FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|
|
|
T
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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|
For the quarterly period ended
June 30, 2012
OR
£
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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|
For the transition period from _____________
to _____________
Commission file number:
0-26480
PSB HOLDINGS, INC.
(Exact name of registrant as specified in charter)
WISCONSIN
(State of incorporation)
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39-1804877
(I.R.S. Employer
Identification Number)
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1905 West Stewart Avenue
Wausau, Wisconsin 54401
(Address of principal executive office)
Registrant’s telephone number, including
area code:
715-842-2191
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
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.
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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x
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(Do not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Exchange Act).
The number of common shares outstanding at August 13, 2012
was 1,663,472.
PSB HOLDINGS, INC.
FORM 10-Q
Quarter Ended June 30, 2012
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PSB Holdings, Inc.
Consolidated Balance Sheets
June 30, 2012 unaudited, December 31, 2011 derived from audited
financial statements
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June 30,
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December 31,
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(dollars in thousands, except per share data)
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2012
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|
2011
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Assets
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|
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Cash and due from banks
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$
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33,248
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$
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14,805
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Interest-bearing deposits and money market funds
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1,210
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1,829
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Federal funds sold
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5,293
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21,571
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Cash and cash equivalents
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39,751
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38,205
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Securities available for sale (at fair value)
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93,565
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59,383
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Securities held to maturity (fair value of $72,563 and $50,751, respectively)
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70,443
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49,294
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Bank certificates of deposit
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2,484
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2,484
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Loans held for sale
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452
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39
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Loans receivable, net
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466,330
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437,557
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Accrued interest receivable
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2,366
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2,068
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Foreclosed assets
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2,642
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2,939
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Premises and equipment, net
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10,191
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9,928
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Mortgage servicing rights, net
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1,110
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1,205
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Federal Home Loan Bank stock (at cost)
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2,761
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3,250
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Cash surrender value of bank-owned life insurance
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11,608
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11,406
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Other assets
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5,321
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5,109
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TOTAL ASSETS
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$
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709,024
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$
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622,867
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Liabilities
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Non-interest-bearing deposits
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$
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82,909
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$
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75,298
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Interest-bearing deposits
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474,498
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406,211
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Total deposits
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557,407
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481,509
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Federal Home Loan Bank advances
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55,124
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50,124
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Other borrowings
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18,086
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19,691
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Senior subordinated notes
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7,000
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7,000
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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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11,043
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6,449
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Total liabilities
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656,392
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572,505
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Stockholders’ equity
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Preferred stock – no par value:
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Authorized – 30,000 shares; no shares issued or outstanding
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—
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—
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Common stock – no par value with a stated value of $1 per share:
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Authorized – 3,000,000 shares; Issued – 1,751,431 shares
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Outstanding – 1,584,637 and 1,575,804 shares, respectively
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1,751
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1,751
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Common stock dividend distributable – 78,835 shares
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79
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—
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Additional paid-in capital
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6,967
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5,323
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Retained earnings
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46,698
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46,111
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Accumulated other comprehensive income, net of tax
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1,654
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1,934
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Treasury stock, at cost – 166,794 and 175,627 shares, respectively
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(4,517
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)
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(4,757
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)
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Total stockholders’ equity
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52,632
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50,362
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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$
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709,024
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$
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622,867
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PSB Holdings, Inc.
Consolidated Statements of Income
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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(dollars in thousands, except per share
data – unaudited)
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2012
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2011
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2012
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2011
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Interest and dividend income:
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Loans, including fees
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$
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5,785
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$
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6,112
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$
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11,626
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$
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12,156
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Securities:
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Taxable
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575
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705
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1,147
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1,383
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Tax-exempt
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299
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|
281
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562
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|
578
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Other interest and dividends
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20
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|
15
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|
39
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39
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|
|
|
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|
|
|
|
|
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|
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Total interest and dividend income
|
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|
6,679
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|
|
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7,113
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|
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13,374
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14,156
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Interest expense:
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|
|
|
|
|
|
|
|
|
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Deposits
|
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1,070
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|
|
|
1,396
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|
|
|
2,222
|
|
|
|
2,825
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|
FHLB advances
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|
353
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|
|
|
459
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|
|
705
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|
916
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|
Other borrowings
|
|
|
149
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|
|
|
165
|
|
|
|
297
|
|
|
|
332
|
|
Senior subordinated notes
|
|
|
142
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|
|
|
141
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|
|
|
284
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|
|
|
283
|
|
Junior subordinated debentures
|
|
|
85
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|
|
|
86
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|
|
|
170
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|
|
|
170
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total interest expense
|
|
|
1,799
|
|
|
|
2,247
|
|
|
|
3,678
|
|
|
|
4,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net interest income
|
|
|
4,880
|
|
|
|
4,866
|
|
|
|
9,696
|
|
|
|
9,630
|
|
Provision for loan losses
|
|
|
165
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|
|
|
430
|
|
|
|
325
|
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
4,715
|
|
|
|
4,436
|
|
|
|
9,371
|
|
|
|
8,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees
|
|
|
413
|
|
|
|
408
|
|
|
|
815
|
|
|
|
787
|
|
Mortgage banking
|
|
|
439
|
|
|
|
281
|
|
|
|
751
|
|
|
|
706
|
|
Investment and insurance sales commissions
|
|
|
238
|
|
|
|
142
|
|
|
|
376
|
|
|
|
272
|
|
Increase in cash surrender value of life insurance
|
|
|
101
|
|
|
|
102
|
|
|
|
202
|
|
|
|
208
|
|
Gain on bargain purchase
|
|
|
851
|
|
|
|
—
|
|
|
|
851
|
|
|
|
—
|
|
Other noninterest income
|
|
|
281
|
|
|
|
264
|
|
|
|
570
|
|
|
|
621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
2,323
|
|
|
|
1,197
|
|
|
|
3,565
|
|
|
|
2,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,217
|
|
|
|
1,991
|
|
|
|
4,380
|
|
|
|
4,101
|
|
Occupancy and facilities
|
|
|
396
|
|
|
|
412
|
|
|
|
802
|
|
|
|
865
|
|
Loss on foreclosed assets, net
|
|
|
4
|
|
|
|
278
|
|
|
|
237
|
|
|
|
573
|
|
Data processing and other office operations
|
|
|
428
|
|
|
|
313
|
|
|
|
832
|
|
|
|
626
|
|
Advertising and promotion
|
|
|
106
|
|
|
|
54
|
|
|
|
164
|
|
|
|
115
|
|
FDIC insurance premiums
|
|
|
105
|
|
|
|
149
|
|
|
|
212
|
|
|
|
338
|
|
Other noninterest expenses
|
|
|
808
|
|
|
|
672
|
|
|
|
1,556
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
4,064
|
|
|
|
3,869
|
|
|
|
8,183
|
|
|
|
7,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
2,974
|
|
|
|
1,764
|
|
|
|
4,753
|
|
|
|
3,612
|
|
Provision for income taxes
|
|
|
1,056
|
|
|
|
538
|
|
|
|
1,655
|
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,918
|
|
|
$
|
1,226
|
|
|
$
|
3,098
|
|
|
$
|
2,511
|
|
Basic earnings per share
|
|
$
|
1.15
|
|
|
$
|
0.74
|
|
|
$
|
1.86
|
|
|
$
|
1.52
|
|
Diluted earnings per share
|
|
$
|
1.15
|
|
|
$
|
0.74
|
|
|
$
|
1.86
|
|
|
$
|
1.51
|
|
PSB Holdings, Inc.
Consolidated Statements of Comprehensive Income
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(dollars in thousands – unaudited)
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,918
|
|
|
$
|
1,226
|
|
|
$
|
3,098
|
|
|
$
|
2,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for sale
|
|
|
(76
|
)
|
|
|
337
|
|
|
|
(74
|
)
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrealized gain
on securities available for sale transferred to securities held to maturity included in net income
|
|
|
(73
|
)
|
|
|
(77
|
)
|
|
|
(144
|
)
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on interest rate swap
|
|
|
(103
|
)
|
|
|
(155
|
)
|
|
|
(113
|
)
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment of interest rate swap settlements included in earnings
|
|
|
26
|
|
|
|
28
|
|
|
|
51
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,692
|
|
|
$
|
1,359
|
|
|
$
|
2,818
|
|
|
$
|
2,558
|
|
PSB Holdings, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
Six months ended June 30, 2012
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Common
|
|
Paid-in
|
|
Retained
|
|
Income
|
|
Treasury
|
|
|
(dollars in thousands – unaudited)
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
(Loss)
|
|
Stock
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2012
|
|
$
|
1,751
|
|
|
$
|
5,323
|
|
|
$
|
46,111
|
|
|
$
|
1,934
|
|
|
$
|
(4,757
|
)
|
|
$
|
50,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
3,098
|
|
|
|
|
|
|
|
|
|
|
|
3,098
|
|
Unrealized loss on securities available for sale, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
(74
|
)
|
Amortization of unrealized gain on
securities available for sale transferred to securities held to maturity included in net income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(144
|
)
|
|
|
|
|
|
|
(144
|
)
|
Unrealized loss on interest rate swap, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(113
|
)
|
|
|
|
|
|
|
(113
|
)
|
Reclassification
of interest rate swap settlements included in earnings, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
9
|
|
Issuance of new restricted stock grants
|
|
|
|
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
230
|
|
|
|
—
|
|
Vesting of existing restricted stock grants
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
Stock dividend declared – 5% of shares
|
|
|
79
|
|
|
|
1,817
|
|
|
|
(1,906
|
)
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
Cash dividends declared $.36 per share
|
|
|
|
|
|
|
|
|
|
|
(591
|
)
|
|
|
|
|
|
|
|
|
|
|
(591
|
)
|
Cash dividends declared on unvested restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2012
|
|
$
|
1,830
|
|
|
$
|
6,967
|
|
|
$
|
46,698
|
|
|
$
|
1,654
|
|
|
$
|
(4,517
|
)
|
|
$
|
52,632
|
|
PSB Holdings, Inc.
Consolidated Statements of Cash Flows
Six months ended June 30, 2012 and 2011
(dollars in thousands – unaudited)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,098
|
|
|
$
|
2,511
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for depreciation and net amortization
|
|
|
1,330
|
|
|
|
1,069
|
|
Provision for loan losses
|
|
|
325
|
|
|
|
790
|
|
Deferred net loan origination costs
|
|
|
(221
|
)
|
|
|
(156
|
)
|
Gain on sale of loans
|
|
|
(803
|
)
|
|
|
(401
|
)
|
Provision for (recovery of) servicing right valuation allowance
|
|
|
133
|
|
|
|
(145
|
)
|
Loss on sale of foreclosed assets
|
|
|
157
|
|
|
|
433
|
|
Increase in cash surrender value of life insurance
|
|
|
(202
|
)
|
|
|
(208
|
)
|
Gain on bargain purchase
|
|
|
(851
|
)
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
104
|
|
|
|
166
|
|
Other assets
|
|
|
199
|
|
|
|
131
|
|
Other liabilities
|
|
|
(395
|
)
|
|
|
(556
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,874
|
|
|
|
3,634
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale and maturities of:
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
13,704
|
|
|
|
7,930
|
|
Securities held to maturity
|
|
|
5,403
|
|
|
|
2,230
|
|
Payment for purchase of:
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
(14,320
|
)
|
|
|
(13,941
|
)
|
Securities held to maturity
|
|
|
(6,599
|
)
|
|
|
(831
|
)
|
Cash acquired on purchase of Marathon State Bank
|
|
|
19,640
|
|
|
|
—
|
|
Redemption of FHLB stock
|
|
|
489
|
|
|
|
—
|
|
Net (increase) decrease in loans
|
|
|
2,297
|
|
|
|
(6,500
|
)
|
Capital expenditures
|
|
|
(187
|
)
|
|
|
(102
|
)
|
Proceeds from sale of foreclosed assets
|
|
|
408
|
|
|
|
330
|
|
Purchase of bank-owned life insurance
|
|
|
—
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
20,835
|
|
|
|
(10,976
|
)
|
PSB Holdings, Inc.
Consolidated Statements of Cash Flows
Six months ended June 30, 2012 and 2011
(continued)
(dollars in thousands – unaudited)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in non-interest-bearing deposits
|
|
|
(16,812
|
)
|
|
|
(2,472
|
)
|
Net decrease in interest-bearing deposits
|
|
|
(8,135
|
)
|
|
|
(14,118
|
)
|
Net increase in FHLB advances
|
|
|
5,000
|
|
|
|
1,690
|
|
Net decrease in other borrowings
|
|
|
(1,605
|
)
|
|
|
(6,372
|
)
|
Dividends declared
|
|
|
(615
|
)
|
|
|
(586
|
)
|
Proceeds from exercise of stock options
|
|
|
9
|
|
|
|
24
|
|
Purchase of treasury stock
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(22,163
|
)
|
|
|
(21,834
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,546
|
|
|
|
(29,176
|
)
|
Cash and cash equivalents at beginning
|
|
|
38,205
|
|
|
|
40,331
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
|
|
$
|
39,751
|
|
|
$
|
11,155
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,735
|
|
|
$
|
4,591
|
|
Income taxes
|
|
|
1,169
|
|
|
|
1,025
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
$
|
631
|
|
|
$
|
1,083
|
|
Loans transferred to foreclosed assets
|
|
|
414
|
|
|
|
135
|
|
Loans originated on sale of foreclosed assets
|
|
|
140
|
|
|
|
—
|
|
Issuance of unvested restricted stock grants at fair value
|
|
|
200
|
|
|
|
200
|
|
Vesting of restricted stock grants
|
|
|
63
|
|
|
|
45
|
|
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 and, where applicable,
its subsidiary Marathon State Bank, which, as described in Note 2 below, was acquired by PSB on June 14, 2012. 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 PSB’s Annual Report on Form 10-K for the year ended December 31, 2011 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 – PSB HOLDINGS, INC. ACQUISITION OF MARATHON STATE BANK
On June 14, 2012, PSB completed its purchase of Marathon State Bank,
a privately owned bank with $107 million in total assets located in the Village of Marathon City, Wisconsin (“Marathon”).
Under the terms of the agreement, PSB paid $5,505 in cash, which was equal to 100% of Marathon’s tangible net book value
following a special dividend by Marathon to its shareholders to reduce its book equity ratio to 6% of total assets. The following
table outlines the fair value of Marathon assets and liabilities acquired including determination of the gain on bargain purchase
using an accounting date of June 1, 2012. A core deposit intangible was not recorded on the purchase as the fair value calculation
determined it was insignificant.
Cash purchase price
|
|
$
|
5,505
|
|
|
|
|
|
|
Fair value of assets acquired:
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
20,392
|
|
Securities
|
|
|
50,547
|
|
Loans receivable
|
|
|
23,760
|
|
Short-term commercial paper and bankers’ acceptances
|
|
|
11,713
|
|
Foreclosed assets
|
|
|
—
|
|
Premises and equipment
|
|
|
402
|
|
Core deposit intangible
|
|
|
—
|
|
Accrued interest receivable and other assets
|
|
|
550
|
|
|
|
|
|
|
Total fair value of assets acquired
|
|
|
107,364
|
|
|
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
23,255
|
|
Interest-bearing deposits
|
|
|
77,611
|
|
Accrued interest payable and other liabilities
|
|
|
142
|
|
|
|
|
|
|
Total fair value of liabilities assumed
|
|
|
101,008
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
|
6,356
|
|
|
|
|
|
|
Gain on bargain purchase
|
|
$
|
851
|
|
PSB recorded a total credit mark
down of $490 on Marathon’s loan portfolio on the purchase date, or 1.52% of purchased loan principal (including non-rated
commercial paper and bankers’ acceptances). Purchased impaired loan principal totaled $310 on which a $21 credit write-down
was recorded. Due to the insignificant amount of total purchased impaired loans, the entire $490 credit mark down will be accreted
to income as a yield adjustment based on contractual cash flows over the remaining life of the purchased loans.
Pro
forma combined results of operations as if the combination occurred at the beginning of the quarterly and year to date periods
ended June 30, 2012:
|
|
|
|
|
|
Quarter ended June 30, 2012 (pro forma combined at beginning of period)
|
|
|
|
Net interest
|
|
|
|
Noninterest
|
|
|
|
Net
|
|
|
|
Earnings
|
|
($000s)
|
|
|
income
|
|
|
|
income
|
|
|
|
income
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSB Holdings, Inc.
|
|
$
|
4,747
|
|
|
$
|
1,469
|
|
|
$
|
1,364
|
|
|
$
|
0.82
|
|
Marathon State Bank
|
|
|
382
|
|
|
|
860
|
|
|
|
523
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Totals
|
|
$
|
5,129
|
|
|
$
|
2,329
|
|
|
$
|
1,887
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2012 (pro forma combined at beginning of period)
|
|
|
|
|
Net interest
|
|
|
|
Noninterest
|
|
|
|
Net
|
|
|
|
Earnings
|
|
($000s)
|
|
|
income
|
|
|
|
income
|
|
|
|
income
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSB Holdings, Inc.
|
|
$
|
9,563
|
|
|
$
|
2,711
|
|
|
$
|
2,544
|
|
|
$
|
1.53
|
|
Marathon State Bank
|
|
|
808
|
|
|
|
872
|
|
|
|
600
|
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Totals
|
|
$
|
10,371
|
|
|
$
|
3,583
|
|
|
$
|
3,144
|
|
|
$
|
1.89
|
|
Pro
forma combined results of operations as if the combination occurred at the beginning of the quarterly and year to date periods
ended June 30, 2011:
|
|
Quarter ended June 30, 2011 (pro forma combined at beginning of period)
|
|
|
|
Net interest
|
|
|
|
Noninterest
|
|
|
|
Net
|
|
|
|
Earnings
|
|
($000s)
|
|
|
income
|
|
|
|
income
|
|
|
|
income
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSB Holdings, Inc.
|
|
$
|
4,866
|
|
|
$
|
1,197
|
|
|
$
|
1,226
|
|
|
$
|
0.74
|
|
Marathon State Bank
|
|
|
443
|
|
|
|
10
|
|
|
|
151
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Totals
|
|
$
|
5,309
|
|
|
$
|
1,207
|
|
|
$
|
1,377
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
Six months ended June 30, 2011 (pro forma combined at beginning of period)
|
|
|
|
Net interest
|
|
|
|
Noninterest
|
|
|
|
Net
|
|
|
|
Earnings
|
|
($000s)
|
|
|
income
|
|
|
|
income
|
|
|
|
income
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSB Holdings, Inc.
|
|
$
|
9,630
|
|
|
$
|
2,594
|
|
|
$
|
2,511
|
|
|
$
|
1.51
|
|
Marathon State Bank
|
|
|
879
|
|
|
|
26
|
|
|
|
289
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Totals
|
|
$
|
10,509
|
|
|
$
|
2,620
|
|
|
$
|
2,800
|
|
|
$
|
1.69
|
|
NOTE 3 – SECURITIES
The amortized cost and estimated fair value of investment securities
are as follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
June 30, 2012
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
32,519
|
|
|
$
|
33
|
|
|
$
|
2
|
|
|
$
|
32,550
|
|
U.S. agency issued residential mortgage-backed securities
|
|
|
17,194
|
|
|
|
982
|
|
|
|
—
|
|
|
|
18,176
|
|
U.S. agency issued residential collateralized mortgage obligations
|
|
|
41,755
|
|
|
|
784
|
|
|
|
40
|
|
|
|
42,499
|
|
Privately issued residential collateralized mortgage obligations
|
|
|
284
|
|
|
|
9
|
|
|
|
—
|
|
|
|
293
|
|
Other equity securities
|
|
|
47
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
91,799
|
|
|
$
|
1,808
|
|
|
$
|
42
|
|
|
$
|
93,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
66,125
|
|
|
$
|
2,206
|
|
|
$
|
18
|
|
|
$
|
68,313
|
|
Nonrated trust preferred securities
|
|
|
1,496
|
|
|
|
35
|
|
|
|
105
|
|
|
|
1,426
|
|
Nonrated senior subordinated notes
|
|
|
403
|
|
|
|
2
|
|
|
|
—
|
|
|
|
405
|
|
Bankers’ acceptances
|
|
|
2,419
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
70,443
|
|
|
$
|
2,243
|
|
|
$
|
123
|
|
|
$
|
72,563
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2011
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
501
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
518
|
|
U.S. agency issued residential mortgage-backed securities
|
|
|
18,754
|
|
|
|
1,068
|
|
|
|
6
|
|
|
|
19,816
|
|
U.S. agency issued residential collateralized mortgage obligations
|
|
|
37,774
|
|
|
|
806
|
|
|
|
7
|
|
|
|
38,573
|
|
Privately issued residential collateralized mortgage obligations
|
|
|
418
|
|
|
|
11
|
|
|
|
—
|
|
|
|
429
|
|
Other equity securities
|
|
|
47
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
57,494
|
|
|
$
|
1,902
|
|
|
$
|
13
|
|
|
$
|
59,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
47,404
|
|
|
$
|
1,636
|
|
|
$
|
30
|
|
|
$
|
49,010
|
|
Nonrated trust preferred securities
|
|
|
1,487
|
|
|
|
40
|
|
|
|
195
|
|
|
|
1,332
|
|
Nonrated senior subordinated notes
|
|
|
403
|
|
|
|
6
|
|
|
|
—
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
49,294
|
|
|
$
|
1,682
|
|
|
$
|
225
|
|
|
$
|
50,751
|
|
Securities
with a fair value of $48,506 and $56,659 at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits,
other borrowings, and for other purposes required by law.
NOTE 4 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans
Loans that management has the intent to hold for the foreseeable
future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for charge-offs,
the allowance for loan losses, and any deferred fees or costs on originated loans. 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 and the collection of principal becomes reasonably
assured. Interest income recognition on loans considered to be impaired is consistent with the recognition on all other loans.
Loan origination fees and certain direct loan origination costs are deferred and recognized as an adjustment of the related loan
yield using the interest method.
Allowance for Loan Losses
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 the collectability
of the principal is unlikely.
Management maintains the allowance for loan losses at a level 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
based on events that have occurred 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. 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
impaired loans include nonaccrual loans, loans identified as restructurings of troubled debt, and loans accruing interest with
elevated risk of default in the near term based on a variety of credit factors. Specific allowances on impaired loans are based
on discounted cash flows of expected future payments using the loan’s initial effective interest rate or the fair value of
the 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 collectability resulting from information available to them at the time of their examination.
The composition of loans, categorized by the type of the loan, is
as follows:
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial, and municipal
|
|
$
|
137,827
|
|
|
$
|
127,192
|
|
Commercial real estate mortgage
|
|
|
179,186
|
|
|
|
184,360
|
|
Commercial construction and development
|
|
|
21,337
|
|
|
|
20,078
|
|
Residential real estate mortgage
|
|
|
98,025
|
|
|
|
78,114
|
|
Residential construction and development
|
|
|
13,084
|
|
|
|
13,419
|
|
Residential real estate home equity
|
|
|
23,607
|
|
|
|
23,193
|
|
Consumer and individual
|
|
|
5,566
|
|
|
|
3,732
|
|
|
|
|
|
|
|
|
|
|
Subtotals – Gross loans
|
|
|
478,632
|
|
|
|
450,088
|
|
Loans in process of disbursement
|
|
|
(4,867
|
)
|
|
|
(4,787
|
)
|
|
|
|
|
|
|
|
|
|
Subtotals – Disbursed loans
|
|
|
473,765
|
|
|
|
445,301
|
|
Net deferred loan costs
|
|
|
213
|
|
|
|
197
|
|
Allowance for loan losses
|
|
|
(7,648
|
)
|
|
|
(7,941
|
)
|
|
|
|
|
|
|
|
|
|
Net loans receivable
|
|
$
|
466,330
|
|
|
$
|
437,557
|
|
The following is a summary of information
pertaining to impaired loans at period-end:
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Impaired loans without a valuation allowance
|
|
$
|
7,425
|
|
|
$
|
5,474
|
|
Impaired loans with a valuation allowance
|
|
|
9,150
|
|
|
|
11,745
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans before valuation allowances
|
|
|
16,575
|
|
|
|
17,219
|
|
Valuation allowance related to impaired loans
|
|
|
2,570
|
|
|
|
3,178
|
|
|
|
|
|
|
|
|
|
|
Net impaired loans
|
|
$
|
14,005
|
|
|
$
|
14,041
|
|
Activity in the allowance for loans losses during the six months
ended June 30, 2012 follows:
Allowance for loan losses:
|
|
|
Commercial
|
|
|
|
Commercial Real Estate
|
|
|
|
Residential
Real Estate
|
|
|
|
Consumer
|
|
|
|
Unallocated
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
3,406
|
|
|
$
|
3,175
|
|
|
$
|
1,242
|
|
|
$
|
118
|
|
|
$
|
—
|
|
|
$
|
7,941
|
|
Provision
|
|
|
(390
|
)
|
|
|
(15
|
)
|
|
|
717
|
|
|
|
13
|
|
|
|
—
|
|
|
|
325
|
|
Recoveries
|
|
|
6
|
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
|
|
—
|
|
|
|
13
|
|
Charge offs
|
|
|
(105
|
)
|
|
|
(115
|
)
|
|
|
(388
|
)
|
|
|
(23
|
)
|
|
|
—
|
|
|
|
(631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,917
|
|
|
$
|
3,048
|
|
|
$
|
1,573
|
|
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
7,648
|
|
Individually evaluated for impairment
|
|
$
|
1,244
|
|
|
$
|
815
|
|
|
$
|
495
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
2,570
|
|
Collectively evaluated for impairment
|
|
$
|
1,673
|
|
|
$
|
2,233
|
|
|
$
|
1,078
|
|
|
$
|
94
|
|
|
$
|
—
|
|
|
$
|
5,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable (gross):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
5,770
|
|
|
$
|
8,216
|
|
|
$
|
2,518
|
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
16,575
|
|
Collectively evaluated for impairment
|
|
$
|
132,057
|
|
|
$
|
192,307
|
|
|
$
|
132,198
|
|
|
$
|
5,495
|
|
|
$
|
—
|
|
|
$
|
462,057
|
|
Activity
in the allowance for loans losses during the six months ended June 30, 2011, follows:
|
|
|
|
Allowance for loan losses:
|
|
Commercial
|
|
|
Commercial Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
3,862
|
|
|
$
|
3,674
|
|
|
$
|
211
|
|
|
$
|
213
|
|
|
$
|
—
|
|
|
$
|
7,960
|
|
Provision
|
|
|
579
|
|
|
|
(653
|
)
|
|
|
932
|
|
|
|
(68
|
)
|
|
|
—
|
|
|
|
790
|
|
Recoveries
|
|
|
139
|
|
|
|
6
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
150
|
|
Charge offs
|
|
|
(766
|
)
|
|
|
(132
|
)
|
|
|
(102
|
)
|
|
|
(83
|
)
|
|
|
—
|
|
|
|
(1,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,814
|
|
|
$
|
2,895
|
|
|
$
|
1,041
|
|
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
7,817
|
|
Individually evaluated for impairment
|
|
$
|
1,943
|
|
|
$
|
882
|
|
|
$
|
542
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
3,387
|
|
Collectively evaluated for impairment
|
|
$
|
1,871
|
|
|
$
|
2,013
|
|
|
$
|
499
|
|
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
4,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable (gross):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
7,338
|
|
|
$
|
7,688
|
|
|
$
|
2,163
|
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
17,267
|
|
Collectively evaluated for impairment
|
|
$
|
123,409
|
|
|
$
|
192,238
|
|
|
$
|
111,323
|
|
|
$
|
3,667
|
|
|
$
|
—
|
|
|
$
|
430,637
|
|
PSB maintains an independent credit administration staff that continually
monitors aggregate commercial loan portfolio and individual borrower credit quality trends. All commercial purpose loans are assigned
a credit grade upon origination, and credit grades for nonproblem borrowers with aggregate credit in excess of $500 are reviewed
annually. In addition, all past due, restructured, or identified problem loans, both commercial and consumer purpose, are reviewed
and assigned an up-to-date credit grade quarterly.
PSB uses a seven point grading scale to estimate credit risk with
risk rating 1, representing the high credit quality, and risk rating 7, representing the lowest credit quality. The assigned
credit grade takes into account several credit quality components which are assigned a weight and blended into the composite grade.
The factors considered and their assigned weight for the final composite grade is as follows:
Cash flow
(30% weight) – Considers earnings trends and
debt service coverage levels.
Collateral
(25% weight) – Considers loan to value and
other measures of collateral coverage.
Leverage
(15% weight) – Considers balance sheet debt
and capital ratios compared to Robert Morris & Associates (RMA) industry medians.
Liquidity
(10% weight) – Considers balance sheet current,
quick, and other working capital ratios compared to RMA industry medians.
Management
(5% weight) – Considers the past performance,
character, and depth of borrower management.
Guarantor
(5% weight) – Considers the existence of a
guarantor along with a bank’s past experience with the guarantor and his related liquidity and credit score.
Financial reporting
(5% weight) – Considers the relative
level of independent financial review obtained by the borrower on its financial statements, from audited financial statements down
to existence of only tax returns or potentially unreliable financial information.
Industry
(5% weight) – Considers the borrower’s
industry and whether it is stable or subject to cyclical or seasonal factors.
Nonclassified loans are assigned a risk rating of 1 to 4 and have
credit quality that ranges from well above average to some inherent industry weaknesses that may present higher than average risk
due to conditions affecting the borrower, the borrower’s industry, or economic development.
Special mention and watch loans are assigned a risk rating of 5 when
potential weaknesses exist that deserve management’s close attention. If left uncorrected, the potential weaknesses may result
in deterioration of repayment prospects or in credit position at some future date. Substandard loans are assigned a risk rating
of 6 and are inadequately protected by the current worth and borrowing capacity of the borrower. Well-defined weaknesses exist
that may jeopardize the liquidation of the debt. There is a possibility of some loss if the deficiencies are not corrected. At
this point, the loan may still be performing and accruing interest.
Impaired and other doubtful loans assigned a risk rating of 7 have
all of the weaknesses of a substandard credit plus the added characteristic that the weaknesses make collection or liquidation
in full on the basis of current facts, conditions, and collateral values highly questionable and improbable. Impaired loans include
all nonaccrual loans and all restructured loans including restructured loans performing according to the restructured terms. In
special situations, an impaired loan with a risk rating of 7 could still be maintained on accrual status such as in the case of
restructured loans performing according to restructured terms.
The commercial credit exposure based on internally assigned credit
grade at June 30, 2012, follows:
|
|
Commercial
|
|
|
Commercial Real Estate
|
|
|
Construction & Development
|
|
|
Agricultural
|
|
|
Government
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High quality (risk rating 1)
|
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44
|
|
Minimal risk (2)
|
|
|
14,800
|
|
|
|
22,022
|
|
|
|
155
|
|
|
|
523
|
|
|
|
1,644
|
|
|
|
39,144
|
|
Average risk (3)
|
|
|
64,681
|
|
|
|
99,031
|
|
|
|
14,762
|
|
|
|
1,975
|
|
|
|
12,343
|
|
|
|
192,792
|
|
Acceptable risk (4)
|
|
|
27,403
|
|
|
|
40,870
|
|
|
|
2,368
|
|
|
|
347
|
|
|
|
—
|
|
|
|
70,988
|
|
Watch risk (5)
|
|
|
7,616
|
|
|
|
7,940
|
|
|
|
1,875
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,431
|
|
Substandard risk (6)
|
|
|
681
|
|
|
|
1,736
|
|
|
|
1,548
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,965
|
|
Impaired loans (7)
|
|
|
5,742
|
|
|
|
7,587
|
|
|
|
629
|
|
|
|
28
|
|
|
|
—
|
|
|
|
13,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
120,967
|
|
|
$
|
179,186
|
|
|
$
|
21,337
|
|
|
$
|
2,873
|
|
|
$
|
13,987
|
|
|
$
|
338,350
|
|
The commercial credit exposure based on internally assigned credit
grade at December 31, 2011, follows:
|
|
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Construction & Development
|
|
|
Agricultural
|
|
|
Government
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High quality (risk rating 1)
|
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65
|
|
Minimal risk (2)
|
|
|
10,404
|
|
|
|
21,922
|
|
|
|
205
|
|
|
|
534
|
|
|
|
1,660
|
|
|
|
34,725
|
|
Average risk (3)
|
|
|
54,387
|
|
|
|
103,614
|
|
|
|
12,981
|
|
|
|
1,088
|
|
|
|
6,153
|
|
|
|
178,223
|
|
Acceptable risk (4)
|
|
|
38,381
|
|
|
|
42,435
|
|
|
|
2,401
|
|
|
|
307
|
|
|
|
—
|
|
|
|
83,524
|
|
Watch risk (5)
|
|
|
7,054
|
|
|
|
7,972
|
|
|
|
2,903
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,929
|
|
Substandard risk (6)
|
|
|
675
|
|
|
|
1,005
|
|
|
|
937
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,617
|
|
Impaired loans (7)
|
|
|
6,456
|
|
|
|
7,412
|
|
|
|
651
|
|
|
|
28
|
|
|
|
—
|
|
|
|
14,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
117,422
|
|
|
$
|
184,360
|
|
|
$
|
20,078
|
|
|
$
|
1,957
|
|
|
$
|
7,813
|
|
|
$
|
331,630
|
|
The consumer credit exposure based on payment activity at June 30,
2012, follows:
|
|
|
Residential-
|
|
|
Residential-
|
|
|
Construction and
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
HELOC
|
|
|
Development
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
$
|
96,026
|
|
|
$
|
23,410
|
|
|
$
|
13,006
|
|
|
$
|
5,509
|
|
|
$
|
137,951
|
|
Nonperforming
|
|
|
|
1,999
|
|
|
|
197
|
|
|
|
78
|
|
|
|
57
|
|
|
|
2,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
98,025
|
|
|
$
|
23,607
|
|
|
$
|
13,084
|
|
|
$
|
5,566
|
|
|
$
|
140,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The consumer credit exposure based on payment activity
at December 31, 2011, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential-
|
|
|
|
Residential-
|
|
|
|
Construction and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
|
HELOC
|
|
|
|
Development
|
|
|
|
Consumer
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
$
|
76,474
|
|
|
$
|
23,034
|
|
|
$
|
13,341
|
|
|
$
|
3,677
|
|
|
$
|
116,526
|
|
Nonperforming
|
|
|
|
1,640
|
|
|
|
159
|
|
|
|
78
|
|
|
|
55
|
|
|
|
1,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
78,114
|
|
|
$
|
23,193
|
|
|
$
|
13,419
|
|
|
$
|
3,732
|
|
|
$
|
118,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The payment age analysis of loans receivable disbursed
at June 30, 2012, follows:
|
|
30-59
|
|
|
60-89
|
|
|
90+
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
90+ and
|
|
Loan Class
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
Past Due
|
|
|
Current
|
|
|
Loans
|
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,215
|
|
|
$
|
67
|
|
|
$
|
1,105
|
|
|
$
|
2,387
|
|
|
$
|
118,580
|
|
|
$
|
120,967
|
|
|
$
|
—
|
|
Agricultural
|
|
|
—
|
|
|
|
28
|
|
|
|
—
|
|
|
|
28
|
|
|
|
2,845
|
|
|
|
2,873
|
|
|
|
—
|
|
Government
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,987
|
|
|
|
13,987
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
564
|
|
|
|
—
|
|
|
|
1,117
|
|
|
|
1,681
|
|
|
|
177,505
|
|
|
|
179,186
|
|
|
|
—
|
|
Commercial construction and development
|
|
|
3
|
|
|
|
—
|
|
|
|
127
|
|
|
|
130
|
|
|
|
18,549
|
|
|
|
18,679
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential – Prime
|
|
|
274
|
|
|
|
425
|
|
|
|
1,198
|
|
|
|
1,897
|
|
|
|
96,128
|
|
|
|
98,025
|
|
|
|
—
|
|
Residential – HELOC
|
|
|
79
|
|
|
|
59
|
|
|
|
113
|
|
|
|
251
|
|
|
|
23,356
|
|
|
|
23,607
|
|
|
|
—
|
|
Residential – construction and development
|
|
|
48
|
|
|
|
—
|
|
|
|
78
|
|
|
|
126
|
|
|
|
10,749
|
|
|
|
10,875
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
5
|
|
|
|
1
|
|
|
|
56
|
|
|
|
62
|
|
|
|
5,504
|
|
|
|
5,566
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,188
|
|
|
$
|
580
|
|
|
$
|
3,794
|
|
|
$
|
6,562
|
|
|
$
|
467,203
|
|
|
$
|
473,765
|
|
|
$
|
—
|
|
The payment age analysis of loans receivable disbursed
at December 31, 2011, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59
|
|
|
60-89
|
|
|
90+
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
90+ and
|
|
Loan Class
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
Past Due
|
|
|
Current
|
|
|
Loans
|
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
670
|
|
|
$
|
25
|
|
|
$
|
2,041
|
|
|
$
|
2,736
|
|
|
$
|
114,686
|
|
|
$
|
117,422
|
|
|
$
|
—
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,957
|
|
|
|
1,957
|
|
|
|
—
|
|
Government
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,813
|
|
|
|
7,813
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
542
|
|
|
|
—
|
|
|
|
1,229
|
|
|
|
1,771
|
|
|
|
182,589
|
|
|
|
184,360
|
|
|
|
—
|
|
Commercial construction and development
|
|
|
—
|
|
|
|
—
|
|
|
|
145
|
|
|
|
145
|
|
|
|
17,195
|
|
|
|
17,340
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential – prime
|
|
|
1,127
|
|
|
|
173
|
|
|
|
1,144
|
|
|
|
2,444
|
|
|
|
75,670
|
|
|
|
78,114
|
|
|
|
—
|
|
Residential – HELOC
|
|
|
255
|
|
|
|
5
|
|
|
|
129
|
|
|
|
389
|
|
|
|
22,804
|
|
|
|
23,193
|
|
|
|
—
|
|
Residential – construction and development
|
|
|
—
|
|
|
|
35
|
|
|
|
77
|
|
|
|
112
|
|
|
|
11,258
|
|
|
|
11,370
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
11
|
|
|
|
—
|
|
|
|
54
|
|
|
|
65
|
|
|
|
3,667
|
|
|
|
3,732
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,605
|
|
|
$
|
238
|
|
|
$
|
4,819
|
|
|
$
|
7,662
|
|
|
$
|
437,639
|
|
|
$
|
445,301
|
|
|
$
|
—
|
|
Impaired loans as of June 30, 2012, and during the six months then
ended, by loan class, follows:
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
2,127
|
|
|
$
|
—
|
|
|
$
|
2,127
|
|
|
$
|
1,867
|
|
|
$
|
38
|
|
Commercial real estate
|
|
|
4,457
|
|
|
|
—
|
|
|
|
4,457
|
|
|
|
4,082
|
|
|
|
130
|
|
Commercial construction & development
|
|
|
127
|
|
|
|
—
|
|
|
|
127
|
|
|
|
64
|
|
|
|
—
|
|
Residential – prime
|
|
|
679
|
|
|
|
—
|
|
|
|
679
|
|
|
|
421
|
|
|
|
5
|
|
Residential – HELOC
|
|
|
35
|
|
|
|
—
|
|
|
|
35
|
|
|
|
18
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
3,615
|
|
|
$
|
1,217
|
|
|
$
|
2,398
|
|
|
$
|
2,807
|
|
|
$
|
28
|
|
Commercial real estate
|
|
|
3,130
|
|
|
|
602
|
|
|
|
2,528
|
|
|
|
2,770
|
|
|
|
47
|
|
Commercial construction & development
|
|
|
502
|
|
|
|
213
|
|
|
|
289
|
|
|
|
375
|
|
|
|
14
|
|
Agricultural
|
|
|
28
|
|
|
|
27
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
Residential – prime
|
|
|
1,498
|
|
|
|
326
|
|
|
|
1,172
|
|
|
|
1,377
|
|
|
|
3
|
|
Residential – HELOC
|
|
|
208
|
|
|
|
128
|
|
|
|
80
|
|
|
|
109
|
|
|
|
—
|
|
Residential construction & development
|
|
|
98
|
|
|
|
41
|
|
|
|
57
|
|
|
|
83
|
|
|
|
1
|
|
Consumer
|
|
|
71
|
|
|
|
16
|
|
|
|
55
|
|
|
|
55
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
5,742
|
|
|
|
1,217
|
|
|
$
|
4,525
|
|
|
$
|
4,674
|
|
|
$
|
66
|
|
Commercial real estate
|
|
|
7,587
|
|
|
|
602
|
|
|
|
6,985
|
|
|
|
6,852
|
|
|
|
177
|
|
Commercial construction & development
|
|
|
629
|
|
|
|
213
|
|
|
|
416
|
|
|
|
439
|
|
|
|
14
|
|
Agricultural
|
|
|
28
|
|
|
|
27
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
Residential – prime
|
|
|
2,177
|
|
|
|
326
|
|
|
|
1,851
|
|
|
|
1,798
|
|
|
|
8
|
|
Residential – HELOC
|
|
|
243
|
|
|
|
128
|
|
|
|
115
|
|
|
|
127
|
|
|
|
2
|
|
Residential construction & development
|
|
|
98
|
|
|
|
41
|
|
|
|
57
|
|
|
|
83
|
|
|
|
1
|
|
Consumer
|
|
|
71
|
|
|
|
16
|
|
|
|
55
|
|
|
|
55
|
|
|
|
1
|
|
The impaired loans at December 31, 2011, and during the year then
ended, by loan class, follows:
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,606
|
|
|
$
|
—
|
|
|
$
|
1,606
|
|
|
$
|
2,409
|
|
|
$
|
51
|
|
Commercial real estate
|
|
|
3,706
|
|
|
|
—
|
|
|
|
3,706
|
|
|
|
4,515
|
|
|
|
204
|
|
Commercial construction and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120
|
|
|
|
—
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150
|
|
|
|
—
|
|
Residential – Prime
|
|
|
162
|
|
|
|
—
|
|
|
|
162
|
|
|
|
396
|
|
|
|
1
|
|
Residential – HELOC
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23
|
|
|
|
—
|
|
Residential construction and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
4,850
|
|
|
$
|
1,635
|
|
|
$
|
3,215
|
|
|
$
|
2,050
|
|
|
$
|
93
|
|
Commercial real estate
|
|
|
3,706
|
|
|
|
694
|
|
|
|
3,012
|
|
|
|
1,637
|
|
|
|
154
|
|
Commercial construction and development
|
|
|
651
|
|
|
|
191
|
|
|
|
460
|
|
|
|
386
|
|
|
|
23
|
|
Agricultural
|
|
|
28
|
|
|
|
28
|
|
|
|
—
|
|
|
|
5
|
|
|
|
2
|
|
Residential – Prime
|
|
|
2,029
|
|
|
|
448
|
|
|
|
1,581
|
|
|
|
1,041
|
|
|
|
53
|
|
Residential – HELOC
|
|
|
268
|
|
|
|
131
|
|
|
|
137
|
|
|
|
99
|
|
|
|
9
|
|
Residential construction and development
|
|
|
144
|
|
|
|
36
|
|
|
|
108
|
|
|
|
74
|
|
|
|
5
|
|
Consumer
|
|
|
69
|
|
|
|
15
|
|
|
|
54
|
|
|
|
37
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
6,456
|
|
|
$
|
1,635
|
|
|
$
|
4,821
|
|
|
$
|
4,459
|
|
|
$
|
144
|
|
Commercial real estate
|
|
|
7,412
|
|
|
|
694
|
|
|
|
6,718
|
|
|
|
6,152
|
|
|
|
358
|
|
Commercial construction and development
|
|
|
651
|
|
|
|
191
|
|
|
|
460
|
|
|
|
506
|
|
|
|
23
|
|
Agricultural
|
|
|
28
|
|
|
|
28
|
|
|
|
—
|
|
|
|
155
|
|
|
|
2
|
|
Residential – Prime
|
|
|
2,191
|
|
|
|
448
|
|
|
|
1,743
|
|
|
|
1,437
|
|
|
|
54
|
|
Residential – HELOC
|
|
|
268
|
|
|
|
131
|
|
|
|
137
|
|
|
|
122
|
|
|
|
9
|
|
Residential construction and development
|
|
|
144
|
|
|
|
36
|
|
|
|
108
|
|
|
|
86
|
|
|
|
5
|
|
Consumer
|
|
|
69
|
|
|
|
15
|
|
|
|
54
|
|
|
|
48
|
|
|
|
2
|
|
Loans on nonaccrual status at period-end, follows:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
3,863
|
|
|
$
|
4,309
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
1,783
|
|
|
|
1,585
|
|
Commercial construction and development
|
|
|
130
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential – prime
|
|
|
1,999
|
|
|
|
1,640
|
|
Residential – HELOC
|
|
|
197
|
|
|
|
159
|
|
Residential construction and development
|
|
|
78
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
57
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,107
|
|
|
$
|
7,974
|
|
During the quarter and six months ended June 30, 2012, the commercial
related contracts identified below were modified to convert from amortizing principal payments to interest only payments or to
capitalize unpaid property taxes and were therefore categorized as troubled debt restructurings. During the quarter and six months
ended June 30, 2011, the commercial related contracts identified below were modified to defer principal payments due or lower the
interest rate. Specific loan reserves maintained in connection with loans restructured during the year to date period totaled $62
at June 30, 2012 and $515 at June 30, 2011. All modified or restructured loans are classified as impaired loans. Recorded investment
as presented in the tables below concerning modified loans represents principal outstanding before specific reserves.
The following table presents information concerning modifications
of troubled debt made during the quarter ended June 30, 2012:
As of June 30, 2012 ($000s)
|
|
Number of contracts
|
|
|
Pre-modification outstanding recorded
investment
|
|
|
Post-modification outstanding recorded investment at period-end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
1
|
|
|
$
|
148
|
|
|
$
|
144
|
|
The following table presents information concerning modifications
of troubled debt made during the six months ended June 30, 2012:
As of June 30, 2012 ($000s)
|
|
Number of contracts
|
|
|
Pre-modification outstanding recorded investment
|
|
|
Post-modification outstanding recorded investment at period-end
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
3
|
|
|
$
|
180
|
|
|
$
|
173
|
|
Commercial real estate
|
|
|
2
|
|
|
$
|
527
|
|
|
$
|
516
|
|
The following table presents information concerning modifications
of troubled debt made during the quarter ended June 30, 2011:
As of June 30, 2011 ($000s)
|
|
Number of contracts
|
|
|
Pre-modification outstanding recorded
investment
|
|
|
Post-modification outstanding recorded investment
at period-end
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
5
|
|
|
$
|
1,132
|
|
|
$
|
1,132
|
|
Commercial real estate
|
|
|
6
|
|
|
$
|
4,282
|
|
|
$
|
4,282
|
|
Commercial construction and development
|
|
|
1
|
|
|
$
|
74
|
|
|
$
|
74
|
|
The following table presents information concerning modifications of troubled debt made during the six months ended June 30, 2011:
As of June 30, 2011 ($000s)
|
|
Number of contracts
|
|
|
Pre-modification outstanding recorded investment
|
|
|
Post-modification outstanding recorded investment at period-end
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
6
|
|
|
$
|
1,157
|
|
|
$
|
1,123
|
|
Commercial real estate
|
|
|
6
|
|
|
$
|
4,282
|
|
|
$
|
4,274
|
|
Commercial construction and development
|
|
|
1
|
|
|
$
|
74
|
|
|
$
|
73
|
|
The following table outlines past troubled debt restructurings that
subsequently defaulted within twelve months of the last restructuring date. For purposes of this table, default is defined as 90
days or more past due on restructured payments.
Default during the quarter and six months ended
|
|
Number of
|
|
|
Recorded
|
|
June 30, 2012 ($000s)
|
|
contracts
|
|
|
investment
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
1
|
|
|
$ 23
|
|
No troubled debt restructurings defaulted during the six months ended
June 30, 2011 that had defaulted within twelve months of the last restructuring date.
NOTE 5 – 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 of foreclosed assets and changes in any valuation allowance are included in loss on foreclosed assets.
A summary of activity in foreclosed assets is as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
3,108
|
|
|
$
|
4,828
|
|
|
$
|
2,939
|
|
|
$
|
4,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of loans at net realizable value to foreclosed assets
|
|
|
50
|
|
|
|
—
|
|
|
|
408
|
|
|
|
135
|
|
Sale proceeds
|
|
|
(408
|
)
|
|
|
(256
|
)
|
|
|
(408
|
)
|
|
|
(330
|
)
|
Loans made on sale of foreclosed assets
|
|
|
(140
|
)
|
|
|
—
|
|
|
|
(140
|
)
|
|
|
—
|
|
Net gain from sale of foreclosed assets
|
|
|
48
|
|
|
|
—
|
|
|
|
48
|
|
|
|
24
|
|
Provision for write-down charged to operations
|
|
|
(16
|
)
|
|
|
(233
|
)
|
|
|
(205
|
)
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,642
|
|
|
$
|
4,339
|
|
|
$
|
2,642
|
|
|
$
|
4,339
|
|
NOTE 6 – DEPOSITS
The distribution of deposits at period end is as follows:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
82,909
|
|
|
$
|
75,298
|
|
Interest bearing demand (NOWs)
|
|
|
118,469
|
|
|
|
108,894
|
|
Savings
|
|
|
50,981
|
|
|
|
28,056
|
|
Money market
|
|
|
108,712
|
|
|
|
102,993
|
|
Retail and local time
|
|
|
126,904
|
|
|
|
91,702
|
|
Broker and national time
|
|
|
69,432
|
|
|
|
74,566
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
557,407
|
|
|
$
|
481,509
|
|
NOTE 7 – OTHER BORROWINGS
Other borrowings consist of the following obligations at June 30,
2012, and December 31, 2011:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
Short-term repurchase agreements
|
|
$
|
4,586
|
|
|
$
|
6,191
|
|
Wholesale structured repurchase agreements
|
|
|
13,500
|
|
|
|
13,500
|
|
|
|
|
|
|
|
|
|
|
Total other borrowings
|
|
$
|
18,086
|
|
|
$
|
19,691
|
|
PSB pledges various securities available for sale as collateral for
repurchase agreements. The fair value of securities pledged for repurchase agreements totaled $23,096 at June 30, 2012 and $22,977
at December 31, 2011.
The following information relates to securities sold under repurchase
agreements and other borrowings:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of end of period - weighted average rate
|
|
|
3.23
|
%
|
|
|
2.61
|
%
|
|
|
3.23
|
%
|
|
|
2.61
|
%
|
For the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Highest month-end balance
|
|
$
|
19,934
|
|
|
$
|
27,279
|
|
|
$
|
19,934
|
|
|
$
|
32,644
|
|
Daily average balance
|
|
$
|
19,705
|
|
|
$
|
26,154
|
|
|
$
|
19,388
|
|
|
$
|
28,421
|
|
Weighted average rate
|
|
|
3.04
|
%
|
|
|
2.53
|
%
|
|
|
3.08
|
%
|
|
|
2.36
|
%
|
NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
PSB is exposed to certain risks relating to its ongoing business
operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered into
to manage interest rate risk associated with PSB’s variable rate junior subordinated debentures. Accounting standards require
PSB to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. PSB designates
its interest rate swap associated with the junior subordinated debentures as a cash flow hedge of variable-rate debt. For derivative
financial instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods
during which the hedged transaction affects earnings. Gains and losses on the derivative instrument representing either hedge ineffectiveness
or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
From time to time, PSB will also enter into fixed interest rate
swaps with customers in connection with their floating rate loans to PSB. When fixed rate swaps are originated with customers,
an identical offsetting swap is also entered into by PSB with a correspondent bank. These swap arrangements are intended to offset
each other as “back to back” swaps and allow PSB’s loan customer to obtain fixed rate loan financing via the
swap while PSB exchanges these fixed payments with a correspondent bank. In these arrangements, PSB’s net cash flows and
interest income are equal to the floating rate loan originated in connection with the swap. These customer swaps are not designated
as hedging instruments and are accounted for at fair value with changes in fair value recognized in the income statement during
the current period.
PSB is exposed to credit-related losses in the event of nonperformance
by the counterparties to these agreements. PSB controls the credit risk of its financial contracts through credit approvals, limits,
and monitoring procedures, and does not expect any counterparties to fail their obligations. PSB swaps originated with correspondent
banks are over-the-counter (OTC) contracts. Negotiated OTC derivative contracts are generally entered into between two counterparties
that negotiate specific agreement terms, including the underlying instrument, amounts, exercise prices, and maturity.
At period end, the following interest rate swaps to hedge variable-rate
debt were outstanding:
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
|
$ 7,500
|
|
|
|
$ 7,500
|
|
Pay fixed rate
|
|
|
2.72%
|
|
|
|
2.72%
|
|
Receive variable rate
|
|
|
0.47%
|
|
|
|
0.55%
|
|
Maturity
|
|
September 2017
|
|
September 2017
|
Unrealized gain (loss) fair value
|
|
|
$ (678)
|
|
|
|
$ (576)
|
|
This agreement provides for PSB to receive payments at a variable
rate determined by the three-month LIBOR in exchange for making payments at a fixed rate. Actual maturities may differ from scheduled
maturities due to call options and/or early termination provisions. No interest rate swap agreements were terminated prior to maturity
during the six months ended June 30, 2012 or 2011. Risk management results for the six months ended June 30, 2012 related to the
balance sheet hedging of variable rate debt indicates that the hedge was 100% effective, and no component of the derivative instrument’s
gain or loss was excluded from the assessment of hedge effectiveness.
As of June 30, 2012, approximately $170 of losses ($103 after tax
impacts) reported in other comprehensive income related to the interest rate swap are expected to be reclassified into interest
expense as a yield adjustment of the hedged borrowings during the 12-month period ending June 30, 2013. The interest rate swap
agreement was secured by cash and cash equivalents of $750 at June 30, 2012, and by $680 at December 31, 2011.
PSB maintains outstanding interest rate swaps with customers and
correspondent banks associated with its lending activities that are not designated as hedges. At period end, the following floating
interest rate swaps were outstanding with customers:
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
|
$ 15,298
|
|
|
|
$14,324
|
|
Receive fixed rate (average)
|
|
|
1.99%
|
|
|
|
2.05%
|
|
Pay variable rate (average)
|
|
|
0.24%
|
|
|
|
0.29%
|
|
Maturity
|
|
March 2015 – Oct. 2021
|
|
March 2015 – Oct. 2021
|
Weighted average remaining term
|
|
|
4.4 years
|
|
|
|
4.9 years
|
|
Unrealized gain (loss) fair value
|
|
|
$702
|
|
|
|
$555
|
|
At period end, the following offsetting fixed interest rate swaps
were outstanding with correspondent banks:
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
|
$ 15,298
|
|
|
|
$ 14,324
|
|
Pay fixed rate (average)
|
|
|
1.99%
|
|
|
|
2.05%
|
|
Receive variable rate (average)
|
|
|
0.24%
|
|
|
|
0.29%
|
|
Maturity
|
|
March 2015 – Oct. 2021
|
|
March 2015 – Oct. 2021
|
Weighted average remaining term
|
|
|
4.4 years
|
|
|
|
4.9 years
|
|
Unrealized gain (loss) fair value
|
|
|
$ (702)
|
|
|
|
$ (555)
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 – INCOME TAX EFFECTS ON ITEMS OF COMPREHENSIVE INCOME
(LOSS)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2012
|
|
Periods ended June 30, 2012
|
|
Pre-tax
|
|
|
Income Tax
|
|
|
Pre-tax
|
|
|
Income Tax
|
|
(dollars in thousands)
|
|
Inc. (Exp.)
|
|
|
Exp. (Credit)
|
|
|
Inc. (Exp.)
|
|
|
Exp. (Credit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities available for sale
|
|
$
|
(126
|
)
|
|
$
|
(50
|
)
|
|
$
|
(130
|
)
|
|
$
|
(56
|
)
|
Amortization of unrealized gain on
securities available for sale transferred to securities held to maturity included in net income
|
|
|
(119
|
)
|
|
|
(46
|
)
|
|
|
(236
|
)
|
|
|
(92
|
)
|
Unrealized loss on interest rate swap
|
|
|
(170
|
)
|
|
|
(67
|
)
|
|
|
(186
|
)
|
|
|
(73
|
)
|
Reclassification
adjustment of interest rate swap settlements included in earnings
|
|
|
43
|
|
|
|
17
|
|
|
|
84
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
(372
|
)
|
|
$
|
(146
|
)
|
|
$
|
(468
|
)
|
|
$
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2011
|
|
Six Months Ended
June 30, 2011
|
Periods ended June 30, 2011
|
|
Pre-tax
|
|
|
Income Tax
|
|
|
Pre-tax
|
|
|
Income Tax
|
|
(dollars in thousands)
|
|
Inc. (Exp.)
|
|
|
Exp. (Credit)
|
|
|
Inc. (Exp.)
|
|
|
Exp. (Credit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities available for sale
|
|
$
|
556
|
|
|
$
|
219
|
|
|
$
|
469
|
|
|
$
|
185
|
|
Amortization of unrealized gain on securities available
for sale transferred to securities held to maturity included in net income
|
|
|
(127
|
)
|
|
|
(50
|
)
|
|
|
(269
|
)
|
|
|
(106
|
)
|
Unrealized loss on interest rate swap
|
|
|
(256
|
)
|
|
|
(101
|
)
|
|
|
(213
|
)
|
|
|
(84
|
)
|
Reclassification
adjustment of interest rate swap settlements included in earnings
|
|
|
46
|
|
|
|
18
|
|
|
|
91
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
219
|
|
|
$
|
86
|
|
|
$
|
78
|
|
|
$
|
31
|
|
NOTE 10 – 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. No additional shares of common stock remain reserved for future grants under
the option plan approved by the shareholders, and the last outstanding option shares were exercised during the quarter ended June
30, 2012. As of December 31, 2011, 588 options were outstanding and eligible to be exercised at a price of $16.03 per share which
were exercised during the quarter ended June 30, 2012. During the six months ended June 30, 2011, 1,537 options were exercised
at $15.08 per share.
PSB granted restricted stock to certain employees having an initial
market value of $200 during the three months ended March 31, 2012 and 2011. 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 six months ended June 30, compensation expense recorded from amortization
of restricted shares expected to vest to employees was $53 and $39 during 2012 and 2011, respectively.
The following tables summarize information regarding restricted stock outstanding at June 30, 2012 and 2011
including activity during the six months then ended.
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Shares
|
|
Grant Price
|
|
|
|
|
|
|
|
|
|
January 1, 2011
|
|
|
19,452
|
|
|
$
|
15.68
|
|
Restricted stock granted
|
|
|
9,130
|
|
|
|
21.90
|
|
Restricted stock legally vested
|
|
|
(3,010
|
)
|
|
|
(16.62
|
)
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
25,572
|
|
|
$
|
17.79
|
|
|
|
|
|
|
|
|
|
|
January 1, 2012
|
|
|
25,572
|
|
|
$
|
17.79
|
|
Restricted stock granted
|
|
|
8,895
|
|
|
|
22.48
|
|
Restricted stock legally vested
|
|
|
(4,058
|
)
|
|
|
(16.08
|
)
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
|
30,409
|
|
|
$
|
19.39
|
|
Scheduled compensation expense per calendar year assuming all restricted
shares eventually vest to employees would be as follows:
|
2012
|
|
|
$
|
105
|
|
|
2013
|
|
|
|
125
|
|
|
2014
|
|
|
|
125
|
|
|
2015
|
|
|
|
95
|
|
|
2016
|
|
|
|
80
|
|
|
Thereafter
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
$
|
570
|
|
NOTE 11–
|
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 considered to be outstanding
shares and used to calculate the weighted average number of shares outstanding and 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. On June 19, 2012, the Company declared a 5% stock dividend to shareholders of record July 16, 2012,
which was paid in the form of additional common stock on July 30, 2012. All references in the accompanying consolidated financial
statements and footnotes to the number of common shares and per share amounts have been restated to reflect the 5% stock dividend.
Presented below are the calculations for basic and diluted earnings
per share:
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30,
|
|
June 30,
|
(dollars in thousands, except per share data – unaudited)
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,918
|
|
|
$
|
1,226
|
|
|
$
|
3,098
|
|
|
$
|
2,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
1,663,410
|
|
|
|
1,652,652
|
|
|
|
1,663,093
|
|
|
|
1,652,063
|
|
Effect of dilutive stock options outstanding
|
|
|
23
|
|
|
|
973
|
|
|
|
109
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
1,663,433
|
|
|
|
1,653,625
|
|
|
|
1,663,202
|
|
|
|
1,653,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.15
|
|
|
$
|
0.74
|
|
|
$
|
1.86
|
|
|
$
|
1.52
|
|
Diluted earnings per share
|
|
$
|
1.15
|
|
|
$
|
0.74
|
|
|
$
|
1.86
|
|
|
$
|
1.51
|
|
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 13 –
|
FAIR VALUE MEASUREMENTS
|
Certain assets and liabilities are recorded or disclosed at fair
value to provide financial statement users additional insight into PSB’s quality of earnings. Under current accounting guidance,
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 instrument’s 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). All transfers between levels are recognized as occurring at the end of the
reporting period.
Following is a brief description of each level of the fair value
hierarchy:
Level 1 – Fair value measurement is based on quoted prices
for identical assets or liabilities in active markets.
Level 2 – Fair value measurement is based on (1) quoted prices
for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets
that are not active; or (3) valuation models and methodologies for which all significant assumptions are or can be corroborated
by observable market data.
Level 3 – Fair value measurement is based on valuation models
and methodologies that incorporate at least one significant assumption that cannot be corroborated by observable market data. Level
3 measurements reflect PSB’s estimates about assumptions market participants would use in measuring fair value of the asset
or liability.
Some assets and liabilities, such as securities available for sale,
loans held for sale, mortgage rate lock commitments, and interest rate swaps, are measured at fair value on a recurring basis under
GAAP. Other assets and liabilities, such as impaired loans, foreclosed assets, and mortgage servicing rights are measured at fair
value on a nonrecurring basis.
Following is a description of the valuation methodology used for
each asset and liability measured at fair value on a recurring or nonrecurring basis, as well as the classification of the asset
or liability within the fair value hierarchy.
Securities available for sale – Securities available for sale
may be classified as Level 1, Level 2, or Level 3 measurements within the fair value hierarchy and are measured on a recurring
basis. Level 1 securities include equity securities traded on a national exchange. The fair value measurement of a Level 1 security
is based on the quoted price of the security. Level 2 securities include U.S. government and agency securities, obligations of
states and political subdivisions, corporate debt securities, and mortgage-related securities. The fair value measurement of a
Level 2 security is obtained from an independent pricing service and is based on recent sales of similar securities and other observable
market data and represents a market approach to fair value.
At June 30, 2012 and December 31, 2011, Level 3 securities include
a common stock investment in Bankers’ Bank, Madison, Wisconsin that is not traded on an active market. Historical cost of
the common stock is assumed to approximate fair value of this investment.
Loans held for sale – Loans held for sale in the secondary
market are carried at the lower of aggregate cost or estimated fair value and are measured on a recurring basis. The fair value
measurement of a loan held for sale is based on current secondary market prices for similar loans, which is considered a Level
2 measurement and represents a market approach to fair value.
Impaired loans – Loans are not measured at fair value on a
recurring basis. Carrying value of impaired loans that are not collateral dependent are based on the present value of expected
future cash flows discounted at the applicable effective interest rate and, thus, are not fair value measurements. However, impaired
loans considered to be collateral dependent are measured at fair value on a nonrecurring basis. The fair value measurement of an
impaired loan that is collateral dependent is based on the fair value of the underlying collateral. Fair value measurements of
underlying collateral that utilize observable market data, such as independent appraisals reflecting recent comparable sales, are
considered Level 2 measurements. Other fair value measurements that incorporate internal collateral appraisals or broker price
opinions, net of selling costs, or estimated assumptions market participants would use to measure fair value, such as discounted
cash flow measurements, are considered Level 3 measurements and represent a market approach to fair value.
In the absence of a recent independent appraisal, collateral dependent
impaired loans are valued based on a recent broker price opinion generally discounted by 10% plus estimated selling costs. In the
absence of a broker price opinion, collateral dependent impaired loans are valued at the lower of last appraisal value or the current
real estate tax value discounted by 20% to 50%, depending on internal judgments on the condition of the property, plus estimated
selling costs. Property values are impacted by many macroeconomic factors. In general, a declining economy or rising interest rates
would be expected to lower fair value of collateral dependent impaired loans while an improving economy or falling interest rates
would be expected to increase fair value of collateral dependent impaired loans.
Foreclosed assets – Real estate and other property acquired
through, or in lieu of, loan foreclosure are not measured at fair value on a recurring basis. Initially, foreclosed assets are
recorded at fair value less estimated costs to sell at the date of 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. Fair
value measurements are based on current formal or informal appraisals of property value compared to recent comparable sales of
similar property. Independent appraisals reflecting comparable sales are considered Level 2 measurements, while internal assessments
of appraised value based on current market activity, including broker price opinions, are considered Level 3 measurements and represent
a market approach to fair value. Property values are impacted by many macroeconomic factors. In general, a declining economy or
rising interest rates would be expected to lower fair value of foreclosed assets while an improving economy or falling interest
rates would be expected to increase fair value of foreclosed assets.
Mortgage servicing rights – Mortgage servicing rights are
not measured at fair value on a recurring basis. However, mortgage servicing rights that are impaired are measured at fair value
on a nonrecurring basis. Serviced loan pools are stratified by year of origination and term of the loan, and a valuation model
is used to calculate the present value of expected future cash flows for each stratum. When the carrying value of a stratum exceeds
its fair value, the stratum is measured at fair value. The valuation model incorporates assumptions that market participants would
use in estimating future net servicing income, such as costs to service, a discount rate, custodial earnings rate, ancillary income,
default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other
assumptions are based on unobservable estimates of what market participants would use to measure fair value. As a result, the fair
value measurement of mortgage servicing rights is considered a Level 3 measurement and represents an income approach to fair value.
When market mortgage rates decline, borrowers may have the opportunity to refinance their existing mortgage loans at lower rates,
increasing the risk of prepayment of loans on which we maintain mortgage servicing rights. Therefore, declining long term interest
rates would decrease the fair value of mortgage servicing rights. Significant unobservable inputs at June 30, 2012 used to measure
fair value included:
Direct annual servicing cost per loan
|
|
$
|
50
|
|
Direct annual servicing cost per loan in process of foreclosure
|
|
$
|
500
|
|
Weighted average prepayment speed: CPR
|
|
|
1.32
|
%
|
Weighted average prepayment speed: PSA
|
|
|
276
|
%
|
Weighted average discount rate
|
|
|
9.30
|
%
|
Asset reinvestment rate
|
|
|
4.00
|
%
|
Short-term cost of funds
|
|
|
0.25
|
%
|
Escrow inflation adjustment
|
|
|
1.00
|
%
|
Servicing cost inflation adjustment
|
|
|
1.00
|
%
|
Mortgage rate lock commitments – The fair value of mortgage
rate lock commitments is measured on a recurring basis. Fair value is based on current secondary market pricing for delivery of
similar loans and the value of originated mortgage servicing rights on loans expected to be delivered, which is considered a Level
2 fair value measurement.
Interest rate swap agreements – Fair values for interest rate
swap agreements are based on the amounts required to settle the contracts based on valuations provided by third-party dealers in
the contracts, which is considered a Level 2 fair value measurement, and are measured on a recurring basis.
|
|
|
|
Recurring Fair Value Measurements Using
|
|
|
|
|
Quoted Prices in Active Markets
|
|
Significant Other
|
|
Significant
|
|
|
|
|
for Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Assets
|
|
Inputs
|
|
Inputs
|
(dollars in thousands)
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value on a recurring basis at June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency debentures
|
|
$
|
32,550
|
|
|
$
|
—
|
|
|
$
|
32,550
|
|
|
$
|
—
|
|
U.S. agency issued residential MBS and CMO
|
|
|
60,675
|
|
|
|
—
|
|
|
|
60,675
|
|
|
|
—
|
|
Privately issued residential MBS and CMO
|
|
|
293
|
|
|
|
—
|
|
|
|
293
|
|
|
|
—
|
|
Other equity securities
|
|
|
47
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
93,565
|
|
|
|
—
|
|
|
|
93,518
|
|
|
|
47
|
|
Loans held for sale
|
|
|
452
|
|
|
|
—
|
|
|
|
452
|
|
|
|
—
|
|
Mortgage rate lock commitments
|
|
|
143
|
|
|
|
—
|
|
|
|
143
|
|
|
|
—
|
|
Interest rate swap agreements
|
|
|
702
|
|
|
|
—
|
|
|
|
702
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
94,862
|
|
|
$
|
—
|
|
|
$
|
94,815
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities – Interest rate swap agreements
|
|
$
|
1,381
|
|
|
$
|
—
|
|
|
$
|
1,381
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value on a recurring basis at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency debentures
|
|
$
|
518
|
|
|
$
|
—
|
|
|
$
|
518
|
|
|
$
|
—
|
|
U.S. agency issued residential MBS and CMO
|
|
|
58,389
|
|
|
|
—
|
|
|
|
58,389
|
|
|
|
—
|
|
Privately issued residential MBS and CMO
|
|
|
429
|
|
|
|
—
|
|
|
|
429
|
|
|
|
—
|
|
Other equity securities
|
|
|
47
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
59,383
|
|
|
|
—
|
|
|
|
59,336
|
|
|
|
47
|
|
Loans held for sale
|
|
|
39
|
|
|
|
—
|
|
|
|
39
|
|
|
|
—
|
|
Mortgage rate lock commitments
|
|
|
60
|
|
|
|
—
|
|
|
|
60
|
|
|
|
—
|
|
Interest rate swap agreements
|
|
|
555
|
|
|
|
—
|
|
|
|
555
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
60,037
|
|
|
$
|
—
|
|
|
$
|
59,990
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities – Interest rate swap agreements
|
|
$
|
1,131
|
|
|
$
|
—
|
|
|
$
|
1,131
|
|
|
$
|
—
|
|
Reconciliation of fair value measurements using significant unobservable
inputs:
|
|
Securities
|
|
|
Available
|
(dollars in thousands)
|
|
For Sale
|
|
|
|
|
|
Balance at January 1, 2011:
|
|
$
|
51
|
|
Total realized/unrealized gains and (losses):
|
|
|
|
|
Included in earnings
|
|
|
—
|
|
Included in other comprehensive income
|
|
|
—
|
|
Purchases, maturities, and sales
|
|
|
—
|
|
Transferred from Level 2 to Level 3
|
|
|
—
|
|
Transferred to held to maturity classification
|
|
|
—
|
|
|
|
|
|
|
Balance at June 30, 2011
|
|
$
|
51
|
|
|
|
|
|
|
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 June 30, 2011
|
|
$
|
—
|
|
|
|
|
|
|
Balance at January 1, 2012
|
|
$
|
47
|
|
Total realized/unrealized gains and (losses):
|
|
|
|
|
Included in earnings
|
|
|
—
|
|
Included in other comprehensive income
|
|
|
—
|
|
Purchases, maturities, and sales
|
|
|
—
|
|
Transferred from Level 2 to Level 3
|
|
|
—
|
|
Transferred to held to maturity classification
|
|
|
—
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
47
|
|
|
|
|
|
|
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 June 30, 2012
|
|
$
|
—
|
|
|
|
|
|
Nonrecurring Fair Value Measurements Using
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Active Markets
|
|
Significant Other
|
|
Significant
|
|
|
|
|
for Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
($000s)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value on a nonrecurring basis at June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
2,907
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,907
|
|
Foreclosed assets
|
|
|
2,642
|
|
|
|
—
|
|
|
|
450
|
|
|
|
2,192
|
|
Mortgage servicing rights
|
|
|
1,110
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,659
|
|
|
$
|
—
|
|
|
$
|
450
|
|
|
$
|
6,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value on a nonrecurring basis at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
4,086
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,086
|
|
Foreclosed assets
|
|
|
2,939
|
|
|
|
—
|
|
|
|
587
|
|
|
|
2,352
|
|
Mortgage servicing rights
|
|
|
1,205
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,230
|
|
|
$
|
—
|
|
|
$
|
587
|
|
|
$
|
7,643
|
|
At June 30, 2012, loans with a carrying amount of $3,516 were considered
impaired and were written down to their estimated fair value of $2,907 net of a valuation allowance of $609. At December 31, 2011,
loans with a carrying amount of $5,306 were considered impaired and were written down to their estimated fair value of $4,086,
net of a valuation allowance of $1,220. Changes in the valuation allowances are reflected through earnings as a component of the
provision for loan losses or as a charge-off against the allowance for loan losses.
At June 30, 2012, mortgage servicing rights with a carrying amount
of $1,325 were considered impaired and were written down to their estimated fair value of $1,110, resulting in an impairment allowance
of $215. At December 31, 2011, mortgage servicing rights with a carrying amount of $1,286 were considered impaired and were written
down to their estimated fair value of $1,205, resulting in an impairment allowance of $81. Changes in the impairment allowances
are reflected through earnings as a component of mortgage banking income.
PSB estimates fair value of all financial instruments regardless
of whether such instruments are measured at fair value. The following methods and assumptions were used by PSB to estimate fair
value of financial instruments not previously discussed.
Cash and cash equivalents – Fair value reflects the carrying
value of cash, which is a Level 1 measurement.
Securities held to maturity – Fair value of securities held
to maturity is based on dealer quotations on similar securities near period-end, which is considered a Level 2 measurement. Certain
debt issued by banks or bank holding companies purchased by PSB as securities held to maturity is valued on a cash flow basis discounted
using market rates reflecting credit risk of the borrower, which is considered a Level 3 measurement.
Bank certificates of deposit – Fair value of fixed rate certificates
of deposit included in other investments is estimated by discounting future cash flows using current rates at which similar certificates
could be purchased, which is a Level 3 measurement.
Loans – Fair value of variable rate loans that reprice frequently
are based on carrying values. Loans with an active sale market, such as one- to four-family residential mortgage loans, estimate
fair value based on sales of loans with similar structure and credit quality. Fair value of other loans is estimated by discounting
future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. Fair value
of impaired and other nonperforming loans are estimated using discounted expected future cash flows or the fair value of underlying
collateral, if applicable. Except for collateral dependent impaired loans valued using an independent appraisal of collateral value,
reflecting a Level 2 fair value measurement, fair value of loans is considered to be a Level 3 measurement due to internally developed
discounted cash flow measurements.
Federal Home Loan Bank stock – Fair value is the redeemable
(carrying) value based on the redemption provisions of the Federal Home Loan Bank, which is considered a Level 3 fair value measurement.
Accrued interest receivable and payable – Fair value approximates
the carrying value, which is considered a Level 3 fair value measurement.
Cash value of life insurance – Fair value is based on reported
values of the assets by the issuer which are redeemable to the insured, which is considered a Level 1 fair value measurement.
Deposits – Fair value of deposits with no stated maturity,
such as demand deposits, savings, and money market accounts, by definition, is the amount payable on demand on the reporting date.
Fair value of fixed rate time deposits is estimated using discounted cash flows applying interest rates currently offered on issue
of similar time deposits. Use of internal discounted cash flows provides a Level 3 fair value measurement.
FHLB advances and other borrowings – Fair value of fixed rate,
fixed term borrowings is estimated by discounting future cash flows using the current rates at which similar borrowings would be
made as calculated by the lender or correspondent. Fair value of borrowings with variable rates or maturing within 90 days approximates
the carrying value of these borrowings. Fair values based on lender provided settlement provisions are considered a Level 2 fair
value measurement. Other borrowings with local customers in the form of repurchase agreements are estimated using internal assessments
of discounted future cash flows, which is a Level 3 measurement.
Senior subordinated notes and junior subordinated debentures –
Fair value of fixed rate, fixed term notes and debentures are estimated internally by discounting future cash flows using the current
rates at which similar borrowings would be made, which is a Level 3 fair value measurement.
The carrying amounts and fair values of PSB’s financial instruments
consisted of the following:
|
|
June 30, 2012
|
|
|
Carrying
|
|
Estimated
|
|
Fair Value Hierarchy Level
|
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets ($000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
39,751
|
|
|
$
|
39,751
|
|
|
$
|
39,751
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities
|
|
|
164,008
|
|
|
|
166,129
|
|
|
|
—
|
|
|
|
164,251
|
|
|
|
1,878
|
|
Bank certificates of deposit
|
|
|
2,484
|
|
|
|
2,556
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,556
|
|
Net loans receivable and loans held for sale
|
|
|
466,782
|
|
|
|
472,642
|
|
|
|
—
|
|
|
|
897
|
|
|
|
471,745
|
|
Accrued interest receivable
|
|
|
2,366
|
|
|
|
2,366
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,366
|
|
Mortgage servicing rights
|
|
|
1,110
|
|
|
|
1,110
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,110
|
|
Mortgage rate lock commitments
|
|
|
143
|
|
|
|
143
|
|
|
|
—
|
|
|
|
143
|
|
|
|
—
|
|
FHLB stock
|
|
|
2,761
|
|
|
|
2,761
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,761
|
|
Cash surrender value of life insurance
|
|
|
11,608
|
|
|
|
11,608
|
|
|
|
11,608
|
|
|
|
—
|
|
|
|
—
|
|
Interest rate swap agreements
|
|
|
702
|
|
|
|
702
|
|
|
|
—
|
|
|
|
702
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities ($000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
557,407
|
|
|
$
|
560,131
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
560,131
|
|
FHLB advances
|
|
|
55,124
|
|
|
|
57,074
|
|
|
|
—
|
|
|
|
57,074
|
|
|
|
—
|
|
Other borrowings
|
|
|
18,086
|
|
|
|
19,608
|
|
|
|
—
|
|
|
|
15,022
|
|
|
|
4,586
|
|
Senior subordinated notes
|
|
|
7,000
|
|
|
|
7,234
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,234
|
|
Junior subordinated debentures
|
|
|
7,732
|
|
|
|
4,961
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,961
|
|
Interest rate swap agreements
|
|
|
1,381
|
|
|
|
1,381
|
|
|
|
—
|
|
|
|
1,381
|
|
|
|
—
|
|
Accrued interest payable
|
|
|
640
|
|
|
|
640
|
|
|
|
—
|
|
|
|
—
|
|
|
|
640
|
|
The carrying amounts and fair values of PSB’s financial instruments
consisted of the following at December 31, 2011:
|
|
December 31, 2011
|
|
|
Carrying
|
|
Estimated
|
|
Fair Value Hierarchy Level
|
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets ($000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,205
|
|
|
$
|
38,205
|
|
|
$
|
38,205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities
|
|
|
108,677
|
|
|
|
110,134
|
|
|
|
—
|
|
|
|
108,346
|
|
|
|
1,788
|
|
Bank certificates of deposit
|
|
|
2,484
|
|
|
|
2,577
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,577
|
|
Net loans receivable and loans held for sale
|
|
|
437,596
|
|
|
|
444,799
|
|
|
|
—
|
|
|
|
39
|
|
|
|
444,760
|
|
Accrued interest receivable
|
|
|
2,068
|
|
|
|
2,068
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,068
|
|
Mortgage servicing rights
|
|
|
1,205
|
|
|
|
1,205
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,205
|
|
Mortgage rate lock commitments
|
|
|
60
|
|
|
|
60
|
|
|
|
—
|
|
|
|
60
|
|
|
|
—
|
|
FHLB stock
|
|
|
3,250
|
|
|
|
3,250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,250
|
|
Cash surrender value of life insurance
|
|
|
11,406
|
|
|
|
11,406
|
|
|
|
11,406
|
|
|
|
—
|
|
|
|
—
|
|
Interest rate swap agreements
|
|
|
555
|
|
|
|
555
|
|
|
|
—
|
|
|
|
555
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities ($000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
481,509
|
|
|
$
|
484,640
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
484,640
|
|
FHLB advances
|
|
|
50,124
|
|
|
|
52,547
|
|
|
|
—
|
|
|
|
52,547
|
|
|
|
—
|
|
Other borrowings
|
|
|
19,691
|
|
|
|
21,454
|
|
|
|
—
|
|
|
|
15,163
|
|
|
|
6,291
|
|
Senior subordinated notes
|
|
|
7,000
|
|
|
|
7,120
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,120
|
|
Junior subordinated debentures
|
|
|
7,732
|
|
|
|
4,849
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,849
|
|
Interest rate swap agreements
|
|
|
1,131
|
|
|
|
1,131
|
|
|
|
—
|
|
|
|
1,131
|
|
|
|
—
|
|
Accrued interest payable
|
|
|
623
|
|
|
|
623
|
|
|
|
—
|
|
|
|
—
|
|
|
|
623
|
|
NOTE 14 –
|
CURRENT YEAR AND COMPARABLE PRIOR YEAR PERIOD ACCOUNTING CHANGES
|
FASB ASC Topic 220,
“Comprehensive Income.”
In June 2011, new authoritative accounting guidance was approved that required changes to the presentation of comprehensive net
income. Effective during the quarter ended March 31, 2012, PSB began to present comprehensive income as a separate financial statement
directly after the basic income statement. Adoption of the new presentation standards for comprehensive income did not have any
financial impact to PSB’s financial results or operations. The requirements to disclose on the face of the income statement
on a line by line basis the impact to current net income on reclassification of items coming out of comprehensive net income was
deferred.
FASB ASC Topic 820,
“Fair Value Measurements.”
In May 2011, new authoritative accounting guidance concerning fair value measurements was issued. Significant provisions of the
new guidance now require both domestic and international companies to follow existing United States guidance in measuring fair
value. In addition, certain Level 3 unobservable inputs and impacts to fair value from sensitivity of these inputs to changes must
be disclosed. Lastly, the level of fair value hierarchy used to estimate fair value of financial instruments not accounted for
at fair value on the balance sheet (such as loans receivable and deposits) must be disclosed. These new disclosures were adopted
during the quarter ended March 31, 2012 and did not have a significant impact to PSB financial reporting or operations.
FASB ASC Topic 310,
“Receivables.”
New
authoritative accounting guidance issued in July 2010 under ASC Topic 310, “Receivables,” required extensive new disclosures
surrounding the allowance for loan losses although it did not change any credit loss recognition or measurement rules. The new
rules require disclosures to include a breakdown of allowance for loan loss activity by portfolio segment as well as problem loan
disclosures by detailed class of loan. In addition, disclosures on internal credit grading metrics and information on impaired,
nonaccrual, and restructured loans are also required. The period-end disclosures were effective for financial periods ending December
31, 2010 but deferred presentation of loan loss allowance by loan portfolio segment until the quarter ended March 31, 2011. PSB
adopted the rules for loan loss allowance disclosures by loan segment effective March 31, 2011.
NOTE 15 –
|
FUTURE ACCOUNTING CHANGES
|
FASB ASC Topic 210,
“Balance Sheet.”
In
December 2011, new authoritative accounting guidance concerning disclosure of information about offsetting and related arrangements
associated with derivative instruments was issued. New requirements will require additional disclosures associated with offsetting
and collateral arrangements with derivative instruments to enable users of PSB’s financial statements to understand the effect
of those arrangements on its financial position. These new disclosures are effective during the quarter ended March 31, 2013 and
are not expected to have significant impact to PSB’s financial results or operations upon adoption.
NOTE 16 –
|
SUBSEQUENT EVENTS
|
Management has reviewed PSB’s operations for potential disclosure
of information or financial statement impacts related to events occurring after June 30, 2012 but prior to the release of these
financial statements. Based on the results of this review, no subsequent event disclosures or financial statement impacts to the
recently completed quarter are required as of the release date.
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Management’s discussion and analysis (“MD&A”)
reviews significant factors with respect to our financial condition as of June 30, 2012 compared to December 31, 2011 and results
of our operations for the three months and six months ended June 30, 2012 compared to the results of operations for the three months
and six months ended June 30, 2011. The following MD&A concerning our operations is intended to satisfy three principal objectives:
|
•
|
Provide a narrative explanation of our financial statements that enables investors to see the company through the eyes of management.
|
|
•
|
Enhance the overall financial disclosure and provide the context within which our financial information should be analyzed.
|
|
•
|
Provide information about the quality of, and potential variability of, our earnings and cash flow, so that investors can ascertain
the likelihood that past performance is, or is not, indicative of future performance.
|
Management’s discussion and analysis, like other portions
of this Quarterly Report on Form 10-Q, includes forward-looking statements that are provided to assist in the understanding of
anticipated future financial performance. However, our anticipated future financial performance involves risks and uncertainties
that may cause actual results to differ materially from those described in our forward-looking statements. A cautionary statement
regarding forward-looking statements is set forth under the caption “Forward-Looking Statements” in Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2011, and, from time to time, in our other filings with the Securities
Exchange Commission. We do not intend to update forward-looking statements. This discussion and analysis should be considered in
light of that cautionary statement. Additional risk factors relating to an investment in our common stock are also described under
Item 1A of the 2011 Annual Report on Form 10-K.
This discussion should be read in conjunction with the consolidated
financial statements, notes, tables, and the selected financial data presented elsewhere in this report. All figures are in thousands,
except per share data and per employee data.
EXECUTIVE OVERVIEW
Results of Operations
June 2012 quarterly earnings were $1,918, or $1.15 per diluted share,
compared to $1,226, or $.74 per diluted share during the June 2011 quarter. Year to date earnings for the six months ended June
30, 2012 were $3,098, or $1.86 per diluted share, compared to $2,511, or $1.51 per diluted share during the six months ended June
30, 2011. The June 2012 quarter included a special non-recurring gain on bargain purchase of Marathon State Bank (“Marathon”)
of $515 (after tax impacts of $336), which increased June 2012 quarterly and year to date earnings by $.31 per share. Separate
from the bargain purchase, we also incurred $75 of merger expenses (after tax benefits) during the June 2012 quarter (which decreased
net income by $.05 per share) after $117 of merger expenses (after tax benefits) during the March 2012 quarter ($.07 per share).
Excluding the special gain on bargain purchase and related merger expenses, diluted earnings per share would have been $.89 and
$.74 during the quarters ended June 30, 2012 and 2011, respectively. Similarly, diluted earnings per share would have been $1.67
and $1.51, during the six months ended June 30, 2012 and 2011, respectively.
Separate from the merger related items, increased earnings were
propelled by a decrease in credit costs, defined as the provision for loan losses plus loss on foreclosed assets, which offset
an increase in operating expenses. Credit costs totaled $169 during the June 2012 quarter and $708 during the June 2011 quarter,
a decrease of $539, or 76%. Similarly, these expenses totaled $562 during the six months ended June 30, 2012 and $1,363 during
the six months ended June 30, 2011, a decrease of $801, or 59%. Considered before credit costs, income from continuing operations
would have been $1,580 and $1,655 during the quarter ended June 30, 2012 and 2011, respectively. Similarly, income from continuing
operations would have been $3,116 and $3,337 during the six months ended June 30, 2012 and 2011, respectively. Future quarterly
period net income growth is likely dependent on declining credit costs as net interest margin will be pressured to decline and
operating costs remain at similar levels.
During the remainder of 2012, PSB expects to incur substantial
additional merger costs up to $600 before income tax benefits related to the data conversion of Marathon customer information.
While a portion of the cost is expected to be capitalized as premises and equipment, the majority of the cost will be recorded
as additional expense. Integration costs may also include a loss on disposal of the existing Peoples Marathon branch location
later in 2012 if market and sale conditions for the real estate decline. The remaining premises and equipment investment in the
Peoples’ Marathon branch is approximately $190. Integration of Peoples’ existing Marathon branch with Marathon State
Bank later in 2012 is expected to generate annual run-rate expense savings of approximately $250 to be fully phased in by the
end of 2013. Marathon State Bank will become a branch of Peoples State Bank later in 2012. During all of 2012, our acquisition
of Marathon is expected to increase 2012 earnings by 0% to 5%, net of all merger related items including the June 2012 gain on
bargain purchase and data conversion expenses.
Total nonperforming assets of $17,360 at June 30, 2012 decreased
$523, or 2.9%, since December 31, 2011 due to a decrease in restructuring of troubled debt maintained on accrual status and a decrease
in foreclosed assets, totaling $656. Total nonperforming assets were 2.45% and 2.87% of total assets at June 30, 2012 and December
31, 2011, respectively. At June 30, 2012, the allowance for loan losses was $7,648, or 1.61% of total loans (55% of nonperforming
loans), compared to $7,941, or 1.78% of total loans (56% of nonperforming loans) at December 31, 2011. Restructured loans maintained
on accrual status and performing according to terms were 34% and 35% of total nonperforming assets at June 30, 2012 and December
31, 2011, respectively. Looking ahead, we continue to face the likelihood of restructuring certain problem commercial related loans
to minimize potential credit losses, which may increase nonperforming assets in future quarters even if restructured loans perform
according to their new terms.
Liquidity
Total assets were $709,024 at June 30, 2012, up $86,157, or 13.8%
compared to $622,867 at December 31, 2011. The increase in total assets was due to the acquisition of Marathon State Bank during
the June 2012 quarter, which added $107,364 of total assets at the acquisition date. However, total asset growth since December
31, 2011 was also impacted by a $20,464 decline in cash and cash equivalents held by our Peoples State Bank subsidiary during the
six months ended June 30, 2012 caused by a $20,007 decline in total deposits, primarily seasonal deposits, including municipal
and commercial demand deposits. Wholesale funding, including brokered and national certificates of deposits, FHLB advances, and
other borrowings, were $142,642 at June 30, 2012, compared to $144,381 at December 31, 2011, down $1,739, or 1.2%. Wholesale funding
was 20.1% of total assets at June 30, 2012 compared to 23.2% of total assets at December 31, 2011.
We regularly maintain access to wholesale markets to fund loan originations
and manage local depositor needs. At June 30, 2012, unused (but available) wholesale funding was approximately $254 million, or
36% of total assets, compared to $238 million, or 38% of total assets at December 31, 2011. Unused wholesale funding sources
include federal funds purchased lines of credit, Federal Reserve Discount Window advances, FHLB advances, brokered and national
certificates of deposit, and a holding company correspondent bank line of credit. Our ability to borrow funds on a short-term basis
from the Federal Reserve Discount Window is an important part of our liquidity analysis and represented 34% and 42% of unused but
available liquidity at June 30, 2012 and December 31, 2011, respectively.
Capital Resources
During the six months ended June 30, 2012, stockholders’ equity
increased $2,270 primarily from $2,483 in retained net income net of $615 of cash dividends paid. Net book value per share at June
30, 2012 was $31.64 compared to $30.44 at December 31, 2011. Net book value and other references to per share information reflect
the impact of PSB’s 5% dividend paid in common stock declared June 19, 2012 and paid July 30, 2012. Common stockholders’
equity was 7.42% of total assets at June 30, 2012 compared to 8.09% at December 31, 2011. The stockholders’ equity ratio
declined since December 31, 2011 due to the cash purchase of Marathon which increased total assets without a new issue of common
stock.
For regulatory purposes, the $7 million 8% senior subordinated notes
maturing July 2019 and $7.7 million junior subordinated debentures maturing September 2035 reflected as debt on the Consolidated
Balance Sheet are reclassified as Tier 2 and Tier 1 regulatory equity capital, respectively. We were considered “well capitalized”
under banking regulations at June 30, 2012 with a leverage capital ratio of 9.18% and a total risk adjusted capital ratio of 14.53%
compared to a leverage ratio of 9.27% and a total risk adjusted capital ratio of 14.99% at December 31, 2011. As with the book
stockholders’ equity ratio, regulatory capital ratios declined as a result of the increased assets recorded with the Marathon
acquisition. PSB retains the ability to prepay its $7 million in 8% senior subordinated notes on a monthly basis beginning
July 1, 2012. After considering total regulatory capital needs for loan growth, regulatory changes impacting capital minimums,
and merger and acquisition activities, we may prepay some or all of the 8% notes during 2012. Repayment of these debentures in
their entirety would reduce interest expense by approximately $140 per quarter.
Approximately 20% of our total regulatory capital at June 30, 2012
is comprised of debt instruments including junior and senior debentures and notes which, unlike common stock, require quarterly
payments of interest aggregating $223 (before tax benefits). Therefore, although no current plans exist, future capital needs
during the next several years would likely be met by issuance of our authorized common or preferred stock as needed. Due to relatively
high cost of capital options, the cash purchase acquisition of Marathon State Bank, and potential future merger and acquisition
activities requiring capital, we do not expect to buy back significant treasury stock shares during 2012, although we do expect
to continue to pay our traditional semi-annual cash dividend assuming continued profitable operations and projections of adequate
future capital levels for growth.
During the June 2012 quarter, the banking regulatory agencies, including
the Board of Governors of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), issued two new regulatory capital
proposals that are likely to have a significant impact on our regulatory capital needs if finalized. Among other significant changes,
the proposal would phase out our current $7.7 million of junior subordinated debentures from Tier 1 capital and move them to Tier
2 capital classification over a 10 year period beginning in 2013. This change would reduce our leverage capital ratio and our Tier
1 risk adjusted capital ratio. Separately, proposed changes to the calculation of risk weighted assets would increase the denominator
of risk adjusted capital ratios, including the Tier 1 capital and Tier 2 (“Total”) capital ratio, which would reduce
our risk adjusted capital ratios. The regulatory agencies have estimated that industry wide total risk adjusted assets are likely
to increase an average of 20% due to the proposed changes. Lastly, under the proposal, minimum capital ratios to be considered
well capitalized, including the impact of the proposed “capital buffer,” would be 6.50% for the leverage ratio, 8.50%
for the Tier 1 to risk adjusted capital ratio, and 10.50% for the total risk adjusted capital ratio, up from 5.00%, 6.00%, and
10.00%, respectively.
Following the passage of the Dodd-Frank Wall Street Reform Act of
2010, which grandfathered existing junior subordinated debentures as Tier 1 capital for banks with less than $15 billion in total
assets, the community banking industry had believed the proposed disallowance of junior subordinated debentures would apply only
to large international banks, and the extent of the Federal Reserve’s recent actions was unexpected. We continue to internally
review the timing and extent of the proposed changes on our regulatory capital position. As a reference for this discussion, assuming
the immediate loss of junior subordinated debentures as Tier 1 capital and a 20% increase in total risk adjusted assets, our pro
forma June 30, 2012 leverage ratio would have been 7.17% instead of 9.18%, our Tier 1 risk adjusted capital ratio would have been
8.61% instead of 11.85%, and our total risk adjusted capital ratio would have been 12.31% instead of 14.53%.
Off Balance –Sheet Arrangements and Contractual Obligations
Our largest volume off-balance sheet activity involves our servicing
of payments and related collection activities on approximately $258 million of residential 1 to 4 family mortgages sold to FHLB
and FNMA at June 30, 2012. At June 30, 2012, we provided a credit enhancement against FHLB loss under five separate “master
commitments” associated with 16% of the total serviced principal (down from 20% at December 31, 2011), up to a maximum guarantee
of $1.9 million in the aggregate. However, we would incur such loss only if the FHLB first lost $1.9 million on this remaining
loan pool of approximately $42 million as part of their “First Loss Account” (discussed here in the aggregate, although
the guarantee is applied on an individual master commitment basis). Since inception of our guarantees to the FHLB beginning in
2000, only $0.3 million of $425 million of loans originated with guarantees have incurred a principal loss, all of which has been
borne by the FHLB within their First Loss Account. No loans have been sold by us to the FHLB with our Credit Enhancement Guarantee
of principal since October 2008 and we do not intend to originate future loans with the guarantee.
We also utilize interest rate swaps to hedge costs associated with
certain variable rate debt (notional amount of $7,500 at June 30, 2012) and as a tool for our customers to obtain long-term fixed
rate commercial loan financing (offsetting notional amounts of $15,298). These arrangements and related off balance sheet commitments
are outlined in Note 8 in the Notes to Consolidated Financial Statements. Aggregate net unrealized losses on fair value of all
interest rate swaps were $678 and $576 at June 30, 2012 and December 31, 2011, respectively before tax benefits.
We provide various commitments to extend credit for both commercial
and consumer purposes totaling approximately $94 million at June 30, 2012 compared to $99 million at December 31, 2011. These lending
commitments are a traditional and customary part of lending operations and many of the commitments are expected to expire without
being drawn upon.
RESULTS OF OPERATIONS
Earnings
Quarter and six months ended June 30, 2012 compared to June
30, 2011
June 2012 quarterly earnings were $1,918, or $1.15 per diluted share
compared to $1,226, or $.74 per diluted share during June 2011, an increase of $692, or $.41 per share, up 55.4%. The increase
was due primarily to a $515 gain on bargain purchase of Marathon State Bank (net of $336 in income tax expense), or $.31 per share,
during the June 2012 quarter. Refer to Note 2 of the Notes to Consolidated Financial Statements for the calculation of the bargain
purchase and the assets and liabilities acquired with the Marathon purchase. Year to date earnings for the six months ended June
30, 2012 were $3,098, or $1.86 per diluted share compared to $2,511, or $1.51 per diluted share during 2011, an increase of $587,
or $.35 per share, up 23.2%. Excluding the gain on bargain purchase and merger related expenses, June 2012 quarterly earnings were
$.89 per share compared to $.74 per share in June 2011, up 20.2%. Similarly, earnings for the six months ended June 30, 2012
were $1.66 per share compared to $1.51 per share in June 2011, up 9.9%. Increased earnings before the special merger impacts were
due to lower credit related costs, defined as provision for loan losses and loss on foreclosed assets, which offset increases in
other operating expenses during 2012 compared to 2011. Table 1 below outlines the merger related adjustments and the impact of
declining credit costs by comparing net income from continuing operations before credit costs to net income as reported.
Table 1: Impact of Special Income and Expense Items on Continuing
Operations (a non-GAAP measure)
|
|
Quarter ended June 30,
|
|
Six months ended June 30,
|
($000s, net of income tax effects)
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations before credit costs
|
|
$
|
1,580
|
|
|
$
|
1,655
|
|
|
$
|
3,116
|
|
|
$
|
3,337
|
|
Less: Credit costs
|
|
|
(102
|
)
|
|
|
(429
|
)
|
|
|
(341
|
)
|
|
|
(826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations after credit costs
|
|
|
1,478
|
|
|
|
1,226
|
|
|
|
2,775
|
|
|
|
2,511
|
|
Add: Gain on bargain purchase
|
|
|
515
|
|
|
|
—
|
|
|
|
515
|
|
|
|
—
|
|
Less: Merger related expenses
|
|
|
(75
|
)
|
|
|
—
|
|
|
|
(192
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,918
|
|
|
$
|
1,226
|
|
|
$
|
3,098
|
|
|
$
|
2,511
|
|
|
|
Quarter ended June 30,
|
|
Six months ended June 30,
|
(per diluted share, net of income tax effects)
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations before credit costs
|
|
$
|
0.95
|
|
|
$
|
1.00
|
|
|
$
|
1.87
|
|
|
$
|
2.01
|
|
Less: Credit costs
|
|
|
(0.06
|
)
|
|
|
(0.26
|
)
|
|
|
(0.21
|
)
|
|
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations after credit costs
|
|
|
0.89
|
|
|
|
0.74
|
|
|
|
1.66
|
|
|
|
1.51
|
|
Add: Gain on bargain purchase
|
|
|
0.31
|
|
|
|
—
|
|
|
|
0.31
|
|
|
|
—
|
|
Less: Merger related expenses
|
|
|
(0.05
|
)
|
|
|
—
|
|
|
|
(0.11
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.15
|
|
|
$
|
0.74
|
|
|
$
|
1.86
|
|
|
$
|
1.51
|
|
Return on average assets was 1.21% (.93% before the Marathon merger
related items) and .82% during the quarters ended June 30, 2012 and 2011, respectively. Return on average stockholders’
equity was 14.60% (11.22% before the merger items) and 10.04% during the quarters ended June 30, 2012 and 2011, respectively.
Return on average assets was 1.00% (.89% before the Marathon merger
related items) and .83% during the six months ended June 30, 2012 and 2011, respectively. Return on average stockholders’
equity was 11.99% (10.74% before the merger items) and 10.50% during the six months ended June 30, 2012 and 2011, respectively.
The following Table 2 presents PSB’s consolidated quarterly
summary financial data.
Table 2: Financial Summary
(dollars in thousands, except per share data)
|
|
Quarter ended
|
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
|
2012
|
|
2012
|
|
2012
|
|
2011
|
|
2011
|
Earnings and dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
4,880
|
|
|
$
|
4,816
|
|
|
$
|
5,060
|
|
|
$
|
4,867
|
|
|
$
|
4,866
|
|
Provision for loan losses
|
|
$
|
165
|
|
|
$
|
160
|
|
|
$
|
240
|
|
|
$
|
360
|
|
|
$
|
430
|
|
Other noninterest income
|
|
$
|
2,323
|
|
|
$
|
1,242
|
|
|
$
|
1,376
|
|
|
$
|
1,367
|
|
|
$
|
1,197
|
|
Other noninterest expense
|
|
$
|
4,064
|
|
|
$
|
4,119
|
|
|
$
|
4,121
|
|
|
$
|
3,835
|
|
|
$
|
3,869
|
|
Net income
|
|
$
|
1,918
|
|
|
$
|
1,180
|
|
|
$
|
1,400
|
|
|
$
|
1,394
|
|
|
$
|
1,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
(3)
|
|
$
|
1.15
|
|
|
$
|
0.70
|
|
|
$
|
0.85
|
|
|
$
|
0.85
|
|
|
$
|
0.74
|
|
Diluted earnings per share
(3)
|
|
$
|
1.15
|
|
|
$
|
0.70
|
|
|
$
|
0.85
|
|
|
$
|
0.84
|
|
|
$
|
0.74
|
|
Dividends declared per share
(3)
|
|
$
|
0.36
|
|
|
$
|
—
|
|
|
$
|
0.35
|
|
|
$
|
—
|
|
|
$
|
0.35
|
|
Net book value per share
|
|
$
|
31.64
|
|
|
$
|
30.96
|
|
|
$
|
30.44
|
|
|
$
|
30.10
|
|
|
$
|
29.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semi-annual dividend payout ratio
|
|
|
19.44
|
%
|
|
|
n/a
|
|
|
|
20.86
|
%
|
|
|
n/a
|
|
|
|
23.33
|
%
|
Average common shares outstanding
|
|
|
1,663,410
|
|
|
|
1,663,138
|
|
|
|
1,654,111
|
|
|
|
1,653,179
|
|
|
|
1,652,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet – average balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net of allowances for loss
|
|
$
|
447,886
|
|
|
$
|
436,907
|
|
|
$
|
440,737
|
|
|
$
|
434,031
|
|
|
$
|
437,314
|
|
Assets
|
|
$
|
639,404
|
|
|
$
|
607,917
|
|
|
$
|
604,216
|
|
|
$
|
602,088
|
|
|
$
|
601,978
|
|
Deposits
|
|
$
|
493,349
|
|
|
$
|
466,121
|
|
|
$
|
457,916
|
|
|
$
|
452,225
|
|
|
$
|
451,214
|
|
Stockholders’ equity
|
|
$
|
52,835
|
|
|
$
|
51,016
|
|
|
$
|
50,910
|
|
|
$
|
49,369
|
|
|
$
|
48,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
(1)
|
|
|
1.21
|
%
|
|
|
0.78
|
%
|
|
|
0.92
|
%
|
|
|
0.92
|
%
|
|
|
0.82
|
%
|
Return on average stockholders’ equity
(1)
|
|
|
14.60
|
%
|
|
|
9.30
|
%
|
|
|
10.91
|
%
|
|
|
11.20
|
%
|
|
|
10.04
|
%
|
Average stockholders’ equity less accumulated
other comprehensive income (loss) to average assets
|
|
|
8.01
|
%
|
|
|
8.10
|
%
|
|
|
8.11
|
%
|
|
|
7.84
|
%
|
|
|
7.75
|
%
|
Net loan charge-offs to average loans
(1)
|
|
|
0.24
|
%
|
|
|
0.31
|
%
|
|
|
0.28
|
%
|
|
|
0.14
|
%
|
|
|
-0.01
|
%
|
Nonperforming loans to gross loans
|
|
|
2.95
|
%
|
|
|
3.38
|
%
|
|
|
3.19
|
%
|
|
|
3.26
|
%
|
|
|
3.21
|
%
|
Allowance for loan losses to gross loans
|
|
|
1.61
|
%
|
|
|
1.75
|
%
|
|
|
1.78
|
%
|
|
|
1.82
|
%
|
|
|
1.75
|
%
|
Nonperforming assets to tangible equity plus the
allowance for loan losses
(4)
|
|
|
29.34
|
%
|
|
|
32.44
|
%
|
|
|
31.32
|
%
|
|
|
32.82
|
%
|
|
|
35.03
|
%
|
Net interest rate margin
(1)(2)
|
|
|
3.42
|
%
|
|
|
3.50
|
%
|
|
|
3.64
|
%
|
|
|
3.53
|
%
|
|
|
3.57
|
%
|
Net interest rate spread
(1)(2)
|
|
|
3.20
|
%
|
|
|
3.27
|
%
|
|
|
3.38
|
%
|
|
|
3.28
|
%
|
|
|
3.34
|
%
|
Service fee revenue as a percent of average demand
deposits
(1)
|
|
|
2.41
|
%
|
|
|
2.66
|
%
|
|
|
2.49
|
%
|
|
|
2.95
|
%
|
|
|
3.05
|
%
|
Noninterest income as a percent of gross revenue
|
|
|
25.81
|
%
|
|
|
15.65
|
%
|
|
|
16.31
|
%
|
|
|
16.15
|
%
|
|
|
14.40
|
%
|
Efficiency ratio
(2)
|
|
|
54.85
|
%
|
|
|
66.04
|
%
|
|
|
62.34
|
%
|
|
|
59.75
|
%
|
|
|
61.92
|
%
|
Noninterest expenses to average assets
(1)
|
|
|
2.56
|
%
|
|
|
2.73
|
%
|
|
|
2.71
|
%
|
|
|
2.53
|
%
|
|
|
2.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
26.67
|
|
|
$
|
24.76
|
|
|
$
|
23.57
|
|
|
$
|
23.81
|
|
|
$
|
24.76
|
|
Low
|
|
$
|
21.81
|
|
|
$
|
21.86
|
|
|
$
|
22.43
|
|
|
$
|
22.05
|
|
|
$
|
22.86
|
|
Last trade value at quarter-end
|
|
$
|
25.24
|
|
|
$
|
24.76
|
|
|
$
|
22.48
|
|
|
$
|
22.62
|
|
|
$
|
23.10
|
|
(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 intangible
assets and any preferred stock capital elements.
Balance Sheet Changes and Analysis
At June 30, 2012, total assets were $709,024, compared to $606,788
at March 31, 2012, and $622,867 at December 31, 2011, an increase of $102,236 (16.8%) and $86,157 (13.8%), respectively. The increase
in total assets was due to the acquisition of Marathon State Bank during the June 2012 quarter, which added $107,364 in total assets
at the acquisition date. Changes in assets during the three months and six months ended June 30, 2012 consisted of:
Table 3: Change in Balance Sheet Assets Composition
|
|
Three months ended
|
|
Six months ended
|
|
Increase (decrease) in assets ($000s)
|
|
June 30, 2012
|
|
June 30, 2012
|
|
|
|
|
$
|
|
|
|
%
|
|
|
|
$
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
51,371
|
|
|
|
45.6
|
%
|
|
$
|
55,331
|
|
|
|
50.9
|
%
|
Cash and cash equivalents
|
|
|
20,035
|
|
|
|
101.6
|
%
|
|
|
1,546
|
|
|
|
4.0
|
%
|
Residential real estate mortgage and home equity loans
|
|
|
18,974
|
|
|
|
16.6
|
%
|
|
|
20,244
|
|
|
|
18.0
|
%
|
Commercial, industrial and agricultural loans
|
|
|
7,272
|
|
|
|
5.6
|
%
|
|
|
10,634
|
|
|
|
8.4
|
%
|
Other assets (various categories)
|
|
|
3,032
|
|
|
|
15.9
|
%
|
|
|
2,317
|
|
|
|
11.7
|
%
|
Commercial real estate mortgage loans
|
|
|
1,918
|
|
|
|
1.0
|
%
|
|
|
(3,820
|
)
|
|
|
-1.9
|
%
|
Bank-owned life insurance
|
|
|
101
|
|
|
|
0.9
|
%
|
|
|
202
|
|
|
|
1.8
|
%
|
Foreclosed assets
|
|
|
(467
|
)
|
|
|
-15.0
|
%
|
|
|
(297
|
)
|
|
|
-10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in assets
|
|
$
|
102,236
|
|
|
|
16.8
|
%
|
|
$
|
86,157
|
|
|
|
13.8
|
%
|
Marathon’s largest asset classes were agency and municipal
investment securities ($50,547 at the acquisition date), loans receivable ($23,760), and cash and due from banks ($20,392) which
made up 88% of total fair value of assets acquired and contributed to the increases categorized in Table 3 for the three months
ended June 30, 2012.
Changes in net assets during the three months and six months ended
June 30, 2012 impacted funding sources as follows:
Table 4: Change in Balance Sheet Liabilities and Equity Composition
Increase (decrease) in liabilities and
equity ($000s)
|
|
Three months ended
June 30, 2012
|
|
Six months ended
June 30, 2012
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Core deposits (including MMDA)
|
|
$
|
78,883
|
|
|
|
22.4
|
%
|
|
$
|
69,498
|
|
|
|
19.3
|
%
|
Retail certificates of deposit > $100
|
|
|
11,464
|
|
|
|
24.9
|
%
|
|
|
11,534
|
|
|
|
25.0
|
%
|
Other liabilities and debt (various categories)
|
|
|
6,063
|
|
|
|
30.8
|
%
|
|
|
4,594
|
|
|
|
21.7
|
%
|
FHLB advances
|
|
|
5,000
|
|
|
|
10.0
|
%
|
|
|
5,000
|
|
|
|
10.0
|
%
|
Stockholders’ equity
|
|
|
1,130
|
|
|
|
2.2
|
%
|
|
|
2,270
|
|
|
|
4.5
|
%
|
Wholesale and national deposits
|
|
|
554
|
|
|
|
0.8
|
%
|
|
|
(5,134
|
)
|
|
|
-6.9
|
%
|
Other borrowings
|
|
|
(858
|
)
|
|
|
-4.5
|
%
|
|
|
(1,605
|
)
|
|
|
-8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in liabilities and stockholders’ equity
|
|
$
|
102,236
|
|
|
|
16.8
|
%
|
|
$
|
86,157
|
|
|
|
13.8
|
%
|
Marathon contributed $100,866 of deposits on the acquisition date,
which included $1,559 of brokered certificates of deposit. These new deposits contributed to the increase in core deposits and
certificates seen during the three months ended June 30, 2012.
Loans Receivable and Credit Quality
Table 5: Period-End Loan Composition
|
|
June 30,
|
|
June 30,
|
|
December 31, 2011
|
|
|
Dollars
|
|
Dollars
|
|
Percentage of total
|
|
|
|
Percentage
|
(dollars in thousands)
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Dollars
|
|
of total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial and agricultural
|
|
$
|
137,825
|
|
|
$
|
130,747
|
|
|
|
29.0
|
%
|
|
|
29.3
|
%
|
|
$
|
127,191
|
|
|
|
28.5
|
%
|
Commercial real estate mortgage
|
|
|
198,078
|
|
|
|
199,484
|
|
|
|
41.7
|
%
|
|
|
44.8
|
%
|
|
|
201,898
|
|
|
|
45.4
|
%
|
Residential real estate mortgage
|
|
|
108,901
|
|
|
|
86,610
|
|
|
|
23.0
|
%
|
|
|
19.4
|
%
|
|
|
89,484
|
|
|
|
20.1
|
%
|
Residential real estate loans held for sale
|
|
|
452
|
|
|
|
319
|
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
39
|
|
|
|
0.0
|
%
|
Consumer home equity
|
|
|
23,607
|
|
|
|
24,976
|
|
|
|
5.0
|
%
|
|
|
5.6
|
%
|
|
|
23,193
|
|
|
|
5.2
|
%
|
Consumer and installment
|
|
|
5,567
|
|
|
|
3,745
|
|
|
|
1.2
|
%
|
|
|
0.8
|
%
|
|
|
3,732
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
474,430
|
|
|
$
|
445,881
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
445,537
|
|
|
|
100.0
|
%
|
Loans held for investment continue to consist primarily of commercial
related loans, including commercial and industrial and commercial real estate loans, representing 71% of total loans at June 30,
2012 and 74% of total loans at December 31, 2011. Loans for the purpose of construction, land development, and other land loans
(including residential construction and development) were $34,421 at June 30, 2012 and $33,497 at December 31, 2011 (including
loan principal in process of disbursement) and represented just 7% of total gross loans. Our markets have traditionally supplied
opportunities for loan growth and loan participations purchased were just $12,464 and $12,196 at June 30, 2012 and December 31,
2011, respectively. The majority of loan participations purchased are arrangements with other community banks in Wisconsin that
work together to meet the credit needs of each other’s largest credit customers and are underwritten in the same manner as
loans originated solely for our own portfolio. At June 30, 2012, only $554 of loan participations were purchased from sources other
than traditional banks with substantial operations in Wisconsin.
Since 2010, local loan growth opportunities have been limited resulting
in sporadic net loan growth and periodic quarter to quarter loan declines. Competition from larger banks in our markets is becoming
stronger as such banks with higher capital levels and substantial deposit growth look to lending for higher yielding assets as
investment security returns remain very low. Banks including BMO Harris Bank (the acquirer of M&I Bank and the bank having
the largest deposit market share in our markets), U.S. Bank, Associated Bank, and Chase Bank appear to have relaxed credit terms
for high credit quality borrowers and lowered lending interest rate spreads in an effort to aggressively increase their loan market
share. We expect strong competition to continue through 2012 which could impact the pace of 2012 loan growth and could negatively
impact net interest margin and net interest income. We could experience a small decrease in our loans outstanding during the remainder
of 2012 compared to loans receivable held at June 30, 2012.
To support loan growth and invest deposits previously held in low
yielding overnight funds, we maintained a temporary program to originate 15-year fully amortizing fixed rate residential first
mortgage loans and retain those loans on our balance sheet rather than selling them to secondary market investors as is our normal
practice. The loans were fully underwritten and conforming to secondary market standards. However, if the property was located
in a rural area in which an adequate number of recent comparable sales were not available, some of the mortgages may not have been
underwritten with a qualifying secondary market appraisal, although a current appraisal was obtained on each loan. The program
originated approximately $10.1 million in residential mortgage loans at a 3.17% weighted average interest rate during the six months
ended June 30, 2012 which contributed to the increase in residential mortgage loans in Table 5 above. If commercial related loan
growth does not reinvest liquidity obtained from the Marathon State Bank acquisition, this 15 year fixed rate residential mortgage
origination program is likely to be utilized in a similar manner during the remainder of 2012 to support loan and net interest
income growth.
The loan portfolio is our primary asset subject to credit risk.
Our process for monitoring credit risk 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. Nonaccrual loans and restructured loans maintained on accrual status
remain classified as nonperforming loans until the uncertainty surrounding the credit is eliminated. In general, uncertainty surrounding
the credit is eliminated when the borrower has displayed a history of regular loan payments using a market interest rate that is
expected to continue as if a typical performing loan. Some borrowers continue to make loan payments while maintained on non-accrual
status. We apply all payments received on nonaccrual loans to principal until the loan is returned to accrual status or repaid.
Total nonperforming assets as a percentage of total tangible common equity including the allowance for loan losses was 29.34%,
31.32%, and 35.03% at June 30, 2012, December 31, 2011, and June 30, 2011, respectively (refer to Table 24). For the purpose of
this measurement, tangible common equity is equal to total common stockholders’ equity less mortgage servicing right assets.
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), (2) investment securities in default as to principal
or interest, and (3) foreclosed assets.
Table 6: Nonperforming Assets
|
|
June 30,
|
|
December 31,
|
(dollars in thousands)
|
|
2012
|
|
2011
|
|
2011
|
|
|
|
|
|
|
|
Nonaccrual loans (excluding restructured loans)
|
|
$
|
5,760
|
|
|
$
|
5,928
|
|
|
$
|
5,893
|
|
Nonaccrual restructured loans
|
|
|
2,347
|
|
|
|
1,905
|
|
|
|
2,081
|
|
Restructured loans not on nonaccrual
|
|
|
5,861
|
|
|
|
6,456
|
|
|
|
6,220
|
|
Accruing loans past due 90 days or more
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
13,968
|
|
|
|
14,289
|
|
|
|
14,194
|
|
Nonaccrual trust preferred investment security
|
|
|
750
|
|
|
|
750
|
|
|
|
750
|
|
Foreclosed assets
|
|
|
2,642
|
|
|
|
4,339
|
|
|
|
2,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
17,360
|
|
|
$
|
19,378
|
|
|
$
|
17,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a % of gross loans receivable
|
|
|
2.95
|
%
|
|
|
3.21
|
%
|
|
|
3.19
|
%
|
Total nonperforming assets as a % of total assets
|
|
|
2.45
|
%
|
|
|
3.22
|
%
|
|
|
2.87
|
%
|
Total nonperforming assets decreased $523, or 2.9% since December
31, 2011 from a $359 decrease in restructured loans maintained on accrual status and a $297 decrease in foreclosed assets. In certain
situations, particularly for loans supported by collateral with depressed valuations or with borrowers undergoing what could be
temporary financial difficulties, we will consider restructuring existing debt in an attempt to protect as much of our loan principal
as possible. Typical restructured terms will convert a loan from amortizing payments to interest only payments, or lower the interest
rate to a level less than market rates for the borrower’s risk profile. Existing restructurings have not forgiven borrower
loan principal and have been associated with commercial related loans, not residential mortgage loans. At June 30, 2012, 71% of
restructured loan principal shown in the table above remained on accrual status.
While we believe the most significant declines in general credit
quality and the economy in our local markets have occurred, some borrowers continue to manage fragile cash flows and debt servicing
ability as the economy has yet to sustain a meaningful recovery. Such conditions are seen in the level of problem borrowers with
restructured loan terms. The longer significant recovery is delayed, the more difficult it will be for some borrowers to continue
scheduled debt payments as previously unencumbered collateral is pledged for new working capital and balance sheet equity is drawn
down, potentially increasing future provisions for loan losses. In light of these conditions, we expect to see an increase in
borrowers requiring restructured loan terms which would increase our level of nonperforming loans. Foreclosed assets may also
increase during the next several quarters as we work through ongoing collection and foreclosure actions. A continued slow local
economy impacts the value of collateral and foreclosed assets, potentially increasing losses on foreclosed borrowers and properties
during the coming quarters.
At June 30, 2012, all nonperforming assets aggregating to $500 or
more measured by gross principal outstanding per credit relationship are summarized in the following table and represented 43%
of all nonperforming assets compared to 52% of nonperforming assets at December 31, 2011. In the table, loans presented as “Accrual
TDR” represent troubled debt restructured loans maintained on accrual status.
Table 7: Largest Nonperforming Assets at June 30, 2012 ($000s)
Collateral Description
|
Asset Type
|
|
|
Gross Principal
|
|
|
|
Specific Reserves
|
|
|
|
|
|
|
|
|
|
|
|
Northern Wisconsin hotel
|
Accrual TDR
|
|
$
|
1,764
|
|
|
$
|
—
|
|
Cranberry producing agricultural real estate
|
Accrual TDR
|
|
|
1,578
|
|
|
|
—
|
|
Vacation home/recreational properties (three)
|
Foreclosed
|
|
|
1,280
|
|
|
|
n/a
|
|
Owner occupied cabinetry contractor real estate and equipment
|
Accrual TDR
|
|
|
758
|
|
|
|
31
|
|
Johnson Financial Group (WI) Capital Trust III debentures
|
Nonaccrual
|
|
|
750
|
|
|
|
—
|
|
Owner occupied multi use, multi-tenant real estate
|
Accrual TDR
|
|
|
676
|
|
|
|
193
|
|
Owner occupied restaurant real estate and business assets
|
Nonaccrual
|
|
|
658
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
Total listed nonperforming assets
|
|
|
$
|
7,464
|
|
|
$
|
397
|
|
Total bank wide nonperforming assets
|
|
|
$
|
17,360
|
|
|
$
|
2,210
|
|
Listed assets as a percent of total nonperforming assets
|
|
|
|
43
|
%
|
|
|
18
|
%
|
No large nonperforming assets in excess of $500 were added to Table
7 during the June 2012 quarter. At March 31, 2012, we included a large nonperforming loan with $1,233 in outstanding principal
and $295 in specific reserves secured by multi-family rental apartment units and vacant land in Table 7 above. However, during
the June 2012 quarter, the majority of this troubled debt restructured loan maintained on accrual status was settled with the borrower
in which we received a payment of $833 on the sale of the property and recorded a $34 charge-off. We continue to have a $359 loan
receivable outstanding with the borrower on which $190 in specific reserves are maintained. Our settlement with the borrower decreased
our required specific reserves on the relationship by $71, net of the charge-off incurred.
During March 2011, we were informed by Johnson Financial Capital
Trust of its intent to defer payment of interest on its 7% trust preferred capital debentures. Johnson Financial Group is the holding
company for Johnson Bank, headquartered in Racine, Wisconsin. Our investment in the $750 debentures was placed on nonaccrual status
at March 31, 2011 and all accrued but uncollected interest was reversed against income. Our internal evaluation has determined
this investment is not other than temporarily impaired and no charge against net income for impairment has been recorded. During
the March 2012 quarter, Johnson Financial Group received a significant new capital injection from its shareholders and is expected
to return to profitability within the next several years. We expect to be repaid all interest due on the debentures in future years.
Total Johnson Financial Capital Trust interest not accrued totaled $79 at June 30, 2012. Similar bank holding company investments
held in our portfolio (identified by name of the operating bank subsidiary) include $800 par value to McFarland State Bank (Madison,
WI), and $500 par value to River Valley Bank (Wausau, WI). These other investments are supported by the continued profitable operations
and reasonable credit quality metrics represented within their portfolios and are expected to continue to remit scheduled quarterly
payments of interest.
In addition to nonperforming loans, we have classified some performing
loans as impaired loans under accounting standards due to heightened risk of nonperformance within the next year or other factors.
Impaired loans maintained on accrual status that have not been restructured are not reported as nonperforming loans. At June 30,
2012, all impaired but performing loans aggregating to $500 or more measured by gross principal outstanding per credit relationship
are summarized in the following table.
Table 8: Largest Performing, but Impaired Loans at June 30,
2012 ($000s)
Collateral Description
|
Asset Type
|
|
Gross Principal
|
|
Specific Reserves
|
|
|
|
|
|
|
|
Owner occupied cabinetry contractor real estate and equipment
|
Impaired
|
|
$
|
706
|
|
|
$
|
—
|
|
Owner occupied manufacturer real estate & equipment
|
Impaired
|
|
|
582
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total listed performing, but impaired loans
|
|
|
$
|
1,288
|
|
|
$
|
—
|
|
Total performing, but impaired loans
|
|
|
$
|
2,558
|
|
|
$
|
360
|
|
Listed assets as a % of total performing, but impaired loans
|
|
|
|
50
|
%
|
|
|
0
|
%
|
Provision for Loan Losses and Loss of Foreclosed Assets
We determine 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 management’s evaluation of the loan portfolio. It is our 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.
Our provision for loan losses was $165 in the June 2012 quarter
compared to $430 in the June 2011 quarter. The lower quarterly provision needed was due to a modest $2.1 million in June 2012 quarterly
net loan growth (excluding loans recorded at net fair value associated with the Marathon State Bank acquisition) and favorable
resolution of a large problem loan that reduced specific loan reserves discussed previously. In addition, quarterly loss on foreclosed
assets declined to $4 in June 2012 compared to $278 in June 2011 (which included a valuation write-down of $233 during 2011). Combined
credit costs totaled $169 during the June 2012 quarter and $708 during the June 2011 quarter. The decline in credit costs compared
to 2011 was an important driver of June 2012 quarterly increased earnings.
Year to date for the six months ended June 30, provision for loan
losses was $325 during 2012 and $790 during 2011. Loss on foreclosed assets was $237 during 2012 and $573 during 2011. Combined
credit costs were $562 during the six months ended June 30, 2012 compared to $1,363 during 2011, down 59%. Valuation write-downs
included as loss on foreclosed assets were $205 during 2012 and $457 during 2011. Refer to Note 5 in the Notes to Consolidated
Financial Statements for more information on foreclosed asset activity during the three months and six months ended June 30, 2012
and 2011.
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 internal credit quality assessments. We maintain our headquarters and one branch location in the
City of Wausau, Wisconsin, and maintain the majority of our deposits (including six of our nine locations, including Marathon State
Bank), and loan customers in Marathon County, Wisconsin. During the June 2012 quarter, the 7.1% unemployment rate in Marathon County
(not seasonally adjusted) declined from 8.2% at March 2012 but remained above the 6.5% measured during December 2011 due to
two separate large manufacturing employers who announced plant closures cutting approximately 1,000 Marathon County jobs during
the March 2012 quarter. The unemployment rate for all of Wisconsin (not seasonally adjusted) was 6.8% during May 2012. Despite
the increased local unemployment rate, the current 7.1% Marathon County rate compares favorably to national levels and is in line
with Wisconsin’s overall level. Outside of these plant closures in the paper and window industries, manufacturing and other
local economies are seeing slow but consistent improvement. Because of these and other factors, we expect credit costs during the
remainder of 2012 to continue to be slightly less than that seen during 2011. However, future provisions will be impacted by the
actual amount of impaired and other problem loans identified by internal procedures or regulatory agencies. In addition, fair value
of existing foreclosed assets continue to be reviewed in light of local market data and may be subject to a partial write-down
of value during the remainder of 2012.
Table 9: Allowance for Loan Losses
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30,
|
|
June 30,
|
(dollars in thousands)
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at beginning
|
|
$
|
7,755
|
|
|
$
|
7,377
|
|
|
$
|
7,941
|
|
|
$
|
7,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
165
|
|
|
|
430
|
|
|
|
325
|
|
|
|
790
|
|
Recoveries on loans previously charged-off
|
|
|
12
|
|
|
|
147
|
|
|
|
13
|
|
|
|
150
|
|
Loans charged off
|
|
|
(284
|
)
|
|
|
(137
|
)
|
|
|
(631
|
)
|
|
|
(1,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end
|
|
$
|
7,648
|
|
|
$
|
7,817
|
|
|
$
|
7,648
|
|
|
$
|
7,817
|
|
Net charge-offs of loan principal were $272 and $618 during the
quarter and six months ended June 30, 2012 respectively. Net loan recoveries were $10 during the June 2011 quarter and net loan
charge-offs were $933 during the six months ended June 30, 2011. During the June 2012 quarter, four borrowers represented 68%
of all charge-offs including $34 charged off in connection with a problem loan settlement discussed previously. Charge-offs during
the six months ended June 30, 2011 were led by a $700 charge-off related to a customer line of credit secured by building supply
inventory and accounts receivable. Annualized net loan charge offs were .24% during the June 2012 quarter and were a net recovery
of principal of .01% during the June 2011 quarter. Annualized net loan charge-offs were 0.28% and 0.43% during the six months
ended June 30, 2012 and 2011, respectively.
Net Interest Income
Quarter ended June 30, 2012 compared to June 30, 2011
Net interest income is the most significant component of earnings.
Tax adjusted net interest income totaled $5,086 during the June 2012 quarter compared to $5,051 during the June 2011 quarter, an
increase of $35, or 0.7%. Although net interest income remained largely unchanged, net interest margin declined from 3.57% in June
2011 to 3.42% during June 2012 as loan and investment security yields declined faster than average deposit costs. The decline in
margin was also impacted by the Marathon acquisition as approximately 47% of the assets acquired ($50,547) were agency and municipal
securities yielding 1.81% on a tax adjusted basis. Increased earning asset volume during the June 2012 quarter compared to June
2011 offset the decline in net interest income from reduced net margin as average earning assets increased 5.6%. During the June
2012 quarter, long-term market rates declined significantly (for example, the 10 year U.S. Treasury rate declined from 2.15% to
1.66% during the June 2012 quarter) and the rate decline experienced in the national economy during the 2008-2009 recession continues
and loans, securities, and funding continue to reprice lower to current rate levels.
Reinvestment yields for investment security cash flows remain very
low and taxable securities yields are expected to continue to decline throughout 2012. In addition, loan yields may decline significantly
due to competitive pressures as competitors seek to increase loan originations while quality credit demand remains weak in addition
to domestic and global economic actions which have lowered long-term rates. With average cost of interest bearing deposits (representing
72% of total average liabilities) at 1.01% during the June 2012 quarter, further reduction of deposit costs to offset lower loan
yields may be difficult. Asset yields are expected to continue to decline faster than funding costs during the remainder of 2012
and net interest income is likely to decline if earning assets do not grow from existing levels. Although a portion of the decline
in earning asset rates will be offset by further declines in certificate of deposit funding costs and nonmaturity deposit costs,
September 2012 quarterly net interest margin is anticipated to continue in a range of 3.35% to 3.40%.
Six months ended June 30, 2012 compared to June 30, 2011
Tax adjusted net interest income totaled $10,082 during the six
months ended June 30, 2012 compared to $10,011 during the six months ended June 30, 2011, an increase of $71, or 0.7%. As during
the June 2012 quarter, year to date net interest income increased slightly from increased earning asset volume which offset a decline
in net margin from 3.51% during 2011 to 3.46% during 2012.
We have increased net interest margin since 2009 by inserting interest
rate floors in commercial-related loans and retail residential home equity lines of credit to avoid the negative impacts to net
interest margin from a sustained low interest rate environment and to appropriately price for credit risk in the current market.
At June 30, 2012, approximately 80% of our $124 million in adjustable rate loans carried a contractual interest rate floor
and, of those loans with floors, approximately 97% carried current loan yields in excess of the normal adjustable rate coupon due
to the interest rate floor. Of those loans with current loan yields in excess of the normal adjustable coupon rate, approximately
76% of principal have “in the money” loan floors which increased the adjustable rate between 100 basis points and 200
basis points. If current interest rate levels were assumed to remain the same, the annualized increase to net interest income and
net interest margin would be approximately $1,340 and .22%, respectively, based on those existing loan floors and average quarterly
earning assets at June 30, 2012. During a period of rising short-term interest rates, we expect average funding costs (which are
not currently subject to contractual caps on the interest rate) to rise while the yield on loans with interest rate floors would
remain the same until those loans’ adjustable rate index caused coupon rates to exceed the loan rate floor. This mismatch
compared to rising funding costs is likely to lower net interest margin and possibly period over period net interest income. The
speed in which short-term interest rates increase is expected to have a significant impact on net interest income from loans with
interest rate floors. Quickly rising short-term rates would allow adjustable rate loans with floors to reprice to rates higher
than the existing floor more quickly, impacting net interest income less adversely than if short-term rates rose slowly or deliberately.
During the September 2011 quarter, the Dodd-Frank Wall Street Reform
Act repealed the prohibition on paying interest on commercial checking accounts. We currently provide an earnings credit against
account fees in lieu of an interest payment and do not expect costs to increase because of this change in the short term. Despite
the law change, we do not sell or promote an interest bearing commercial checking account at this time. However, the change could
have greater long-term implications as competitor banks begin to use premium interest rate levels on commercial deposits in attempts
to raise deposits in coming years.
The following Tables present a schedule of yields and costs for
the quarter and six months ended June 30, 2012 compared to the prior year periods ended June 30, 2011 and the interest income and
expense volume and rate analysis for the six months ended June 30, 2012 compared to the six months ended June 30, 2011.
Table 10: Net Interest Income Analysis (Quarter)
(dollars in thousands)
|
|
Quarter ended June 30, 2012
|
|
Quarter ended June 30, 2011
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)(2)
|
|
$
|
455,734
|
|
|
$
|
5,837
|
|
|
|
5.15
|
%
|
|
$
|
444,844
|
|
|
$
|
6,152
|
|
|
|
5.55
|
%
|
Taxable securities
|
|
|
93,727
|
|
|
|
575
|
|
|
|
2.47
|
%
|
|
|
81,355
|
|
|
|
705
|
|
|
|
3.48
|
%
|
Tax-exempt securities
(2)
|
|
|
36,673
|
|
|
|
453
|
|
|
|
4.97
|
%
|
|
|
32,808
|
|
|
|
426
|
|
|
|
5.21
|
%
|
FHLB stock
|
|
|
2,819
|
|
|
|
3
|
|
|
|
0.43
|
%
|
|
|
3,250
|
|
|
|
—
|
|
|
|
0.00
|
%
|
Other
|
|
|
9,925
|
|
|
|
17
|
|
|
|
0.69
|
%
|
|
|
4,947
|
|
|
|
15
|
|
|
|
1.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(2)
|
|
|
598,878
|
|
|
|
6,885
|
|
|
|
4.62
|
%
|
|
|
567,204
|
|
|
|
7,298
|
|
|
|
5.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
15,611
|
|
|
|
|
|
|
|
|
|
|
|
8,068
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
9,914
|
|
|
|
|
|
|
|
|
|
|
|
10,287
|
|
|
|
|
|
|
|
|
|
Cash surrender value insurance
|
|
|
11,545
|
|
|
|
|
|
|
|
|
|
|
|
11,136
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
11,304
|
|
|
|
|
|
|
|
|
|
|
|
12,813
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(7,848
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
639,404
|
|
|
|
|
|
|
|
|
|
|
$
|
601,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and demand deposits
|
|
$
|
145,675
|
|
|
$
|
203
|
|
|
|
0.56
|
%
|
|
$
|
125,134
|
|
|
$
|
295
|
|
|
|
0.95
|
%
|
Money market deposits
|
|
|
108,956
|
|
|
|
148
|
|
|
|
0.55
|
%
|
|
|
98,766
|
|
|
|
203
|
|
|
|
0.82
|
%
|
Time deposits
|
|
|
169,755
|
|
|
|
719
|
|
|
|
1.70
|
%
|
|
|
173,587
|
|
|
|
898
|
|
|
|
2.07
|
%
|
FHLB borrowings
|
|
|
50,674
|
|
|
|
353
|
|
|
|
2.80
|
%
|
|
|
56,483
|
|
|
|
459
|
|
|
|
3.26
|
%
|
Other borrowings
|
|
|
19,705
|
|
|
|
149
|
|
|
|
3.04
|
%
|
|
|
26,154
|
|
|
|
165
|
|
|
|
2.53
|
%
|
Senior subordinated notes
|
|
|
7,000
|
|
|
|
142
|
|
|
|
8.16
|
%
|
|
|
7,000
|
|
|
|
141
|
|
|
|
8.08
|
%
|
Junior subordinated debentures
|
|
|
7,732
|
|
|
|
85
|
|
|
|
4.42
|
%
|
|
|
7,732
|
|
|
|
86
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
509,497
|
|
|
|
1,799
|
|
|
|
1.42
|
%
|
|
|
494,856
|
|
|
|
2,247
|
|
|
|
1.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
68,963
|
|
|
|
|
|
|
|
|
|
|
|
53,727
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
8,109
|
|
|
|
|
|
|
|
|
|
|
|
4,417
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
52,835
|
|
|
|
|
|
|
|
|
|
|
|
48,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
639,404
|
|
|
|
|
|
|
|
|
|
|
$
|
601,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
5,086
|
|
|
|
|
|
|
|
|
|
|
$
|
5,051
|
|
|
|
|
|
Rate spread
|
|
|
|
|
|
|
|
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
Net yield on interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
3.42
|
%
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
(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%.
Table 11: Net Interest Income Analysis (Six Months)
|
|
Quarter ended June 30, 2012
|
|
Quarter ended June 30, 2011
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
(dollars in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)(2)
|
|
$
|
450,347
|
|
|
$
|
11,722
|
|
|
|
5.23
|
%
|
|
$
|
442,012
|
|
|
$
|
12,239
|
|
|
|
5.58
|
%
|
Taxable securities
|
|
|
86,288
|
|
|
|
1,147
|
|
|
|
2.67
|
%
|
|
|
79,902
|
|
|
|
1,383
|
|
|
|
3.49
|
%
|
Tax-exempt securities
(2)
|
|
|
33,556
|
|
|
|
852
|
|
|
|
5.11
|
%
|
|
|
33,411
|
|
|
|
876
|
|
|
|
5.29
|
%
|
FHLB stock
|
|
|
2,938
|
|
|
|
4
|
|
|
|
0.27
|
%
|
|
|
3,250
|
|
|
|
2
|
|
|
|
0.12
|
%
|
Other
|
|
|
13,684
|
|
|
|
35
|
|
|
|
0.51
|
%
|
|
|
16,470
|
|
|
|
37
|
|
|
|
0.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(2)
|
|
|
586,813
|
|
|
|
13,760
|
|
|
|
4.72
|
%
|
|
|
575,045
|
|
|
|
14,537
|
|
|
|
5.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
12,013
|
|
|
|
|
|
|
|
|
|
|
|
8,240
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
9,917
|
|
|
|
|
|
|
|
|
|
|
|
10,341
|
|
|
|
|
|
|
|
|
|
Cash surrender value insurance
|
|
|
11,495
|
|
|
|
|
|
|
|
|
|
|
|
11,059
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
11,372
|
|
|
|
|
|
|
|
|
|
|
|
12,969
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(7,951
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
623,659
|
|
|
|
|
|
|
|
|
|
|
$
|
609,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and demand deposits
|
|
$
|
140,699
|
|
|
$
|
425
|
|
|
|
0.61
|
%
|
|
$
|
128,448
|
|
|
$
|
585
|
|
|
|
0.92
|
%
|
Money market deposits
|
|
|
108,052
|
|
|
|
321
|
|
|
|
0.60
|
%
|
|
|
104,279
|
|
|
|
438
|
|
|
|
0.85
|
%
|
Time deposits
|
|
|
165,966
|
|
|
|
1,476
|
|
|
|
1.79
|
%
|
|
|
170,656
|
|
|
|
1,802
|
|
|
|
2.13
|
%
|
FHLB borrowings
|
|
|
50,970
|
|
|
|
705
|
|
|
|
2.78
|
%
|
|
|
56,656
|
|
|
|
916
|
|
|
|
3.26
|
%
|
Other borrowings
|
|
|
19,388
|
|
|
|
297
|
|
|
|
3.08
|
%
|
|
|
28,421
|
|
|
|
332
|
|
|
|
2.36
|
%
|
Senior subordinated notes
|
|
|
7,000
|
|
|
|
284
|
|
|
|
8.16
|
%
|
|
|
7,000
|
|
|
|
283
|
|
|
|
8.15
|
%
|
Junior subordinated debentures
|
|
|
7,732
|
|
|
|
170
|
|
|
|
4.42
|
%
|
|
|
7,732
|
|
|
|
170
|
|
|
|
4.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
499,807
|
|
|
|
3,678
|
|
|
|
1.48
|
%
|
|
|
503,192
|
|
|
|
4,526
|
|
|
|
1.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
64,489
|
|
|
|
|
|
|
|
|
|
|
|
53,923
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,415
|
|
|
|
|
|
|
|
|
|
|
|
4,556
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
51,948
|
|
|
|
|
|
|
|
|
|
|
|
48,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
623,659
|
|
|
|
|
|
|
|
|
|
|
$
|
609,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
10,082
|
|
|
|
|
|
|
|
|
|
|
$
|
10,011
|
|
|
|
|
|
Rate spread
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
3.29
|
%
|
Net yield on interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
3.46
|
%
|
|
|
|
|
|
|
|
|
|
|
3.51
|
%
|
(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%.
Table 12: Interest Income and Expense Volume and Rate
Analysis (Year to Date)
|
|
2012 compared to 2011
|
|
|
increase (decrease) due to (1)
|
(dollars in thousands)
|
|
Volume
|
|
Rate
|
|
Net
|
|
|
|
|
|
|
|
Interest earned on:
|
|
|
|
|
|
|
Loans
(2)
|
|
$
|
217
|
|
|
$
|
(734
|
)
|
|
$
|
(517
|
)
|
|
|
Taxable securities
|
|
|
85
|
|
|
|
(321
|
)
|
|
|
(236
|
)
|
|
|
Tax-exempt securities
(2)
|
|
|
4
|
|
|
|
(28
|
)
|
|
|
(24
|
)
|
|
|
FHLB stock
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
|
|
Other interest income
|
|
|
(7
|
)
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
299
|
|
|
|
(1,076
|
)
|
|
|
(777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and demand deposits
|
|
|
37
|
|
|
|
(197
|
)
|
|
|
(160
|
)
|
|
|
Money market deposits
|
|
|
11
|
|
|
|
(128
|
)
|
|
|
(117
|
)
|
|
|
Time deposits
|
|
|
(42
|
)
|
|
|
(284
|
)
|
|
|
(326
|
)
|
|
|
FHLB borrowings
|
|
|
(79
|
)
|
|
|
(132
|
)
|
|
|
(211
|
)
|
|
|
Other borrowings
|
|
|
(138
|
)
|
|
|
103
|
|
|
|
(35
|
)
|
|
|
Senior subordinated notes
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(211
|
)
|
|
|
(637
|
)
|
|
|
(848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest earnings
|
|
$
|
510
|
|
|
$
|
(439
|
)
|
|
$
|
71
|
|
|
|
(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.
Interest Rate Sensitivity
We incur market risk primarily from interest-rate risk inherent
in our lending and deposit taking activities. Market risk is the risk of loss from adverse changes in market prices and rates.
We actively monitor and manage our interest-rate risk exposure. The measurement of the market risk associated with financial instruments
(such as loans and deposits) is meaningful only when all related and offsetting on- and off-balance sheet transactions are aggregated,
and the resulting net positions are identified. Disclosures about the fair value of financial instruments that reflect changes
in market prices and rates can be found in Note 13 of the Notes to Consolidated Financial Statements.
Our primary objective in managing interest-rate risk is to
minimize the adverse impact of changes in interest rates on net interest income and capital, while adjusting the asset-liability
structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure reflected
on the Consolidated Balance Sheets to control interest-rate risk. In general, longer-term earning assets are funded by shorter-term
funding sources allowing us to earn net interest income on both the credit risk taken on assets and the yield curve of market interest
rates. However, a sudden and substantial change in interest rates may adversely impact earnings, to the extent that the interest
rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. We do not engage
in significant trading activities to enhance earnings or for hedging purposes.
Our overall strategy is to coordinate the volume of rate
sensitive assets and liabilities to minimize the impact of interest rate movement on the net interest margin. The following Table
represents our earnings sensitivity to changes in interest rates at June 30, 2012. It is a static indicator which does not
reflect various repricing characteristics and may not indicate the sensitivity of net interest income in a changing interest rate
environment, particularly during periods when the interest yield curve is flattening or steepening. The following repricing methodologies
should be noted:
1. Public or government fund MMDA and NOW accounts are
considered fully repriced within 60 days. Higher yielding retail and non-governmental money market and NOW deposit accounts are
considered fully repriced within 90 days. Rewards Checking NOW accounts and other money market deposit 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 core deposits are generally considered to reprice beyond five years.
2. Nonaccrual loans are considered to reprice beyond 5
years.
3. Assets and liabilities with contractual calls or prepayment
options are repriced according to the likelihood of the call or prepayment being exercised in the current interest rate environment.
4. Measurements taking into account the impact of rising
or falling interest rates are based on a parallel yield curve change that is fully implemented within a 12-month time horizon.
5. Bank owned life insurance is considered to reprice
beyond 5 years.
The gap analysis reflects an asset sensitive gap position
during the next year, with a cumulative negative one-year gap ratio at June 30, 2012 of 90.6% compared to a positive gap of 107.9%
at December 31, 2011. In general, a current negative gap would be favorable in a falling interest rate environment but unfavorable
in a rising rate environment. However, net interest income is impacted not only by the timing of product repricing, but the extent
of the change in pricing which could be severely limited from local competitive pressures. The existence of our significant “in
the money” floating rate loan floors could also lessen the impact of an asset sensitive gap position in a rising interest
rate environment. These factors can result in change to net interest income from changing interest rates different than expected
from review of the gap table.
Table 13: Interest Rate Sensitivity Gap Analysis
|
|
June 30, 2012
|
(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
|
|
$
|
182,960
|
|
|
$
|
32,728
|
|
|
$
|
58,853
|
|
|
$
|
69,665
|
|
|
$
|
94,602
|
|
|
$
|
35,622
|
|
|
$
|
474,430
|
|
Securities
|
|
|
11,431
|
|
|
|
7,656
|
|
|
|
11,974
|
|
|
|
20,352
|
|
|
|
57,236
|
|
|
|
55,359
|
|
|
|
164,008
|
|
FHLB stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,761
|
|
|
|
2,761
|
|
CSV bank-owned life ins.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,608
|
|
|
|
11,608
|
|
Other earning assets
|
|
|
6,503
|
|
|
|
—
|
|
|
|
—
|
|
|
|
748
|
|
|
|
1,736
|
|
|
|
—
|
|
|
|
8,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
200,894
|
|
|
$
|
40,384
|
|
|
$
|
70,827
|
|
|
$
|
90,765
|
|
|
$
|
153,574
|
|
|
$
|
105,350
|
|
|
$
|
661,794
|
|
Cumulative rate sensitive assets
|
|
$
|
200,894
|
|
|
$
|
241,278
|
|
|
$
|
312,105
|
|
|
$
|
402,870
|
|
|
$
|
556,444
|
|
|
$
|
661,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
91,157
|
|
|
$
|
32,246
|
|
|
$
|
196,344
|
|
|
$
|
31,899
|
|
|
$
|
44,494
|
|
|
$
|
78,358
|
|
|
$
|
474,498
|
|
FHLB advances
|
|
|
16,000
|
|
|
|
—
|
|
|
|
4,000
|
|
|
|
20,384
|
|
|
|
14,740
|
|
|
|
—
|
|
|
|
55,124
|
|
Other borrowings
|
|
|
4,586
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,000
|
|
|
|
5,500
|
|
|
|
18,086
|
|
Senior subordinated notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,732
|
|
|
|
7,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
111,743
|
|
|
$
|
32,246
|
|
|
$
|
200,344
|
|
|
$
|
52,283
|
|
|
$
|
67,234
|
|
|
$
|
98,590
|
|
|
$
|
562,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest sensitive liabilities
|
|
$
|
111,743
|
|
|
$
|
143,989
|
|
|
$
|
344,333
|
|
|
$
|
396,616
|
|
|
$
|
463,850
|
|
|
$
|
562,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap for the individual period
|
|
$
|
89,151
|
|
|
$
|
8,138
|
|
|
$
|
(129,517
|
)
|
|
$
|
38,482
|
|
|
$
|
86,340
|
|
|
$
|
6,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of rate sensitive assets to rate sensitive liabilities for the individual period
|
|
|
179.8
|
%
|
|
|
125.2
|
%
|
|
|
35.4
|
%
|
|
|
173.6
|
%
|
|
|
228.4
|
%
|
|
|
106.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest sensitivity gap
|
|
$
|
89,151
|
|
|
$
|
97,289
|
|
|
$
|
(32,228
|
)
|
|
$
|
6,254
|
|
|
$
|
92,594
|
|
|
$
|
99,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative ratio of rate sensitive assets to rate sensitive liabilities
|
|
|
179.8
|
%
|
|
|
167.6
|
%
|
|
|
90.6
|
%
|
|
|
101.6
|
%
|
|
|
120.0
|
%
|
|
|
117.7
|
%
|
|
|
|
|
We use financial modeling techniques that measure interest
rate risk. These policies are intended to limit exposure of earnings to risk. A formal liquidity contingency plan exists that directs
management to the least expensive liquidity sources to fund sudden and unanticipated liquidity needs. We also use various policy
measures to assess interest rate risk as described below.
We balance 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, we model interest rate simulations on a quarterly basis. Our 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 14: Net Interest Margin Rate Simulation Impacts
Period Ended:
|
|
June 2012
|
|
December 2011
|
|
June 2011
|
|
|
|
|
|
|
|
Cumulative 1 year gap ratio
|
|
|
|
|
|
|
Base
|
|
|
91
|
%
|
|
|
108
|
%
|
|
|
95
|
%
|
Up 200
|
|
|
87
|
%
|
|
|
104
|
%
|
|
|
90
|
%
|
Down 100*
|
|
|
93
|
%
|
|
|
111
|
%
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net Interest Income – Year 1
|
|
|
|
|
|
|
|
|
|
|
|
|
Up 200 during the year
|
|
|
-3.6
|
%
|
|
|
-2.1
|
%
|
|
|
-3.4
|
%
|
Down 100 during the year*
|
|
|
-0.8
|
%
|
|
|
-0.7
|
%
|
|
|
-0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net Interest Income – Year 2
|
|
|
|
|
|
|
|
|
|
|
|
|
No rate change (base case)
|
|
|
-3.5
|
%
|
|
|
-5.1
|
%
|
|
|
-2.9
|
%
|
Following up 200 in year 1
|
|
|
-6.0
|
%
|
|
|
-3.5
|
%
|
|
|
-2.3
|
%
|
Following down 100 in year 1*
|
|
|
-3.8
|
%
|
|
|
-9.8
|
%
|
|
|
-7.6
|
%
|
|
*
|
Simulations reflect net interest income changes from a down 100 basis point scenario, rather than a down 200 basis point scenario as dictated by internal policy due to the currently low level of relative short-term rates.
|
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 stockholders’ equity capital. Core deposits
including DDA, lower yielding NOW, and non-maturity savings accounts (not including high yield NOW such as Rewards Checking deposits
and money market accounts) are also considered core long-term funding sources. The core funding utilization ratio is defined as
assets that reprice in excess of 60 months divided by core funding. Our 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. Our core funding utilization ratio after a projected 200 basis point increase in rates was 63.3% at June
30, 2012 compared to 61.9%% at December 31, 2011.
At June 30, 2012, internal interest rate simulations that
project interest rate changes that maintain the current shape of the yield curve (often referred to as “parallel yield curve
shifts”) and those which assume a flattening of the yield curve all point to decreased net interest income from a static
balance sheet compared to the June 30, 2012 “base case.” If market rates decline, net interest income is negatively
impacted by falling asset yields while funding costs currently near 0% have little room to decline. If market rates increase, net
interest income is negatively impacted by existing interest rate floors on floating rate loans. As funding costs rise, these floating
rate loans could remain at the same yield for several periods, reducing net interest margin and net interest income. During a period
of rising interest rates, net interest income is also negatively impacted by a flattening yield curve. When the yield curve flattens,
repriced short-term funding cost, such as for terms of 1 year or less increases, while maturing fixed rate balloon loans, such
as with terms from 3 to 5 years, increase much less. During flattening periods, assets and liabilities may reprice at the same
time but to a much different extent.
The table below summarizes the percentage change to current
“base case” net interest income as a result of certain interest simulations:
Table 15: Projected Changes to Net Interest Income
Under Alternative Rate Simulations
|
|
Down 100 bp
|
|
Up 400 bp 24M
|
|
Delayed (12M)
Flat up 500 bp
|
|
|
|
|
|
|
|
Year 1
|
|
|
|
-0.8
|
%
|
|
|
-2.3
|
%
|
|
|
1.3
|
%
|
|
Year 2
|
|
|
|
-3.8
|
%
|
|
|
-7.3
|
%
|
|
|
1.7
|
%
|
|
Year 3
|
|
|
|
-5.6
|
%
|
|
|
-13.5
|
%
|
|
|
-12.7
|
%
|
|
Year 4
|
|
|
|
-8.3
|
%
|
|
|
3.7
|
%
|
|
|
-19.8
|
%
|
|
Year 5
|
|
|
|
-10.0
|
%
|
|
|
21.2
|
%
|
|
|
-0.3
|
%
|
|
Current negative domestic and global economic trends, including
potential sovereign debt defaults by industrialized nations, are expected to continue interest rate volatility and raise the potential
for continued declines in market interest rates. Current indications by the Board of Governors of the Federal Reserve call for
the existing very low rate environment to continue through the end of 2014. We regularly monitor our asset-liability position in
light of this potential long-term risk to net interest income levels from such a protracted low interest rate environment.
Noninterest Income
Quarter ended June 30, 2012 compared to June 30, 2011
Total noninterest income for the quarter ended June 30, 2012
was $2,323, compared to $1,197 earned during the June 2011 quarter, an increase of $1,126 primarily from an $851 gain on bargain
purchase of Marathon State Bank. Other factors increasing quarterly noninterest income were a $158 increase in mortgage banking
(up 56%) due to customer home loan refinancing to lower long-term rates and a $96 increase in investment and insurance sales commissions
(up 68%). PSB expects to see similar elevated mortgage banking income during the upcoming September 2012 quarter, although current
quarterly levels of investment and insurance sales commissions are unlikely to remain at such a high level.
Despite 2011 regulation to limit bank debit card interchange
and overdraft fees, these income types were not yet adversely affected and totaled $532 and $515 during the quarters ended June
30, 2012 and 2011, respectively.
Six months ended June 30, 2012 compared to June 30,
2011
During the six months ended June 30, noninterest income was
$3,565 in 2012, up $971 from $2,594 in 2011. Excluding the Marathon bargain purchase gain, noninterest income would have increased
$120, or 4.6%, from 2011 primarily from a $104 increase in investment and insurance sales commissions.
Noninterest Expense
Quarter ended June 30, 2012 compared to June 30, 2011
Noninterest expenses totaled $4,064 during the June 2012
quarter compared to $3,869 during the June 2011 quarter, an increase of $195, or 5.0%. Excluding the $4 loss on foreclosed assets
and $75 of merger related costs during 2012 and $278 of loss on foreclosed assets during 2011, noninterest expense would have increased
$394, or 11.0%. The majority of the operating expense increase was due to $90 in Marathon daily operating costs following the acquisition,
self-insured employee health plan costs up $95 (up 50%), and higher data processing costs, up $115, or 36.7%, during June 2012
compared to June 2011. Data processing expense increased as special conversion contractual cost reductions associated with the
June 2010 data system conversion were fully phased out during the September 2011 quarter. On a linked quarter basis, Peoples’
data processing costs (excluding Marathon costs) were $402 during the June 2012 quarter and $404 during the March 2012 quarter.
Six months ended June 30, 2012 compared to June 30,
2011
During the six months ended June 30, 2012, noninterest expense,
excluding $192 of merger related costs and loss on foreclosed assets, was $7,754 compared to $7,249 during 2011, up $505, or 7.0%.
Similar to the June 2012 quarter, the expense increase was led by an increase of $235 in wages and benefits (excluding Marathon,
up 5.7%), data processing costs up $180 (excluding Marathon), and Marathon daily operating costs of $90.
During the remainder of 2012, PSB expects to incur substantial
additional merger costs up to $600 before income tax benefits related to the data conversion of Marathon customer information.
Approximately $270 of the data conversion cost will be payments to Marathon’s prior third party data processing service to
obtain Marathon customer information for the conversion which will be expensed when incurred. Approximately $130 of the data conversion
cost includes payments to our data processor for licensing fees and software parameter design charges which will be capitalized
as premises and equipment investment and amortized to expense over the remaining seven years of our data processing contract. The
remaining estimated $200 of data conversion fees will be paid to our data processor for conversion services and expensed when incurred.
Future integration costs may also include a loss on disposal
of the existing Peoples Marathon branch location later in 2012 if market and sale conditions for the real estate decline. The remaining
premises and equipment investment in the Peoples’ Marathon branch is approximately $190. Integration of Peoples’ existing
Marathon branch with Marathon State Bank is expected to generate annual run-rate expense savings of approximately $250 to be fully
phased in by the end of 2013.
LIQUIDITY
Liquidity refers to the ability to generate adequate amounts
of cash to meet our need for cash at a reasonable cost. We manage our liquidity to provide adequate funds to support borrowing
needs and deposit flow of our customers. We also view 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 and repurchase agreements are the primary source of funding. Retail and local deposits and repurchase agreements
were 69.5% of total assets at June 30, 2012 compared to 66.3% of total assets at December 31, 2011 and 63.0% of total assets at
June 30, 2011.
Table 16: Period-end Deposit Composition
|
|
June 30,
|
|
December 31,
|
(dollars in thousands)
|
|
2012
|
|
2011
|
|
2011
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
82,909
|
|
|
|
14.9
|
%
|
|
$
|
55,460
|
|
|
|
12.4
|
%
|
|
$
|
75,298
|
|
|
|
15.6
|
%
|
Interest-bearing demand and savings
|
|
|
169,450
|
|
|
|
30.4
|
%
|
|
|
121,584
|
|
|
|
27.0
|
%
|
|
|
136,950
|
|
|
|
28.4
|
%
|
Money market deposits
|
|
|
108,712
|
|
|
|
19.5
|
%
|
|
|
98,498
|
|
|
|
22.0
|
%
|
|
|
102,993
|
|
|
|
21.4
|
%
|
Retail and local time deposits less than $100
|
|
|
65,712
|
|
|
|
11.8
|
%
|
|
|
48,514
|
|
|
|
10.8
|
%
|
|
|
45,653
|
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits
|
|
|
426,783
|
|
|
|
76.7
|
%
|
|
|
324,056
|
|
|
|
72.2
|
%
|
|
|
360,894
|
|
|
|
74.9
|
%
|
Retail and local time deposits $100 and over
|
|
|
61,192
|
|
|
|
11.0
|
%
|
|
|
47,242
|
|
|
|
10.5
|
%
|
|
|
46,049
|
|
|
|
9.6
|
%
|
Broker & national time deposits less than $100
|
|
|
737
|
|
|
|
0.1
|
%
|
|
|
832
|
|
|
|
0.2
|
%
|
|
|
835
|
|
|
|
0.2
|
%
|
Broker & national time deposits $100 and over
|
|
|
68,695
|
|
|
|
12.3
|
%
|
|
|
76,537
|
|
|
|
17.1
|
%
|
|
|
73,731
|
|
|
|
15.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
557,407
|
|
|
|
100.0
|
%
|
|
$
|
448,667
|
|
|
|
100.0
|
%
|
|
$
|
481,509
|
|
|
|
100.0
|
%
|
The acquisition of Marathon State Bank increased demand deposits
and savings balance as these deposit types represented approximately $57.2 million (57%) of the acquired portfolio while certificates
of deposit represented approximately $38.0 million of the portfolio (38%) and money market deposits represented approximately
$5.7 million of the portfolio (5%).
Separately from the new Marathon deposits, we continue to
experience ongoing retail time deposit quarterly declines that began during the March 2009 quarter as wholesale funding rates for
various funding types began to be lower than local retail certificates of deposit. Certificate balances have also been replaced
by higher interest bearing demand account balances and money market accounts as customers have moved certificate funds into liquid,
short-term deposit vehicles as certificate rates locally have moved to very low levels relative to certain nonmaturity deposit
accounts.
We discontinued sale of our Rewards Checking account effective
October 1, 2011. Balances in Rewards Checking totaled $48,850 at September 30, 2011 and continued at $46,627 at June 30, 2012.
Peoples Rewards Checking paid a premium interest rate 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. The average interest
cost of Reward Checking balances (excluding debit card interchange fee income, savings from delivery of electronic periodic statements,
customer reimbursement of ATM fees, and vendor software costs of maintaining the program) was 1.59% during the year ended December
31, 2011 and was 1.01% during the June 2012 quarter and 1.27% during the March 2012 quarter. Existing Rewards Checking customers
at October 1, 2011 were allowed to remain in this account which at June 30, 2012 paid a premium 1.50% yield up to $15,000 in balances.
Balances above these levels earn a yield of .25%. Participation in the account requires customers to receive their periodic statement
via email and complete monthly ACH or direct deposit activity within the account.
We originate retail certificates of deposit with local depositors
under the CDARS program, in which our 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 $10,272 at June 30, 2012 compared
to $11,825 at December 31, 2011. Although classified as retail time deposits $100 and over in the table above, we are required
to report these balances as broker deposits on our quarterly regulatory call reports. We also originate certificates of deposit
obtained through a national rate listing service and held $4,180 and $3,840 of such deposits at June 30, 2012 and December 31,
2011, respectively. These national certificates are classified with broker deposits in the table above.
Wholesale funding often carries higher interest rates than
local core deposit funding, so loan growth supported by wholesale funds can generate lower net interest spreads than loan growth
supported by local funds. However, wholesale funds provide us 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 economy’s
ability to grow in a way that supports the deposit needs of all local financial institutions. Current brokered certificate of deposit
rates available to us are less costly than equivalent local deposits due to very low rates of return available on the most conservative
fixed income investments and as national wholesale funds place a premium on FDIC insurance available on their large deposit when
placed with brokers in amounts less than current FDIC insurance limits. Due to large demand through brokers for these types of
deposits, brokered deposit rates for well performing banks are historically low. In addition, declines in profitability and capital
at some banks have reduced their access to wholesale funding or otherwise increased its cost. In many cases, these institutions
with reduced wholesale funding access have increased their retail interest rates to gather funds through local depositors. Consequently,
local certificate of deposit rates in many markets are priced higher than equivalent wholesale brokered deposits due to a limited
supply of retail deposits. We expect this difference in pricing between wholesale and local certificates of deposit to be removed
by the wholesale funding market as the banking industry becomes well capitalized and regains consistent profits. An improving national
economy will likely increase wholesale rates relative to local core deposit rates which could increase the volatility of our interest
expense due to a significant portion of our funding coming from wholesale sources.
Our 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 were 9.8%,
12.0%, and 12.9% at June 30, 2012, December 31, 2011, and June 30, 2011, respectively. During the remainder of 2012, we do not
expect to increase our usage of brokered certificates due to limited loan growth opportunities and liquidity added by our acquisition
of Marathon State Bank. Beyond the use of brokered and national time deposits, secondary wholesale sources also include FHLB advances,
Federal Reserve Discount Window advances, and pledging of investment securities against wholesale repurchase agreements.
Table 17: Summary of Balance by Significant Deposit
Source
|
|
June 30,
|
|
December 31,
|
(dollars in thousands)
|
|
2012
|
|
2011
|
|
2011
|
|
|
|
|
|
|
|
Total time deposits $100 and over
|
|
$
|
129,887
|
|
|
$
|
123,779
|
|
|
$
|
119,780
|
|
Total broker and national deposits
|
|
|
69,432
|
|
|
|
77,369
|
|
|
|
74,566
|
|
Total retail and local time deposits
|
|
|
126,904
|
|
|
|
95,756
|
|
|
|
91,702
|
|
Core deposits, including money market deposits
|
|
|
426,783
|
|
|
|
324,056
|
|
|
|
360,894
|
|
Table 18: June 30, 2012 Change in Deposit Balance since
Period Ended:
|
|
June 30, 2011
|
|
December 31, 2011
|
(dollars in thousands)
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Total time deposits $100 and over
|
|
$
|
6,108
|
|
|
|
4.9
|
%
|
|
$
|
10,107
|
|
|
|
8.4
|
%
|
Total broker and national deposits
|
|
|
(7,937
|
)
|
|
|
-10.3
|
%
|
|
|
(5,134
|
)
|
|
|
-6.9
|
%
|
Total retail and local time deposits
|
|
|
31,148
|
|
|
|
32.5
|
%
|
|
|
35,202
|
|
|
|
38.4
|
%
|
Core deposits, including money market deposits
|
|
|
102,727
|
|
|
|
31.7
|
%
|
|
|
65,889
|
|
|
|
18.3
|
%
|
As a supplement to local deposits, we use short-term and
long-term funding sources other than retail deposits including federal funds purchased from other correspondent banks, advances
from the FHLB, use of wholesale and national time deposits, advances taken from the Federal Reserve’s Discount Window, and
repurchase agreements from security pledging. The table below outlines the available and unused portion of these funding sources
(based on collateral and/or company policy limitations) as of June 30, 2012 and December 31, 2011. Currently unused but available
funding sources at June 30, 2012 are considered sufficient to fund anticipated 2012 asset growth and meet contingency funding needs.
We maintain formal policies to address liquidity contingency
needs and to manage a liquidity crisis. The following table provides a summary of how the wholesale funding sources normally available
to us would be impacted by various operating conditions.
Table 19: Environmental Impacts on Availability of
Wholesale Funding Sources:
|
Normal
|
Moderately
|
Highly
|
|
Operating
|
Stressed
|
Stressed
|
|
Environment
|
Environment
|
Environment
|
|
|
|
|
Repurchase Agreements
|
Yes
|
Likely*
|
Not Likely
|
FHLB (primary 1-4 REM collateral)
|
Yes
|
Yes*
|
Less Likely*
|
FHLB (secondary loan collateral)
|
Yes
|
Likely*
|
Not Likely
|
Brokered CDs
|
Yes
|
Likely*
|
Not Likely
|
National CDs
|
Yes
|
Likely*
|
Not Likely
|
Federal Funds Lines
|
Yes
|
Less Likely*
|
Not Likely
|
FRB (Borrow-In-Custody)
|
Yes
|
Yes
|
Less Likely*
|
FRB (Discount Window securities)
|
Yes
|
Yes
|
Yes
|
Holding Company line of credit
|
Yes
|
Yes
|
Less Likely*
|
* May be available but subject to restrictions
Table 20 summarizes the availability of various wholesale
funding sources at June 30, 2012 and December 31, 2011.
Table 20: Available but Unused Funding Sources other
than Retail Deposits
|
|
June 30, 2012
|
|
December 31, 2011
|
|
|
Unused, but
|
|
Amount
|
|
Unused, but
|
|
Amount
|
(dollars in thousands)
|
|
Available
|
|
Used
|
|
Available
|
|
Used
|
|
|
|
|
|
|
|
|
|
Overnight federal funds purchased
|
|
$
|
35,000
|
|
|
$
|
—
|
|
|
$
|
28,000
|
|
|
$
|
—
|
|
Federal Reserve discount window advances
|
|
|
86,209
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
—
|
|
FHLB advances under blanket mortgage lien
|
|
|
21,326
|
|
|
|
55,124
|
|
|
|
22,559
|
|
|
|
50,124
|
|
Repurchase agreements and other FHLB advances
|
|
|
36,375
|
|
|
|
18,086
|
|
|
|
34,416
|
|
|
|
19,691
|
|
Wholesale and national deposits
|
|
|
72,372
|
|
|
|
69,432
|
|
|
|
50,007
|
|
|
|
74,566
|
|
Holding company secured line of credit
|
|
|
3,000
|
|
|
|
—
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
254,282
|
|
|
$
|
142,642
|
|
|
$
|
237,982
|
|
|
$
|
144,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding as a percent of total assets
|
|
|
35.9
|
%
|
|
|
20.1
|
%
|
|
|
38.2
|
%
|
|
|
23.2
|
%
|
The following discussion examines each of the available but
unused funding sources listed in the table above and the factors that may directly or indirectly influence the timing or the amount
ultimately available to us.
June 30, 2012 compared to December 31, 2011
Overnight federal funds purchased
Our consolidated federal funds purchase availability of $35,000
is from $28,000 of agreements with Peoples State Bank from three correspondent banks and $7,000 of agreements with Marathon State
Bank from two correspondent banks. Following conversion of Marathon State Bank into a branch of Peoples State Bank later this year,
the two correspondent bank lines with Marathon will be eliminated resulting in consolidated federal funds purchase availability
of $28,000 once again as at December 31, 2011. The most significant portion of the total is $15,000 from our primary correspondent
bank, Bankers’ Bank located in Madison, Wisconsin. We make regular use of the Bankers’ Bank line as part of our normal
daily cash settlement procedures, but rarely have used the lines offered by the other two correspondent banks. Federal funds must
be repaid each day and borrowings may be renewed for up to 14 consecutive business days. To unilaterally draw on the existing federal
funds line, we need to maintain a “composite ratio” as defined by Bankers’ Bank of 40% or less. Bankers’
Bank defines the composite ratio to be nonaccrual loans and foreclosed assets divided by tangible capital including the allowance
for loan losses calculated at our subsidiary bank level. Due to existence of the composite ratio, an increase in nonaccrual loans
or foreclosed assets could impact availability of the line or subject us to further review. In addition, a rising composite ratio
could cause our other two correspondent banks to reconsider their federal funds line with us since they do not also serve as our
primary correspondent bank. Our subsidiary bank’s composite ratio was approximately 16% at June 30, 2012 and December 31,
2011, and less than the 40% benchmark used by Bankers’ Bank.
Federal Reserve discount window advances
We have a $100,000 line of credit with the Federal Reserve
Discount Window supported by both commercial and commercial real estate collateral provided to the Federal Reserve under their
Borrower in Custody (“BIC”) program. During 2011 and as of June 30, 2012, the annualized interest rate applicable to
Discount Window advances was .75%. Under the BIC program, we provide a monthly listing of detailed loan information on the loans
provided as collateral. We are subject to annual review and certification by the Federal Reserve to retain participation in the
program. The Discount Window represents the primary source of liquidity on a daily basis following our federal funds purchased
lines of credit discussed above. We were limited to a maximum advance of $86,209 and $100,000 at June 30, 2012 and December 31,
2011, respectively, based on the BIC loan collateral pledged. Discount Window advances must be repaid or renewed each day. No Discount
Window advances were used during the six months ended June 30, 2012.
Only performing loans are permitted as collateral under the
BIC and each individual loan is subject to a haircut to collateral value based on the Federal Reserve’s review of the listing
each month. In general, approximately 75% of the loan principal offered as collateral is able to support Discount Window advances.
Similar to the federal funds purchased lines of credit, an increase in nonperforming loans would decrease the amount of collateral
available for Discount Window advances.
Federal Home Loan Bank (FHLB) advances under blanket mortgage
lien and other FHLB advances
We maintain an available line of credit with the FHLB of
Chicago based on a pledge of 1 to 4 family mortgage loan collateral, both first and secondary lien positions. We may borrow on
the line to the lesser of the blanket mortgage lien collateral provided, or 20 times our existing FHLB capital stock investment.
Based on our existing $2,761 capital stock investment, total FHLB advances in excess of $55,220 require us to purchase additional
FHLB stock equal to 5% of the advance amount. At June 30, 2012, we could have drawn an FHLB advance up to $96 of the $21,326 available
without the purchase of FHLB stock. At December 31, 2011, we could have drawn an FHLB advance up to $14,876 of the $22,559
available without the purchase of FHLB stock. Further advances of the remaining $21,230 available at June 30, 2012 would have required
us to purchase additional FHLB stock totaling $1,062. FHLB stock currently pays an annualized dividend of .30% with expectations
of continuing this dividend level. Therefore, additional FHLB advances carry additional cost relative to other wholesale borrowing
alternatives due to the requirement to hold relatively low yielding FHLB stock.
Similar to the Discount Window, only performing residential
mortgage loans may be pledged to the FHLB under the blanket lien. In addition, we are subject to a haircut of approximately 36%
on first mortgage collateral and 60% on secondary lien collateral at June 30, 2012 and December 31, 2011. The FHLB also conducts
periodic audits of collateral identification and submission procedures and adjusts the collateral haircuts higher in response to
negative exam findings. The FHLB also assigns a credit risk grade to each member based on a quarterly review of the member’s
regulatory CALL report. Our current credit risk is within the normal range for a healthy member bank. Negative financial performance
trends such as reduced capital levels, increased nonperforming assets, net operating losses, and other factors can increase a member’s
credit risk grade. Higher risk grades can require a member to provide detailed loan collateral listings (rather than a blanket
lien), physical collateral, and other restrictions on the maximum line usage. FHLB advances are available on a daily basis and
along with Discount Window advances represent a primary source of liquidity following our federal funds purchased lines of credit.
FHLB advances carry substantial penalties for early prepayment
that are generally not recovered from the lower interest rates in refinancing. The amount of early prepayment penalty is a function
of the difference between the current borrowing rate, and the rate currently available for refinancing. Under a new collateral
and pledging agreement we maintain with the FHLB effective April 12, 2011, we are also permitted to pledge commercial related collateral
for advances. However, we did not pledge any commercial loan collateral to the FHLB at June 30, 2012 or December 31, 2011.
In connection with the lifting of their regulatory consent
order, the FHLB of Chicago announced a capital stock conversion plan and $106 of our FHLB stock was repurchased during the June
2012 quarter after $383 was repurchased during the March 2012 quarter. A member must continue to hold capital stock no less than
5% of outstanding FHLB advances. Our FHLB capital stock shares are considered “B-2” capital shares. Excess holdings
of B-2 shares may be redeemed by the FHLB at the request of a member following a five year redemption period. We do not expect
to offer more of our FHLB stock for repurchase during the remainder of 2012.
Repurchase agreements and FHLB advances collateralized
by investment securities
Wholesale repurchase agreements may be available from a correspondent
bank counterparty for both overnight and longer terms. Such arrangements typically call for the agreement to be collateralized
by us at 110% of the repurchase principal. In the current market, repurchase counterparty providers are extremely limited and would
likely require a minimum $10 million transaction. Repurchase agreements could require up to several business days to receive funding.
Due to the lack of availability of counterparties offering the product, wholesale repurchase agreements are not a reliable source
of liquidity. At June 30, 2012, $13,500 of our repurchase agreements are wholesale agreements with correspondent banks and $4,586
are overnight repurchase agreements with local customers using our treasury management services. At December 31, 2011, $13,500
of our repurchase agreements were wholesale agreements with correspondent banks and $6,191 were overnight repurchase agreements
with local customers.
In addition to availability of FHLB advances under the blanket
mortgage lien, we also have the ability to pledge investment securities as collateral against FHLB advances. Advances secured by
investments are also subject to the FHLB stock ownership requirement as described previously. Due to the need to purchase additional
FHLB member stock, FHLB advances secured by investments are not considered a primary source of liquidity. At June 30, 2012, $36,375
of additional FHLB advances were available based on pledging of securities if an additional $1,819 of member capital stock were
purchased. At December 31, 2011, $34,416 of additional FHLB advances were available based on pledging of securities if an additional
$1,721 of member capital stock were purchased.
Wholesale market deposits
Due to the strength of our capital position, balance sheet,
and ongoing earnings, we enjoy the lowest possible costs when purchasing wholesale certificates of deposit on the brokered market.
We have an internal policy that limits use of brokered deposits to 20% of total assets, which gave availability of $72,372 at June
30, 2012 and $50,007 at December 31, 2011. Brokered and national certificates were 9.8% and 12.0% of assets at June 30, 2012 and
December 31, 2011, respectively. Increased brokered deposit availability came with increased assets following the Marathon purchase.
Due to a limited number of providers of repurchase agreement funding as well as our desire to retain unencumbered securities for
liquidity purposes and adverse impacts from holding additional FHLB capital stock, loan growth in past years was often funded with
brokered certificate of deposit funding. Following our purchase of Marathon State Bank, we expect our reliance on brokered deposits
to decline during the remainder of 2012.
Participants in the brokered certificate market must be considered
“well capitalized” under current regulatory capital standards to acquire brokered deposits without approval of their
primary federal regulator. We regularly acquire brokered deposits from three market providers and maintain relationships with other
providers to obtain required funds at the lowest possible cost. Ten business days are typically required between the request for
brokered funding and settlement. Therefore, brokered deposits are a reliable, but not daily, source of liquidity. Brokered deposits
represent our largest source of wholesale funding and we would see significant negative impacts if capital levels or earnings were
to decline to levels not considered to be well capitalized. In addition to the requirement to be considered well-capitalized, banks
under regulatory consent orders are not permitted to participate in the brokered deposit market without approval of their primary
federal regulator even if they maintain a well-capitalized capital classification.
Holding company unsecured line of credit
We maintained a $3,000 line of credit with Bankers’
Bank in Madison, Wisconsin as a contingency liquidity source at June 30, 2012 and December 31, 2011. No amounts were drawn on the
line at June 30, 2012 or December 31, 2011. Although our bank subsidiary has in the past provided the holding company’s liquidity
needs through semi-annual upstream cash dividend of profits, losses or other negative performance trends could prevent the bank
from providing these dividends as cash flow. Because our bank holding company has approximately $892 of financing payments per
year as well as approximately $150 of other expenses (before tax benefits), the holding company line of credit is a critical source
of potential liquidity.
We were subject to financial covenants associated with the
line which require our bank subsidiary to:
|
•
|
Maintain Tier 1 leverage, Tier 1 risk based capital, and Tier 2 risk based capital ratios above 8%, 10%, and 12%, respectively.
|
|
•
|
Maintain nonperforming assets (excluding accruing troubled debt restructured loans) as a percentage of tangible equity plus the allowance for loan losses to less than 20%.
|
At June 30, 2012 and December 31, 2011, we were not in violation
of any of the line of credit covenants. A violation of any covenant could prevent us from utilizing the unused balance of the line
of credit. The line of credit expires during December 2012.
If liquidity needs persist after exhausting all available
funds from the sources described above, we would consider more drastic methods to raise funds including, but not limited to, sale
of investment securities at a loss, cessation of lending to new or existing customers, sale of branch real estate in a sale-leaseback
transaction, surrender of bank owned life insurance to obtain the cash surrender value net of taxes due, packaging and sale of
residential mortgage loan pools held in our portfolio, sale of foreclosed assets at a loss, and sale of mortgage servicing rights.
Such actions could generate undesirable sale losses or income tax impacts.
While sale of additional common stock or issuance of
other types of capital could provide additional liquidity, the ability to find significant buyers of such capital issues during
a liquidity crisis would be difficult making such a source of funding unlikely or unreliable if the liquidity crisis was caused
by our deteriorating financial condition.
Liquidity Measurements and Contingency Plan
Our liquidity management and contingency plan calls for quarterly
measurement of key funding, capital, problem loan, and liquidity contingency ratios at our banking subsidiary level. The measurements
are compared to various risk levels that direct management to further responses to declining liquidity measurements as outlined
below:
Risk Level 1
is defined as circumstances that create the potential for elevated liquidity risk, thus requiring an assessment of possible funding
deficiencies. Normal business operations, plans and strategies are not anticipated to be immediately impacted.
Risk Level 2
is defined as
circumstances
that point to an increased potential for disruptions in the Bank’s funding plans, needs and/or resources. Assessment of the
probability of a liquidity crisis is more urgent, and identification and prioritization of pre-emptive alternatives and actions
may be both warranted and time sensitive.
Risk Level 3
is defined as
circumstances
that create a likely funding problem, or are symptomatic of circumstances that are highly correlated with impending funding problems;
and, therefore, are expected to require some level of immediate action depending upon the situation.
These risk parameters and other qualitative and environmental
factors are considered to determine whether a “Stress Level” response is required. Identification of a risk trigger
does not automatically call for a stress level response. The following summarizes our response plans to various degrees of liquidity
stress:
Stress Level A
– Management provides
a written summary evaluating the warning indicators and why it is deemed unlikely that there will be a resulting liquidity challenge.
Stress Level B
– Management provides
an assessment of the probability of a liquidity crisis and completes a sources and uses of funds report to estimate the impact
on pro forma liquidity. Liquidity stress tests will be reviewed to ensure the scenarios being simulated are sufficiently robust
and that there is adequate funding to satisfy potential demands for cash. Various pre-emptive actions will be considered and acted
on as needed.
Stress Level C
– Management has determined
a funding crisis is likely and documents detailed assessments of the current liquidity situation and future liquidity needs. The
Board approved action plan is carried out with vigor and may call for one or all of the following steps, among others, to mitigate
the liquidity concern: sale of loans, intensify local deposit gathering programs, transferring unencumbered securities and loans
to the Federal Reserve for Discount Window borrowings, curtail all lending except for specifically approved loans, reduce or suspend
stock dividends, and investigate opportunities to raise new capital.
No Risk Level triggers were exceeded at June 30, 2012 or
December 31, 2011 and no liquidity stress levels were considered to exist in either period.
As part of our formal quarterly asset-liability management
projections, we also measure basic surplus as the amount of existing net liquid assets (after deducting short-term liabilities
and coverage for anticipated deposit funding outflows during the next 30 days) divided by total assets. The basic surplus calculation
does not consider unused but available correspondent bank federal funds purchased, as those funds are subject to availability based
on the correspondent bank’s own liquidity needs and therefore are not guaranteed contractual funds. However, basic surplus
does include unused but available FHLB advances under the open line of credit supported by a blanket lien on mortgage collateral.
Basic surplus does not include available brokered certificate of deposit funding as those funds generally may not be obtained within
one business day following the request for funding. Our policy is to maintain a basic surplus of at least 5%. Basic surplus was
16.4% and 7.9% at June 30, 2012 and December 31, 2011, respectively. Basic surplus increased significantly at June 30, 2012 due
to the acquisition of Marathon and its $34.2 million of U.S. Agency securities (its largest class of assets).
CAPITAL RESOURCES
During the six months ended June 30, 2012, stockholders’
equity increased $2,270 primarily from $2,483 in retained net income, net of $615 in cash dividends paid. Net book value per share
at June 30, 2012 was $31.64 compared to $30.44 at December 31, 2011. The stockholders’ equity ratio declined during 2012
to 7.42% at June 30, 2012 compared to 8.09% at December 31, 2011 due to the purchase of Marathon State Bank without the issuance
and new common stock. In addition, our regulatory leverage ratio declined at June 30, 2012, although the ratio is still significantly
higher than the regulatory well-capitalized minimum of 5%.
We declared a 5% stock dividend to shareholders on June 19,
2012 to celebrate the 50
th
anniversary of our subsidiary Peoples State Bank, which was paid in additional shares of
our common stock on July 30, 2012 to shareholders of record on July 16, 2012. All references to per share information in this Quarterly
Report on Form 10-Q have been updated to reflect the 5% stock dividend.
For regulatory purposes, the $7 million 8% senior subordinated
notes maturing July 2019 and $7.7 million junior subordinated debentures maturing September 2035 reflected as debt on the Consolidated
Balance Sheet are reclassified as Tier 2 and Tier 1 regulatory equity capital, respectively. The floating rate payments required
by the junior subordinated debentures have been hedged with a fixed rate interest rate swap resulting in a total interest cost
of 4.42% through September 2017. PSB was considered “well capitalized” under banking regulations at June 30, 2012.
The senior subordinated notes will phase out of qualifying Tier 2 capital beginning July 1, 2014 equal to 20% of the original note
principal per year. Beginning July 1, 2012, we have the right to prepay all or a portion of the 8% senior subordinated notes on
a monthly basis. To the extent Tier 2 capital is not required for asset growth, changing regulatory requirements, or merger and
acquisition activities in the near term, we may consider prepayment of the debt to reduce our level of interest expense, subject
to regulatory approval. In addition, proposed new regulatory rules would phase the $7.7 million junior subordinated debentures
out of Tier 1 capital and into Tier 2 capital over a 10 year period beginning in 2013.
Unrealized gains on securities available for sale, net of
tax, reflected as accumulated other comprehensive income represented approximately $1.24, or 3.9% of total net book value per share
at June 30, 2012 compared to $.70, or 2.3% of total net book value per share at December 31, 2011. The decline in market interest
rates since September 30, 2008 has increased the fair value of the fixed rate debt securities held in our investment portfolio
and classified as available for sale, which is recorded as an increase to equity. If market rates were to increase in the future,
existing unrealized gains on our fixed rate investment portfolio would decline, negatively influencing net book value per share.
During the March 2012 quarter, we issued 8,897 shares of
restricted stock having a grant date value of $200 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, prior to vesting, the employee is no longer employed with the Bank. Refer to Footnote 10 of the Notes to Consolidated Financial
Statements for more information on the restricted shares.
We purchased 200 shares of our common stock on the open market
at a price of $23.25 per share during the quarter ended March 31, 2012. No shares were repurchased during 2011 as we sought to
conserve capital for growth, merger and acquisition activity, repayment of our 8% senior subordinated notes, and increased regulatory
capital ratios. Industry wide, the cost of capital has increased significantly compared to prior years 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 we expect to refrain from significant treasury stock repurchases during the remainder of 2012.
The adequacy of our capital is regularly reviewed to ensure
sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. As of June 30, 2012
and December 31, 2011, the Bank’s 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 us from obtaining future whole sale brokered time deposits which are an important source of funding.
As discussed earlier in the Executive Summary section of
this Quarterly Report on Form 10-Q, banking regulators recently issued two proposals that would substantially change how regulatory
capital is calculated and the minimum capital to be retained. While we do not expect to be required to raise common stock capital
solely to meet these new requirements, the new rules would increase the likelihood we would need capital through the issuance of
new common stock if we continued merger and acquisition activity for growth, similar to our recent purchase of Marathon State Bank.
Because the market price of our stock currently trades at less than our book value, issuance of new common stock shares, such as
for an acquisition, would dilute the book value of existing shareholders.
Table 21: Capital Ratios – PSB Holdings, Inc.
– Consolidated
|
|
June 30,
|
|
December 31,
|
(dollars in thousands)
|
|
2012
|
|
2011
|
|
2011
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
$
|
52,632
|
|
|
$
|
48,731
|
|
|
$
|
50,362
|
|
Junior subordinated debentures, net
|
|
|
7,500
|
|
|
|
7,500
|
|
|
|
7,500
|
|
Disallowed mortgage servicing right assets
|
|
|
(111
|
)
|
|
|
(123
|
)
|
|
|
(121
|
)
|
Accumulated other comprehensive income
|
|
|
(1,654
|
)
|
|
|
(2,575
|
)
|
|
|
(1,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 regulatory capital
|
|
|
58,367
|
|
|
|
53,533
|
|
|
|
55,807
|
|
Senior subordinated notes
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Allowance for loan losses
|
|
|
6,173
|
|
|
|
5,697
|
|
|
|
5,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total regulatory capital
|
|
$
|
71,540
|
|
|
$
|
66,230
|
|
|
$
|
68,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total quarterly average assets (as defined by current regulations)
|
|
$
|
637,608
|
|
|
$
|
602,181
|
|
|
$
|
604,252
|
|
Disallowed mortgage servicing right assets
|
|
|
(111
|
)
|
|
|
(125
|
)
|
|
|
(121
|
)
|
Accumulated other comprehensive (income) loss
|
|
|
(1,654
|
)
|
|
|
(2,509
|
)
|
|
|
(2,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average tangible assets (as defined by current regulations)
|
|
$
|
635,843
|
|
|
$
|
599,547
|
|
|
$
|
602,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets (as defined by current regulations)
|
|
$
|
492,380
|
|
|
$
|
453,619
|
|
|
$
|
457,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average tangible assets (leverage ratio)
|
|
|
9.18
|
%
|
|
|
8.93
|
%
|
|
|
9.27
|
%
|
Tier 1 capital to risk-weighted assets
|
|
|
11.85
|
%
|
|
|
11.80
|
%
|
|
|
12.20
|
%
|
Total capital to risk-weighted assets
|
|
|
14.53
|
%
|
|
|
14.60
|
%
|
|
|
14.99
|
%
|
Table 22: Capital Ratios – Peoples State Bank
– Subsidiary
Tier 1 capital to average tangible assets (leverage ratio)
|
|
|
9.45
|
%
|
|
|
9.74
|
%
|
|
|
9.99
|
%
|
Tier 1 capital to risk-weighted assets
|
|
|
12.57
|
%
|
|
|
12.88
|
%
|
|
|
13.13
|
%
|
Total capital to risk-weighted assets
|
|
|
13.82
|
%
|
|
|
14.14
|
%
|
|
|
14.39
|
%
|
Table 23: Capital Ratios – Marathon State Bank
– Subsidiary
Tier 1 capital to average tangible assets (leverage ratio)
|
|
|
5.71
|
%
|
Tier 1 capital to risk-weighted assets
|
|
|
15.12
|
%
|
Total capital to risk-weighted assets
|
|
|
15.14
|
%
|
As a measurement of the adequacy of a bank’s capital
base related to its level of nonperforming assets, many investors use a “non-GAAP” measure commonly referred to as
the “Texas Ratio.” We also track changes in our Texas Ratio against our internal capital and liquidity risk parameters
to highlight negative capital trends that could impact our ability for future growth, payment of dividends to shareholders, or
other factors. As noted previously, correspondent bank providers of our daily federal funds purchased line of credit and the holding
company operating line of credit use similar measures that impact our ability to continued use of those lines of credit if our
level of nonperforming assets to capital were to rise above prescribed levels. The following table presents the calculation of
our Texas Ratio.
Table: 24: Calculation of “Texas Ratio”
(a non-GAAP measure)
|
|
As of Quarter End
|
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
(dollars in thousands)
|
|
2012
|
|
2012
|
|
2011
|
|
2011
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
17,360
|
|
|
$
|
18,850
|
|
|
$
|
17,883
|
|
|
$
|
18,583
|
|
|
$
|
19,378
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$
|
52,632
|
|
|
$
|
51,502
|
|
|
$
|
50,362
|
|
|
$
|
49,756
|
|
|
$
|
48,731
|
|
Less: Mortgage servicing rights, net (intangible assets)
|
|
|
(1,110
|
)
|
|
|
(1,151
|
)
|
|
|
(1,205
|
)
|
|
|
(1,154
|
)
|
|
|
(1,230
|
)
|
Less: Preferred stock capital elements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Add: Allowance for loan losses
|
|
|
7,648
|
|
|
|
7,755
|
|
|
|
7,941
|
|
|
|
8,019
|
|
|
|
7,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tangible common stockholders’ equity and reserves
|
|
$
|
59,170
|
|
|
$
|
58,106
|
|
|
$
|
57,098
|
|
|
$
|
56,621
|
|
|
$
|
55,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets as a percentage of total tangible common stockholders’ equity and reserves
|
|
|
29.34
|
%
|
|
|
32.44
|
%
|
|
|
31.32
|
%
|
|
|
32.82
|
%
|
|
|
35.03
|
%
|
OFF BALANCE-SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Off Balance Sheet Arrangements
We service residential mortgage loans originated by our lenders
and sold to the FHLB and FNMA. As a FHLB Mortgage Partnership Finance (“MPF”) loan servicer, we provide a credit enhancement
guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of the original loan principal sold to the FHLB prior to
November 2008. These first mortgage loans are underwritten using standardized criteria we consider to be conservative on residential
properties in our local communities. We believe loans serviced for the FHLB will realize minimal foreclosure losses in the future
and that we will experience no loan losses related to charge-offs in excess of the FHLB 1% First Loss Account. The north central
Wisconsin residential real estate market is experiencing similar home value declines as the state of Wisconsin as a whole, which
are moderate when compared to other states in the country. The average residential first mortgage originated by us under the FHLB
program which required a credit enhancement was approximately $154 in 2008 and $140 during 2007, the last two years of the program.
Under bank regulatory capital rules, this FHLB recourse obligation
to the FHLB is risk-weighted for the purposes of the total capital to risk-weighted assets capital calculation. Total risk-based
capital required to be held for the recourse obligations under the FHLB MPF programs for capital adequacy purposes was $1,859 at
June 30, 2012 and December 31, 2011. During October 2008, we ceased origination and sale of loans to the FHLB that required a credit
enhancement and no additional risk-based capital will be required to support such loans. More information on all loans serviced
for other investors, including FHLB and FNMA, is outlined in Table 24.
During 2011, we began sale of a new product that allowed
certain adjustable rate commercial loan customers to fix their interest rate with an interest rate swap. Refer to Note 8 of the
Notes to Consolidated Financial Statements for details on the program. There were $15,298 and $14,324 in interest rate swaps outstanding
under the program at June 30, 2012 and December 31, 2011, respectively.
Residential Mortgage Loan Servicing
We service $258,072 and $261,811 of residential real estate
loans which have been sold to the FHLB and FNMA at June 30, 2012 and December 31, 2011, respectively. Loans sold to FHLB and FNMA
are not reflected on our Consolidated Balance Sheets. An annualized servicing fee equal to .25% of outstanding principal is retained
from payments collected from the customer as compensation for servicing the loan for the FHLB and FNMA. We recognize a mortgage
servicing right asset due to the substantial volume of loans serviced for the FHLB and FNMA. Despite ongoing heightened customer
mortgage refinance activity since December 31, 2011, total serviced loans have declined due to keeping approximately $10.1 million
of 15 year fixed rate mortgage originations during 2012 in our on-balance sheet loan portfolio rather than selling those loans
and retaining servicing.
For loans originated and sold to the FHLB prior to November
2008, we are also paid an annualized “credit enhancement” fee of .07% to .10% of outstanding serviced principal in
addition to the .25% collected for servicing the loan for the FHLB impacting $41,952, or 16%, of serviced loans at June 30, 2012
compared to $51,518, or 20%, at December 31, 2011. Mortgage loan servicing and credit enhancement fees have been an important source
of mortgage banking income. Because no further loans are sold to the FHLB with our credit enhancement and because foreclosure principal
losses on these loans are credited against any available credit enhancement fees, we expect credit enhancement fees to be negligible
during the year ended December 31, 2012.
Losses incurred by the FHLB on loans in the MPF 100 program
and the MPF 125 program are absorbed by the FHLB in their First Loss Account. If cumulative losses were to exceed the First Loss
Account, we would reimburse the FHLB for any excess losses up to the extent of our Credit Enhancement Guarantee. Ten years after
the original pool master commitment date, the First Loss Account and the Credit Enhancement Guarantee are reset to current levels
based on loans remaining in the pool. These factors are further reset every subsequent five years until the pool is repaid. During
2010, the MPF 100 program reached its ten year anniversary and the First Loss Account and Credit Enhancement Guarantee associated
with that program were reset to the new level shown in Table 21. The next First Loss Account reset date for any individual master
commitment containing our Credit Enhancement Guarantee is scheduled for August 18, 2013.
Due to historical strength of mortgage borrowers in our markets
and relative stability of collateral home values, and the original 1% of principal First Loss Account provided by the FHLB, we
believe the possibility of losses under guarantees to the FHLB to be remote. Since inception of our pools containing guarantees
to the FHLB in 2000, only $0.3 million of $425 million of loans originated with guarantees have incurred a principal loss, all
of which has been borne by the FHLB within their First Loss Account. Accordingly, no provision for a recourse liability has been
made for this recourse obligation on loans currently serviced by us. Loans originated and sold to the FHLB under their XTRA program
do not require credit enhancement and PSB has no risk of principal loss on such loans properly underwritten and sold. Under the
MPF 100 and MPF 125 credit enhancement programs, the FHLB is reimbursed for any incurred principal losses in its First Loss Account
by withholding the monthly credit enhancement fee normally paid to us until their principal loss is recovered. We recognize credit
enhancement income on a cash basis when received monthly from the FHLB.
All loans sold to FHLB or FNMA in which we retain the loan
servicing are subject to underwriting representations and warranties made by us as the originator and we are subject to annual
underwriting audits from both entities. Our representations and warranties would allow FHLB or FNMA to require us to repurchase
inadequately originated loans for any number of underwriting violations. During 2011, we were required to repurchase a foreclosed
loan and incur a $37 loss related to underwriting violations related to private mortgage guarantee insurance. During the March
2012 quarter, we reviewed our existing portfolio and believe we do not have continued risk for significant loss on other loans
that could have this underwriting issue. Other than this loan, we have originated loans to these secondary market providers since
2000 and have never been required to repurchase a loan for underwriting or servicing violations and do not expect to be required
to repurchase loans in the near term.
The following tables summarize loan principal serviced for
the FHLB under various MPF programs and for FNMA as of June 30, 2012 and December 31, 2011.
Table 25: Residential Mortgage Loans Serviced for Others
as of June 30, 2012 ($000s)
|
|
Principal
|
|
Loan
|
|
Weighted Average Coupon
|
|
Average Monthly Payment
|
|
PSB Credit Enhancement
|
|
Agency Funded First Loss
|
|
Mortgage Servicing Right, net
|
Agency Program
|
|
Serviced
|
|
Count
|
|
Rate
|
|
Seasoning
|
|
Guarantee
|
|
Account
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB MPF 100
|
|
$
|
14,784
|
|
|
|
283
|
|
|
|
5.38
|
%
|
|
|
110
|
|
|
$
|
94
|
|
|
$
|
353
|
|
|
$
|
28
|
|
|
|
0.19
|
%
|
FHLB MPF 125
|
|
|
27,168
|
|
|
|
303
|
|
|
|
5.75
|
%
|
|
|
70
|
|
|
|
1,851
|
|
|
|
1,585
|
|
|
|
79
|
|
|
|
0.29
|
%
|
FHLB XTRA
|
|
|
190,165
|
|
|
|
1,472
|
|
|
|
4.25
|
%
|
|
|
20
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
869
|
|
|
|
0.46
|
%
|
FNMA
|
|
|
25,955
|
|
|
|
197
|
|
|
|
3.88
|
%
|
|
|
15
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
134
|
|
|
|
0.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
258,072
|
|
|
|
2,255
|
|
|
|
4.44
|
%
|
|
|
30
|
|
|
$
|
1,945
|
|
|
$
|
1,938
|
|
|
$
|
1,110
|
|
|
|
0.43
|
%
|
Table 26: Residential Mortgage Loans Serviced for Others
as of December 31, 2011 ($000s)
|
|
|
|
|
|
Weighted
|
|
Average Monthly
|
|
PSB Credit
|
|
Agency Funded First
|
|
Mortgage Servicing Right, net
|
Agency Program
|
|
Principal Serviced
|
|
Loan Count
|
|
Average Coupon Rate
|
|
Payment Seasoning
|
|
Enhancement Guarantee
|
|
Loss Account
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB MPF 100
|
|
$
|
18,132
|
|
|
|
329
|
|
|
|
5.38
|
%
|
|
|
104
|
|
|
$
|
94
|
|
|
$
|
353
|
|
|
$
|
46
|
|
|
|
0.25
|
%
|
FHLB MPF 125
|
|
|
33,386
|
|
|
|
350
|
|
|
|
5.75
|
%
|
|
|
66
|
|
|
|
1,851
|
|
|
|
1,587
|
|
|
|
131
|
|
|
|
0.39
|
%
|
FHLB XTRA
|
|
|
191,421
|
|
|
|
1,451
|
|
|
|
4.50
|
%
|
|
|
18
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
931
|
|
|
|
0.49
|
%
|
FNMA
|
|
|
18,872
|
|
|
|
146
|
|
|
|
4.00
|
%
|
|
|
13
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
97
|
|
|
|
0.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
261,811
|
|
|
|
2,276
|
|
|
|
4.68
|
%
|
|
|
30
|
|
|
$
|
1,945
|
|
|
$
|
1,940
|
|
|
$
|
1,205
|
|
|
|
0.46
|
%
|
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 our Form 10-K for the year ended December 31, 2011.
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 our President and Chief Executive Officer and the Chief Financial Officer,
evaluated the effectiveness of the design and operation of our 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 our disclosure controls and procedures were effective.
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 referenced in Part I of PSB’s Annual Report on Form 10-K for
the year ended December 31, 2011, under the caption “Forward-Looking Statements.” These and other risk factors could
materially affect PSB’s business, financial condition, or future results of operations. The risks referenced in PSB’s
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 PSB’s business, financial condition, and/or
operating results.
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
|
101.INS*
|
XBRL Instance Document
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF*
|
XBRL Taxonomy Definition Linkbase Document
|
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
* XBRL (Extensible Business Reporting
Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11
or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and
otherwise is not subject to liability under these sections.
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
PSB HOLDINGS, INC.
|
|
|
August 14, 2012
|
SCOTT M. CATTANACH
|
|
Scott M. Cattanach
|
|
Treasurer
|
|
|
|
(On behalf of the Registrant and as Principal
Financial Officer)
|
EXHIBIT INDEX
to
FORM 10-Q
of
PSB HOLDINGS, INC.
for the quarterly period ended June
30, 2012
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:
-58-
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