FORM
10-Q
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
☒ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2014
OR
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _____________ to _____________
Commission
file number: 0-26480
PSB
HOLDINGS, INC.
(Exact
name of registrant as specified in charter)
WISCONSIN |
|
39-1804877 |
(State
of incorporation) |
|
(I.R.S.
Employer Identification Number) |
1905
Stewart Avenue
Wausau,
Wisconsin 54401
(Address
of principal executive office)
Registrant’s
telephone number, including area code: 715-842-2191
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
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).
Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer |
☐ |
|
Accelerated
filer |
☐ |
|
|
|
|
|
|
|
|
|
Non-accelerated
filer |
☐ |
|
Smaller
reporting company |
☒ |
|
|
(Do
not check if a smaller reporting company) |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Exchange Act).
Yes ☐ No ☒
The
number of common shares outstanding at November 1, 2014 was 1,638,157.
PSB
HOLDINGS, INC.
FORM
10-Q
Quarter
Ended September 30, 2014
|
|
Page
No. |
PART
I. |
FINANCIAL
INFORMATION |
|
|
|
|
|
Item
1. |
Financial
Statements |
|
|
|
|
|
|
|
Consolidated
Balance Sheets |
|
|
|
September
30, 2014 (unaudited) and December 31, 2013 |
|
|
|
(derived
from audited financial statements) |
1 |
|
|
|
|
|
|
Consolidated
Statements of Income |
|
|
|
Three
Months and Nine Months Ended September 30, 2014 and 2013 (unaudited) |
2 |
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income |
|
|
|
Three
Months and Nine Months Ended September 30, 2014 and 2013 (unaudited) |
3 |
|
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity |
|
|
|
Nine
Months Ended September 30, 2014 and 2013 (unaudited) |
4 |
|
|
|
|
|
|
Consolidated
Statements of Cash Flows |
|
|
|
Nine
Months Ended September 30, 2014 and 2013 (unaudited) |
5 |
|
|
|
|
|
|
Notes
to Consolidated Financial Statements |
7 |
|
|
|
|
|
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations |
30 |
|
|
|
|
|
Item
3. |
Quantitative
and Qualitative Disclosures About Market Risk |
59 |
|
|
|
|
|
Item
4. |
Controls
and Procedures |
59 |
|
|
|
|
PART
II. |
OTHER
INFORMATION |
|
|
|
|
|
|
Item
1A. |
Risk
Factors |
59 |
|
|
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
59 |
|
|
|
|
|
Item
6. |
Exhibits |
60 |
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
PSB Holdings,
Inc.
Consolidated
Balance Sheets
September
30, 2014 unaudited, December 31, 2013 derived from audited financial statements
| |
September 30, | | |
December 31, | |
(dollars in thousands, except per share data) | |
2014 | | |
2013 | |
Assets | |
| | |
| |
| |
| | |
| |
Cash and due from banks | |
$ | 9,824 | | |
$ | 13,800 | |
Interest-bearing deposits and money market funds | |
| 1,820 | | |
| 977 | |
Federal funds sold | |
| 1,173 | | |
| 16,745 | |
| |
| | | |
| | |
Cash and cash equivalents | |
| 12,817 | | |
| 31,522 | |
| |
| | | |
| | |
Securities available for sale (at fair value) | |
| 73,174 | | |
| 61,650 | |
Securities held to maturity (fair value of $71,645 and $71,672 respectively) | |
| 70,402 | | |
| 71,629 | |
Bank certificates of deposit | |
| 3,424 | | |
| 2,236 | |
Loans held for sale | |
| 999 | | |
| 150 | |
Loans receivable, net | |
| 533,088 | | |
| 509,880 | |
Accrued interest receivable | |
| 2,165 | | |
| 2,076 | |
Foreclosed assets | |
| 1,724 | | |
| 1,750 | |
Premises and equipment, net | |
| 10,981 | | |
| 9,669 | |
Mortgage servicing rights, net | |
| 1,734 | | |
| 1,696 | |
Federal Home Loan Bank stock (at cost) | |
| 2,556 | | |
| 2,556 | |
Cash surrender value of bank-owned life insurance | |
| 13,127 | | |
| 12,826 | |
Other assets | |
| 4,114 | | |
| 3,901 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 730,305 | | |
$ | 711,541 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
| |
| | | |
| | |
Non-interest-bearing deposits | |
$ | 109,197 | | |
$ | 102,644 | |
Interest-bearing deposits | |
| 492,880 | | |
| 474,870 | |
| |
| | | |
| | |
Total deposits | |
| 602,077 | | |
| 577,514 | |
| |
| | | |
| | |
Federal Home Loan Bank advances | |
| 31,372 | | |
| 38,049 | |
Other borrowings | |
| 18,211 | | |
| 20,441 | |
Senior subordinated notes | |
| 4,000 | | |
| 4,000 | |
Junior subordinated debentures | |
| 7,732 | | |
| 7,732 | |
Accrued expenses and other liabilities | |
| 6,305 | | |
| 7,052 | |
| |
| | | |
| | |
Total liabilities | |
| 669,697 | | |
| 654,788 | |
| |
| | | |
| | |
Stockholders’ equity | |
| | | |
| | |
| |
| | | |
| | |
Preferred stock – no par value: | |
| | | |
| | |
Authorized – 30,000 shares; no shares issued or outstanding | |
| – | | |
| – | |
Common stock – no par value with a stated value of $1 per share: | |
| | | |
| | |
Authorized – 6,000,000 shares; Issued – 1,830,266 shares | |
| | | |
| | |
Outstanding – 1,648,157 and 1,651,518 shares, respectively | |
| 1,830 | | |
| 1,830 | |
Additional paid-in capital | |
| 6,956 | | |
| 6,967 | |
Retained earnings | |
| 56,403 | | |
| 52,432 | |
Accumulated other comprehensive income, net of tax | |
| 397 | | |
| 349 | |
Treasury stock, at cost – 182,109 and 178,748 shares,
respectively | |
| (4,978 | ) | |
| (4,825 | ) |
| |
| | | |
| | |
Total stockholders’ equity | |
| 60,608 | | |
| 56,753 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 730,305 | | |
$ | 711,541 | |
PSB Holdings,
Inc.
Consolidated
Statements of Income
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30, | | |
September 30, | |
(dollars in thousands, except per share data – unaudited) | |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Interest and dividend income: | |
| | |
| | |
| | |
| |
Loans, including fees | |
$ | 5,821 | | |
$ | 5,865 | | |
$ | 16,885 | | |
$ | 17,333 | |
Securities: | |
| | | |
| | | |
| | | |
| | |
Taxable | |
| 617 | | |
| 509 | | |
| 1,779 | | |
| 1,566 | |
Tax-exempt | |
| 377 | | |
| 383 | | |
| 1,132 | | |
| 1,133 | |
Other interest and dividends | |
| 18 | | |
| 15 | | |
| 60 | | |
| 56 | |
| |
| | | |
| | | |
| | | |
| | |
Total interest and dividend income | |
| 6,833 | | |
| 6,772 | | |
| 19,856 | | |
| 20,088 | |
| |
| | | |
| | | |
| | | |
| | |
Interest expense: | |
| | | |
| | | |
| | | |
| | |
Deposits | |
| 703 | | |
| 738 | | |
| 2,132 | | |
| 2,279 | |
FHLB advances | |
| 118 | | |
| 323 | | |
| 534 | | |
| 977 | |
Other borrowings | |
| 154 | | |
| 165 | | |
| 464 | | |
| 490 | |
Senior subordinated notes | |
| 38 | | |
| 38 | | |
| 113 | | |
| 147 | |
Junior subordinated debentures | |
| 86 | | |
| 86 | | |
| 255 | | |
| 255 | |
| |
| | | |
| | | |
| | | |
| | |
Total interest expense | |
| 1,099 | | |
| 1,350 | | |
| 3,498 | | |
| 4,148 | |
| |
| | | |
| | | |
| | | |
| | |
Net interest income | |
| 5,734 | | |
| 5,422 | | |
| 16,358 | | |
| 15,940 | |
Provision for loan losses | |
| 140 | | |
| 3,340 | | |
| 420 | | |
| 4,015 | |
| |
| | | |
| | | |
| | | |
| | |
Net interest income after provision for loan losses | |
| 5,594 | | |
| 2,082 | | |
| 15,938 | | |
| 11,925 | |
| |
| | | |
| | | |
| | | |
| | |
Noninterest income: | |
| | | |
| | | |
| | | |
| | |
Service fees | |
| 448 | | |
| 422 | | |
| 1,223 | | |
| 1,170 | |
Mortgage banking | |
| 375 | | |
| 384 | | |
| 965 | | |
| 1,338 | |
Investment and insurance sales commissions | |
| 225 | | |
| 204 | | |
| 718 | | |
| 695 | |
Net gain on sale of securities | |
| – | | |
| – | | |
| – | | |
| 12 | |
Increase in cash surrender value of life insurance | |
| 103 | | |
| 102 | | |
| 302 | | |
| 300 | |
Other noninterest income | |
| 330 | | |
| 299 | | |
| 962 | | |
| 834 | |
| |
| | | |
| | | |
| | | |
| | |
Total noninterest income | |
| 1,481 | | |
| 1,411 | | |
| 4,170 | | |
| 4,349 | |
| |
| | | |
| | | |
| | | |
| | |
Noninterest expense: | |
| | | |
| | | |
| | | |
| | |
Salaries and employee benefits | |
| 2,489 | | |
| 2,031 | | |
| 7,282 | | |
| 6,609 | |
Occupancy and facilities | |
| 454 | | |
| 408 | | |
| 1,361 | | |
| 1,324 | |
Loss on foreclosed assets | |
| 47 | | |
| 144 | | |
| 121 | | |
| 294 | |
Data processing and other office operations | |
| 503 | | |
| 449 | | |
| 1,732 | | |
| 1,403 | |
Advertising and promotion | |
| 82 | | |
| 80 | | |
| 257 | | |
| 234 | |
FDIC insurance premiums | |
| 145 | | |
| 100 | | |
| 424 | | |
| 311 | |
Other noninterest expenses | |
| 741 | | |
| 605 | | |
| 2,239 | | |
| 1,940 | |
| |
| | | |
| | | |
| | | |
| | |
Total noninterest expense | |
| 4,461 | | |
| 3,817 | | |
| 13,416 | | |
| 12,115 | |
| |
| | | |
| | | |
| | | |
| | |
Income (loss) before provision for income taxes | |
| 2,614 | | |
| (324 | ) | |
| 6,692 | | |
| 4,159 | |
Provision (credit) for income taxes | |
| 832 | | |
| (337 | ) | |
| 2,057 | | |
| 976 | |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 1,782 | | |
$ | 13 | | |
$ | 4,635 | | |
$ | 3,183 | |
Basic earnings per share | |
$ | 1.08 | | |
$ | 0.01 | | |
$ | 2.80 | | |
$ | 1.93 | |
Diluted earnings per share | |
$ | 1.08 | | |
$ | 0.01 | | |
$ | 2.80 | | |
$ | 1.93 | |
PSB Holdings,
Inc.
Consolidated
Statements of Comprehensive Income (Loss)
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30, | | |
September 30, | |
(dollars in thousands – unaudited) | |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Net income | |
$ | 1,782 | | |
$ | 13 | | |
$ | 4,635 | | |
$ | 3,183 | |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive income, net of tax: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Unrealized gain (loss) on securities available for sale | |
| (165 | ) | |
| (265 | ) | |
| 132 | | |
| (780 | ) |
| |
| | | |
| | | |
| | | |
| | |
Reclassification adjustment for security gain included
in net income | |
| – | | |
| – | | |
| – | | |
| (7 | ) |
| |
| | | |
| | | |
| | | |
| | |
Accretion (amortization) of unrealized gain included
in net income on securities available for sale transferred to securities held to maturity | |
| (50 | ) | |
| 16 | | |
| (152 | ) | |
| (175 | ) |
| |
| | | |
| | | |
| | | |
| | |
Unrealized gain (loss) on interest rate swap | |
| 20 | | |
| (39 | ) | |
| (17 | ) | |
| 45 | |
| |
| | | |
| | | |
| | | |
| | |
Reclassification adjustment
of interest rate swap settlements included in earnings | |
| 28 | | |
| 28 | | |
| 85 | | |
| 84 | |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive income (loss) | |
| (167 | ) | |
| (260 | ) | |
| 48 | | |
| (833 | ) |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income (loss) | |
$ | 1,615 | | |
$ | (247 | ) | |
$ | 4,683 | | |
$ | 2,350 | |
PSB Holdings,
Inc.
Consolidated
Statements of Changes in Stockholders’ Equity
Nine
months ended September 30, 2014 - unaudited
| |
| | |
| | |
| | |
Accumulated | | |
| | |
| |
| |
| | |
| | |
| | |
Other | | |
| | |
| |
| |
| | |
Additional | | |
| | |
Comprehensive | | |
| | |
| |
| |
Common | | |
Paid-in | | |
Retained | | |
Income | | |
Treasury | | |
| |
(dollars in thousands) | |
Stock | | |
Capital | | |
Earnings | | |
(Loss) | | |
Stock | | |
Totals | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance January 1, 2014 | |
$ | 1,830 | | |
$ | 6,967 | | |
$ | 52,432 | | |
$ | 349 | | |
$ | (4,825 | ) | |
$ | 56,753 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| | | |
| | | |
| 4,635 | | |
| | | |
| | | |
| 4,635 | |
Other comprehensive income | |
| | | |
| | | |
| | | |
| 48 | | |
| | | |
| 48 | |
Purchase of treasury stock | |
| | | |
| | | |
| | | |
| | | |
| (332 | ) | |
| (332 | ) |
Issuance of new restricted stock grants | |
| | | |
| (173 | ) | |
| | | |
| | | |
| 173 | | |
| – | |
Vesting of existing restricted stock grants | |
| | | |
| 162 | | |
| | | |
| | | |
| | | |
| 162 | |
Directors fees paid in grants of stock | |
| | | |
| – | | |
| | | |
| | | |
| 6 | | |
| 6 | |
Cash dividends declared $.40 per share | |
| | | |
| | | |
| (649 | ) | |
| | | |
| | | |
| (649 | ) |
Cash dividends declared
on unvested restricted stock grants | |
| | | |
| | | |
| (15 | ) | |
| | | |
| | | |
| (15 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance September 30, 2014 | |
$ | 1,830 | | |
$ | 6,956 | | |
$ | 56,403 | | |
$ | 397 | | |
$ | (4,978 | ) | |
$ | 60,608 | |
Nine
months ended September 30, 2013 - unaudited
| |
| | |
| | |
| | |
Accumulated | | |
| | |
| |
| |
| | |
| | |
| | |
Other | | |
| | |
| |
| |
| | |
Additional | | |
| | |
Comprehensive | | |
| | |
| |
| |
Common | | |
Paid-in | | |
Retained | | |
Income | | |
Treasury | | |
| |
(dollars in thousands) | |
Stock | | |
Capital | | |
Earnings | | |
(Loss) | | |
Stock | | |
Totals | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance January 1, 2013 | |
$ | 1,830 | | |
$ | 7,020 | | |
$ | 48,977 | | |
$ | 1,394 | | |
$ | (4,774 | ) | |
$ | 54,447 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| | | |
| | | |
$ | 3,183 | | |
| | | |
| | | |
$ | 3,183 | |
Other comprehensive loss | |
| | | |
| | | |
| | | |
| (833 | ) | |
| | | |
| (833 | ) |
Purchase of treasury stock | |
| | | |
| | | |
| | | |
| | | |
| (269 | ) | |
| (269 | ) |
Issuance of new restricted stock grants | |
| | | |
| (218 | ) | |
| | | |
| | | |
| 218 | | |
| – | |
Vesting of existing restricted stock grants | |
| | | |
| 128 | | |
| | | |
| | | |
| | | |
| 128 | |
Cash dividends declared $.39 per share | |
| | | |
| | | |
| (631 | ) | |
| | | |
| | | |
| (631 | ) |
Cash dividends declared
on unvested restricted stock grants | |
| | | |
| | | |
| (13 | ) | |
| | | |
| | | |
| (13 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance September 30, 2013 | |
$ | 1,830 | | |
$ | 6,930 | | |
$ | 51,516 | | |
$ | 561 | | |
$ | (4,825 | ) | |
$ | 56,012 | |
PSB Holdings,
Inc.
Consolidated
Statements of Cash Flows
Nine months
ended September 30, 2014 - unaudited
(dollars in thousands – unaudited) | |
2014 | | |
2013 | |
| |
| | |
| |
Cash flows from operating activities: | |
| | |
| |
| |
| | |
| |
Net income | |
$ | 4,635 | | |
$ | 3,183 | |
Adjustments to reconcile net income to net cash provided
by operating activities: | |
| | | |
| | |
Provision for depreciation and net amortization | |
| 1,729 | | |
| 1,956 | |
Provision for loan losses | |
| 420 | | |
| 4,015 | |
Deferred net loan origination costs | |
| (314 | ) | |
| (387 | ) |
Gain on sale of loans | |
| (688 | ) | |
| (1,152 | ) |
Provision for servicing right valuation allowance | |
| 5 | | |
| (240 | ) |
Loss on sale of premises and equipment | |
| 12 | | |
| – | |
Loss on sale of foreclosed assets | |
| 19 | | |
| 210 | |
Gain on sale of securities | |
| – | | |
| (12 | ) |
Increase in cash surrender value of life insurance | |
| (302 | ) | |
| (300 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accrued interest receivable | |
| (41 | ) | |
| (100 | ) |
Other assets | |
| 60 | | |
| 1,285 | |
Other liabilities | |
| (667 | ) | |
| (841 | ) |
| |
| | | |
| | |
Net cash provided by operating activities | |
| 4,868 | | |
| 7,617 | |
PSB Holdings,
Inc.
Consolidated
Statements of Cash Flows
Nine months
ended September 30, 2014 – unaudited (continued)
(dollars in thousands – unaudited) | |
2014 | | |
2013 | |
| |
| | |
| |
Cash flows from investing activities: | |
| | |
| |
| |
| | |
| |
Proceeds from sale and maturities of: | |
| | |
| |
Securities available for sale | |
| 12,225 | | |
| 39,084 | |
Securities held to maturity | |
| 3,940 | | |
| 4,397 | |
Payment for purchase of: | |
| | | |
| | |
Securities available for sale | |
| (23,762 | ) | |
| (26,909 | ) |
Securities held to maturity | |
| (3,158 | ) | |
| (6,668 | ) |
Cash acquired on branch purchase | |
| 17,741 | | |
| – | |
Proceeds from (purchase of) other investments | |
| (1,188 | ) | |
| 1,984 | |
Purchase of FHLB stock | |
| – | | |
| (1,088 | ) |
Net increase in loans | |
| (3,522 | ) | |
| (42,649 | ) |
Capital expenditures | |
| (501 | ) | |
| (191 | ) |
Proceeds from sale of premises and equipment | |
| 7 | | |
| – | |
Proceeds from sale of foreclosed assets | |
| 765 | | |
| 698 | |
Purchase of bank-owned life insurance | |
| – | | |
| (610 | ) |
| |
| | | |
| | |
Net cash provided by (used in) investing
activities | |
| 2,547 | | |
| (31,952 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
| |
| | | |
| | |
Net increase in non-interest-bearing deposits | |
| 2,663 | | |
| 2,322 | |
Net decrease in interest-bearing deposits | |
| (18,880 | ) | |
| (13,466 | ) |
Net increase (decrease) in FHLB advances | |
| (6,677 | ) | |
| 8,000 | |
Net decrease in other borrowings | |
| (2,230 | ) | |
| (375 | ) |
Repayment of senior subordinated notes | |
| – | | |
| (3,000 | ) |
Dividends declared | |
| (664 | ) | |
| (644 | ) |
Purchase of treasury stock | |
| (332 | ) | |
| (269 | ) |
| |
| | | |
| | |
Net cash used in financing activities | |
| (26,120 | ) | |
| (7,432 | ) |
| |
| | | |
| | |
Net decrease in cash and cash equivalents | |
| (18,705 | ) | |
| (31,767 | ) |
Cash and cash equivalents at beginning | |
| 31,522 | | |
| 48,847 | |
| |
| | | |
| | |
Cash and cash equivalents at end | |
$ | 12,817 | | |
$ | 17,080 | |
| |
| | | |
| | |
Supplemental cash flow information: | |
| | | |
| | |
| |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | 3,564 | | |
$ | 4,304 | |
Income taxes | |
| 1,880 | | |
| 694 | |
| |
| | | |
| | |
Noncash investing and financing activities: | |
| | | |
| | |
| |
| | | |
| | |
Loans charged off | |
$ | 810 | | |
$ | 4,366 | |
Loans transferred to foreclosed assets | |
| 801 | | |
| 947 | |
Loans originated on sale of foreclosed assets | |
| 43 | | |
| 207 | |
Issuance of unvested restricted stock grants at fair value | |
| 200 | | |
| 210 | |
Vesting of restricted stock grants | |
| 162 | | |
| 128 | |
PSB
Holdings, Inc.
Notes
to Consolidated Financial Statements
NOTE 1 –
GENERAL
In the opinion
of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly
PSB Holdings, Inc.’s (“PSB”) financial position, results of its operations, and cash flows for the periods presented,
and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries.
All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year. Any reference to “PSB” refers to the consolidated
or individual operations of PSB Holdings, Inc. and its subsidiary Peoples State Bank. Dollar amounts are in thousands, except
per share amounts.
These interim
consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission
and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting
principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes
in PSB’s Annual Report on Form 10-K for the year ended December 31, 2013 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 – PURCHASE OF NORTHWOODS NATIONAL BANK, RHINELANDER BRANCH, OF THE BARABOO NATIONAL BANK
On April
11, 2014, Peoples State Bank, subsidiary of PSB Holdings, Inc., purchased the following assets and liabilities of the Northwoods
National Bank, Rhinelander, Wisconsin branch:
Fair value of assets acquired ($000s): | |
| |
| |
| |
Cash and due from banks | |
$ | 17,741 | |
Loans receivable, including accrued interest | |
| 21,365 | |
Premises and equipment | |
| 1,368 | |
Core deposit intangible | |
| 231 | |
Goodwill | |
| 113 | |
| |
| | |
Total fair value of assets acquired | |
$ | 40,818 | |
| |
| | |
Fair value of liabilities assumed ($000s): | |
| | |
| |
| | |
Non-interest bearing deposits | |
$ | 3,890 | |
Interest-bearing deposits, including accrued interest | |
| 36,912 | |
Other liabilities | |
| 16 | |
| |
| | |
Fair value of liabilities assumed | |
$ | 40,818 | |
The core
deposit intangible is being amortized over a five year period using a double declining balance method. In the transaction, net
cash received by PSB from the seller was reduced by the purchase premium of $654.
NOTE 3 –
SECURITIES
The amortized
cost and estimated fair value of investment securities are as follows:
| |
| | |
Gross | | |
Gross | | |
Estimated | |
| |
Amortized | | |
Unrealized | | |
Unrealized | | |
Fair | |
September 30, 2014 | |
Cost | | |
Gains | | |
Losses | | |
Value | |
| |
| | |
| | |
| | |
| |
Securities available for sale | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
U.S. agency issued residential mortgage-backed
securities | |
$ | 41,198 | | |
$ | 562 | | |
$ | 257 | | |
$ | 41,503 | |
U.S. agency issued residential collateralized mortgage
obligations | |
| 30,726 | | |
| 342 | | |
| 424 | | |
| 30,644 | |
Privately issued residential collateralized mortgage
obligations | |
| 29 | | |
| 1 | | |
| | | |
| 30 | |
Nonrated SBA loan fund | |
| 950 | | |
| – | | |
| – | | |
| 950 | |
Other equity securities | |
| 47 | | |
| – | | |
| – | | |
| 47 | |
| |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 72,950 | | |
$ | 905 | | |
$ | 681 | | |
$ | 73,174 | |
| |
| | | |
| | | |
| | | |
| | |
Securities held to maturity | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Obligations of states and political subdivisions | |
$ | 68,464 | | |
$ | 1,572 | | |
$ | 208 | | |
$ | 69,828 | |
Nonrated trust preferred securities | |
| 1,538 | | |
| 29 | | |
| 154 | | |
| 1,413 | |
Nonrated senior subordinated
notes | |
| 400 | | |
| 4 | | |
| | | |
| 404 | |
| |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 70,402 | | |
$ | 1,605 | | |
$ | 362 | | |
$ | 71,645 | |
| |
| | |
Gross | | |
Gross | | |
Estimated | |
| |
Amortized | | |
Unrealized | | |
Unrealized | | |
Fair | |
December 31, 2013 | |
Cost | | |
Gains | | |
Losses | | |
Value | |
| |
| | |
| | |
| | |
| |
Securities available for sale | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
U.S. Treasury securities and obligations
of U.S. government corporations and agencies | |
$ | 1,001 | | |
$ | – | | |
$ | 2 | | |
$ | 999 | |
U.S. agency issued residential mortgage-backed securities | |
| 21,388 | | |
| 522 | | |
| 424 | | |
| 21,486 | |
U.S. agency issued residential collateralized mortgage
obligations | |
| 37,998 | | |
| 482 | | |
| 576 | | |
| 37,904 | |
Privately issued residential collateralized mortgage
obligations | |
| 102 | | |
| 3 | | |
| – | | |
| 105 | |
Obligations of states and political subdivisions | |
| 159 | | |
| – | | |
| – | | |
| 159 | |
Nonrated SBA loan fund | |
| 950 | | |
| – | | |
| – | | |
| 950 | |
Other equity securities | |
| 47 | | |
| – | | |
| – | | |
| 47 | |
| |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 61,645 | | |
$ | 1,007 | | |
$ | 1,002 | | |
$ | 61,650 | |
| |
| | | |
| | | |
| | | |
| | |
Securities held to maturity | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Obligations of states and political subdivisions | |
$ | 69,704 | | |
$ | 1,059 | | |
$ | 887 | | |
$ | 69,876 | |
Nonrated trust preferred securities | |
| 1,524 | | |
| 30 | | |
| 165 | | |
| 1,389 | |
Nonrated senior subordinated
notes | |
| 401 | | |
| 6 | | |
| – | | |
| 407 | |
| |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 71,629 | | |
$ | 1,095 | | |
$ | 1,052 | | |
$ | 71,672 | |
Securities
with a fair value of $49,500 and $47,593 at September 30, 2014 and December 31, 2013, respectively, were pledged to secure public
deposits, other borrowings, and for other purposes required by law.
During the
quarter ended March 31, 2014, PSB realized a net gain of $0 from proceeds totaling $262 on the sale of securities available for
sale. During the quarter ended March 31, 2013, PSB realized a net gain of $12 ($7 after tax expense) from proceeds totaling $986
on the sale of securities available for sale. There were no other sales of securities during the nine month periods ended September
30, 2014 and 2013.
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:
| |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | |
| |
Commercial, industrial, and municipal | |
$ | 138,999 | | |
$ | 130,220 | |
Commercial real estate mortgage | |
| 207,477 | | |
| 212,850 | |
Commercial construction and development | |
| 31,943 | | |
| 13,672 | |
Residential real estate mortgage | |
| 129,286 | | |
| 123,980 | |
Residential construction and development | |
| 17,254 | | |
| 18,277 | |
Residential real estate home equity | |
| 23,570 | | |
| 20,677 | |
Consumer and individual | |
| 3,448 | | |
| 3,567 | |
| |
| | | |
| | |
Subtotals – Gross loans | |
| 551,977 | | |
| 523,243 | |
Loans in process of disbursement | |
| (12,776 | ) | |
| (6,895 | ) |
| |
| | | |
| | |
Subtotals – Disbursed loans | |
| 539,201 | | |
| 516,348 | |
Net deferred loan costs | |
| 311 | | |
| 315 | |
Allowance for loan losses | |
| (6,424 | ) | |
| (6,783 | ) |
| |
| | | |
| | |
Net loans receivable | |
$ | 533,088 | | |
$ | 509,880 | |
The following
is a summary of information pertaining to impaired loans at period-end:
| |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | |
| |
Impaired loans without a valuation allowance | |
$ | 9,042 | | |
$ | 9,303 | |
Impaired loans with a valuation allowance | |
| 10,298 | | |
| 6,472 | |
| |
| | | |
| | |
Total impaired loans before valuation allowances | |
| 19,340 | | |
| 15,775 | |
Valuation allowance related to impaired loans | |
| 2,283 | | |
| 2,108 | |
| |
| | | |
| | |
Net impaired loans | |
$ | 17,057 | | |
$ | 13,667 | |
Activity
in the allowance for loans losses during the nine months ended September 30, 2014 follows:
Allowance for loan losses: | |
Commercial | | |
Commercial Real Estate | | |
Residential Real Estate | | |
Consumer | | |
Unallocated | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Beginning Balance | |
$ | 2,828 | | |
$ | 2,653 | | |
$ | 1,223 | | |
$ | 79 | | |
$ | – | | |
$ | 6,783 | |
Provision (credit) | |
| (455 | ) | |
| (241 | ) | |
| 1,116 | | |
| – | | |
| – | | |
| 420 | |
Recoveries | |
| 6 | | |
| – | | |
| 18 | | |
| 7 | | |
| – | | |
| 31 | |
Charge offs | |
| (99 | ) | |
| – | | |
| (692 | ) | |
| (19 | ) | |
| – | | |
| (810 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance | |
$ | 2,280 | | |
$ | 2,412 | | |
$ | 1,665 | | |
$ | 67 | | |
$ | – | | |
$ | 6,424 | |
Activity
in the allowance for loans losses during the nine months ended September 30, 2013 follows:
Allowance for loan losses: | |
Commercial | | |
Commercial Real Estate | | |
Residential Real Estate | | |
Consumer | | |
Unallocated | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Beginning Balance | |
$ | 3,014 | | |
$ | 2,803 | | |
$ | 1,511 | | |
$ | 103 | | |
$ | – | | |
$ | 7,431 | |
Provision | |
| 3,553 | | |
| 226 | | |
| 198 | | |
| 38 | | |
| – | | |
| 4,015 | |
Recoveries | |
| 2 | | |
| 30 | | |
| 3 | | |
| 11 | | |
| – | | |
| 46 | |
Charge offs | |
| (3,568 | ) | |
| (174 | ) | |
| (574 | ) | |
| (50 | ) | |
| – | | |
| (4,366 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance | |
$ | 3,001 | | |
$ | 2,885 | | |
$ | 1,138 | | |
$ | 102 | | |
$ | – | | |
$ | 7,126 | |
The
following tables provide other information regarding the allowance for loan losses and balances by type of allowance methodology.
| |
At September 30, 2014 | |
| |
| | |
Commercial | | |
Residential | | |
| | |
| | |
| |
Allowance for loan
losses: | |
Commercial | | |
Real Estate | | |
Real Estate | | |
Consumer | | |
Unallocated | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Individually evaluated for impairment | |
$ | 1,233 | | |
$ | 519 | | |
$ | 522 | | |
$ | 9 | | |
$ | – | | |
$ | 2,283 | |
Collectively evaluated
for impairment | |
| 1,047 | | |
| 1,893 | | |
| 1,143 | | |
| 58 | | |
| – | | |
| 4,141 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total allowance for
loan losses | |
$ | 2,280 | | |
$ | 2,412 | | |
$ | 1,665 | | |
$ | 67 | | |
$ | – | | |
$ | 6,424 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans receivable (gross): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated for impairment | |
$ | 10,965 | | |
$ | 5,277 | | |
$ | 3,089 | | |
$ | 9 | | |
$ | – | | |
$ | 19,340 | |
Collectively evaluated
for impairment | |
| 128,034 | | |
| 234,143 | | |
| 167,021 | | |
| 3,439 | | |
| – | | |
| 532,637 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total loans receivable
(gross) | |
$ | 138,999 | | |
$ | 239,420 | | |
$ | 170,110 | | |
$ | 3,448 | | |
$ | – | | |
$ | 551,977 | |
| |
At December 31, 2013 | |
| |
| | |
Commercial | | |
Residential | | |
| | |
| | |
| |
Allowance for loan
losses: | |
Commercial | | |
Real Estate | | |
Real Estate | | |
Consumer | | |
Unallocated | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Individually evaluated for impairment | |
$ | 1,167 | | |
$ | 695 | | |
$ | 228 | | |
$ | 18 | | |
$ | – | | |
$ | 2,108 | |
Collectively evaluated
for impairment | |
| 1,661 | | |
| 1,958 | | |
| 995 | | |
| 61 | | |
| – | | |
| 4,675 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total allowance for
loan losses | |
$ | 2,828 | | |
$ | 2,653 | | |
$ | 1,223 | | |
$ | 79 | | |
$ | – | | |
$ | 6,783 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans receivable (gross): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated for impairment | |
$ | 8,102 | | |
$ | 5,527 | | |
$ | 2,129 | | |
$ | 17 | | |
$ | – | | |
$ | 15,775 | |
Collectively evaluated
for impairment | |
| 122,118 | | |
| 220,995 | | |
| 160,805 | | |
| 3,550 | | |
| – | | |
| 507,468 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total loans receivable
(gross) | |
$ | 130,220 | | |
$ | 226,522 | | |
$ | 162,934 | | |
$ | 3,567 | | |
$ | – | | |
$ | 523,243 | |
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 PSB’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 September 30, 2014, follows:
| |
| | |
Commercial | | |
Construction & | | |
| | |
| | |
| |
| |
Commercial | | |
Real Estate | | |
Development | | |
Agricultural | | |
Government | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
High quality (risk rating 1) | |
$ | 197 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 197 | |
Minimal risk (2) | |
| 32,034 | | |
| 19,535 | | |
| 298 | | |
| 1,718 | | |
| 65 | | |
| 53,650 | |
Average risk (3) | |
| 49,742 | | |
| 127,406 | | |
| 26,888 | | |
| 3,100 | | |
| 6,526 | | |
| 213,662 | |
Acceptable risk (4) | |
| 30,552 | | |
| 47,617 | | |
| 3,098 | | |
| 580 | | |
| 301 | | |
| 82,148 | |
Watch risk (5) | |
| 2,500 | | |
| 7,306 | | |
| 1,527 | | |
| 11 | | |
| – | | |
| 11,344 | |
Substandard risk (6) | |
| 708 | | |
| 468 | | |
| – | | |
| – | | |
| – | | |
| 1,176 | |
Impaired loans (7) | |
| 7,996 | | |
| 5,145 | | |
| 132 | | |
| 124 | | |
| 2,845 | | |
| 16,242 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 123,729 | | |
$ | 207,477 | | |
$ | 31,943 | | |
$ | 5,533 | | |
$ | 9,737 | | |
$ | 378,419 | |
The commercial
credit exposure based on internally assigned credit grade at December 31, 2013, follows:
| |
| | |
Commercial | | |
Construction & | | |
| | |
| | |
| |
| |
Commercial | | |
Real Estate | | |
Development | | |
Agricultural | | |
Government | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
High quality (risk rating 1) | |
$ | 44 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 44 | |
Minimal risk (2) | |
| 24,085 | | |
| 19,249 | | |
| 120 | | |
| 1,115 | | |
| 78 | | |
| 44,647 | |
Average risk (3) | |
| 51,745 | | |
| 145,673 | | |
| 8,863 | | |
| 2,563 | | |
| 6,512 | | |
| 215,356 | |
Acceptable risk (4) | |
| 26,395 | | |
| 34,154 | | |
| 2,917 | | |
| 424 | | |
| 357 | | |
| 64,247 | |
Watch risk (5) | |
| 8,146 | | |
| 7,572 | | |
| 1,632 | | |
| – | | |
| – | | |
| 17,350 | |
Substandard risk (6) | |
| 654 | | |
| 815 | | |
| – | | |
| – | | |
| – | | |
| 1,469 | |
Impaired loans (7) | |
| 4,860 | | |
| 5,387 | | |
| 140 | | |
| 152 | | |
| 3,090 | | |
| 13,629 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 115,929 | | |
$ | 212,850 | | |
$ | 13,672 | | |
$ | 4,254 | | |
$ | 10,037 | | |
$ | 356,742 | |
The consumer
credit exposure based on payment activity and internally assigned credit grade at September 30, 2014, follows:
| |
Residential- | | |
Construction and | | |
Residential- | | |
| | |
| |
| |
Prime | | |
Development | | |
HELOC | | |
Consumer | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Performing | |
$ | 127,076 | | |
$ | 16,756 | | |
$ | 23,189 | | |
$ | 3,439 | | |
$ | 170,460 | |
Impaired loans | |
| 2,210 | | |
| 498 | | |
| 381 | | |
| 9 | | |
| 3,098 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 129,286 | | |
$ | 17,254 | | |
$ | 23,570 | | |
$ | 3,448 | | |
$ | 173,558 | |
The consumer
credit exposure based on payment activity and internally assigned credit grade at December 31, 2013, follows:
| |
Residential- | | |
Construction and | | |
Residential- | | |
| | |
| |
| |
Prime | | |
Development | | |
HELOC | | |
Consumer | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Performing | |
$ | 122,408 | | |
$ | 18,230 | | |
$ | 20,167 | | |
$ | 3,550 | | |
$ | 164,355 | |
Impaired loans | |
| 1,572 | | |
| 47 | | |
| 510 | | |
| 17 | | |
| 2,146 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 123,980 | | |
$ | 18,277 | | |
$ | 20,677 | | |
$ | 3,567 | | |
$ | 166,501 | |
The payment
age analysis of loans receivable disbursed at September 30, 2014, follows:
| |
30-59 | | |
60-89 | | |
90+ | | |
Total | | |
| | |
Total | | |
90+ and | |
Loan Class | |
Days | | |
Days | | |
Days | | |
Past Due | | |
Current | | |
Loans | | |
Accruing | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Commercial: | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Commercial and industrial | |
$ | 350 | | |
$ | 67 | | |
$ | 555 | | |
$ | 972 | | |
$ | 122,757 | | |
$ | 123,729 | | |
$ | – | |
Agricultural | |
| 7 | | |
| – | | |
| 124 | | |
| 131 | | |
| 5,402 | | |
| 5,533 | | |
| – | |
Government | |
| – | | |
| – | | |
| – | | |
| – | | |
| 9,737 | | |
| 9,737 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate | |
| 655 | | |
| 32 | | |
| 625 | | |
| 1,312 | | |
| 206,165 | | |
| 207,477 | | |
| – | |
Commercial construction and development | |
| – | | |
| – | | |
| 16 | | |
| 16 | | |
| 20,962 | | |
| 20,978 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential – Prime | |
| 13 | | |
| 391 | | |
| 962 | | |
| 1,366 | | |
| 127,920 | | |
| 129,286 | | |
| – | |
Residential – HELOC | |
| 218 | | |
| 41 | | |
| 124 | | |
| 383 | | |
| 23,187 | | |
| 23,570 | | |
| – | |
Residential – construction and development | |
| 114 | | |
| 37 | | |
| 118 | | |
| 269 | | |
| 15,174 | | |
| 15,443 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consumer | |
| 4 | | |
| 5 | | |
| 2 | | |
| 11 | | |
| 3,437 | | |
| 3,448 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 1,361 | | |
$ | 573 | | |
$ | 2,526 | | |
$ | 4,460 | | |
$ | 534,741 | | |
$ | 539,201 | | |
$ | – | |
The payment
age analysis of loans receivable disbursed at December 31, 2013, follows:
| |
30-59 | | |
60-89 | | |
90+ | | |
Total | | |
| | |
Total | | |
90+ and | |
Loan Class | |
Days | | |
Days | | |
Days | | |
Past Due | | |
Current | | |
Loans | | |
Accruing | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Commercial: | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Commercial and industrial | |
$ | 297 | | |
$ | 57 | | |
$ | 610 | | |
$ | 964 | | |
$ | 114,965 | | |
$ | 115,929 | | |
$ | – | |
Agricultural | |
| – | | |
| – | | |
| 152 | | |
| 152 | | |
| 4,102 | | |
| 4,254 | | |
| – | |
Government | |
| – | | |
| – | | |
| – | | |
| – | | |
| 10,037 | | |
| 10,037 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate | |
| 376 | | |
| 547 | | |
| 1,276 | | |
| 2,199 | | |
| 210,651 | | |
| 212,850 | | |
| – | |
Commercial construction and development | |
| – | | |
| – | | |
| – | | |
| – | | |
| 11,434 | | |
| 11,434 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential – prime | |
| 369 | | |
| 87 | | |
| 335 | | |
| 791 | | |
| 123,189 | | |
| 123,980 | | |
| – | |
Residential – HELOC | |
| 45 | | |
| 14 | | |
| 314 | | |
| 373 | | |
| 20,304 | | |
| 20,677 | | |
| – | |
Residential – construction and development | |
| 37 | | |
| – | | |
| – | | |
| 37 | | |
| 13,583 | | |
| 13,620 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consumer | |
| 2 | | |
| 10 | | |
| 9 | | |
| 21 | | |
| 3,546 | | |
| 3,567 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 1,126 | | |
$ | 715 | | |
$ | 2,696 | | |
$ | 4,537 | | |
$ | 511,811 | | |
$ | 516,348 | | |
$ | – | |
Impaired
loans as of September 30, 2014, and during the year to date period 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 | |
$ | 2,505 | | |
$ | – | | |
$ | 2,456 | | |
$ | 2,659 | | |
$ | 164 | |
Commercial real estate | |
| 2,615 | | |
| – | | |
| 2,389 | | |
| 2,383 | | |
| 55 | |
Government | |
| 2,845 | | |
| – | | |
| 2,845 | | |
| 2,968 | | |
| 72 | |
Residential – prime | |
| 1,289 | | |
| – | | |
| 1,197 | | |
| 1,032 | | |
| 23 | |
Residential – HELOC | |
| 155 | | |
| – | | |
| 155 | | |
| 133 | | |
| 4 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
With an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial & industrial | |
$ | 5,809 | | |
$ | 1,194 | | |
$ | 5,540 | | |
$ | 3,770 | | |
$ | 128 | |
Commercial real estate | |
| 3,058 | | |
| 497 | | |
| 2,756 | | |
| 2,884 | | |
| 5 | |
Commercial construction & development | |
| 135 | | |
| 22 | | |
| 132 | | |
| 136 | | |
| 5 | |
Agricultural | |
| 127 | | |
| 39 | | |
| 124 | | |
| 138 | | |
| – | |
Residential – prime | |
| 1,518 | | |
| 232 | | |
| 1,013 | | |
| 859 | | |
| 16 | |
Residential – HELOC | |
| 250 | | |
| 118 | | |
| 226 | | |
| 313 | | |
| – | |
Residential construction & development | |
| 505 | | |
| 172 | | |
| 498 | | |
| 273 | | |
| 1 | |
Consumer | |
| 10 | | |
| 9 | | |
| 9 | | |
| 14 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Totals: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial & industrial | |
$ | 8,314 | | |
$ | 1,194 | | |
$ | 7,996 | | |
$ | 6,429 | | |
$ | 292 | |
Commercial real estate | |
| 5,673 | | |
| 497 | | |
| 5,145 | | |
| 5,267 | | |
| 60 | |
Commercial construction & development | |
| 135 | | |
| 22 | | |
| 132 | | |
| 136 | | |
| 5 | |
Agricultural | |
| 127 | | |
| 39 | | |
| 124 | | |
| 138 | | |
| – | |
Government | |
| 2,845 | | |
| – | | |
| 2,845 | | |
| 2,968 | | |
| 72 | |
Residential – prime | |
| 2,807 | | |
| 232 | | |
| 2,210 | | |
| 1,891 | | |
| 39 | |
Residential – HELOC | |
| 405 | | |
| 118 | | |
| 381 | | |
| 446 | | |
| 4 | |
Residential construction & development | |
| 505 | | |
| 172 | | |
| 498 | | |
| 273 | | |
| 1 | |
Consumer | |
| 10 | | |
| 9 | | |
| 9 | | |
| 14 | | |
| – | |
The impaired
loans at December 31, 2013, 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 | |
$ | 2,906 | | |
$ | – | | |
$ | 2,861 | | |
$ | 2,172 | | |
$ | 135 | |
Commercial real estate | |
| 2,555 | | |
| – | | |
| 2,376 | | |
| 1,740 | | |
| 85 | |
Commercial construction and development | |
| 1 | | |
| – | | |
| – | | |
| – | | |
| – | |
Government | |
| 3,090 | | |
| – | | |
| 3,090 | | |
| 1,545 | | |
| 150 | |
Residential – Prime | |
| 979 | | |
| – | | |
| 866 | | |
| 845 | | |
| 14 | |
Residential – HELOC | |
| 110 | | |
| – | | |
| 110 | | |
| 55 | | |
| 3 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
With an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial and industrial | |
$ | 2,231 | | |
$ | 1,112 | | |
$ | 1,999 | | |
$ | 2,813 | | |
$ | 43 | |
Commercial real estate | |
| 3,143 | | |
| 621 | | |
| 3,011 | | |
| 2,955 | | |
| 81 | |
Commercial construction and development | |
| 142 | | |
| 74 | | |
| 140 | | |
| 171 | | |
| 8 | |
Agricultural | |
| 152 | | |
| 55 | | |
| 152 | | |
| 153 | | |
| – | |
Residential – Prime | |
| 749 | | |
| 101 | | |
| 706 | | |
| 1,085 | | |
| 9 | |
Residential – HELOC | |
| 412 | | |
| 119 | | |
| 400 | | |
| 453 | | |
| 5 | |
Residential construction and development | |
| 49 | | |
| 8 | | |
| 47 | | |
| 100 | | |
| 1 | |
Consumer | |
| 19 | | |
| 18 | | |
| 17 | | |
| 22 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Totals: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial and industrial | |
$ | 5,137 | | |
$ | 1,112 | | |
$ | 4,860 | | |
$ | 4,985 | | |
$ | 178 | |
Commercial real estate | |
| 5,698 | | |
| 621 | | |
| 5,387 | | |
| 4,695 | | |
| 166 | |
Commercial construction and development | |
| 143 | | |
| 74 | | |
| 140 | | |
| 171 | | |
| 8 | |
Agricultural | |
| 152 | | |
| 55 | | |
| 152 | | |
| 153 | | |
| – | |
Government | |
| 3,090 | | |
| – | | |
| 3,090 | | |
| 1,545 | | |
| 150 | |
Residential – Prime | |
| 1,728 | | |
| 101 | | |
| 1,572 | | |
| 1,930 | | |
| 23 | |
Residential – HELOC | |
| 522 | | |
| 119 | | |
| 510 | | |
| 508 | | |
| 8 | |
Residential construction and development | |
| 49 | | |
| 8 | | |
| 47 | | |
| 100 | | |
| 1 | |
Consumer | |
| 19 | | |
| 18 | | |
| 17 | | |
| 22 | | |
| – | |
Loans on
nonaccrual status at period-end, follows:
| |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | |
| |
Commercial: | |
| | |
| |
| |
| | |
| |
Commercial and industrial | |
$ | 2,737 | | |
$ | 1,575 | |
Agricultural | |
| 124 | | |
| 152 | |
| |
| | | |
| | |
Commercial real estate: | |
| | | |
| | |
| |
| | | |
| | |
Commercial real estate | |
| 3,608 | | |
| 4,103 | |
Commercial construction and development | |
| 16 | | |
| 17 | |
| |
| | | |
| | |
Residential real estate: | |
| | | |
| | |
| |
| | | |
| | |
Residential – prime | |
| 1,317 | | |
| 1,059 | |
Residential – HELOC | |
| 242 | | |
| 387 | |
Residential construction and development | |
| 482 | | |
| 30 | |
| |
| | | |
| | |
Consumer | |
| 9 | | |
| 17 | |
| |
| | | |
| | |
Total | |
$ | 8,535 | | |
$ | 7,340 | |
During the
quarter and nine months ended September 30, 2014, the contracts identified below were modified to capitalize unpaid property taxes
or interest, convert amortizing payments to interest only payments, or to extend payment amortization periods, and were categorized
as troubled debt restructurings. During the quarter and nine months ended September 30, 2013, the contracts identified below were
modified to capitalize unpaid property taxes, convert amortizing payments to interest only payments, extend the amortization period,
or lower the interest rate. Specific loan reserves maintained in connection with loans restructured during the nine months September
30 totaled $546 at September 30, 2014, and $165 at September 30, 2013. 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 September 30, 2014:
| |
Number of | |
Pre-modification outstanding recorded | | |
Post-modification outstanding recorded investment at | |
As of September 30, 2014 ($000s) | |
contracts | |
investment | | |
period-end | |
| |
| |
| | | |
| | |
Commercial real estate | |
2 | |
$ | 376 | | |
$ | 339 | |
The following
table presents information concerning modifications of troubled debt made during the nine months ended September 30, 2014:
| |
Number of | |
Pre-modification outstanding recorded | | |
Post-modification outstanding recorded investment at | |
As of September 30, 2014 ($000s) | |
contracts | |
investment | | |
period-end | |
| |
| |
| | | |
| | |
Commercial & industrial | |
5 | |
$ | 1,252 | | |
$ | 1,198 | |
Commercial real estate | |
3 | |
$ | 866 | | |
$ | 786 | |
Residential real estate – prime | |
2 | |
$ | 309 | | |
$ | 183 | |
The following
table presents information concerning modifications of troubled debt made during the quarter ended September 30, 2013:
| |
Number of | |
Pre-modification
outstanding recorded | | |
Post-modification outstanding recorded investment at | |
As of September 30, 2013 ($000s) | |
contracts | |
investment | | |
period-end | |
| |
| |
| | | |
| | |
Commercial & industrial | |
1 | |
$ | 75 | | |
$ | 75 | |
Commercial real estate | |
1 | |
$ | 82 | | |
$ | 81 | |
Residential real estate – prime | |
4 | |
$ | 777 | | |
$ | 774 | |
The following
table presents information concerning modifications of troubled debt made during the nine months ended September 30, 2013:
| |
Number of | |
Pre-modification
outstanding recorded | | |
Post-modification outstanding recorded investment at | |
As of September 30, 2013 ($000s) | |
contracts | |
investment | | |
period-end | |
| |
| |
| | | |
| | |
Commercial & industrial | |
4 | |
$ | 471 | | |
$ | 369 | |
Commercial real estate | |
3 | |
$ | 303 | | |
$ | 288 | |
Residential real estate – prime | |
5 | |
$ | 867 | | |
$ | 862 | |
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.
| |
Number of | |
Recorded | |
Default during the quarter ended September 30, 2014 ($000s) | |
contracts | |
investment | |
| |
| |
| |
Commercial and industrial | |
2 | |
$ | 255 | |
Commercial real estate | |
1 | |
$ | 102 | |
| |
Number of | |
Recorded | |
Default during the nine months ended September 30, 2014 ($000s) | |
contracts | |
investment | |
| |
| |
| |
Commercial and industrial | |
3 | |
$ | 255 | |
Commercial real estate | |
3 | |
$ | 102 | |
Residential real estate – prime | |
2 | |
$ | – | |
| |
Number of | |
Recorded | |
Default during the quarter ended September 30, 2013 ($000s) | |
contracts | |
investment | |
| |
| |
| | |
Commercial and industrial | |
1 | |
$ | 172 | |
| |
Number of | |
Recorded | |
Default during the nine months ended September 30, 2013 ($000s) | |
contracts | |
investment | |
| |
| |
| |
Commercial and industrial | |
1 | |
$ | 172 | |
Commercial real estate | |
1 | |
$ | 81 | |
Residential – prime | |
1 | |
$ | 88 | |
NOTE 5 –
FORECLOSED ASSETS
Real estate
and other property acquired through, or in lieu of, loan foreclosure 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 | | |
Nine months ended | |
| |
September 30, | | |
September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Balance at beginning of period | |
$ | 1,266 | | |
$ | 1,336 | | |
$ | 1,750 | | |
$ | 1,774 | |
| |
| | | |
| | | |
| | | |
| | |
Transfer of loans at net realizable value to foreclosed
assets | |
| 516 | | |
| 538 | | |
| 801 | | |
| 947 | |
Sale proceeds | |
| (4 | ) | |
| (47 | ) | |
| (765 | ) | |
| (698 | ) |
Loans made on sale of foreclosed assets | |
| (43 | ) | |
| (100 | ) | |
| (43 | ) | |
| (207 | ) |
Net gain (loss) from sale of foreclosed assets | |
| 4 | | |
| 28 | | |
| (4 | ) | |
| 88 | |
Provision for write-down
charged to operations | |
| (15 | ) | |
| (149 | ) | |
| (15 | ) | |
| (298 | ) |
| |
| | | |
| | | |
| | | |
| | |
Balance at end of period | |
$ | 1,724 | | |
$ | 1,606 | | |
$ | 1,724 | | |
$ | 1,606 | |
NOTE 6 –
DEPOSITS
The distribution
of deposits at period end is as follows:
| |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | |
| |
Non-interest bearing demand | |
$ | 109,197 | | |
$ | 102,644 | |
Interest bearing demand (NOWs) | |
| 115,345 | | |
| 118,769 | |
Savings | |
| 62,745 | | |
| 57,658 | |
Money market | |
| 137,312 | | |
| 136,797 | |
Retail and local time | |
| 123,801 | | |
| 104,287 | |
Broker and national time | |
| 53,677 | | |
| 57,359 | |
| |
| | | |
| | |
Total deposits | |
$ | 602,077 | | |
$ | 577,514 | |
NOTE 7 –
OTHER BORROWINGS
Other borrowings
consist of the following obligations at September 30, 2014, and December 31, 2013:
($000s) | |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | | |
| | |
Federal funds purchased | |
$ | – | | |
$ | – | |
Short-term repurchase agreements | |
| 4,211 | | |
| 5,441 | |
Bank stock term loan | |
| 500 | | |
| 1,500 | |
Wholesale structured repurchase agreements | |
| 13,500 | | |
| 13,500 | |
| |
| | | |
| | |
Total other borrowings | |
$ | 18,211 | | |
$ | 20,441 | |
PSB pledges
various securities available for sale as collateral for repurchase agreements. The fair value of securities pledged for repurchase
agreements totaled $20,864 at September 30, 2014 and $22,699 at December 31, 2013.
PSB has
pledged its common stock ownership of its subsidiary, Peoples State Bank, as collateral for the bank stock term loan. The bank
note carries a floating rate of interest with required remaining principal payments of $500 in 2015. In addition, $8,000 of wholesale
structured repurchase agreements mature in 2014 with the remaining $5,500 maturing in 2017.
The following
information relates to securities sold under repurchase agreements and other borrowings:
| |
Three months ended | | |
Nine months ended | |
| |
September 30, | | |
September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
As of end of period – weighted average rate | |
| 3.20 | % | |
| 3.09 | % | |
| 3.20 | % | |
| 3.09 | % |
For the period: | |
| | | |
| | | |
| | | |
| | |
Highest month-end balance | |
$ | 24,198 | | |
$ | 24,100 | | |
$ | 24,198 | | |
$ | 24,100 | |
Daily average balance | |
$ | 19,962 | | |
$ | 22,797 | | |
$ | 20,348 | | |
$ | 22,368 | |
Weighted average rate | |
| 3.06 | % | |
| 2.87 | % | |
| 3.05 | % | |
| 2.93 | % |
NOTE 8 –
SENIOR SUBORDINATED NOTES
During the
quarter ended March 31, 2013, PSB elected to prepay $7,000 of its 8% senior subordinated notes with $1,000 of cash and $6,000
in proceeds from an issue of new subordinated debt. The new debt included $4,000 of privately placed notes carrying a 3.75% fixed
interest rate with semi-annual interest only payments, due in 2018, and $2,000 in a fully amortizing bank stock term loan with
Bankers’ Bank, Madison, Wisconsin, carrying a floating rate of interest based on changes in the 90-day LIBOR plus 3.00%
and maturing in 2015. The $4,000 of new fixed rate debt is held by related parties, including directors and a significant shareholder.
Total interest expense on senior subordinated notes was $113 and $147 during the nine months ended September 30, 2014 and 2013,
respectively.
NOTE 9
– 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:
| |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | |
| |
Notional amount: | |
$ | 7,500 | | |
$ | 7,500 | |
Pay fixed rate: | |
| 2.72 | % | |
| 2.72 | % |
Receive variable rate: | |
| 0.23 | % | |
| 0.24 | % |
Maturity: | |
September 2017 | | |
September 2017 | |
Unrealized fair value gain (loss) | |
$ | (327 | ) | |
$ | (438 | ) |
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 nine months ended September 30, 2014 or 2013. Risk
management results for the nine months ended September 30, 2014 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 September
30, 2014, approximately $181 of losses ($110 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 September 30, 2015. The interest rate swap agreement was secured by cash and cash equivalents of $570 at September
30, 2014 and December 31, 2013.
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:
| |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | |
| |
Notional amount: | |
$ | 13,816 | | |
$ | 14,323 | |
Receive fixed rate (average): | |
| 2.00 | % | |
| 2.00 | % |
Pay variable rate (average): | |
| 0.16 | % | |
| 0.17 | % |
Maturity: | |
| March
2015 – Oct. 2021 | | |
| March
2015 – Oct. 2021 | |
Weighted average remaining term | |
| 2.2
years | | |
| 2.9
years | |
Unrealized fair value gain (loss) | |
$ | 193 | | |
$ | 276 | |
At period
end, the following offsetting fixed interest rate swaps were outstanding with correspondent banks:
| |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | |
| |
Notional amount | |
$ | 13,816 | | |
$ | 14,323 | |
Pay fixed rate (average) | |
| 2.00 | % | |
| 2.00 | % |
Receive variable rate (average) | |
| 0.16 | % | |
| 0.17 | % |
Maturity | |
| March
2015 – Oct. 2021 | | |
| March
2015 – Oct. 2021 | |
Weighted average remaining term | |
| 2.2
years | | |
| 2.9
years | |
Unrealized fair value gain (loss) | |
$ | (193 | ) | |
$ | (276 | ) |
NOTE 10
– INCOME TAX EFFECTS ON ITEMS OF COMPREHENSIVE INCOME
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September
30, 2014 | | |
September
30, 2014 | |
Period ended September 30, 2014 | |
Pre-tax | | |
Income Tax | | |
Pre-tax | | |
Income Tax | |
(dollars in thousands) | |
Inc.
(Exp.) | | |
Exp.
(Credit) | | |
Inc.
(Exp.) | | |
Exp.
(Credit) | |
| |
| | |
| | |
| | |
| |
Unrealized gain (loss) on securities available
for sale | |
$ | (272 | ) | |
$ | (107 | ) | |
$ | 218 | | |
$ | 86 | |
Amortization of unrealized gain on securities available
for sale transferred | |
| | | |
| | | |
| | | |
| | |
to securities held to maturity included in net
income | |
| (83 | ) | |
| (33 | ) | |
| (251 | ) | |
| (99 | ) |
Unrealized gain (loss) on interest rate swap | |
| 33 | | |
| 13 | | |
| (28 | ) | |
| (11 | ) |
Reclassification
adjustment of interest rate swap settlements included in earnings | |
| 46 | | |
| 18 | | |
| 140 | | |
| 55 | |
| |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | (276 | ) | |
$ | (109 | ) | |
$ | 79 | | |
$ | 31 | |
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September
30, 2013 | | |
September
30, 2013 | |
Period ended September 30, 2013 | |
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 | |
$ | (416 | ) | |
$ | (151 | ) | |
$ | (1,277 | ) | |
$ | (497 | ) |
Reclassification adjustment for security gain included
in net income | |
| – | | |
| – | | |
| (12 | ) | |
| (5 | ) |
Accretion (amortization) of unrealized gain on securities
available | |
| | | |
| | | |
| | | |
| | |
for sale transferred to securities held to maturity
included in net income | |
| 3 | | |
| (13 | ) | |
| (319 | ) | |
| (144 | ) |
Unrealized gain (loss) on interest rate swap | |
| (62 | ) | |
| (23 | ) | |
| 75 | | |
| 30 | |
Reclassification
adjustment of interest rate swap settlements included in earnings | |
| 47 | | |
| 19 | | |
| 139 | | |
| 55 | |
| |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | (428 | ) | |
$ | (168 | ) | |
$ | (1,394 | ) | |
$ | (561 | ) |
NOTE 11
– RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
During the
quarter ended September 30, 2014, PSB reclassified $46 ($28 after tax impacts) of interest rate swap settlements which increased
comprehensive income. The increase to comprehensive net income was recognized as an increase to interest
expense on junior subordinated debentures on the statement of income during the quarter.
During the nine months ended September 30, 2014, PSB reclassified
$140 ($85 after tax impacts) of interest rate swap settlements which increased comprehensive income. The increase to comprehensive
net income was recognized as an increase to interest expense on junior subordinated debentures on the statement of income during
the period.
During the nine months ended September 30, 2013, PSB reclassified $12 ($7 after tax impacts) to reduce comprehensive
net income following a gain on sale of securities available for sale. The reduction to comprehensive net income was recognized
as a gain on sale of securities on the statement of income during the period.
During the quarter ended September 30, 2013, PSB reclassified $47
($28 after tax impacts) of interest rate swap settlements which increased comprehensive income. The increase to comprehensive
net income was recognized as an increase to interest expense on junior subordinated debentures on the statement of income during
the quarter.
During the
nine months ended September 30, 2013, PSB reclassified $139 ($84 after tax impacts) of interest rate swap settlements which increased
comprehensive income. The increase to comprehensive net income was recognized as a $139 ($84 after tax impacts) increase to interest
expense on junior subordinated debentures on the statement of income during the period.
NOTE 12
– STOCK-BASED COMPENSATION
PSB grants
restricted stock to certain employees during the first quarter of each year, which had an initial market value of $200 during
the nine months ended September 30, 2014 compared to $210 granted during the nine months ended September 30, 2013. Restricted
shares vest to employees based on continued PSB service over a six-year period and are recognized as compensation expense over
the vesting period. Cash dividends are paid on unvested shares at the same time and amount as paid to PSB common shareholders.
Cash dividends paid on unvested restricted stock shares are charged to retained earnings as significantly all restricted shares
are expected to vest to employees. Unvested shares are subject to forfeiture upon employee termination. During the nine months
ended September 30, compensation expense recorded from amortization of restricted shares expected to vest to employees was $124
and $109 during 2014 and 2013, respectively.
The following
tables summarize information regarding restricted stock outstanding at September 30, 2014 and 2013 including activity during the
three months then ended.
| |
| | |
Weighted | |
| |
| | |
Average | |
| |
Shares | | |
Grant Price | |
| |
| | |
| |
January 1, 2013 | |
| 30,409 | | |
$ | 19.39 | |
Restricted stock granted | |
| 8,076 | | |
| 26.00 | |
Restricted stock legally vested | |
| (5,883 | ) | |
| (17.85 | ) |
| |
| | | |
| | |
September 30, 2013 | |
| 32,602 | | |
$ | 21.30 | |
| |
| | | |
| | |
January 1, 2014 | |
| 32,602 | | |
$ | 21.30 | |
Restricted stock granted | |
| 6,400 | | |
| 31.25 | |
Restricted stock legally vested | |
| (7,640 | ) | |
| (18.91 | ) |
| |
| | | |
| | |
September 30, 2014 | |
| 31,362 | | |
$ | 23.92 | |
Scheduled
compensation expense per calendar year assuming all restricted shares eventually vest to employees would be as follows:
2014 | |
$ | 166 | |
2015 | |
| 157 | |
2016 | |
| 162 | |
2017 | |
| 122 | |
2018 | |
| 82 | |
Thereafter | |
| 40 | |
| |
| | |
Totals | |
$ | 729 | |
NOTE 13
– 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 any outstanding stock options.
Presented
below are the calculations for basic and diluted earnings per share:
| |
Three months ended | | |
Nine months ended | |
| |
September 30, | | |
September 30, | |
(dollars in thousands, except per share data – unaudited) | |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Net income | |
$ | 1,782 | | |
$ | 13 | | |
$ | 4,635 | | |
$ | 3,183 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| 1,650,716 | | |
| 1,651,518 | | |
| 1,655,603 | | |
| 1,653,098 | |
Effect of dilutive stock options outstanding | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Diluted weighted average shares outstanding | |
| 1,650,716 | | |
| 1,651,518 | | |
| 1,655,603 | | |
| 1,653,098 | |
| |
| | | |
| | | |
| | | |
| | |
Basic earnings per share | |
$ | 1.08 | | |
$ | 0.01 | | |
$ | 2.80 | | |
$ | 1.93 | |
Diluted earnings per share | |
$ | 1.08 | | |
$ | 0.01 | | |
$ | 2.80 | | |
$ | 1.93 | |
NOTE 14–
CONTINGENCIES
In the normal
course of business, PSB is involved in various legal proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated financial statements.
NOTE 15
– 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 September
30, 2014 and December 31, 2013, Level 3 securities include a common stock investment in Bankers’ Bancorporation, Inc., 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 30%, 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.
Estimated selling costs typically range from 5% to 15% of the property value. 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 PSB maintains mortgage servicing rights. Therefore, declining long-term interest rates would decrease the fair value of
mortgage servicing rights. Significant unobservable inputs at September 30, 2014, used to measure fair value included:
Direct annual servicing cost per loan | |
$ | 60 | |
Direct annual servicing cost per loan in process of foreclosure | |
$ | 600 | |
Weighted average prepayment speed: CPR | |
| 23.11 | % |
Weighted average prepayment speed: PSA | |
| 478.10 | % |
Weighted average cash flow discount rate | |
| 7.91 | % |
Asset reinvestment rate | |
| 4.00 | % |
Short-term cost of funds | |
| 0.25 | % |
Escrow inflation adjustment | |
| 1.00 | % |
Servicing cost inflation adjustment | |
| 1.00 | % |
Other
intangible assets – The fair value and impairment of other intangible assets, including core deposit intangible assets
and goodwill, is measured annually as of December 31 or more frequently if conditions indicate that impairment may have occurred.
The evaluation of possible impairment of other intangible assets involves significant judgment based upon short-term and long-term
projections of future performance, which is a Level 3 fair value measurement, and represents an income approach to fair value.
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 OMSR 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 September 30, 2014: | |
| | |
| |
| |
| | |
| | |
| | |
| |
Securities available for sale: | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
U.S. agency issued residential MBS and CMO | |
$ | 72,147 | | |
| – | | |
$ | 72,147 | | |
| $– | |
Privately issued residential MBS and CMO | |
| 30 | | |
| – | | |
| 30 | | |
| – | |
Solomon Hess SBA loan fund (CDFI Fund) | |
| 950 | | |
| – | | |
| 950 | | |
| – | |
Other equity securities | |
| 47 | | |
| – | | |
| – | | |
| 47 | |
| |
| | | |
| | | |
| | | |
| | |
Total securities available for sale | |
| 73,174 | | |
| – | | |
| 73,127 | | |
| 47 | |
Loans held for sale | |
| 999 | | |
| | | |
| 999 | | |
| | |
Mortgage rate lock commitments | |
| 21 | | |
| – | | |
| 21 | | |
| – | |
Interest rate swap agreements | |
| 193 | | |
| – | | |
| 193 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 74,387 | | |
| – | | |
$ | 74,340 | | |
$ | 47 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities – Interest rate swap agreements | |
$ | 520 | | |
$ | – | | |
$ | 520 | | |
$ | – | |
Assets measured at fair value on a recurring basis at December 31, 2013: | | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Securities available for sale: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
U.S. Treasury and agency debentures | |
$ | 999 | | |
$ | – | | |
$ | 999 | | |
$ | – | |
Obligations of states and political subdivisions | |
| 159 | | |
| | | |
| 159 | | |
| – | |
U.S. agency issued residential MBS and CMO | |
| 59,390 | | |
| – | | |
| 59,390 | | |
| – | |
Privately issued residential MBS and CMO | |
| 105 | | |
| – | | |
| 105 | | |
| – | |
Solomon Hess SBA loan fund (CDFI Fund) | |
| 950 | | |
| | | |
| 950 | | |
| – | |
Other equity securities | |
| 47 | | |
| – | | |
| – | | |
| 47 | |
| |
| | | |
| | | |
| | | |
| | |
Total securities available for sale | |
| 61,650 | | |
| – | | |
| 61,603 | | |
| 47 | |
Loans held for sale | |
| 150 | | |
| – | | |
| 150 | | |
| – | |
Mortgage rate lock commitments | |
| 14 | | |
| – | | |
| 14 | | |
| – | |
Interest rate swap agreements | |
| 276 | | |
| – | | |
| 276 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 62,090 | | |
$ | – | | |
$ | 62,043 | | |
$ | 47 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities – Interest rate swap agreements | |
$ | 714 | | |
$ | – | | |
$ | 714 | | |
$ | – | |
Reconciliation
of fair value measurements using significant unobservable inputs:
| |
Securities | |
| |
Available | |
(dollars in thousands) | |
For Sale | |
| |
| |
Balance at January 1, 2013: | |
$ | 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 September 30, 2013 | |
$ | 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 September 30, 2013 | |
$ | – | |
| |
| | |
Balance at January 1, 2014 | |
$ | 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 September 30, 2014 | |
$ | 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 September 30, 2014 | |
$ | – | |
| |
| | |
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 September 30, 2014: | |
| | |
| |
| |
| | |
| | |
| | |
| |
Impaired loans | |
$ | 2,059 | | |
$ | – | | |
$ | 644 | | |
$ | 1,415 | |
Foreclosed assets | |
| 1,724 | | |
| – | | |
| 509 | | |
| 1,215 | |
Mortgage servicing rights | |
| 1,734 | | |
| – | | |
| – | | |
| 1,734 | |
Other intangible assets | |
| 297 | | |
| – | | |
| – | | |
| 297 | |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 5,814 | | |
$ | – | | |
$ | 1,153 | | |
$ | 4,661 | |
| |
| | | |
| | | |
| | | |
| | |
Assets measured at fair value on a nonrecurring basis at December 31, 2013: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Impaired loans | |
$ | 1,720 | | |
$ | – | | |
$ | – | | |
$ | 1,720 | |
Foreclosed assets | |
| 1,750 | | |
| – | | |
| 792 | | |
| 958 | |
Mortgage servicing rights | |
| 1,696 | | |
| – | | |
| – | | |
| 1,696 | |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 5,166 | | |
$ | – | | |
$ | 792 | | |
$ | 4,374 | |
At September
30, 2014, loans with a carrying amount of $2,429 were considered impaired and were written down to their estimated fair value
of $2,059 net of a valuation allowance of $370. At December 31, 2013, loans with a carrying amount of $2,119 were considered impaired
and were written down to their estimated fair value of $1,720, net of a valuation allowance of $399. 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 September
30, 2014, foreclosed assets with a carrying amount of $2,405 had been written down to a fair value of $1,724, less costs to sell.
During the nine months ended September 30, 2014, foreclosed assets with a fair value of $810 were acquired through or in lieu
of foreclosure, which is the fair value net of estimated costs to sell. Impairment charges recorded as a reduction to earnings
totaled $15 during the nine months ended September 30, 2014.
At December
31, 2013, foreclosed assets with a carrying amount of $2,735 had been written down to a fair value of $1,750, less costs to sell.
During the nine months ended September 30, 2013, foreclosed assets with a fair value of $947 were acquired through or in lieu
of foreclosure, which is the fair value net of estimated costs to sell. Impairment charges recorded as a reduction to earnings
totaled $298 during the nine months ended September 30, 2013.
At September
30, 2014, mortgage servicing rights with a carrying amount of $1,760 were considered impaired and were written down to their estimated
fair value of $1,734, resulting in an impairment allowance of $26. At December 31, 2013, mortgage servicing rights with a carrying
amount of $1,717 were considered impaired and were written down to their estimated fair value of $1,696, resulting in an impairment
allowance of $21. 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 is 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 2 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 at September 30, 2014:
| |
September 30, 2014 | |
| |
Carrying | | |
Estimated | | |
Fair Value Hierarchy Level | |
| |
Amount | | |
Fair Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Financial assets ($000s): | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| |
Cash and cash equivalents | |
$ | 12,817 | | |
$ | 12,817 | | |
$ | 12,817 | | |
$ | – | | |
$ | – | |
Securities | |
| 143,576 | | |
| 144,819 | | |
| – | | |
| 142,955 | | |
| 1,864 | |
Bank certificates of deposit | |
| 3,424 | | |
| 3,452 | | |
| – | | |
| – | | |
| 3,452 | |
Net loans receivable and loans held for sale | |
| 534,087 | | |
| 536,240 | | |
| – | | |
| 1,643 | | |
| 534,597 | |
Accrued interest receivable | |
| 2,165 | | |
| 2,165 | | |
| – | | |
| – | | |
| 2,165 | |
Mortgage servicing rights | |
| 1,734 | | |
| 1,734 | | |
| – | | |
| – | | |
| 1,734 | |
Mortgage rate lock commitments | |
| 21 | | |
| 21 | | |
| – | | |
| 21 | | |
| – | |
FHLB stock | |
| 2,556 | | |
| 2,556 | | |
| – | | |
| – | | |
| 2,556 | |
Cash surrender value of life insurance | |
| 13,127 | | |
| 13,127 | | |
| – | | |
| 13,127 | | |
| – | |
Interest rate swap agreements | |
| 193 | | |
| 193 | | |
| – | | |
| 193 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial liabilities ($000s): | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 602,077 | | |
$ | 599,665 | | |
$ | – | | |
$ | – | | |
$ | 599,665 | |
FHLB advances | |
| 31,372 | | |
| 31,421 | | |
| – | | |
| 31,421 | | |
| – | |
Other borrowings | |
| 18,211 | | |
| 18,703 | | |
| – | | |
| 13,992 | | |
| 4,711 | |
Senior subordinated notes | |
| 4,000 | | |
| 3,563 | | |
| – | | |
| – | | |
| 3,563 | |
Junior subordinated debentures | |
| 7,732 | | |
| 7,186 | | |
| – | | |
| – | | |
| 7,186 | |
Interest rate swap agreements | |
| 520 | | |
| 520 | | |
| – | | |
| 520 | | |
| – | |
Accrued interest payable | |
| 411 | | |
| 411 | | |
| – | | |
| – | | |
| 411 | |
The carrying
amounts and fair values of PSB’s financial instruments consisted of the following at December 31, 2013:
| |
December 31, 2013 | |
| |
Carrying | | |
Estimated | | |
Fair Value Hierarchy Level | |
| |
Amount | | |
Fair Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Financial assets ($000s): | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| |
Cash and cash equivalents | |
$ | 31,522 | | |
$ | 31,522 | | |
$ | 31,522 | | |
$ | – | | |
$ | – | |
Securities | |
| 133,279 | | |
| 133,322 | | |
| – | | |
| 131,479 | | |
| 1,843 | |
Bank certificates of deposit | |
| 2,236 | | |
| 2,280 | | |
| – | | |
| – | | |
| 2,280 | |
Net loans receivable and loans held for sale | |
| 510,030 | | |
| 514,309 | | |
| – | | |
| 150 | | |
| 514,159 | |
Accrued interest receivable | |
| 2,076 | | |
| 2,076 | | |
| – | | |
| – | | |
| 2,076 | |
Mortgage servicing rights | |
| 1,696 | | |
| 1,696 | | |
| – | | |
| – | | |
| 1,696 | |
Mortgage rate lock commitments | |
| 14 | | |
| 14 | | |
| – | | |
| 14 | | |
| – | |
FHLB stock | |
| 2,556 | | |
| 2,556 | | |
| – | | |
| – | | |
| 2,556 | |
Cash surrender value of life insurance | |
| 12,826 | | |
| 12,826 | | |
| – | | |
| 12,826 | | |
| – | |
Interest rate swap agreements | |
| 276 | | |
| 276 | | |
| – | | |
| 276 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial liabilities ($000s): | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 577,514 | | |
$ | 578,387 | | |
$ | – | | |
$ | – | | |
$ | 578,387 | |
FHLB advances | |
| 38,049 | | |
| 38,511 | | |
| – | | |
| 38,511 | | |
| – | |
Other borrowings | |
| 20,441 | | |
| 21,251 | | |
| – | | |
| 14,364 | | |
| 6,887 | |
Senior subordinated notes | |
| 4,000 | | |
| 3,489 | | |
| – | | |
| – | | |
| 3,489 | |
Junior subordinated debentures | |
| 7,732 | | |
| 7,085 | | |
| – | | |
| – | | |
| 7,085 | |
Interest rate swap agreements | |
| 714 | | |
| 714 | | |
| – | | |
| 714 | | |
| – | |
Accrued interest payable | |
| 477 | | |
| 477 | | |
| – | | |
| – | | |
| 477 | |
NOTE 16
– CURRENT ACCOUNTING CHANGES
FASB
ASC Topic 210, “Balance Sheet.” In January 2013, clarifications were issued of new authoritative accounting
guidance first issued in December 2011 concerning disclosure of information about offsetting and related arrangements associated
with derivative instruments. The clarifications and originally issued guidance 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 beginning March 31, 2013. These new disclosures were added as necessary
during the quarter ended March 31, 2013 and did not have a significant impact to the reporting of PSB’s financial results
upon adoption.
FASB
ASC Topic 805, Business Combinations. In October 2012, new authoritative accounting guidance was issued that addressed
accounting for an indemnification asset acquired as a result of a government-assisted acquisition of a financial institution when
a subsequent change in cash flows expected to be collected is identified. After identification of the new cash flows, the reporting
entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as accounting
for the change in the assets subject to the indemnification. Amortization of these changes in value is limited to the remaining
contractual term of the indemnification agreement. These new rules became effective for changes in cash flows identified beginning
January 1, 2013. Adoption of this new guidance did not have an impact on PSB’s financial statements.
FASB
ASC Topic 220, Comprehensive Income. In February 2013, new authoritative accounting guidance was issued which required
PSB to report the effect of significant reclassifications out of accumulated other comprehensive income in a footnote to the financial
statements. The disclosure was effective beginning March 31, 2013 on a prospective basis. The change did not have a significant
impact on PSB’s financial reporting or results of operations upon adoption.
NOTE 17
– FUTURE ACCOUNTING CHANGES
FASB
ASC Topic 310, Receivables. In January 2014, new authoritative accounting guidance was issued that defined when a lender
has obtained physical possession of residential real estate collateral, requiring charge-off of the loan and recognition as foreclosed
property. In addition, additional disclosures on the amount of residential real estate included in foreclosed assets as well as
the amount of residential loans in the process of foreclosure are required for each period end. These new rules become effective
for quarterly periods beginning January 1, 2015. Adoption of this new guidance is not expected to have a significant impact on
PSB’s results of operations or financial statements.
FASB
ASC Topic 606, Revenue from Contracts with Customers. In May 2014, new authoritative accounting guidance was issued
that provides guidance on when it is appropriate to recognize customer sales agreements as revenue. This large standard has limited
impact on PSB as loans, deposits, and other financial instruments are excluded from the scope of the standard. However sales of
foreclosed property and certain noninterest income from contracts with customers, such as insurance contracts, are subject to
new rules applied on an individual transaction basis. The standard is effective for quarterly periods beginning January 1, 2017.
Adoption of this new guidance is not expected to have a significant impact on PSB’s results of operations or financial statements.
NOTE 18
– SUBSEQUENT EVENTS
Management
has reviewed PSB’s operations for potential disclosure of information or financial statement impacts related to events occurring
after September 30, 2014 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 September
30, 2014 compared to December 31, 2013 and results of our operations for the three months and nine months ended September 30,
2014 compared to the results of operations for the three months and nine months ended September 30, 2013. 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, 2013, 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 2013 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
September
2014 quarterly earnings were $1.08 per share on net income of $1,782 compared to earnings of $.01 per share on net income of $13
during the September 2013 quarter in which a $3,340 pre-tax credit write-down related to customer loan fraud was recognized. Earnings
during the nine months ended September 30, 2014 were $2.80 per share on net income of $4,635 compared to earnings of $1.93 per
share on net income of $3,183 during the nine months ended September 30, 2013.
In addition
to the large customer fraud credit loss, there were other nonrecurring items that impacted both periods, including merger and
conversion related costs incurred on PSB’s purchase of the Northwoods National Bank, Rhinelander, Wisconsin branch of The
Baraboo National Bank during 2014. These items are outlined in Table 1 below. As shown in the table, September 2014 quarterly
earnings were $1.08 per share on net income of $1,782 compared to 2013 quarterly pro-forma earnings of $1.07 per share on net
income of $1,766. September 2014 quarterly earnings were similar to the prior year quarter before the special items as a $312
increase in net interest income offset a $43 increase in credit costs and a $283 increase in operating expense before tax impacts.
Excluding
the special items as shown in the table below, earnings for the nine months ended September 30, 2014 would have been $2.94 per
share on net income of $4,860 compared to September 2013 year to date earnings of $2.94 per share on net income of $4,863. Compared
to the prior year before the special items, a $428 decline in 2014 credit costs, down 44%, and a $418 increase in net interest
income and $194 increase in other noninterest income offset a $373 decline in mortgage banking revenue, down 28%, and a $645 increase
in operating costs, up 5%, resulting in similar net income levels.
Looking
ahead to the December 2014 quarter, earnings are expected to remain similar to those seen during the September 2014 quarter as
increasing net interest margin from maturity of high-cost wholesale funding offsets slightly higher operating expenses despite
little increase in loans receivable due to low customer loan demand within our markets.
Credit
Quality
Total
nonperforming assets decreased $523, or 4.3%, during the quarter ended September 2014 to $11,649, compared to $12,172 at June
30, 2014, but increased $1,260, or 12.1%, compared to $10,389 at December 31, 2013. The increase since the beginning of the year
was due to placing a $578 single family jumbo residential mortgage (net of a $497 partial charge-off recorded in the September
2014 quarter) and a $944 commercial loan onto nonaccrual status during the nine months ended September 30, 2014. Net charge-offs
of loan principal were $645 and $779 during the quarter and nine months ended September 30, 2014, which were .48% and .20% of
average loans during the respective periods on an annualized basis.
During
the prior year September 2013 quarter, we recorded a $3,340 provision for loan losses due to the write down of a loan to a grain
commodities dealer who was discovered to have misrepresented inventory collateral, financial statements, inventory records, and
federal warehouse receipts taken as collateral. The entire loan balance was charged-off at that time, and the borrower and its
former operation remain under investigation by the authorities. Separate from this loss, there was no provision for loan losses
recorded during the September 2013 quarter. We continue to pursue a recovery of this loss through several channels and remains
cautiously optimistic concerning potential outcomes. Net charge-offs of loan principal were $514 and $980 during the quarter and
nine months ended September 30, 2013 excluding the large grain loss, which represented .40% and .26% of average loans during the
respective periods on an annualized basis.
A reduction
in total credit costs, including the provision for loan losses and loss on foreclosed assets, has been an important sustainer
of income during 2014 offsetting significant declines in mortgage banking revenue. Total credit costs were $541 and $969 (excluding
the large grain loss) during the nine months ended September 30, 2014 and 2013, respectively, a reduction of $428, or 44.2% during
2014. At September 30, 2014, the allowance for loan losses was $6,424, or 1.19% of total loans (65% of nonperforming loans), compared
to $6,783, or 1.31% of total loans (79% of nonperforming loans) at December 31, 2013.
Despite
2014 recognition of the two new nonperforming credits noted previously, credit conditions represented in the loan portfolio as
a whole continue to improve, and credit costs are expected to remain in a similar range during the December 2014 quarter compared
to the September 2014 quarter. During the December 2014 quarter, our nonperforming loans may increase $2,845 from the addition
of a municipal tax financing district development loan upon restructuring of the debt issue to extend the amortization term. At
September 30, 2014, we classified this municipal loan as an impaired but performing loan and maintained no specific reserves applicable
to this credit. The credit is expected to remain on accrual status following the restructuring and no principal loss is anticipated.
Asset
Growth and Liquidity
Total
assets were $730,305 at September 30, 2014 compared to $711,541 million at December 31, 2013, up $18,764, or 2.6%, due to an increase
in net loans receivable of $23,208, up 4.6%. The loan increase included $18,507 of purchased Northwoods branch loans held at September
30, 2014, plus $4,701 of existing market loan growth year to date, primarily in seasonal usage of commercial lines of credit.
In addition to loan growth, a $10,297 increase in investment securities was funded by an $18,705 decline in cash and cash equivalents
during the nine months ended September 30, 2014.
Total
local deposits increased $28,245 year to date due to $35,341 in purchased Northwoods branch deposits retained at September 30,
2014 (approximately 87% of the original purchased deposits) with other existing market deposits declining $7,096, or 1.4% since
December 31, 2013, led by an $11,652 decline in seasonal government tax deposits. In addition to funding loan growth, the increase
in total deposits was used to repay $10.4 million of wholesale funding year to date. Wholesale funding (including brokered certificates
of deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements) was $98,549 (13.5% of total assets) at September
30, 2014 compared to $108,908 (15.3% of total assets) at December 31, 2013.
During the
upcoming December 2014 quarter, total loans receivable are expected to remain stable primarily due to low borrower demand within
our markets while seasonal government tax deposits are expected to significantly increase total deposits. However, maturing wholesale
funding may be paid down with the increased deposit liquidity, limiting total asset growth during the quarter.
Capital
Resources
During
the nine months ended September 30, 2014, stockholders’ equity increased $3,855 primarily from $3,971 of retained net income
during the period after payment of $664 in shareholder dividends. During the September 2014 quarter, we repurchased 10,000 shares
of our common stock at an average cost of $33.23 per share, while no shares were repurchased in the September 2013 quarter. Year
to date, 10,000 shares of common stock were repurchased at an average cost of $33.23 per share during 2014 while 10,030 shares
were repurchased at an average cost of $26.78 per share during the nine months ended September 30, 2013. We continued our quarterly
stock buyback plan during the December 2014 quarter with shares purchased on the open market at prevailing prices as opportunities
arise.
Tangible
net book value increased to $36.59 per share at September 30, 2014, compared to $34.36 per share at December 31, 2013, an increase
of 6.5%. Our stockholders’ equity to assets ratio increased to 8.30% at September 30, 2014 compared to 7.98% at December
31, 2013 due to increased retained earnings with modest asset growth since the beginning of 2014. For regulatory purposes, the
$7,732 junior subordinated debentures maturing September 2035 reflected as debt on the Consolidated Balance Sheet are reclassified
as Tier 1 regulatory equity capital. We were considered “well capitalized” under banking regulations at September
30, 2014.
New
regulatory capital rules applicable to all banks become effective for us beginning January 1, 2015. The new rules expand the number
of capital measurements and new minimum ratios over which a bank may pay dividends, repurchase common stock, or pay certain executive
compensation. Other changes addressed the amount of capital required on a “risk adjusted” basis for certain assets
and other obligations. We expect regulatory capital ratios to be negatively impacted when the changes are fully implemented, but
do not expect to issue additional common stock solely to meet the new requirements or that recurring operations or growth potential
will be significantly impacted.
We
regularly maintain access to wholesale markets to fund loan originations and manage local depositor needs. At September 30, 2014,
unused and available wholesale funding was approximately $328,357, or 45% of total assets, compared to $296,590, or 42% of total
assets at December 31, 2013. 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.
Off Balance
–Sheet Arrangements and Contractual Obligations
Our largest
volume off-balance sheet activity involves our servicing of payments and related collection activities on $276,367 of residential
1 to 4 family mortgages sold to FHLB and FNMA at September 30, 2014 compared to $272,280 at December 31, 2013. At September 30,
2014, we provided a credit enhancement against FHLB loss under five separate “master commitments” associated with
7% of the total serviced principal (down from 9% at December 31, 2013), up to a maximum guarantee of $949 in the aggregate. However,
we would incur such loss only if the FHLB first lost $1,456 on this remaining loan pool of $19,652 as part of their “First
Loss Account” (discussed here in the aggregate, although the guarantee is applied on an individual master commitment basis).
No loans have been sold by us to the FHLB with our credit enhancement since October 2008 and we do not intend to originate future
loans with the guarantee.
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 even if
we had not provided a credit enhancement on the mortgage. Provision for representation and warranty losses were $23 and $204 during
the nine months ended September 30, 2014 and 2013, respectively. We first began to recognize a reserve liability for representation
and warranty losses during the quarter ended March 31, 2013 when a provision for representation and warranty losses of $203 was
recorded. We maintained a reserve liability for potential future representation and warranty losses of $100 at September 30, 2014
and $108 at December 31, 2013.
We also
utilize interest rate swaps to hedge costs associated with certain variable rate debt (notional amount of $7,500 at September 30,
2014) and as a tool for our customers to obtain long-term fixed rate commercial loan financing (offsetting notional amounts of
$13,816 at September 30, 2014). These arrangements and related off balance sheet commitments are outlined in Note 9 in the Notes
to Consolidated Financial Statements. Aggregate net unrealized losses on fair value of all interest rate swaps determined by offsetting
all swap positions were $327 and $438 at September 30, 2014 and December 31, 2013, respectively before tax impacts. Cash held
on deposit with swap counterparties against these liabilities totaled $570 at September 30, 2014 and December 31, 2013.
We provide
various commitments to extend credit for both commercial and consumer purposes totaling approximately $117 million at September
30, 2014 compared to $119 million at December 31, 2013. 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
ended September 30, 2014 compared to September 30, 2013
September
2014 quarterly earnings were $1.08 per share on net income of $1,782 compared to earnings of $.01 per share on net income of $13
during the September 2013 quarter. Earnings during the September 2013 quarter were reduced a combined $1,753 after tax benefits
from the loan provision and subsequent charge-off of a loan to a customer in the grain commodities industry. During the September
2013 quarter, we identified that the customer had misrepresented the amounts and records of collateral securing our loan and the
loans of several other unrelated banks, resulting in a large collateral shortfall. Other non-recurring special income and expense
items impacted the September 2013 quarter as outlined in Table 1 below. Excluding these special items, September 2014 quarterly
net income was $1.08 per share on net income of $1,782 compared to September 2013 pro-forma net income of $1.07 per share on net
income of $1,766. Table 2 below outlines key financial performance metrics for five linked quarters ending September 30, 2014.
Looking
ahead to the December 2014 quarter, earnings are expected to remain similar to those seen for the September 2013 quarter as increased
net interest margin from repayment of high-cost wholesale funding upon maturity will outpace slightly increased operating expense.
However, earnings could be challenged by lower mortgage banking income and a decline in loans receivable outstanding due to low
borrower demand in our markets.
Nine
months ended September 30, 2014 compared to September 30, 2013
Earnings
during the nine months ended September 30, 2014 were $2.80 per share on net income of $4,635 compared to earnings of $1.93 per
share on net income of $3,183 during the nine months ended September 30, 2013. Earnings during the year to date periods were impacted
by significant non-recurring items as outlined in Table 1 below. Excluding these non-recurring items, pro-forma net income during
the nine months ended September 30, 2014 was $2.94 per share on net income of $4,860 compared to pro-forma net income of $2.94
per share on net income of $4,863. Compared to the prior year before the special items, a $428 decline in 2014 credit costs, down
44%, and a $418 increase in net interest income and $194 increase in other noninterest income offset a $373 decline in mortgage
banking revenue, down 28%, and a $645 increase in operating costs, up 5%, resulting in similar net income levels.
Table
1: Impact of Special Income and Expense Items on Continuing Operations (a non-GAAP measure)
| |
Three months ended | | |
Nine months ended | |
| |
September 30, | | |
September 30, | |
($000s, net of income tax effects) | |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Net income from recurring operations before credit costs | |
$ | 1,895 | | |
$ | 1,853 | | |
$ | 5,188 | | |
$ | 5,450 | |
Less: Credit costs, excluding the grain credit loss | |
| (113 | ) | |
| (87 | ) | |
| (328 | ) | |
| (587 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income from recurring operations | |
| 1,782 | | |
| 1,766 | | |
| 4,860 | | |
| 4,863 | |
Less: Grain credit loss | |
| – | | |
| (2,031 | ) | |
| – | | |
| (2,031 | ) |
Add: Reduced employee benefits related to the grain credit loss | |
| – | | |
| 278 | | |
| – | | |
| 27 8 | |
Add: Benefit from amendment of Marathon tax returns | |
| – | | |
| – | | |
| – | | |
| 73 | |
Less: Merger related expenses and data processing conversion | |
| – | | |
| – | | |
| (225 | ) | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 1,782 | | |
$ | 13 | | |
$ | 4,635 | | |
$ | 3,183 | |
| |
Three months ended | | |
Nine months ended | |
| |
September 30, | | |
September 30, | |
(per diluted share, net of income tax effects) | |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Net income from recurring operations before credit costs | |
$ | 1.15 | | |
$ | 1.12 | | |
$ | 3.14 | | |
$ | 3.30 | |
Less: Credit costs, excluding the grain credit loss | |
| (0.07 | ) | |
| (0.05 | ) | |
| (0.20 | ) | |
| (0.36 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income from recurring operations | |
| 1.08 | | |
| 1.07 | | |
| 2.94 | | |
| 2.94 | |
Less: Grain credit loss | |
| – | | |
| (1.23 | ) | |
| – | | |
| (1.23 | ) |
Add: Reduced employee benefits related to grain credit loss | |
| – | | |
| 0.17 | | |
| – | | |
| 0.17 | |
Add: Benefit from amendment of Marathon tax returns | |
| – | | |
| – | | |
| – | | |
| 0.05 | |
Less: Merger related expenses and data processing conversion | |
| – | | |
| – | | |
| (0.14 | ) | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 1.08 | | |
$ | 0.01 | | |
$ | 2.80 | | |
$ | 1.93 | |
Proforma
return on average assets and return on average equity from net income from recurring operations after credit costs:
Proforma return on average assets from recurring operations | |
| 0.97 | % | |
| 1.01 | % | |
| 0.91 | % | |
| 0.94 | % |
Return on average assets - as reported | |
| 0.97 | % | |
| 0.01 | % | |
| 0.87 | % | |
| 0.62 | % |
| |
| | | |
| | | |
| | | |
| | |
Proforma return on average equity from recurring operations | |
| 11.77 | % | |
| 12.31 | % | |
| 11.00 | % | |
| 11.52 | % |
Return on average equity - as reported | |
| 11.77 | % | |
| 0.09 | % | |
| 10.49 | % | |
| 7.54 | % |
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 | |
| |
September 30, | | |
June 30 | | |
March 31, | | |
December 31, | | |
September 30, | |
Earnings and dividends: | |
2014 | | |
2014 | | |
2014 | | |
2013 | | |
2013 | |
| |
| | |
| | |
| | |
| | |
| |
Net interest income | |
$ | 5,734 | | |
$ | 5,450 | | |
$ | 5,174 | | |
$ | 5,365 | | |
$ | 5,422 | |
Provision for loan losses | |
$ | 140 | | |
$ | 140 | | |
$ | 140 | | |
$ | – | | |
$ | 3,340 | |
Other noninterest income | |
$ | 1,481 | | |
$ | 1,369 | | |
$ | 1,320 | | |
$ | 1,274 | | |
$ | 1,411 | |
Other noninterest expense | |
$ | 4,461 | | |
$ | 4,666 | | |
$ | 4,289 | | |
$ | 4,391 | | |
$ | 3,817 | |
Net income | |
$ | 1,782 | | |
$ | 1,403 | | |
$ | 1,450 | | |
$ | 1,561 | | |
$ | 13 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Basic
earnings per share(3) | |
$ | 1.08 | | |
$ | 0.85 | | |
$ | 0.87 | | |
$ | 0.95 | | |
$ | 0.01 | |
Diluted
earnings per share(3) | |
$ | 1.08 | | |
$ | 0.85 | | |
$ | 0.87 | | |
$ | 0.95 | | |
$ | 0.01 | |
Dividends
declared per share(3) | |
$ | – | | |
$ | 0.40 | | |
$ | – | | |
$ | 0.39 | | |
$ | – | |
Tangible
net book value per share(4) | |
$ | 36.59 | | |
$ | 35.56 | | |
$ | 35.15 | | |
$ | 34.36 | | |
$ | 33.92 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Semi-annual dividend payout ratio | |
| n/a | | |
| 23.34 | % | |
| n/a
| | |
| 40.91 | % | |
| n/a
| |
Average common shares outstanding | |
| 1,650,716 | | |
| 1,658,157 | | |
| 1,658,017 | | |
| 1,651,518 | | |
| 1,651,518 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance sheet – average balances: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Loans receivable, net of allowances
for loss | |
$ | 528,420 | | |
$ | 513,163 | | |
$ | 498,957 | | |
$ | 507,898 | | |
$ | 510,937 | |
Assets | |
$ | 727,738 | | |
$ | 716,477 | | |
$ | 698,127 | | |
$ | 704,559 | | |
$ | 695,344 | |
Deposits | |
$ | 598,845 | | |
$ | 592,377 | | |
$ | 567,500 | | |
$ | 557,639 | | |
$ | 537,836 | |
Stockholders’ equity | |
$ | 60,080 | | |
$ | 59,424 | | |
$ | 57,710 | | |
$ | 57,243 | | |
$ | 56,907 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Performance ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Return
on average assets(1) | |
| 0.97 | % | |
| 0.79 | % | |
| 0.84 | % | |
| 0.88 | % | |
| 0.01 | % |
Return
on average stockholders’ equity(1) | |
| 11.77 | % | |
| 9.47 | % | |
| 10.19 | % | |
| 10.82 | % | |
| 0.09 | % |
Average stockholders’
equity less accumulated other comprehensive income (loss) to average assets | |
| 8.20 | % | |
| 8.24 | % | |
| 8.22 | % | |
| 8.07 | % | |
| 8.09 | % |
Net
loan charge-offs to average loans(1) | |
| 0.48 | % | |
| 0.07 | % | |
| 0.03 | % | |
| 0.27 | % | |
| 2.97 | % |
Nonperforming loans to gross loans | |
| 1.84 | % | |
| 2.06 | % | |
| 1.75 | % | |
| 1.67 | % | |
| 1.66 | % |
Allowance for loan losses to gross
loans | |
| 1.19 | % | |
| 1.31 | % | |
| 1.39 | % | |
| 1.31 | % | |
| 1.36 | % |
Nonperforming
assets to tangible equity plus the allowance for loan losses(4) | |
| 17.92 | % | |
| 18.96 | % | |
| 16.27 | % | |
| 16.80 | % | |
| 16.73 | % |
Net
interest rate margin(1)(2) | |
| 3.43 | % | |
| 3.34 | % | |
| 3.31 | % | |
| 3.32 | % | |
| 3.40 | % |
Net
interest rate spread(1)(2) | |
| 3.28 | % | |
| 3.19 | % | |
| 3.15 | % | |
| 3.14 | % | |
| 3.23 | % |
Service
fee revenue as a percent of average demand deposits(1) | |
| 1.72 | % | |
| 1.83 | % | |
| 1.68 | % | |
| 1.76 | % | |
| 2.01 | % |
Noninterest
income as a percent of gross revenue | |
| 17.81 | % | |
| 17.14 | % | |
| 17.09 | % | |
| 15.92 | % | |
| 17.24 | % |
Efficiency
ratio(2) | |
| 59.91 | % | |
| 66.19 | % | |
| 63.75 | % | |
| 63.87 | % | |
| 53.94 | % |
Noninterest
expenses to average assets(1) | |
| 2.43 | % | |
| 2.61 | % | |
| 2.49 | % | |
| 2.47 | % | |
| 2.18 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Stock price information: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
High | |
$ | 34.00 | | |
$ | 33.85 | | |
$ | 34.50 | | |
$ | 31.25 | | |
$ | 31.50 | |
Low | |
$ | 32.25 | | |
$ | 31.75 | | |
$ | 30.10 | | |
$ | 29.75 | | |
$ | 29.40 | |
Last trade value at quarter-end | |
$ | 33.80 | | |
$ | 32.42 | | |
$ | 32.00 | | |
$ | 31.25 | | |
$ | 29.76 | |
(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.
Net Interest
Income
Quarter
ended September 30, 2014 compared to September 30, 2013
Net interest
income is the most significant component of earnings. Tax adjusted net interest income totaled $5,965 (on net margin of 3.43%)
during the September 30, 2014 quarter compared to $5,666 (3.40%) in the September 2013 quarter, an increase of $299, or 5.3%.
Net interest income increased over the prior year quarter as average earnings assets increased 4.5% primarily from loans acquired
in the purchase of the Northwoods National Bank, Rhinelander, Wisconsin branch during the June 2014 quarter. In addition, maturity
of high-cost FHLB advances since the September 2013 quarter has reduced advance interest expense, which declined $205, or 63%,
during the September 2014 quarter compared to the prior year quarter. Refer to Table 3 for more information on average balances,
rates, and yields by product for the quarters ended September 30, 2014 and 2013.
Looking
ahead, net margin is expected to increase slightly during the December 2014 quarter as continued interest expense savings on maturing
high-cost wholesale funding outpace a slight decline in loan yield. However, loan growth is expected to slow, resulting in December
2014 quarterly tax adjusted net interest margin similar to that seen during the September 2014 quarter.
During the
September 2014 and September 2013 quarters, net interest margin benefited from interest rate floors on certain commercial-related
loans and retail residential home equity lines of credit. At September 30, 2014, the coupon rate on approximately $72 million,
or 13.3%, of gross disbursed loans at September 30, 2014 was supported by an average interest rate floor approximately 103 basis
points greater than the normal adjustable rate. If current interest rate levels were assumed to remain the same, the annualized
increase to net interest income and net interest margin was approximately $738 and .11%, respectively, based on those existing
loan floors and average total earning assets during the quarter ended September 30, 2014. 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. For these particular loans, 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.
At September
30, 2013, the coupon rate on approximately $80 million, or 15.2%, of gross loans at September 30, 2013 was supported by an average
interest rate floor approximately 117 basis points greater than the normal adjustable rate. The annualized increase to net interest
income and net interest margin was approximately $937 and .14%, respectively, based on those existing loan floors and average
total earning assets during the quarter ended September 30, 2013.
Nine
months ended September 30, 2014 compared to September 30, 2013
Tax adjusted
net interest income totaled $17,053 (on net margin of 3.36%) during the nine months ended September 30, 2014 compared to $16,672
(3.39%) in the nine months ended September 30, 2013, an increase of $381, or 2.3%. As in the September 2014 quarter discussed
above, maturity of high-cost funding during 2014 has reduced FHLB advance interest expense, supporting the increase in net interest
income. FHLB advance interest expense totaled $534 during the nine months ended September 30, 2014 compared to $977 during the
prior year period, down $443, or 45%. Net margin has declined slightly from the prior year period as loan yields have declined
slightly faster than funding costs, which are already near functional interest rate floors. A 3.2% increase in earning assets
increased net interest income by $979 during the 2014 year to date compared to the nine months ended September 30, 2013, but the
decline in net interest margin decreased net interest income by $598 during the nine months ended September 30, 2014 compared
to the prior year period. Refer to Table 4 for more information on average balances, rates, and yields by product for the nine
months ended September 30, 2014 and 2013.
The following
Tables present a schedule of yields and costs for the quarter and nine months ended September 30, 2014, compared to the prior
year periods ended September 30, 2013, and the interest income and expense volume and rate analysis for the nine months ended
September 30, 2014, compared to the nine months ended September 30, 2013.
Table
3: Net Interest Income Analysis (Quarter)
(dollars in thousands) | |
Quarter
ended September 30, 2014 | | |
Quarter
ended September 30, 2013 | |
| |
Average | | |
| | |
Yield/ | | |
Average | | |
| | |
Yield/ | |
| |
Balance | | |
Interest | | |
Rate | | |
Balance | | |
Interest | | |
Rate | |
Assets | |
| | |
| | |
| | |
| | |
| | |
| |
Interest-earning assets: | |
| | |
| | |
| | |
| | |
| | |
| |
Loans(1)(2) | |
$ | 535,375 | | |
$ | 5,858 | | |
| 4.34 | % | |
$ | 518,504 | | |
$ | 5,912 | | |
| 4.52 | % |
Taxable securities | |
| 90,321 | | |
| 617 | | |
| 2.71 | % | |
| 77,961 | | |
| 509 | | |
| 2.59 | % |
Tax-exempt securities(2) | |
| 53,579 | | |
| 571 | | |
| 4.23 | % | |
| 54,636 | | |
| 580 | | |
| 4.21 | % |
FHLB stock | |
| 2,556 | | |
| 4 | | |
| 0.62 | % | |
| 3,594 | | |
| 2 | | |
| 0.22 | % |
Other | |
| 8,208 | | |
| 14 | | |
| 0.68 | % | |
| 5,869 | | |
| 13 | | |
| 0.88 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total(2) | |
| 690,039 | | |
| 7,064 | | |
| 4.06 | % | |
| 660,564 | | |
| 7,016 | | |
| 4.21 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
| 11,098 | | |
| | | |
| | | |
| 10,912 | | |
| | | |
| | |
Premises and equipment, net | |
| 11,037 | | |
| | | |
| | | |
| 9,786 | | |
| | | |
| | |
Cash surrender value insurance | |
| 13,064 | | |
| | | |
| | | |
| 12,350 | | |
| | | |
| | |
Other assets | |
| 9,455 | | |
| | | |
| | | |
| 9,299 | | |
| | | |
| | |
Allowance for loan
losses | |
| (6,955 | ) | |
| | | |
| | | |
| (7,567 | ) | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 727,738 | | |
| | | |
| | | |
$ | 695,344 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities and stockholders’ equity | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Savings and demand deposits | |
$ | 178,271 | | |
$ | 70 | | |
| 0.16 | % | |
$ | 168,860 | | |
$ | 89 | | |
| 0.21 | % |
Money market deposits | |
| 138,485 | | |
| 86 | | |
| 0.25 | % | |
| 121,267 | | |
| 100 | | |
| 0.33 | % |
Time deposits | |
| 178,841 | | |
| 547 | | |
| 1.21 | % | |
| 164,441 | | |
| 549 | | |
| 1.32 | % |
FHLB borrowings | |
| 30,529 | | |
| 118 | | |
| 1.53 | % | |
| 59,537 | | |
| 323 | | |
| 2.15 | % |
Other borrowings | |
| 19,962 | | |
| 154 | | |
| 3.06 | % | |
| 22,797 | | |
| 165 | | |
| 2.87 | % |
Senior subordinated notes | |
| 4,000 | | |
| 38 | | |
| 3.77 | % | |
| 4,000 | | |
| 38 | | |
| 3.77 | % |
Junior subordinated
debentures | |
| 7,732 | | |
| 86 | | |
| 4.41 | % | |
| 7,732 | | |
| 86 | | |
| 4.41 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| 557,820 | | |
| 1,099 | | |
| 0.78 | % | |
| 548,634 | | |
| 1,350 | | |
| 0.98 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand deposits | |
| 103,248 | | |
| | | |
| | | |
| 83,268 | | |
| | | |
| | |
Other liabilities | |
| 6,590 | | |
| | | |
| | | |
| 6,535 | | |
| | | |
| | |
Stockholders’
equity | |
| 60,080 | | |
| | | |
| | | |
| 56,907 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 727,738 | | |
| | | |
| | | |
$ | 695,344 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net interest income | |
| | | |
$ | 5,965 | | |
| | | |
| | | |
$ | 5,666 | | |
| | |
Rate spread | |
| | | |
| | | |
| 3.28 | % | |
| | | |
| | | |
| 3.23 | % |
Net yield on interest-earning
assets | |
| | | |
| | | |
| 3.43 | % | |
| | | |
| | | |
| 3.40 | % |
(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
4: Net Interest Income Analysis (Nine months)
(dollars in thousands) | |
Nine
months ended September 30, 2014 | | |
Nine
months ended September 30, 2013 | |
| |
Average | | |
| | |
Yield/ | | |
Average | | |
| | |
Yield/ | |
| |
Balance | | |
Interest | | |
Rate | | |
Balance | | |
Interest | | |
Rate | |
Assets | |
| | |
| | |
| | |
| | |
| | |
| |
Interest-earning assets: | |
| | |
| | |
| | |
| | |
| | |
| |
Loans(1)(2) | |
$ | 520,556 | | |
$ | 16,997 | | |
| 4.37 | % | |
$ | 506,241 | | |
$ | 17,481 | | |
| 4.62 | % |
Taxable securities | |
| 87,021 | | |
| 1,779 | | |
| 2.73 | % | |
| 84,426 | | |
| 1,566 | | |
| 2.48 | % |
Tax-exempt securities(2) | |
| 53,986 | | |
| 1,715 | | |
| 4.25 | % | |
| 53,314 | | |
| 1,717 | | |
| 4.31 | % |
FHLB stock | |
| 2,556 | | |
| 10 | | |
| 0.52 | % | |
| 3,189 | | |
| 6 | | |
| 0.25 | % |
Other | |
| 13,982 | | |
| 50 | | |
| 0.48 | % | |
| 9,631 | | |
| 50 | | |
| 0.69 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total(2) | |
| 678,101 | | |
| 20,551 | | |
| 4.05 | % | |
| 656,801 | | |
| 20,820 | | |
| 4.24 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
| 10,202 | | |
| | | |
| | | |
| 10,147 | | |
| | | |
| | |
Premises and equipment, net | |
| 10,462 | | |
| | | |
| | | |
| 10,009 | | |
| | | |
| | |
Cash surrender value insurance | |
| 12,964 | | |
| | | |
| | | |
| 12,087 | | |
| | | |
| | |
Other assets | |
| 9,428 | | |
| | | |
| | | |
| 9,632 | | |
| | | |
| | |
Allowance for
loan losses | |
| (6,935 | ) | |
| | | |
| | | |
| (7,529 | ) | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 714,222 | | |
| | | |
| | | |
$ | 691,147 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities and stockholders’ equity | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Savings and demand deposits | |
$ | 179,884 | | |
$ | 225 | | |
| 0.17 | % | |
$ | 173,931 | | |
$ | 295 | | |
| 0.23 | % |
Money market deposits | |
| 140,185 | | |
| 282 | | |
| 0.27 | % | |
| 119,489 | | |
| 299 | | |
| 0.33 | % |
Time deposits | |
| 172,516 | | |
| 1,625 | | |
| 1.26 | % | |
| 162,314 | | |
| 1,685 | | |
| 1.39 | % |
FHLB borrowings | |
| 30,358 | | |
| 534 | | |
| 2.35 | % | |
| 58,923 | | |
| 977 | | |
| 2.22 | % |
Other borrowings | |
| 20,348 | | |
| 464 | | |
| 3.05 | % | |
| 22,368 | | |
| 490 | | |
| 2.93 | % |
Senior subordinated notes | |
| 4,000 | | |
| 113 | | |
| 3.78 | % | |
| 4,750 | | |
| 147 | | |
| 4.14 | % |
Junior subordinated
debentures | |
| 7,732 | | |
| 255 | | |
| 4.41 | % | |
| 7,732 | | |
| 255 | | |
| 4.41 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| 555,023 | | |
| 3,498 | | |
| 0.84 | % | |
| 549,507 | | |
| 4,148 | | |
| 1.01 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand deposits | |
| 93,822 | | |
| | | |
| | | |
| 79,146 | | |
| | | |
| | |
Other liabilities | |
| 6,321 | | |
| | | |
| | | |
| 6,042 | | |
| | | |
| | |
Stockholders’
equity | |
| 59,056 | | |
| | | |
| | | |
| 56,452 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 714,222 | | |
| | | |
| | | |
$ | 691,147 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net interest income | |
| | | |
$ | 17,053 | | |
| | | |
| | | |
$ | 16,672 | | |
| | |
Rate spread | |
| | | |
| | | |
| 3.21 | % | |
| | | |
| | | |
| 3.23 | % |
Net yield on interest-earning
assets | |
| | | |
| | | |
| 3.36 | % | |
| | | |
| | | |
| 3.39 | % |
(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
5: Interest Expense and Expense Volume and Rate Analysis (Year to Date)
Nine
months ended September 30, 2014
| |
2014 compared to 2013 | |
| |
increase (decrease) due to (1) | |
(dollars in thousands) | |
Volume | | |
Rate | | |
Net | |
| |
| | |
| | |
| |
Interest earned on: | |
| | |
| | |
| |
Loans(2) | |
$ | 468 | | |
$ | (952 | ) | |
$ | (484 | ) |
Taxable securities | |
| 53 | | |
| 160 | | |
| 213 | |
Tax-exempt securities(2) | |
| 21 | | |
| (23 | ) | |
| (2 | ) |
FHLB stock | |
| (2 | ) | |
| 6 | | |
| 4 | |
Other interest income | |
| 16 | | |
| (16 | ) | |
| – | |
| |
| | | |
| | | |
| | |
Total | |
| 556 | | |
| (825 | ) | |
| (269 | ) |
| |
| | | |
| | | |
| | |
Interest paid on: | |
| | | |
| | | |
| | |
Savings and demand deposits | |
| 8 | | |
| (78 | ) | |
| (70 | ) |
Money market deposits | |
| 42 | | |
| (59 | ) | |
| (17 | ) |
Time deposits | |
| 96 | | |
| (156 | ) | |
| (60 | ) |
FHLB borrowings | |
| (502 | ) | |
| 59 | | |
| (443 | ) |
Other borrowings | |
| (46 | ) | |
| 20 | | |
| (26 | ) |
Senior subordinated notes | |
| (21 | ) | |
| (13 | ) | |
| (34 | ) |
Junior subordinated debentures | |
| – | | |
| – | | |
| – | |
| |
| | | |
| | | |
| | |
Total | |
| (423 | ) | |
| (227 | ) | |
| (650 | ) |
| |
| | | |
| | | |
| | |
Net interest earnings | |
$ | 979 | | |
$ | (598 | ) | |
$ | 381 | |
(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 15 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. In general, a sudden and substantial change in interest rates
could 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 September
30, 2014. 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 a liability sensitive gap position during the next year, with a cumulative negative one-year gap ratio at September
30, 2014 of 93.0% compared to a negative gap of 85.4% at December 31, 2013. 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. If we held an asset sensitive gap position, the existence of our “in the money” floating rate
loan floors discussed previously 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
6: Interest Rate Sensitivity Gap Analysis
| |
September 30, 2014 | |
(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 | |
$ | 194,245 | | |
$ | 36,261 | | |
$ | 66,966 | | |
$ | 85,172 | | |
$ | 117,367 | | |
$ | 40,500 | | |
$ | 540,511 | |
Securities | |
| 7,598 | | |
| 5,721 | | |
| 9,425 | | |
| 21,044 | | |
| 52,356 | | |
| 47,432 | | |
| 143,576 | |
FHLB stock | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2,556 | | |
| 2,556 | |
CSV bank-owned life insurance | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 13,127 | | |
| 13,127 | |
Other earning assets | |
| 2,993 | | |
| 1,192 | | |
| 2,232 | | |
| | | |
| | | |
| | | |
| 6,417 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 204,836 | | |
$ | 43,174 | | |
$ | 78,623 | | |
$ | 106,216 | | |
$ | 169,723 | | |
$ | 103,615 | | |
$ | 706,187 | |
Cumulative rate sensitive assets | |
$ | 204,836 | | |
$ | 248,010 | | |
$ | 326,633 | | |
$ | 432,849 | | |
$ | 602,572 | | |
$ | 706,187 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing deposits | |
$ | 87,486 | | |
$ | 21,417 | | |
$ | 202,410 | | |
$ | 28,280 | | |
$ | 53,532 | | |
$ | 99,755 | | |
$ | 492,880 | |
FHLB advances | |
| 26,540 | | |
| | | |
| | | |
| | | |
| 4,832 | | |
| | | |
| 31,372 | |
Other borrowings | |
| 12,711 | | |
| | | |
| | | |
| | | |
| 5,500 | | |
| | | |
| 18,211 | |
Senior subordinated notes | |
| | | |
| | | |
| 500 | | |
| 1,000 | | |
| 2,500 | | |
| | | |
| 4,000 | |
Junior subordinated debentures | |
| | | |
| | | |
| | | |
| | | |
| 7,732 | | |
| | | |
| 7,732 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 126,737 | | |
$ | 21,417 | | |
$ | 202,910 | | |
$ | 29,280 | | |
$ | 74,096 | | |
$ | 99,755 | | |
$ | 554,195 | |
Cumulative interest sensitive liabilities | |
$ | 126,737 | | |
$ | 148,154 | | |
$ | 351,064 | | |
$ | 380,344 | | |
$ | 454,440 | | |
$ | 554,195 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest sensitivity gap for the individual period | |
$ | 78,099 | | |
$ | 21,757 | | |
$ | (124,287 | ) | |
$ | 76,936 | | |
$ | 95,627 | | |
$ | 3,860 | | |
| | |
Ratio of rate sensitive assets to rate sensitive liabilities for the individual period | |
| 161.6 | % | |
| 201.6 | % | |
| 38.7 | % | |
| 362.8 | % | |
| 229.1 | % | |
| 103.9 | % | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cumulative interest sensitivity gap | |
$ | 78,099 | | |
$ | 99,856 | | |
$ | (24,431 | ) | |
$ | 52,505 | | |
$ | 148,132 | | |
$ | 151,992 | | |
| | |
Cumulative ratio of rate sensitive assets to rate sensitive liabilities | |
| 161.6 | % | |
| 167.4 | % | |
| 93.0 | % | |
| 113.8 | % | |
| 132.6 | % | |
| 127.4 | % | |
| | |
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
7: Net Interest Margin Rate Simulation Impacts
Period Ended: | |
September 2014 | | |
December 2013 | | |
September 2013 | |
| |
| | |
| | |
| |
Cumulative 1 year gap ratio | |
| | |
| | |
| |
Base | |
| 93 | % | |
| 85 | % | |
| 82 | % |
Up 200 | |
| 89 | % | |
| 82 | % | |
| 78 | % |
Down 100 | |
| 94 | % | |
| 87 | % | |
| 84 | % |
| |
| | | |
| | | |
| | |
Change in Net Interest Income – Year 1 | |
| | | |
| | | |
| | |
Up 200 during the year | |
| -4.2 | % | |
| -2.8 | % | |
| -2.4 | % |
Down 100 during the year | |
| -0.4 | % | |
| -0.1 | % | |
| 0.1 | % |
| |
| | | |
| | | |
| | |
Change in Net Interest Income – Year 2 | |
| | | |
| | | |
| | |
No rate change (base case) | |
| -0.8 | % | |
| -0.8 | % | |
| 1.6 | % |
Following up 200 in year 1 | |
| -3.2 | % | |
| -0.2 | % | |
| 0.1 | % |
Following down 100 in year 1 | |
| -4.7 | % | |
| -2.4 | % | |
| -1.1 | % |
Note: Simulations
since June 2008 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.
We completed
a non-maturity deposit study following March 31, 2014 and used the current report findings to update certain key assumptions beginning
with our June 30, 2014 interest margin simulations. The findings called for slightly higher average rate change (beta) in rising
rate simulations (which would increase projected interest rate risk) as well as extending the projected average life of core deposits
under normal operations based on historical experience (which would decrease projected interest rate risk). The increase in non-maturity
deposit beta rates in a rising rate environment lowered projected net interest income in the up 200 basis point increase simulations
as shown in Table 7 above when comparing September 2014 to the prior quarters before the key assumption change made effective
June 30, 2014.
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 50.8% at September 30, 2014 compared to 53.8% at December 31, 2013.
We also
measure 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”) as well as rising rate environments that create a “flattening”
yield curve. We also project the potential impacts of extreme periods of interest rate changes such as up 400 basis points during
a 24 month period. The impact of various rate simulations on projected “base” net interest income are shown in the
Table below. When the yield curve flattens, repriced short-term funding cost, such as for terms of one 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. In addition, although market expectations
are for interest rates to rise during the next several years, we also have risk to a prolonged period of low or falling rates
in the currently low rate environment. If interest rates remain low, loan and security yields continue to decline while funding
costs reach effective lows, reducing net interest margin, particularly if average credit spreads were to decline to levels seen
prior to 2008 (pre-recessionary levels).
The table
below summarizes the percentage change to current “base case” net interest income as a result of certain alternative
interest simulations:
Table
8: Projected Changes to Net Interest Income Under Various Rate Change Simulations
| |
During next 12M | | |
During next 24M
Parallel | | |
During next 24M | | |
Yield Curve | |
| |
Down 100 bp | | |
up 400 bp | | |
Flat up 500 bp | | |
Twist* | |
| |
| | |
| | |
| | |
| |
Year 1 | |
| -0.4 | % | |
| -4.0 | % | |
| -5.0 | % | |
| 1.1 | % |
Year 2 | |
| -3.9 | % | |
| -5.5 | % | |
| -7.8 | % | |
| 3.4 | % |
Year 3 | |
| -7.6 | % | |
| 0.7 | % | |
| -1.4 | % | |
| -3.6 | % |
Year 4 | |
| -10.4 | % | |
| 15.6 | % | |
| 14.8 | % | |
| 5.5 | % |
Year 5 | |
| -11.9 | % | |
| 31.9 | % | |
| 33.7 | % | |
| 22.0 | % |
*Yield
curve steepens over the first 18 months of the simulation (10 year CMT Treasury = 3.75%) and flattens over months 19-36 to the
average slope from 2005-2007 (with Fed Funds targeted at 4.00%)
Noninterest
Income
Quarter
ended September 30, 2014 compared to September 30, 2013
Total
noninterest income for the quarter ended September 30, 2014 was $1,481, compared to $1,411 earned during the September 2013 quarter,
an increase of $70, or 5.0%. Mortgage banking revenue was $375 during the September 2014 quarter compared to $384 during the September
2013 quarter. Mortgage banking includes the gain on sale of residential mortgage loans to secondary market investors as well as
the net loan servicing income associated with those loans. The increase in quarterly noninterest income was led by small increases
in service fees and other noninterest income.
Nine
months ended September 30, 2014 compared to September 30, 2013
Total
noninterest income for the nine months ended September 30, 2014 was $4,170, compared to $4,349 during the comparable year period,
down $179, or 4.1%, as residential mortgage banking declined $373, or 27.9%. Gain on sale of mortgage loans has led the decline
in mortgage banking revenue on significantly lower residential loan refinance activity due to an increase in long term interest
rates in response to expected actions by the Federal Reserve. Offsetting the year to date mortgage banking decline were higher
service fees, up $53, and higher debit and credit card interchange income, up $142. During December 2013, PSB sold its credit
card loan principal portfolio in exchange for greater interchange fee income on those retained credit card customers, accounting
for 62% of the increased interchange income during the nine months ended September 30, 2014. Prior to the sale of the credit card
portfolio, card income was categorized as loan interest income.
Noninterest
Expense
Quarter
ended September 30, 2014 compared to September 30, 2013
Noninterest
expenses totaled $4,461 during the September 2014 quarter compared to $3,817 during the September 2013 quarter. However, September
2013 noninterest expense would have been $4,131 before a $458 reduction to employee incentive benefits on recognition of the large
grain charge-off and the loss on foreclosed assets. Excluding these items from both quarters, noninterest expenses increased $283,
or 6.9%, during the September 2014 quarter compared to the comparable prior year period. The majority of the 2014 cost increase
was due to higher direct operating costs allocated to the new Northwoods branch totaling $118, a $54 increase in data processing
fees, a $45 increase in FDIC insurance premiums from impacts of the large September 2013 grain loan charge-off and deposit growth,
and a $58 increase in audit and exam charges.
Nine
months ended September 30, 2014 compared to September 30, 2013
During
the nine months ended September 30, 2014, noninterest expense totaled $13,416 compared to $12,115 during the prior year period.
However, both periods included special items including $371 of nonrecurring Northwoods Rhinelander merger and conversion costs
during 2014 and a $458 reduction in employee incentive costs during 2014 on recognition of the large gain loss. Excluding the
proforma impact of these items as well as the loss on foreclosed assets, noninterest expense during the nine months ended September
30, 2014 would have been $12,924 compared to $12,279 during 2013, an increase of $645, or 5.3%. Approximately $207 of the increase
was from recurring Northwoods branch wage and other direct operating costs following the acquisition. Separate from Northwoods
wage costs, proforma salaries and employee benefits increased an additional $141, or 2.0%. Data processing and office operations
costs increased $105 (excluding the Northwoods branch acquisition conversion and operating costs) and FDIC insurance premiums
increased $113 related to the grain loan charge-off and increased deposits. All other net operating expense increases totaled
$79.
CREDIT
QUALITY AND PROVISION FOR LOAN LOSSES
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 17.92%, 16.80%, and 16.73% at September 30, 2014, December
31, 2013, and September 30, 2013, respectively (refer to Table 25). For the purpose of this measurement, tangible common equity
is equal to total common stockholders’ equity less mortgage servicing right assets, goodwill, and core deposit intangible
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
9: Nonperforming Assets
| |
September 30, | | |
December 31, | |
(dollars in thousands) | |
2014 | | |
2013 | | |
2013 | |
| |
| | |
| | |
| |
Nonaccrual loans (excluding restructured loans) | |
$ | 4,192 | | |
$ | 4,063 | | |
$ | 3,704 | |
Nonaccrual restructured loans | |
| 4,343 | | |
| 2,973 | | |
| 3,636 | |
Restructured loans not on nonaccrual | |
| 1,390 | | |
| 1,643 | | |
| 1,299 | |
Accruing loans past due 90 days or more | |
| – | | |
| – | | |
| – | |
| |
| | | |
| | | |
| | |
Total nonperforming loans | |
| 9,925 | | |
| 8,679 | | |
| 8,639 | |
Foreclosed assets | |
| 1,724 | | |
| 1,606 | | |
| 1,750 | |
| |
| | | |
| | | |
| | |
Total nonperforming assets | |
$ | 11,649 | | |
$ | 10,285 | | |
$ | 10,389 | |
| |
| | | |
| | | |
| | |
Nonperforming loans as a % of gross loans receivable | |
| 1.84 | % | |
| 1.66 | % | |
| 1.67 | % |
Total nonperforming assets as a % of total assets | |
| 1.60 | % | |
| 1.46 | % | |
| 1.46 | % |
Allowance for loan losses as a % of nonperforming loans | |
| 64.73 | % | |
| 82.11 | % | |
| 78.52 | % |
Total nonperforming
assets decreased $523, or 4.3%, during the quarter ended September 2014 to $11,649, compared to $12,172 at June 30, 2014, but
increased $1,260, or 12.1%, compared to $10,389 at December 31, 2013. The increase since the beginning of the year was due to
placing a $1,075 single family jumbo residential mortgage and a $959 commercial loan onto nonaccrual status during the June 2014
quarter. Recognition of the two problem loans also increased allowance for loan loss needs during the nine months ended September
30, 2014 by $909. Offsetting these significant new problem loans was continued improvement in general loan quality and collateral
values on certain impaired loans, allowing a portion of the existing allowance for loan losses to be recaptured, offsetting the
negative impact of new reserves recognized on the two problem loans. At September 30, 2014, the allowance for loan losses was
$6,424, or 1.19% of total loans (65% of nonperforming loans), compared to $6,783, or 1.31% of total loans (79% of nonperforming
loans) at December 31, 2013.
The $1,075 single family residential jumbo mortgage loan became
30 to 59 days delinquent during the March 2014 quarter and was classified as an impaired, but performing loan at March 31, 2014.
During the June 2014 quarter, the borrower was placed on nonaccrual status due to nonpayment, and the loan continues to be classified
as a nonaccrual loan at September 30, 2014. The borrower is disputing a potential change in ownership of the home via divorce
proceedings. This mortgage is significantly under collateralized although the borrower continues income levels sufficient to service
the required debt payments. During the September 2014 quarter, we recorded a $497 partial charge-off of the loan reflecting the
collateral shortfall. Refer to Table 10 below for more information on this loan relationship and specific reserves maintained
on this nonaccrual loan. During the nine months ended September 30, 2014, total past due residential - prime loans increased $575,
to $1,366, compared to $791 at December 31, 2013, as shown in Note 4 of the Notes to Consolidated Financial Statements. This remaining
$578 nonaccrual jumbo mortgage loan, net of the $497 partial charge off, represents virtually all of the increase in delinquent
residential –prime mortgage principal during the nine months ended September 30, 2014.
Separately,
a commercial and industrial loan relationship that includes a significant government agency guarantee of principal became past
due during the March 2014 quarter but was classified as a performing loan and credit risk rating 5 (“Watch”) as of
March 31, 2014. This borrower was negatively impacted by loss of a large customer during 2013 that has resulted in strained cash
flow. The full borrower relationship includes loans receivable totaling $3,464 at September 30, 2014, of which $2,520 carries
an 80% principal guarantee by the United States Department of Agriculture (“USDA”). During the June 2014 quarter,
the unguaranteed portion of this loan was restructured to convert to interest only payments and was reclassified as a nonaccrual
loan, which has a balance of $944 at September 30, 2014. The guaranteed portion of the loan totaling $2,520 was not restructured
and continues to be classified as an impaired but performing loan at September 30, 2014. Refer to Table 10 below for more information
on this loan relationship and specific reserves maintained on this nonaccrual loan.
While the
general credit quality of our loan portfolio and identified problem loans continues to improve, improved local economic conditions
are slow growing in central and northern Wisconsin, and during the past several years, large local employers in the paper manufacturing,
window manufacturing, and insurance claim processing industries announced plant closures, job reductions, or loss of key customer
contracts. Our market area has a higher than typical allocation of resources in the manufacturing sector, although the greatest
economic growth for many years has been in health and education services. The local paper and wood industries had, and continue
to experience, a long-term production decline. The local retail sales environment also declined during 2013 as J.C. Penney Company,
Inc., Gap, Inc., and Abercrombie & Fitch, Co. brand Hollister announced store closures within our primary markets.
We expect
these conditions to restrain economic growth as some borrowers continue to carefully manage cash flows and debt servicing ability.
In addition, the loss of the significant employers mentioned previously may have a significant negative impact on small local
municipalities that depended on these closed manufacturing plants for tax assessment base and utility revenue. At September 30,
2014, $2,845 of tax exempt general obligation and tax incremental financing district development loans receivable reflected in
Table 12 with a local municipality expected to be significantly negatively impacted due to a plant closure were classified as
performing, but impaired loans with no specific reserve. We expect to restructure this loan to extend the life of the tax incremental
financing district so that existing property tax collections from real estate located within the district continue for a period
long enough to fully pay the original district development costs. This debt restructuring is expected to be classified as a troubled
debt restructuring, which would increase non performing loans in Table 9.
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 five of our nine locations), and loan customers in Marathon County, Wisconsin. The significant majority of our customers
and borrowers live and work in Marathon, Oneida, and Vilas Counties, Wisconsin, in which we have branch locations. The unemployment
rate (not seasonally adjusted) in the Wausau-Marathon County, Wisconsin MSA was 4.9% at August 2014 (the most recent data available)
compared to 6.3% at August 2013. The unemployment rate in Oneida County, Wisconsin was 5.7% at August 2014 compared to 6.9% at
August 2013. The unemployment rate in Vilas County, Wisconsin was 5.7% at August 2014 compared to 7.1% at August 2013. The unemployment
rate for all of Wisconsin (not seasonally adjusted) was 5.1% at August 2014 compared to 6.4% at August 2013. A local economic
outlook survey of business owners for our market area published in the December 2013 quarter points to expectations of an improving
local economy with some businesses considering a local capital expansion, although an overall economic rebound was considered
further out in the future towards the end of 2014.
At September
30, 2014, all nonperforming assets aggregating to $500 or more measured by gross principal outstanding per credit relationship
are summarized in the following table and represented 30% of all nonperforming assets compared to 20% of nonperforming assets
at December 31, 2013. In the table, loans presented as “Accrual TDR” represent troubled debt restructured loans maintained
on accrual status. During the nine months ended September 30, 2014, there were two loans added to the large nonperforming assets
table, including the $944 unguaranteed portion of a USDA guaranteed loan and the $578 residential jumbo mortgage loan, discussed
previously.
Table
10: Largest Nonperforming Assets at September 30, 2014 ($000s)
| |
| |
Gross | | |
Specific | |
Collateral Description | |
Asset Type | |
Principal | | |
Reserves | |
| |
| |
| | |
| |
Timber byproduct processing equipment and receivables | |
Nonaccrual | |
$ | 944 | | |
$ | 355 | |
Non-owner occupied light manufacturing facility real estate | |
Nonaccrual | |
| 695 | | |
| 195 | |
Owner occupied commercial office and residential rentals | |
Nonaccrual | |
| 691 | | |
| 137 | |
Owner occupied multi-use, multi-tenant professional building | |
Nonaccrual | |
| 610 | | |
| 77 | |
Single family residential home first mortgage | |
Nonaccrual | |
| 578 | | |
| 31 | |
| |
| |
| | | |
| | |
Total listed nonperforming assets | |
| |
$ | 3,518 | | |
$ | 795 | |
Total bank wide nonperforming assets | |
| |
$ | 11,649 | | |
$ | 2,074 | |
Listed assets as a % of total nonperforming assets | |
| |
| 30 | % | |
| 38 | % |
Table
11: Largest Nonperforming Assets at December 31, 2013 ($000s)
Collateral Description | |
Asset Type | |
Gross Principal | | |
Specific Reserves | |
| |
| |
| | |
| |
Non-owner occupied light manufacturing facility real estate | |
Nonaccrual | |
$ | 731 | | |
$ | 304 | |
Owner occupied multi use, multi-tenant professional building | |
Nonaccrual | |
| 658 | | |
| 107 | |
Owner occupied commercial office and residential rentals | |
Nonaccrual | |
| 642 | | |
| 51 | |
| |
| |
| | | |
| | |
Total listed nonperforming assets | |
| |
$ | 2,031 | | |
$ | 462 | |
Total bank wide nonperforming assets | |
| |
$ | 10,389 | | |
$ | 1,936 | |
Listed assets as a percent of total nonperforming assets | |
| |
| 20 | % | |
| 24 | % |
In addition
to nonperforming loans, we have classified certain performing loans as impaired loans under accounting standards due to heightened
risk of nonperformance within the next year or other factors. In general, loans not classified as nonaccrual or restructured may
be classified as impaired due to elevated potential credit risk but still be considered performing. At September 30, 2014, all
impaired but performing loans aggregating to $500 or more measured by gross principal outstanding per credit relationship are
summarized in the following table. During the June 2014 quarter, a new $2,520 commercial loan guaranteed by the USDA as discussed
previously was added to the large impaired loan list, as shown in the table below.
Table
12: Largest Performing, but Impaired Loans at September 30, 2014 ($000s)
| |
| |
Gross | | |
Specific | |
Collateral Description | |
Asset Type | |
Principal | | |
Reserves | |
| |
| |
| | |
| |
Municipal tax incremental financing district (TID) debt issue | |
Impaired | |
$ | 2,845 | | |
$ | – | |
Timber byproduct processing real estate and transportation equipment | |
Impaired | |
| 2,520 | | |
| 26 | |
Owner occupied light manufacturing facility and equipment | |
Impaired | |
| 1,688 | | |
| – | |
Owner occupied cabinetry contractor real estate and equipment | |
Impaired | |
| 752 | | |
| – | |
| |
| |
| | | |
| | |
Total listed performing, but impaired loans | |
| |
$ | 7,805 | | |
$ | 26 | |
Total performing, but impaired loans | |
| |
$ | 9,415 | | |
$ | 209 | |
Listed assets as a % of total performing, but impaired loans | |
| |
| 83 | % | |
| 12 | % |
Table
13: Largest Performing, but Impaired Loans at December 31, 2013 ($000s)
Collateral Description | |
Asset Type | |
Gross Principal | | |
Specific Reserves | |
| |
| |
| | |
| |
Municipal tax incremental financing district (TID) debt issue | |
Impaired | |
$ | 3,090 | | |
$ | – | |
Owner occupied light manufacturing facility and equipment | |
Impaired | |
| 1,725 | | |
| – | |
Owner occupied cabinetry contractor real estate
and equipment | |
Impaired | |
| 700 | | |
| – | |
| |
| |
| | | |
| | |
Total listed performing, but impaired loans | |
| |
$ | 5,515 | | |
$ | – | |
Total performing, but impaired loans | |
| |
$ | 7,136 | | |
$ | 172 | |
Listed assets as a percent of total performing,
but impaired loans | |
| |
| 77 | % | |
| 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.
Comparison
of the provision for loan losses and loss on foreclosed assets during the quarter and nine months ended September 30, 2014 compared
to the prior year periods must recognize that we recorded a $3,340 provision for loan losses during the September 2013 quarter
due to the write down of a loan to a grain commodities dealer. This credit loss resulted from an apparent customer fraud associated
with pledges of single party grain inventory represented by federal warehouse receipts or other inventory records to multiple
parties as collateral and misrepresented inventory records and financial statements. The borrower and its prior operations remain
under investigation by the authorities. We continue to pursue all available channels for recovery of a portion of the credit loss
and are cautiously optimistic concerning some amount of future recovery, although the timing and amount of such recovery are still
uncertain.
We had a
lending relationship with the borrower for several years, dating back to 2008. Our monitoring of the loan relationship included
weekly debtor’s certificates demonstrating weekly collateral position of the bank’s loans. In addition, as grain
was sold and proceeds came to reduce the bank’s loan balance, we normally would re-advance on the revolving lines of credit
based on new collateral pledged (federal warehouse receipts and contracts for sale of grain pledged to bank). The loans had performed
as required from the origination date until August 2013 when the misrepresentation was uncovered. Three other unrelated banks
were also involved in the collateral based financing arrangement. During 2013, we initiated a review to identify other unrelated
credits with similar risk characteristics that could lead to similar losses. The review did not identify other credits with similar
risk factors and this large grain loss was considered to be an unusual and non-recurring loss not representative of portfolio
credit risk a whole.
Due to improving
general credit trends within its portfolio and a slowly improving local economy, our provision for loan losses during the quarter
and nine months ended September 30, 2014 respectively was $140 and $420, an increase from $0 recorded for the September 2013 quarter
but a decline from $675 recorded during the nine months ended September 30, 2013, when the large grain loss is excluded from both
prior year periods. A reduction in total credit costs, including the provision for loan losses and loss on foreclosed assets,
has been an important sustainer of income during 2014 offsetting significant declines in mortgage banking revenue. Total credit
costs were $187 and $144 during the quarters ended September 30, 2014 and 2013 excluding the large grain loss. Likewise, total
credit costs were $541 and $969 during the nine months ended September 30, 2014 and 2013, respectively, a reduction of $428, or
44.2% excluding the grain loss At September 30, 2014, the allowance for loan losses was $6,424, or 1.19% of total loans (65% of
nonperforming loans), compared to $6,783, or 1.31% of total loans (79% of nonperforming loans) at December 31, 2013.
Provision
for loan losses during the December 2014 quarter is expected to remain similar to that recorded for the prior quarters during
2014. Future provisions are also impacted by the actual amount of newly impaired and other problem loans identified by internal
procedures or regulatory agencies which are not yet known.
Table
14: Allowance for Loan Losses
| |
Three months ended | | |
Nine months ended | |
| |
September 30, | | |
September 30, | |
(dollars in thousands) | |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Allowance for loan losses at beginning | |
$ | 6,929 | | |
$ | 7,640 | | |
$ | 6,783 | | |
$ | 7,431 | |
| |
| | | |
| | | |
| | | |
| | |
Provision for loan losses | |
| 140 | | |
| 3,340 | | |
| 420 | | |
| 4,015 | |
Recoveries on loans previously charged-off | |
| 19 | | |
| 32 | | |
| 31 | | |
| 46 | |
Loans charged off | |
| (664 | ) | |
| (3,886 | ) | |
| (810 | ) | |
| (4,366 | ) |
| |
| | | |
| | | |
| | | |
| | |
Allowance for loan losses at end | |
$ | 6,424 | | |
$ | 7,126 | | |
$ | 6,424 | | |
$ | 7,126 | |
Net loan
charge-offs totaled $645 during the September 2014 quarter (.48% of average loans on an annualized basis) compared to $3,854 during
the September 2013 quarter (2.97% of average loans). September 2013 quarterly net charge-offs would have been $514, or .40% of
average annualized loans if the $3,340 large grain loss charge-off was excluded. Net loan charge-offs totaled $779 during the
nine months ended September 30, 2014 (.20% of average loans) compared to $4,320 during the nine months ended September 30, 2013
(1.14% of average loans). Net charge-offs during the nine months ended September 30, 2013 would have been $980, or .26% of average
loans had the large grain loss charge-off been excluded.
The largest
loan charge-off during the nine months ended September 2014 was the $497 partial charge-off of the residential jumbo mortgage
loan recorded in the September 2014 quarter previously discussed, which represented 64% of all 2014 net loan charge-offs. The
largest charge-off during the nine months ended September 30, 2013 was the large grain loss charge-off, which was 77% of all charge-offs
during the period.
ASSET
GROWTH AND LIQUIDITY
Balance
Sheet Changes and Analysis
Total
assets were $730,305 at September 30, 2014 compared to $711,541 million at December 31, 2013, up $18,764, or 2.6%, due to an increase
in net loans receivable of $23,208, up 4.6%. The loan increase included $18,507 of purchased Northwoods branch loans held at September
30, 2014, plus $4,701 of existing market loan growth year to date, primarily in seasonal usage of commercial lines of credit.
In addition to loan growth, a $10,297 increase in investment securities was funded by an $18,705 decline in cash and cash equivalents
during the nine months ended September 30, 2014.
Total
local deposits increased $28,245 year to date due to $35,341 in purchased Northwoods branch deposits retained at September 30,
2014 (approximately 87% of the original purchased deposits) with other existing market deposits declining $7,096, or 1.4% since
December 31, 2013, led by an $11,652 decline in seasonal government tax deposits. In addition to funding loan growth, the increase
in total deposits was used to repay $10.4 million of wholesale funding year to date. Wholesale funding (including brokered certificates
of deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements) was $98,549 (13.5% of total assets) at September
30, 2014 compared to $108,908 (15.3% of total assets) at December 31, 2013.
During the
upcoming December 2014 quarter, total loans receivable are expected to remain stable primarily due to low borrower demand within
our markets while seasonal government tax deposits are expected to significantly increase total deposits. However, maturing wholesale
funding may be paid down with the increased deposit liquidity, limiting total asset growth during the quarter.
Changes
in assets during the three months and nine months ended September 30, 2014 are listed in Table 15 below.
Table
15: Change in Balance Sheet Assets Composition
| |
Three months ended | | |
Nine months ended | |
Increase (decrease) in assets ($000s) | |
September 30, 2014 | | |
September 30, 2014 | |
| |
$ | | |
% | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| |
Commercial, industrial and agricultural loans | |
$ | 11,006 | | |
| 8.6 | % | |
$ | 8,779 | | |
| 6.7 | % |
Commercial real estate mortgage loans | |
| 1,162 | | |
| 0.5 | % | |
| 4,167 | | |
| 1.9 | % |
Other assets (various categories) | |
| 953 | | |
| 4.4 | % | |
| 855 | | |
| 4.0 | % |
Premises and equipment, net | |
| (60 | ) | |
| -0.5 | % | |
| 1,312 | | |
| 13.6 | % |
Bank certificates of deposit | |
| (248 | ) | |
| -6.8 | % | |
| 1,188 | | |
| 53.1 | % |
Residential real estate mortgage and home equity loans | |
| (271 | ) | |
| -0.2 | % | |
| 10,871 | | |
| 6.9 | % |
Investment securities | |
| (665 | ) | |
| -0.5 | % | |
| 10,297 | | |
| 7.7 | % |
Cash and cash equivalents | |
| (8,113 | ) | |
| -38.8 | % | |
| (18,705 | ) | |
| -59.3 | % |
| |
| | | |
| | | |
| | | |
| | |
Total increase (decrease) in assets | |
$ | 3,764 | | |
| 0.5 | % | |
$ | 18,764 | | |
| 2.6 | % |
A significant
portion of the increase in loans during the nine months ended September 30, 2014 came from the acquisition of the Northwoods Rhinelander
branch, which at September 30, 2014 had increased commercial real estate mortgages by $7,072 (170% of the year to date increase),
increased residential real estate mortgages and related loans by $10,304 (95% of the year to date increase), and increased commercial
and related loans by $909 (10% of the year to date increase).
During the
nine months ended September 30, 2014, the increase in investment securities included an additional $10,357 investment in federal
agency issued residential mortgage backed securities purchased at a slight discount to par value with a weighted average purchased
yield of 2.80% and an expected average principal life of 5.4 years under current interest rate levels. These securities are subject
to extension of principal payments in a rising rate scenario with average principal life increasing up to 7.2 years in connection
with a significant increase in interest rates such as the 10 year U.S. Treasury rate. Total remaining net book value of these
securities was $9,860 at September 30, 2014. The majority of the purchased mortgage backed securities were represented by fully
amortizing 15 year residential mortgage collateral. While the purchase is expected to increase 2014 net income by approximately
$40 per quarter, the purchase was made with existing overnight funds and slightly increased our interest rate risk position in
future years.
Changes
in net assets during the three months and six months ended September 30, 2014, impacted funding sources as listed in Table 16
below.
Table
16: Change in Balance Sheet Liabilities and Equity Composition
| |
Three months ended | | |
Nine months ended | |
Increase (decrease) in liabilities and equity ($000s) | |
September 30, 2014 | | |
September 30, 2014 | |
| |
$ | | |
% | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| |
Core deposits (including MMDA) | |
$ | 8,424 | | |
| 1.7 | % | |
$ | 23,357 | | |
| 4.9 | % |
FHLB advances | |
| 3,493 | | |
| 12.5 | % | |
| (6,677 | ) | |
| -17.5 | % |
Stockholders’ equity | |
| 1,327 | | |
| 2.2 | % | |
| 3,855 | | |
| 6.8 | % |
Senior subordinated notes | |
| – | | |
| 0.0 | % | |
| – | | |
| 0.0 | % |
Other liabilities and debt (various categories) | |
| (445 | ) | |
| -3.1 | % | |
| (747 | ) | |
| -5.1 | % |
Wholesale and national deposits | |
| (1,748 | ) | |
| -3.2 | % | |
| (3,682 | ) | |
| -6.4 | % |
Retail certificates of deposit > $100 | |
| (2,939 | ) | |
| -5.4 | % | |
| 4,888 | | |
| 10.5 | % |
Other borrowings | |
| (4,348 | ) | |
| -19.3 | % | |
| (2,230 | ) | |
| -10.9 | % |
| |
| | | |
| | | |
| | | |
| | |
Total increase (decrease) in liabilities and stockholders’
equity | |
$ | 3,764 | | |
| 0.5 | % | |
$ | 18,764 | | |
| 2.6 | % |
Loans
Receivable
Table
17: Period-End Loan Composition
| |
September 30, | | |
September 30, | | |
December 31, 2013 | |
| |
Dollars | | |
Dollars | | |
Percentage of total | | |
| | |
Percentage | |
(dollars in thousands) | |
2014 | | |
2013 | | |
2014 | | |
2013 | | |
Dollars | | |
of total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Commercial, industrial and agricultural | |
$ | 138,999 | | |
$ | 143,396 | | |
| 25.7 | % | |
| 27.3 | % | |
$ | 130,220 | | |
| 25.2 | % |
Commercial real estate mortgage | |
| 228,766 | | |
| 220,592 | | |
| 42.3 | % | |
| 42.0 | % | |
| 224,599 | | |
| 43.5 | % |
Residential real estate mortgage | |
| 144,729 | | |
| 135,353 | | |
| 26.8 | % | |
| 25.8 | % | |
| 137,600 | | |
| 26.6 | % |
Residential real estate loans held for sale | |
| 999 | | |
| 824 | | |
| 0.2 | % | |
| 0.2 | % | |
| 150 | | |
| 0.0 | % |
Consumer home equity | |
| 23,570 | | |
| 20,346 | | |
| 4.4 | % | |
| 3.9 | % | |
| 20,677 | | |
| 4.0 | % |
Consumer and installment | |
| 3,448 | | |
| 4,312 | | |
| 0.6 | % | |
| 0.8 | % | |
| 3,567 | | |
| 0.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 540,511 | | |
$ | 524,823 | | |
| 100.0 | % | |
| 100.0 | % | |
$ | 516,813 | | |
| 100.0 | % |
Loans held
for investment continue to consist primarily of commercial related loans, including commercial and industrial and commercial real
estate loans, representing 68% of total loans as shown in the Table above at September 30, 2014 and 69% of total loans at December
31, 2013. Refer to Note 4 of the Notes to Consolidated Financial Statements for more information on the composition of loans at
period-end.
Following
a March 2014 quarter characterized by a $19,565 decline in commercial related loans receivable, total loans increased $33,530
(6.8%) during the June 2014 quarter, including $21,468 of purchased Northwoods Rhinelander loans and $12,062 of organic market
growth. During the linked quarter ended September 30, 2014, total loans increased an additional $11,758 from local organic growth.
Factors contributing to the organic loan balance changes during the nine months ended September 30, 2014 are listed below:
|
● |
Commercial real estate loans declined $8,288 during the March 2014 quarter from the refinance of a multi-family housing
development loan with a national lender at low long-term fixed interest rates. We continue to serve as the lender for this
developer during the construction and development periods and continue to have ongoing lending relationships for this purpose
totaling $3,005 at September 30, 2014. |
|
|
|
|
● |
At September 30, 2014, we had $48.5 million of combined line of credit commitments to our seven largest line of credit
customers. Most of these lines are used to manage seasonal business factors and fluctuate in balance during the year. During
the March 2014 quarter, these seven customer reduced their lines balances by $4,663, but increased line usage by $1,834 during
the June 2014 quarter and by $7,035 during the September 2014 quarter. Year to date, usage of these large lines of credit
is up $4,206 since December 31, 2013 and totaled $20,803 at September 30, 2014. We expect these customers to repay their increased
line balances during the normal course of business during the coming months, negatively impacting December 2014 quarterly
loan growth. |
| ● | During
the nine months ended September 30, 2014 total participation loans purchased decreased
$4,332, from $27,404 at December 31, 2013 to $23,072 at September 30, 2014. At the beginning
of 2014, participation purchased loans included $5,547 of purchased loans from a Wisconsin
community bank lead lender collateralized by out of state mobile home park real estate.
During the March 2014 quarter, this position declined $2,130 when the loan was refinanced
with another lender on a long-term basis. During the June and September 2014 quarters,
we repurchased a total of $3,176 of similar loans from the same Wisconsin lender. Together,
during the nine months ended September 30, 2014, this position in mobile home park purchased
real estate loans increased $1,078, to $6,625 held at September 30, 2014. The $5,410
decline in other participations purchased occurred during the September 2014 quarter
as we were repaid those balances from various community bank lead lenders. |
| ● | During
the September quarter, we originated a $4,600 commercial real estate loan to an existing
borrower for retail sales business expansion into the Madison, Wisconsin market. |
| ● | Separate
from the purchased Northwoods Rhinelander branch loans and the other loan changes discussed
above, all other loans increased $6,000 during the nine months ended September 30, 2014
primarily from commercial related lending activity for a variety of factors. |
During the
upcoming December 2014 quarter, we expect loan balances to remain flat or decline as seasonal lines of credit are repaid and local
loan demand remains weak.
Competition
from larger banks in our markets is strong as such banks with higher capital levels and substantial excess deposits look to lending
for higher yielding assets as investment security returns remain very low. Banks including BMO Harris Bank (having the largest
deposit market share in our markets), U.S. Bank, and Associated Bank aggressively pursue high credit quality borrowers with low
lending interest rate spreads in an effort to aggressively increase their loan market share. We expect strong competition to continue
during the next several quarters which could impact the pace of future loan growth and could negatively impact net interest margin
and net interest income. Certain lenders within our markets appear to have relaxed their credit standards to support loan growth,
including not requiring borrower guarantees on commercial purpose loans, and the offering of original principal amortization periods
in excess of 20 years. We have not made changes to our credit standards during 2014 to stimulate loan growth, although from time
to time we may extend original commercial real estate amortization periods as long as 25 years on a case by case basis. In addition,
to support loan growth, we may seek to increase purchased loan participations from other banks in Wisconsin during 2014 and 2015.
Deposits
and Wholesale Funding Sources
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 75.7% of total assets at September 30, 2014, compared to 73.9% of total assets
at December 31, 2013 and 70.0% of total assets at September 30, 2013. This percentage increased compared to the prior year periods
due to the purchase of the Northwoods Rhinelander branch deposits in April 2014 as well as continued pay down of wholesale funding.
Table
18: Period-end Deposit Composition
| |
September 30, | | |
December 31, | |
(dollars in thousands) | |
2014 | | |
2013 | | |
2013 | |
| |
$ | | |
% | | |
$ | | |
% | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Non-interest bearing demand | |
$ | 109,197 | | |
| 18.1 | % | |
$ | 92,141 | | |
| 16.6 | % | |
$ | 102,644 | | |
| 17.8 | % |
Interest-bearing demand and savings | |
| 178,090 | | |
| 29.7 | % | |
| 167,631 | | |
| 30.2 | % | |
| 176,427 | | |
| 30.5 | % |
Money market deposits | |
| 137,312 | | |
| 22.8 | % | |
| 125,508 | | |
| 22.6 | % | |
| 136,797 | | |
| 23.7 | % |
Retail and local time deposits
less than $100 | |
| 72,523 | | |
| 12.0 | % | |
| 57,584 | | |
| 10.4 | % | |
| 57,897 | | |
| 10.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total core deposits | |
| 497,122 | | |
| 82.6 | % | |
| 442,864 | | |
| 79.8 | % | |
| 473,765 | | |
| 82.0 | % |
Retail and local time deposits $100 and over | |
| 51,278 | | |
| 8.5 | % | |
| 45,686 | | |
| 8.3 | % | |
| 46,390 | | |
| 8.1 | % |
Broker and national time deposits less than $100 | |
| 198 | | |
| 0.0 | % | |
| 542 | | |
| 0.1 | % | |
| 542 | | |
| 0.1 | % |
Broker and national time
deposits $100 and over | |
| 53,479 | | |
| 8.9 | % | |
| 65,147 | | |
| 11.8 | % | |
| 56,817 | | |
| 9.8 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 602,077 | | |
| 100.0 | % | |
$ | 554,239 | | |
| 100.0 | % | |
$ | 577,514 | | |
| 100.0 | % |
Total deposits
increased $24,563, or 4.3%, to $602,077 at September 30, 2014 compared to $577,514 at December 31, 2013. The majority of the increase
was from the purchase of the Northwoods Rhinelander branch, which included $35,341 of deposits at September 30, 2014. Other deposits
declined $10,778, or 1.9% of total deposits at September 30, 2014 compared to December 31, 2013. The decline included a $3,682
reduction in brokered and national certificates of deposit, and a $7,096 decline in local deposits. The local deposit decline
was led by a reduction of $11,652 in seasonal municipal tax deposits since December 31, 2013.
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 often less costly to us 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. 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 is considered to be 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 deposits (not including CDARS) to 20% of total assets. Broker and national deposits
as a percentage of total assets were 7.4%, 8.1%, and 9.3% at September 30, 2014, December 31, 2013, and September 30, 2013, respectively.
Limited loan growth and the purchase of the Northwoods Rhinelander branch during April 2014 have provided local deposits used
to regularly repay maturing brokered deposits and other wholesale funding for the past several quarters, reducing the ratio of
brokered deposits to total assets. During the December quarter, increased seasonal municipal tax deposits will likely be used
to repay maturing wholesale funds, decreasing wholesale fund as a percent of total assets at December 31, 2014. Beyond the use
of brokered and national time deposits, secondary wholesale sources also include federal funds purchased, FHLB advances, Federal
Reserve Discount Window advances, and pledging of investment securities against wholesale repurchase agreements.
Table
19: Summary of Balance by Significant Deposit Source
| |
September 30, | | |
December 31, | |
(dollars in thousands) | |
2014 | | |
2013 | | |
2013 | |
| |
| | |
| | |
| |
Total time deposits $100 and over | |
$ | 104,757 | | |
$ | 110,833 | | |
$ | 103,207 | |
Total broker and national deposits | |
| 53,677 | | |
| 65,689 | | |
| 57,359 | |
Total retail and local time deposits | |
| 123,801 | | |
| 103,270 | | |
| 104,287 | |
Core deposits, including money market deposits | |
| 497,122 | | |
| 442,864 | | |
| 473,765 | |
Table
20: September 30, 2014 Change in Deposit Balance since Period Ended:
| |
September 30, 2013 | | |
December 31, 2013 | |
(dollars in thousands) | |
$ | | |
% | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| |
Total time deposits $100 and over | |
$ | (6,076 | ) | |
| -5.5 | % | |
$ | 1,550 | | |
| 1.5 | % |
Total broker and national deposits | |
| (12,012 | ) | |
| -18.3 | % | |
| (3,682 | ) | |
| -6.4 | % |
Total retail and local time deposits | |
| 20,531 | | |
| 19.9 | % | |
| 19,514 | | |
| 18.7 | % |
Core deposits, including money market deposits | |
| 54,258 | | |
| 12.3 | % | |
| 23,357 | | |
| 4.9 | % |
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. Table 21 below outlines the available and unused
portion of these funding sources (based on collateral and/or company policy limitations) as of September 30, 2014 and December
31, 2013. Currently unused but available funding sources at September 30, 2014 are considered sufficient to fund anticipated asset
growth and meet contingency funding needs during the next several quarters. We also maintain formal policies to address liquidity
contingency needs and to manage a liquidity crisis. The following Table 21 provides a summary of how the wholesale funding sources
normally available to us would be impacted by various operating conditions.
Table
21: 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 22
summarizes the availability of various wholesale funding sources at September 30, 2014, and December 31, 2013.
Table
22: Available but Unused Funding Sources other than Retail Deposits
| |
September
30, 2014 | | |
December
31, 2013 | |
| |
Unused,
but | | |
Amount | | |
Unused,
but | | |
Amount | |
(dollars
in thousands) | |
Available | | |
Used | | |
Available | | |
Used | |
| |
| | |
| | |
| | |
| |
Overnight
federal funds purchased | |
$ | 28,000 | | |
$ | – | | |
$ | 28,000 | | |
$ | – | |
Federal
Reserve discount window advances | |
| 84,243 | | |
| – | | |
| 89,875 | | |
| – | |
FHLB
advances under blanket mortgage lien | |
| 72,012 | | |
| 31,372 | | |
| 54,944 | | |
| 38,049 | |
Repurchase
agreements and other FHLB advances | |
| 48,718 | | |
| 17,711 | | |
| 35,822 | | |
| 20,441 | |
Wholesale
and national deposits | |
| 92,384 | | |
| 53,677 | | |
| 84,949 | | |
| 57,359 | |
Holding
company secured line of credit | |
| 3,000 | | |
| – | | |
| 3,000 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 328,357 | | |
$ | 102,760 | | |
$ | 296,590 | | |
$ | 115,849 | |
| |
| | | |
| | | |
| | | |
| | |
Funding
as a percent of total assets | |
| 45.0 | % | |
| 14.1 | % | |
| 41.7 | % | |
| 16.3 | % |
Percentage
of gross available funding used at period-end | |
| n/a | | |
| 23.8 | % | |
| n/a | | |
| 28.1 | % |
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.
September
30, 2014 compared to December 31, 2013
Overnight
federal funds purchased
Our maximum
federal funds purchased availability totals $28,000 from three correspondent banks. 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 14% at September 30, 2014 and 13% at December 31, 2013, 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. At September 30, 2014 and December
31, 2013, 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 $84,243
at September 30, 2014 compared to $89,875 at December 31, 2013 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 nine months ended September 30, 2014 or during
2013.
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 70% to 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 $2,556 capital stock investment, total FHLB advances in excess
of $51,124 require us to purchase additional FHLB stock equal to 5% of the advance amount. At September 30, 2014, $19,752 of advances
were available from the FHLB on the blanket mortgage lien without the purchase of additional FHLB stock. Further advances of the
remaining $52,260 available at September 30, 2014 would have required us to purchase additional FHLB stock totaling $2,613. FHLB
stock currently pays an annualized dividend of .50% 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 were subject to a haircut of approximately 36% on first mortgage collateral and 60% on secondary lien collateral at both September
30, 2014 and December 31, 2013. The FHLB 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 the 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 September 30, 2014 or December 31, 2013.
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 September 30, 2014, $13,500 of our repurchase agreements
are wholesale agreements with correspondent banks and $4,211 are overnight repurchase agreements with local customers using our
treasury management services. At December 31, 2013, $13,500 of our repurchase agreements were wholesale agreements with correspondent
banks and $5,441 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 September 30, 2014, $48,718 of additional FHLB advances were available based on pledging of
securities if an additional $2,436 of member capital stock were purchased. At December 31, 2013, $35,822 of additional FHLB advances
were available based on pledging of securities if an additional $1,791 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 $92,384 at September 30, 2014 and $84,949 at December 31, 2013. Brokered and national certificates
were 7.3% of total assets at September 30, 2014 and 8.1% at December 31, 2013. 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.
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 line of credit
We maintained
a $3,000 line of credit secured by a pledge of our bank subsidiary common stock with Bankers’ Bank in Madison, Wisconsin
as a contingency liquidity source at September 30, 2014 and December 31, 2013. No amounts were drawn on the line at September
30, 2014 or December 31, 2013. 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 currently has approximately $1,500 of debt 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 are 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%. |
| ● | Maintain
an allowance for loan losses no less than 70% of nonperforming loans (excluding accruing
troubled debt restructured loans). |
At September
30, 2014 and December 31, 2013, 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 2014.
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 September 30, 2014 or December 31, 2013 and no liquidity stress levels were considered to exist
at those dates.
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 15.6% and 11.6% at September 30, 2014 and December 31, 2013,
respectively. Basic surplus increased since December 31, 2013 as excess cash and cash equivalent funds from loan pay downs were
used to repay maturing FHLB advances, increasing FHLB borrowing capacity during the year to date period.
CAPITAL
RESOURCES
During the
nine months ended September 30, 2014, stockholders’ equity increased $3,855, or 6.8%, primarily from $3,971 in retained
net income net of $664 of cash dividends declared. Tangible net book value per share at September 30, 2014 was $36.59 compared
to $34.36 at December 31, 2013, and increase of 6.5%. The stockholders’ equity ratio increased at September 30, 2014 to
8.30% compared to 8.16% at June 30, 2014, and 7.98% at December 31, 2013. On the purchase of the Northwoods Rhinelander, Wisconsin
branch, we recorded $344 of core deposit intangible assets and goodwill, which reduced tangible net book value by $.21 per share
at the acquisition date. At September 30, 2014, $297 of these intangibles remain as the core deposit intangible to be amortized
over five years using a double declining balance method beginning April 2014.
For regulatory
purposes, the $7.7 million junior subordinated debentures maturing September 2035 reflected as debt on the Consolidated Balance
Sheet are reclassified as Tier 1 regulatory equity capital. 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. 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 September 30, 2014 and December 31, 2013, 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.”
Refer to Table 23 for specific regulatory capital ratios at period-end. Failure to remain well-capitalized could prevent us from
obtaining future whole sale brokered time deposits which are an important source of funding.
During the
March 2014 quarter, we issued 6,400 shares of restricted stock having a grant date value of $200, or $31.25 per share, 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 Note 12 of the Notes to Consolidated Financial Statements for more information on the restricted shares.
During the
September 2014 quarter, we repurchased 10,000 shares of our common stock at an average cost of $33.23 per share, while no shares
were repurchased in the September 2013 quarter. Year to date, 10,000 shares of common stock were repurchased at an average cost
of $33.23 per share during 2014 while 10,030 shares were repurchased at an average cost of $26.78 per share during the nine months
ended September 30, 2013. For a community bank such as us, the cost of capital remains very high, particularly related to issue
of new common stock as our current stock price trades on the open market at less than our net book value per share. In addition,
many sources of previously low cost capital such as pooled trust preferred offerings are no longer available. New regulatory capital
rules also become effective for us on January 1, 2015 which are expected to decrease existing capital ratios. The priority use
of excess capital is to support continued growth through acquisition activities as such opportunities become available. However,
we continue to maintain a quarterly program to repurchase up to 10,000 shares of our common stock on the open market at prevailing
prices.
During 2013, the banking regulatory agencies finalized new regulatory
capital rules that will increase our capital needs beginning January 1, 2015. The minimum capital ratios to be considered well
capitalized and to cover the newly required “capital buffer,” phased in during 2015 through 2019, 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 under current capital regulation.
The most
significant factors of the rules changes include:
| ● | Requirement
to meet minimum capital ratios for a new regulatory capital ratio defined as the “Common
equity Tier 1 capital ratio.” |
| | |
| ● | Institution
of a new “capital conservation buffer” which provides a buffer between the
minimum regulatory capital ratios to be considered “adequately capitalized”
and capital ratios that allow the bank to pay certain levels of shareholder dividends,
purchase treasury stock, or fund certain executive management incentive plans. The capital buffer will be phased in beginning in 2015 and be fully implemented in 2019. |
| | |
| ● | Potential
limitations on mortgage servicing right assets and deferred income tax assets allowed
as regulatory capital as well as a greater risk weight applied to the amount allowed
for regulatory capital purposes. |
| | |
| ● | Past
due loans would be subject to a 150% risk weighting, up from the 100% risk weighting
currently applied. |
| | |
| ● | Unused
lines of credit not unconditionally cancellable by the bank would be subject to a 20%
risk weighting, up from the 0% risk weighting current applied. |
If the new
capital rules were applied to our reported consolidated December 31, 2013 regulatory capital position and made effective immediately,
the proforma new capital ratios are projected to change as follows:
| |
Actual | | |
Proforma | | |
Targeted minimum | |
| |
as
of:
Dec 31,
2013 | | |
as
of:
Dec 31,
2013 | | |
with capital buffer | |
| |
| | | |
| | | |
| | |
Tier 1 leverage
ratio to average assets | |
| 9.06 | % | |
| 9.06 | % | |
| 6.50 | % |
Common equity Tier 1 ratio
(new) | |
| n/a | | |
| 10.62 | % | |
| 7.00 | % |
Tier 1 risk adjusted capital
ratio | |
| 12.63 | % | |
| 12.04 | % | |
| 8.50 | % |
Tier 2 total risk adjusted
capital ratio | |
| 13.88 | % | |
| 13.29 | % | |
| 10.50 | % |
We continue
to internally review the timing and extent of the proposed changes on our regulatory capital position and the final capital ratios
at January 1, 2015, may be different than the proforma capital ratios shown above. Increased regulatory capital requirements could
impact our ability to pay shareholder cash dividends, repurchase shares of treasury stock, or the pace of which we could grow
in assets, both organically and via merger and acquisition activities. 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. 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, could dilute the book value
per share of existing shareholders.
Table
23: Capital Ratios – PSB Holdings, Inc. – Consolidated
| |
September 30, | | |
December 31, | |
(dollars in thousands) | |
2014 | | |
2013 | | |
2013 | |
| |
| | |
| | |
| |
Stockholders’ equity | |
$ | 60,608 | | |
$ | 56,012 | | |
$ | 56,753 | |
Junior subordinated debentures, net | |
| 7,500 | | |
| 7,500 | | |
| 7,500 | |
Disallowed mortgage servicing right assets | |
| (173 | ) | |
| (166 | ) | |
| (170 | ) |
Disallowed other intangible assets | |
| (297 | ) | |
| – | | |
| – | |
Accumulated other comprehensive income | |
| (397 | ) | |
| (561 | ) | |
| (349 | ) |
| |
| | | |
| | | |
| | |
Tier 1 regulatory capital | |
| 67,241 | | |
| 62,785 | | |
| 63,734 | |
Allowance for loan and credit losses | |
| 6,524 | | |
| 6,352 | | |
| 6,314 | |
| |
| | | |
| | | |
| | |
Total regulatory capital | |
$ | 73,765 | | |
$ | 69,137 | | |
$ | 70,048 | |
| |
| | | |
| | | |
| | |
Total quarterly average assets (as defined by current regulations) | |
$ | 727,138 | | |
$ | 695,909 | | |
$ | 704,448 | |
Disallowed mortgage servicing right assets | |
| (173 | ) | |
| (166 | ) | |
| (170 | ) |
Disallowed other intangible assets | |
| (297 | ) | |
| – | | |
| – | |
Accumulated other comprehensive income
| |
| (985 | ) | |
| (1,414 | ) | |
| (1,017 | ) |
| |
| | | |
| | | |
| | |
Quarterly average tangible assets (as
defined by current regulations) | |
$ | 725,683 | | |
$ | 694,329 | | |
$ | 703,261 | |
| |
| | | |
| | | |
| | |
Risk-weighted assets (as defined by current
regulations) | |
$ | 531,862 | | |
$ | 507,648 | | |
$ | 504,561 | |
| |
| | | |
| | | |
| | |
Tier 1 capital to average tangible assets (leverage ratio) | |
| 9.27 | % | |
| 9.04 | % | |
| 9.06 | % |
Tier 1 capital to risk-weighted assets | |
| 12.64 | % | |
| 12.37 | % | |
| 12.63 | % |
Total capital to risk-weighted assets | |
| 13.87 | % | |
| 13.62 | % | |
| 13.88 | % |
Table
24: Capital Ratios – Peoples State Bank – Subsidiary
Tier 1 capital to average tangible assets (leverage ratio) | |
| 9.57 | % | |
| 9.51 | % | |
| 9.39 | % |
Tier 1 capital to risk-weighted assets | |
| 13.07 | % | |
| 13.03 | % | |
| 13.10 | % |
Total capital to risk-weighted assets | |
| 14.30 | % | |
| 14.28 | % | |
| 14.35 | % |
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
25 presents the calculation of our Texas Ratio.
Table:
25: Calculation of “Texas Ratio” (a non-GAAP measure)
| |
As
of Quarter End | |
| |
September 30, | | |
June 30, | | |
March 31, | | |
December 31, | | |
September 30, | |
(dollars in thousands) | |
2014 | | |
2014 | | |
2014 | | |
2013 | | |
2013 | |
| |
| | |
| | |
| | |
| | |
| |
Total
nonperforming assets | |
$ | 11,649 | | |
$ | 12,172 | | |
$ | 10,323 | | |
$ | 10,389 | | |
$ | 10,285 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total stockholders’ equity | |
$ | 60,608 | | |
$ | 59,281 | | |
$ | 58,277 | | |
$ | 56,753 | | |
$ | 56,012 | |
Less: Mortgage servicing rights, net | |
| (1,734 | ) | |
| (1,698 | ) | |
| (1,707 | ) | |
| (1,696 | ) | |
| (1,662 | ) |
Less: Goodwill and other intangible assets | |
| (297 | ) | |
| (321 | ) | |
| – | | |
| – | | |
| – | |
Add: Allowance
for loan losses | |
| 6,424 | | |
| 6,929 | | |
| 6,882 | | |
| 6,783 | | |
| 7,126 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total tangible common
stockholders’ equity and reserves | |
$ | 65,001 | | |
$ | 64,191 | | |
$ | 63,452 | | |
$ | 61,840 | | |
$ | 61,476 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total nonperforming assets as a percentage of total tangible
common stockholders’ equity and reserves | |
| 17.92 | % | |
| 18.96 | % | |
| 16.27 | % | |
| 16.80 | % | |
| 16.73 | % |
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 2009. At September 30, 2014, our credit guarantee covered $19,652 of loan principal on
which we would incur credit losses up to $949 if the FHLB first loss exceeds $1,456 on foreclosure of loans within this pool.
At December 31, 2013, our credit guarantee covered $23,709 of loan principal on which we would incur credit losses up to $949
if the FHLB first loss exceeds $1,593 on foreclosure of loans within this pool. 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 experiences housing price
changes similar to the state of Wisconsin as a whole, and we do not have a significant reliance on vacation homes located in our
northern markets. 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. At September 30, 2014, the average remaining
first mortgage principal balance for loans on which we provided the credit enhancement was $60.
Ten years
after the original pool master commitment date, the FHLB First Loss Account and our 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 2012, a MPF 125 program pool 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 26. The next First Loss Account reset date for
any individual master commitment containing our Credit Enhancement Guarantee is scheduled for July 2017.
Under bank
regulatory capital rules, this 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 $864 at September 30, 2014 and December 31, 2013. 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 26.
Use of
Interest Rate Swap Derivatives
From time
to time, we sell interest rate swaps to certain adjustable rate commercial loan customers to fix the interest rate on their floating
rate loan. There were $13,816 and $14,323 of interest rate swaps associated with customer floating rate commercial loan principal
at September 30, 2014 and December 31, 2013, respectively, under the program. When the fixed rate swap is originated with customer,
an identical offsetting swap is also entered into by us with a correspondent bank. Refer to Note 9 of the Notes to Consolidated
Financial Statements for more information on the program.
We also
maintain an interest rate swap to convert floating interest payments on our $7.7 million junior subordinated debentures to a fixed
rate which matures during September 2017. Refer to Note 9 of the Notes to Consolidated Financial Statements for further information
on this swap, which is designated as a cash flow hedge of interest rate payments.
Residential
Mortgage Loan Servicing
We serviced
$276,367 and $272,280 of residential real estate loans which have been sold to the FHLB and FNMA at September 30, 2014, and December
31, 2013, 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. Mortgage loan servicing fees are an important source of mortgage banking income. We recognize
a mortgage servicing right asset due to the substantial volume of loans serviced for the FHLB and FNMA.
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. Provision
for mortgage banking losses from required repurchase was $23 and $204 during the nine months ended September 30, 2014 and 2013,
respectively and reduced mortgage banking income for those periods. We have provided a liability of $100 at September 30, 2014
compared to $108 at December 31, 2013 for potential future representation and warranty losses. Actual representation and warranty
losses were $31 and $126 during the nine months ended September 30, 2014 and 2013, respectively.
The following
tables summarize loan principal serviced for the FHLB under various MPF programs and for FNMA as of September 30, 2014 and December
31, 2013.
Table
26: Residential Mortgage Loans Serviced for Others as of September 30, 2014 ($000s)
| |
| | |
| | |
Weighted | | |
Average Monthly | | |
PSB Credit | | |
Agency | | |
Mortgage | |
Agency | |
Principal | | |
Loan | | |
Average | | |
Payment | | |
Enhancement | | |
Funded First | | |
Servicing Right, net | |
Program | |
Serviced | | |
Count | | |
Coupon Rate | | |
Seasoning | | |
Guarantee | | |
Loss Account | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
FHLB MPF 100 | |
$ | 6,832 | | |
| 160 | | |
| 5.38 | % | |
| 137 | | |
$ | 94 | | |
$ | 291 | | |
$ | 14 | | |
| 0.20 | % |
FHLB MPF 125 | |
| 17,001 | | |
| 210 | | |
| 5.75 | % | |
| 85 | | |
| 855 | | |
| 1,165 | | |
| 67 | | |
| 0.39 | % |
FHLB XTRA | |
| 171,561 | | |
| 1,402 | | |
| 3.75 | % | |
| 36 | | |
| n/a | | |
| n/a | | |
| 1,005 | | |
| 0.59 | % |
FNMA | |
| 80,973 | | |
| 551 | | |
| 3.63 | % | |
| 18 | | |
| n/a | | |
| n/a | | |
| 648 | | |
| 0.80 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 276,367 | | |
| 2,323 | | |
| 3.88 | % | |
| 36 | | |
$ | 949 | | |
$ | 1,456 | | |
$ | 1,734 | | |
| 0.63 | % |
Table
27: Residential Mortgage Loans Serviced for Others as of December 31, 2013 ($000s)
| |
| | |
| | |
Weighted | | |
Average Monthly | | |
PSB Credit | | |
Agency | | |
Mortgage | |
Agency | |
Principal | | |
Loan | | |
Average | | |
Payment | | |
Enhancement | | |
Funded First | | |
Servicing Right, net | |
Program | |
Serviced | | |
Count | | |
Coupon Rate | | |
Seasoning | | |
Guarantee | | |
Loss Account | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
FHLB MPF 100 | |
$ | 8,493 | | |
| 184 | | |
| 5.38 | % | |
| 128 | | |
$ | 94 | | |
$ | 291 | | |
$ | 19 | | |
| 0.22 | % |
FHLB MPF 125 | |
| 18,748 | | |
| 226 | | |
| 5.75 | % | |
| 81 | | |
| 855 | | |
| 1,302 | | |
| 77 | | |
| 0.41 | % |
FHLB XTRA | |
| 185,283 | | |
| 1,472 | | |
| 3.75 | % | |
| 27 | | |
| n/a | | |
| n/a | | |
| 1,133 | | |
| 0.61 | % |
FNMA | |
| 59,756 | | |
| 409 | | |
| 3.50 | % | |
| 15 | | |
| n/a | | |
| n/a | | |
| 467 | | |
| 0.78 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 272,280 | | |
| 2,291 | | |
| 3.88 | % | |
| 31 | | |
$ | 949 | | |
$ | 1,593 | | |
$ | 1,696 | | |
| 0.62 | % |
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, 2013.
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, 2013, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
| |
Total number of shares (or units) purchased | | |
Average price paid per share (or unit) | | |
Total number of shares (or units) purchased as part of publicly announced plans or programs | | |
Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs | |
Period | |
(a) | | |
(b) | | |
(c) | | |
(d) | |
| |
| | |
| | |
| | |
| |
July 2014 | |
| 5,600 | | |
$ | 32.88 | | |
| – | | |
| – | |
August 2014 | |
| 4,400 | | |
| 33.69 | | |
| – | | |
| – | |
September 2014 | |
| – | | |
| – | | |
| – | | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Quarterly totals | |
| 10,000 | | |
$ | 33.23 | | |
| – | | |
| – | |
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. |
|
|
November 14, 2014 |
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 September 30, 2014
Pursuant
to Section 102(d) of Regulation S-T
(17
C.F.R. §232.102(d))
The
following exhibits are filed as part this report:
31.1 | |
Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 |
31.2 | |
Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 |
32.1 | |
Certifications under Section 906 of Sarbanes-Oxley Act of 2002 |
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.
|
-62-
Exhibit
31.1
Certification
Under Section 302
of
Sarbanes-Oxley Act of 2002
I,
Peter W. Knitt, certify that:
1. I
have reviewed this quarterly report on Form 10-Q of PSB Holdings, Inc. (the “registrant”);
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
(a) all
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information;
and
(b) any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: November
14, 2014
|
PETER W. KNITT |
|
Peter W. Knitt |
|
President and Chief Executive Officer |
Exhibit
31.2
Certification
Under Section 302
of
Sarbanes-Oxley Act of 2002
I,
Scott M. Cattanach, certify that:
1. I
have reviewed this quarterly report on Form 10-Q of PSB Holdings, Inc. (the “registrant”);
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
(a) all
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information;
and
(b) any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: November
14, 2014
|
SCOTT M. CATTANACH |
|
Scott M. Cattanach |
|
Treasurer (Principal Financial Officer) |
Exhibit
32.1
Certification
of
PSB
Holdings, Inc.
under
Section 906 of Sarbanes-Oxley Act of 2002
The
undersigned Chief Executive Officer and Chief Financial Officer of PSB Holdings, Inc. (the “Company”) certify pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that (1) the quarterly report on Form 10-Q of the Company
for the quarterly period ended September 30, 2014 (the “Report”), fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. 78m or 78o(d), and (2) the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: November
14, 2014
|
PETER W. KNITT |
|
Peter W. Knitt |
|
President and CEO |
|
SCOTT M. CATTANACH |
|
Scott M. Cattanach |
|
Treasurer |
|
(Chief Financial Officer)
|
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