-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KXcvpqhsIZw3bK5GdLWJatosiBCLh5YWvQDXI0QAWgdvP1PMLZzy/ep1sqwW2boJ 5lxZZ7h2rkeINRi/n9prwA== 0000916480-01-000009.txt : 20010329 0000916480-01-000009.hdr.sgml : 20010329 ACCESSION NUMBER: 0000916480-01-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSB HOLDINGS INC /WI/ CENTRAL INDEX KEY: 0000948368 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 391804877 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26480 FILM NUMBER: 1581305 BUSINESS ADDRESS: STREET 1: 1905 WEST STEWART AVE CITY: WAUSAU STATE: WI ZIP: 54401 BUSINESS PHONE: 7158422191 MAIL ADDRESS: STREET 1: 1905 WEST STEWART AVE CITY: WAUSAU STATE: WI ZIP: 54401 FORMER COMPANY: FORMER CONFORMED NAME: PSB HOLDINGS INC /WI/ DATE OF NAME CHANGE: 19950721 FORMER COMPANY: FORMER CONFORMED NAME: PEOPLES STATE BANK /WI/ DATE OF NAME CHANGE: 19950721 10-K 1 0001.txt PSB HOLDINGS, INC. 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________ to __________ COMMISSION FILE NO. 0-26480 PSB HOLDINGS, INC. (Exact name of registrant as specified in charter) 1905 W. STEWART AVENUE WISCONSIN WAUSAU, WI 54401 (State of incorporation) 39-1804877 (Address of principal executive office) (I.R.S. Employer Identification Number) Registrant's telephone number, including area code: 715-842-2191 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (Title of each class) Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of March 15, 2001, the aggregate market value of the common stock held by non-affiliates was $21,224,051. As of March 15, 2001, 839,705 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE PROXY STATEMENT DATED MARCH 30, 2001 (TO THE EXTENT NOTED HEREIN): PART III TABLE OF CONTENTS PAGE PART 1 Item 1. Business .............................................1 Item 2. Properties ...........................................6 Item 3. Legal Proceedings ....................................6 Item 4. Submission of Matters to a Vote of Security Holders ..6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................7 Item 6. Selected Financial Data ..............................8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................9 Item 7A. Quantitative and Qualitative Disclosure About Market Risk ................................................28 Item 8. Financial Statements and Supplementary Data .........29 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .................60 PART III Item 10. Directors and Executive Offers of Registrant ........61 Item 11. Executive Compensation ..............................61 Item 12. Security Ownership of Certain Beneficial Owners and Management ......................................61 Item 13. Certain Relationships and Related Transactions ......61 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................................ 62 -i- PART I ITEM 1. BUSINESS. PSB HOLDINGS, INC. PSB Holdings, Inc., a Wisconsin corporation (the "Company"), was formed in 1995. The Company is a one-bank holding company regulated by the Board of Governors of the Federal Reserve System (the "FRB") under the authority of the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company's sole business is the ownership and management of Peoples State Bank (the "Bank"). Except as may otherwise be noted, this Annual Report on Form 10-K describes the business of the Company and the Bank as in effect on December 31, 2000. The Company intends to pursue opportunities to acquire additional bank subsidiaries or banking offices so that, at any time, it may be engaged in some tentative or preliminary discussions for such purposes with officers, directors or principal shareholders of other holding companies or banks. There are no plans, understandings, or arrangements, written or oral, regarding other acquisitions as of the date hereof. THE BANK GENERAL The Bank was organized as a state banking corporation under the laws of the state of Wisconsin in August, 1962. The Bank's principal office is located at 1905 West Stewart Avenue, Wausau, Wisconsin, 54401. The Bank's principal branch offices are located in the city of Wausau, Rib Mountain Township, Marathon City, and the city of Rhinelander, Wisconsin. The Bank provides various commercial and consumer banking services for customers located principally in Marathon County and portions of Lincoln and Oneida Counties, Wisconsin. The Bank is engaged in general commercial and retail banking. The Bank serves individuals, businesses, and governmental units and offers most forms of commercial and consumer lending, including lines of credit, secured and unsecured term loans, real estate financing and mortgage lending. In addition, the Bank provides a full range of personal banking services, including checking accounts, savings and time accounts, installment and other personal loans, as well as mortgage loans. The Bank offers automated teller machines and online computer banking to its customers to expand its services to customers on a 24-hour basis. New services are frequently added to the Bank's retail banking departments. The Bank offers discount brokerage services at its Wausau branch locations, including the sale of annuities, mutual funds and other investments to Bank customers and the general public. The Bank maintains an investment subsidiary in Nevada to manage, hold and trade cash, securities, and loans. -1- PRINCIPAL SOURCES OF REVENUE The table below shows the amount and percentages of the Bank's total consolidated operating revenues resulting from interest on loans and leases and interest on investment securities for each of the last three years:
($ in thousands) Interest on loans and Interest on Investment LEASES SECURITIES Percent Percent of Total of Total Year Ended Operating Operating DECEMBER 31, AMOUNT REVENUES AMOUNT REVENUES 2000 $18,260 78.1 $3,485 14.9 1999 14,065 74.3 3,471 18.3 1998 13,404 73.8 3.020 16.6
BANK MARKET AREA AND COMPETITION There is a mix of retail, manufacturing, agricultural and service businesses in the area served by the Bank. The Bank has substantial competition in its market area. Much of this competition comes from companies which are larger and have greater resources than the Company. The Bank competes for deposits and other sources of funds with other banks, savings associations, credit unions, finance companies, mutual funds, life insurance companies and other financial and non-financial companies. Many of these nonbank competitors offer products and services which are functionally equivalent to the products and services offered by the Bank. Recent changes in banking laws have had a significant effect on the competitive environment in which the Bank operates and are likely to continue to increase competition for the Bank. For example, current federal law permits adequately capitalized and managed bank holding companies to engage in interstate banking on a much broader scale than in the past. Banks are also permitted to create interstate branching networks in states which do not "opt out" of the new laws. The Gramm- Leach-Bliley Act of 1999 has also increased the competitive environment for the Bank. Under this act, financial holding companies are now permitted to conduct a broad range of banking, insurance and securities activities. The Company believes that the combined effects of more interstate banking and the development of greater "one-stop" availability for banking, insurance and securities services will both increase the overall level of competition and attract competitors with which the Bank may not now compete for its customers. -2- In addition to competition, the business of the Bank will be affected by general economic conditions, including the level of interest rates and the monetary policies of the FRB (see "Regulation and Supervision - Monetary Policy"). EMPLOYEES The Company has no employees. Officers of the Company serve as full time employees of the Bank. As of March 15, 2001, the Bank had 111 employees, including 29 employed on a part-time basis. Officers and certain supervisors are salaried, and other full and part-time employees are paid on an hourly basis. The Bank considers its relations with its employees to be excellent. None of the Bank's employees is covered by a collective bargaining agreement. EXECUTIVE OFFICERS The executive officers of the Company as of March 15, 2001, their ages and principal occupations during the last five years are set forth below.
David K. Kopperud, 55 President of the Company and the Bank since July, 1999; previously Executive Vice President of the Bank (1994-1999) and Vice President of the Bank (1991-1994). Kenneth M. Selner, 54 Vice President & Secretary of the Company; Executive Vice President of the Bank. Todd R. Toppen, 42 Treasurer of the Company; Vice President of the Bank since 1994, Assistant Vice President 1988 to 1993.
REGULATION AND SUPERVISION REGULATION The Company and the Bank are subject to regulation under both federal and state law. The Company is a registered bank holding company and is subject to regulation and examination by the FRB pursuant to the BHCA. The Bank is subject to regulation and examination by the Federal Deposit Insurance Corporation ("FDIC") and, as a Wisconsin chartered bank, by the Wisconsin Department of Financial Institutions. The FRB expects a bank holding company to be a source of strength for its subsidiary banks. As such, the Company may be required to take certain actions or commit certain resources to the Bank when it might otherwise choose not to do so. Under federal and state banking laws, the Company and the Bank are also subject to regulations which govern the -3- Company's and the Bank's capital adequacy, loans and loan policies (including the extension of credit to affiliates), deposits, payment of dividends, establishment of branch offices, mergers and other acquisitions, investments in or the conduct of other lines of business, management personnel, interlocking directorates and other aspects of the operation of the Company and the Bank. Bank regulators having jurisdiction over the Company and the Bank generally have the authority to impose civil fines or penalties and to impose regulatory sanctions for noncompliance with applicable banking regulations and policies. In particular, the FDIC has broad authority to take corrective action if the Bank fails to maintain required minimum capital. Information concerning the Company's compliance with applicable capital requirements is set forth in Note 15 of the Notes to Consolidated Financial Statements. Banking laws and regulations have undergone periodic revisions that often have a direct or indirect effect on the Bank's operations and its competitive environment. From time to time various formal or informal proposals, including new legislation, relating to, among other things, changes with respect to deposit insurance, permitted bank activities and restructuring of the federal regulatory scheme have been made and may be made in the future. The Gramm-Leach-Bliley Act of 1999, which eliminated many of the barriers to affiliation among banks, insurance companies and other securities or financial services companies, is an example of legislation which may, and often does, materially affect the operation of the Company's business. Depending on the scope and timing of future regulatory changes, it is likely they will affect the competitive environment in which the Company operates or increase costs of regulatory compliance and, accordingly, may have a material adverse effect on the Company's consolidated financial condition, liquidity or results of operations. MONETARY POLICY The earnings and growth of the Bank, and therefore the Company, are affected by the monetary and fiscal policies of the federal government and governmental agencies. The FRB has a direct and indirect influence on the costs of funds used by the Bank for lending and its actions have a substantial effect on interest rates, the general availability of credit and the economy as a whole. These policies therefore affect the growth of bank loans and deposits and the rates charged for loans and paid for deposits. Governmental and FRB monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. The Company is not able to anticipate the future impact of such policies and practices on the growth or profitability of the Company. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, reports to shareholders, press releases, and in other oral and written statements made by or with the approval of the Company which are not statements of historical fact will constitute forward-looking statements within the meaning of the Reform Act. -4- Examples of forward-looking statements include, but are not limited to: (1) expectations concerning financial performance of the Company, (2) expectations concerning the payment of dividends, (3) statements of plans and objectives of the Company, (4) statements of future economic performance and (5) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "targeted" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. In making forward-looking statements within the meaning of the Reform Act, the Company undertakes no obligation to publicly update or revise any such statement. Forward-looking statements of the Company are based on information available to the Company as of the date of such statements and reflect the Company's expectations as of such date, but are subject to risks and uncertainties that may cause actual results to vary materially. In addition to specific factors which may be described in connection with any of the Company's forward-looking statements, factors which could cause actual results to differ materially from those discussed in the forward- looking statements include, but are not limited to the following: (1) the strength of the U.S. economy in general and the strength of the local economies in the markets served by the Bank; (2) the effects of and changes in government policies, including interest rate policies of the FRB; (3) inflation, interest rate, market and monetary fluctuations; (4) the timely development of and acceptance of new products and services; (5) changes in consumer spending, borrowing and saving habits; (6) increased competition in the Company's principal market area; (7) technological changes; (8) acquisitions and the inability to successfully integrate acquired institutions or branches into current operations; (9) the effect of changes in laws and regulations which increase operating costs or increase competition; (10)the effect of changes in accounting policies and practices; and (11)the costs and effects of litigation and of unexpected or adverse outcomes in such litigation. -5- ITEM 2. PROPERTIES. The Company's operations are carried out at the Bank's administrative office facility at 1905 West Stewart Avenue, Wausau, Wisconsin. The Company does not maintain any separate offices. The Bank operates a total of five office locations. The Bank owns four of the buildings in which it conducts operations and each building is occupied solely by the Bank. All four buildings are designed for commercial banking operations and are suitable for current operations. One location occupies leased space within a supermarket which is designed for commercial banking operations. ITEM 3. LEGAL PROCEEDINGS. As of December 31, 2000, the Company was not involved in any legal proceedings, nor was it aware of any threatened litigation. In the ordinary course of its business, the Bank is or may be engaged from time to time in legal actions as both a plaintiff and a defendant. In some cases, claims for significant compensatory or punitive damages, or unspecified damages, may be made against the Bank. As of the date of this report, the Bank was not a party to any legal or administrative proceedings which, in the opinion of Company management, would have a material adverse effect on the operations, liquidity or consolidated financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's shareholders during the fourth quarter of 2000. -6- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET There is no active established public trading market in the Company common stock. Bid and ask prices are quoted on the OTC Bulletin Board under the symbol "PSBQ.OB." Transactions in the Company common stock are limited and sporadic. During 2000, 27 transactions with a total volume of 86,000 shares were reported on the OTC Bulletin Board. Of those, 14 were transactions in which the Company purchased a total of 40,690 shares of stock. At December 31, 2000, the quoted bid price for the stock was $28.00. On January 10, 2000, the Board of Directors authorized the Company to repurchase up to 45,000 shares of its issued and outstanding common stock. As of December 31, 2000, the Company had repurchased 43,530 shares under that authorization. The shares purchased represented approximately 4.93% of the shares outstanding at January 10, 2000. As of December 31, 2000, and as of March 15, 2001, 839,705 shares of the Company's common stock were outstanding. HOLDERS As of December 31, 2000 there were approximately 980 holders of record of the Company's common stock. Some of the Company's shares are held in "street" name and the number of beneficial owners of such shares is not known nor included in the foregoing number. DIVIDENDS The Company's bylaws provide that, subject to the provisions of applicable law, the Board of Directors may declare dividends from unreserved and unrestricted earned surplus, at such times and in such amounts as the board shall deem advisable. The Company's ability to pay dividends depends upon the receipt of dividends from the Bank. Payment of Bank dividends is subject to various limitations under banking laws and regulations. The declaration of dividends by the Company is discretionary and will depend upon operating results and financial condition, regulatory limitations, tax considerations and other factors. The Company has paid regular dividends since its inception in 1995. Per share dividends declared by the Company in its two most recent fiscal years were:
1999 2000 Second Quarter $.38 $.38 Fourth Quarter $.62 $.65
-7- ITEM 6. SELECTED FINANCIAL DATA. The following table presents consolidated financial data of the Company and its subsidiary. This information and the following discussion and analysis should be read in conjunction with other financial information presented elsewhere in this report.
YEARS ENDED DECEMBER 31 ($ in thousands, except per share amounts) 2000 1999 1998 1997 1996 CONSOLIDATED SUMMARY OF EARNINGS: Total interest income $ 21,940 $ 17,671 $ 16,746 $ 15,744 $ 14,824 Total interest expense 12,540 8,598 8,722 8,253 7,769 Provision for loan and lease losses 600 460 300 230 180 Net interest income after provision for loan and lease losses 8,800 8,613 7,724 7,261 6,875 Total other income 1,446 1,265 1,408 745 990 Total other expense (except income taxes) 6,474 6,221 6,115 4,932 4,715 Net income $ 2,670 $ 2,589 $ 2,089 $ 2,103 $ 2,156 Per Share: Basic and diluted Earnings per share $ 3.11 $ 2.93 $ 2.36 $ 2.37 $ 2.39 Common dividends declared 1.03 1.00 .93 .90 .85 Other significant data: Return on average shareholders equity 12.33% 12.31% 10.62% 11.15% 11.98% Return on average assets .94% 1.08% .96% 1.02% 1.10% Dividend payout ratio 32.64% 34.12% 39.33% 37.85% 35.40% Average equity to average assets ratio 7.63% 8.75% 9.06% 9.15% 9.16% 2000 1999 1998 1997 1996 CONSOLIDATED SUMMARY BALANCE SHEETS Total assets $306,239 $259,889 $233,491 $215,019 $204,158 Total deposits 241,534 202,354 199,800 186,603 178,129 Short-term borrowings 11,515 21,215 4,549 3,960 5,766 Long-term borrowings 28,000 13,000 6,000 3000 0 Stockholders' equity 22,274 21,046 20,556 19,217 18,289 Other significant data: Book value per share at year end $ 26.53 $ 23.83 $ 23.27 $ 21.76 $ 20.42 Average common shares outstanding 858,286 883,235 883,235 887,988 900,641 Shareholders of record at year end 980 990 975 974 974 Employees at year end (FTE) 86 91 87 78 70 Historically reported credit quality ratios: Net loan and lease charge-offs to average loans and leases .14% .19% .14% .22% .03% Allowance for loan and lease losses to End of period loans and leases 1.06% 1.15% 1.27% 1.24% 1.39% -8-
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following management's discussion and analysis reviews significant factors with respect to the Company's financial condition and results of operations at and for the three-year period ended December 31, 2000. This discussion should be read in conjunction with the consolidated financial statements, notes, tables, and the selected financial data presented elsewhere in this report. The Company is not aware of any current recommendations by any regulatory authority, which, if they were implemented, would have a material effect on liquidity, capital resources, or operations. Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties which may cause actual results to differ materially from those in such statements. For a discussion of certain factors that may cause such forward-looking statements to differ materially from actual results see Item 1, Cautionary Statement Regarding Forward-Looking Information, in this Annual Report on Form 10-K for the year ended December 31, 2000. RESULTS OF OPERATIONS The Company's consolidated net income for 2000 was $2,669,619 compared with $2,588,982 in 1999, and $2,088,577 in 1998. Net income increased 3.11% in 2000 from 1999 and 23.96% in 1999 from 1998. Results for 1998 included a pre-tax expense of $405,891 relating to the termination of our defined benefit pension plan. Return on average common stockholders' equity amounted to 12.33% in 2000 compared to 12.31% in 1999, and 10.62% in 1998. Return on average assets for 2000 amounted to .94% compared to 1.08% for 1999 and .96% in 1998. Net income per share amounted to $3.11 in 2000, compared to $2.93 in 1999 and $2.36 in 1998. Cash dividends declared in 2000 was $1.03 per share, compared to $1.00 in 1999 and $.93 in 1998. The per share ratio of dividends to shareholders to net income was 32.64% in 2000, compared to 34.12% in 1999 and 39.33% in 1998. MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest-rate risk inherent in its lending and deposit taking activities. Management actively monitors and manages its interest-rate risk exposure. The -9- measurement of the market risk associated with financial instruments 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 footnote 17 on the Notes to the Financial Statements. The Company's primary objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while adjusting the Company's asset- liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest-rate risk. However, a sudden and substantial increase in interest rates may adversely impact the Company's 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. Whereas, a sudden and substantial decrease in interest rates will positively impact the Company's earnings. The Company does not engage in trading activities. NET INTEREST INCOME Net interest income represents the difference between interest earned on loans, securities and other interest-earning assets, and the interest expense associated with the deposits and borrowings that fund them. Interest rate fluctuations together with changes in volume and types of earning assets and interest-bearing liabilities combine to affect total net interest income. -10-
INTEREST INCOME & EXPENSE VOLUME & RATE CHANGE 2000 compared to 1999 1999 compared to 1998 increase (decrease) increase (decrease) due to (1) due to (1) ($ in thousands) VOLUME RATE NET VOLUME RATE NET Interest earned on: Loans (2) $3,741 487 4,228 $1,362 (696) 666 Taxable investment securities 29 38 67 445 (18) 427 Non-taxable investment securities (2) (81) 1 (80) 58 (21) 37 Other interest income 40 20 60 (183) (5) (188) Total 3,729 546 4,275 1,682 (740) 942 Interest paid on: Savings and demand deposits 438 822 1,260 509 (178) 331 Time deposits 573 688 1,261 (440) (482) (922) Short-term borrowings 306 195 501 465 (62) 403 Long-term borrowings 758 163 921 87 (23) 64 Total 2,075 1,868 3,943 621 (745) (124) Net interest earnings $ 1,654 (1,322) 332 $1,061 5 1,066 (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 change in each. (2)The amount of interest income on non-taxable loans and investment securities has been adjusted to its fully taxable equivalent using a 34% tax rate.
The following table demonstrates how the changing interest rate environment affected the net yield on earning assets (on fully tax equivalent basis) for the three-year period ending December 31, 2000.
Year Ended December 31, 2000 1999 1998 Yield Change Yield Change Yield Change Yield on earning assets 8.28% + .32% 7.96% - .31% 8.27% -.09% Effective rate on all liabilities as a % of earning assets 4.66 + .86% 3.80 - .43% 4.23 -.06% Net yield on earning assets 3.62 - .54% 4.16 +.12% 4.04 -.03% -11-
The 2000 figures as a percent of average earning assets reflects an increase in interest rates during 2000. The Company will focus on increasing net interest income in 2001 through continued control of interest expense, maintaining the level of interest rates on loans, and managing rates on the investment portfolio. Loans are the largest component of earning assets. On average, loans grew $44 million to $208 million for 2000, and represented 77.1% of earning assets. A change in the total yield on the loan portfolio generally has the largest impact on net interest income. The yield on total loans increased 22 basis points to 8.8% in 2000. The yield was strongly impacted by the loans tied to the prime lending rate repricing immediately with a change in the rate, and competitive pricing on loans. Deposits are the largest component of interest bearing liabilities. Deposit growth has not kept pace with asset growth, in part because of a low rate of personal savings by households and competition for depositor funds from higher-yielding investments. On average, total deposits grew $23 million for 2000, and represented 83.1% of interest bearing liabilities, compared to 90.0% for 1999. As a result, the Bank had greater dependence on wholesale funds to fund the asset growth. On average, borrowed funds increased 106.9% to $39 million in 2000. The following table sets forth average consolidated balance sheet data and average rate data on a tax equivalent basis for the periods, indicated. -12- DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY INTEREST RATES AND DIFFERENTIALS
2000 1999 1998 Average Yield/ Average Yield/ Average Yield/ ($ IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE Assets Interest earning assets: Loans (1)(2)(3) $207,527 $18,283 8.81% $163,929 $14,065 8.58% $148,806 $13,404 9.01% Taxable investment securities 48,290 3,072 6.36% 47,091 2,912 6.18% 39,631 2,470 6.23% Nontaxable investment securities(2) 13,074 905 6.92% 14,251 985 6.91% 13,423 947 7.06% Federal funds sold 179 12 6.70% 811 44 5.43% 4,620 248 5.37% Total (2) 269,070 22,272 8.28% 226,082 18,006 7.96% 206,480 17,069 8.27% Non-interesting earning assets: Cash and due from banks 8,467 8,694 8,497 Premises & equip. - net 4,352 3,892 3,949 Other assets 4,178 3,843 3,578 Less: allow. loan loss (2,280) (2,085) (1,929) Total 283,787 240,426 220,575 Liabilities & Stockholders' Equity Interest bearing liabilities: Savings and demand deposits 86,926 3,972 4.57% 74,835 2,712 3.62% 61,657 2,381 3.86% Time deposits 104,021 6,134 5.90% 93,069 4,873 5.24% 100,713 5,795 5.75% Short-term borrowings 17,233 1,140 6.62% 11,661 640 5.49% 3,803 237 6.23% Long-term borrowings 21,733 1,294 5.95% 7,168 373 5.20% 5,724 309 5.40% Total 229,913 12,540 5.45% 186,733 8,598 4.60% 171,897 8,722 5.07% Non-interest bearing Liabilities: Demand deposits 30,209 30,616 26,827 Other liabilities 2,025 2,039 1,875 Stockholders' equity 21,660 21,038 19,976 Total 283,787 240,426 220,575 Net interest income 9,732 9,408 8,347 Rate spread 2.83% 3.36% 3.20% Net yield on interest earning assets 3.62% 4.16% 4.04% (1) For purposes of these computations, non-accruing loans are included in the daily average loan amounts outstanding. (2) The amount of interest income on non-taxable investment securities and loans has been adjusted to its fully taxable equivalent, using a federal tax rate of 34%. (3) Loan fees are included in total interest income as follows: 2000-$240, 1999-$172, 1998-$155.
-13- The preceding table shows a 2000 increase of 32 basis points in gross yield on interest earning assets. The average rate on taxable investment securities increased 18 basis points in 2000 to 6.36%, up from 6.18% in 1999. Time deposits rates increased by 66 basis points while funds shifted into the more liquid Money Market deposit accounts, which the Company continued to promote throughout 2000 in an effort to retain deposits to support loan demand. Average deposits for 2000 showed an increase of $22,636 increasing to $221,156 from 198,520 in 1999. Average borrowing increased $20,137 increasing from $18,829 in 1999 to $38,966 in 2000. The average rate on all interest bearing liabilities increased by 85 basis points in 2000 to 5.45% up from 4.60% in 1999. As the largest component of operating income, improvements in the growth of net interest income are important to the Company's earnings performance. The Company uses modeling and analysis techniques to its asset-liability structure to manage net interest income and the related interest rate risk position. The Company seeks to meet the needs of its customers, yet provide for stability in net interest income in the event of significant interest rate changes.
MIX OF AVERAGE INTEREST-EARNING ASSETS AND AVERAGE INTEREST-BEARING LIABILITIES Year Ended December 31 2000 1999 1998 Loans 77.13% 72.51% 72.07% Taxable Investments 17.95% 20.83% 19.19% Non-taxable 4.86% 6.30% 6.50% Other .06% .36% 2.24% 100.00% 100.00% 100.00% Savings and demand deposits 37.81% 40.08% 35.87% Time deposits 45.24% 49.84% 58.59% Short term borrowing 7.50% 6.24% 2.21% Long term borrowing 9.45% 3.84% 3.33% 100.00% 100.00% 100.00%
-14- NON-INTEREST INCOME The following table shows the major components of non-interest income.
($ in thousands) Year Ended December 31, 2000 1999 1998 Non-interest income: Service fees $855 $709 $699 Net realized gain on sale of securities available for sale 36 Gain on sale of loans 66 223 332 Investment sales commissions 195 138 147 Other operating income 330 195 193 Total non-interest income 1,446 1,265 1,407
Total 2000 operating non-interest income, excluding gains from sales of loans, increased by $338 or 32.44%, over 1999, compared to a decrease of $33, or 3.07% in 1999 over 1998. NON-INTEREST EXPENSE The following table shows the major components of non-interest expense.
($ in thousands) 2000 1999 1998 Salaries and employee benefits $3,842 $3,621 $3,331 Loss on settlement on pension plan 406 Occupancy 937 859 828 Data processing and other office operations 460 441 421 Advertising and promotion 211 222 202 Director compensation and benefits 158 170 142 Other operating 866 908 785 Total non-interest expense $6,474 $6,221 $6,115
Total non-interest expense increased $253 in 2000 or 4.07% in 2000. Personnel expense accounts for 87.35% of this increase, up $221 over 1999. Occupancy expenses in 2000 increased $78 over 1999. Salaries and employee benefits increased $221 or 6.10% compared to 1999. This category continues to be the largest component of non-interest expense, representing 59.35% of operating expenses in 2000 and 58.21% and -15- 54.47% in 1999 and 1998, respectively. The increase in 2000 was attributable to base merit pay increases, incentive pay and new positions added. Occupancy expense increased $78 or 9.08% in 2000. Data processing costs increased by $19 or 4.31% in 2000 compared to 1999. Other operating expense decreased by $42 or 4.63% in 2000. PROVISIONS FOR LOAN LOSSES Management determines the adequacy of the allowance for loan losses based on past loan experience, current economic conditions, composition of the loan portfolio, and the potential for future loss. Accordingly, the amount charged to expense is based on management's evaluation of the loan portfolio. It is the Company's policy that when available information confirms that specific loans, or portions thereof, including impaired loans are uncollectable, these amounts are promptly charged off against the allowance. The provision for loan losses was $600,000 in 2000; compared to $460,000 in 1999 and $300,000 in 1998. The allowance for loan losses as a percentage of gross loans outstanding was 1.06% at December 31, 2000; 1.15% at December 31, 1999; and 1.27% at December 31, 1998. The increased provision in 2000 is intended to provide adequate reserves for potential losses. Charge-offs as a percentage of average loans outstanding were .14% in 2000; .19% in 1999; and .13% in 1998. Charge- offs have not been concentrated in any industry or business segment as reflected in the schedule below. The loan portfolio is the primary asset subject to credit risk. Credit risk is controlled through the use of credit standards, review of potential borrowers, and loan payment performance. As of December 31, 2000, the allowance for loan losses grew by 14.67% to $2,407,439 compared to $2,099,241 at the end of 1999. The allowance for loan losses shown in the following table represents a general allowance available to absorb future losses within the entire portfolio. -16- ALLOWANCE FOR LOAN LOSS
($ in thousands) YEAR ENDED DECEMBER 31 2000 1999 1998 1997 1996 Average balance of loans for period $207,527 $163,929 $148,806 $140,962 $130,783 Allowance for loan losses at beginning of period $ 2,099 $ 1,947 $ 1,845 $ 1,925 $ 1,781 Loans charged off Commercial & Industrial (250) (322) (138) (156) (48) Real Estate - Mortgage (14) (72) 0 (136) 0 Installment & Other Consumer Loans (51) (38) (69) (59) (25) Total Charge Offs (315) (432) (207) (351) (73) Recoveries on loans previously charged off Commercial & Industrial 16 67 0 17 33 Real Estate - Mortgage 3 7 0 19 0 Installment & Other Consumer Loans 4 50 9 5 4 Total Recoveries $23 $124 $9 $41 $37 Net loans charged off ($292) ($308) ($198) ($310) ($36) Additions charged to operations 600 460 300 230 180 Allowance for loan losses at end of period $ 2,407 $ 2,099 $ 1,947 $ 1,845 $ 1,925 Ratio of net charge offs during period to average loans outstanding 0.14% 0.19% 0.13% 0.22% 0.03% Ratio of allowance for loan losses to total loans receivable at end of period 1.06% 1.15% 1.27% 1.24% 1.39%
-17- The allowance for loan losses represents management's estimate of an amount adequate to provide for potential losses in the loan portfolio. Adequacy of the allowance for loan losses is based on management's ongoing review and grading of the loan portfolio, past loan loss experience, trends in past due and nonperforming loans, current economic conditions, and collateral. In the opinion of management, the allowance for loan losses is adequate as of December 31, 2000. While management uses available information to recognize losses on loans, future adjustments may be necessary based on changes in economic conditions. The allocation of the year-end allowance for loan losses for each of the past three years based on management's estimates of loss exposure by category of loans is shown in the following table. Management believes this allocation is appropriate in light of current and expected economic conditions, the geographic and industry mix of the loan portfolio and other risk related factors. Commercial loans secured by real estate are included in this table under the category of real estate and the allowance for loan losses is allocated to cover expectations of loss.
($ in thousands) YEAR ENDED DECEMBER 31 2000 1999 1998 as a % as a % as a % of Total of Total of Total Amount Loans Amount Loans Amount Loans Commercial, financial and agriculture $1,467 22.70% $1,263 26.74% $1,120 25.74% Real Estate $ 249 69.53% $ 217 64.73% $ 201 65.98% Installment and Other loans to Individuals $ 369 6.94% $ 322 7.32% $ 298 7.65% Impaired Loans $ 322 .83% $ 297 1.21% $ 328 .63% Unallocated $ 0 n/a $ 0 n/a $ 0 n/a Total $2,407 100.00% $2,099 100.00% $1,947 100.00%
Factors that are critical to managing overall credit quality are sound loan underwriting and administration, and monitoring existing loans. The Company's process for monitoring loan quality includes weekly analysis of delinquencies, non-performing assets and potential problem loans. The Company's policy is to place loans on a non-accrual status when they become contractually past due 90 days or more as to interest or principal -18- payments. All interest accrued (including applicable impaired loans) but not collected for loans that are placed on non-accrual or charged off is reversed to interest income. The interest on these loans is accounted for on the cash basis until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due have been collected and there is reasonable assurance that repayment will continue within a reasonable time frame. The total reduction in interest income as a result of discontinuing the accrual of interest on loans that are delinquent for over 90 days was $135,000 during 2000. The term "impaired loan" refers to certain commercial loans with respect to which, based on current information, it is probable that the Company will not be able to collect all amounts due in accordance with the contractual terms of the loan agreement. Impairment is based on discounted cash flows of expected future payments using the loans effective interest rate or the fair value of the collateral if the loan is collateral dependent. An analysis of impaired loans follows:
($ in thousands) AT DECEMBER 31, 2000 1999 1998 1997 1996 Non-accrual $ 803 $ 510 $ 564 $ 484 $ 43 Accruing income 1,098 1,696 406 640 270 Total impaired loans 1,901 2,206 970 1,124 313 Less - Allowance for loan losses 322 297 328 178 20 Net investment in impaired loans $1,579 $1,909 $ 642 $ 946 $ 293 ($ in thousands) YEARS ENDED DECEMBER 31, 2000 1999 1998 1997 1996 Average recorded investment, net of allowance for loan losses $1,948 $1,874 $ 820 $1,191 $ 304 Interest income recognized $ 175 $ 118 $ 40 $ 83 $ 23
-19- The Company maintained generally high loan quality during 2000. The following table sets forth the amount of risk element loans as of the dates indicated.
($ in thousands) DECEMBER 31 2000 1999 1998 1997 1996 Loans on a non-accrual basis $1,123 $ 620 $ 582 $ 835 $ 247 Loans contractually past due ninety days or more as to interest or principal payments and still accruing interest $ 0 $ 0 $ 0 $ 7 $ 275 Restructured loans $1,348 $ 278 $ 296 $ 618 $ 0 Total non-performing loans $2,471 $ 898 $ 878 $1,460 $ 522 Other real estate owned $ 17 $ 24 $ 0 $ 336 $ 0 Total non-performing assets $2,488 $ 922 $ 878 $1,796 $ 522
The reserve for loan losses continues to provide substantial non- performing loan coverage, at 96.74% at December 31, 2000. This compares to non-performing loan coverage of 227.66% at December 31, 1999, and 221.75% at December 31, 1998. INCOME TAXES The effective tax rate was 29.22% in 2000, 29.19% in 1999, and 30.76% in 1998. LIQUIDITY AND INTEREST SENSITIVITY The Bank's Asset Liability Management process provides a unified approach to management of liquidity, capital and interest rate risk, and to provide adequate funds to support the borrowing requirements and deposit flow of its customers. Management views liquidity as the ability to raise cash at a reasonable cost or with a minimum of loss and as a measure of balance sheet flexibility to react to marketplace, regulatory, and competitive changes. The primary sources of the Company's liquidity are marketable assets maturing within one year. The Company attempts when possible to match relative maturities of assets and liabilities, while maintaining the desired net interest margin. Management believes liquidity is adequate. Management's 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 the Company's earning sensitivity to changes in interest rates at December 31, 2000. -20- The following table reflects a negative gap position in all categories one year or less; the cumulative one-year gap ratio is negative at 65.62%. The Bank is attempting to change this trend in the gap ratio by offering more time deposit products maturing over one year and shortening final loan maturities and offering more variable rate loan products. A significant portion of consumer deposits do not re-price or mature on a contractual basis. These deposit balances and rates are considered to be core deposits since these balances are generally not susceptible to significant interest rate changes. The Bank's Asset Liability Committee distributes these deposits over a number of periods to reflect those portions of such accounts that are expected to re-price fully with market rates over the simulation period. The assumptions are based on historical experience with the Bank's individual markets and customers and include projections for how management expects to continue to price in response to marketplace and market changes. The Asset Liability Committee uses financial modeling techniques that measure the interest rate risk. Policies established by the Bank's Asset liability Committee limit exposure of earnings at risk. Management considers that an acceptable range for the rate sensitivity ratio is 70-130%.
INTEREST RATE RISK EXPOSURE DECEMBER 31, 2000 90 DAY 91-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND 5 YEARS TOTAL Loans $ 48,623 $ 17,723 $ 29,671 $128,486 $ 2,720 $227,223 Securities 3,274 500 1,995 22,435 35,902 64,106 Fed Funds & Other 53 53 $ 51,950 $ 18,223 $ 31,666 $150,924 $ 38,622 $291,382 Cumulative Rate Sensitive Assets $ 51,950 $ 70,173 $101,839 $ 252,760 $ 291,382 <$100M CDs & Other Time Deposits $ 11,801 $ 16,942 $ 21,287 $ 11,116 $ $ 61,146 Money Market Accounts 20,326 13,550 13,550 20,326 67,752 Regular Savings 1,660 2,490 2,490 9,962 16,602 Now Accounts 2,408 1,605 1,605 2,408 8,026 >$100M & Over CDs 9,300 19,645 18,823 5,048 52,816 or equal to FF Purch, Repo, & Other Borrowed Funds 8,219 542 6,606 21,148 3,000 39,515 $ 53,714 $ 37,129 $ 64,361 $ 54,957 $ 35,696 $245,857 Cumulative Rate Sensitive Liabilities $ 53,714 $ 90,843 $155,204 $210,161 $ 245,857 Rate Sensitive Gap $(1,764) $(18,906) $(32,695) $ 95,964 $ 2,926 Cumulative Rate Sensitivity Gap $(1,764) $(20,670) $(53,365) $ 42,599 $ 45,525 Cumulative Gap Ratio 96.72% 77.25% 65.62% 120.27% 118.52%
-21- INVESTMENT PORTFOLIO The investment securities portfolio is intended to provide liquidity, flexible asset/liability management and a source of stable income. The following table shows the relative maturities of the investment portfolio as of December 31, 2000 using amortized cost. Weighted average yields on tax-exempt securities have been calculated on a tax equivalent basis using a tax rate of 34%. Yields on securities available for sale are calculated based on amortized cost.
After one After two After five Within but within but within but within Over ONE YEAR TWO YEARS FIVE YEARS TEN YEARS TEN YEARS ($ in thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD U.S. Treasury $ 500 4.60% -- $ -- -- $ -- -- $ -- -- __ U.S. Government agencies and corporations 4,100 5.99% 1,501 5.84% 14,395 6.11% 11,348 6.15% 16,434 6.33% State and political subdivisions (domestic) 855 6.93% 1,127 7.10% 3,456 7.02% 8,537 6.78% -- -- Other equity securities 2,056 8.00% - - -- -- -- -- -- -- Total $ 7,511 6.53% $ 2,628 6.39% $17,851 6.29% $19,885 6.42% $16,434 6.33%
The Company follows Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115), which specifies the accounting for investments in securities that have readily determinable fair values. The Bank classifies all U.S. Treasury and other U.S. Government Agencies & Corporations as available- for-sale. State and Political subdivisions were classified as held-to maturity. Securities with an approximate carrying value of $12,554,863 and $20,207,957, at December 31, 2000 and 1999 respectively, were pledged primarily to secure public deposits and for repurchase agreements. -22- The following table sets forth the distribution of investment securities as of the dates indicated.
($ in thousands) DECEMBER 31 2000 1999 1998 Amount % of Total Amount % of Total Amount % of Total U.S. Treasury and other U.S. Government agencies and corporations $ 48,075 74.99% $ 45,742 75.82% $ 47,185 76.16% State and political subdivisions (domestic) 13,975 21.80% 13,843 22.94% 14,068 22.71% Other equity securities 2,056 3.21% 747 1.24% 701 1.13% Total $ 64,106 100.00% $ 60,332 100.00% $ 61,954 100.00%
During 2000, the interest rates beyond one year decreased. The market value of the fixed income portion on the investment portfolio as a percentage of book value has increased due to the decrease in interest rates. At December 31, 2000, market value was 99.73% of book value. The net unrealized loss on securities available for sale, recorded as a separate component of stockholders' equity, was $124,815, net of deferred income taxes of $79,267 compared to a loss of $1,043,128, net of deferred taxes of $460,773 at December 31, 1999. The Bank's investment subsidiary, PSB Investments, Inc., was formed in May, 1992, and currently holds approximately $62,800,000 in investments and loans at book value. Income tax expense for 2000 was approximately $165,000 lower as a result of holding these investments and loans at the subsidiary. AMORTIZED COST VALUE AND MARKET VALUE OF INVESTMENT SECURITIES
December 31, 2000 December 31, 1999 Amortized Cost Amortized Cost Value Market Value Value Market Value U.S. treasury securities and obligations Of other U.S. Govt agencies & Corp $48,278,448 $48,074,367 $47,245,814 $45,741,912 Obligations to states & political Subdivisions $13,974,600 $14,005,308 $13,843,068 $13,472,511 Other securities $ 2,056,372 $ 2,056,372 $ 747,274 $ 747,274 Totals $64,309,420 $64,136,047 $61,836,156 $59,961,697
-23- LOAN PORTFOLIO The following table sets forth the approximate maturities of the loan portfolios and the sensitivity of loans to interest changes as of December 31, 2000.
MATURITY Over one ($ in thousands) One year year thru Over OR LESS FIVE YEARS FIVE YEARS Commercial, industrial, and financial $25,410 $ 23,811 $ 895 Agricultural 980 2,321 4 Real estate mortgage 68,756 88,570 578 Installment & other consumer loans 2,904 10,735 2,145 Total $98,050 $125,437 $3,622
INTEREST SENSITIVITY Amounts of loans due after one year with: Fixed Variable ($ in thousands) RATE RATE Commercial, industrial, and financial $ 10,497 $ 14,209 Agriculture 1,488 837 Real estate mortgage 53,314 35,834 Installment & other consumer loans 12,465 415 Total $ 77,764 $ 51,295
Loan growth for the year ended December 31, 2000 was 24.36%; increasing from $182,623,354 at December 31, 1999 to $227,109,086 at December 31, 2000. The composition of loans outstanding as of the dates indicated are as follows:
($ in thousands) Dec 31 % of Dec 31 % of Dec 31 % of Dec 31 % of Dec 31 % of 2000 total 1999 total 1998 total 1997 total 1996 total Commercial, industrial and financial $ 53,421 23.53% $ 51,053 27.95% $ 40,415 25.29% $ 33,801 22.69% $ 30,351 22.04% Real estate mortgage 157,904 69.53% 118,195 64.73% 101,380 65.98% 102,953 69.09% 93,171 67.65% Installment and other consumer loans 15,784 6.94% 13,375 7.32% 11,755 7.65% 12,262 8.23% 14,210 10.32% Total $227,109 100.00% $182,623 100.00% $153,649 100.00% $149,016 100.00% $137,732 100.00%
Loans held for sale as of December 31, 2000 totaled $114. There were no loans held for sale as of December 31, 1999. Real estate mortgage loans totaled $157,904 at the end of 2000 and $118,195 at the end of 1999. Loans in this classification in 2000 include $83,726 of loans secured by 1-to-4 family residential properties. -24- Residential real estate loans consist of home mortgages, home equity lines, and second mortgages. At the end of 2000, real estate loans comprise 69.53% of the total loans outstanding, up from 64.73% at the end of 1999. The commercial and industrial loan classification primarily consists of commercial loans to small businesses. Loans of this type are in a broad range of industries. Installment loans to individuals totaled $15,784 at the end of 2000, up from $13,375 at the end of 1999. Installment loans include short-term installment loans, automobile loans, recreational vehicle loans, credit card loans, and other personal loans. DEPOSITS The average balances of deposits and the average rate paid on these deposits during the years ended December 31, 2000, 1999, and 1998 are:
($ in thousands) 2000 1999 1998 BALANCE RATE BALANCE RATE BALANCE RATE Non-interest bearing demand deposits $ 30,209 $ 30,616 $ 26,827 Interest bearing demand and savings deposits 86,926 4.57% 74,835 3.62% 61,657 3.86% Time deposits 104,021 5.90% 93,069 5.24% 100,713 5.75% Total $221,156 $198,520 $189,197
Average total deposits in 2000 were $221 million, an increase of 11.4% or $23 million over 1999. Average non-interest-bearing demand deposits as a percentage of total average deposits decreased to 13.66% of total deposits compared to 15.42% in 1999 and 14.18% in 1998. The total average noninterest-bearing and interest-bearing demand, savings, and money market deposits increased to $117 million for 2000 from $105 million in 1999. These deposits as percentage of total average assets were 41.28% for 2000, 43.86% for 1999, and 40.12% for 1998. -25- The amount of time certificates of deposit issued in amounts of $100,000 or more and outstanding as of December 31, 2000 is approximately $52,816,000. Their maturity distribution as of December 31, 2000 and 1999 is as follows:
(in thousands) 2000 1999 - three months or less $ 9,300 $ 10,346 - over three months through six months $ 19,645 $ 12,324 - over six months through twelve months $ 18,823 $ 5,381 - over one year through five years $ 5,048 $ 1,076 - over five years $ 0 $ 0 Total $ 52,816 $ 29,127
The Bank does not have any deposits in foreign banking offices. SHORT-TERM BORROWINGS Short-term borrowings consist of securities sold under repurchase agreements, an open line of credit from Federal Home Loan Bank, and federal funds purchased. The repurchase agreements are payable on demand. Average total short-term borrowings were $17.2 million in 2000 compared with $11.7 million in 1999. Information related to the Bank's funds purchased and security repurchase agreements for the last three years is as follows:
($ in thousands) 2000 1999 1998 Securities sold under repurchase agreements $ 7,662 $10,738 $ 4,550 Federal Home Loan Bank open line of credit 3,853 0 0 Federal funds purchased 0 10,477 0 Totals $11,515 $21,215 $ 4,550 Average amount outstanding during the year $17,232 $11,661 $ 3,803 Maximum amount outstanding at any month's end 26,863 21,215 5,220 Weighted average interest rate at year end 6.83% 5.90% 5.63% Weighted average interest rate during the year 6.62% 5.49% 6.23%
-26- SUMMARY QUARTERLY FINANCIAL INFORMATION The following is a summary of the quarterly results of operations for the years ended December 31, 2000, 1999 and 1998.
THREE MONTHS ENDED March 31 June 30 September 30 December 31 ($ in thousands, except per share data) 2000 Interest income $4,907 $5,305 $5,666 $6,062 Interest expense $2,576 $2,991 $3,414 $3,559 Net interest income $2,331 $2,314 $2,252 $2,503 Provision for loan losses $150 $150 $150 $150 Net income applicable to common stock $573 $680 $545 $872 Earnings per common share $0.64 $0.78 $0.65 $1.04 1999 Interest income $4,179 $4,281 $4,547 $4,664 Interest expense $2,050 $2,093 $2,208 $2,247 Net interest income $2,129 $2,188 $2,339 $2,417 Provision for loan losses $75 $75 $105 $205 Net income applicable to common stock $635 $722 $759 $473 Earnings per common share $0.72 $0.82 $0.86 $0.53 1998 Interest income $4,146 $4,288 $4,252 $4,060 Interest expense $2,164 $2,174 $2,205 $2,179 Net interest income $1,982 $2,114 $2,047 $1,882 Provision for loan losses $75 $75 $75 $75 Net income applicable to common stock $390 $638 $719 $342 Earnings per common share $0.44 $0.72 $0.81 $0.39
CAPITAL ADEQUACY Stockholders' equity at December 31, 2000, increased to $22,274,374 or $26.53 per share compared with $21,046,417 or $23.83 per share at the end of 1999. Included in capital at year-end 2000 is a $(124,814) equity component compared to $(1,043,128) at December 31, 1999, related to unrealized losses on securities AFS, net of their tax effect. Cash dividend paid in 2000 were $1.03 per share compared to $1.00 per share in 1999. The adequacy of the Company's capital is regularly reviewed to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. As of December 31, 2000, 1999, 1998, the Company's Tier 1 risk-based capital ratios, total risk-based -27- capital ratios and Tier 1 leverage ratios were well in excess of regulatory requirements, (see Item 8, Note 15 of the Notes to Consolidated Financial Statements). Management feels the capital structure of the Company is adequate. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest-rate risk inherent in its lending and deposit taking activities. Management actively monitors and manages its interest-rate risk exposure. The measurement of the market risk associated with financial instruments 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 at December 31, 2000, which reflect changes in market prices and rates, can be found in Item 8, Note 17 of the Notes to Consolidated Financial Statements. The Company's primary objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while adjusting the Company's asset- liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest-rate risk. However, a sudden and substantial increase in interest rates may adversely impact the Company's 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. The Company does not engage in trading activities. The Company believes that it does not have a material exposure to interest-rate risk. Additional information required by this Item 7A is set forth in Item 6, "Selected Financial Data" and under subcaptions "Results of Operations", "Net Interest Income", "Provision for Loan Losses", "Liquidity and Interest Sensitivity", "Investment Portfolio", and "Deposits" under Item 7, Management's Discussion and Analysis of Financial Conditions. -28- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEPENDENT AUDITOR'S REPORT Board of Directors PSB Holdings, Inc. Wausau, Wisconsin We have audited the accompanying consolidated balance sheets of PSB Holdings, Inc. and Subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the three years ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PSB Holdings, Inc. and Subsidiary at December 31, 2000 and 1999, and the results of their operations and their cash flows for the three years ended December 31, 2000 in conformity with generally accepted accounting principles. WIPFLI ULLRICH BERTELSON LLP Wipfli Ullrich Bertelson LLP January 26, 2001 Wausau, Wisconsin -29-
PSB HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 2000 1999 ASSETS Cash and due from banks $ 9,225,645 $11,925,985 Interest-bearing deposits and money market funds 88,494 61,779 Federal funds sold 53,000 Securities: Held to maturity (fair values of $14,005,308 and $13,472,511, in 2000 and 1999, respectively) 13,974,600 13,843,068 Available for sale (at fair value) 50,130,739 46,489,186 Loans held for sale 114,000 Loans receivable, net of allowance for loan losses of $2,407,439 and $2,099,241 in 2000 and 1999, respectively 224,701,647 180,524,113 Accrued interest receivable 2,101,513 1,746,038 Premises and equipment 4,750,856 3,897,223 Other assets 1,098,328 1,401,641 TOTAL ASSETS $306,238,822 $259,889,033 LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest-bearing deposits $ 35,192,386 $ 33,657,598 Interest-bearing deposits 206,341,892 168,696,643 Total deposits 241,534,278 202,354,241 Short-term borrowings 11,514,743 21,214,890 Long-term borrowings 28,000,000 13,000,000 Accrued expenses and other liabilities 2,915,427 2,273,485 Total liabilities 283,964,448 238,842,616 Stockholders' equity: Common stock - No-par value with a stated value of $2 per share: Authorized - 1,000,000 shares Issued - 902,425 shares 1,804,850 1,804,850 Additional paid-in capital 7,158,505 7,158,505 Retained earnings 15,726,996 13,928,790 Accumulated other comprehensive loss, net of tax (124,814) (1,043,128) Treasury stock, at cost - 62,720 shares and 19,190 shares in 2000 and 1999, respectively (2,291,163) (802,600) Total stockholders' equity 22,274,374 21,046,417 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $306,238,822 $259,889,033 See accompanying notes to consolidated financial statements.
-30-
PSB HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 2000 1999 1998 Interest income: Interest and fees on loans $18,259,930 $14,065,041 $13,403,646 Interest on securities: Taxable 2,888,251 2,821,551 2,394,816 Tax-exempt 597,000 649,901 625,427 Other interest and dividends 194,503 134,512 322,546 Total interest income 21,939,684 17,671,005 16,746,435 Interest expense: Deposits 10,105,320 7,584,588 8,175,617 Short-term borrowings 1,140,346 639,760 237,059 Long-term borrowings 1,294,350 373,416 308,913 Total interest expense 12,540,016 8,597,764 8,721,589 Net interest income 9,399,668 9,073,241 8,024,846 Provision for loan losses 600,000 460,000 300,000 Net interest income after provision for loan losses 8,799,668 8,613,241 7,724,846 Noninterest income: Service fees 855,069 708,794 699,145 Net realized gain on sale of securities available for sale 35,867 Gain on sale of loans 66,440 223,002 332,027 Investment sales commissions 195,212 137,621 146,756 Other operating income 329,548 195,230 192,903 Total noninterest income 1,446,269 1,264,647 1,406,698 Noninterest expense: Salaries and employee benefits 3,841,735 3,621,239 3,330,964 Loss on settlement of pension plan 405,891 Occupancy 937,071 858,719 827,558 Data processing and other office operations 459,746 440,588 421,488 Advertising and promotion 211,073 222,435 201,754 Other operating 1,024,693 1,078,425 927,312 Total noninterest expense 6,474,318 6,221,406 6,114,967 Income before income taxes 3,771,619 3,656,482 3,016,577 Provision for income taxes 1,102,000 1,067,500 928,000 Net income $2,669,619 $2,588,982 $2,088,577 Basic and diluted earnings per share $ 3.11 $ 2.93 $ 2.36 Weighted average shares outstanding 858,286 883,235 883,235 See accompanying notes to consolidated financial statements.
-31-
PSB HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK TOTALS Balance, January 1, 1998 $1,804,850 $7,158,505 $10,955,877 $ 100,543 $(802,600) $19,217,175 Comprehensive income: Net income 2,088,577 2,088,577 Unrealized gain on securities available for sale, net of tax of $36,245 71,874 71,874 Total comprehensive income 2,160,451 Cash dividends declared $.93 per share (821,411) (821,411) Balance, December 31, 1998 1,804,850 7,158,505 12,223,043 172,417 (802,600) 20,556,215 Comprehensive income: Net income 2,588,982 2,588,982 Unrealized loss on securities available for sale, net of tax of $553,766 (1,215,545) (1,215,545) Total comprehensive income 1,373,437 Cash dividends declared $1.00 per share (883,235) (883,235) Balance, December 31, 1999 1,804,850 7,158,505 13,928,790 (1,043,128) (802,600) 21,046,417 Comprehensive income: Net income 2,669,619 2,669,619 Unrealized gain on securities available for sale, net of tax of $381,507 918,314 918,314 Total comprehensive income 3,587,933 Purchase of treasury stock (1,488,563) (1,488,563) Cash dividends declared $1.03 per share (871,413) (871,413) Balance, December 31, 2000 $1,804,850 $7,158,505 $15,726,996 $ (124,814) $(2,291,163) $ 22,274,374 See accompanying notes to consolidated financial statements.
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PSB HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 2000 1999 1998 Cash flows from operating activities: Net income $ 2,669,619 $ 2,588,982 $ 2,088,577 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and net amortization 570,555 554,059 520,981 Benefit from deferred income taxes (81,000) (70,000) (169,900) Provision for loan losses 600,000 460,000 300,000 Proceeds from sales of loans held for sale 4,722,650 21,214,462 26,186,442 Originations of loans held for sale (4,770,210) (17,871,010) (28,674,365) Gain on sale of loans (66,440) (223,002) (332,027) Gain on sale of premises and equipment (69,000) Net gain on sale of other real estate (21,461) (4,134) Net gain on sale of securities available for sale (35,867) FHLB stock dividends 129,800 Changes in operating assets and liabilities: Accrued interest receivable (355,475) (20,695) 12,150 Other assets 75,956 (109,686) (25,811) Accrued expenses and other liabilities 540,486 (276,212) 316,587 Net cash provided by operating activities 3,966,941 6,225,437 182,633 Cash flows from investing activities: Proceeds from sale and maturities of: Held to maturity securities 1,290,001 2,865,000 1,340,000 Available for sale securities 6,393,719 13,262,495 17,470,126 Payment for purchase of: Held to maturity securities (1,439,927) (2,664,188) (2,881,464) Available for sale securities (8,878,698) (13,653,389) (27,616,227) Net increase in loans (44,777,534) (32,402,322) (1,709,893) Net (increase) decrease in interest-bearing deposits and money market funds (26,715) 679,214 (587,722) Net decrease (increase) in federal funds sold (53,000) 3,934,000 (3,934,000) Capital expenditures (1,442,917) (522,284) (633,488) Proceeds from sale of premises and equipment 119,568 Proceeds from sale of other real estate 24,196 76,722 503,667 Net cash used in investing activities (48,791,307) (28,424,752) (18,049,001)
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PSB HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued) 2000 1999 1998 Cash flows from operating activities: Net increase in non-interest-bearing deposits $ 1,534,788 $ 507,689 $ 5,585,407 Net increase in interest-bearing deposits 37,645,249 2,046,655 7,611,785 Net increase (decrease) in short-term borrowings (9,700,147) 16,665,382 589,466 Proceeds from issuance of long-term borrowings 25,000,000 10,000,000 3,000,000 Repayments of long-term borrowings (10,000,000) (3,000,000) Dividends paid (867,301) (846,189) (791,254) Purchase of treasury stock (1,488,563) Net cash provided by financing activities 42,124,026 25,373,537 15,995,404 Net increase (decrease) in cash and due from banks (2,700,340) 3,174,222 (1,870,964) Cash and due from banks at beginning 11,925,985 8,751,763 10,622,727 Cash and due from banks at end $ 9,225,645 $11,925,985 $ 8,751,763 Supplemental cash flow information: Cash paid during the year for: Interest $ 12,071,704 $ 8,738,300 $ 8,734,905 Income taxes 983,000 1,416,524 877,563 Noncash investing and financing activities: Loans charged off 314,876 432,444 207,450 Loans transferred to other real estate 17,352 79,457 198,544 See accompanying notes to consolidated financial statements.
-34- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPAL BUSINESS ACTIVITY PSB Holdings, Inc. and Subsidiary (the "Company"), operates Peoples State Bank (the "Bank"), a full-service financial institution with a primary marketing area including, but not limited to, the greater Wausau, Wisconsin area in Marathon County, and Rhinelander, Wisconsin in Oneida County. It provides a variety of banking products including uninsured investment product sales and long-term fixed rate residential mortgages. PRINCIPLES OF CONSOLIDATION All significant intercompany balances and transactions have been eliminated. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to the general practices within the banking industry. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "cash and due from banks." Cash and due from banks includes cash on hand and non-interest-bearing deposits at correspondent banks. SECURITIES Investment securities are assigned an appropriate classification at the time of purchase in accordance with management's intent. Securities held to maturity represent those securities for which the Company has the positive intent and ability to hold to maturity. Accordingly, these securities are carried at cost adjusted for amortization of premium and accretion of discount calculated using the effective yield method. Unrealized gains and losses on securities held to maturity are not recognized in the financial statements. Trading securities include those securities bought and held principally for the purpose of selling them in the near future. The Company has no trading securities. -35- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) SECURITIES (Continued) Securities not classified as either securities held to maturity or trading securities are considered available for sale and reported at fair value determined from estimates of brokers or other sources. Unrealized gains and losses are excluded from earnings but are reported as other comprehensive income, net of income tax effects, in a separate component of stockholders' equity. Any gains and losses on sales of securities are recognized at the time of sale using the specific identification method. INTEREST AND FEES ON 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 doubtful. When a loan is placed on nonaccrual status, previously accrued but unpaid interest deemed uncollectible is reversed and charged against current income. After being placed on nonaccrual status, additional income is recorded only to the extent that payments are received or the collection of principal becomes reasonably assured. Interest income recognition on impaired loans is consistent with the recognition on all other loans (as detailed above). Fees received on loans are credited to income when received. 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 that the collectibility of the principal is unlikely. Management believes the allowance for loan losses is adequate to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. In accordance with current accounting standards, the allowance is provided for losses that have been incurred as of the balance sheet date. The allowance is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the subsidiary Bank to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination. -36- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) LOANS HELD FOR SALE Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method using quoted market prices. Mortgage servicing rights are not retained. PREMISES AND EQUIPMENT Premises and equipment are stated at cost. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of property and equipment are reflected in income. Depreciation is computed principally on the straight-line method and is based on the estimated useful lives of the assets varying from 5 to 40 years on buildings, 5 to 20 years on equipment, and 3 years on software. FORECLOSED REAL ESTATE Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Costs related to development and improvement of property are capitalized, whereas costs related to holding property are expensed. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in any valuation allowance are included in loss on foreclosed real estate. RETIREMENT PLANS The Company maintains a defined contribution 401(k) profit-sharing plan which covers substantially all full-time employees. INCOME TAXES Deferred income taxes have been provided under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences are expected to reverse. Deferred tax expense is the result of changes in the deferred tax asset and liability. -37- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ADVERTISING AND PROMOTIONAL COSTS Costs relating to Company advertising and promotion are generally expensed when paid. EARNINGS PER SHARE Earnings per share are based upon the weighted average number of shares outstanding. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to current year presentation. NOTE 2 CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, " Accounting for Certain Derivative Instruments and Certain Hedging Activities." Under these SFAS, the Company must recognize all material derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in fair value are generally recognized in earnings in the period of the change. The adoption of SFAS No. 133 and No. 138 did not have a material impact on the Company's financial condition or results of operations. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Under this SFAS, the Company reports those items defined as comprehensive income in the statement of changes in stockholders' equity. The adoption of SFAS No. 130 did not have an impact on the Company's financial condition or results of operations. Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which was issued in February 1998. This statement revises employers' disclosures about pension and other postretirement benefit plans. It did not change the measurement or recognition of those plans. It standardized the disclosure requirement and required additional information on changes in benefit obligations and fair value of plan assets, and eliminated certain disclosures which were no longer considered useful. The disclosure requirements had no impact on the Company's financial position or results of operations. -38- NOTE 3 CASH AND DUE FROM BANKS Cash and due from banks in the amount of $875,000 was restricted at December 31, 2000 to meet the reserve requirements of the Federal Reserve System. In the normal course of business, the Company and its subsidiary maintain cash and due from bank balances with correspondent banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company and its subsidiary also maintain cash balances in money market funds. Such balances are not insured. Total uninsured balances at December 31, 2000 totaled $6,348,019. -39- NOTE 4 SECURITIES The amortized cost and estimated fair value of investment securities are as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE DECEMBER 31, 2000 Securities held to maturity - Obligations of states and political SUBDIVISIONS $ 13,974,600 $ 101,316 $ 70,608 $ 14,005,308 Securities available for sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 48,278,448 $ 194,876 $ 398,957 $ 48,074,367 OTHER EQUITY SECURITIES 2,056,372 2,056,372 TOTALS $ 50,334,820 $ 194,876 $ 398,957 $ 50,130,739 DECEMBER 31, 1999 Securities held to maturity - Obligations of states and political SUBDIVISIONS $ 13,843,068 $ 17,904 $ 388,461 $ 13,472,511 Securities available for sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 47,245,814 $ 13,398 $ 1,517,300 $ 45,741,912 OTHER EQUITY SECURITIES 747,274 747,274 TOTALS $ 47,993,088 $ 13,398 $ 1,517,300 $ 46,489,186
-40- NOTE 4 SECURITIES (Continued) The amortized cost and estimated fair value of debt securities held to maturity and securities available for sale at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
ESTIMATED AMORTIZED FAIR COST VALUE SECURITIES HELD TO MATURITY Due in one year or less $ 855,392 $ 856,165 Due after one year through five years 4,582,808 4,616,128 DUE AFTER FIVE YEARS THROUGH TEN YEARS 8,536,400 8,533,015 TOTALS $13,974,600 $14,005,308 SECURITIES AVAILABLE FOR SALE Due in one year or less $ 4,599,564 $ 4,588,552 Due after one year through five years 15,994,892 15,892,650 Due after five years through ten years 3,977,666 3,929,126 MORTGAGE-BACKED SECURITIES 23,706,326 23,664,039 TOTALS $48,278,448 $48,074,367
Securities with an approximate carrying value of $12,554,863 and $20,207,957 at December 31, 2000 and 1999, respectively, were pledged to secure public deposits and short-term borrowings and for other purposes required by law. No securities were sold in 2000 or 1999. Proceeds from securities sales in 1998 were $1,533,300. Gross gains of $35,867 were realized on those sales. As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to hold stock in the FHLB based on the anticipated level of borrowings to be advanced. This stock is recorded at cost which approximates fair value. Transfer of the stock is substantially restricted. Equity securities include $2,008,700 and $699,600 of FHLB stock at December 31, 2000 and 1999, respectively. -41- NOTE 5 LOANS The composition of loans is as follows:
2000 1999 Commercial and industrial $ 53,420,913 $ 51,053,737 Real estate mortgage (commercial and residential) 149,859,334 111,923,276 Real estate construction 11,231,393 9,653,803 CONSUMER AND INDIVIDUAL 15,784,138 13,374,588 Subtotals 230,295,778 186,005,404 Less: Loans in process of disbursement 3,186,692 3,382,050 ALLOWANCE FOR LOAN LOSSES 2,407,439 2,099,241 NET LOANS $224,701,647 $180,524,113
The Company, in the ordinary course of business, grants loans to its executive officers and directors, including their families and firms in which they are principal owners. All loans to executive officers and directors are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and, in the opinion of management, did not involve more than the normal risk of collectibility or present other unfavorable features. Activity in such loans is summarized below:
2000 1999 Loans outstanding, January 1 $ 4,344,679 $ 5,038,511 New loans 2,045,266 3,411,051 REPAYMENTS (2,391,667) (4,104,883) LOANS OUTSTANDING, DECEMBER 31 $ 3,998,278 $ 4,344,679
The allowance for loan losses includes specific allowances related to commercial loans which have been judged to be impaired as defined by current accounting standards. A loan is impaired when, based on current information, it is probable that the Company will not collect all amounts due in accordance with the contractual terms of the loan agreement. These specific allowances are based on discounted cash flows of expected future payments using the loan's initial effective interest rate or the fair value of the collateral if the loan is collateral dependent. -42- NOTE 5 LOANS (Continued) An analysis of impaired loans follows:
AT DECEMBER 31, 2000 1999 Nonaccrual $ 802,907 $ 509,971 ACCRUING INCOME 1,097,938 1,696,412 Total impaired loans 1,900,845 2,206,383 LESS - ALLOWANCE FOR LOAN LOSSES 322,104 297,009 NET INVESTMENT IN IMPAIRED LOANS $ 1,578,741 $ 1,909,374 YEARS ENDED DECEMBER 31, 2000 1999 1998 Average recorded investment, net OF ALLOWANCE FOR LOAN LOSSES $ 1,947,806 $ 1,874,008 $ 819,630 INTEREST INCOME RECOGNIZED $ 174,963 $ 118,162 $ 39,569 Interest income recognized on a CASH BASIS ON IMPAIRED LOANS $ 101,618 $ 6,366 $ 2,769
An analysis of the allowance for loan losses for the three years ended December 31, follows:
2000 1999 1998 Balance, January 1 $ 2,099,241 $ 1,946,864 $ 1,845,064 Provision charged to operating expense 600,000 460,000 300,000 Recoveries on loans 23,074 124,821 9,250 LOANS CHARGED OFF (314,876) (432,444) (207,450) BALANCE, DECEMBER 31 $ 2,407,439 $ 2,099,241 $ 1,946,864
-43- NOTE 6 PREMISES AND EQUIPMENT An analysis of premises and equipment follows:
2000 1999 Land $ 1,605,349 $ 709,117 Buildings and improvements 3,793,211 3,466,588 Furniture and equipment 3,526,351 3,196,731 CONSTRUCTION IN PROGRESS 8,470 162,947 Total cost 8,933,381 7,535,383 LESS - ACCUMULATED DEPRECIATION AND AMORTIZATION 4,182,525 3,638,160 TOTAL $ 4,750,856 $3,897,223
Depreciation and amortization charged to operating expenses amounted to $544,366 in 2000, $511,047 in 1999 and $493,934 in 1998. NOTE 7 DEPOSITS At December 31, 2000, certificate of deposit and IRA accounts have scheduled maturity dates as follows:
2001 $ 93,183,149 2002 15,148,347 2003 3,457,409 2004 1,968,304 2005 204,790 TOTAL $ 113,961,999
Certificate of deposit and IRA accounts with individual balances greater than $100,000 totaled $47,228,159 and $24,760,217 at December 31, 2000 and 1999, respectively. Deposits from Company directors, officers, and related parties at December 31, 2000 and 1999 totaled $5,513,988 and $5,772,331, respectively. -44- NOTE 8 SHORT-TERM BORROWINGS Short-term borrowings consist of the following at December 31:
2000 1999 Securities sold under repurchase agreement $ 7,661,743 $10,737,890 FHLB open line of credit 3,853,000 FEDERAL FUNDS PURCHASED 10,477,000 TOTALS $11,514,743 $21,214,890
As a member of the FHLB system, the Company may draw on a line of credit totaling approximately $50,000,000. At December 31, 2000, the Company's available and unused portion of this line of credit totaled approximately $18,000,000. The Company pledges U.S. Treasury and agency securities available for sale as collateral for repurchase agreements. The fair value of pledged securities totaled $8,108,140 and $15,378,207 at December 31, 2000 and 1999, respectively. Repurchase agreements with Company directors, officers, and related parties at December 31, 2000 and 1999 totaled $4,500,000 and $6,122,705, respectively. The following information relates to federal funds purchased and securities sold under repurchase agreements for the years ended December 31:
2000 1999 1998 As of end of year: Weighted average rate 6.83% 5.90% 5.63% For the year: Highest month-end balance $26,862,797 $21,214,890 $ 5,220,455 Daily average balance $17,232,498 $11,660,602 $ 3,803,415 Weighted average rate 6.62% 5.49% 6.23%
-45- NOTE 9 LONG-TERM BORROWINGS Long-term borrowings at December 31, consist of the following:
2000 1999 Note payable to the FHLB, monthly interest payments only at 5.07%, due February 2008, callable beginning February 2001 $ 3,000,000 $ 3,000,000 Note payable to the FHLB, monthly interest payments only at 6.50%, due November 2003 6,000,000 Note payable to the FHLB, monthly interest payments only at 6.21%, due February 2005, callable beginning February 2001 5,000,000 Note payable to the FHLB, monthly interest payments only at 6.17%, due March 2005, callable beginning March 2001 8,000,000 Note payable to the FHLB, monthly interest payments only at 6.10%, due April 2005, callable beginning January 2001 6,000,000 4.97% to 5.15% notes payable to the FHLB, monthly INTEREST PAYMENTS ONLY, REPAID VIA CALL DURING 2000 10,000,000 TOTALS $28,000,000 $13,000,000
The scheduled principal maturities are:
2001 $ 2002 2003 6,000,000 2004 2005 19,000,000 THEREAFTER 3,000,000 TOTAL $28,000,000
The FHLB advances are secured by a blanket lien consisting principally of one-to-four family real estate loans totaling in excess of $47,000,000 and $22,000,000 at December 31, 2000 and 1999, respectively. -46- NOTE 10 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS The Company has established a 401(k) profit-sharing contribution pension plan for its employees. The Company matches 50% of employees' salary deferrals up to the first 4% of pay deferred. The Company also may declare a discretionary profit-sharing contribution. The expense recognized for contributions to the plan for the years ended December 31, 2000, 1999, and 1998 was $160,166, $173,858, and $159,014, respectively. The Company approved formation of an employee stock ownership plan (ESOP) during 2000. The plan is still in development and no activity has occurred within the plan. The Company also maintained an unfunded retirement plan for its directors which terminated effective December 31, 2000. Benefits were frozen at that date. The plan will pay retired directors who have at least 15 years of service as of December 31, 2000, 50% of the fees received from 1996 through 2000. Five directors are eligible for these benefits. Details regarding the actuarial benefit obligation and related disclosures are not available. The liability recognized in the financial statements for this plan was $130,981 and $156,285 at December 31, 2000 and 1999, respectively. There was no provision for plan expense during 1999 or 1998. The reduction of the liability resulted in the reversal of expense totaling $25,304 for the year ended December 31, 2000. Effective January 1, 1997, the Company terminated its defined benefit pension plan. The Company received regulatory approval to distribute participants' vested defined benefit pension plan balances to participants or into the Company's 401(k) profit-sharing plan. During January 1998, the Company settled the defined benefit pension plan obligation by transferring existing plan assets of $1,857,740, plus an additional cash payment of $202,738 to qualified retirement plans or directly to the plan participants. The Company also maintains an unfunded postretirement health care benefit plan which covers the officers of the Company. After retirement, the Company will pay between 25% and 50% of the health insurance premiums for former Company officers. To qualify, an officer must have at least 15 years of service, be employed by the Company at retirement, and must be 62 years of age at retirement. The actual amount paid is based upon years of service to the Company. -47 NOTE 10 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued) The following tables provide a reconciliation of changes in the postretirement health care benefit plan for the years ended December 31, 2000 and 1999:
2000 1999 Reconciliation of benefit obligations: Obligation at January 1 $ 201,637 $ 167,930 Service cost 15,466 13,134 Interest cost 21,771 19,314 Benefit payments (9,213) (6,137) NET AMORTIZATION OF PRIOR SERVICE COSTS 7,396 7,396 OBLIGATION AT DECEMBER 31 $ 237,057 $ 201,637
The following table provides the components of net periodic benefit cost (income) of the plans for the years ended December 31, 2000, 1999, and 1998:
DEFINED POSTRETIREMENT BENEFIT HEALTH CARE PENSION BENEFIT PLAN Plan 2000 1999 1998 1998 Service cost $ 15,466 $ 13,134 $ 11,176 $ Interest cost 21,771 19,314 16,658 9,723 Return on plan assets (8,060) Net amortization transition and prior SERVICE COSTS (INCOME) 7,396 7,396 7,396 (16,075) Net periodic pension cost (income) 44,633 39,844 35,230 (14,412) SETTLEMENT LOSS 405,891 Net periodic benefit cost AFTER SETTLEMENT $ 44,633 $ 39,844 $ 35,230 $391,479
-48- NOTE 10 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued) The assumptions used in the measurement of the Company's benefit obligation are shown in the following table:
POSTRETIREMENT HEALTH CARE BENEFIT PLAN 2000 1999 1998 Discount rate 7.50% 7.50% 7.50% Health care cost trend rate 7.25% 7.50% 7.25%
The health care cost trend rate is anticipated to be 7.00% in 2001, grading down .25% per year to 5.00%. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care benefit plan. A 1% increase in assumed health care cost trend rates would have the following effects:
2000 1999 1998 Effect on service and interest cost $ 8,813 $ 8,011 $ 5,681 Effect on accumulated benefit obligation at December 31 65,014 59,971 43,082
NOTE 11 SELF-FUNDED HEALTH INSURANCE PLAN The Company has established an employee medical benefit plan to self- insure claims up to $15,000 per year for each individual with a $286,690 stop-loss per year for participants in the aggregate. The Company and its covered employees contribute to the fund to pay the claims and stop-loss premiums. Medical benefit plan costs are expensed as incurred. The liability recognized for claims incurred but not yet paid as of December 31, 2000 was $60,824. No liability was recorded as of December 31, 1999. Health insurance expense recorded in 2000, 1999, and 1998 was $278,639, $168,564, and $143,969, respectively. -49- NOTE 12 INCOME TAXES The components of the income tax provision are as follows:
2000 1999 1998 Current income tax provision: Federal $ 1,101,000 $ 1,016,000 $ 991,400 STATE 82,000 121,500 106,500 TOTAL CURRENT 1,183,000 1,137,500 1,097,900 Deferred income tax benefit: Federal (60,000) (60,000) (142,400) STATE (21,000) (10,000) (27,500) TOTAL DEFERRED (81,000) (70,000) (169,900) TOTAL PROVISION FOR INCOME TAXES $ 1,102,000 $ 1,067,500 $ 928,000
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The major components of the net deferred tax assets are as follows:
2000 1999 Deferred tax assets: Allowance for loan losses $ 833,600 $ 708,800 Deferred compensation 51,600 68,800 State net operating loss 16,800 13,000 Post-retirement health care benefits 89,300 73,500 Employee pension plan 29,500 41,000 Unrealized loss on securities available for sale 79,267 560,774 LESS - VALUATION ALLOWANCES (16,800) (113,000) GROSS DEFERRED TAX ASSETS 1,083,267 1,352,874 Deferred tax liabilities: Premises and equipment 117,700 138,500 FHLB stock 51,100 OTHER 6,400 5,800 GROSS DEFERRED TAX LIABILITIES 175,200 144,300 NET DEFERRED TAX ASSETS $ 908,067 $ 1,208,574
-50- NOTE 12 INCOME TAXES (Continued) The Company and its subsidiary pay state income taxes on individual, unconsolidated net earnings. At December 31, 2000, net operating loss carryforwards at the parent company of approximately $313,000 existed to offset future state taxable income. These net operating losses will begin to expire in 2012. A valuation allowance has been recognized to adjust deferred tax assets to the amount of net operating losses expected to be utilized to offset future income. At December 31, 1999, a valuation allowance of $100,000 was also recognized to offset deferred tax assets related to unrealized capital losses of approximately $295,000. A summary of the source of differences between income taxes at the federal statutory rate and the provision for income taxes for the years ended December 31, follows:
2000 1999 1998 PERCENT PERCENT PERCENT OF OF OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME Tax expense at statutory rate $ 1,282,000 34.0 $ 1,243,000 34.0 $ 1,026,000 34.0 Increase (decrease) in taxes resulting from: Tax-exempt (215,000) (5.7) (221,900) (6.1) (194,000) (6.4) interest State income tax 40,300 1.1 73,600 2.0 52,000 1.7 OTHER (5,300) (0.2) (27,200) (0.7) 44,000 1.5 Provision for INCOME TAXES $ 1,102,000 29.2 $ 1,067,500 29.2 $ 928,000 30.8
NOTE 13 LEASES The Company leases various pieces of equipment under cancelable leases and space for two branch locations under noncancelable leases. The Company has the option to renew the noncancelable branch location leases for an -51- additional term upon expiration. All leases are classified as operating. Future minimum payments under the noncancelable leases are as follows:
2001 $ 49,722 2002 62,252 2003 38,677 2004 39,574 2005 43,531 THEREAFTER 14,964 TOTAL $ 248,720
Rental expense for all operating leases was $43,468, $39,104, and $32,462 for the years ended December 31, 2000, 1999, and 1998, respectively. NOTE 14 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK CREDIT RISK The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance- sheet instruments. These commitments at December 31, are as follows:
2000 1999 Commitments to extend credit: Fixed rate $ 10,122,861 $ 10,525,503 Variable rate 18,085,926 15,915,386 Letters of credit - Variable rate 651,167 845,952 CREDIT CARD COMMITMENTS - FIXED RATE 2,970,366 2,667,512 TOTALS $ 31,830,320 $ 29,954,353
-52- NOTE 14 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued) CREDIT RISK (Continued) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. The commitments are structured to allow for 100% collateralization on all letters of credit. Credit card commitments are commitments on credit cards issued by the Company and serviced by Elan Financial Services. These commitments are unsecured. CONCENTRATION OF CREDIT RISK The Company grants residential mortgage, commercial, and consumer loans predominantly in the greater Wausau, Wisconsin area in Marathon County, and Rhinelander, Wisconsin in Oneida County. There are no significant concentrations of credit to any one debtor or industry group. It is felt that the diversity of the local economy will prevent significant losses in the event of an economic downturn. CONTINGENCIES In the normal course of business, the Company 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. Under the most recent provisions approved by the Company's Board of Directors, up to 45,000 shares may be repurchased from shareholders from time to time at the prevailing market price. As of December 31, 2000, 43,530 shares have already been repurchased from shareholders. -53- NOTE 14 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued) INTEREST RATE RISK The Company originates and holds adjustable rate mortgage loans with variable rates of interest. The rate of interest on these loans is capped over the life of the loan. At December 31, 2000, none of the approximately $19,816,000 of variable rate loans had reached the interest rate cap. NOTE 15 CAPITAL REQUIREMENTS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2000, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. -54- The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
TO BE WELL- CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO As of December 31, 2000: Total capital (to risk weighted assets): Consolidated $24,806,000 12.1% $16,392,000 8.0% N/A Subsidiary bank $24,722,000 12.1% $16,392,000 8.0 $20,491,000 10.0% Tier I capital (to risk weighted assets): Consolidated $22,399,000 10.9% $8,196,000 4.0% N/A Subsidiary bank $22,315,000 10.9% $8,196,000 4.0% $12,294,000 6.0% Tier I capital (to average assets): Consolidated $22,399,000 7.4% $12,122,000 4.0% N/A Subsidiary bank $22,315,000 7.4% $12,122,000 4.0% $15,153,000 5.0% As of December 31, 1999: Total capital (to risk weighted assets): Consolidated $24,189,000 13.4% $14,402,000 8.0% N/A Subsidiary bank $23,965,000 13.3% $14,401,000 8.0% $18,001,000 10.0% Tier I capital (to risk weighted assets): Consolidated $22,090,000 12.3% $ 7,201,000 4.0% N/A Subsidiary bank $21,866,000 12.1% $ 7,200,000 4.0% $10,800,000 6.0% Tier I capital (to average assets): Consolidated $22,090,000 8.7% $10,128,000 4.0% N/A Subsidiary bank $21,866,000 8.6% $10,128,000 4.0% $12,660,000 5.0%
-55- NOTE 16 RESTRICTIONS ON RETAINED EARNINGS The Bank is restricted by banking regulations from making dividend distributions above prescribed amounts and is limited in making loans and advances to the Company. At December 31, 2000, the retained earnings of the subsidiary available for distribution as dividends without regulatory approval was approximately $6,100,000. NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS Current accounting standards require that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial statements: Cash and Short-Term Investments: The carrying amounts reported in the balance sheets for cash and due from banks, interest-bearing deposits and money market funds, and federal funds sold approximate the fair value of these assets. Securities: Fair values are based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage, and other consumer. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company's repayment schedules for each loan classification. In addition, for impaired loans, marketability and appraisal values for collateral were considered in the fair value determination. The carrying amount of accrued interest approximates its fair value. Deposit Liabilities: The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, NOW accounts, and money market accounts, is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate reflects the credit quality and operating expense factors of the Company. Short-Term Borrowings: The fair value of short-term borrowings with no stated maturity, such as federal funds purchased, is equal to the amount payable on demand at the reporting -56- NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) date. Fair value for fixed rate repurchase agreements is estimated using a discounted cash flow calculation that applies interest rates currently being offered on repurchase agreements to a schedule of aggregated expected maturities on the existing agreements. Long-Term Borrowings: The fair value of the Company's long-term borrowings (other than deposits) is estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Off-Balance-Sheet Instruments: The fair value of commitments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counter parties. Since this amount is immaterial, no amounts for fair value are presented. The carrying amounts and fair values of the Company's financial instruments consisted of the following at December 31:
2000 1999 CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE Financial assets: Cash and short-term investments $ 9,367,139 $ 9,367,139 $ 11,987,763 $ 11,987,763 Securities 64,105,339 64,136,047 60,332,254 59,961,697 Net loans 224,815,647 227,772,909 180,524,112 180,032,781 Financial liabilities: Deposits 241,534,278 241,970,455 202,354,241 202,400,590 Short-term borrowings 11,514,743 11,564,152 21,214,890 21,200,651 Long-term borrowings 28,000,000 28,052,483 13,000,000 12,907,246
LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based -57- on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, other assets, and other liabilities. In addition, the tax ramifications related to the realization of the unrealized gains or losses can have a significant effect on fair value estimates and have not been considered in the estimates. NOTE 18 SUBSEQUENT EVENT Subsequent to year-end, the Company authorized formation of an incentive stock option plan subject to stockholders' approval. The plan calls for up to 15,000 options to purchase common shares to be issued during 2001 and 2002. NOTE 19 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed balance sheets as of December 31, 2000 and 1999, and condensed statements of income and cash flows for the years ended December 31, 2000, 1999, and 1998, for PSB Holdings, Inc. should be read in conjunction with the consolidated financial statements and footnotes.
BALANCE SHEETS December 31, 2000 and 1999 ASSETS 2000 1999 Cash and due from banks $ 627,714 $ 752,995 Investment in subsidiary 22,189,893 20,823,276 OTHER ASSETS 26,306 35,573 TOTAL ASSETS $ 22,843,913 $ 21,611,844 LIABILITIES AND STOCKHOLDERS' EQUITY Accrued dividends payable $ 569,539 $ 565,427 TOTAL STOCKHOLDERS' EQUITY 22,274,374 21,046,417 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,843,913 $ 21,611,844
-58- NOTE 19 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
STATEMENTS OF INCOME Years Ended December 31, 2000, 1999, and 1998 2000 1999 1998 Income: Dividends from subsidiary $ 2,269,000 $ 909,000 $ 967,000 INTEREST 5,235 8,148 2,383 TOTAL INCOME 2,274,235 917,148 969,383 Expenses: Interest 8,577 OTHER 66,342 77,589 54,418 TOTAL EXPENSES 74,919 77,589 54,418 Income before income taxes and equity in undistributed net income of subsidiary 2,199,316 839,559 914,965 PROVISION FOR INCOME TAX BENEFIT (22,000) (22,000) (17,000) Net income before equity in undistributed net income of subsidiary 2,221,316 861,559 931,965 Equity in undistributed net income of SUBSIDIARY 448,303 1,727,423 1,156,612 NET INCOME $ 2,669,619 $ 2,588,982 $ 2,088,577
-59- NOTE 19 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
STATEMENTS OF CASH FLOWS Years Ended December 31, 2000, 1999, and 1998 2000 1999 1998 Increase (decrease) in cash and due from banks: Cash flows from operating activities: Net income $ 2,669,619 $ 2,588,982 $ 2,088,577 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in net income of subsidiary (2,717,303) (2,636,423) (2,123,612) Net amortization 8,965 21,517 21,517 (INCREASE) DECREASE IN OTHER ASSETS 302 (9,607) 28,002 Net cash provided by (used in) operating ACTIVITIES (38,417) (35,531) 14,484 Cash flows from investing activities - DIVIDENDS RECEIVED FROM SUBSIDIARY 2,269,000 909,000 967,000 Cash flows from financing activities: Dividends paid (867,301) (846,189) (791,254) PURCHASE OF TREASURY STOCK (1,488,563) NET CASH USED IN FINANCING ACTIVITIES (2,355,864) (846,189) (791,254) Net increase in cash and due from banks (125,281) 27,280 190,230 CASH AND DUE FROM BANKS AT BEGINNING 752,995 725,715 535,485 CASH AND DUE FROM BANKS AT END $ 627,714 $ 752,995 $ 725,715
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -60- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT. Information relating to directors of the Company is incorporated into this Form 10-K by this reference to the material set forth in the table under the caption "Proposal No. 1 - Election of Directors," pages 3 through 4, of the Company's proxy statement dated March 31, 2001 (the "2001 Proxy Statement"). Information relating to executive officers is found in Part I of this Form 10-K, page 3. Information required under Rule 405 of Regulation S-K is incorporated into this Form 10-K by this reference to the material set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 9 of the 2001 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. Information relating to director compensation is incorporated into this Form 10-K by this reference to the material under the subcaption "Compensation of Directors," pages 5 and 6 of the 2001 Proxy Statement. Information relating to the compensation of executive officers is incorporated into this Form 10-K by this reference to (1) the material set forth under the subcaption "Summary Compensation Table," page 9, and (2) the material set forth under the subcaption "Compensation Committee and Board Interlocks and Insider Participation," page 10, in the 2001 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information relating to security ownership of certain beneficial owners and management is incorporated into this Form 10-K by this reference to the material set forth under the caption "Beneficial Ownership of Common Stock," pages 7 and 8, in the 2001 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information relating to transactions with management is incorporated into this Form 10-K by this reference to the material set forth under the subcaption "Certain Relationships and Related Transactions," page 11, in the 2001 Proxy Statement. -61- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report. (1) The financial statements filed as part of this report are set forth on pages 30-61 herein. (2) No financial statement schedules are required by Item 14(d). (3) Exhibits. The following exhibits required by Item 601 of Regulation S-K are filed with the Securities and Exchange Commission as part of this report. Exhibit NUMBER DESCRIPTION 3.1 Restated Articles of Incorporation, as amended 3.2 Bylaws 4.1 Articles of Incorporation and Bylaws (see Exhibits 3.1 and 3.2) 10.1 Bonus Plan of Directors of the Bank 10.2 Non-Qualified Retirement Plan for Directors of the Bank 10.4 Consulting Agreement with Chairman of the Board 21.1 Subsidiaries of the Company (b) Reports on Form 8-K. None. -62- Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PSB Holdings, Inc. By DAVID K. KOPPERUD March 29, 2001 David K. Kopperud, President and Chief Executive Officer Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 29th day of March, 2001. SIGNATURE AND TITLE SIGNATURE AND TITLE DAVID K. KOPPERUD TODD R. TOPPEN David K. Kopperud, President Todd R. Toppen, Treasurer Chief Executive Officer (Chief Financial and Principal Accounting Officer) DIRECTORS: GORDON P. CONNOR PATRICK L. CROOKS Gordon P. Connor Patrick L. Crooks WILLIAM J. FISH CHARLES A. GHIDORZI William J. Fish Charles A. Ghidorzi GORDON P. GULLICKSON LAWRENCE HANZ, JR. Gordon P. Gullickson Lawrence Hanz, Jr. THOMAS R. POLZER THOMAS A. RIISER Thomas A. Polzer Thomas A. Riiser WILLIAM M. REIF EUGENE WITTER William M. Reif Eugene Witter -63- EXHIBIT INDEX TO FORM 10-K OF PSB HOLDINGS, INC. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 Pursuant to Section 102(d) of Regulation S-T (17 C.F.R. 232.102(d) Exhibit NUMBER DESCRIPTION 3.1 Restated Articles of Incorporation, as amended 3.2 Bylaws 4.1 Articles of Incorporation and Bylaws (see Exhibits 3.1 and 3.2) 10.1 Bonus Plan of Directors of the Bank 10.2 Non-Qualified Retirement Plan for Directors of the Bank 10.4 Consulting Agreement with Chairman of the Board 21.1 Subsidiaries of the Company -64- EX-3.(I) 2 0002.txt RESTATED ARTICLES OF INCORPORATED Exhibit 3.1 RESTATED ARTICLES OF INCORPORATION OF PSB HOLDINGS, INC. Article 1. NAME. The name of the Corporation is PSB Holdings, Inc. Article 2. SPECIFIC PURPOSE. The Corporation is organized for the purpose of acting as a bank holding company under the provisions of the Bank Holding Company Act of 1956, as amended, and for any other lawful purpose. Article 3. AUTHORIZED SHARES. The aggregate number of shares that the Corporation shall have authority to issue is 1,000,000 shares of common stock with no par value. Article 4. REGISTERED OFFICE AND REGISTERED AGENT. The street address of the Corporation's registered office located in Wisconsin is 1905 West Stewart Avenue, Wausau, Wisconsin, 54401. The name of the Corporation's registered agent at this address is Kenneth M. Selner. -1- Article 5. DIRECTORS. The Board of Directors of this Corporation shall consist of not less than five members nor more than seventeen members. The initial Board of Directors shall consist of 10 members. The number of directors may be fixed, from time to time and within the limits prescribed herein, by resolution of the Board of Directors. Article 6. MERGERS, CONSOLIDATIONS, SALE OR SHARE EXCHANGE. The affirmative vote or consent of the holders of two-thirds of all voting groups of this Corporation entitled to vote in elections of directors shall be required for (a) the adoption of any agreement for the merger or consolidation of this Corporation with or into any other corporation, (b) the sale of all or substantially all of the assets of this Corporation, or (c) approval of a plan of share exchange of the stock of this Corporation in addition to the vote or consent of the holders of the stock of this Corporation otherwise required by law. Article 7. AMENDMENT OF ARTICLES. An amendment of these articles of incorporation shall be effective only if such amendment shall have received the affirmative vote of two-thirds of all voting groups of this Corporation entitled to vote in the election of directors in addition to the vote or consent of the holders of the stock of this Corporation otherwise required by law. Article 8. SUPERSESSION OF PREVIOUS ARTICLES. These articles shall supersede and take the place of the heretofore existing Articles of Incorporation and all amendments thereto. -2- EX-3.(II) 3 0003.txt BYLAWS Exhibit 3.2 B Y L A W S OF PSB HOLDINGS, INC. TABLE OF CONTENTS Page BYLAW I. IDENTIFICATION .................................... 1 Section 1.01. NAME ..................................... 1 Section 1.02. PRINCIPAL AND BUSINESS OFFICES ........... 1 Section 1.03. REGISTERED AGENT AND OFFICE .............. 1 Section 1.04. PLACE OF KEEPING CORPORATE RECORDS ....... 1 BYLAW II. SHAREHOLDERS ..................................... 1 Section 2.01. ANNUAL MEETING ........................... 1 Section 2.02. SPECIAL MEETINGS ......................... 1 Section 2.03. PLACE OF MEETING ......................... 2 Section 2.04. NOTICE OF MEETING ........................ 2 Section 2.05. WAIVER ................................... 2 Section 2.06. FIXING OF RECORD DATE .................... 2 Section 2.07. VOTING LIST .............................. 3 Section 2.08. QUORUM AND VOTING REQUIREMENTS ........... 3 Section 2.09. CONDUCT OF MEETINGS ...................... 4 Section 2.10. PROXIES .................................. 4 Section 2.11. VOTING OF SHARES ......................... 4 Section 2.12. VOTING OF SHARES BY CERTAIN HOLDERS ...... 4 BYLAW III. BOARD OF DIRECTORS .............................. 6 Section 3.01. GENERAL POWERS ........................... 6 Section 3.02. NUMBER, TENURE AND QUALIFICATIONS ........ 6 Section 3.03. ELECTION ................................. 6 Section 3.04. REGULAR MEETINGS ......................... 6 Section 3.05. SPECIAL MEETINGS ......................... 6 Section 3.06. MEETINGS BY ELECTRONIC MEANS OF COMMUNICATION ............................. 7 Section 3.07. MANNER OF ACTING ......................... 7 Section 3.08. QUORUM ................................... 7 Section 3.09. VACANCIES ................................ 8 Section 3.10. NOTICE OF MEETINGS; WAIVER ............... 8 Section 3.11. CONDUCT OF MEETINGS ...................... 8 Section 3.12. COMPENSATION AND EXPENSES ................ 9 Section 3.13. DIRECTORS' ASSENT ........................ 9 Section 3.14. COMMITTEES ............................... 9 Section 3.15. ACTION WITHOUT A MEETING ................. 10 BYLAW IV. OFFICERS ......................................... 10 Section 4.01. NUMBER AND TITLES ........................ 10 Section 4.02. ELECTION AND TERM OF OFFICE .............. 10 Section 4.03. ADDITIONAL OFFICERS, AGENTS, ETC ......... 11 Section 4.04. REMOVAL .................................. 11 Section 4.05. RESIGNATIONS ............................. 11 Section 4.06. VACANCIES ................................ 11 -i- Section 4.07. POWERS, AUTHORITY AND DUTIES ............. 11 Section 4.08. THE CHAIRMAN OF THE BOARD ................ 12 Section 4.09. THE PRESIDENT ............................ 12 Section 4.10. THE VICE PRESIDENTS ...................... 12 Section 4.11. THE SECRETARY ............................ 13 Section 4.12. THE TREASURER ............................ 13 Section 4.13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS ............................... 14 BYLAW V. CONTRACTS, LOANS, CHECKS AND DEPOSITS ............ 14 Section 5.01. CONTRACTS ................................ 14 Section 5.02. LOANS .................................... 14 Section 5.03. CHECKS, DRAFTS, ETC ...................... 15 Section 5.04. DEPOSITS ................................. 15 BYLAW VI. VOTING OF SECURITIES OWNED BY THIS CORPORATION ... 15 Section 6.01. AUTHORITY TO VOTE ........................ 15 Section 6.02. PROXY AUTHORIZATION ...................... 15 BYLAW VII. CONTRACTS BETWEEN THIS CORPORATION AND RELATED PERSONS .................. 15 BYLAW VIII. CERTIFICATES FOR SHARES AND THEIR TRANSFER ..... 16 Section 8.01. CERTIFICATES FOR SHARES .................. 16 Section 8.02. FACSIMILE SIGNATURES ..................... 17 Section 8.03. SIGNATURE BY FORMER OFFICER .............. 17 Section 8.04. CONSIDERATION FOR SHARES ................. 17 Section 8.05. TRANSFER OF SHARES ....................... 17 Section 8.06. LOST, DESTROYED OR STOLEN CERTIFICATES ... 17 Section 8.07. STOCK REGULATIONS ........................ 18 BYLAW IX. DISTRIBUTIONS .................................... 18 BYLAW X. INDEMNIFICATION ................................... 18 BYLAW XI. FISCAL YEAR ...................................... 26 BYLAW XII. SEAL ............................................ 26 BYLAW XIII. AMENDMENTS ..................................... 26 Section 13.01. BY SHAREHOLDERS ......................... 26 Section 13.02. BY DIRECTORS ............................ 26 Section 13.03. IMPLIED AMENDMENTS ...................... 26 -ii- B Y L A W S OF PSB HOLDINGS, INC. BYLAW I. IDENTIFICATION Section 1.01. NAME. The name of the corporation is PSB Holdings, Inc. (the "corporation"). Section 1.02. PRINCIPAL AND BUSINESS OFFICES. The corporation may have such principal and other business offices as the Board of Directors may designate or as the corporation's business may require from time to time. Section 1.03. REGISTERED AGENT AND OFFICE. The corporation's registered agent may be changed from time to time by the corporation or by the Board of Directors. The address of the corporation's registered office may be changed from time to time by the corporation, by the Board of Directors or by the registered agent. The business office of the corporation's registered agent shall be identical to the registered office. The corporation's registered office may be, but need not be, identical with the corporation's principal office in the state of Wisconsin. Section 1.04. PLACE OF KEEPING CORPORATE RECORDS. The records and documents specified in Section 180.1601, Wisconsin Statutes, shall be kept at the corporation's principal office. BYLAW II. SHAREHOLDERS Section 2.01. ANNUAL MEETING. The annual shareholders meeting shall be held in the month of April of each year, at such time and place, either in or outside the state of Wisconsin, as may be designated by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting; provided, however, that if not so designated, the annual meeting shall be held on the third Tuesday in April in each year. Section 2.02. SPECIAL MEETINGS. Special shareholders' meetings may be called by: (a) the chairman of the board; (b) the president; (c) the Board of Directors or by such other officer(s) as it may authorize from time to time; or (d) the president or secretary upon the written request -1- of the holders of record of at least 10% of all the votes entitled to be cast upon the matter(s) set forth as the purpose of the meeting in such written request. Upon delivery to the president or secretary of a written request pursuant to (d), above, stating the purpose(s) of the requested meeting, dated and signed by the person(s) entitled to request such a meeting, it shall be the duty of such officer to whom the request is delivered to give notice of the meeting to shareholders. Notice of any special meetings shall be given in the same manner provided in Section 2.04 of these Bylaws. Only business within the purpose described in this special meeting notice shall be conducted at a special shareholders' meeting. Section 2.03. PLACE OF MEETING. The Board of Directors may designate any place, either in or outside the state of Wisconsin, as the place of meeting for any annual or special meeting. If no designation is made by the Board of Directors, the place of meeting shall be the corporation's principal office. Section 2.04. NOTICE OF MEETING. The corporation shall notify each shareholder who is entitled to vote at the meeting, of the date, time and place of each annual or special shareholders' meeting. In the case of special meetings, the notice shall also contain the purpose of such special meeting. The meeting notice shall be given not less than 10 days nor more than 60 days before the meeting date. Notice of a meeting must be sent by mail to the shareholder's address shown in the corporation's current record of shareholders. Section 2.05. WAIVER. Notice of any shareholders' meeting may be waived by a shareholder, before or after the date and time stated in the notice. The waiver must be in writing, contain the same information that would have been required in the notice (except the time and place of the meeting need not be stated), be signed by the shareholder, and be delivered to the corporation for inclusion in the corporate records. Section 2.06. FIXING OF RECORD DATE. For the purpose of determining shareholders of any voting group entitled to notice of or to vote at any meeting of shareholders, or shareholders entitled to receive payment of any distribution or dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may fix a future date as the record date. Such record date shall not be more than 70 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is so fixed by the board, the record date for determination of such shareholders shall be at the close of business on: (a) With respect to the payment of a share dividend, the date the board authorizes the share dividend; -2- (b) With respect to a distribution to shareholders (other than one involving a repurchase or reacquisition of shares), the date the board authorizes the distribution; or (c) With respect to any other matter for which such a determination is required, as provided by law. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. Section 2.07. VOTING LIST. After fixing a record date for a meeting, the corporation shall prepare a list of the names of all of its shareholders who are entitled to notice of a shareholders' meeting. The list shall be arranged by class or series of shares and show the address of and number of shares held by each shareholder. The corporation shall make the shareholders' list available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing to the date of the meeting, at the corporation's principal office (or at the place identified in the meeting notice in the city where the meeting will be held). The corporation shall make the shareholders' list available at the meeting, and any shareholder or his agent or attorney may inspect the list at any time during the meeting or any adjournment. Section 2.08. QUORUM AND VOTING REQUIREMENTS. Except as otherwise provided by the articles of incorporation, these Bylaws, or any provision of Chapter 180, a majority of the shares entitled to vote on all matters to be voted on at the shareholders' meeting, represented in person or by proxy, shall constitute a quorum. If a quorum is present, action on a matter is approved if the number of votes in favor of the action is greater than the number of votes against, unless the vote of a greater number of the voting group is required by the articles of incorporation, these Bylaws, or any provision of Chapter 180. Amendment of the articles of incorporation requires the affirmative vote of two-thirds of all voting groups of this corporation in addition to any other vote required by any provision of Chapter 180. Even though less than a quorum is represented, a majority of the shares represented at the meeting may adjourn the meeting without further notice. At the adjourned meeting at which a quorum shall be represented, any business may be transacted that might have been transacted at the meeting as originally notified. -3- Section 2.09. CONDUCT OF MEETINGS. The president, and in his absence, the chairman of the board and, in their respective absences, any person chosen by the shareholders present shall call the meeting of the shareholders to order and shall act as chairman of the board of the meeting. The corporation's secretary shall act as secretary of all meetings of the shareholders, but, in his absence, the presiding officer may appoint any assistant secretary or other person to act as secretary of the meeting. Section 2.10. PROXIES. At all shareholders' meetings, a shareholder entitled to vote may vote in person or by proxy appointed in writing by the shareholder or by his duly authorized attorney-in-fact. A proxy shall become effective when received by the secretary or other officer or agent of the corporation authorized to tabulate votes. Unless otherwise provided in the proxy, a proxy may be revoked at any time before it is voted, either by written notice filed with the secretary or other officer or agent of the corporation authorized to tabulate votes, or by oral notice given by the shareholder during the meeting. The presence of a shareholder who has filed his proxy shall not of itself constitute a revocation. No proxy shall be valid after 11 months from the date of its execution, unless otherwise provided in the proxy. The Board of Directors shall have the power and authority to make rules establishing presumptions as to the validity and sufficiency of proxies. Section 2.11. VOTING OF SHARES. Each outstanding share shall be entitled to one vote upon each matter submitted to a vote at a shareholders' meeting, except to the extent that the voting rights of the shares of any class or classes are enlarged, limited or denied by the articles of incorporation or as otherwise required by Chapter 180. Section 2.12. VOTING OF SHARES BY CERTAIN HOLDERS. (a) OTHER CORPORATIONS. Shares standing in another corporation's name may be voted either in person or by proxy, by the other corporation's president or any other officer appointed by the president. A proxy executed by any principal officer of the other corporation or such an officer's assistant shall be conclusive evidence of the signer's authority to act, in the absence of express notice to this corporation, given in writing to this corporation's secretary, or other officer or agent of the corporation authorized to tabulate votes, of the designation of some other person by the corporation's Board of Directors or Bylaws. (b) LEGAL REPRESENTATIVES AND FIDUCIARIES. Shares held by an administrator, executor, guardian, conservator, trustee in bankruptcy, -4- receiver, or assignee for creditors, in a fiduciary capacity, may be voted by the fiduciary, either in person or by proxy, without transferring the shares into his name, provided that there is filed with the secretary, before or at the time of the meeting, proper evidence of his incumbency and the number of shares held. Shares standing in a fiduciary's name may be voted by him, either in person or by proxy. A proxy executed by a fiduciary shall be conclusive evidence of the fiduciary's authority to give such proxy, in the absence of express notice to the corporation, given in writing to the corporation's secretary, or other officer or agent of the corporation authorized to tabulate votes, that this manner of voting is expressly prohibited or otherwise directed by the document creating the fiduciary relationship. (c) PLEDGEES. A shareholder whose shares are pledged shall be entitled to vote the shares until they have been transferred into the pledgee's name, and thereafter the pledgee shall be entitled to vote the shares so transferred. (d) MINORS. Shares held by a minor may be voted by the minor in person or by proxy, and no such vote shall be subject to disaffirmance or avoidance unless before the vote the corporation's secretary, or other officer or agent of the corporation authorized to tabulate votes, has received written notice or has actual knowledge that the shareholder is a minor. (e) INCOMPETENTS AND SPENDTHRIFTS. Shares held by an incompetent or spendthrift may be voted by the incompetent or spendthrift in person or by proxy, and no such vote shall be subject to disaffirmance or avoidance unless before the vote the corporation's secretary, or other officer or agent of the corporation authorized to tabulate votes, has actual knowledge that the shareholder has been adjudicated an incompetent or spendthrift or actual knowledge that judicial proceedings for appointment of a guardian have been filed. (f) JOINT TENANTS. Shares registered in the names of two or more individuals who are named in the registration as joint tenants may be voted in person or by proxy signed by one or more of the joint tenants if either (1) no other joint tenant or his legal representative is present and claims the right to participate in the voting of the shares or, before the vote, files with the corporation's secretary, or other officer or agent of the corporation authorized to tabulate votes, a contrary written voting authorization or direction or written denial of authority of the joint tenant present or signing the proxy proposed to be voted, or (2) all other joint tenants are deceased and the corporation's secretary, or other -5- officer or agent of the corporation authorized to tabulate votes, has no actual knowledge that the survivor has been adjudicated not to be the successor to the interests of those deceased. BYLAW III. BOARD OF DIRECTORS Section 3.01. GENERAL POWERS. The corporation's powers shall be exercised by or under the authority of, and its business and affairs shall be managed under the direction of its Board of Directors, subject to any limitations set forth in the articles of incorporation, these Bylaws, or any provision of Chapter 180. Section 3.02. NUMBER, TENURE AND QUALIFICATIONS. The number of directors of the corporation shall be not less than five nor more than seventeen. The exact number of directors, within the minimum and maximum limitation, shall be fixed from time to time by resolution of the Board of Directors. Each director shall hold office for a term of one year and until his successor shall have been elected by the shareholders or until his prior death, resignation or removal. A director may be removed from office by a vote of the shareholders taken at any shareholders' meeting called for that purpose, provided that a quorum is present. A director may resign at any time by delivering his written resignation to the Board of Directors. Section 3.03. ELECTION. Directors shall be elected by the shareholders at each annual shareholders' meeting. Each director shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. Section 3.04. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after the annual meeting of shareholders, and each adjourned session thereof. The place of such regular meeting shall be the same as the place of the meeting of shareholders which precedes it, or such other suitable place as may be announced at such meeting of shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the state of Wisconsin, for the holding of additional regular meetings without other notice than such resolution. Section 3.05. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the chairman of the board, if any, or the president, or any two directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either in or outside the state of Wisconsin, as the place -6- for holding any special meeting of the Board of Directors called by them, and if no other place is fixed, the place of meeting shall be the principal business office of the corporation in the state of Wisconsin. Section 3.06. MEETINGS BY ELECTRONIC MEANS OF COMMUNICATION. (a) CONDUCT OF MEETINGS. The Board of Directors may, in addition to conducting meetings in which each director participates in person, conduct any regular or special meeting by the use of any means of communication, provided all participating directors may simultaneously hear each other during the meeting, all communication during the meeting is immediately transmitted to each participating director, and each participating director is able to immediately send messages to all other participating directors. All participating directors shall be informed that a meeting is taking place at which official business may be transacted. (b) VERIFICATION OF DIRECTORS' IDENTITY. The identity of each director participating in a meeting of the Board of Directors conducted pursuant to Section 3.06(a) (other than a meeting in which each director participates in person) must be verified by the secretary before the directors vote on (1) a plan of merger or share exchange; (2) to sell, lease, exchange, or otherwise dispose of substantial property or assets of the corporation; (3) to voluntarily dissolve or to revoke voluntary dissolution proceedings; or (4) to file for bankruptcy. The secretary shall verify each participating director's identity by requesting the director to give the password which shall have been provided specifically to such director in the notice of the meeting. For purposes of this section, whether a disposal of property or assets of the corporation shall be "substantial" shall be determined by the Board of Directors. Section 3.07. MANNER OF ACTING. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the act of a greater number is required by law or by the articles of incorporation or these Bylaws. Section 3.08. QUORUM. A majority of the number of directors as required in Section 3.02 of these Bylaws shall constitute a quorum for the transaction of business at any Board of Directors' meeting, and a majority of the number of directors serving on a committee as authorized in Section 3.14 of these Bylaws shall constitute a quorum for the transaction of business at any committee meeting, but a majority of the directors -7- present (though less than such quorum) may adjourn the meeting from time to time without further notice. These provisions shall not, however, apply to the determination of a quorum for actions taken pursuant to Bylaw VII of these Bylaws or any other provisions of these Bylaws which fix different quorum requirements as of the date of the adoption of this Section 3.08. Section 3.09. VACANCIES. Any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, may be filled by the shareholders. During such time as the shareholders fail or are unable to fill such vacancies, then and until the shareholders act, (a) the Board of Directors may fill the vacancy; or (b) if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all directors remaining in office. Section 3.10. NOTICE OF MEETINGS; WAIVER. Written notice of each Board of Directors' meeting, except meetings pursuant to Section 3.04 of these Bylaws, shall be delivered personally, or by mail, private carrier, telegram, telex, telecopy, or other document transmitted electronically, to each director at his business address or at such other address as the director shall have designated in writing and filed with the secretary. Notice shall be given not less than 48 hours before the meeting being noticed, or 72 hours before the meeting being noticed if the notice is given by mail or private carrier. Oral notice may be given but in no event less than one hour before the meeting. Notice shall be deemed given at the time it is deposited with postage prepaid in the United States mail or delivered to a private carrier or telegraph company, as the case may be. Notice by telex or telecopy shall be deemed given when transmitted. Oral notice is deemed given and effective when communicated. A director may waive notice required under this section or by law at any time, whether before or after the time of the meeting. The waiver must be in writing, signed by the director, and retained in the corporate record book. The director's attendance at a meeting shall constitute a waiver of notice of the meeting, except when a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of the meeting. Section 3.11. CONDUCT OF MEETINGS. The chairman of the board, if any, and in his absence, the president, and in the absence of both of them, any director chosen by the directors present, shall call meetings of the Board of Directors to order and shall act as chairman of the board of the meeting. The secretary of the corporation shall act as secretary of -8- all meetings of the Board of Directors, but in the absence of the secretary, the presiding officer may appoint any assistant secretary or any director or other person present to act as secretary of the meeting. Section 3.12. COMPENSATION AND EXPENSES. The Board of Directors, by affirmative vote of a majority of the directors then in office and irrespective of any personal interest of any of its members, may (a) establish reasonable compensation of all directors for services to the corporation as directors or may delegate this authority to an appropriate committee, (b) provide for, or to delegate authority to an appropriate committee to provide for, reasonable pensions, disability or death benefits, and other benefits or payments to directors of the corporation and to their estates, families, dependents, or beneficiaries for prior services rendered to the corporation by the directors, and (c) provide for reimbursement of reasonable expenses incurred in the performance of the directors' duties, including the expense of traveling to and from board meetings. Section 3.13. DIRECTORS' ASSENT. A director of the corporation who is present at a meeting of the Board of Directors or of a committee of the board of which he is a member, at which action on any corporate matter is taken, shall be deemed to have assented to the action taken unless (a) he objects at the beginning of the meeting (or promptly upon his arrival) to holding it or transacting business at the meeting; or (b) minutes of the meeting are prepared and his dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) he delivers written notice of his dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation immediately after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. Section 3.14. COMMITTEES. The Board of Directors may create and appoint members to one or more committees, by resolution adopted by the affirmative vote of a majority of the number of directors required by Section 3.02 of these Bylaws. Each committee shall consist of two or more directors. To the extent provided in the resolution as initially adopted and as thereafter supplemented or amended by further resolution adopted by a like vote, each committee shall have and may exercise, when the Board of Directors is not in session, the powers of the Board of Directors in the management of the corporation's business and affairs, except that a committee may not (a) authorize distributions; (b) approve or propose to shareholders action that requires shareholder approval; (c) elect the principal officers; (d) amend articles of incorporation, or amend, adopt, or repeal bylaws; (e) approve a plan of merger not requiring shareholder approval; (f) authorize or approve reacquisition of shares except by a -9- formula or method approved or prescribed by the Board of Directors; (g) authorize or approve the issuance or sale or contract for sale of shares or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the Board of Directors may authorize a committee or a senior executive officer of the corporation to do so within limits prescribed by the Board of Directors; or (h) fill vacancies on the Board of Directors or on committees created pursuant to this section, unless the Board of Directors, by resolution, provides that committee vacancies may be filled by a majority of the remaining committee members. The Board of Directors may elect one or more of its members as alternate members of any such committee who may take the place of any absent member or members at any meeting of the committee, upon the request of the president or of the chairman of the board of the meeting. Each committee shall fix its own rules governing the conduct of its activities and shall make such report of its activities to the Board of Directors as the board may request. Section 3.15. ACTION WITHOUT A MEETING. Any action required or permitted by the articles of incorporation, these Bylaws, or any provision of law to be taken by the Board of Directors at a board meeting may be taken without a meeting if one or more written consents, setting forth the action so taken, shall be signed by all of the directors entitled to vote on the subject matter of the action and retained in the corporate records. Action taken pursuant to written consent shall be effective when the last director signs the consent or upon such other effective date as is specified in the consent. BYLAW IV. OFFICERS Section 4.01. NUMBER AND TITLES. The corporation's principal officers shall be a president, a secretary, and a treasurer, each of whom shall be elected by the board. There may, in addition, be a chairman of the board, and one or more vice presidents, whenever the board shall see fit to cause such office or offices to be filled. If there is more than one vice president, the board may establish designations for the vice presidencies to identify their functions or their order. The same natural person may simultaneously hold more than one office. Section 4.02. ELECTION AND TERM OF OFFICE. The officers of the corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until his successor shall have -10- been duly elected, or until the officer's death or resignation or removal in the manner hereinafter provided. Section 4.03. ADDITIONAL OFFICERS, AGENTS, ETC. In addition to the officers referred to in Section 4.01 of these Bylaws, the corporation may have such other officers, assistants to officers, acting officers and agents, as the Board of Directors may deem necessary and may appoint. Each such person shall act under his appointment for such period, have such authority, and perform such duties as may be provided in these Bylaws, or as the board may from time to time determine. The Board of Directors may delegate to any officer the power to appoint any subordinate officers, assistants to officers, acting officers, or agents. In the absence of any officer, or for any other reason the Board of Directors may deem sufficient, the board may delegate, for such time as the board may determine, any or all of an officer's powers and duties to any other officer or to any director. Section 4.04. REMOVAL. The Board of Directors may remove any officer or agent whenever in its judgment the corporation's best interests will be served thereby, but the removal shall be without prejudice to the contract rights, if any, of the person so removed. Appointment shall not of itself create contract rights. An officer may remove, with or without cause, any officer or assistant officer who was appointed by that officer. Section 4.05. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors, the president, or the secretary. Any such resignation shall take effect at the time the notice of resignation is delivered, unless the notice specifies a later effective date. Unless otherwise specified in the notice of resignation, the acceptance of the resignation shall not be necessary to make it effective. Section 4.06. VACANCIES. A vacancy in any principal office because of death, resignation, removal, disqualification, or other reason shall be filled by the Board of Directors for the unexpired portion of the term. A vacancy in any other office, as created under Section 4.01, of this Bylaw IV, because of death, resignation, removal, disqualification, or other reason may be filled by the Board of Directors for the unexpired portion of the term. Section 4.07. POWERS, AUTHORITY AND DUTIES. Officers of the corporation shall have the powers and authority conferred and the duties prescribed by the Board of Directors or the officer who appointed them in addition to and to the extent not inconsistent with those specified in other sections of this Bylaw IV. -11- Section 4.08. THE CHAIRMAN OF THE BOARD. The chairman of the board, if and while there be an incumbent of the office, shall preside at all meetings of the Board of Directors and meetings of the shareholders at which he is present. The chairman of the board shall have and exercise general supervision over the conduct of the corporation's affairs and over its other officers, subject, however, to the board's control. The chairman of the board shall from time to time report to the board all matters within his knowledge that the corporation's interests may require to be brought to the board's notice. The chairman of the board shall, whenever practicable, be consulted on all matters of general policy and shall have such authority and duties as the Board of Directors shall from time to time determine. Section 4.09. THE PRESIDENT. The president, unless otherwise determined by the Board of Directors, shall be the chief executive officer of the corporation and, subject to the control of the Board of Directors, shall oversee and direct the business and affairs of the corporation. If and while there is no incumbent in the office of the chairman of the board of Directors, the president shall preside at all meetings of the shareholders. The president shall have authority, subject to such rules as may be prescribed by the Board of Directors, to appoint such officers, assistants to officers, acting officers, agents and employees of the corporation as the president shall deem necessary, to prescribe their powers, duties and compensation, and to delegate authority to them. Such agents and employees shall hold office at the discretion of the president. The president shall have authority together with another officer to sign, execute and deliver in the corporation's name all instruments either when specifically authorized by the Board of Directors or when required or deemed necessary or advisable by the president in the ordinary conduct of the corporation's normal business, except in cases where the signing and execution of the instruments shall be expressly delegated by these Bylaws or by the board to the president, acting alone, or to some other officer or agent of the corporation or shall be required by law or otherwise to be signed or executed by some other officer or agent. In general, the president shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time. Section 4.10. THE VICE PRESIDENTS. In the president's absence, or in the event of his death or inability or refusal to act, or if for any reason it shall be impractical for the president to act personally, the vice president (or if there is more than one vice president, the vice presidents in the order designated by the Board of Directors, or in the absence of any designation, in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. Each vice -12- president shall perform such other duties and have such authority as from time to time may be delegated or assigned to him by the chairman of the board, if any, the president or by the Board of Directors. The execution of any instrument of the corporation by any vice president shall be conclusive evidence, as to third parties, of his authority to act in the president's place. Section 4.11. THE SECRETARY. The secretary shall: (a) keep the record of all minutes of the shareholders and of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with these Bylaws or as required by law; (c) be custodian of the corporation's corporate records and see that the books, reports, statements, certificates and all other documents and records required by law are properly kept and filed; (d) have charge, directly or through such transfer agent or agents and registrar or registrars as the Board of Directors may appoint, of the issue, transfer, and registration of certificates for shares in the corporation and of the records thereof, such records to be kept in such manner as to show at any time the number of shares in the corporation issued and outstanding, the names and addresses of the shareholders of record, and the numbers and classes of shares held by each; (e) exhibit at reasonable times upon the request of any director the records of the issue, transfer, and registration of the corporation's share certificates, at the place where those records are kept, and have these records available at each shareholders' meeting; and (f) in general, perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the chairman of the board, the president or by the Board of Directors. Section 4.12. THE TREASURER. The treasurer shall: (a) have charge and custody of, and be responsible for, all of the corporation's funds and securities; receive and give receipts for monies due and payable to the corporation from any source whatsoever; deposit all such monies in the corporation's name in such banks, financial institutions, trust companies or other depositories as shall be selected -13- in accordance with the provisions of Section 5.04 of these Bylaws; cause such funds to be disbursed by checks or drafts on the authorized corporation's depositories, signed as the Board of Directors may require; and be responsible for the accuracy of the amounts of, and cause to be preserved proper vouchers for, all monies disbursed; and (b) in general, perform all duties incident to the office of treasurer and such other duties as from time to time may be delegated or assigned to him by the chairman of the board, the president or by the Board of Directors. If required by the Board of Directors, the treasurer shall furnish a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the board shall determine. Section 4.13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. There shall be such number of assistant secretaries and assistant treasurers as the Board of Directors may from time to time authorize. The assistant secretaries may sign with the president or a vice president, certificates for shares of the corporation, the issuance of which shall have been authorized by a resolution of the Board of Directors. The assistant treasurers shall respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The assistant secretaries and assistant treasurers, in general, shall perform such duties and have such authority as shall from time to time be delegated or assigned to them by the secretary or the treasurer, respectively, or by the chairman of the board, the president or by the Board of Directors. BYLAW V. CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 5.01. CONTRACTS. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute or deliver any instrument in the corporation's name and on its behalf. The authorization may be general or confined to specific instruments. When an instrument is so executed, no other party to the instrument or any third party shall be required to make any inquiry into the authority of the signing officer or officers, agent or agents. Section 5.02. LOANS. No indebtedness for borrowed money shall be contracted on the corporation's behalf and no evidences of such indebtedness shall be issued in its name unless authorized by or under the authority of a resolution of the Board of Directors. The authorization -14- may be general or confined to specific instances. Section 5.03. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for the payment of money, or notes or other evidences of indebtedness issued in the corporation's name, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by or under the authority of a resolution of the Board of Directors. Section 5.04. DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the corporation's credit in such banks, trust companies, or other depositories as may be selected by or under the authority of a resolution of the Board of Directors. BYLAW VI. VOTING OF SECURITIES OWNED BY THIS CORPORATION Section 6.01. AUTHORITY TO VOTE. Any shares or other securities issued by any other corporation and owned or controlled by this corporation may be voted at any meeting of the issuing corporation's security holders by the president of this corporation if he be present, or in his absence, by any vice president of this corporation who may be present. Section 6.02. PROXY AUTHORIZATION. Whenever, in the judgment of the president, or in his absence, of any vice president, it is desirable for this corporation to execute a proxy or written consent with respect to any shares or other securities issued by any other corporation and owned by this corporation, the proxy or consent shall be executed in this corporation's name by the president or one of the vice presidents of this corporation, without necessity of any authorization by the Board of Directors, counter-signature, or attestation by another officer. Any person or persons designated in this manner as this corporation's proxy or proxies shall have full right, power and authority to vote the shares or other securities issued by the other corporation and owned by this corporation in the same manner as the shares or other securities might be voted by this corporation. BYLAW VII. CONTRACTS BETWEEN THIS CORPORATION AND RELATED PERSONS Any contract or other transaction between the corporation and one or more of its directors, or between the corporation and any entity of which one or more of its directors are members or employees or in which one or -15- more of its directors are interested, or between the corporation and any corporation or association of which one or more of its directors are shareholders, members, directors, officers, or employees or in which one or more of its directors are interested, shall not be voidable by the corporation solely because of the director's or officer's interest in the transaction if: (a) the material facts of the transaction and the director's or officer's interest were disclosed or known to the Board of Directors or a committee of the Board of Directors, and a majority of disinterested members of the Board of Directors or committee authorized, approved, or specifically ratified the transaction; or (b) the material facts of the transaction and the director's or officer's interest were disclosed or known to the shareholders entitled to vote, and a majority of the shares held by disinterested shareholders authorized, approved, or specifically ratified the transaction; and (c) the transaction was fair to the corporation. For purposes of this Bylaw VII, a majority of directors, including directors having a direct or indirect interest in the transaction, shall constitute a quorum of the board or a committee of the board acting on the matter. BYLAW VIII. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 8.01. CERTIFICATES FOR SHARES. Certificates representing shares in the corporation shall, at a minimum, state on their face all of the following: (a) the name of the corporation and that it is organized under the laws of the state of Wisconsin; (b) the name of the person to whom issued; and (c) the number and class of shares that the certificate represents. The share certificates shall be signed by the president or any vice president and by the secretary and any assistant secretary or any other officer or officers designated by the Board of Directors. A record shall be kept of the name of the owner or owners of the shares represented by each certificate, the number of shares represented by each certificate, the date of each certificate, and in case of cancellation, the date of cancellation. Every certificate surrendered to the corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificates until the existing certificates shall have been so cancelled, except in cases provided for in Section 8.07 of these Bylaws. -16- Section 8.02. FACSIMILE SIGNATURES. The signatures of the president or vice president and the secretary or assistant secretary upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the corporation itself or an employee of the corporation. Section 8.03. SIGNATURE BY FORMER OFFICER. If an officer who has signed or whose facsimile signature has been placed upon any share certificate shall have ceased to be an officer before the certificate is issued, the corporation may issue the certificate with the same effect as if he were an officer at the date of its issue. Section 8.04. CONSIDERATION FOR SHARES. The corporation's shares may be issued for such consideration as shall be determined by the Board of Directors to be adequate. When the corporation receives payment of the consideration for which shares are to be issued, the shares shall be deemed fully paid and nonassessable by the corporation. Section 8.05. TRANSFER OF SHARES. Transfers of shares in the corporation shall be made on the corporation's books only by the registered shareholder, by his legal guardian, executor, or administrator, or by his or her attorney authorized by a power of attorney duly executed and filed with the corporation's secretary or with a transfer agent appointed by the Board of Directors, and on surrender of the certificate or certificates for the shares. Where a share certificate is presented to the corporation with a request to register for transfer, the corporation shall not be liable to the owner or any other person suffering a loss as a result of the registration of transfer if (a) there were on or with the certificate the necessary endorsements, and (b) the corporation had no duty to inquire into adverse claims or has discharged the duty. The corporation may require reasonable assurance that the endorsements are genuine and effective in compliance with such other regulations as may be prescribed by or under the Board of Directors' authority. The person in whose name shares stand on the corporation's books shall, to the full extent permitted by law, be deemed the owner of the shares for all purposes. Section 8.06. LOST, DESTROYED OR STOLEN CERTIFICATES. If an owner claims that his share certificate has been lost, destroyed, or wrongfully taken, a new certificate shall be issued in place of the original certificate if the owner (a) so requests before the corporation has notice that the shares have been acquired by a bona fide purchaser; (b) files with the corporation a sufficient indemnity bond (unless such bond is waived by the Board of Directors); and (c) satisfies such other reasonable -17- requirements as may be prescribed by or under the authority of the Board of Directors. Section 8.07. STOCK REGULATIONS. The Board of Directors shall have the power and authority to make all such further rules and regulations not inconsistent with the statutes of the state of Wisconsin as they may deem expedient concerning the registration of certificates representing shares of the corporation. BYLAW IX. DISTRIBUTIONS The Board of Directors may make distributions to its shareholders whenever and in whatever amounts as, in the board's opinion, the corporation's condition renders advisable in the manner and upon the terms and conditions provided by law and the restated articles of incorporation. BYLAW X. INDEMNIFICATION (a) MANDATORY INDEMNIFICATION. (1) Subject to the conditions and limitations of this Bylaw X and the corporation's articles of incorporation, the corporation shall, to the fullest extent permitted by the Wisconsin Business Corporation Law as it may then be in effect, indemnify and hold harmless each person (and the heirs and legal representatives of such person) who is or was a director or officer of the corporation, or of any other corporation or other enterprise which is served in any capacity at the request of the corporation (the "executive"), against any and all expenses (including, but not limited to, fees, costs, charges, disbursements, attorneys' fees and any other expenses (hereafter collectively referred to as "expenses")) and liabilities (including, but not limited to, the obligation to pay a judgment, settlement, penalty, assessment, forfeiture or fine, including an excise tax assessed with respect to an employee benefit plan (hereinafter collectively referred to as "liabilities")) actually and reasonably incurred by him in connection with the result from any threatened, pending or completed civil, criminal, administrative or investigative action, suit, arbitration or other proceeding (whether brought by or in the right of the corporation or such other corporation or otherwise) ("proceedings"), or in connection with an appeal relating thereto, including, without limitation, proceedings brought under and/or predicated upon the Securities Act of 1933, as amended, and/or the Securities Exchange Act of 1934, as amended, and/or the Investment Company -18- Act of 1940, as amended, and/or their respective state counterparts and/or any rule or regulation promulgated thereunder, in which he may become involved, as a party or otherwise, by reason of his being or having been such executive, or by reason of any past or future action or omission or alleged action or omission (including those antedating the adoption of the Bylaw) by him in such capacity, whether or not he continues to be such at the time such liability or expense is incurred, either: (A) to the extent he is successful on the merits or otherwise in the defense of a proceeding, or (B) to the extent he is not successful on the merits or otherwise in the defense of a proceeding, unless it is determined pursuant to paragraph (b) of this Bylaw that liability was incurred because the executive breached or failed to perform a duty he owed to the corporation and the breach or failure to perform constituted: (i) a willful failure to deal fairly with the corporation or its shareholders in connection with a matter in which the executive had a material conflict of interest, (ii) a violation of criminal law, unless the executive had reasonable cause to believe his conduct was lawful or no reasonable cause to believe his conduct was unlawful, (iii) a transaction from which the executive derived an improper personal profit, or (iv) willful misconduct. (2) In the event the executive is or was serving as an executive, trustee, fiduciary, administrator, employee or agent of an employee benefit plan sponsored by or otherwise associated with the corporation and incurs expenses or liabilities by reason of a proceeding having been brought, or having been threatened, against such executive because of his status as such an executive, trustee, fiduciary, administrator, employee or agent of such plan or by reason of his performing duties in any such capacities, the corporation shall indemnify and hold harmless the executive against any and all of such reasonable amounts subject to the provisions of paragraph (a) hereof. (3) The corporation may agree to indemnify and allow reasonable expenses for an employee or agent of the corporation who is not an -19- executive by general or specific action of the Board of Directors, or by contract or agreement. (b) RIGHT TO INDEMNIFICATION; HOW DETERMINED. (1) An executive's indemnification under this Bylaw X shall be determined pursuant to one of the following means (the "Authority") as may be selected by the executive seeking such indemnification: (A) by a majority vote of a quorum of the Board of Directors consisting of directors not at the time parties to the same or related proceedings. If a quorum of disinterested directors cannot be obtained, by a majority vote of a committee duly appointed by the Board of Directors and consisting of two or more directors not at the time parties to the same or related proceedings. Directors who are parties to the same or related proceedings may participate in the designation of the members of the committee; (B) by independent legal counsel selected by a quorum of the Board of Directors or its committee in the manner prescribed in (i) above or, if unable to obtain such quorum or committee, by majority vote of the full Board of Directors, including directors who are parties to the same or related proceedings; (C) by a panel of three arbitrators consisting of one arbitrator selected by those directors entitled under (ii) above to select independent legal counsel, one arbitrator selected by the executive seeking indemnification and one arbitrator selected by the two arbitrators previously selected; (D) by an affirmative vote of shares as set forth in Section 2.08 of Bylaw II of these Bylaws; (E) by a court pursuant to the Wisconsin Business Corporation Law as it may then be in effect; or (F) by any other method provided for by the articles of incorporation, contract or agreement. In any such determination there shall exist a rebuttable presumption that the executive has met such standard(s) of conduct and is therefore entitled to indemnification pursuant to this Bylaw X. The burden of rebutting such presumption by clear and convincing evidence shall be on the corporation. The Authority shall make a determination within sixty days of being selected and shall -20- simultaneously submit a written opinion of its conclusions to both the corporation and the executive and, if the Authority determines that the executive is entitled to be indemnified for any amounts pursuant to this Bylaw X, the corporation shall pay such amounts (net of all amounts, if any, previously advanced to the executive pursuant to paragraph (d), including interest thereon as provided in paragraph (e)(3), to the executive (or to such other person or entity as he may designate in writing to the corporation) within ten days of receipt of such opinion. (2) Any executive may, either before or within two years after a determination, if any, has been made by the Authority, petition the appropriate circuit court of the state of Wisconsin or any other court of competent jurisdiction to determine whether the executive is entitled to indemnification under this Bylaw X, and such court shall thereupon have the exclusive authority to make such determination unless and until such court dismisses or otherwise terminates such proceeding without having made such determination. The court shall, as petitioned, make an independent determination of whether the executive is entitled to indemnification as provided under this Bylaw X, irrespective of any prior determination made by the Authority; provided, however, that there shall exist a rebuttable presumption that the executive has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Bylaw X. The burden of rebutting such presumption by clear and convincing evidence shall be on the corporation. If the court determines that the executive is entitled to be indemnified for any amounts pursuant to this Bylaw X, unless otherwise ordered by such court, the corporation shall pay such amounts (net of all amounts, if any, previously advanced to the executive pursuant to paragraph (d), including interest thereon as provided in paragraph (e)(3), to the executive (or to such other person or entity as the executive may designate in writing to the corporation) within ten days of the rendering of such determination. An executive shall pay all expenses incurred by the executive in connection with the judicial determination provided in this paragraph (b)(2), and any subsequent appeal thereof, unless it shall ultimately be determined by the court that he is entitled to be indemnified, in whole or in part, by the corporation as authorized in this Bylaw X. (3) Except as otherwise set forth in this subparagraph (2)(b), the expenses associated with the indemnification process set forth in this -21- paragraph (b), including, without limitation, the expenses of the Authority selected hereunder, shall be paid by the corporation. (c) TERMINATION OF A PROCEEDING IS NONCONCLUSIVE. The termination of any proceeding, no matter by whom brought, including, without limitation, Securities Law proceedings, by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the executive has not met the applicable standard(s) of conduct set forth in paragraph (a). (d) ADVANCE PAYMENT. (1) Upon written request, the corporation shall advance expenses to, or where appropriate, at its expense, undertake the defense of, every such person prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount unless it shall ultimately be determined that he is entitled to indemnification under this Bylaw X together with a written affirmation of his good faith and belief that he has not breached or failed to perform his duties to the corporation. (2) In the event the corporation makes an advance of expenses to the executive pursuant to this Bylaw X, the corporation shall be subrogated to each and every right of recovery the executive may have against any insurance carrier from whom the corporation has purchased insurance for such purpose, if any. (e) PARTIAL INDEMNIFICATION; INTEREST. (1) If it is determined pursuant to this Bylaw X that an executive is entitled to indemnification as to some claims, issues or matters, but not as to other claims, issues or matters, involved in any proceeding, no matter by whom brought, including, without limitation, Securities Law proceedings, the Authority (or the court) shall authorize the reasonable proration (and payment by the corporation) of such expenses and liabilities with respect to which indemnification is sought by the executive, among such claims, issues or matters as the Authority (or the court) shall deem appropriate in light of all of the circumstances of such proceeding. (2) If it is determined pursuant to this Bylaw X that certain amounts incurred by an executive, are for whatever reason, unreasonable in amount, the Authority (or the court) shall authorize indemnification to be paid by the corporation to the executive for only such amounts as the -22- Authority (or the court) shall deem reasonable in light of all of the circumstances of such proceeding. (3) To the extent deemed appropriate by the Authority pursuant to this Bylaw X, or by the court before which such proceeding was brought, interest shall be paid by the corporation to an executive, at a reasonable interest rate, for amounts for which the corporation indemnifies the executive. (f) LIMITATION OF DERIVATIVE PROCEEDINGS AND RELEASE OF DERIVATIVE CLAIMS. No proceeding shall be brought and no cause of action shall be asserted, including, without limitation, Securities Law proceedings, by or in the right of the corporation, against the executive, his spouse, heirs, executors or administrators after the expiration of two years from the date the executive ceases, for any reason whatsoever, to serve as an executive of the corporation and/or of an affiliate unless asserted by the filing of an appropriate proceeding within such two-year period. The provisions of any federal, state or local law or statute providing in substance that releases shall not extend to claims, demands, injuries or damages which are unknown or unsuspected to exist at the time to the person or entity executing such release are hereby expressly waived by the corporation and its shareholders. (g) NONEXCLUSIVITY OF BYLAW X. The right to indemnification provided to an executive by this Bylaw X shall not be deemed exclusive of any other rights to indemnification or the advancement of expenses to which he may be entitled under any charter provision, contract, agreement, resolution, vote of shareholders or disinterested directors of the corporation or otherwise, including, without limitation, under Federal law or Wisconsin Business Corporation Law Chapter 180 as it may then be in effect, both as to acts in his official capacity as such executive or other employee or agent of the corporation or of an affiliate or as to acts in any other capacity while holding such office or position, and the terms and provisions of this Bylaw X shall continue as to the executive if he ceases to be an executive or other employee or agent of the corporation or of an affiliate, and such terms and provisions shall inure to the benefit of the heirs, executors and administrators of the executive. (h) INSURANCE. (1) The corporation may purchase and maintain insurance on behalf of an executive, agent or employee against any liability asserted against him or incurred by or on behalf of him or her in such capacity as an executive or other employee or agent of the corporation or of an -23- affiliate, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Bylaw X or under Wisconsin Business Corporation Law Chapter 180 as it may then be in effect. The purchase and maintenance of such insurance shall not in any way limit or affect the rights and obligations of the corporation or the executive under this Bylaw X and the execution and delivery of this Bylaw X by the corporation and the executive shall not in any way limit or affect the rights and obligations of the corporation or of the other party or parties thereto under any such policy or agreement of insurance. (2) If an executive shall receive payment from any insurance carrier or from the plaintiff in any proceeding against the executive in respect of indemnified amounts after payments on account of all or part of such indemnified amounts have been made by the corporation pursuant to this Bylaw X, the executive shall promptly reimburse the corporation for the amount, if any, by which the sum of such payment by such insurance carrier or such plaintiff and payments by the corporation to the executive exceeds such indemnified amounts; provided, however, that such portions, if any, of such insurance proceeds that are required to be reimbursed to the insurance carrier under the terms of its insurance policy, such as deductible or co-insurance payments, shall not be deemed to be payments to the executive hereunder. In addition, upon payment of indemnified amounts under this Bylaw X, the corporation shall be subrogated to an executive's rights against any insurance carrier in respect of such indemnified amounts and the executive shall execute and deliver any and all instruments and/or documents and perform any and all other acts or deeds which the corporation deems necessary or advisable to secure such rights. The executive shall do nothing to prejudice such rights of recovery or subrogation. (i) WITNESS EXPENSES. Upon the executive's written request, the corporation shall pay (in advance or otherwise) or reimburse any and all expenses reasonably incurred by him in connection with his or her appearance as a witness in any proceeding at a time when he has not been formally named a defendant or respondent to such a proceeding. (j) CONTRIBUTION. (1) In the event the indemnity provided for in paragraph (a) is unavailable to the executive for any reason whatsoever, the corporation, in lieu of indemnifying the executive, shall contribute to the amount reasonably incurred by or on behalf of the executive, whether for -24- liabilities and/or for expenses in connection with any proceeding, no matter by whom brought, including without limitation, Securities Law proceedings, in such proportion as is deemed fair and reasonable by the Authority pursuant to paragraph (b) hereof, or by the court before which such proceeding was brought, taking into account all of the circumstances of such proceeding, in order to reflect: (A) the relative benefits received by the corporation and the executive as a result of the event(s) and/or transaction(s) giving cause to such proceeding; and/or (B) the relative fault of the corporation (and its other executives, employees and/or agents) and the executive in connection with such event(s) and/or transaction(s). (2) The executive shall not be entitled to contribution from the corporation under this paragraph (j) if it is determined by the Authority pursuant to paragraph (b), or by the court before which such proceeding was brought, that the executive, in the performance of his duty to the corporation or otherwise, violated the provisions of paragraph(a). (3) The corporation's payment of, and the executive's right to, contribution under this paragraph (j) shall be made and determined in accordance with paragraph (b) hereof relating to the corporation's payment of, and the executive's right to, indemnification under this Bylaw X. (k) SEVERABILITY. In the event that any provision of this Bylaw X shall be deemed invalid or inoperative, or in the event that a court of competent jurisdiction determines that any of the provisions of this Agreement contravene public policy, this Bylaw X shall be construed so that the remaining provisions shall not be affected, but shall remain in full force and effect, and any such provisions which are invalid or inoperative or which contravene public policy shall be deemed, without further action or deed on the part of any person, to be modified, amended and/or limited, but only to the extent necessary to render the same valid and enforceable, and the corporation shall indemnify the executive as to reasonable expenses, judgments, fines and amounts incurred in settlement with respect to any proceeding, no matter by whom brought, including Securities Law proceedings, to the full extent permitted by any applicable provision of this Bylaw X that shall not have been invalidated and to the full extent otherwise permitted by the Wisconsin Business Corporation Law as it may then be in effect. -25- BYLAW XI. FISCAL YEAR The fiscal year of the corporation shall begin on the 1st day of January and end on the 31st day of December in each year. BYLAW XII. SEAL The corporation shall not have a corporate seal, and all formal corporate documents shall, when required, carry the designation "No Seal" along with the signature of the officer or officers. BYLAW XIII. AMENDMENTS Section 13.01. BY SHAREHOLDERS. Except with respect to Sections 2.02, 2.08 and 3.08, and unless a greater number of shares is required under the terms of any section of any bylaw of these Bylaws which has been adopted by the shareholders or by law, these Bylaws may be altered, amended or repealed and new bylaws may be adopted by the shareholders by affirmative vote of not less than a majority of all voting groups of this corporation entitled to vote in the election of directors present or represented at any annual or special meeting of the shareholders at which a quorum is in attendance. Sections 2.02, 2.08 and 3.08 of the Bylaws may be altered, amended or repealed only by the affirmative vote of two-thirds of all voting groups of this corporation entitled to vote in the election of directors at any annual or special meeting of the shareholders at which a quorum is in attendance in addition to the vote or consent of the holders of the stock of this corporation otherwise required by law. Section 13.02. BY DIRECTORS. These Bylaws may also be altered, amended or repealed and new bylaws may be adopted by the Board of Directors by affirmative vote of a majority of the number of directors present at any meeting at which a quorum is in attendance; but no bylaw adopted by the shareholder shall be amended or repealed by the Board of Directors if the bylaw so adopted so provides. Section 13.03. IMPLIED AMENDMENTS. Any action taken or authorized by the shareholders or by the Board of Directors, which would be inconsistent with the bylaws then in effect but is taken or authorized by affirmative vote of not less than the number of shares or the number of directors required to amend the bylaws so that the bylaws would be consistent with such action, shall be given the same effect as though the bylaws had been temporarily amended or suspended so far, but only so far, as is necessary to permit the specific action so taken or authorized. -26- EX-10.1 4 0004.txt BONUS PLAN OF DIRECTORS OF THE BANK Exhibit 10.1 BONUS PLAN OF DIRECTORS OF PEOPLES STATE BANK Directors of the Bank are eligible to receive an annual bonus in a maximum amount of $4,800. The maximum bonus is reduced by $400 for each meeting of the Board not attended after the first absence. EX-10.2 5 0005.txt NON-QUALIFIED RETIREMENT PLAN FOR DIRECTORS Exhibit 10.2 NON-QUALIFIED RETIREMENT PLAN FOR DIRECTORS OF PEOPLES STATE BANK (As adopted May 18, 1981 and amended and terminated as of December 31, 2000 as to any Bank director who did not have at least 15 years of service as a director on December 31, 2000) RESOLVED, that any and all directors who have served the Bank for fifteen (15) years or more shall, upon his or her retirement as a director, be paid a retirement payment quarterly of a sum equal to one- twentieth of 50% of his/her total earnings from the Bank during the five years immediately preceding his or her retirement as such director, such quarterly payment to be made for a period of five (5) years following his or her retirement; however, in the event of the death of such director prior to the expiration of said five (5) year period, the balance of said payments shall be paid either in one lump sum, or in payments to his or her estate, at the discretion of the Board of Directors; And, if any director who has served for more than fifteen (15) years shall die while serving as a director, then said pension payments shall be paid to his or her estate either in one lump sum or in payments, at the discretion of the Board of Directors. Upon resignation by any of the original Board of Directors of said Bank, the status of "Director Emeritus" is hereby conferred upon said retiring director, and said Director Emeritus shall be entitled to attend all directors meetings thereafter, without vote, and without compensation for said attendance. EX-10.4 6 0006.txt CONSULTING AGREEMENT Exhibit 10.4 DESCRIPTION OF CONSULTING AGREEMENT OF CHAIRMAN OF THE BOARD OF PEOPLES STATE BANK The Chairman of the Board shall receive $1,000 per month from the date of his retirement as President of Peoples State Bank (June 15, 1999) through December 31, 2000, for providing consulting services to the Bank in connection with the transition of Bank management and for providing continuity and contact with Bank customers. EX-21.1 7 0007.txt SUBSIDIARIES OF THE COMPANY Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Peoples State Bank, a Wisconsin chartered bank, a wholly owned subsidiary of the Registrant PSB Investments, Inc., a Nevada corporation, a wholly owned subsidiary of Peoples State Bank -----END PRIVACY-ENHANCED MESSAGE-----