 Premises and equipment 12,574 12,432 Mortgage servicing rights, net 818 839 Cash surrender value of bank-owned life insurance 4,582 - Other assets 1,164 595 TOTAL ASSETS $468,692 $454,974 LIABILITIES Non-interest-bearing deposits $ 48,458 $ 51,635 Interest-bearing deposits 316,926 306,590 Total deposits 365,384 358,225 Federal Home Loan Bank advances 52,000 52,000 Other borrowings 15,044 8,565 Accrued expenses and other liabilities 2,327 2,568 Total liabilities 434,755 421,358 STOCKHOLDERS' EQUITY Common stock - no par value with a stated value of $1 per share: Authorized - 3,000,000 shares Issued - 1,887,179 shares 1,887 1,887 Additional paid-in capital 9,655 9,672 Retained earnings 26,321 25,281 Accumulated other comprehensive income (loss) (194) 384 Treasury stock, at cost - 170,408 and 167,586 shares, respectively (3,732) (3,608) Total stockholders' equity 33,937 33,616 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $468,692 $454,974
1
PSB HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended (dollars in thousands, except per share data - unaudited) March 31, 2005 2004 Interest and dividend income: Loans, including fees $5,203 $4,554 Securities: Taxable 452 461 Tax-exempt 241 243 Other interest and dividends 68 46 Total interest and dividend income 5,964 5,304 Interest expense: Deposits 1,811 1,291 FHLB advances 550 466 Other borrowings 83 73 Total interest expense 2,444 1,830 Net interest income 3,520 3,474 Provision for loan losses 150 240 Net interest income after provision for loan losses 3,370 3,234 Noninterest income: Service fees 260 291 Mortgage banking 155 160 Investment and insurance sales commissions 170 91 Net gain on sale of securities 6 111 Increase in cash surrender value of life insurance 20 - Other noninterest income 192 87 Total noninterest income 803 740 Noninterest expense: Salaries and employee benefits 1,629 1,548 Occupancy and facilities 445 301 Data processing and other office operations 172 160 Advertising and promotion 63 34 Other noninterest expenses 331 559 Total noninterest expense 2,640 2,602 Income before provision for income taxes 1,533 1,372 Provision for income taxes 493 418 Net income $1,040 $ 954 Basic earnings per share $ 0.60 $ 0.55 Diluted earnings per share $ 0.60 $ 0.55
2
PSB HOLDINGS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Three months ended March 31, 2005 - unaudited Accumulated Other Additional Comprehensive Common Paid-in Retained Income Treasury (dollars in thousands) Stock Capital Earnings (Loss) Stock Totals Balance January 1, 2005 $1,887 $9,672 $25,281 $384 $(3,608) $33,616 Comprehensive income: Net income 1,040 1,040 Unrealized loss on securities available for sale, net of tax (576) (576) Reclassification adjustment for security gain included in net income, net of tax (2) (2) Total comprehensive income 462 Purchase of treasury stock (192) (192) Proceeds from stock options issued out of treasury (17) 65 48 Distribution of treasury stock in settlement of liability to Company directors 3 3 Balance March 31, 2005 $1,887 $9,655 $26,321 $(194) $(3,732) $33,937
3
PSB HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2005 and 2004 - unaudited 2005 2004 Cash flows from operating activities: Net income $ 1,040 $ 954 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and net amortization 396 244 Provision for loan losses 150 240 Deferred net loan origination costs (137) - Gain on sale of mortgage loans (110) (154) Provision for servicing right valuation allowance 13 60 Gain on sale of premises and equipment (2) - Gain on sale of foreclosed assets (2) (17) Gain on sale of securities (6) (111) Increase in cash surrender value of bank-owned life insurance (20) - FHLB stock dividends (39) (40) Changes in operating assets and liabilities: Accrued interest receivable (199) (99) Other assets (250) (118) Other liabilities (238) (1,200) Net cash provided by (used in) operating activities 596 (241) Cash flows from investing activities: Proceeds from sale and maturities of: Securities available for sale 3,476 3,808 Payment for purchase of: Securities available for sale (6,598) (3,749) Net increase in loans (18,210) (10,029) Capital expenditures (346) (1,908) Proceeds from sale of premises and equipment 2 - Proceeds from sale of foreclosed assets 2 - Purchase of bank-owned life insurance (4,562) - Net cash used in investing activities (26,236) (11,878) Cash flows from financing activities: Net decrease in non-interest-bearing deposits (3,177) (5,282) Net increase in interest-bearing deposits 10,336 6,571 Proceeds from long-term FHLB advances 8,000 10,000 Repayments of long-term FHLB advances (8,000) (10,000) Net increase in other borrowings 6,479 10,351 Proceeds from issuance of stock options 48 - Purchase of treasury stock (192) - Net cash provided by financing activities 13,494 11,640
4
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED Net decrease in cash and cash equivalents (12,146) (479) Cash and cash equivalents at beginning 23,324 18,927 Cash and cash equivalents at end $ 11,178 $ 18,448 Supplemental cash flow information: Cash paid during the period for: Interest $ 2,339 $ 1,825 Income taxes 135 408 Noncash investing and financing activities: Loans charged off $ 6 $ 83 Loans transferred to foreclosed assets 281 - Loans originated on sale of foreclosed assets - 17 Distribution of treasury stock in settlement of liability to Company directors 3 8
5 PSB Holdings, Inc. Notes to Consolidated Financial Statements NOTE 1 - GENERAL In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly PSB Holdings, Inc.'s ("PSB") financial position, results of its operations, and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Any reference to "PSB" refers to the consolidated or individual operations of PSB Holdings, Inc. and its subsidiary Peoples State Bank. These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in PSB's 2004 annual report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are susceptible to significant change include the determination of the allowance for loan losses, mortgage servicing right assets, and the valuation of investment securities. NOTE 2 - STOCK-BASED COMPENSATION PSB records expense relative to stock-based compensation using the "intrinsic value method." Since the exercise price is equal to the fair value of PSB's common stock on the date of the award, the intrinsic value of PSB's stock options is "zero" at the time of the award and no expense is recorded. As permitted by generally accepted accounting principles, PSB has not adopted the "fair value method" of expense recognition for stock-based compensation awards. Rather, the effects of the fair value method on PSB's earnings are presented on a pro forma basis. Because no grants of stock options were made during the three months ended March 31, 2005 and 2004, there was no pro forma impact to net income or earnings per share during these periods. Under the terms of an incentive stock option plan adopted during 2001, shares of unissued common stock are reserved for options to officers and key employees at prices not less than the fair market value of the shares at the date of the grant. These options expire 10 years after the 6 grant date with the first options scheduled to expire beginning in the year 2011. As of March 31, 2005, 21,215 options outstanding were eligible to be exercised at a weighted average exercise price of $16.06 per share. No additional shares of common stock remain reserved for future grants under the option plan approved by the shareholders. NOTE 3 - EARNINGS PER SHARE Basic earnings per share of common stock are based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options. Presented below are the calculations for basic and diluted earnings per share:
Three months ended (dollars in thousands, except per share data) March 31, 2005 2004 Net income $ 1,040 $ 954 Weighted average shares outstanding 1,721,058 1,733,531 Effect of dilutive stock options outstanding 10,558 15,130 Diluted weighted average shares outstanding 1,731,616 1,748,661 Basic earnings per share $ 0.60 $ 0.55 Diluted earnings per share $ 0.60 $ 0.55
NOTE 4 - COMPREHENSIVE INCOME Comprehensive income as defined by current accounting standards for the three months ended March 31, 2005 and 2004 is as follows: (dollars in thousands - unaudited) Three months ended March 31, 2005 2004 Net income $ 1,040 $ 954 Unrealized gain (loss) on securities available for sale, net of tax (576) 478 Reclassification adjustment for security gain included in net income, net of tax (2) (67) Comprehensive income $ 462 $ 1,365
7 NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Loans receivable are stated at unpaid principal balances plus net deferred loan origination costs less loans in process and the allowance for loan losses. Interest on loans is credited to income as earned. Interest income is not accrued on loans where management has determined collection of such interest is doubtful or those loans which are past due 90 days or more as to principal or interest payments. When a loan is placed on nonaccrual status, previously accrued but unpaid interest deemed uncollectible is reversed and charged against current income. After being placed on nonaccrual status, additional income is recorded only to the extent that payments are received or the collection of principal becomes reasonably assured. Interest income recognition on loans considered to be impaired under current accounting standards is consistent with the recognition on all other loans. Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual life of the underlying loan. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Management believes the allowance for loan losses is adequate to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. In accordance with current accounting standards, the allowance is provided for losses that have been incurred as of the balance sheet date. The allowance is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. The allowance for loan losses includes specific allowances related to loans which have been judged to be impaired as defined by current accounting standards. A loan is impaired when, based on current information, it is probable that PSB will not collect all amounts due in accordance with the contractual terms of the loan agreement. Management has determined that commercial, financial, agricultural, and commercial real estate loans that have a nonaccrual status or have had their terms restructured meet this definition. Large groups of homogenous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment. Specific allowances are based on discounted cash flows of expected future payments using the loan's initial effective interest rate or the fair value of collateral if the loan is collateral dependent. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the subsidiary Bank to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination. 8 Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate and are carried as "Loans held for sale" on the balance sheet. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method using quoted market prices. NOTE 6 - FORECLOSED REAL ESTATE Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value (after deducting estimated costs to sell) at the date of foreclosure, establishing a new cost basis. Costs related to development and improvement of property are capitalized, whereas costs related to holding property are expensed. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in any valuation allowance are included in loss on foreclosed real estate. NOTE 7 - INCOME TAXES The Internal Revenue Service (IRS) is currently conducting an audit of PSB's open tax returns. PSB has been assessed approximately $170,000 in taxes, interest, and penalties for the tax years ending 1999 through 2002 as a result of the IRS audit; however, this assessment is in the process of being appealed. PSB believes all tax returns were filed appropriately and, at this time, no additional tax expense for this has been recorded. NOTE 8 - CONTINGENCIES In the normal course of business, PSB is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is presented to assist in the understanding and evaluation of PSB's financial condition and results of operations. It is intended to complement the unaudited financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10- Q and should be read in conjunction therewith. Dollar amounts are in thousands, except per share amounts. The quarterly report on Form 10-Q describes the business of PSB Holdings, Inc. and its subsidiary Peoples State Bank as in effect on March 31, 2005, and any reference to "PSB" refers to the consolidated or individual operations of PSB Holdings, Inc. and Peoples State Bank. Forward-looking statements have been made in this document that are subject to risks and uncertainties. While PSB believes these forward-looking statements are based on reasonable assumptions, all such statements involve risk and uncertainties that could cause actual results to differ materially from those contemplated in this report. The assumptions, risks, and uncertainties relating to the forward-looking statements in this report include those described under the caption "Cautionary Statements Regarding Forward-Looking Information" in Part I of PSB's Form 10-K for the year ended December 31, 2004 and, from time to time, in PSB's other filings with the Securities and Exchange Commission.
BALANCE SHEET At March 31, 2005, total assets were $468,692, an increase of $13,718, or 3.0%, over December 31, 2004. Asset growth since December 31, 2004 consisted of: Three months ended Increase (decrease) in assets ($000s) March 31, 2005 $ % Increase in commercial, industrial and agricultural loans $11,027 15.2% Increase in commercial real estate mortgage loans 4,577 2.8% Purchase of bank-owned life insurance 4,562 n/a Increase in investment securities 2,189 3.2% Increase in residential real estate mortgage loans 1,995 2.1% Decrease in federal funds sold (7,379) -100.0% Decrease in cash and interest-bearing deposits (4,767) -29.9% Net change in remaining assets (various categories) 1,514 4.6% Total increase in assets $13,718 3.0%
PSB emphasized non real estate commercial loans during the first quarter 2005, and growth in this type of loan represented 80.4% of the total net increase in assets during the quarter. However, one new loan relationship of approximately $5 million contributed to the significant quarterly increase. Commercial lending growth is not anticipated to continue at this pace during all of 2005. 10 A decline in cash equivalents of $12,146 including federal funds sold of $7,379 held at December 31, 2004, funded a purchase of bank-owned life insurance of $4,562 and a significant portion of the $18,099 increase in gross loans during the quarter ended March 31, 2005.
Net asset growth since December 31, 2004 was funded by the following: Three months ended Increase (decrease) in liabilities and equity ($000s) March 31, 2005 $ % Increase in federal funds purchased $ 5,596 n/a Increase in core deposits (including MMDA) 5,417 2.2% Increase in wholesale certificates of deposit 1,317 2.4% Increase in other borrowings 883 10.3% Increase in retail certificates of deposit > $100 425 0.8% Increase in stockholders' equity 321 1.0% Net decrease in other liabilities (various categories) (241) -9.4% Total increase in liabilities and stockholders' equity $13,718 3.0%
Available liquidity tightened during the current quarter as PSB experienced strong loan growth without matching core deposit growth. A significant portion of net asset growth was funded with increases in short-term funding, both federal funds purchased and core deposits including NOW and savings accounts.
Table 1: Period-End Loan Composition March 31, March 31, December 31, 2004 Dollars Dollars Percentage of total Percentage (dollars in thousands) 2005 2004 2005 2004 Dollars of total Commercial, industrial, and agricultural $ 83,483 $ 70,995 22.8% 22.3% $ 72,456 20.8% Commercial real estate mortgage 169,108 152,852 46.2% 48.1% 164,531 47.2% Residential real estate mortgage 95,006 77,322 25.9% 24.3% 93,011 26.7% Residential real estate loans held for sale 274 140 0.1% 0.0% 342 0.1% Consumer home equity 12,203 9,591 3.3% 3.0% 11,620 3.3% Consumer and installment 6,379 7,250 1.7% 2.3% 6,462 1.9% Totals $366,453 $318,150 100.0% 100.0% $348,422 100.0%
The loan portfolio is PSB's primary asset subject to credit risk. PSB's process for monitoring credit risks includes monthly analysis of loan quality, delinquencies, nonperforming assets, and potential problem loans. Loans are placed on a nonaccrual status when they become contractually past due 90 days or more as to interest or principal payments. All interest accrued but not collected for loans (including applicable impaired loans) that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due have been collected and there is reasonable assurance that repayment according to the contractual terms will continue. 11 The aggregate amount of nonperforming assets increased $202 (7.2%) to $3,011 at March 31, 2005 from $2,809 at December 31, 2004. Nonperforming loans also include restructured loans until six consecutive monthly payments are received under the new loan terms. Total nonperforming assets as a percentage of total assets increased slightly to .64% from .62% at December 31, 2004, but decreased from .90% at March 31, 2004. PSB also tracks delinquencies on a contractual basis quarter to quarter. Loans contractually delinquent 30 days or more as a percentage of gross loans were .59% at March 31, 2005 compared to .56% at December 31, 2004, and .88% at March 31, 2004. The allowance for loan losses was 1.18% of gross loans at March 31, 2005 compared to 1.19% at December 31, 2004, and 1.16% at March 31, 2004.
Table 2: Allowance for Loan Losses Three months ended March 31, (dollars in thousands) 2005 2004 Allowance for loan losses at beginning $4,157 $3,536 Provision for loan losses 150 240 Recoveries on loans previously charged off 2 7 Loans charged off (6) (83) Allowance for loan losses at end $4,303 $3,700
Nonperforming assets include: 1) loans that are either contractually past due 90 days or more as to interest or principal payments, on a nonaccrual status, or the terms of which have been renegotiated to provide a reduction or deferral of interest or principal (restructured loans), and 2) foreclosed assets.
Table 3: Nonperforming Assets March 31, December 31, (dollars in thousands) 2005 2004 2004 Nonaccrual loans $2,148 $3,225 $2,174 Accruing loans past due 90 days or more - 270 - Restructured loans not on nonaccrual 576 213 628 Total nonperforming loans 2,724 3,708 2,802 Foreclosed assets 287 82 7 Total nonperforming assets $3,011 $3,790 $2,809 Nonperforming loans as a % of gross loans receivable 0.74% 1.17% 0.80% Total nonperforming assets as a % of total assets 0.64% 0.90% 0.62%
12 LIQUIDITY Liquidity refers to the ability of PSB to generate adequate amounts of cash to meet PSB's need for cash at a reasonable cost. PSB manages its liquidity to provide adequate funds to support borrowing needs and deposit flow of its customers. Management views liquidity as the ability to raise cash at a reasonable cost or with a minimum of loss and as a measure of balance sheet flexibility to react to marketplace, regulatory, and competitive changes. Deposit growth is the primary source of funding. Retail and local deposits and other local borrowings continue to comprise the bulk of asset funding and were 68.2% of total assets at March 31, 2005 compared to 68.8% of total assets at December 31, 2004 and 66.4% at March 31, 2004. Federal Home Loan Bank advances and broker and national certificates of deposit continue to represent a significant portion of PSB's total funding ability, and is expected to grow as a percentage of assets during the remainder of 2005.
Table 4: Period-end Deposit Composition March 31, 2005 2004 (dollars in thousands) $ % $ % Non-interest bearing demand $ 48,458 13.3% $ 45,281 14.3% Interest bearing demand and savings 72,276 19.8% 54,253 17.1% Money market deposits 67,576 18.4% 66,711 20.9% Retail time deposits less than $100 65,975 18.1% 59,753 18.8% Total core deposits 254,285 69.7% 225,998 71.1% Retail time deposits $100 and over 55,884 15.3% 43,767 13.8% Broker & national time deposits less than $100 3,507 1.0% 9,728 3.1% Broker & national time deposits $100 and over 51,708 14.1% 38,210 12.0% Totals $365,384 100.0% $317,703 100.0%
A significant portion of the increase in core deposits continues to come from interest bearing demand (NOW) deposits from local governmental entities. These deposits are required to be collateralized and carry an interest rate that moves with the overall market. NOW balances increased $7,702 during the quarter ended March 31, 2005, the majority of which were deposits from local governmental entities. Because the local governmental entities within these categories generally carry their highest annual balances during the first quarter of the year, this level of growth is not expected to continue. PSB originates retail certificates of deposit with local depositors under a program known as the Certificate of Deposit Account Registry System (CDARS) in which PSB customer deposits (with participation of other banks in the CDARS network) are able to obtain levels of FDIC deposit insurance coverage in amounts greater than traditional limits. For purposes of Table 4 above, these certificates are included in retail time deposits $100 and over and totaled $7,671 at March 31, 2005, $7,666 at December 31, 2004, and $1,747 at March 31, 2004. Although classified as retail time deposits in the table above, these balances are required to be classified as broker deposits on PSB's quarterly regulatory call reports. PSB policy is to limit broker and national 13 time deposits to 20% of total assets. As of March 31, 2005 and December 31, 2004, broker and national time deposits were 11.8% of total assets compared to 11.4% at March 31, 2004. Early in the second quarter of 2005, short-term funding in federal funds purchased were refinanced with short-term priced broker deposits. Broker deposits as a percentage of total assets is expected to increase during 2005 as loan growth continues to outpace core deposit growth.
Table 5: Summary of Changes by Significant Deposit Source March 31, % Change from prior year (dollars in thousands) 2005 2004 2005 2004 Total time deposits $100 and over $107,592 $81,977 31.2% 21.8% Total broker and national time deposits 55,215 47,938 15.2% 17.4% Total retail time deposits 121,859 103,520 17.7% 3.2% Core deposits, including money market deposits 254,285 225,998 12.5% 6.0%
Table 6 below presents maturity repricing information as of March 31, 2005. The following repricing methodologies should be noted: 1. Money market deposit accounts are considered fully repriced within 90 days. NOW and savings accounts are considered "core" deposits as they are generally insensitive to interest rate changes. These deposits are generally considered to reprice beyond five years. 2. Nonaccrual loans are considered to reprice beyond five years. 3. Assets and liabilities with contractual calls or prepayment options are repriced according to the likelihood of the call or prepayment being exercised in the current interest rate environment. 4. Impact of rising or falling interest rates is based on a parallel yield curve change that is fully implemented within a 12-month time horizon. 14
Table 6: Interest Rate Sensitivity Gap Analysis March 31, 2005 (dollars in thousands) 0-90 days 91-180 days 181-365 days 1-2 yrs Beyond 2-5 yrs Beyond 5 yrs Total Earning assets: Loans $143,663 $ 25,195 $ 38,474 $ 60,819 $ 77,793 $ 20,509 $366,453 Securities 4,083 2,775 5,558 12,927 32,342 13,398 71,083 FHLB stock 2,913 2,913 CSV bank-owned life ins. 4,582 4,582 Other earning assets 1,877 1,877 Total $152,536 $ 27,970 $ 44,032 $ 73,746 $110,135 $ 38,489 $446,908 Cumulative rate sensitive assets $152,536 $180,506 $224,538 $298,284 $408,419 $446,908 Interest-bearing liabilities Interest-bearing deposits $137,214 $ 30,458 $ 32,768 $ 38,647 $ 30,581 $ 47,258 $316,926 FHLB advances 14,000 - 6,000 5,000 27,000 52,000 Other borrowings 8,375 - 2,813 1,203 2,653 15,044 Total $159,589 $ 30,458 $ 41,581 $ 44,850 $ 60,234 $ 47,258 $383,970 Cumulative interest sensitive liabilities $159,589 $190,047 $231,628 $276,478 $336,712 $383,970 Interest sensitivity gap for the individual period $ (7,053) $ (2,488) $ 2,451 $ 28,896 $49,901 $ (8,769) Ratio of rate sensitive assets To rate sensitive liabilities For the individual period 95.6% 91.8% 105.9% 164.4% 182.8% 81.4% Cumulative interest sensitivity gap $ (7,053) $ (9,541) $ (7,090) $ 21,806 $ 71,707 $ 62,938 Cumulative ratio of rate sensitive assets to rate sensitive liabilities 95.6% 95.0% 96.9% 107.9% 121.3% 116.4%
At March 31, 2005, if interest rates had risen 200 basis points or had fallen 100 basis points, the 365-day cumulative ratio of rate sensitive assets to rate sensitive liabilities would have changed from approximately 97% to 94% (if up 200 basis points) and 102% (if down 100 basis points), respectively. At December 31, 2004, if interest rates had risen 200 basis points or had fallen 100 basis points, the 365-day cumulative ratio of rate sensitive assets to rate sensitive liabilities would have changed from approximately 101% to 95% (if up 200 basis points) and 105% (if down 100 basis points), respectively. At March 31, 2004, if interest rates had risen 200 basis points or had fallen 100 basis points, the 365-day cumulative ratio of rate sensitive assets to rate sensitive liabilities would have changed from approximately 99% to 94% (if up 200 basis points) and 103% (if down 100 basis points), respectively. The Asset/Liability Committee uses financial modeling techniques that measure the interest rate risk. Policies established by PSB's Asset/Liability Committee are intended to limit exposure of earnings at risk. A formal liquidity contingency plan exists that directs management to the least expensive liquidity sources to fund sudden and unanticipated liquidity needs. PSB also uses various policy measures to assess the adequacy of PSB's liquidity and interest rate risk as described below. 15 Basic Surplus PSB measures basic surplus as the amount of existing net liquid assets (after deducting short-term liabilities and coverage for anticipated deposit funding outflows during the next 30 days) divided by total assets. The basic surplus calculation does not consider unused but available correspondent bank federal funds purchased, as those funds are subject to availability based on the correspondent bank's own liquidity needs and therefore are not guaranteed contractual funds. PSB's basic surplus, including available open line of credit FHLB advances not yet utilized at March 31, 2005, December 31, 2004, and March 31, 2004, was 3.5%, 7.1%, and 5.5%. During the quarter ended March 31, 2005, basic surplus declined due in large part to pledging of securities for deposits from governmental entities, which reduced available net liquid assets. During the second quarter 2005, PSB has reallocated deposits to free up available collateral and anticipates presenting a basic surplus near 5% at June 30, 2005. Interest Rate Risk Limits PSB balances the need for liquidity with the opportunity for increased net interest income available from longer term loans held for investment and securities. To measure the impact on net interest income from interest rate changes, PSB models interest rate simulations on a quarterly basis. Company policy is that projected net interest income over the next 12 months will not be reduced by more than 15% given a change in interest rates of up to 200 basis points. At March 31, 2005, December 31, 2004, and March 31, 2004, net interest income for the next 12 months was projected to increase 1.28%, decrease .04%, and decrease .60%, respectively, if rates increase 200 basis points. At March 31, 2005, December 31, 2004, and March 31, 2004, net interest income for the next 12 months was projected to decrease .56%, decrease 2.15%, and decrease ..95%, respectively, if rates decrease 100 basis points. These changes are within policy requirements and considered acceptable by management. Core Funding Utilization To assess whether interest rate sensitivity beyond one year helps mitigate or exacerbate the short-term rate sensitive position, a quarterly measure of core funding utilization is made. Core funding is defined as liabilities with a maturity in excess of 60 months and capital. "Core" deposits including DDA, NOW and non-maturity savings accounts (except money market accounts) are also considered core long-term funding sources. The core funding utilization ratio is defined as assets with a maturity in excess of 60 months divided by core funding. PSB's target for the core funding utilization ratio is to remain at 80% or below given the same 200 basis point changes in rates that apply to the guidelines for interest rate risk limits exposure described previously. At March 31, 2005, December 31, 2004, and March 31, 2004, PSB's core funding utilization ratio was projected to be 49%, 46% and 46%, respectively, after a rate increase of 200 basis points and was therefore within policy requirements. CAPITAL RESOURCES Stockholders' equity at March 31, 2005 increased $321 to $33,937, or 1.0% from $33,616 at December 31, 2004. After shareholder stock buybacks of $192, net income retained during the 16 three months ended March 31, 2005 was $848. However, capital decreased $578 since December 31, 2004 from a decline in the unrealized gain on securities available for sale (net of tax effects) as increases in short-term rates reduced the value of fixed rate debt securities. All other net increases in capital totaled $51. Stockholders' equity included unrealized losses on securities available for sale, net of their tax effect, of $194 at March 31, 2005, compared to unrealized gains of $384 at December 31, 2004. The adequacy of PSB's capital is regularly reviewed to ensure sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. As of March 31, 2005 and December 31, 2004, PSB's subsidiary bank's Tier 1 risk-based capital ratio, total risk-based capital, and Tier 1 leverage ratio were in excess of regulatory minimums and were classified as "well-capitalized." Failure to remain well-capitalized would prevent PSB from obtaining future wholesale broker time deposits which have been an important source of funding during the past several years. Average tangible capital to average assets was 7.25% during the March 2005 quarter, 7.49% during the December 2004 quarter, and 7.83% during the March 2004 quarter. Regulatory capital has decreased during 2005 as asset growth has exceeded Tier 1 capital growth from retained net income. Management expects to obtain additional capital in 2005 from a pooled trust preferred capital issue or other non-dilutive capital issue to remain well-capitalized during 2005 based on planned asset growth and shareholder dividend payments. PSB maintains an annual, ongoing share repurchase program of up to 1% of outstanding shares per year and 6,000 shares at $32.00 per share were purchased under this program during the quarter ended March 31, 2005. 3,058 shares of the buyback were re-issued to fund an exercise of employee stock options, exercised at a price of $15.83 per share. During April 2005, PSB repurchased an additional 4,000 shares at $31.50 per share and anticipates that it will purchase another 7,200 shares during 2005 on the open market at prices then in effect.
Table 7: Capital Ratios - Consolidated Holding Company (dollars in thousands) March 31, Dec. 31, 2005 2004 2004 Stockholders' equity $ 33,937 $ 33,514 $ 33,616 Disallowed mortgage servicing right assets (82) (75) (84) Unrealized (gain) loss on securities available for sale 194 (1,255) (384) Tier 1 regulatory capital 34,049 32,184 33,148 Add: allowance for loan losses 4,303 3,700 4,157 Total regulatory capital $ 38,352 $ 35,884 $ 37,305 Total assets $468,692 $420,738 $454,974 Disallowed mortgage servicing right assets (82) (75) (84) Unrealized (gain) loss on securities available for sale 194 (1,255) (384) Tangible assets $468,804 $419,408 $454,506 Risk-weighted assets (as defined by current regulations) $368,398 $327,563 $350,224 Tier 1 capital to average tangible assets (leverage ratio) 7.33% 7.67% 7.40% Tier 1 capital to adjusted risk-weighted assets 9.24% 9.83% 9.46% Total capital to adjusted risk-weighted assets 10.41% 10.95% 10.65%
17 RESULTS OF OPERATIONS Net income for the quarter ended March 31, 2005 was $1,040, or $.60 for basic and diluted earnings per share. Comparatively, net income for the quarter ended March 31, 2004 was $954, or $.55 per share for basic and diluted earnings per share. The March 2005 quarter saw increased earnings over last year and 2005 net income is expected to be in a range of $4.3 million to $4.6 million. Operating results for the first quarter 2005 generated an annualized return on average assets of .91% and an annualized return on average equity of 12.41%, compared to .94% and 11.64% for the March 2004 quarter. The quarter ended March 31, 2005 benefited from two special items. The first was a large recovery of collection expenses on a problem loan that increased net income $61. In addition, a payout of PSB's investment on the sale of the Pulse ATM system (a cooperative) to Discover Financial Services increased net income $42. Net income for the quarter ended March 31, 2004 included the write-off of collection expenses of $127 and a large security gain of $111 as special items. Quarterly net income before these special collection items and all gains on sale of investment securities was $933 in 2005 compared to $964 in 2004. The following Table 8 presents PSB's consolidated quarterly summary financial data. 18
Table 8: Financial Summary (dollars in thousands, except per share data) Quarter ended March 31, Dec. 31, Sept. 30, June 30, March 31, EARNINGS AND DIVIDENDS: 2005 2004 2004 2004 2004 Net interest income $3,520 $3,577 $3,521 $3,517 $3,474 Provision for loan losses $ 150 $ 180 $ 195 $ 240 $ 240 Other noninterest income $ 803 $ 764 $ 764 $ 855 $ 740 Other noninterest expense $2,640 $2,626 $2,833 $2,914 $2,602 Net income $1,040 $1,043 $ 747 $ 782 $ 954 Basic earnings per share (3) $ 0.60 $ 0.61 $ 0.43 $ 0.45 $ 0.55 Diluted earnings per share (3) $ 0.60 $ 0.60 $ 0.43 $ 0.45 $ 0.55 Dividends declared per share (3) $ - $ 0.30 $ - $ 0.30 $ - Net book value per share $19.77 $19.55 $19.41 $18.68 $19.33 Semi-annual dividend payout ratio n/a 28.82% n/a 29.84% n/a Average common shares outstanding 1,721,058 1,717,394 1,720,436 1,729,322 1,733,531 BALANCE SHEET - AVERAGE BALANCES: Loans receivable, net of allowances for loss $354,136 $341,997 $331,167 $320,471 $307,109 Assets $465,083 $448,591 $439,177 $426,826 $407,577 Deposits $367,394 $353,310 $347,015 $330,337 $312,455 Stockholders' equity $ 33,989 $ 34,076 $ 33,010 $ 32,942 $ 32,878 PERFORMANCE RATIOS: Return on average assets (1) 0.91% 0.92% 0.67% 0.73% 0.94% Return on average stockholders' equity (1) 12.41% 12.18% 8.98% 9.52% 11.64% Average tangible stockholders' equity to average assets 7.25% 7.49% 7.46% 7.61% 7.83% Net loan charge-offs to average loans 0.00% 0.04% 0.00% 0.01% 0.02% Nonperforming loans to gross loans 0.74% 0.80% 0.94% 0.98% 1.17% Allowance for loan losses to gross loans 1.18% 1.19% 1.22% 1.19% 1.16% Net interest rate margin (1)(2) 3.40% 3.50% 3.51% 3.64% 3.73% Net interest rate spread (1)(2) 3.05% 3.12% 3.17% 3.30% 3.38% Service fee revenue as a percent of average demand deposits (1) 2.19% 2.22% 2.52% 2.63% 2.60% Noninterest income as a percent of gross revenue 11.87% 11.64% 11.93% 13.54% 12.24% Efficiency ratio (2) 59.11% 58.52% 63.95% 64.54% 59.73% Noninterest expenses to average assets (1) 2.30% 2.33% 2.56% 2.74% 2.56% STOCK PRICE INFORMATION: High $32.20 $33.25 $35.25 $35.60 $35.60 Low $31.85 $32.00 $33.00 $34.50 $33.50 Market value at quarter-end $31.85 $32.10 $33.00 $34.50 $35.00 (1)Annualized (2)The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%. (3)Due to rounding, cumulative quarterly per share performance may not equal annual per share totals.
19 NET INTEREST INCOME Net interest income is the most significant component of earnings. Tax adjusted net interest income increased $47 (1.3%) from $3,616 for the quarter ended March 31, 2004 to $3,663 for the current quarter ended March 31, 2005, but declined $60 from $3,723 for the quarter ended December 31, 2004. Net interest income has been negatively impacted by a flattening yield curve and competitive pressures on deposit rates while loan growth continued to be funded with higher cost wholesale funds. Margin on earning assets declined from 3.73% in the March 2004 quarter, and from 3.50% in the December 2004 quarter to 3.40% during the March 2005 quarter. Earning asset yields increased slightly and were 5.66% at March 2005, 5.59% at December 2004, and 5.60% at March 2004. However, the cost of interest-bearing liabilities increased from 2.24% at March 2004 to 2.47% at December 2004, and 2.61% at March 2005. PSB updated accounting procedures during March 2005 to improve recognition and amortization of deferred loan origination fees and costs in accordance with Statement of Financial Accounting Standard No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans ("FAS 91"). This change is more fully described in this Quarterly Report on From 10-Q under "Noninterest Expense." Tax-adjusted net interest margin before accounting adjustments for FAS 91 would have been 3.51% during the March 2005 quarter (compared to a reported 3.40%), 3.63% during the December 2004 quarter (compared to a reported 3.50%), and 3.78% in the March 2004 quarter (compared to a reported 3.73%). The increase in funding costs has been led by interest-bearing core deposits (excluding retail certificates of deposit), whose rate increased from .87% at December 2004 to 1.30% at March 2005, an increase of 43 basis points. This increase is due to several factors. Prior to the March 2005 quarter, recent increases in the Federal Reserve discount rate (totaling 125 basis points by December 31, 2004) were not yet reflected in core deposit rates, as the average rate for these deposits was .79% in the June 2004 quarter (the initial discount rate increase occurred in June 2004). Future discount rate increases are expected to continue to be reflected in the core deposit rates. In addition, a portion of the commercial loan growth in the March 2005 quarter was funded by high-yield money market and NOW accounts sold to new large depositors and local governmental entities earning rates tied to the 30-day LIBOR rate or other adjustable wholesale rates. Lastly, these core deposits made up a larger base of our funding, with average quarterly balances growing $20.0 million over the December 2004 quarter, an increase of 16.2%. As noted previously, because the local governmental entities within these categories generally carry their highest annual balances during the first quarter of the year, this level of average balance growth is not expected to continue. While PSB's balance sheet remains largely neutral to interest rate changes, to facilitate retention and growth in core deposits a change in the money market product to introduce higher tiered rates for higher balances effective April 1, 2005 is expected to continue the margin decline in the coming months. 20 Table 9: Net Interest Income Analysis
(dollars in thousands) Quarter ended March 31, 2005 Quarter ended March 31, 2004 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: Loans (1)(2) $358,351 $5,222 5.91% $310,718 $4,571 5.90% Taxable securities 46,739 452 3.92% 47,878 461 3.86% Tax-exempt securities (2) 24,511 365 6.04% 24,639 368 5.99% FHLB stock 2,900 40 5.59% 2,471 40 6.49% Other 4,734 28 2.40% 2,953 6 0.81% Total (2) 437,235 6,107 5.66% 388,659 5,446 5.62% Non-interest earning assets: Cash and due from banks 13,473 11,475 Premises and equipment, net 12,517 8,288 Cash surrender value of life insurance 2,728 - Other assets 3,345 2,764 Allowance for loan losses (4,215) (3,609) Total $465,083 $407,577 Liabilities & stockholders' equity Interest bearing liabilities: Savings and demand deposits $72,611 $239 1.33% $51,820 $85 0.66% Money market deposits 71,681 222 1.26% 66,568 154 0.93% Time deposits 174,939 1,350 3.13% 149,235 1,052 2.83% FHLB borrowings 48,889 550 4.56% 46,615 466 4.01% Other borrowings 12,283 83 2.74% 13,555 73 2.16% Total 380,403 2,444 2.61% 327,793 1,830 2.24% Non-interest bearing liabilities: Demand deposits 48,163 44,832 Other liabilities 2,528 2,074 Stockholders' equity 33,989 32,878 Total $465,083 $407,577 Net interest income 3,663 3,616 Rate spread 3.05% 3.38% Net yield on interest-earning assets 3.40% 3.73% (1)Nonaccrual loans are included in the daily average loan balances outstanding. (2)The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.
21
Table 10: Interest Expense and Expense Volume and Rate Analysis Three months ended March 31, 2005 2005 compared to 2004 (dollars in thousands) increase (decrease) due to (1) Volume Rate Net Interest earned on: Loans (2) $ 642 $ 9 $ 651 Taxable securities (11) 2 (9) Tax-exempt securities (2) (6) 3 (3) FHLB stock 7 (7) - Other interest income 4 18 22 Total 636 25 661 Interest paid on: Savings and demand deposits 34 120 154 Money market deposits 12 56 68 Time deposits 179 119 298 FHLB borrowings 22 62 84 Other borrowings (7) 17 10 Total 240 374 614 Net interest earnings $ 396 $(349) $ 47 (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) The yield on tax-exempt loans and investment securities has been adjusted to its fully taxable equivalent using a 34% tax rate.
PROVISION FOR LOAN LOSSES Management determines the adequacy of the provision for loan losses based on past loan experience, current economic conditions, and composition of the loan portfolio. Accordingly, the amount charged to expense is based on management's evaluation of the loan portfolio. It is PSB's policy that when available information confirms that specific loans and leases, or portions thereof, including impaired loans, are uncollectible, these amounts are promptly charged off against the allowance. The provision for loan losses was $150 for the three months ended March 31, 2005, and $240 for the three months ended March 31, 2004. Net charge-offs as a percentage of average loans outstanding were ..00% and .02% during the three months ended March 31, 2005 and 2004, respectively. PSB has seen an improvement in the credit quality of existing loans and has decreased the amount of provision made to the allowance to reflect this improvement. Nonperforming loans are reviewed to determine exposure for potential loss within each loan category. The adequacy of the allowance for loan losses is assessed based on credit quality and 22 other pertinent loan portfolio information. The adequacy of the allowance and the provision for loan losses is consistent with the composition of the loan portfolio and recent credit quality history. NONINTEREST INCOME Quarterly noninterest income increased $63 in the March 2005 quarter to $803 compared to $740 in 2004. However, a one-time payout of $70 was received during the March 2005 quarter from Discover Financial Services on the purchase of the Pulse ATM system (in which PSB was a cooperative member) which increased noninterest income. A decline of $105 in gain on sale of securities compared to the March 2004 quarter was offset largely by an increase in investment and insurance sales commissions of $79 during March 2005. Mortgage banking income was $155 in March 2005 compared to $160 in March 2004. Service fee income declined $31 to $260 in March 2005 compared to the prior year quarter, continuing a quarterly downward trend. However, PSB recently completed a comprehensive retail and commercial fee review and updated fees to be effective on April 1 for retail products and June 1 for commercial products. During February 2005, PSB purchased $4.5 million of bank-owned life insurance on bank officers in connection with new employee deferred compensation and incentive plans. The increase in cash surrender value of life insurance was $20 during the March 2005 quarter. The incremental tax-favored earnings on the life insurance are intended to offset the cost of the additional compensation plans. The previously disclosed compensation plans generally provide deferred compensation with benefits dependent on PSB achieving profit and growth benchmarks. Peoples Insurance Services LLC, our commercial property and casualty insurance agency and brokerage (a September 2003 start-up), incurred a net loss of $24 after tax benefits during March 2005, compared to a net loss of $31 during the March 2004 quarter (excluding internal cost allocations). Total revenue during the March 2005 quarter of $16 continues to be less than budgeted. Management continues to consider changes to agency operations and products to meet budget. As a FHLB Mortgage Partnership Finance loan servicer, PSB has provided a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of the original loan principal sold to the FHLB on an aggregate pool basis. At March 31, 2005, the maximum obligation on the entire servicing portfolio for such guarantees was approximately $787 (.49% of the serviced principal) up from $601 (.39% of the serviced principal) at March 31, 2004, and $743 (.46% of the serviced principal) at December 31, 2004. Due to historical strength of mortgage borrowers in our markets, the original 1% of principal loss pool provided by the FHLB, and current economic conditions, management believes the possibility of losses under guarantees to the FHLB to be remote. Accordingly, no provision for a recourse liability has been made for this recourse obligation on loans currently serviced by PSB. 23 NONINTEREST EXPENSE Noninterest operating expenses increased $38, or 1.5% to $2,640 in the quarter ended March 2005 compared to $2,602 during the quarter ended March 2004. Increases in salaries and wages of $81 and in occupancy expenses of $144 were offset by a decline in other noninterest expenses of $228. During the March 2005 quarter, a reimbursement of collection fees on a problem loan were recovered, which decreased other noninterest expenses by $101. Conversely, the March 2004 quarter included $127 of collection fees written off to other noninterest expense in response to regulatory requirements to account for collection fees as expense until collected. The increase in employee salaries and benefits of $81 previously mentioned was up 5.2% from the prior year. Company employees were granted inflationary and merit increases effective January 1, 2005 averaging 3.4% of base pay. However, salaries and wages were also reduced by $165 during the March 2005 quarter as PSB implemented a daily automated system to improve accounting for deferred loan fees and costs (including lender and support personnel salaries) in accordance with current accounting standards (FAS 91). FAS 91 requires loan origination fees and direct loan origination costs to be deferred and amortized as a yield adjustment earned on the loan. Previously, these accounting adjustments for deferral of costs were made only at year-end and in prior years had an immaterial impact on the individual quarterly financial statements. The change in accounting procedure was made to simplify operations and improve the accuracy of earnings reporting. Excluding the deferral of salaries for FAS 91, the increase in salaries and benefits was $246, an increase of 15.9%. In addition to the annual inflationary and merit increases in base pay, the number of full time equivalent employees increased 15.4% during the 12 months ended March 31, 2005. Offsetting the increase to March 2005 income from deferred employee wage expense related to new loan originations under FAS 91 were decreases to income from deferral of $28 in fees collected, and amortization of previously capitalized net loan origination costs of $89 against net interest income. Taken together, FAS 91 accounting adjustments increased March 2005 net income by $29 and decreased March 2004 net income by $22. Total noninterest expenses excluding the special collection expense items and the impact of deferred loan origination costs (wages) in the March 2005 quarter were $2,906 compared to $2,475 in March 2004, an increase of 17.4%. 24 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the information provided in response to Item 7A of PSB's Form 10-K for the year ended December 31, 2004. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, management, under the supervision, and with the participation, of PSB's President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of PSB's disclosure controls and procedures pursuant to Rule 13a-15(c) under the Securities Exchange Act of 1934. Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that PSB's disclosure controls and procedures were effective in all material respects. There have been no significant changes in PSB's internal controls or in other factors which could significantly affect internal controls subsequent to the date PSB carried out its evaluation, nor were there any significant deficiencies or material weaknesses identified which required any corrective action to be taken. 25 PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Purchases of Equity Securities Maximum number Total number (or approximate of shares (or dollar value) of Total number units) purchased shares (or units) of shares Average price as part of publicly that may yet be (or units) paid per share announced plans purchased under the purchased (or unit) or programs plans or programs Period (a) (b) (c) (d) January 2005 0 $ 0 0 0 February 2005 1,189 32.00 0 0 March 2005 6,000 32.00 6,000 11,200 Quarterly Totals 7,189 $32.00 6,000 11,200
Note regarding share purchases made other than through a publicly announced program During February 2005, Company officers purchased shares of PSB for their personal accounts, including 1,189 shares at an average price of $32.00. ITEM 6. EXHIBITS Exhibits required by Item 601 of Regulation S-K. Exhibit Number Description 10.1 Amendment to Executive Deferred Compensation Plan - David K. Kopperud 10.2 Amendment to Executive Deferred Compensation Plan - David A. Svacina 10.3 PSB Holdings, Inc. 2001 Stock Option Plan 10.4 Executive Officer Post Retirement Benefit Plan 31.1 Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 31.2 Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PSB HOLDINGS, INC. May 13, 2005 SCOTT M. CATTANACH Scott M. Cattanach Treasurer (On behalf of the Registrant and as Principal Financial Officer) 27 EXHIBIT INDEX TO FORM 10-Q OF PSB HOLDINGS, INC. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 PURSUANT TO SECTION 102(D) OF REGULATION S-T (17 C.F.R. Section 232.102(D)) The following exhibits are filed as part this report: 10.1 Amendment to Executive Deferred Compensation Plan - David K. Kopperud 10.2 Amendment to Executive Deferred Compensation Plan - David A. Svacina 10.3 PSB Holdings, Inc. 2001 Stock Option Plan 10.4 Executive Officer Post Retirement Benefit Plan 31.1 Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 31.2 Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002 EX-10.1 3 psbex101.txt PSB EXHIBIT 10.1 - AMENDMENT TO DCA - D. KOPPERUD Exhibit 10.1 AMENDMENT TO THE PEOPLES STATE BANK EXECUTIVE DEFERRED COMPENSATION AGREEMENT This amendment (the "Amendment") to that certain Executive Deferred Compensation Agreement (the "Agreement") originally entered into February 7, 2005 by and between Peoples State Bank, a banking association organized under the laws of the State of Wisconsin (the "Bank"), and David J. Kopperud (the "Executive"), is made effective the 7th day of February 2005 (the "Effective Date"). WHEREAS, the Executive is currently employed by the Bank in an executive capacity; WHEREAS, the Executive and the Bank originally entered into the Agreement in order to induce the Executive to remain in the employ of the Bank and to continue to provide valuable services and business counsel to the Bank; WHEREAS, the Agreement provides certain benefits to the Executive in the form of deferred compensation payments which commence upon the Executive's retirement or other termination of employment from the Bank, as provided more specifically in the Agreement; WHEREAS, the Bank and the Executive desire to amend the Agreement to clarify certain benefits offered under the Agreement; and WHEREAS, pursuant to Section 9.1 of the Agreement, the Bank and the Executive may agree to amend the Agreement. NOW, THEREFORE, the Bank, with the Executive's consent, hereby amends the Agreement effective February 7, 2005, as follows: 1. Section 1.1.16 of the Agreement is amended by deleting existing Section 1.1.16 of the Agreement in its entirety, and substituting the following new Section 1.1.16 in its place: "1.1.16 'Early Retirement Age' means age sixty-two (62)." 2. Section 1.1.18 of the Agreement is amended by deleting existing Section 1.1.18 of the Agreement in its entirety, and substituting the following new Section 1.1.18 in its place: "1.1.18 `Interest' has the meaning set forth in Section 3.1.5." 3. Article 3 of the Agreement is amended by deleting existing Section 3.1.3 of the Agreement in its entirety, and substituting the following new Sections of Article 3 of the Agreement in its place: "3.1.3 Annual Grant of Deferred Compensation. At the end of each Plan Year, the Bank shall make a contribution to the Deferral Account in an amount equal to Ten Percent (10%) of the Executive's Base Salary and shall report that contribution to the Executive in writing in substantially the form set forth in Exhibit E of this Agreement on the first day of the subsequent Plan Year. 3.1.3.1 Final Grant of Deferred Compensation. Notwithstanding the preceding Section 3.1.3, the Executive shall receive no Annual Grant of Deferred Compensation in any Plan Year following the Plan Year in which the Executive attains Normal Retirement Age. 3.1.4 Annual Incentive Grant of Deferred Compensation. At the end of each Plan Year, the Bank shall make a contribution to the Deferral Account in an amount equal to a percentage of the Executive's Base Salary as determined in accordance with Addendum A to Exhibit F of this Agreement for any given Plan Year and shall report that contribution to the Executive in writing in substantially the form set forth in Exhibit F of this Agreement on the first day of the subsequent Plan Year. 3.1.4.1 Final Grant of Deferred Compensation. Notwithstanding the preceding Section 3.1.4, the Executive shall receive no Annual Incentive Grant of Deferred Compensation in any Plan Year following the Plan Year in which the Executive: (a) attains Normal Retirement Age; or (b) no longer remains a full-time employee of the Bank; or (c) is employed with the Bank but no longer serves as the Bank's Chief Executive Officer. 3.1.5 Interest. Until any payment commences under Article 4 or Article 5 of this Agreement, the Bank shall accrue Interest on the Deferral Account at an annual rate equal to the fifty percent (50%) of the annual Return on Equity of the Bank for the Plan Year, subject to a minimum of zero percent (0%) and a maximum of ten percent (10%). The Bank shall credit annual Interest in arrears at the end of each Plan Year on only the Deferrals and Matching Deferrals credited during the Plan Year to the Deferral Account. In addition, as of the first day of a Plan Year, the Bank will credit compound Interest to the Deferral Account based on the Deferral Account balance as of the last day of the preceding Plan Year. Interest credited under this Section 3.1.5 shall continue until payment commences using the ROE for the prior Plan Year. In the event of a part-year interest payment due the Executive's entitlement to and commencement of benefits under this Agreement, the interest rate shall be applied to the Deferral Account balance using monthly compounding for the period prior to the first payment of any benefits under this Agreement." 4. The Agreement is amended by adding the following new Exhibits E an F to the Agreement: EXHIBIT E PEOPLES STATE BANK INCENTIVE DEFERRED BONUS AGREEMENT GRANT OF DEFERRED COMPENSATION THIS GRANT (the "Grant") is made and entered into as of ______ day of ______________, 20____, by the Peoples State Bank, Wausau, Wisconsin (the "Bank"), pursuant to the Executive Deferred Compensation Agreement between the Bank and ________________________ (the "Executive"), effective February ___, 2005 (the "Agreement"). Capitalized terms set forth herein shall have the same meaning provided in the Agreement, unless otherwise expressly stated herein. 1. Annual Deferred Amount. The Bank hereby grants to the Executive's Deferral Account ______________________ Dollars ($___________) under the terms and subject to the conditions set forth herein and in the Agreement under Section 3.1.3, which is incorporated by reference into this Grant. The Executive acknowledges receipt of a copy of the Agreement. 2. No Ownership Rights. The amount granted shall be credited to the Executive's Deferral Account pursuant to the terms set forth in the Agreement. Except as otherwise provided in the Agreement, this Grant does not convey to the Executive any current interest in the amount subject of this Grant or any prior Grant. PEOPLES STATE BANK: By: _________________________________________ Title: ________________________________________ EXHIBIT F PEOPLES STATE BANK INCENTIVE DEFERRED BONUS AGREEMENT GRANT OF DEFERRED COMPENSATION THIS GRANT (the "Grant") is made and entered into as of ______ day of ______________, 20____, by the Peoples State Bank, Wausau, Wisconsin (the "Bank"), pursuant to the Executive Deferred Compensation Agreement between the Bank and ________________________ (the "Executive"), effective February ___, 2005 (the "Agreement"). Capitalized terms set forth herein shall have the same meaning provided in the Agreement, unless otherwise expressly stated herein. 1. Annual Deferred Amount. The Bank hereby grants to the Executive's Deferral Account ______________________ Dollars ($___________) under the terms and subject to the conditions set forth herein and in the Agreement under Section 3.1.4, which is incorporated by reference into this Grant. The Executive acknowledges receipt of a copy of the Agreement. 2. No Ownership Rights. The amount granted shall be credited to the Executive's Deferral Account pursuant to the terms set forth in the Agreement. Except as otherwise provided in the Agreement, this Grant does not convey to the Executive any current interest in the amount subject of this Grant or any prior Grant. PEOPLES STATE BANK: By: _________________________________________ Title: ________________________________________ ADDENDUM A PEOPLES STATE BANK EXECUTIVE DEFERRED BONUS AGREEMENT ANNUAL INCENTIVE GRANT CALCULATION OF ANNUAL INCENTIVE GRANT (WHICH SHALL BE STATED ON EXHIBIT F). The amount of the Executive's benefit determined in accordance with Section 3.1.4 of the Agreement shall be based on the following specific factors: FACTOR ONE: The percentage shown on the table below determined by measuring the increase of the Bank's Average Assets from one Plan Year to the next, calculated based upon the data provided in the Report and Condition of Income prepared for the Bank as of December 31st of the respective Plan Year by the FFIEC:
AVERAGE ASSET GROWTH RANGE FROM: TO: PERCENTAGE: 7.5% 8.4% 2.00% 8.5% 9.4% 6.00% 9.5% 10.4% 12.00% 10.5% 11.4% 20.00% 11.5% 12.4% 28.00% 12.5% And up 36.00%
FACTOR TWO: The Executive's Base Salary as determined under the Agreement. The amount of the Executive's Annual Incentive Grant of Deferred Compensation is the product of Factor One multiplied by Factor Two, which is set forth on Exhibit F for the completed Plan Year. EXECUTIVE: _____________________________________ Date: ____________ PEOPLES STATE BANK: By: ____________________________________ Date: ____________ Title: __________________________________ IN WITNESS WHEREOF, the Bank and the Executive both acknowledge that each has carefully read this Amendment and has executed an original hereof on the ____ day of March 2005, to be effective as of February 7, 2005. EXECUTIVE: By: _______________________________________ David J. Kopperud BANK: By: _______________________________________ Its: ______________________________________ EX-10.2 4 psbex102.txt PSB EXHIBIT 10.2 - AMENDMENT TO DCA - D. SVACINA Exhibit 10.2 AMENDMENT TO THE PEOPLES STATE BANK EXECUTIVE DEFERRED COMPENSATION AGREEMENT This amendment (the "Amendment") to that certain Executive Deferred Compensation Agreement (the "Agreement") originally entered into February 7, 2005 by and between Peoples State Bank, a banking association organized under the laws of the State of Wisconsin (the "Bank"), and David Svacina (the "Executive"), is made effective the 7th day of February 2005 (the "Effective Date"). WHEREAS, the Executive is currently employed by the Bank in an executive capacity; WHEREAS, the Executive and the Bank originally entered into the Agreement in order to induce the Executive to remain in the employ of the Bank and to continue to provide valuable services and business counsel to the Bank; WHEREAS, the Agreement provides certain benefits to the Executive in the form of deferred compensation payments which commence upon the Executive's retirement or other termination of employment from the Bank, as provided more specifically in the Agreement; WHEREAS, the Bank and the Executive desire to amend the Agreement to clarify certain benefits offered under the Agreement; and WHEREAS, pursuant to Section 9.1 of the Agreement, the Bank and the Executive may agree to amend the Agreement. NOW, THEREFORE, the Bank, with the Executive's consent, hereby amends the Agreement effective February 7, 2005, as follows: 1. Section 1.1.16 of the Agreement is amended by deleting existing Section 1.1.16 of the Agreement in its entirety, and substituting the following new Section 1.1.16 in its place: "1.1.16 `Early Retirement Age' means age sixty-two (62)." 2. Section 1.1.18 of the Agreement is amended by deleting existing Section 1.1.18 of the Agreement in its entirety, and substituting the following new Section 1.1.18 in its place: "1.1.18 `Interest' has the meaning set forth in Section 3.1.5." 3. Article 3 of the Agreement is amended by deleting existing Section 3.1.3 of the Agreement in its entirety, and substituting the following new Sections of Article 3 of the Agreement in its place: "3.1.3 Annual Grant of Deferred Compensation. At the end of each Plan Year, the Bank shall make a contribution to the Deferral Account in an amount equal to two percent (2%) of the Executive's Base Salary and shall report that contribution to the Executive in writing in substantially the form set forth in Exhibit E of this Agreement on the first day of the subsequent Plan Year. 3.1.3.1 Final Grant of Deferred Compensation. Notwithstanding the preceding Section 3.1.3, the Executive shall receive no Annual Grant of Deferred Compensation in any Plan Year following the Plan Year in which the Executive attains Normal Retirement Age. 3.1.4 Annual Incentive Grant of Deferred Compensation. At the end of each Plan Year, the Bank shall make a contribution to the Deferral Account in an amount equal to a percentage of the Executive's Base Salary as determined in accordance with Addendum A to Exhibit F of this Agreement for any given Plan Year and shall report that contribution to the Executive in writing in substantially the form set forth in Exhibit F of this Agreement on the first day of the subsequent Plan Year. 3.1.4.1 Final Grant of Deferred Compensation. Notwithstanding the preceding Section 3.1.4, the Executive shall receive no Annual Incentive Grant of Deferred Compensation in any Plan Year following the Plan Year in which the Executive: (a) attains Normal Retirement Age; or (b) no longer remains a full-time employee of the Bank. 3.1.5 Interest. Until any payment commences under Article 4 or Article 5 of this Agreement, the Bank shall accrue Interest on the Deferral Account at an annual rate equal to the fifty percent (50%) of the annual Return on Equity of the Bank for the Plan Year, subject to a minimum of zero percent (0%) and a maximum of ten percent (10%). The Bank shall credit annual Interest in arrears at the end of each Plan Year on only the Executive's Deferrals and Matching Deferrals credited during the Plan Year to the Deferral Account. In addition, as of the first day of a Plan Year, the Bank will credit compound Interest to the Deferral Account based on the Deferral Account balance as of the last day of the preceding Plan Year. Interest credited under this Section 3.1.5 shall continue until payment commences using the ROE for the prior Plan Year. In the event of a part-year interest payment due the Executive's entitlement to and commencement of benefits under this Agreement, the interest rate shall be applied to the Deferral Account balance using monthly compounding for the period prior to the first payment of any benefits under this Agreement." 4. The Agreement is amended by adding the following new Exhibits E an F to the Agreement: EXHIBIT E PEOPLES STATE BANK INCENTIVE DEFERRED BONUS AGREEMENT GRANT OF DEFERRED COMPENSATION THIS GRANT (the "Grant") is made and entered into as of ______ day of ______________, 20____, by the Peoples State Bank, Wausau, Wisconsin (the "Bank"), pursuant to the Executive Deferred Compensation Agreement between the Bank and ________________________ (the "Executive"), effective February ___, 2005 (the "Agreement"). Capitalized terms set forth herein shall have the same meaning provided in the Agreement, unless otherwise expressly stated herein. 1. Annual Deferred Amount. The Bank hereby grants to the Executive's Deferral Account ______________________ Dollars ($___________) under the terms and subject to the conditions set forth herein and in the Agreement under Section 3.1.3, which is incorporated by reference into this Grant. The Executive acknowledges receipt of a copy of the Agreement. 2. No Ownership Rights. The amount granted shall be credited to the Executive's Deferral Account pursuant to the terms set forth in the Agreement. Except as otherwise provided in the Agreement, this Grant does not convey to the Executive any current interest in the amount subject of this Grant or any prior Grant. PEOPLES STATE BANK: By: _________________________________________ Title: ________________________________________ EXHIBIT F PEOPLES STATE BANK INCENTIVE DEFERRED BONUS AGREEMENT GRANT OF DEFERRED COMPENSATION THIS GRANT (the "Grant") is made and entered into as of ______ day of ______________, 20____, by the Peoples State Bank, Wausau, Wisconsin (the "Bank"), pursuant to the Executive Deferred Compensation Agreement between the Bank and ________________________ (the "Executive"), effective February ___, 2005 (the "Agreement"). Capitalized terms set forth herein shall have the same meaning provided in the Agreement, unless otherwise expressly stated herein. 1. Annual Deferred Amount. The Bank hereby grants to the Executive's Deferral Account ______________________ Dollars ($___________) under the terms and subject to the conditions set forth herein and in the Agreement under Section 3.1.4, which is incorporated by reference into this Grant. The Executive acknowledges receipt of a copy of the Agreement. 2. No Ownership Rights. The amount granted shall be credited to the Executive's Deferral Account pursuant to the terms set forth in the Agreement. Except as otherwise provided in the Agreement, this Grant does not convey to the Executive any current interest in the amount subject of this Grant or any prior Grant. PEOPLES STATE BANK: By: _________________________________________ Title: ________________________________________ ADDENDUM A PEOPLES STATE BANK EXECUTIVE DEFERRED BONUS AGREEMENT ANNUAL INCENTIVE GRANT CALCULATION OF ANNUAL INCENTIVE GRANT (WHICH SHALL BE STATED ON EXHIBIT F). The amount of the Executive's benefit determined in accordance with Section 3.1.4 of the Agreement shall be based on the following specific factors: FACTOR ONE: The percentage shown on the table below determined by measuring the increase of the Bank's Average Assets from one Plan Year to the next, calculated based upon the data provided in the Report and Condition of Income prepared for the Bank as of December 31st of the respective Plan Year by the FFIEC:
AVERAGE ASSET GROWTH RANGE FROM: TO: PERCENTAGE: 7.5% 8.4% 2.00% 8.5% 9.4% 4.00% 9.5% 10.4% 8.00% 10.5% 11.4% 12.00% 11.5% 12.4% 16.00% 12.5% And up 20.00%
FACTOR TWO: The Executive's Base Salary as determined under the Agreement. The amount of the Executive's Annual Incentive Grant of Deferred Compensation is the product of Factor One multiplied by Factor Two, which is set forth on Exhibit F for the completed Plan Year. EXECUTIVE: _____________________________________ Date: _____________ PEOPLES STATE BANK: By: ____________________________________ Date: _____________ Title: __________________________________ IN WITNESS WHEREOF, the Bank and the Executive both acknowledge that each has carefully read this Amendment and has executed an original hereof on the ____ day of March 2005, to be effective as of February 7, 2005. EXECUTIVE: By: _________________________________ David Svacina BANK: By: _________________________________ Its: ________________________________ EX-10.3 5 psbex103.txt PSB EXHIBIT 10.3 - 2001 STOCK OPTION PLAN AMENDED Exhibit 10.3 PSB HOLDINGS, INC. 2001 STOCK OPTION PLAN As amended March 15, 2005 PSB HOLDINGS, INC. 2001 STOCK OPTION PLAN SECTION 1. PURPOSE. The Plan has been adopted to (a) enable the Company to attract and retain superior employees by providing incentive opportunities with respect to future services that are competitive with those of other similar companies, (b) further identify the interests of participating employees with those of the Company's other shareholders through compensation based on the performance of the Company's common stock and (c) promote the long-term financial interests of the Company and its shareholders. SECTION 2. CERTAIN DEFINITIONS. As used in this Plan, and in addition to any terms elsewhere defined in this Plan, the following terms, when capitalized, shall have the meanings set forth in this Section 2. Section 2.1. "Board" means the Board of Directors of the Company. Section 2.2. "Cause" means any one or more of the following on the part of the participant: (a) the commission of an act which results in a payment of a claim filed by the Company or a Subsidiary under a blanket banker fidelity bond or similar policy as from time to time and at any time maintained; (b) an intentional failure to perform assigned duties; (c) willful misconduct in the course of the participant's employment; (d) breach of a fiduciary duty involving personal profit or acts or omissions of personal dishonesty, including, but not limited to, commission of any crime of theft, embezzlement, misapplication of funds, unauthorized issuance of obligations, or false entries; (e) any intentional, reckless, or negligent act or omission to act which results in the violation by the participant of any policy established by the Company or a Subsidiary which is designed to insure compliance with applicable banking, securities, employment discrimination or other laws or which causes or results in the Company's or a Subsidiary's violation of such laws, except any act done by the participant in good faith, as determined in the reasonable discretion of the Board, or which results in a violation of such policies or law which is, in the reasonable sole discretion of such Board, immaterial; or (f) any of the foregoing which results in material loss to the Company or any of its Subsidiaries. Except to the extent of the discretion granted to the Board in clause (e), the Committee shall have the sole discretion to determine whether "Cause" exists, and the Committee's determination shall be final. Section 2.3. "Change in Control" has the meaning set forth in Section 8.2. Section 2.4. "Code" means the Internal Revenue Code of 1986, as amended. The reference to any specific section of the Code shall include any successor section or sections. Section 2.5. "Committee" means, subject to the provisions of Section 4, the Option Committee of the Board. Section 2.6. "Common Stock" means the common stock of the Company. -1- Section 2.7. "Company" means PSB Holdings, Inc., a Wisconsin corporation. Section 2.8. "Disability" means (a) a physical or mental condition which qualifies as a total and permanent disability under the terms of any plan or policy maintained by the Company or a Subsidiary and for which the Optionee is eligible to receive benefits under such plan or policy, or (b) if the Optionee does not participate in a disability plan, or is not covered by a disability policy, of the Company or a Subsidiary, "Disability" means the permanent and total inability of a participant by reason of mental or physical infirmity, or both, to perform the work customarily assigned to him or her, if a medical doctor selected or approved by the Board, and knowledgeable in the field of such infirmity, advises the Committee either that it is not possible to determine when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of said participant's lifetime. Section 2.9. "Effective Date" means February 20, 2001. Section 2.10. "Employed," and any variation thereof such as "employment," means, as appropriate, employed by or employment with any of the Company or any present or future Subsidiary. Section 2.11. "Exchange Act" means the Securities Exchange Act of 1934, as amended. Section 2.12. "Fair Market Value" of a share of the Common Stock as of any date means an amount equal to: (a) the average of the highest bid and lowest ask prices of the Common Stock reported on the OTC Bulletin Board, or, if prices for the Common Stock are not quoted on the OTC Bulletin Board, the average of the highest bid and lowest ask prices reported on any other bona fide over- the-counter stock market selected in good faith by the Committee; provided, however, if the date on which "Fair Market Value" is to be determined is not a business day, or, if there shall be no reported transactions for such date, such determination shall be made on the next preceding business day for which transactions were reported, or (b) if the Committee determines that the amount determined pursuant to (a) is not indicative of the market value of the Common Stock because of limited or sporadic trading of the Common Stock and the lack of recent quotations for the Common Stock on the OTC Bulletin Board, then such amount as may be determined by the Committee by whatever means or method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate and representative of the fair market value of the Common Stock. Section 2.13. "Option" means an option to purchase Shares awarded pursuant to the provisions of Section 6 and which is intended to meet the requirements of an "incentive stock option" within the meaning of Section 422 of the Code. -2- Section 2.14. "Option Agreement" means the written document which evidences an award of Options, whether or not such document requires the signature of the Optionee. Section 2.15. "Optionee" means an eligible employee, as determined in accordance with Section 5, who has been granted an Option. Section 2.16. "Option Price" means, with respect to each Option, the price per Share at which such Option may be exercised and the Shares subject to such Option purchased. Section 2.17. "Plan" means the PSB Holdings, Inc. 2001 Stock Option Plan as set forth herein or as hereafter amended. Section 2.18. "Share" means a share of Common Stock. Section 2.19. "Subsidiary" means any corporation, partnership, or other entity in which the Company owns, directly or indirectly, at least a 50% interest in the voting rights or profits. Section 2.20. "Termination of Employment" means the termination of an Optionee's employment with, or performance of services for, the Company and any of its Subsidiaries. An Optionee employed by, or performing services for, a Subsidiary shall also be deemed to incur a Termination of Employment if the Subsidiary ceases to be such a Subsidiary and the Optionee does not immediately thereafter become an employee of the Company or another Subsidiary. Temporary absences from employment because of illness, vacation, or leave of absence and transfers among the Company and its Subsidiaries shall not be considered Terminations of Employment. For purposes of the Plan, an Optionee's employment shall be deemed to have terminated at the close of business on the day preceding the first date on which he or she is no longer for any reason whatsoever employed by the Company or any of its Subsidiaries. SECTION 3. NUMBER OF SHARES AVAILABLE FOR OPTIONS. Section 3.1 Shares Subject. The aggregate number of Shares which may be delivered under Options awarded pursuant to the Plan shall be 15,000. Section 3.2 Undelivered Shares. To the extent any Shares subject to an Option are not delivered to an Optionee (or the estate or other transferee of such Optionee) because the Option is forfeited, expires, or otherwise becomes unexercisable such Shares shall be deemed not to have been delivered for purposes of determining the maximum number of Shares available for delivery under the Plan. Section 3.3 Exercise Using Shares. If the Option Price of any Option awarded under the Plan is satisfied by tendering Shares to the Company only the number of Shares issued to the Optionee (or the estate or other transferee of such Optionee), net of the Shares tendered, shall be deemed delivered for purposes of determining the maximum number of Shares available for delivery under the Plan. -3- Section 3.4 Stock Dividends, etc. If the Company shall, after the Effective Date, change the Common Stock into a greater or lesser number of Shares through a stock dividend, stock split-up or combination of Shares, then (a) the number of Shares then subject to the Plan as provided for in Section 3.1, but which are not then subject to any outstanding Option, (b) the number of Shares subject to each then outstanding Option (to the extent not previously exercised), and (c) the price per Share payable upon exercise of each then outstanding Option, shall all be proportionately increased or decreased as of the record date for such stock dividend, stock split-up or combination of Shares in order to give effect thereto. Notwithstanding any such proportionate increase or decrease, no fraction of a Share shall be issued upon the exercise of an Option and the Shares subject to an Option shall be rounded to the nearest whole Share. Section 3.5 Other Changes. If, after the Effective Date, there shall be any change in the Common Stock or other change in the capitalization of the Company other than through a stock dividend, stock split-up or combination of Shares, including, but not limited to, a change which results from a merger, consolidation, spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization is within the meaning of Section 368 of the Code), or any partial or complete liquidation of the Company, then if, and only if, the Committee shall determine that such change equitably requires an adjustment in (a) the number or kind of shares of stock then reserved for issuance under Section 3.1, (b) the number or kind of shares of stock then subject to an Option, (c) the Option Price with respect to an Option, or (d) any other limitation on the Option which may be granted to any participant, to the extent such adjustment does not cause any Option to fail to satisfy the requirements for exemption from the limitations on deductibility imposed by Section 162(m) of the Code that is set forth in Section 162(m)(4)(c) of the Code if such Option would have satisfied such requirements immediately prior to such adjustment and if such Option, if then exercised, would, when added to the Optionee's estimated compensation from the Company and all Subsidiaries for such year, exceed the deductibility limits of Section 162(m) of the Code, such adjustment as the Committee shall determine is equitable and as shall be approved by the Board shall be made and shall be effective and binding for all purposes of such Option and the Plan. If any member of the Committee shall, at the time of such approval, be an Optionee, he shall not participate in action in connection with such adjustment. SECTION 4. ADMINISTRATION OF THE PLAN. Section 4.1 Committee. The Plan shall be administered by the Committee. The Committee shall, subject to the terms of the Plan, have the authority to, in its sole discretion, (a) select eligible employees to receive an award of one or more Options and to participate in the Plan, (b) determine the number of Shares subject to each award and the Option Price associated therewith, (c) establish terms and conditions concerning the time of, and conditions precedent to, the exercisability of each Option (including, without limitation, conditions with respect to the passage of time, performance of the Company, or a Subsidiary, or the Optionee, restrictions on competitive employment or satisfaction of Company policies, and any other conditions which the Committee deems reasonably related to the satisfaction of the purposes of the Plan), (d) determine the form of each Option Agreement and all terms and conditions thereof with respect -4- to each award, (e) interpret the Plan and the application thereof and establish such rules and regulations as it deems necessary or desirable for the administration of the Plan, (f) modify or cancel any award or Option or take such action to cause the vesting or exercisability of any or all outstanding Options to become exercisable in part or in full for any reason at any time, subject to the limitation of Section 8.1, and (g) exercise such other authority as is reasonably related to the administration of and/or the fulfillment of the purpose of the Plan. All actions, interpretations, rules, regulations and conditions taken or established by the Committee shall be final, binding and conclusive upon the Company, each Subsidiary, and all Optionees. Section 4.2 Membership of the Committee. (a) Membership Qualifications. Except as provided in this Section 4.2, at all times the Committee shall consist of not less than three members designated by the Board from among those of its members who are not officers or employees of the Company or a Subsidiary and each of whom is (a) a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act (a "Non-Employee Director") and (b) an "outside director" within the meaning of Section 162(m) of the Code (an "Outside Director"); provided, however, that in addition to the Board's general authority to amend the Plan as provided for in Section 9.1, the Board shall have the specific authority to modify or eliminate the foregoing qualifications or adopt such other qualifications as are reasonably intended to result in (x) the award of Options, and transactions with respect to the award or exercise of such Options, satisfying an exemption from Section 16(b) of the Exchange Act, or any successor thereto, and (y) compensation recognized by Optionees qualifying as a deductible expense of the Company under the "performance-based compensation" exception to compensation deduction limits which would otherwise be imposed on the Company under Section 162(m) of the Code. (b) Appointment of Other Members. In the event that one or more members of the Committee shall fail to meet the qualifications set forth in Section 4.2(a), the Board shall remove such member or members and appoint a successor or successors who satisfy such qualifications. The Board shall act in a reasonably prompt manner to fill any vacancy on the Committee from among such of its members who are both Non-Employee Directors and Outside Directors. (c) Validity of Grants. Notwithstanding the qualifications for members of the Committee established in Section 4.2(a), any award of Options made by the Committee in good faith and without the knowledge that one or more of its members did not satisfy such qualifications, shall be valid and enforceable by the Optionee even though the members of the Committee did not, at the time of such award, satisfy such qualifications. Section 4.3 Actions by the Committee. A majority of the members of the Committee shall constitute a quorum. In the absence of specific rules to the contrary, action by the Committee shall require the consent of a majority of the members of the Committee, expressed either orally at a meeting of the Committee or in writing in the absence of a meeting. -5- Section 4.4 Actions by the Board. Any authority granted to the Committee may also be exercised by the full Board, except to the extent that the grant or exercise of such authority would cause any Option or transaction to become subject to (or lose an exemption under) the short-swing profit recovery provisions of Section 16 of the Exchange Act or cause an Option not to qualify for, or to cease to qualify for, the exemption as "performance-based compensation" under Section 162 of the Code, and the regulations promulgated thereunder. To the extent that any permitted action taken by the Board conflicts with action taken by the Committee, the Board action shall control. Section 4.5 Limitation on Liability and Indemnification of Board. No member of the Board, no executive officer or other employee of the Company, and no other agent or representative of the Company shall be liable for any act, omission, interpretation, construction, or determination made in connection with the Plan in good faith, and all such persons shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage, or expense (including attorneys fees) arising therefrom to the full extent permitted by law, except as otherwise may be provided in the Company's articles of incorporation and/or by-laws, and under any directors' and officers' liability insurance that may be in effect from time to time. SECTION 5. PERSONS ELIGIBLE TO BECOME OPTIONEES. Persons who are (a) key salaried employees of the Company or any Subsidiary or (b) prospective key salaried employees who have accepted offers of employment from the Company or a Subsidiary shall be eligible to be selected, in the sole discretion of the Committee, to participate in, and receive an award of one or more Options pursuant to the Plan; provided, however, that only employees of the Company or a Subsidiary shall be eligible to receive an award intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. SECTION 6. AWARDING OF OPTIONS. Section 6.1 Optionees. Subject to the limitations of Section 5, Options shall be awarded to such eligible employees of the Company and its Subsidiaries as the Committee may, from time to time and at any time, select. Membership of an employee or prospective employee in a class shall not, without specific Committee action, entitle such employee or prospective employee to receive an Option award. Section 6.2 Option Agreement. Each Option shall be evidenced by an Option Agreement, the terms of which may differ from other Option Agreements. Each Option Agreement shall be signed on behalf of the Company and, if so provided by the Committee, the Optionee, and shall set forth with respect to the Option or Options awarded therein, the name of the Optionee, the date awarded, the Option Price, the number of Shares subject to the Option, and such other terms and conditions consistent with the Plan as determined by the Committee. The Committee may at the time of award or at any time thereafter impose such additional terms and conditions on the exercise of such Option as it deems necessary or desirable for such Option, or the exercise thereof, to be exempt under Section 16(b) of the Exchange Act, and the regulations promulgated thereunder, and to qualify as "performance-based compensation" under -6- Section 162 of the Code, and the regulations promulgated thereunder. Each Option Agreement shall incorporate by reference all terms, conditions and Limitations set forth in the Plan. Section 6.3 Terms and Conditions of the Options. In addition to any other terms, conditions, and limitations specified in the Plan, each Option awarded hereunder shall, as to each Optionee, satisfy the following requirements: (a) Date of Award. Options must be awarded on or before February 19, 2011. (b) Expiration. No Option shall be exercisable after the expiration of ten years from the date such Option is awarded. (c) Price. The Option Price as to any Share subject to an Option may not be less than the Fair Market Value of the Share on the date the Option is awarded. (d) Limitations on Transferability. No Option shall be transferable by the Optionee other than by will or the laws of descent and distribution, nor can it be exercised by anyone other than the Optionee during the Optionee's lifetime. No Option may be sold, transferred, assigned, pledged, hypothecated, encumbered, or otherwise disposed of (whether by operation of law or otherwise), or be subject to execution, attachment, or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber, or otherwise dispose of any such award, such award and all rights thereunder shall immediately become null and void. (e) Exercise. Except as otherwise permitted by the Committee, options must be exercised in accordance with the following time limitations: (i) Termination by Death. If an Optionee incurs a Termination of Employment by reason of death, any Option held by such Optionee may thereafter be exercised, to the extent then exercisable, for a period of one year from the date of such death or until the expiration of the stated term of such Option, whichever period is shorter. (ii) Termination by Reason of Disability. If an Optionee incurs a Termination of Employment by reason of Disability, any Option held by such Optionee may thereafter be exercised by the Optionee (or the estate of the Optionee in the event of death), to the extent it was exercisable at the time of such Termination of Employment, for a period of one year. (iii) Other Termination. Unless otherwise determined by the Committee, if the Optionee incurs a Termination of Service for Cause, all Options then held by such Optionee shall terminate and may not be exercised from and after the effective date of such Termination of Service. If an Optionee incurs a Termination of Service for any reason other than death, Disability, or Cause, any Option then held by the Optionee, to the extent it was exercisable on the date of -7- such Termination of Service, may be exercised for a period of three months from the date of such Termination of Service or until the expiration of the stated term of such Option, whichever period is shorter. (iv) Death After Termination. If the Optionee dies subsequent to a Termination of Service for any reason other than Cause (unless otherwise determined by the Committee in the event of Termination of Service for Cause), then, notwithstanding any other limitation on the exercise of the Optionee's Option set forth in subparagraphs (i), (ii) or (iii), any Option held by such Optionee on the Optionee's date of death may thereafter be exercised, to the extent it was exercisable on such date, for a period of one year from the date of death or until the expiration of the stated term of such Option, whichever period is shorter. (f) Minimum Holding Period. No Option may be exercised before the date which is six months after the later of (i) the date on which the Plan is approved by the shareholders of the Company, or (ii) the date on which such Option was awarded. (g) Additional Restrictions Relating to Options. No Option may be awarded (i) to the extent that the aggregate Fair Market Value (determined as of the time the Option is awarded) of the Shares for which Options are exercisable for the first time by an individual during any calendar year (under the Plan or any other plan of the Company or a Subsidiary) exceeds $100,000 (or such other individual limit as may be in effect under the Code on the date of award) and (ii) to an employee who, at the time such Option is awarded, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary within the meaning of Section 422(b)(6) of the Code unless (A) at the time the Option is awarded, the Option Price is at least 110% of the Fair Market Value of the Shares subject to the Option, and (B) such Option by its terms is not exercisable after the expiration of five years from the date such Option is awarded. (h) Limitation on Option Awards. No Optionee may be awarded Options under the Plan in any calendar year with respect to more than 2,500 Shares. Section 6.4 Termination or Lapse of Options. Each Option shall terminate or lapse upon the first to occur of (a) the expiration date or any date as of which the Option is deemed to be forfeited as set forth in the applicable Option Agreement, (b) the applicable date determined by Section 6.3(b), or (c) midnight of the last day such Option could be exercised under Section 6.3(e). SECTION 7. EXERCISE AND PAYMENT OF OPTION PRICE. Section 7.1 Exercise of Options. Options shall be exercised as to all or a portion of the Shares subject to the Option by written notice to the Company setting forth the exact number of Shares as to which the Option is being exercised and including with such notice payment of the -8- Option Price (plus the minimum required tax withholding, if any). The date of exercise shall be the date such written notice and payment have been delivered (in cash or in such other manner as provided in Section 7.2) to the Secretary of the Company either in person or by depositing said notice and payment in the United States mail, postage pre-paid and addressed to such officer at the Company's home office. Section 7.2 Payment for Shares. Payment of the Option Price (plus required tax withholding, if any) may be made (a) by tendering cash (in the form of a check or otherwise) in such amount or (b) with the consent of the Committee, and if authorized in the Option Agreement, by tendering Shares owned by the Optionee with a Fair Market Value on the date of exercise equal to such amount or (c) any combination of (a) and (b); provided, however, that any Shares delivered in payment of the Option Price shall have been purchased on the open market and held by the Optionee for at least six months at the time of exercise of the Option. Section 7.3 Tax Withholding. Although the Options are intended to qualify as incentive stock options under Sections 422 of the Code, the delivery of Shares under the Plan is subject to withholding of all applicable taxes, and the Committee may condition the delivery of any Shares or other benefits on satisfaction of applicable withholding obligations. Section 7.4 Issuance of Shares. No Shares shall be issued until full payment therefor has been made. An Optionee shall have all of the rights of a shareholder of the Company holding the Common Stock that is subject to such Option (including, if applicable, the right to vote the Shares and the right to receive dividends), when the Optionee has given written notice of exercise, has paid in full for such Shares and, if requested, has given the representation described in Section 11. SECTION 8. CHANGE IN CONTROL. Section 8.1 Adjustment of Options. (a) Vesting and Cash Payment. In the event of a Change in Control, (i) all Options outstanding on the date on which such Change in Control has occurred (the "Change in Control Date") shall, to the extent not then exercisable or vested, immediately become exercisable in full, and (ii) each Optionee may elect (the Optionee's "Election Right") with respect to each Option held by such Optionee on the Change in Control Date to surrender such Option for an immediate lump sum cash payment in an amount equal to the product of (A) the number of Shares then subject to the Option as to which the election is being exercised multiplied by (B) the excess, if any, of (1) the greater of (a) the Change in Control Price or (b) the highest Fair Market Value of a Share on any day in the 60-day period ending on the Change in Control Date, over (2) the Option Price of such Option. For purposes of this Section 8.1(a), the "Change in Control Price" shall mean, if the Change in Control is the result of a -9- tender or exchange offer or a Corporate Transaction (as defined in Section 8.2(c)), the highest price per Share paid in such tender or exchange offer or Corporate Transaction, and, to the extent that the consideration paid in any such transaction consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Committee. (b) Election. The exercise of an Election Right must be in writing, specify the Option or Options and the number of Shares as to which the election is being exercised, and be delivered to the Secretary of the Company or his successor either in person or by depositing said notice and payment in the United States mail, postage pre-paid and addressed to such officer at the home office of the Company or its successor on or before the 60th day following the Change in Control Date. (c) Payment Date. All payments due an Optionee pursuant to the provisions of this Section 8.1 shall be made by the Company or its successor on or before the 5th business day following the date on which the Optionee's election has been delivered pursuant to Section 8.1(b). (d) Pooling Considerations. Notwithstanding any other provision of this Section 8.1, if the grant or the exercise of an Optionee's Election Right or payment of cash provided for in this Section 8.1 would make a Change in Control transaction ineligible for pooling-of-interests accounting treatment under APB No. 16, that, but for the nature of such grant or exercise of Election Rights or payment of cash, would otherwise be eligible for such pooling-of-interests accounting treatment, the Committee shall have the right and authority to substitute for the cash payments to be made to the Optionee pursuant to Section 8.1(a), Common Stock with a Fair Market Value, determined as of the date of delivery of such Shares, equal to the cash that would otherwise be payable to such Optionee in connection with the exercise of an Optionee's Election Right hereunder or, to the extent necessary to preserve such pooling-of- interests accounting treatment, to otherwise modify, eliminate, or terminate such Election Right. Section 8.2 Definition of "Change in Control." For purposes of the Plan, a "Change in Control" means the happening of any of the following events: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this paragraph (a), the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was -10- itself acquired directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company, and (D) any acquisition pursuant to a transaction which complies with clauses (i), (ii), and (iii) of paragraph(c) of this Section 8.2; or (b) A change in the composition of the Board such that the individuals who, as of the Effective Date, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of the Plan, that any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be deemed to be and shall be considered as though such individual were a member of the Incumbent Board, but provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so deemed or considered as a member of the Incumbent Board; or (c) Consummation of a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of the assets or securities of any other entity (a "Corporate Transaction"); excluding, however, such a Corporate Transaction pursuant to which (i) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) (the "Resulting Company") in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than the Company, any employee benefit plan (or related trust) of the Company) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the Resulting Company or the combined voting power of the then outstanding voting securities of such Resulting Company entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Company prior to the Corporate Transaction, and (iii) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the Resulting Company; or -11- (d) The approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. SECTION 9. AMENDMENT AND TERMINATION OF PLAN. Section 9.1 Amendment of Plan. The Board may amend the Plan from time to time and at any time; provided, however, that (a) except as specifically provide herein, no amendment shall, in the absence of written consent to the change by an affected Optionee, adversely affect such Optionee's rights under any Option which has been awarded prior to the amendment except to the extent such amendment is, in the sole opinion of the Committee, required to comply with any stock exchange or over-the-counter market listing rules, accounting rules, or laws applicable to the Company or the Plan, (b) no amendment with respect to the maximum number of Shares which may be issued pursuant to Options under the Plan or to any individual in any calendar year made be made unless approved by a majority of the Shares entitled to vote at a meeting of the shareholders if such amendment would, in the absence of such approval and in the sole opinion of the Committee, have an adverse effect on the Company under applicable tax or securities laws or accounting rules, and (c) no amendment shall be made without the approval of the Company's shareholders to the extent such approval is required by applicable law or stock exchange or over-the- counter market listing rules. Section 9.2 Termination of Plan. The Plan shall terminate on the first to occur of (a) February 19, 2011 or (b) the date specified by the Board as the effective date of Plan termination; provided, however, that the termination of the Plan shall not limit or otherwise affect any Options outstanding on the date of termination. SECTION 10. EFFECTIVE DATE. Notwithstanding any provision of this Plan to the contrary, the Plan shall not be effective, and any Options awarded under the Plan shall be null and void, unless the adoption of the Plan is approved at the annual meeting of the Company's shareholders next following the Effective Date by the majority of the shares entitled to vote at such meeting. SECTION 11. INVESTMENT INTENT. The Committee may require each person purchasing or receiving Shares pursuant to an Option to represent to and agree with the Company in writing that such person is acquiring the Shares without a view to the distribution thereof. The certificates for such Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer imposed in connection with the Company's compliance with any securities law. SECTION 12. AVAILABILITY OF INFORMATION. If the Shares subject to an Option are not registered or to be registered under the Securities Act of 1933 as amended, the Company shall furnish each Optionee with (a) a copy of the Plan and the Company's most recent annual report to its shareholders at the time the Option Agreement is delivered to the Optionee and (b) a copy of each subsequent annual report and proxy statement, on or about the same date as such report shall be made available to shareholders of the Company. The Company will furnish, upon written request addressed to the Secretary of the Company, but at no charge to the Optionee or -12- any duly authorized representative of the Optionee, copies of all reports filed by the Company with the Securities and Exchange Commission, including, but not limited to, the Company's annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its proxy statements. Notwithstanding the foregoing provisions of this Section 12, the Company shall not be required to furnish any such report or statement if a copy of such report is otherwise provided to the Optionee in connection with another plan maintained by the Company or such Optionee's status as a shareholder of the Company or if, by virtue of such Optionee's employment or office with the Company or a Subsidiary, the Optionee has received such report or statement. SECTION 13. LIMITATION OF RIGHTS. (a) Conditions of Employment. The Plan shall not constitute a contract of employment, and participation in or eligibility for participation in the Plan shall not confer upon any employee the right to be continued as an employee of the Company or any present or future Subsidiary and the Company and each Subsidiary hereby expressly reserves the right to terminate the employment of any employee, with or without cause, as if the Plan and any Options awarded pursuant to it were not in effect. (b) Company Assets. Neither an Optionee nor any other person shall, by reason of receiving an award of an Option under the Plan acquire any right, title, or interest in any assets of the Company or any Subsidiary by reason of such Option or the Plan. To the extent an Optionee or any other person shall acquire a right to receive payments from the Company pursuant to an Option Agreement or the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. (c) Issuance of Shares. Notwithstanding any other provision of the Plan or agreements made pursuant thereto, the Company shall not be required to issue or deliver any certificate or certificates for Shares under the Plan prior to fulfillment of all of the following conditions: (i) Listing or approval for listing upon notice of issuance, of such Shares on the exchange or over-the-counter market as may at the time be the principal market for the Common Stock; (ii) Any registration or other qualification of the Shares under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Committee shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (iii) Obtaining any other consent, approval, or permit from any state or federal governmental agency which the Committee shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. SECTION 14. COMPLIANCE WITH APPLICABLE LAWS. If at any time the Company shall be advised by its counsel that the exercise of any Option or the delivery of Shares upon the exercise -13- of an Option is required to be approved, listed, registered or qualified under any securities law, that certain actions must be taken under the rules of any stock exchange or over-the-counter market, that such exercise or delivery must be accompanied or preceded by a prospectus or similar circular meeting the requirements of any applicable law, or that some other action is required to be taken by the Company in compliance with applicable law, the Company will use reasonable efforts to take all actions required within a reasonable time, but exercise of the Options or delivery by the Company of certificates for Shares may be deferred until the Company shall be in compliance with all such requirements. SECTION 15. GOVERNING LAW. The Plan, each Option and related Option Agreement and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the internal laws of the State of Wisconsin and construed in accordance therewith without giving effect to the principles of conflicts of laws applied by any state. IN WITNESS WHEREOF, the Company has caused the Plan to be executed by its duly authorized officers as of March 19, 2001. PSB HOLDINGS, INC. By: DAVID K. KOPPERUD David K. Kopperud President -14- EX-10.4 6 psbex104.txt PSB EXHIBIT 10.4 - POST RETIREMENT BENEFIT PLAN Exhibit 10.4 PSB HOLDINGS, INC. EXECUTIVE OFFICER POST RETIREMENT BENEFIT PLAN The company shall pay 25% of the health and dental insurance premiums under the company's group health insurance plan for the President and Vice President of the company following retirement at age 62. Such supplemental payments shall continue until the retired officer attains the later of age 65 or qualification for Medicare coverage. EX-31.1 7 psbex311.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: May 13, 2005 DAVID K. KOPPERUD David K. Kopperud President and Chief Executive Officer EX-31.2 8 psbex312.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: May 13, 2005 SCOTT M. CATTANACH Scott M. Cattanach Treasurer (Principal Financial Officer) EX-32.1 9 psbex321.txt PSB EXHIBIT 32.1 - CERTIFICATION UNDER SARBANES OXLEY ACT 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 March 31, 2005 (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: May 13, 2005 DAVID K. KOPPERUD David K. Kopperud President and CEO SCOTT M. CATTANACH Scott M. Cattanach Treasurer (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----