FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2008
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)
Registrants 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
T
No
£
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
£
Accelerated filer
£
Non-accelerated filer
£
Smaller reporting company
T
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
£
No
T
The number of common shares outstanding at November 6, 2008 was 1,548,898.
PSB HOLDINGS, INC.
FORM 10-Q
Quarter Ended September 30, 2008
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Page No.
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PART I.
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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Consolidated Balance Sheets
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September 30, 2008 (unaudited) and December 31, 2007
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(derived from audited financial statements)
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1
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Consolidated Statements of Income
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Three Months and Nine Months Ended September 30, 2008 and 2007 (unaudited)
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2
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Consolidated Statement of Changes in Stockholders Equity
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Nine Months Ended September 30, 2008 (unaudited)
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3
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Consolidated Statements of Cash Flows
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Nine Months Ended September 30, 2008 and 2007 (unaudited)
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4
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Notes to Consolidated Financial Statements
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6
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Item 2.
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Managements Discussion and Analysis of Financial Condition
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and Results of Operations
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10
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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28
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Item 4.
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Controls and Procedures
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28
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PART II.
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OTHER INFORMATION
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Item 1A.
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Risk Factors
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29
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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29
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Item 6.
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Exhibits
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29
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i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PSB Holdings, Inc.
Consolidated Balance Sheets
September 30, 2008 unaudited, December 31, 2007 derived from audited financial statements
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September 30,
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December 31,
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(dollars in thousands, except per share data)
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2008
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2007
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Assets
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Cash and due from banks
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$ 9,138
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$ 18,895
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Interest-bearing deposits and money market funds
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834
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2,232
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Cash and cash equivalents
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9,972
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21,127
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Securities available for sale (at fair value)
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98,731
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97,214
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Loans held for sale
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365
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Loans receivable, net
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418,386
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387,130
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Accrued interest receivable
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2,448
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2,383
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Foreclosed assets
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680
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653
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Premises and equipment, net
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11,153
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11,082
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Mortgage servicing rights, net
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974
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889
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Federal Home Loan Bank stock (at cost)
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3,250
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3,017
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Cash surrender value of bank-owned life insurance
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9,877
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8,728
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Other assets
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2,315
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1,597
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TOTAL ASSETS
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$ 557,786
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$ 534,185
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Liabilities
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Non-interest-bearing deposits
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$ 51,713
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$ 55,470
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Interest-bearing deposits
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365,105
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346,536
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Total deposits
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416,818
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402,006
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Federal Home Loan Bank advances
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65,000
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57,000
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Other borrowings
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25,607
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26,407
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Junior subordinated debentures
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7,732
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7,732
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Accrued expenses and other liabilities
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4,349
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4,425
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Total liabilities
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519,506
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497,570
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Stockholders' equity
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Common stock no par value with a stated value of $1 per share:
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Authorized 3,000,000 shares; Issued 1,751,431 and 1,887,179 shares, respectively
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Outstanding 1,548,898 and 1,544,982 shares, respectively
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1,751
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1,887
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Additional paid-in capital
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5,854
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9,493
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Retained earnings
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35,795
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34,081
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Accumulated other comprehensive income
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366
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423
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Treasury stock, at cost 202,533 and 342,197 shares, respectively
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(5,486)
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(9,269)
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Total stockholders equity
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38,280
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36,615
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$ 557,786
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$ 534,185
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1
PSB Holdings, Inc.
Consolidated Statements of Income
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Three Months Ended
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Nine Months Ended
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(dollars in thousands,
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September 30,
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September 30,
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except per share data unaudited)
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2008
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2007
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2008
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2007
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Interest and dividend income:
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Loans, including fees
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$ 6,113
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$ 6,918
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$ 18,850
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$ 20,348
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Securities:
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Taxable
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818
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642
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2,511
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1,860
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Tax-exempt
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349
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325
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1,021
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952
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Other interest and dividends
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30
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128
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88
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296
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Total interest and dividend income
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7,310
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8,013
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22,470
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23,456
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Interest expense:
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Deposits
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2,850
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3,619
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8,917
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10,432
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FHLB advances
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654
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656
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1,893
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1,845
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Other borrowings
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205
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128
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701
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352
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Junior subordinated debentures
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113
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113
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340
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340
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Total interest expense
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3,822
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4,516
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11,851
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12,969
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Net interest income
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3,488
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3,497
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10,619
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10,487
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Provision for loan losses
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285
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120
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555
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360
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Net interest income after provision for loan losses
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3,203
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3,377
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10,064
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10,127
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Noninterest income:
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Service fees
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412
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339
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1,175
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970
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Mortgage banking
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233
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215
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841
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664
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Investment and insurance sales commissions
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105
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141
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303
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471
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Net loss on write down of FNMA preferred stock
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(991)
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(991)
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Increase in cash surrender value of life insurance
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97
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67
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277
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193
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Other noninterest income
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165
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165
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512
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471
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Total noninterest income
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21
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927
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2,117
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2,769
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Noninterest expense:
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Salaries and employee benefits
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1,732
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1,648
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5,193
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5,159
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Occupancy and facilities
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467
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455
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1,479
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1,423
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Data processing and other office operations
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246
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187
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717
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607
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Advertising and promotion
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76
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96
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251
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249
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Other noninterest expenses
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674
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489
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1,814
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1,543
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Total noninterest expense
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3,195
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2,875
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9,454
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8,981
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Income before provision for income taxes
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29
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1,429
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2,727
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3,915
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Provision (credit) for income taxes
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(192)
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408
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485
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1,087
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Net income
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$ 221
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$ 1,021
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$ 2,242
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$ 2,828
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Basic earnings per share
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$ 0.14
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$ 0.66
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$ 1.45
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$ 1.80
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Diluted earnings per share
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$ 0.14
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$ 0.66
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$ 1.45
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$ 1.79
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2
PSB Holdings, Inc.
Consolidated Statement of Changes in Stockholders Equity
Nine months ended September 30, 2008 unaudited
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Accumulated
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Other
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Additional
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Comprehensive
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Common
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Paid-in
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Retained
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Income
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Treasury
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(dollars in thousands)
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Stock
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Capital
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Earnings
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(Loss)
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Stock
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Totals
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Balance January 1, 2008
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$ 1,887
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$ 9,493
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$ 34,081
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$ 423
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$ (9,269)
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$ 36,615
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Comprehensive income:
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Net income
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2,242
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2,242
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Unrealized loss on securities
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available for sale, net of tax
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(657)
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(657)
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Reclassification adjustment for security
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loss included in net income, net of tax
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600
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600
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Total comprehensive income
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2,185
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Return Treasury Stock to unissued shares
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(136)
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(3,541)
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3,677
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Issuance of new restricted stock grants
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(106)
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106
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Vesting of existing restricted stock grants
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8
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8
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Cash dividends declared $.34 per share
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(525)
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(525)
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Cash dividends declared on unvested
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restricted stock grants
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(3)
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(3)
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Balance September 30, 2008
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$ 1,751
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$ 5,854
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$ 35,795
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$ 366
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$ (5,486)
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$ 38,280
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3
PSB Holdings, Inc.
Consolidated Statements of Cash Flows
Nine months ended September 30, 2008 and 2007 unaudited
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(dollars in thousands)
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2008
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2007
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Cash flows from operating activities:
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Net income
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$ 2,242
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$ 2,828
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Adjustments to reconcile net income to net
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cash provided by operating activities:
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Provision for depreciation and net amortization
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1,243
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1,155
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Provision for loan losses
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555
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360
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Deferred net loan origination costs
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(443)
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(382)
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Gain on sale of loans
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(596)
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(357)
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Reduction in servicing right valuation allowance
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(21)
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(16)
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Loss on sale of premises and equipment
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14
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Loss on sale of foreclosed assets
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23
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(4)
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Loss on write down of FNMA preferred stock
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991
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Increase in cash surrender value of life insurance
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(277)
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(193)
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Changes in operating assets and liabilities:
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Accrued interest receivable
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(65)
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(329)
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Other assets
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(718)
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(497)
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Other liabilities
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(76)
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(151)
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Net cash provided by operating activities
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2,872
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2,414
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Cash flows from investing activities:
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Proceeds from sale and maturities of:
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Securities available for sale
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18,384
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7,547
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Payment for purchase of:
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Securities available for sale
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(20,856)
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(17,850)
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Purchase of FHLB stock
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(233)
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Net increase in loans
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(31,320)
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(10,550)
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Capital expenditures
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(781)
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(415)
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Proceeds from sale of premises and equipment
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12
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Proceeds from sale of foreclosed assets
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155
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124
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Purchase of bank-owned life insurance
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(872)
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(779)
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Net cash used in investing activities
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(35,511)
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(21,923)
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4
Consolidated Statements of Cash Flows, continued
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2008
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2007
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Cash flows from financing activities:
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Net decrease in non-interest-bearing deposits
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(3,757)
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(6,278)
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Net increase in interest-bearing deposits
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18,569
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14,984
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Net increase (decrease) in FHLB advances
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8,000
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(4,000)
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Net increase (decrease) in other borrowings
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(800)
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5,864
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Dividends declared
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(528)
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(515)
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Proceeds from exercise of stock options
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221
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Purchase of treasury stock
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(1,700)
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Net cash provided by financing activities
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21,484
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8,576
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Net decrease in cash and cash equivalents
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(11,155)
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(10,933)
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Cash and cash equivalents at beginning
|
21,127
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25,542
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Cash and cash equivalents at end
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$ 9,972
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$ 14,609
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Supplemental cash flow information:
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Cash paid during the period for:
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Interest
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$ 11,954
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$ 12,931
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Income taxes
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1,215
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|
1,410
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Noncash investing and financing activities:
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Loans charged off
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$ 117
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$ 33
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Loans transferred to foreclosed assets
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206
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37
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Issuance of unvested restricted stock grants at fair value
|
100
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Vesting of restricted stock grants
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8
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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. Dollar amounts are in thousands, except per share amounts.
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 PSBs Annual Report on Form 10-K for the year ended December 31, 2007, 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
Under the terms of an incentive stock option plan adopted during 2001, shares of unissued common stock were reserved for options to officers and key employees at prices not less than the fair market value of the shares at the date of the grant. These options expire 10 years after the grant date with the first options scheduled to expire beginning in the year 2011. No additional shares of common stock remain reserved for future grants under the option plan approved by the shareholders. As of September 30, 2008, 4,476 options were outstanding and eligible to be exercised at a weighted average exercise price of $15.96 per share. During the nine months ended September 30, 2008, no options were exercised or lapsed. During the nine months ended September 30, 2007, options were exercised with respect to 13,755 shares at an average price of $16.14 per share. Options to purchase 1,084 shares at $15.83 lapsed during the nine months ended September 30, 2007. The total estimated intrinsic value of options exercised was $168 during the nine months ended September 30, 2007.
During the quarter ended March 31, 2008, PSB granted 3,916 shares of restricted stock to certain employees at $25.53 per share having a total market value of $100 upon issuance. The restricted shares vest to employees based on continued PSB service over a six-year period and are recognized as compensation expense over the vesting period. Cash dividends are paid on unvested shares at the same time and amount as paid to PSB common shareholders. Cash dividends paid on unvested restricted stock shares are charged to retained earnings as significantly all restricted shares are expected to vest to employees. Unvested shares are subject to forfeiture upon employee termination. During the nine months ended September 30, 2008, compensation expense of $8 was recorded from amortization of restricted shares expected to vest upon the initial vesting date. Projected compensation expense assuming all restricted shares eventually vest to employees would be $10 in 2008, $10 in 2009, and $20 during 2010, 2011, 2012, and 2013, respectively. As of September 30, 2008, all 3,916 shares of restricted stock remained unvested.
6
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. Unvested but issued restricted shares are not considered to be outstanding for purposes of calculating weighted average number of shares outstanding or included to determine net book value per share. 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 and unvested restricted stock. Unvested restricted shares are included as outstanding shares as of period-end as disclosed in the consolidated balance sheets.
Presented below are the calculations for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30,
|
|
September 30,
|
(dollars in thousands, except per share data unaudited)
|
2008
|
2007
|
|
2008
|
2007
|
|
|
|
|
|
|
Net income
|
$ 221
|
|
$ 1,021
|
|
|
$ 2,242
|
|
$ 2,828
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
1,544,982
|
|
1,553,952
|
|
|
1,544,982
|
|
1,572,072
|
|
Effect of dilutive stock options outstanding
|
1,490
|
|
4,105
|
|
|
1,572
|
|
5,933
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
1,546,472
|
|
1,558,057
|
|
|
1,546,554
|
|
1,578,005
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$ 0.14
|
|
$ 0.66
|
|
|
$ 1.45
|
|
$ 1.80
|
|
Diluted earnings per share
|
$ 0.14
|
|
$ 0.66
|
|
|
$ 1.45
|
|
$ 1.79
|
|
NOTE 4 COMPREHENSIVE INCOME
Comprehensive income as defined by current accounting standards for the three months and nine months ended September 30, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30,
|
|
September 30,
|
(dollars in thousands unaudited)
|
2008
|
2007
|
|
2008
|
2007
|
|
|
|
|
|
|
Net income
|
$ 221
|
|
$ 1,021
|
|
|
$ 2,242
|
|
$ 2,828
|
|
Unrealized gain (loss) on securities
|
|
|
|
|
|
|
|
|
|
available for sale, net of tax
|
155
|
|
836
|
|
|
(657)
|
|
91
|
|
Reclassification adjustment for security
|
|
|
|
|
|
|
|
|
|
loss included in net income, net of tax
|
600
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
$ 976
|
|
$ 1,857
|
|
|
$ 2,185
|
|
$ 2,919
|
|
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.
7
Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual life of the underlying loan.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Management believes the allowance for loan losses is adequate to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. In accordance with current accounting standards, the allowance is provided for losses that have been incurred as of the balance sheet date. The allowance is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions.
The allowance for loan losses includes specific allowances related to loans which have been judged to be impaired as defined by current accounting standards. A loan is impaired when, based on current information, it is probable that PSB will not collect all amounts due in accordance with the contractual terms of the loan agreement. Management has determined that commercial, financial, agricultural, and commercial real estate loans that have a nonaccrual status or have had their terms restructured meet this definition. Large groups of homogenous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment. Specific allowances are based on discounted cash flows of expected future payments using the loans initial effective interest rate or the fair value of collateral if the loan is collateral dependent.
In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require PSB to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination.
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate and are carried as Loans held for sale on the balance sheet. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method using quoted market prices.
NOTE 6 FORECLOSED ASSETS
Real estate and other property 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 or other property 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 assets.
NOTE 7 INCOME TAXES
The Internal Revenue Service (IRS) audited PSBs federal income tax returns for 1999 through 2002, and had disallowed a portion of the Banks interest deductions for such years. The IRS asserted that PSB owed an additional $184 of tax including interest, which PSB paid in 2005 following the audit. The IRSs contention was that municipal bonds owned by the Banks Nevada investment subsidiary should be treated as owned by the Bank for purposes of computing the Banks allowable interest expense deduction. In August 2005, PSB filed a petition with the United States Tax Court contesting such adjustment.
On November 1, 2007, the Tax Court decided for PSB on each significant point in the case. Based on this decision, PSB reduced its federal income tax expense during the quarter ended December 31, 2007, by $200 for the refund to be received from the case. During the quarter ended March 31, 2008, the IRS announced it would not appeal the Tax Court decision, and PSB received a refund of all these amounts paid to the IRS. PSB
8
recorded no reduction to income tax expense during the nine months ended September 30, 2008, upon receipt of the refund.
NOTE 8 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
All derivative instruments are recorded at their fair values. If derivative instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in income.
NOTE 9 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.
NOTE 10 HOLDING COMPANY LINE OF CREDIT
PSB maintains an unsecured line of credit at the parent holding company level for advances up to $3 million, which expires February 27, 2009. The maximum line of credit was $1 million at December 31, 2007, which was increased to $3 million upon renewal during 2008. The line carries a variable rate of interest based on changes in the 30-day London Interbank Offered Rate (LIBOR) plus 1.50%. As of September 30, 2008, no advances were outstanding on the line, and there was no usage of the line during the nine months ended September 30, 2008.
Advances under the line of credit require PSB and its subsidiary, Peoples State Bank, to be well capitalized as defined by banking regulation and to maintain total non-performing loans and foreclosed property at a level no greater than 2% of total loans and foreclosed property unless these conditions are waived by the lender. At September 30, 2008, PSBs total non-performing loans and foreclosed property were greater than 2% of total loans and foreclosed property and in violation of this covenant. PSB is working with the lender to obtain a written waiver of this covenant. Advances on the line of credit may not be obtained until the written waiver is received.
NOTE 11 CURRENT YEAR ACCOUNTING CHANGES
In 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements,
which was effective for financial statements issued after January 1, 2008. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at period end and establishes a three-level hierarchy for fair value measurement. SFAS No. 157 also expands disclosure about instruments measured at fair value and how changes in fair value have impacted net income. PSB adopted this statement during the quarter ended March 31, 2008 (except as delayed for nonfinancial assets and liabilities), which had no material effect on its financial statements.
FASB Staff Position (FSP) on SFAS No. 157-2 delays the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years and interim periods beginning after November 15, 2008. PSB elected to delay the application of SFAS 157 to nonfinancial assets and liabilities including foreclosed assets held at March 31, 2008.
FSP on SFAS No. 157-3 provides clarification regarding application of SFAS No. 157 to value financial assets exchanged in a market that is not active. This FSP on SFAS 157-3 codified a joint Securities and Exchange Commission and FASB position published on September 30, 2008. PSB adopted this statement on September 30, 2008, which had no material effect on its financial statements.
9
In 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Liabilities.
This statement permits PSB to choose to measure many financial instruments at fair value that are not currently required to be measured at fair value. This election establishes new presentation and disclosure requirements in the event such fair value election is made. PSB did not elect to measure any financial instruments at fair value in connection with adoption of SFAS No. 159 on January 1, 2008.
NOTE 12 FAIR VALUE MEASUREMENTS
Certain assets are recorded and disclosed at fair value to provide financial statement users additional insight into PSBs quality of earnings. Although no such liabilities were held by PSB at September 30, 2008, certain liabilities could also be recorded and disclosed at fair value. Some of these assets and liabilities are measured on a recurring basis, while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as loans held for sale, impaired loans, and mortgage servicing rights are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets.
Under SFAS 157, PSB groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instruments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:
Level 1 Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques.
Assets measured at fair value on a recurring basis at period-end:
|
|
|
|
|
|
|
|
Fair value Measurements at Period End Using
|
|
|
Quoted Prices in
|
|
|
|
|
Active Markets
|
Significant Other
|
Significant
|
|
|
for Identical
|
Observable
|
Unobservable
|
|
($000s)
|
Assets
|
Inputs
|
Inputs
|
Description
|
Sept. 30, 2008
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|
|
|
|
|
Securities available for sale
|
$98,731
|
$
|
$ 97,022
|
$1,709
|
|
|
|
|
|
|
Reconciliation of fair value measurements using significant unobservable inputs:
|
Securities
|
|
|
|
|
Available
|
(dollars in thousands)
|
|
|
|
For Sale
|
|
|
|
|
|
Beginning of year balance
|
|
|
|
$2,198
|
|
|
|
|
|
|
|
Total realized/unrealized gains and (losses):
|
|
|
|
|
|
Included in earnings
|
|
|
|
|
|
Included in other comprehensive income
|
|
|
|
11
|
|
Purchases, maturities, and sales
|
|
|
|
(500)
|
|
|
|
|
|
|
|
End of period balance
|
|
|
|
$1,709
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or (losses) for the period included in earnings attributable to the
|
|
|
change in unrealized gains or losses relating to assets still held at period end
|
$
|
|
Securities available for sale classified within Level 2 of the valuation hierarchy are carried at fair value estimated from pricing models based on quoted prices of similar securities on active markets. Securities classified as Level 2 include U.S. Government and Agency securities, agency and whole loan mortgage related securities, obligations of states and political subdivisions, and Federal National Mortgage Association (FNMA) preferred stock.
PSB considers nonrated trust preferred securities and other equity securities not traded on active markets to be classified as Level 3 assets whose fair value is determined using significant unobservable inputs. Nonrated trust preferred securities issued by other Wisconsin banks to PSB on a private issue basis represent nearly all Level 3 securities at September 30, 2008. Other equity securities in this category are carried at cost, which approximates fair value.
The fair value of nonrated trust preferred securities is estimated using a discounted cash flow model based on estimated current investment yields that would be required by the same security with similar terms issued by the same entity as currently held in the portfolio. Discounted cash flows are accumulated up to the initial security call date upon which date the security is expected to be called. Determination of the expected call date takes into account existing security spreads and expected replacement spreads to reissue a similarly structured trust preferred issue.
Assets measured at fair value on a non-recurring basis at period-end:
|
|
|
|
|
|
|
|
|
|
|
Fair value Measurements at Period End Using
|
|
|
Quoted Prices in
|
|
|
|
|
Active Markets
|
Significant Other
|
Significant
|
|
|
for Identical
|
Observable
|
Unobservable
|
|
($000s)
|
Assets
|
Inputs
|
Inputs
|
Description
|
Sept. 30, 2008
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|
|
|
|
|
Impaired loans
|
$6,570
|
|
|
|
|
|
$6,570
|
|
Mortgage servicing rights
|
974
|
|
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
Totals
|
$7,544
|
|
$
|
|
$
|
|
$7,544
|
|
Fair values for impaired loans are estimated using underlying collateral values as a practicable expedient to determine fair value. Collateral fair values are estimated based on independent appraisals or upon managements internal estimates of value based on sales of similar collateral. Fair value of impaired loans are reported before selling costs of the related collateral, but measured on the balance sheet net of estimated selling costs. Therefore, significant estimated selling costs would cause the reported fair value of impaired loans to be greater than the measurement value of impaired loans as maintained on the balance sheet. At September 30, 2008, estimated selling costs of collateral supporting impaired loans were immaterial.
Mortgage servicing rights are valued based on stratification of the serviced loan pools by year of origination, term of the loan, and range of interest rate within each term. Quarterly, each stratum is analyzed using prepayment assumptions provided by independent sources based on national market trends and expectations. Expectations of future cash flows from servicing are discounted using a rate of generally 10%. Unrealized fair value gains and losses represented within each stratum are netted together to determine measurement value on a lower of cost or market basis. These lower of cost or market measurements by stratum are aggregated and compared to amortized historical cost of mortgage servicing rights to determine the need for a valuation reserve. As of September 30, 2008, a total valuation reserve of $15 was maintained against the amortized cost of mortgage servicing rights. During the nine months ended September 30, 2008, the valuation reserve declined $21, which increased mortgage banking income.
11
NOTE 13 FUTURE ACCOUNTING CHANGES
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations
. This Statement establishes principles and requirements for the acquirer in a business combination to recognize and measure identifiable assets acquired and liabilities assumed; to recognize and measure goodwill acquired or gain from a bargain purchase; and to determine what information to disclose in the financial statements. SFAS No. 141R is effective for business combinations after December 31, 2008. PSB believes the adoption of this Statement will not have a significant effect on its financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133.
This Statement changes the disclosures requirements for derivative instruments and hedging activities and requires enhanced disclosures about such activities. SFAS No. 161 is effective for periods beginning January 1, 2009. The adoption of this Statement will require PSB to expand its disclosures on its derivative and hedging activities; however, PSB does not expect adoption of this Statement to have a significant effect on its financial statements.
In June 2008, the FASB issued FSP No. EITF 03-06-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities
. This FSP states that unvested share-based payment awards that contain nonforfeitable rights to dividends (or dividend equivalents) are participating securities and, as such, shall be included in the computation of earnings per share. FSP No. EITF 03-06-1 is effective for financial statements issued for fiscal years beginning January 1, 2009. The adoption of this FSP will require PSB to include unvested restricted stock in its earnings per share computations. Management estimates this will cause annual earnings per share to decrease by approximately $.01 per share upon adoption. This FSP should not have any other significant effect on PSBs financial statements. Upon adoption, all prior period earnings per share will be adjusted retrospectively to conform to the provisions of this FSP.
In September 2008, the FASB issued FSP No. 133-1 and FIN 45-4,
Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45
. This FSP addresses disclosures concerning credit derivatives (as defined) and expands disclosures of guarantors regarding current status of the payment/performance risk. While PSB does not maintain any credit derivatives, PSB does guarantee to third parties the credit performance on certain customers. Upon adoption, PSB will make disclosures on past payment performance and credit risk associated with these guarantees. PSB does not expect adoption of this statement on December 31, 2008, to have a significant effect on its financial statements.
12
Item 2. Managements 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 PSBs 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. This Quarterly Report on Form 10-Q describes the business of PSB Holdings, Inc. and its subsidiary Peoples State Bank as in effect on September 30, 2008, 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 risks 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 Forward-Looking Statements in Item 1 of PSBs Form 10-K for the year ended December 31, 2007 (2007 Form 10-K), and, from time to time, in PSBs other filings with the Securities and Exchange Commission. PSB does not intend to update forward-looking statements. Additional risk factors relating to an investment in PSB common stock are described under Item 1A of the 2007 Form 10-K.
Management Discussion and Analysis Executive Overview
This overview summarizes PSBs financial trends and the primary opportunities and challenges faced by management. It is intended to assist the reader in better understanding these trends and managements plan to address them. In addition, the near-term issues on which management is most focused are outlined in general terms as a backdrop for more detailed statistical analysis presented in this Quarterly Report on Form 10-Q.
September 2008 quarterly net income was $221, or $.14 per diluted share, a decline from $1,021, or $.66 per share during September 2007. Year to date net income through September 30, 2008, was $2,242, or $1.45 per share, a decline from $2,828,000, or $1.79 per share during 2007. The decline in September 2008 quarterly and year to date net income was due to a write-down of PSBs investment in Federal National Mortgage Association (FNMA) preferred stock of approximately $1 million. The federal governments placement of FNMA into conservatorship on September 7, 2008, permanently impaired the value of PSBs FNMA investment by placement of the governments new equity interest as superior to FNMAs existing preferred stock. During September, PSB reduced its holding cost of the investment to $50 through a write-down of $991, which reduced net income by $600 after tax benefits. September 2008 quarterly net income prior to the special FNMA charge would have been $821, or $.53 per share, and year to date income would have been $2,842, or $1.84 per share.
PSBs provision for loan losses rose to $285 in the September 2008 quarter, compared to $120 in the September 2007 quarter. Loan loss provisions for the nine months ended September 30 were $555 and $360 in 2008, and 2007, respectively. The provision for loan losses was increased to account for deterioration in credit quality and payment ability of certain problem loan relationships during the September 2008 quarter. The increased provision for loan losses also lowered net income compared to prior year periods.
Assets at September 30, 2008, were $557,786, compared to $534,185 at December 31, 2007, an increase of $23,601, or 4.4% (5.9% on an annualized basis). Total loans receivable were $418,386 at September 30, 2008, compared to $387,130 at December 31, 2007, an increase of $31,256 or 8.1% (10.8% on an annualized basis). Year to date, on-balance sheet residential mortgage loans declined $11,026 as customers have refinanced into secondary market loan programs with payments continuing to be serviced by PSB for other investors. The addition of key lending personnel and strategic focus on locally owned small- to middle-market commercial customers has led to significant commercial loan growth during 2008. Total commercial real estate and other commercial purpose loans increased $39,132 to $319,461 at September 30, 2008, compared to $280,329 at December 31, 2007, an increase of 14.0% (18.6% on an annualized basis).
13
Total deposits at September 30, 2008, were $416,818 compared to $402,006 million at December 31, 2007, an increase of $14,812, or 3.7%. Strategic initiatives to grow retail deposits through PSBs Reward Checking account led to $8,154 growth in Rewards Checking balances since December 31, 2007, an increase of 73.8% (98.4% on an annualized basis). Peoples Rewards Checking pays a premium interest rate to depositors who meet account usage requirements, including minimum debit card purchases, acceptance of electronic account statements, and direct deposit activity. Offsetting the Rewards Checking growth was a seasonal decline in government and municipal deposit balances, which declined $9,082 since December 31, 2007. Governmental depositors typically carry their largest balances during the months of December and January.
A significant portion of the deposit growth since December 31, 2007, was from an increase in wholesale brokered certificates of deposit of $19,953. FHLB advances also increased $8,000 during the nine months ended September 30, 2008. Wholesale funding, including brokered deposits, FHLB advances, and other borrowings totaled $161,260, compared to $134,107 at December 31, 2007. Wholesale funding totaled 28.9% of total assets at September 30, 2008, compared 25.1% of total assets at December 31, 2007, as loan growth has consistently outpaced local deposit growth. PSB regularly maintains access to wholesale markets to fund loan originations and manage local depositor needs on a daily basis as needed. At September 30, 2008, unused (but available) wholesale funding was approximately $108,223, or 19.4% of total assets, compared to $116,085, or 21.3% of total assets at June 30, 2008.
During November 2007, PSB purchased $15 million of conforming 30-year residential mortgage pools funded by $13.5 million of structured repurchase agreements. Certain repurchase agreement interest costs are adjustable up or down with changes in the 90-day LIBOR rate through various lock out periods ending November 2009 and 2010. As short-term interest rates fell since the purchase and mortgage loan investment spreads widened compared to U.S. Treasury rates, the spread on the leverage trade increased from approximately 1.39% at purchase to approximately 2.48% at September 30, 2008. The leveraged investment transaction increased net interest income by approximately $261 during the nine months ended September 30, 2008, but contributed to the decline in net interest margin compared to 2007.
Nonperforming assets increased $5,894 at September 30, 2008, to $11,616 compared to $5,722 at June 30, 2008, and $4,450 at December 31, 2007. The increase was due to the addition of a $5,525 loan receivable whose source of future principal and interest payments must come from sale of the recreation/land development collateral or another valuable asset of the borrower under the terms of unlimited individual guarantees. Based on the terms of a new collateral appraisal and the individual guarantees, PSB believes it will recover all principal due under the loan, but does maintain a specific reserve for loss totaling $200 at September 30, 2008. PSB has initiated foreclosure proceedings on the collateral. Excluding this large loan, nonperforming assets would have been $6,091 at September 30, 2008, or 1.09% of total assets, compared to 1.05% of total assets at June 30, 2008, and .83% of total assets at December 31, 2007.
Significant growth in commercial loans and letters of credit combined with a decline in the residential mortgage portfolio has lowered the total risk-weighted regulatory capital ratio to 10.60% at September 30, 2008 compared to 11.36% at December 31, 2007. PSBs banking subsidiary is required to maintain total risk adjustable capital of at least 10.00% to be considered well-capitalized under current banking regulation. Failure to remain well-capitalized would likely prevent PSB from obtaining future wholesale broker time deposits which have been an important source of funding growth during the past several years and most recent quarter.
After reviewing potential sources and cost of additional capital, PSB intends to apply to participate in the U.S. Treasurys TARP Capital Purchase Program (the Program) by the November 14, 2008 deadline. Although well capitalized, PSB believes that the Program would add additional capital on favorable terms and enable the Company additional flexibility in addressing the challenges and opportunities in current markets. If allowed to participate in the Program, PSB would be eligible to issue and sell to the U.S. Treasury shares of its preferred stock (to be authorized by an amendment to PSBs Amended and Restated Articles of Incorporation subject to approval by PSBs shareholders) for cash consideration ranging from approximately $5 million to $14 million (the Senior Preferred Stock). PSB intends to request to sell the U.S. Treasury up to $14 million of its Senior Preferred Stock, which will pay cumulative dividends at a rate of 5% per year for the first five years and 9% thereafter. As a Program participant, PSB would also be required to sell to the U.S. Treasury warrants
14
(options) to purchase PSB Common Stock for cash consideration equal to 15% of the amount of Senior Preferred Stock sold. The number of warrants outstanding would be determined based on PSB Common Stock market prices per share during the 20 days leading up to the Senior Preferred Stock sale date.
Management Discussion and Analysis Statistical Tables and Analysis
BALANCE SHEET
At September 30, 2008, total assets were $557,786, an increase of $23,601, or 4.4% over December 31, 2007, and an increased $12,786, or 2.3% over June 30, 2008. Changes in assets since June 30, 2008, and December 31, 2007, consisted of:
Table 1: Change in Balance Sheet Assets Composition
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
Increase (decrease) in assets ($000s)
|
September 30, 2008
|
|
September 30, 2008
|
|
$
|
%
|
|
$
|
%
|
|
|
|
|
|
|
Commercial, industrial and agricultural loans
|
$ 9,750
|
|
8.1%
|
|
|
$ 19,827
|
|
18.1%
|
|
Commercial real estate mortgage loans
|
7,110
|
|
3.9%
|
|
|
19,305
|
|
11.3%
|
|
Bank-owned life insurance
|
678
|
|
7.4%
|
|
|
1,149
|
|
13.2%
|
|
Other assets (various categories)
|
314
|
|
1.5%
|
|
|
1,647
|
|
8.5%
|
|
Investment securities
|
311
|
|
0.3%
|
|
|
1,517
|
|
1.6%
|
|
Residential real estate mortgage and home equity loans
|
191
|
|
0.2%
|
|
|
(8,689)
|
|
-8.1%
|
|
Cash and cash equivalents
|
(5,568)
|
|
-35.8%
|
|
|
(11,155)
|
|
-52.8%
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in assets
|
$ 12,786
|
|
2.3%
|
|
|
$ 23,601
|
|
4.4%
|
|
Commercial purpose loan originations have led the increase in total assets and were up $39,192 during the nine months ended September 30, 2008. The increase in commercial purpose loans was offset by a decline in cash and the residential real estate mortgage portfolio totaling $19,844 during the same period. Residential mortgage loans have declined as PSB met customer demands of long-term fixed rate mortgages by directing them into one of several secondary market programs. Loans sold, but serviced for the FHLB and FNMA increased $14,721 during the nine months ended September 30, 2008, reflecting movement of these residential loans into the secondary market.
The residential first mortgage portfolio has declined each quarter since June 2006 as origination of loans into the secondary market has been more profitable than holding such mortgages on the balance sheet funded by wholesale borrowings. During the December 2008 quarter, PSB initiated a program to fund and hold high quality residential mortgages with fixed rates up to 10 years, and amortizations up to 30 years at rates that approximate secondary market conforming mortgage rates. This temporary program has several advantages to PSB, including more individualized options for customers, replacement of mortgage loans available for pledging against FHLB advances to improve long-term liquidity, and increased net interest income from historically wide spreads on residential mortgage loans compared to U.S. Treasury securities. The program will be reevaluated at the end of December 2008 or after $10 million in originations have been generated.
15
The change in net assets impacted funding sources since June 30, 2008, and December 31, 2007, as follows:
Table 2: Change in Balance Sheet Liabilities and Equity Composition
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
Increase (decrease) in liabilities and equity ($000s)
|
September 30, 2008
|
|
September 30, 2008
|
|
$
|
%
|
|
$
|
%
|
|
|
|
|
|
|
Wholesale certificates of deposit
|
$ 6,981
|
|
11.0%
|
|
|
$ 19,953
|
|
39.4%
|
|
Core deposits (including MMDA)
|
5,560
|
|
2.0%
|
|
|
(10,883)
|
|
-3.7%
|
|
Retail certificates of deposit > $100
|
1,361
|
|
2.2%
|
|
|
5,742
|
|
9.8%
|
|
Stockholders equity
|
979
|
|
2.6%
|
|
|
1,665
|
|
4.5%
|
|
FHLB advances
|
|
|
0.0%
|
|
|
8,000
|
|
14.0%
|
|
Other liabilities and debt (various categories)
|
(431)
|
|
-3.4%
|
|
|
(76)
|
|
-0.6%
|
|
Other borrowings
|
(1,664)
|
|
-6.1%
|
|
|
(800)
|
|
-3.0%
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in liabilities and stockholders equity
|
$ 12,786
|
|
2.3%
|
|
|
$ 23,601
|
|
4.4%
|
|
Deposit funding during the nine months ended September 30, 2008, reflects declining retail and core deposits, while local jumbo certificates and brokered certificates increased. The majority of the core deposit decline was seen in the government deposits category, which was down $9,082. Most of the brokered certificate of deposit increase occurred during the June 2008 quarter to fund loan growth and to pay down federal funds purchased at March 31, 2008 (classified as other borrowings). During the September 2008 quarter, both core deposits and wholesale certificates of deposits increased in similar amounts. The increase in core deposits came from Rewards Checking balance growth and governmental deposits. While increasing $8,000 during the nine months ended September 30, 2008, FHLB advances remained the same during the September 2008 quarter.
Table 3: Period-End Loan Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
December 31, 2007
|
|
Dollars
|
Dollars
|
|
Percentage of total
|
|
|
Percentage
|
(dollars in thousands)
|
2008
|
2007
|
|
2008
|
2007
|
|
Dollars
|
of total
|
|
|
|
|
|
|
|
|
|
Commercial, industrial and agricultural
|
$ 129,466
|
$ 106,173
|
|
30.6%
|
|
27.5%
|
|
|
$ 109,639
|
27.9%
|
|
Commercial real estate mortgage
|
189,995
|
165,718
|
|
44.8%
|
|
43.0%
|
|
|
170,690
|
43.6%
|
|
Residential real estate mortgage
|
79,311
|
92,647
|
|
18.7%
|
|
24.0%
|
|
|
90,337
|
23.0%
|
|
Residential real estate loans held for sale
|
|
581
|
|
0.0%
|
|
0.2%
|
|
|
365
|
0.1%
|
|
Consumer home equity
|
19,325
|
16,383
|
|
4.6%
|
|
4.2%
|
|
|
16,988
|
4.3%
|
|
Consumer and installment
|
5,585
|
4,426
|
|
1.3%
|
|
1.1%
|
|
|
4,326
|
1.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
$ 423,682
|
$ 385,928
|
|
100.0%
|
|
100.0%
|
|
|
$ 392,345
|
100.0%
|
|
The loan portfolio is PSBs primary asset subject to credit risk. PSBs process for monitoring credit risks includes quarterly 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 status or charged off is reversed against interest income. PSB applies all payments received on nonaccrual loans to principal until the loan is returned 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 increased $7,166 (161%) at September 30, 2008, to $11,616, compared to December 31, 2007, and increased $6,898 (146%), compared to September 30, 2007. Nonperforming assets are 2.08% of total assets at September 30, 2008.
16
PSB has experienced an increase in nonperforming assets from a general deterioration of economic conditions in our local market area. However, PSB does not believe it has any undue geographic, industry, or real estate/land development concentrations which carry significant loss exposure. PSB maintains a conservative identification and reporting system regarding nonperforming loans. Nonperforming loans are spread over many different borrowers and industries and are generally well-collateralized. Restructured and nonaccrual loans remain classified as nonperforming loans until the uncertainty surrounding the credit is eliminated. Therefore, some borrowers continue to make substantially all required payments while on nonaccrual status. PSB applies all payments received on nonaccrual loans to principal until the loan is returned to accrual status. As of September 30, 2008, cumulative borrower payments made while they have been on nonaccrual status have reduced nonaccrual loan principal by $314, or 3.0% of total nonaccrual loans.
Nonperforming loans increased substantially from addition of a $5,525 loan to nonaccrual status during the September 2008 quarter. The loans source of future principal and interest payments must come from sale of the recreation/land development collateral or another valuable asset of the borrower under the terms of unlimited individual guarantees. Based on the terms of a new collateral appraisal and the individual guarantees, PSB believes it will recover all principal due under the loan, but does maintain a specific reserve for loss totaling $200 at September 30, 2008. PSB has initiated foreclosure proceedings on the collateral and anticipates taking the loan into foreclosed property during 2009. Excluding this large loan, nonperforming assets would have been $6,091 at September 30, 2008, or 1.09% of total assets, compared to 1.05% of total assets at June 30, 2008, and .83% of total assets at December 31, 2007.
Excluding the $5,525 nonperforming loan noted above, at September 30, 2008, PSBs internal credit grading system identified 13 separate relationships with remaining principal totaling approximately $2.0 million against which specific loan loss reserves were recorded totaling $682. Also excluding the $5,525 nonperforming loan noted above, at June 30, 2008, there were 11 separate relationships with remaining principal totaling approximately $1.3 million against which specific loan loss reserves were recorded totaling $445. Not all relationships carrying a specific reserve are classified as nonperforming loans, as loss estimates could exist for customers with inadequate collateral or other negative factors besides payment performance.
Local loan demand has traditionally met requirements for loan growth and out of area participation loans purchased by PSB represent a very small portion of the total loan portfolio, currently $12,771 or 3.0% of the gross loan portfolio. Many Wisconsin community banks work together on an informal basis to allow customers with credit needs above an institutions legal lending limit to be served by their local community bank as the lead bank after selling portions of the loan to other banks. From time to time, PSB will purchase an out of area loan originated by another Wisconsin community bank for this purpose. In addition, PSB may sell a portion of a large loan credit for one of its customers to these same community banks to accommodate large loan requests.
PSB has guaranteed repayment of certain customer interest rate swaps and letters of credit to a correspondent bank in exchange for an underwriting fee and a first mortgage lien on real estate. The total principal amount guaranteed by PSB totaled $9,750 and $5,607 at September 30, 2008, and December 31, 2007, respectively. The letter of credit guarantees expire during a period from 2010 to 2011, while the swap guarantees expire in 2018 and 2022. The guarantee liability is carried at cost (equal to the amount of deferred income received), which approximates fair value and totaled $110 and $84 at September 30, 2008, and December 31, 2007, respectively. The liability is recognized as income on a pro-rata basis over the life of the letter of credit guarantee as loan interest income, while swap guarantee income is recognized as other noninterest income. Income recognized on the guarantees totaled $56 and $6 during the nine months ended September 30, 2008, and 2007, respectively.
17
Table 4: Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30,
|
|
September 30,
|
(dollars in thousands)
|
2008
|
2007
|
|
2008
|
2007
|
|
|
|
|
|
|
Allowance for loan losses at beginning
|
$ 5,047
|
|
$ 4,728
|
|
|
$ 4,850
|
|
$ 4,478
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
285
|
|
120
|
|
|
555
|
|
360
|
|
Recoveries on loans previously charged-off
|
1
|
|
2
|
|
|
8
|
|
24
|
|
Loans charged off
|
(37)
|
|
(21)
|
|
|
(117)
|
|
(33)
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end
|
$ 5,296
|
|
$ 4,829
|
|
|
$ 5,296
|
|
$ 4,829
|
|
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 5: Nonperforming Assets
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(dollars in thousands)
|
2008
|
2007
|
|
2007
|
|
|
|
|
|
Nonaccrual loans
|
$ 10,299
|
|
$ 3,683
|
|
|
$ 3,144
|
|
Accruing loans past due 90 days or more
|
|
|
|
|
|
|
|
Restructured loans not on nonaccrual
|
637
|
|
657
|
|
|
653
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
10,936
|
|
4,340
|
|
|
3,797
|
|
Foreclosed assets
|
680
|
|
378
|
|
|
653
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
$ 11,616
|
|
$ 4,718
|
|
|
$ 4,450
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a % of gross loans receivable
|
2.58%
|
|
1.13%
|
|
|
0.97%
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets as a % of total assets
|
2.08%
|
|
0.92%
|
|
|
0.83%
|
|
LIQUIDITY
Liquidity refers to the ability of PSB to generate adequate amounts of cash to meet PSBs 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. Retail and local deposits are the primary source of funding. Retail and local deposits were 62.1% of total assets at September 30, 2008, compared to 65.8% of total assets at December 31, 2007, and 66.2% at September 30, 2007. This liquidity and funding measure declined during the nine months ended September 30, 2008, as commercial loan growth and seasonal run-off of local governmental deposits were funded primarily with brokered certificates of deposit and new FHLB advances.
18
Table 6: Period-end Deposit Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(dollars in thousands)
|
2008
|
|
2007
|
|
2007
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
$ 51,713
|
12.4%
|
|
|
$ 48,805
|
12.2%
|
|
|
$ 55,470
|
13.8%
|
|
Interest-bearing demand and savings
|
89,825
|
21.6%
|
|
|
81,370
|
20.3%
|
|
|
92,983
|
23.1%
|
|
Money market deposits
|
71,266
|
17.1%
|
|
|
77,440
|
19.4%
|
|
|
74,171
|
18.5%
|
|
Retail time deposits less than $100
|
69,229
|
16.6%
|
|
|
71,393
|
17.8%
|
|
|
70,292
|
17.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits
|
282,033
|
67.7%
|
|
|
279,008
|
69.7%
|
|
|
292,916
|
72.9%
|
|
Retail time deposits $100 and over
|
64,132
|
15.4%
|
|
|
60,856
|
15.2%
|
|
|
58,390
|
14.4%
|
|
Broker & national time deposits less than $100
|
602
|
0.1%
|
|
|
1,040
|
0.3%
|
|
|
1,041
|
0.3%
|
|
Broker & national time deposits $100 and over
|
70,051
|
16.8%
|
|
|
59,217
|
14.8%
|
|
|
49,659
|
12.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
$ 416,818
|
100.0%
|
|
|
$ 400,121
|
100.0%
|
|
|
$ 402,006
|
100.0%
|
|
Wholesale funding generally carries higher interest rates than local funding, so loan growth supported by wholesale funds often generates lower net interest spreads than loan growth supported by local funds. However, wholesale funds provide PSB the ability to quickly raise large funding blocks and to match loan terms to minimize interest rate risk and avoid the higher incremental cost to existing deposits from simply increasing retail rates to raise local deposits. Rates paid on local deposits are significantly impacted by competitor interest rates and the local economys ability to grow in a way that supports deposit needs for all local banks.
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 the Period-end Deposit Composition Table above, these certificates are included in retail time deposits $100 and over and totaled $13,705 at September 30, 2008, up $3,693, or 36.9% from $10,012 at June 30, 2008, as certain large PSB depositors sought to increase the FDIC insurance coverage on their accounts during the period of significant national financial turmoil experienced during September 2008. CDARS balances were $11,024 at December 31, 2007, and $10,364 at September 30, 2007. Although classified as retail time deposits $100 and over in the table above, these balances are required to be classified as broker deposits on PSBs quarterly regulatory call reports.
PSBs internal policy is to limit broker and national time (not including CDARS) deposits to 20% of total assets. Broker and national deposits as a percentage of total assets was 12.7%, 9.5%, and 11.7% at September 30, 2008, December 31, 2007, and September 30, 2007, respectively. Brokered deposits as a percentage of total assets may increase during the remainder of 2008 as loan growth is expected to outpace local deposit growth subject to seasonal governmental deposit growth during December 2008.
Although governmental deposits declined during the March 2008 quarter, core deposits have increased since September 30, 2007, due to growth in balances held in the Peoples Rewards Checking product with a balance totaling $19.2 million at September 30, 2008, up from $11.0 million at September 30, 2007. Peoples Rewards Checking currently pays a premium interest rate of 4.51% annual percentage yield and reimbursement of ATM fees to depositors who meet account usage requirements including minimum debit card purchases, acceptance of electronic account statements, and direct deposit activity.
19
Table 7: Summary of Balance by Significant Deposit Source
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(dollars in thousands)
|
2008
|
2007
|
|
2007
|
|
|
|
|
|
Total time deposits $100 and over
|
$ 134,183
|
|
$ 120,073
|
|
|
$ 108,049
|
|
Total broker and national time deposits
|
70,653
|
|
60,257
|
|
|
50,700
|
|
Total retail time deposits
|
133,361
|
|
132,249
|
|
|
128,682
|
|
Core deposits, including money market deposits
|
282,033
|
|
279,008
|
|
|
292,916
|
|
Table 8: Change in Deposit Balance since Prior Period Ended
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
December 31, 2007
|
(dollars in thousands)
|
$
|
%
|
|
$
|
%
|
|
|
|
|
|
|
Total time deposits $100 and over
|
$ 14,110
|
|
11.8%
|
|
|
$ 26,134
|
|
24.2%
|
|
Total broker and national time deposits
|
10,396
|
|
17.3%
|
|
|
19,953
|
|
39.4%
|
|
Total retail time deposits
|
1,112
|
|
0.8%
|
|
|
4,679
|
|
3.6%
|
|
Core deposits, including money market deposits
|
3,025
|
|
1.1%
|
|
|
(10,883)
|
|
-3.7%
|
|
Table 9: Available but Unused Funding Sources other than Retail Deposits
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Unused, but
|
Amount
|
|
Unused, but
|
Amount
|
(dollars in thousands)
|
Available
|
Used
|
|
Available
|
Used
|
|
|
|
|
|
|
Overnight federal funds purchased
|
$ 23,976
|
|
$ 3,524
|
|
|
$ 30,008
|
|
$ 2,492
|
|
Federal Reserve discount window advances
|
10,000
|
|
|
|
|
10,000
|
|
|
|
FHLB advances under blanket mortgage lien
|
10,047
|
|
65,000
|
|
|
23,571
|
|
57,000
|
|
Repurchase agreements
|
23,296
|
|
22,083
|
|
|
9,865
|
|
23,915
|
|
Wholesale market time deposits
|
40,904
|
|
70,653
|
|
|
56,137
|
|
50,700
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
$ 108,223
|
|
$ 161,260
|
|
|
$ 129,581
|
|
$ 134,107
|
|
|
|
|
|
|
|
|
|
|
|
Funding as a percent of total assets
|
19.4%
|
|
28.9%
|
|
|
24.3%
|
|
25.1%
|
|
Total FHLB advances in excess of the $65,000 currently held require PSB to purchase additional FHLB stock equal to 5% of the advance amount. The FHLB currently pays no dividends on its stock and has informed its shareholders that no dividends should be expected during 2008. Therefore, additional FHLB advances carry additional cost relative to other wholesale borrowing alternatives due to the requirement to hold non-earning FHLB stock.
Wholesale funding availability was reduced during September 2008 from cancellation of a $5 million federal funds availability line offered by a correspondent bank. PSB was informed by the correspondent bank that it was cancelling all customer lines that were infrequently used and for customers that did not use them as the primary correspondent bank relationship. PSB had last used this federal funds purchased line prior to 2006 and the bank was not PSBs primary correspondent bank. PSB is seeking to increase its Federal Reserve discount window borrowing capacity to greater than $40 million by pledging existing unencumbered commercial loans held for investment. The discount window line currently has a $10 million maximum and had been unused for many years. Discount window advances are expected to provide both emergency liquidity (as needed) as well as low cost short-term funding for growth of adjustable rate loans held for investment.
20
Available but unused wholesale funding remains sufficient for current operations despite a reduction in unused but available funding during the September 2008 quarter. Since additional FHLB advances would require PSB to purchase nonperforming FHLB stock, as well as relatively low levels of securities available for pledging, PSB expects to fund loan growth with brokered certificates as needed in the near term.
The table below presents maturity repricing information as of September 30, 2008. The following repricing methodologies should be noted:
1.
Money market deposit accounts are considered fully repriced within 90 days. Rewards Checking NOW accounts are considered fully repriced within one year. Other 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.
21
Table 10: Interest Rate Sensitivity Gap Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
(dollars in thousands)
|
0-90 Days
|
91-180 days
|
181-365 days
|
1-2 yrs.
|
2-5 yrs.
|
Beyond 5 yrs.
|
Total
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
Loans
|
$171,067
|
|
$ 33,432
|
|
$ 46,657
|
|
$ 59,592
|
$ 89,474
|
$ 23,460
|
|
$423,682
|
Securities
|
9,507
|
|
4,716
|
|
5,607
|
|
15,445
|
27,508
|
35,948
|
|
98,731
|
FHLB stock
|
|
|
|
|
|
|
|
|
3,250
|
|
3,250
|
CSV bank-owned life insurance
|
|
|
|
|
|
|
|
|
9,877
|
|
9,877
|
Other earning assets
|
834
|
|
|
|
|
|
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$181,408
|
|
$ 38,148
|
|
$ 52,264
|
|
$ 75,037
|
$116,982
|
$ 72,535
|
|
$536,374
|
Cumulative rate
|
|
|
|
|
|
|
|
|
|
|
|
sensitive assets
|
$181,408
|
|
$219,556
|
|
$271,820
|
|
$346,857
|
$463,839
|
$536,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
$167,350
|
|
$ 20,437
|
|
$ 77,871
|
|
$ 41,228
|
$ 26,384
|
$ 31,835
|
|
$365,105
|
FHLB advances
|
6,400
|
|
9,000
|
|
12,100
|
|
18,000
|
19,500
|
|
|
65,000
|
Other borrowings
|
12,240
|
|
|
|
213
|
|
7,243
|
5,500
|
411
|
|
25,607
|
Junior subordinated debentures
|
|
|
|
|
|
|
7,732
|
|
|
|
7,732
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$185,990
|
|
$ 29,437
|
|
$ 90,184
|
|
$ 74,203
|
$ 51,384
|
$ 32,246
|
|
$463,444
|
Cumulative interest
|
|
|
|
|
|
|
|
|
|
|
|
sensitive liabilities
|
$185,990
|
|
$215,427
|
|
$305,611
|
|
$379,814
|
$431,198
|
$463,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap for
|
|
|
|
|
|
|
|
|
|
|
|
the individual period
|
$ (4,582)
|
|
$ 8,711
|
|
$(37,920)
|
|
$ 834
|
$ 65,598
|
$ 40,289
|
|
|
Ratio of rate sensitive assets
|
|
|
|
|
|
|
|
|
|
|
|
to rate sensitive liabilities
|
|
|
|
|
|
|
|
|
|
|
|
for the individual period
|
97.5%
|
|
129.6%
|
|
58.0%
|
|
101.1%
|
227.7%
|
224.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest
|
|
|
|
|
|
|
|
|
|
|
|
sensitivity gap
|
$ (4,582)
|
|
$ 4,129
|
|
$(33,791)
|
|
$(32,957)
|
$ 32,641
|
$ 72,930
|
|
|
Cumulative ratio of rate
|
|
|
|
|
|
|
|
|
|
|
|
sensitive assets to rate
|
|
|
|
|
|
|
|
|
|
|
|
sensitive liabilities
|
97.5%
|
|
101.9%
|
|
88.9%
|
|
91.3%
|
107.6%
|
115.7%
|
|
|
The Asset/Liability Committee uses financial modeling techniques that measure the interest rate risk. Policies established by PSBs 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 PSBs liquidity and interest rate risk as described below.
Basic Surplus
PSB measures basic surplus as the amount of existing net liquid assets (after deducting short-term liabilities and coverage for anticipated deposit funding outflows during the next 30 days) divided by total assets. The basic surplus calculation does not consider unused but available correspondent bank federal funds purchased, as those funds are subject to availability based on the correspondent banks own liquidity needs and therefore are not guaranteed contractual funds. Internal company policy is to maintain a basic surplus including FHLB capacity of at least 5.0%. PSBs basic surplus, including available open line of credit FHLB advances not yet utilized at September 30, 2008, December 31, 2007, and June 30, 2007, was 5.4%, 7.4%, and 5.4% respectively. The decline in the basis surplus ratio occurring during the nine months ended September 30, 2008 was due to an increase in FHLB advances outstanding, which reduced FHLB funds available for liquidity surplus.
22
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. The following table presents the projected impact to net interest income by certain rate change scenarios and the change to the one year cumulative ratio of rate sensitive assets to rate sensitive liabilities.
Table 11: Net Interest Margin Rate Simulation Impacts
|
|
|
|
Period Ended:
|
September 08
|
December 07
|
September 07
|
|
|
|
|
Cumulative 1 year gap ratio
|
|
|
|
Base
|
89%
|
92%
|
98%
|
Up 200
|
88%
|
88%
|
93%
|
Down 200
|
92%*
|
100%
|
103%
|
|
|
|
|
Change in Net Interest Income - Year 1
|
|
|
Up 200 during the year
|
1.3%
|
-0.8%
|
-0.2%
|
Down 200 during the year
|
-0.6%*
|
-0.8%
|
-1.4%
|
|
|
|
|
Change in Net Interest Income - Year 2
|
|
|
No rate change (base case)
|
4.8%
|
0.4%
|
0.3%
|
Following up 200 in year 1
|
5.1%
|
-2.2%
|
-0.3%
|
Following down 200 in year 1
|
3.4%*
|
-3.8%
|
-0.3%
|
* Simulation ratios for these periods represent a 100 basis point decline in interest rates rather than a 200 basis point decline due to currently low relative short-term rate levels.
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 certain 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. PSBs target for the core funding utilization ratio is to remain at 80% or below given the same 200 basis point changes in rates that apply to the guidelines for interest rate risk limits exposure described previously. At September 30, 2008, December 31, 2007, and September 30, 2007, PSBs core funding utilization ratio was projected to be 85%, 69%, and 57%, respectively, after a rate increase of 200 basis points.
The increase in the utilization ratio at September 30, 2008, is a result of a leveraged security purchase transaction completed in November 2007 that added $15 million in 30 year fixed rate conforming mortgage pools funded by $13.5 million in structured repurchase agreements. In the up 200 basis point scenario, the mortgage pools are projected to extend principal payments, while the repurchase agreements are projected to be put to PSB by the counterparty for repayment. In the base case simulation, the repurchase agreements are considered to mature in excess of 60 months based on their stated maturities. Changes in projected maturities of the securities and the related repurchase agreements increases the core funding utilization ratio from 67% in the base case interest rate scenario to 85% in the up 200 basis point scenario.
23
CAPITAL RESOURCES
Stockholders equity increased $1,665 to $38,280 during the nine months ended September 30, 2008. The increase was driven by undistributed net income (net of dividends declared) of $1,714. All other adjustments reduced equity by $49. Net book value per share increased from $23.70 per share at December 31, 2007, to $24.78 per share at September 30, 2008, an increase of 4.6%.
During the March 2008 quarter, PSB issued 3,916 shares of restricted stock to certain key employees as a retention tool and to align employee performance with shareholder interests. The shares vest over the service period using a straight-line method and unvested shares are forfeited if the employee leaves PSBs employment. Refer to Footnote 2 of the Notes to Consolidated Financial Statements for more information on the restricted shares.
No shares were repurchased by PSB during the nine months ended September 30, 2008. During the nine months ended September 30, 2007, 59,000 shares were repurchased at an average price of $28.81. PSB share repurchases on the open market during 2008 were discontinued in part to preserve capital for ongoing commercial loan growth. Industry wide, the cost of capital has increased significantly during the past year and many sources of previously low cost capital such as pooled trust preferred offerings have been closed. The banking industry continues to place a premium on capital and PSB expects to refrain from significant treasury stock repurchases during the remainder of 2008.
During the nine months ended September 30, 2007, 13,755 treasury shares were re-issued to fund an exercise of employee stock options, exercised at an average price of $16.14 per share. These option exercises had a total intrinsic value of $168 upon exercise. Refer to Note 2 to the Consolidated Financial Statements for additional details on the PSB stock compensation plan.
During the June 2008 quarter, PSB returned 135,748 treasury shares to unissued common shares, causing common stock equity and additional paid in capital to decline $3,677, offset by a decline in treasury stock cost balance of $3,677. There was no impact to net book value or total stockholders equity as a result of this stock retirement.
The adequacy of PSBs capital is regularly reviewed to ensure sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. As of September 30, 2008, and December 31, 2007, the Banks Tier 1 risk-weighted capital ratio, total risk-weighted capital, and Tier 1 leverage ratio were in excess of regulatory minimums and were classified as well-capitalized. Failure to remain well-capitalized could prevent PSB from obtaining future wholesale brokered time deposits which are an important source of funding. Average book tangible stockholders equity to average assets was 6.91% during the September 2008 quarter, 6.92% during the December 2007 quarter, and 6.91% during the September 2007 quarter.
Both book and regulatory capital levels have declined during 2008 from significant organic growth in commercial lending while the residential real estate loan portfolio declined. This change in PSBs asset mix has placed downward pressure on the regulatory risk-weighted total capital ratio. PSB is required to maintain a minimum of 10% risk-weighted total capital under current banking regulation to be considered well-capitalized. PSBs total risk-weighted capital ratio was 10.60% at September 30, 2008, 11.36% at December 31, 2007, and 11.23% at September 30, 2007. Due to expectations for continued commercial loan growth, PSB has been investigating options to raise regulatory capital.
After reviewing potential sources and cost of additional capital, PSB intends to apply to participate in the U.S. Treasurys TARP Capital Purchase Program (the Program) by the November 14, 2008, application deadline. Although well capitalized, PSB believes that the Program would add additional capital on favorable terms and enable the Company additional flexibility in addressing the challenges and opportunities in current markets. If allowed to participate in the Program, PSB would be eligible to issue and sell to the U.S. Treasury shares of its preferred stock (to be authorized by an amendment to PSBs Amended and Restated Articles of Incorporation, subject to approval by PSBs shareholders) for cash consideration ranging from approximately $5 million to $14 million (the Senior Preferred Stock). PSB will request to sell the U.S. Treasury up to $14 million of its Senior Preferred Stock, which will pay cumulative dividends at a rate of 5% per year for the first five years and
24
9% thereafter. As a Program participant, PSB would also be required to grant to the U.S. Treasury warrants (options) to purchase PSB Common Stock for cash consideration equal to 15% of the amount of Senior Preferred Stock sold. The number of warrants outstanding would be determined based on PSB Common Stock market prices per share during the 20 days leading up to the Senior Preferred Stock sale date.
According to the term sheet issued by the U.S. Treasury, if PSB is allowed to participate in the Program, the Senior Preferred Stock may not be redeemed by PSB for a period of three years from the date of the purchase by the U.S. Treasury, except with the proceeds from an equity offering of either more perpetual preferred stock or common stock.
As long as any Senior Preferred Stock is outstanding, PSB may pay dividends on its Common Stock and redeem or repurchase its Common Stock, provided that all dividends for all past dividend periods on the Senior Preferred Stock are fully paid. PSB would need to obtain the U.S. Treasurys consent for any increase in dividends paid on its Common Stock, or for the repurchase of its Common Stock, until the third anniversary of the date on which the U.S. Treasury purchases the Senior Preferred Stock. For more information, the U.S. Treasurys term sheet describing the Program is available on the U.S. Treasurys website at http://ustreas.gov.
Table 12: Capital Ratios Consolidated Holding Company
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(dollars in thousands)
|
2008
|
2007
|
|
2007
|
|
|
|
|
|
Stockholders equity
|
$ 38,280
|
|
$ 35,372
|
|
|
$ 36,615
|
|
Junior subordinated debentures, net
|
7,500
|
|
7,500
|
|
|
7,500
|
|
Disallowed mortgage servicing right assets
|
(97)
|
|
(89)
|
|
|
(89)
|
|
Unrealized (gain) loss on securities available for sale
|
(366)
|
|
14
|
|
|
(423)
|
|
|
|
|
|
|
|
|
|
Tier 1 regulatory capital
|
45,317
|
|
42,797
|
|
|
43,603
|
|
Qualifying unrealized gain on equity securities available for sale
|
15
|
|
|
|
|
|
|
Add: allowance for loan losses
|
5,296
|
|
4,829
|
|
|
4,850
|
|
|
|
|
|
|
|
|
|
Total regulatory capital
|
$ 50,628
|
|
$ 47,626
|
|
|
$ 48,453
|
|
|
|
|
|
|
|
|
|
Total assets
|
$ 557,786
|
|
$ 513,184
|
|
|
$ 534,185
|
|
Disallowed mortgage servicing right assets
|
(97)
|
|
(89)
|
|
|
(89)
|
|
Unrealized (gain) loss on securities available for sale
|
(366)
|
|
14
|
|
|
(423)
|
|
|
|
|
|
|
|
|
|
Tangible assets
|
$ 557,323
|
|
$ 513,109
|
|
|
$ 533,673
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets (as defined by current regulations)
|
$ 477,650
|
|
$ 424,229
|
|
|
$ 426,663
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average tangible assets (leverage ratio)
|
8.23%
|
|
8.39%
|
|
|
8.39%
|
|
Tier 1 capital to risk-weighted assets
|
9.49%
|
|
10.09%
|
|
|
10.22%
|
|
Total capital to risk-weighted assets
|
10.60%
|
|
11.23%
|
|
|
11.36%
|
|
25
RESULTS OF OPERATIONS
September 2008 quarterly earnings were $.14 per share on net income of $221, a decline from $.66 per share on net income of $1,021 in the September 2007 quarter, and a decrease from $.66 per share on net income of $1,019 in the June 2008 quarter. Year to date earnings for the nine months ended September 30, 2008, were $1.45 per share on net income of $2,242 compared to $1.79 per share on net income of $2,828 during 2007.
As discussed in the
Executive Overview
section of Item 2 of this Form 10-Q, the decline in September 2008 quarterly and year to date net income was due to a write down of PSBs investment in FNMA preferred stock of approximately $1 million. The federal governments placement of FNMA into conservatorship on September 7, 2008, permanently impaired the value of PSBs FNMA investment by placement of the governments new equity interest as superior to FNMAs existing preferred stock. During September, PSB reduced its holding cost of the investment to $50 through a write-down of $991, which reduced net income by $600 after tax benefits. September 2008 quarterly net income prior to the special FNMA charge would have been $821, or $.53 per share, and year to date income would have been $2,842, or $1.84 per share, an increase in diluted earnings per share of 2.8% over the same period during 2007.
Return on average assets was .16% and .79% during the quarters ended September 30, 2008 and 2007, respectively. Return on average stockholders equity was 2.32% and 11.70% during the quarters ended September 30, 2008 and 2007, respectively. Year to date for the nine months ended September 30, return on assets was .56% in 2008 compared to .75% in 2007. Year to date return on equity was 7.87% in 2008 compared to 10.83% in 2007. Year to date return on equity and return on assets during 2008 would have been 9.98% and .70%, respectively, before the FNMA charge.
The following Table 13 presents PSBs consolidated quarterly summary financial data.
26
Table 13: Financial Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share data)
|
Quarter ended
|
|
Sept 30,
|
June 30,
|
March 31,
|
Dec 31,
|
Sept 30,
|
Earnings and dividends:
|
2008
|
2008
|
2008
|
2007
|
2007
|
|
|
|
|
|
|
|
Net interest income
|
$ 3,488
|
|
$ 3,568
|
|
$ 3,563
|
|
$ 3,648
|
|
$ 3,497
|
|
|
Provision for loan losses
|
$ 285
|
|
$ 135
|
|
$ 135
|
|
$ 120
|
|
$ 120
|
|
|
Other noninterest income
|
$ 21
|
|
$ 1,072
|
|
$ 1,024
|
|
$ 935
|
|
$ 927
|
|
|
Other noninterest expense
|
$ 3,195
|
|
$ 3,141
|
|
$ 3,118
|
|
$ 2,971
|
|
$ 2,875
|
|
|
Net income
|
$ 221
|
|
$ 1,019
|
|
$ 1,002
|
|
$ 1,312
|
|
$ 1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
(3)
|
$ 0.14
|
|
$ 0.66
|
|
$ 0.65
|
|
$ 0.85
|
|
$ 0.66
|
|
|
Diluted earnings per share
(3)
|
$ 0.14
|
|
$ 0.66
|
|
$ 0.65
|
|
$ 0.85
|
|
$ 0.66
|
|
|
Dividends declared per share
(3)
|
$
|
|
$ 0.34
|
|
$
|
|
$ 0.33
|
|
$
|
|
|
Net book value per share
|
$ 24.78
|
|
$ 24.14
|
|
$ 25.02
|
|
$ 23.70
|
|
$ 22.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semi-annual dividend payout ratio
|
n/a
|
|
26.13%
|
|
n/a
|
|
21.86%
|
|
n/a
|
|
|
Average common shares outstanding
|
1,548,898
|
|
1,548,898
|
|
1,548,855
|
|
1,544,855
|
|
1,553,952
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet - average balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net of allowances for loss
|
$ 405,578
|
|
$ 396,635
|
|
$ 383,456
|
|
$ 384,069
|
|
$ 382,474
|
|
|
Assets
|
$ 551,077
|
|
$ 539,020
|
|
$ 525,605
|
|
$ 520,098
|
|
$ 509,947
|
|
|
Deposits
|
$ 413,848
|
|
$ 397,092
|
|
$ 392,616
|
|
$ 395,148
|
|
$ 395,508
|
|
|
Stockholders equity
|
$ 37,884
|
|
$ 38,729
|
|
$ 37,627
|
|
$ 36,044
|
|
$ 34,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
(1)
|
0.16%
|
|
0.76%
|
|
0.77%
|
|
1.00%
|
|
0.79%
|
|
|
Return on average stockholders equity
(1)
|
2.32%
|
|
10.58%
|
|
10.71%
|
|
14.44%
|
|
11.70%
|
|
|
Average tangible stockholders equity to
|
|
|
|
|
|
|
|
|
|
|
|
average assets
(4)
|
6.91%
|
|
6.99%
|
|
7.00%
|
|
6.92%
|
|
6.91%
|
|
|
Net loan charge-offs to average loans
(1)
|
0.04%
|
|
0.05%
|
|
0.03%
|
|
0.10%
|
|
0.02%
|
|
|
Nonperforming loans to gross loans
|
2.58%
|
|
1.24%
|
|
1.23%
|
|
0.97%
|
|
1.13%
|
|
|
Allowance for loan losses to gross loans
|
1.25%
|
|
1.24%
|
|
1.27%
|
|
1.24%
|
|
1.25%
|
|
|
Net interest rate margin
(1)(2)
|
2.84%
|
|
2.99%
|
|
3.05%
|
|
3.11%
|
|
3.05%
|
|
|
Net interest rate spread
(1)(2)
|
2.45%
|
|
2.57%
|
|
2.61%
|
|
2.60%
|
|
2.53%
|
|
|
Service fee revenue as a percent of
|
|
|
|
|
|
|
|
|
|
|
|
average demand deposits
(1)
|
3.13%
|
|
3.25%
|
|
3.11%
|
|
2.89%
|
|
2.75%
|
|
|
Noninterest income as a percent
|
|
|
|
|
|
|
|
|
|
|
|
of gross revenue
|
0.29%
|
|
12.57%
|
|
11.73%
|
|
10.35%
|
|
10.37%
|
|
|
Efficiency ratio
(2)
|
85.70%
|
|
64.71%
|
|
65.15%
|
|
62.21%
|
|
62.27%
|
|
|
Noninterest expenses to average assets
(1)
|
2.31%
|
|
2.34%
|
|
2.39%
|
|
2.27%
|
|
2.24%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
$ 25.75
|
|
$ 26.65
|
|
$ 26.65
|
|
$ 27.25
|
|
$ 29.00
|
|
|
Low
|
$ 22.50
|
|
$ 24.00
|
|
$ 22.00
|
|
$ 25.05
|
|
$ 27.10
|
|
|
Last trade value at quarter-end
|
$ 22.50
|
|
$ 24.85
|
|
$ 25.25
|
|
$ 26.00
|
|
$ 27.10
|
|
(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.
(4)
Tangible stockholders equity excludes the impact of cumulative other comprehensive income (loss).
27
NET INTEREST INCOME
Net interest income is the most significant component of earnings. September 2008 quarter tax adjusted net interest income declined $75, or 2.0% to $3,707 from the recent quarter ended June 30, 2008, and increased $17, or 0.5% from the prior year quarter ended September 30, 2007. Quarterly product balances, yields, and costs are presented in the following tables. Despite an annualized increase in average earning assets of 7.6% during the nine months ended September 30, 2008, net interest income has been flat due to falling net interest spreads on new loan growth funded with brokered certificates of deposit and a significant increase in nonaccrual loans.
Tax adjusted net interest margin was 2.84% during the September 2008 quarter, compared to 2.99% in the June 2008 quarter and 3.05% during the September 2007 quarter. During the September 2008 quarter, asset yields declined .29% while cost of interest-bearing liabilities declined .17%, causing net interest spread to fall to 2.45%.
Since the beginning of 2008, the aggregate 2.25% reduction by the Federal Reserve to bring down their targeted federal funds to 2.00% at September 30, 2008, has lowered PSBs yield on adjustable rate loans. Approximately 1/3 of PSBs loan portfolio is adjustable rate with rates tied to both the prime rate and to the 30-day LIBOR rate. However, due to local competition and increased wholesale funding spreads/costs, deposit and funding rates could not be lowered to compensate for the loss of adjustable loan income which resulted in declining net interest margin during each quarter of 2008. The Federal Reserve during October 2008 again lowered their targeted federal funds rate another 1.00% to combat a slowing economy. While PSB had previously placed floors on many adjustable rate commercial loans, these reductions are expected to further restrain improvements in net interest margin. In all rate environments, pressure on current net interest margin is expected to continue as wholesale funding spreads remain elevated and PSB expects to utilize such funding for new loan growth.
28
Table 14A: Net Interest Income Analysis (Quarter)
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Quarter ended September 30, 2008
|
|
Quarter ended September 30, 2007
|
|
Average
|
|
Yield/
|
|
Average
|
|
Yield/
|
|
Balance
|
Interest
|
Rate
|
|
Balance
|
Interest
|
Rate
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
Loans
(1)(2)
|
$ 410,696
|
|
$ 6,146
|
|
5.95%
|
|
$ 387,242
|
|
$ 6,944
|
|
7.11%
|
Taxable securities
|
62,992
|
|
824
|
|
5.20%
|
|
49,860
|
|
642
|
|
5.11%
|
Tax-exempt securities
(2)
|
36,297
|
|
529
|
|
5.80%
|
|
32,631
|
|
492
|
|
5.98%
|
FHLB stock
|
3,250
|
|
|
|
0.00%
|
|
3,017
|
|
21
|
|
2.76%
|
Other
|
5,181
|
|
30
|
|
2.30%
|
|
8,019
|
|
107
|
|
5.29%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(2)
|
518,416
|
|
7,529
|
|
5.78%
|
|
480,769
|
|
8,206
|
|
6.77%
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
10,636
|
|
|
|
|
|
9,763
|
|
|
|
|
Premises and equipment, net
|
11,172
|
|
|
|
|
|
11,250
|
|
|
|
|
Cash surrender value insurance
|
9,597
|
|
|
|
|
|
6,831
|
|
|
|
|
Other assets
|
6,374
|
|
|
|
|
|
6,102
|
|
|
|
|
Allowance for loan losses
|
(5,118)
|
|
|
|
|
|
(4,768)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$ 551,077
|
|
|
|
|
|
$ 509,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings and demand deposits
|
$ 89,345
|
|
$ 442
|
|
1.97%
|
|
$ 81,591
|
|
$ 633
|
|
3.08%
|
Money market deposits
|
71,248
|
|
390
|
|
2.18%
|
|
72,996
|
|
658
|
|
3.58%
|
Time deposits
|
200,904
|
|
2,018
|
|
4.00%
|
|
192,017
|
|
2,328
|
|
4.81%
|
FHLB borrowings
|
64,052
|
|
654
|
|
4.06%
|
|
56,261
|
|
656
|
|
4.63%
|
Other borrowings
|
23,013
|
|
205
|
|
3.54%
|
|
11,550
|
|
128
|
|
4.40%
|
Junior subordinated debentures
|
7,732
|
|
113
|
|
5.81%
|
|
7,732
|
|
113
|
|
5.80%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
456,294
|
|
3,822
|
|
3.33%
|
|
422,147
|
|
4,516
|
|
4.24%
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
52,351
|
|
|
|
|
|
48,904
|
|
|
|
|
Other liabilities
|
4,548
|
|
|
|
|
|
4,260
|
|
|
|
|
Stockholders equity
|
37,884
|
|
|
|
|
|
34,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$ 551,077
|
|
|
|
|
|
$ 509,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ 3,707
|
|
|
|
|
$ 3,690
|
|
|
Rate spread
|
|
|
2.45%
|
|
|
|
2.53%
|
Net yield on interest-earning assets
|
|
|
2.84%
|
|
|
|
3.05%
|
(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%.
29
Table 14B: Net Interest Income Analysis (Nine Months)
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine Months Ended Sept. 30, 2008
|
|
Nine months ended Sept. 30, 2007
|
|
Average
|
|
Yield/
|
|
Average
|
|
Yield/
|
|
Balance
|
Interest
|
Rate
|
|
Balance
|
Interest
|
Rate
|
Assets
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
Loans
(1)(2)
|
$ 400,263
|
|
$ 18,942
|
|
6.32%
|
|
$ 382,725
|
|
$ 20,426
|
|
7.14%
|
Taxable securities
|
64,347
|
|
2,527
|
|
5.25%
|
|
49,038
|
|
1,860
|
|
5.07%
|
Tax-exempt securities
(2)
|
35,464
|
|
1,547
|
|
5.83%
|
|
31,931
|
|
1,442
|
|
6.04%
|
FHLB stock
|
3,159
|
|
|
|
0.00%
|
|
3,017
|
|
64
|
|
2.84%
|
Other
|
4,232
|
|
88
|
|
2.78%
|
|
5,859
|
|
232
|
|
5.29%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(2)
|
507,465
|
|
23,104
|
|
6.08%
|
|
472,570
|
|
24,024
|
|
6.80%
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
10,070
|
|
|
|
|
|
10,115
|
|
|
|
|
Premises and equipment, net
|
11,123
|
|
|
|
|
|
11,358
|
|
|
|
|
Cash surrender value insurance
|
9,184
|
|
|
|
|
|
6,658
|
|
|
|
|
Other assets
|
5,830
|
|
|
|
|
|
5,567
|
|
|
|
|
Allowance for loan losses
|
(5,003)
|
|
|
|
|
|
(4,656)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$ 538,669
|
|
|
|
|
|
$ 501,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings and demand deposits
|
$ 88,787
|
|
$ 1,445
|
|
2.17%
|
|
$ 81,995
|
|
$ 1,869
|
|
3.05%
|
Money market deposits
|
71,470
|
|
1,269
|
|
2.37%
|
|
69,473
|
|
1,802
|
|
3.47%
|
Time deposits
|
191,357
|
|
6,203
|
|
4.33%
|
|
189,012
|
|
6,761
|
|
4.78%
|
FHLB borrowings
|
61,872
|
|
1,893
|
|
4.09%
|
|
54,876
|
|
1,845
|
|
4.50%
|
Other borrowings
|
25,357
|
|
701
|
|
3.69%
|
|
10,524
|
|
352
|
|
4.47%
|
Junior subordinated debentures
|
7,732
|
|
340
|
|
5.87%
|
|
7,732
|
|
340
|
|
5.88%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
446,575
|
|
11,851
|
|
3.54%
|
|
413,612
|
|
12,969
|
|
4.19%
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
49,617
|
|
|
|
|
|
49,058
|
|
|
|
|
Other liabilities
|
4,424
|
|
|
|
|
|
4,044
|
|
|
|
|
Stockholders equity
|
38,053
|
|
|
|
|
|
34,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$ 538,669
|
|
|
|
|
|
$ 501,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ 11,253
|
|
|
|
|
$ 11,055
|
|
|
Rate spread
|
|
|
2.54%
|
|
|
|
2.61%
|
Net yield on interest-earning assets
|
|
|
2.96%
|
|
|
|
3.13%
|
(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%
30
Table 15: Interest Expense and Expense Volume and Rate Analysis (Year to Date)
|
|
|
|
|
|
|
|
2008 compared to 2007
|
|
increase (decrease) due to (1)
|
(dollars in thousands)
|
Volume
|
Rate
|
Net
|
|
|
|
|
Interest earned on:
|
|
|
|
Loans
(2)
|
$ 830
|
|
$ (2,314)
|
|
$ (1,484)
|
|
Taxable securities
|
602
|
|
65
|
|
667
|
|
Tax-exempt securities
(2)
|
154
|
|
(49)
|
|
105
|
|
FHLB stock
|
|
|
(64)
|
|
(64)
|
|
Other interest income
|
(34)
|
|
(110)
|
|
(144)
|
|
|
|
|
|
|
|
|
Total
|
1,552
|
|
(2,472)
|
|
(920)
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
Savings and demand deposits
|
110
|
|
(534)
|
|
(424)
|
|
Money market deposits
|
35
|
|
(568)
|
|
(533)
|
|
Time deposits
|
76
|
|
(634)
|
|
(558)
|
|
FHLB borrowings
|
214
|
|
(166)
|
|
48
|
|
Other borrowings
|
410
|
|
(61)
|
|
349
|
|
Junior subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
845
|
|
(1,963)
|
|
(1,118)
|
|
|
|
|
|
|
|
|
Net interest earnings
|
$ 707
|
|
$ (509)
|
|
$ 198
|
|
(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 loss experience, current economic conditions, and composition of the loan portfolio. Accordingly, the amount charged to expense is based on managements evaluation of the loan portfolio. It is PSBs policy that when available information confirms that specific loans, or portions thereof, including impaired loans, are uncollectible, these amounts are promptly charged off against the allowance. PSBs provision for loan losses was $285 in the September 2008 quarter compared to $120 in the September 2007 quarter. Annualized net charge-offs were .04% and .02% during the September 2008 and 2007 quarters, respectively. Year to date provision for loan losses was $555 and $360 during the nine months ended September 30, 2008 and 2007, respectively. Annualized net charge-offs during this nine month period were .04% and .00% during 2008 and 2007, 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 loan losses is consistent with the composition of the loan portfolio and recent credit quality history. The current quarterly level of loan loss provision may increase in future quarters to support new loan growth or to reflect changes in credit quality as a result of general economic conditions. PSB does not expect nonperforming loans to decrease below the level seen at September 30, 2008, during the remainder of 2008 from a continuing deterioration of general economic conditions. Provision for loan losses during the remainder of 2008 is likely to continue near levels seen during the September 2008 quarter.
31
NONINTEREST INCOME
Total noninterest income for the quarter ended September 30, 2008, was $21 compared to $927 earned during the September 2007 quarter, a decrease of $906 or 97.7%. During September 2008, PSB recorded a $991 charge to recognize permanent impairment in value of its investment in FNMA preferred stock. If this loss was excluded, total noninterest income during the quarter ended September 30, 2008, would have been $1,012, an increase of $85, or 9.2% over the prior years quarter.
Service fees increased $73, from an increase in the per item overdraft fee and expansion of PSBs Overdraft Defender product (which pays customer drafts of insufficient funds in exchange for the overdraft fee). Overdraft Defender losses from write-off of overdrafted accounts are recorded as other noninterest expense and increased $7 during the September 2008 quarter compared to the prior years quarter. Increased mortgage banking fees of $18 and increase in cash surrender value of life insurance of $30 offset a $36 decline in retail investment sale commissions during the quarter. Retail investment sale commissions are down due to lower sales of variable annuity products compared to 2007.
During early 2008, PSB expanded its retail investment sales division to provide investment advisory services and access to trust services and rebranded the division as Peoples Wealth Management. Certain PSB customers are better served from ongoing investment advisory services in exchange for a servicing fee rather than the sale of individual investment products in exchange for a one-time sales commission. Over the typical customer relationship period, profit on both retail commission and advisory fee investment products are similar but are earned during different periods of the relationship. Individual retail investment sales commissions are generally collected upon sale while investment advisory services are paid as services are rendered. Due to receipt for services over time, investment advisory fees are believed to be a more stable source of noninterest income for PSB and well suited for an aging customer base approaching retirement or decisions regarding wealth transfer. However, investment and annuity sales income has been negatively impacted from this change in the service model as investment and annuity sales income was $303 during the nine months ended September 30, 2008, compared to $471 during the same period during 2007. PSB expects investment and annuity sales income to trail that seen during 2007 for the next several quarters.
As a FHLB Mortgage Partnership Finance (MPF) 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. The following table summarizes loan principal serviced for the FHLB by the MPF program as of September 30, 2008.
Table 17: FHLB Mortgage Partnership Financing (MPF) Program Servicing
|
|
|
|
|
|
|
|
|
|
|
PSB Credit
|
FHLB
|
Mortgage
|
|
Principal
|
Enhancement
|
Funded First
|
Servicing
|
As of September 30, 2008 ($000s)
|
Serviced
|
Guarantee
|
Loss Account
|
Right, net
|
|
|
|
|
|
MPF 100 Program (agent program)
|
$ 65,386
|
|
$ 499
|
|
$ 2,494
|
|
$ 292
|
|
MPF125 Program (closed loan program)
|
118,529
|
|
1,545
|
|
1,660
|
|
682
|
|
|
|
|
|
|
|
|
|
|
Total FHLB MPF serviced loans
|
$ 183,915
|
|
$ 2,044
|
|
$ 4,154
|
|
$ 974
|
|
|
|
|
|
|
FHLB MPF Program elements as a percentage of principal serviced:
|
|
|
|
|
|
|
|
|
September 30, 2008
|
December 31, 2007
|
As of period ended:
|
MPF 100
|
MPF 125
|
MPF 100
|
MPF 125
|
|
|
|
|
|
PSB credit enhancement guarantee
|
0.76%
|
1.30%
|
0.66%
|
1.10%
|
FHLB funded first loss account
|
3.81%
|
1.40%
|
3.32%
|
1.26%
|
Multiple of FHLB funded loss account to
|
|
|
|
|
PSB credit enhancement
|
5.00
|
1.07
|
5.03
|
1.15
|
Mortgage servicing right, net
|
0.45%
|
0.58%
|
0.44%
|
0.59%
|
32
PSB ceased originating loans under the MPF 100 program during November 2003. Since that time all originations have been through the FHLB MPF 125 closed loan program. 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 in our markets, 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. PSB recognizes credit enhancement income on a cash basis when received from the FHLB on a monthly basis.
During October 2008, PSB ceased to originate loans through the FHLB MPF 125 closed loan program as that product was no longer offered by the FHLB. Going forward, PSB will originate mortgage loans under the FHLBs new MPF Xtra product. Under the Xtra program, loan principal is sold to the FHLB in exchange for a fee while PSB retains servicing rights to the loan. PSB is paid an annualized fee of 25 basis points for servicing future payments on the loan. PSB provides no credit enhancement on the loan to the FHLB and is paid no credit enhancement fees. The FHLB has no recourse to PSB for their realized future principal losses under the Xtra program. During 2008, quarterly credit enhancement fee income under the prior MPF 100 and MPF 125 programs has been approximately $39 per quarter. As loan principal is repaid by customers on loans in these discontinued programs, credit enhancement fees (approximately 7 to 10 basis points of principal per year on a loan level basis) will decline, potentially reducing PSB mortgage banking income in future periods.
NONINTEREST EXPENSE
Total noninterest expenses increased $320, or 11.1% during the September 2008 quarter to $3,195 compared to total noninterest expenses of $2,875 during September 2007. Salaries and employee benefits increased $84, or 5.1% during the September 2008 quarter compared to the prior year due in part to an increase of $31 in health insurance expense and a $16 increase in non-qualified deferred compensation plan contributions. Absent the increased costs for health insurance and deferred compensation plan funding, wages and benefits increased 2.2% during the September 2008 quarter compared to the September 2007 quarter.
Data processing costs increased during the September 2008 quarter by $59, or 31.6% compared to the prior years quarter. The increased costs were due to an upgrade of PSBs computer wide area network and related communication infrastructure costs and fees paid to the vendor used to process Peoples Rewards Checking account activity. Other noninterest expenses increased $185 during the September 2008 quarter as FDIC deposit insurance premiums increased $62 due to industry wide FDIC assessment increases. PSB will incur higher deposit insurance premiums throughout 2008 and 2009. Legal and professional fees also increased $132 during the September 2008 quarter compared to the prior year due to several one-time factors including strategic planning, review of bank wide governance and compensation plans, a Wisconsin Department of Financial Institutions normally recurring regulatory exam, and costs related to foreclosure actions.
Year to date for the nine months ended September 30, 2008, total noninterest expenses increased $473 to $9,454 compared to $8,981 last year, an increase of 5.3%. During this period, FDIC insurance premiums totaled $190 in 2008 compared to $35 in 2007. Excluding FDIC insurance premiums, total noninterest expenses increased $318, or 3.5% during the nine months ended September 30, 2008 compared to 2007.
33
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 PSBs Form 10-K for the year ended December 31, 2007.
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 PSBs President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of PSBs disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that PSBs disclosure controls and procedures were effective. There were no changes in PSBs internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, PSBs internal control over financial reporting.
34
PART II OTHER INFORMATION
Item 1A. Risk Factors
In addition to the other information set forth in this report, this report should be considered in light of the risk factors discussed in Part I, Item 1A. Risk Factors in PSBs Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect PSBs business, financial condition, or future results of operations. The risks described in PSBs Annual Report on Form 10-K are not the only risks facing PSB. Additional risks and uncertainties not currently known to PSB or that it currently deems to be immaterial also may materially adversely affect PSBs business, financial condition, and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
Maximum number
|
|
|
|
Total number
|
(or approximate
|
|
|
|
of shares (or
|
dollar value) of
|
|
Total number
|
|
units) purchased
|
shares (or units)
|
|
of shares
|
Average price
|
as part of publicly
|
that may yet be
|
|
(or units)
|
paid per share
|
announced plans
|
purchased under the
|
|
purchased
|
(or unit)
|
or programs
|
plans or programs
|
Period
|
(a)
|
(b)
|
(c)
|
(d)
|
|
|
|
|
|
July 2008
|
|
$
|
|
|
|
August 2008
|
|
|
|
|
|
September 2008
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly totals
|
|
$
|
|
|
|
Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K.
|
|
Exhibit
|
|
Number
|
Description
|
|
|
31.1
|
Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
|
31.2
|
Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
|
32.1
|
Certifications under Section 906 of Sarbanes-Oxley Act of 2002
|
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PSB HOLDINGS, INC.
November 14, 2008
SCOTT M. CATTANACH
Scott M. Cattanach
Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
36
EXHIBIT INDEX
to
FORM 10-Q
of
PSB HOLDINGS, INC.
for the quarterly period ended September 30, 2008
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. §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
37