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