-----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, DwhawKMaEOIRaKzDhAkTJDGk0EjgGc0+1D8F0Vsn7ok3rMSYzJYUnyL2CTD0k7li tqkmqSWV6IkcqOJqw6B1nw== 0000916480-02-000005.txt : 20020415 0000916480-02-000005.hdr.sgml : 20020415 ACCESSION NUMBER: 0000916480-02-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 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: 1934 Act SEC FILE NUMBER: 000-26480 FILM NUMBER: 02593038 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: PEOPLES STATE BANK /WI/ DATE OF NAME CHANGE: 19950721 10-K 1 psb10k.txt PSB 10-K 12/31/01 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. For the fiscal year ended December 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ................ to ......................... Commission file number: 0-26480 PSB HOLDINGS, INC. (Exact name of registrant as specified in its charter) WISCONSIN 39-1804877 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1905 W. Stewart Avenue Wausau, Wisconsin 54401 (Address of principal executive offices) (Zip Code) 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 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 (229.405 of this chapter) 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. [X] As of March 22, 2002, 839,416 shares of common stock were outstanding and the total aggregate market value of the common stock held by nonaffiliates of the Registrant was approximately $26,159,000. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement dated March 29, 2002 (to the extent specified herein): Part III -1- FORM 10-K PSB HOLDINGS, INC. TABLE OF CONTENTS PART I ITEM 1. Business 3 2. Properties 8 3. Legal proceedings 8 4. Submission of matters to a vote of security holders 8 PART II 5. Market for registrant's common equity and related stockholder matters 9 6. Selected financial data 10 7. Management's discussion and analysis of financial condition and results of operations 11 7A. Quantitative and qualitative disclosures about market risk 36 8. Financial statements and supplementary data 36 9. Changes in and disagreements with accountants on accounting and financial disclosure 36 PART III 10. Directors and executive officers of the registrant 37 11. Executive compensation 37 12. Security ownership of certain beneficial owners and management 37 13. Certain relationships and related transactions 37 PART IV 14. Exhibits, financial statement schedules, and reports on Form 8-K 38 -2- 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 "Board") 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, 2001. ACQUISITIONS 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 communities of Wausau, Rib Mountain, Marathon, Rhinelander and Eagle River, Wisconsin. The Bank provides various commercial and consumer banking services for customers located principally in Marathon, Lincoln, Oneida and Vilas 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 location, including the sale of annuities, mutual funds and other investments to Bank customers and the general public. The Bank -3- maintains an investment subsidiary in Nevada to manage, hold and trade cash, securities, and loans. 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:
Interest on loans Interest on securities % of total % of total operating operating (dollars in thousands) AMOUNT REVENUE AMOUNT REVENUE Year ended December 31, 2001 $ 19,263 75.6% $ 3,641 14.3% 2000 18,260 78.1% 3,485 14.9% 1999 14,065 74.3% 3,471 18.3%
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. -4- 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 Board (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, 2002, the Bank had 100 full-time equivalent employees, including 24 employed on a part-time basis. None of the Bank's employees is covered by a collective bargaining agreement. EXECUTIVE OFFICERS The executive officers of the Company as of March 19, 2002, their ages and principal occupations during the last five years are set forth below. David K. Kopperud, 56 - President of the Company and the Bank since July, 1999; previously Executive Vice President of the Bank (1994-1999). David A. Svacina, 55 - Vice-President of the Company since March, 2002; Vice President of the Bank. Todd R. Toppen, 43 - Secretary of the Company since March 2002; Treasurer of the Company (1995- March 2002); Vice President of the Bank. Scott M. Cattanach, 33 - Treasurer of the Company since March 2002; Chief Financial Officer of the Bank since March 2002. Prior to March 2002, certified public accountant at regional public accounting firm. 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 Board 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 Board 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 -5- govern the 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 18 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 Board 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 Board 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. -6- 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. 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 Board; (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; -7- (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. 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 six 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. The Rhinelander and Eagle River branches occupy leased space within supermarkets which are designed for commercial banking operations. A new Rhinelander facility is under construction and will open in 2002. ITEM 3. LEGAL PROCEEDINGS. As of December 31, 2001, 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 2001. -8- 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 by one regional broker- dealer on the OTC Bulletin Board under the symbol "PSBQ.OB." Transactions in the Company common stock are limited and sporadic. 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 March 22, 2002, the Company had repurchased all shares covered by that authorization. As of December 31, 2001, and March 12, 2002, there were 839,705 shares and 839,416 shares of the Company's common stock outstanding, respectively. HOLDERS As of December 31, 2001 there were approximately 970 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. At December 31, 2001, the Bank could have paid approximately $6.8 million in additional dividends to the Company without prior regulatory approval. 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. -9- MARKET PRICES AND DIVIDENDS Price ranges of over-the-counter quotations and dividends declared per share on the Company common stock for the periods indicated are:
2001 PRICES 2000 PRICES QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS 1st $29.50 $27.00 $ - $34.00 $34.00 $ - 2nd $40.00 $29.00 $0.38 $34.00 $33.75 $0.38 3rd $31.75 $29.00 $ - $34.00 $29.00 $ - 4th $33.40 $30.75 $0.70 $33.00 $28.00 $0.65
Prices detailed for the common stock represent the bid prices reported on the OTC Bulletin Board. The prices do not reflect retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions. There is no active established trading market. The common stock was first quoted on the OTC Bulletin Board during January 2000. ITEM 6. SELECTED FINANCIAL DATA
Table 1: Earnings Summary and Selected Financial Data 2001 2000 1999 1998 1997 CONSOLIDATED SUMMARY OF EARNINGS: (dollars in thousands, except per share data) Years ended December 31, Total interest income $ 23,428 $ 21,940 $ 17,671 $ 16,746 $ 15,744 Total interest expense 12,468 12,540 8,598 8,722 8,253 Net interest income 10,960 9,400 9,073 8,024 7,491 Provision for loan losses 890 600 460 300 230 Net interest income after provision for loan losses 10,070 8,800 8,613 7,724 7,261 Total noninterest income 2,065 1,446 1,265 1,408 745 Total noninterest expenses 7,316 6,474 6,221 6,115 4,932 Provision for income taxes 1,453 1,102 1,068 928 971 Net income $ 3,366 $ 2,670 $ 2,589 $ 2,089 $ 2,103 -10-
CONSOLIDATED SUMMARY BALANCE SHEETS: As of December 31, 2001 2000 1999 1998 1997 Total assets $ 344,296 $ 306,239 $259,889 $ 233,491 $ 215,019 Total loans receivable, net of loan loss allowances 236,574 224,702 180,524 148,582 147,172 Total deposits 273,635 241,534 202,354 199,800 186,603 Short-term borrowings 4,327 11,515 21,215 4,549 3,960 Long-term borrowings 38,000 28,000 13,000 6,000 3,000 Stockholders' equity 25,349 22,274 21,046 20,556 19,217 PERFORMANCE RATIOS: Basic and diluted earnings per share $ 4.01 $ 3.11 $ 2.93 $ 2.36 $ 2.37 Common dividends declared per share $ 1.08 $ 1.03 $ 1.00 $ 0.93 $ 0.90 Return on average stockholders' equity 13.96% 12.33% 12.31% 10.62% 11.15% Return on average assets 1.05% 0.94% 1.08% 0.96% 1.02% Dividend payout ratio 26.94% 32.64% 34.12% 39.33% 37.85% Average equity to average assets 7.53% 7.63% 8.75% 9.06% 9.15% Net book value per share at year-end $ 30.19 $ 26.53 $ 23.83 $ 23.27 $ 21.76 Net loan charge-offs to average loans 0.14% 0.14% 0.19% 0.13% 0.22% Allowance for loan losses to loans at year-end 1.24% 1.06% 1.15% 1.27% 1.24% Average common shares outstanding 839,705 858,286 883,235 883,235 887,988 Shareholders of record at year-end 970 980 990 975 974 FTE employees at year-end 100 86 91 87 78
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCAL 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, 2001. This discussion should be read in conjunction with the consolidated financial statements, notes, tables, and the selected financial data presented elsewhere in this report. All figures are in thousands, except per share data. 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 that 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 -11- results see Item 1, Cautionary Statement Regarding Forward-Looking Information, in this Annual Report on Form 10-K for the year ended December 31, 2001. RESULTS OF OPERATIONS 2001 COMPARED TO 2000 The Company's consolidated net income for 2001 was $3,366, an increase of $696 or 26.1% higher than 2000. Basic and diluted earnings per share for 2001 were $4.01, a 28.9% increase over 2000 basic and diluted earnings per share of $3.11. Return on average common stockholders' equity and return on average assets were 13.96% and 1.05% for 2001 compared to 12.33% and .94% for 2000. Cash dividends paid in 2001 increased by 4.9% to $1.08 per share over the $1.03 per share paid in 2000. Current year profits were significantly impacted by the following factors: Taxable equivalent net interest income grew $1,665, or 17.1% from $9,732 in 2000 to $11,397 in 2001. Taxable equivalent interest income was $23,865 for 2001, $1,593 or 7.2% higher than 2000. However, interest expense decreased by $72. Increases in volume and changes in product mix added $1,703 to taxable equivalent net interest income, whereas changes in the rate environment of 2001 resulted in a $38 decrease. The allowance for loan losses increased $562 from $2,407 in 2000 to $2,969 in 2001. Net loan charge-offs increased $37 from $292 in 2000 to $329 in 2001 and were .14% of average loans outstanding in both 2001 and 2000. The ratio of allowance for loan losses to loans increased to 1.24% from 1.06% due to additional provisions to the allowance for loan losses beyond that needed for new loan growth. Provision for loan losses grew $290, from $600 in 2000 to $890 in 2001. Noninterest income was $2,065 for 2001, $619 or 42.8% higher than 2000. The primary reason for the increase was additional income from the sale of long-term fixed rate secondary market loans. Gain on sale of such loans was $683 in 2001 compared to $66 in 2000. Separate from this activity, noninterest income increased $2 during 2001. Noninterest expense was $7,316 in 2001, $842 or 13.0% higher than 2000. Salaries and employee benefits increased $578, while data processing and office operations increased $63, and advertising and promotion increased $96. Separate from these activities, noninterest expense increased $105 during 2001. 2000 COMPARED TO 1999 The Company's consolidated net income for 2000 was $2,670 compared with $2,588 in 1999. Net income increased 3.1% in 2000 from 1999. Return on average common stockholders' equity was 12.33% in 2000 compared to 12.31% in 1999. Return on average assets for 2000 was .94% compared to 1.08% for 1999. -12- Net income per share amounted to $3.11 in 2000, compared to $2.93 in 1999. Cash dividends declared in 2000 was $1.03 per share, compared to $1.00 in 1999. The per share ratio of dividends to shareholders to net income was 32.64% in 2000, compared to 34.12% in 1999. 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 that reflect changes in market prices and rates can be found in footnote 20 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 change 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. INCOME STATEMENT ANALYSIS 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. Additionally, net interest income is impacted by the sensitivity of the balance sheet to change in interest rates, contractual maturities, and repricing frequencies. 2001 COMPARED TO 2000 Fully taxable equivalent net interest income was $11,397 for 2001, an increase of $1,665 or 17.1% from 2000. The increase in fully taxable equivalent net interest income was due primarily to an increase in earning assets of 13.5% during 2001. To a lesser extent, taxable equivalent net interest income increased due to an increased interest rate spread caused by a liability sensitive repricing gap during 2001's falling interest rate environment. -13- As indicated in tables 2 and 3, increases in volume and changes in the mix of both earning assets and interest bearing liabilities added $1,703 to fully taxable equivalent net interest income, and the changes in the interest rates resulted in a $38 decrease, for a net increase of $1,665. The net interest margin and interest rate spread improved to 3.73% and 3.02% compared to 3.62% and 2.83% in 2000. For 2001, the yield on earning assets decreased 47 basis points, decreasing interest income by $1,654 while the cost of interest bearing liabilities decreased 66 basis points, decreasing interest expense by $1,616 for a net decrease of $38 in fully taxable equivalent net interest income as a result in changes in interest rates. The decrease in net interest margin was impacted by the interest rate environment of 2001 causing the liability sensitive balance sheet of the Company to reprice at the declining interest rates. However, the Company had a substantial portion of earning assets in liquid and overnight funds which earned interest at currently declining interest rates despite maintaining a liability sensitive balance sheet. The growth and composition change of earning assets contributed an additional $3,247 to fully taxable equivalent net interest income, while the growth and composition of interest bearing liabilities cost an additional $1,544, netting a $1,703 increase in fully taxable equivalent net interest income. Average earning assets were $305,499 in 2001, an increase of $36,429 or 13.5%, from 2000. Average interest bearing liabilities increased $30,596, or 13.3% from 2000. The composition of interest bearing liabilities shifted from higher cost short-term borrowings to more core deposit lower interest rate products and fixed rate long term borrowings. Total borrowings were $44,178 on average for 2001, up $5,212 or 13.4%. Total interest bearing deposits cost 4.52% on average for 2001 (77 basis points less than last year), while wholesale borrowings cost 6.11% (14 basis points less than last year). 2000 COMPARED TO 1999 The 2000 figures as a percent of average earning assets reflect an increase in interest rates during 2000. Loans are the largest component of earning assets. On average, loans grew $43,598 to $207,527 for 2000, and represented 77.13% 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 23 basis points to 8.81% in 2000. The yield was strongly impacted by the loans tied to the prime lending rate repricing immediately with a change in the rate. The prime rate increased 1.0% during 2000 from 6.5% to 7.5%. 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 $22,636 for 2000, and represented 83.05% of interest bearing liabilities, compared to 89.92% for 1999. As a result, the Bank had -14- greater dependence on wholesale funds to fund the asset growth. On average, borrowed funds increased $20,137 to $38,966 in 2000. During 2000 the gross yield on interest earning assets increased 32 basis points. The average rate on taxable investment securities increased 12 basis points in 2000 to 6.20%, up from 6.08% 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. The average rate on all interest bearing liabilities increased by 85 basis points in 2000 to 5.45% up from 4.60% in 1999. The table on the following page sets forth average consolidated balance sheet data and average rate data on a tax equivalent basis for the periods, indicated. -15-
Table 2: Average Balances and Interest Rates (dollars in thousands) 2001 2000 1999 Average Yield/ Average Yield/ Average Yield/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE Assets Interest earning assets: Loans (1)(2)(3) $ 226,819 $ 19,301 8.51% $ 207,527 $ 18,283 8.81% $ 163,929 $14,065 8.58% Taxable securities 48,272 2,866 5.94% 46,568 2,889 6.20% 46,406 2,821 6.08% Tax-exempt securities (2) 17,191 1,174 6.83% 13,074 905 6.92% 14,251 985 6.91% Other interest income 13,217 524 3.96% 1,901 195 10.26% 1,496 135 9.02% Total (2) 305,499 23,865 7.81% 269,070 22,272 8.28% 226,082 18,006 7.96% Non-interest earning assets: Cash and due from banks 9,223 8,467 8,694 Premises and equipment, Net 4,557 4,352 3,892 Other assets 3,447 4,178 3,843 Allowance for loan Losses (2,642) (2,280) (2,085) Total $ 320,084 $ 283,787 $ 240,426 Liabilities & stockholders' equity Interest bearing liabilities: Savings and demand Deposits $ 101,238 $ 3,261 3.22% $ 86,926 $ 3,972 4.57% $ 74,835 $ 2,712 3.62% Time deposits 115,093 6,509 5.66% 104,021 6,134 5.90% 93,069 4,873 5.24% Short-term borrowings 6,414 432 6.74% 17,233 1,140 6.62% 11,661 640 5.49% Long-term borrowings 37,764 2,266 6.00% 21,733 1,294 5.95% 7,168 373 5.20% Total 260,509 12,468 4.79% 229,913 12,540 5.45% 186,733 8,598 4.60% Non-interest bearing liabilities: Demand deposits 32,710 30,209 30,616 Other liabilities 2,757 2,005 2,039 Stockholders' equity 24,108 21,660 21,038 Total $ 320,084 $ 283,787 $ 240,426 Net interest income 11,397 9,732 9,408 Rate spread 3.02% 2.83% 3.36% Net yield on interest earning assets 3.73% 3.62% 4.16% (1) Non-accrual loans are included in the daily average loan balances outstanding. (2) The yield on tax-exempt loans and securities is computed on a tax- equivalent basis using a tax rate of 34% (3) Loan fees are included in total interest income as follows: 2001-$344, 2000-$240, 1999-$172.
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Table 3: Interest Income and Expense Volume and Rate Analysis 2001 compared to 2000 2000 compared to 1999 increase (decrease) due to (1) increase (decrease) due to (1) (dollars in thousands) VOLUME RATE NET VOLUME RATE NET Interest earned on: Loans (2) $ 1,698 $ (680) $ 1,018 $ 3,741 $ 477 $ 4,218 Taxable securities 103 (126) (23) 12 56 68 Tax-exempt securities (2) 284 (15) 269 (81) 1 (80) Other interest income 1,162 (833) 329 36 24 60 Total 3,247 (1,654) 1,593 3,708 558 4,266 Interest paid on: Savings and demand deposits 656 (1,367) (711) 434 826 1,260 Time deposits 651 (276) 375 574 687 1,261 Short-term borrowings (716) 8 (708) 305 195 500 Long-term borrowings 953 19 972 758 163 921 Total 1,544 (1,616) (72) 2,071 1,871 3,942 Net interest earnings $ 1,703 (38) $ 1,665 $ 1,637 $ (1,313) $ 324 (1)The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2)The yield on tax-exempt loans and investment securities has been adjusted to its fully taxable equivalent using a 34% tax rate.
Table 4: Yield on Earning Assets Year ended December 31, 2001 2000 1999 YIELD CHANGE YIELD CHANGE YIELD CHANGE Yield on earning assets 7.81% -0.47% 8.28% 0.32% 7.96% -0.31% Effective rate on all liabilities as a percent of earning assets 4.08% -0.58% 4.66% 0.86% 3.80% -0.43% Net yield on earning assets 3.73% 0.11% 3.62% -0.54% 4.16% 0.12%
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Table 5: Mix of Average Interest-Earning Assets and Average Interest- Bearing Liabilities Year ended December 31 2001 2000 1999 Loans 74.25% 77.13% 72.51% Taxable securities 15.80% 17.31% 20.53% Tax-exempt securities 5.63% 4.86% 6.30% Other 4.32% 0.70% 0.66% Total interest earning assets 100.00% 100.00% 100.00% Savings and demand deposits 38.86% 37.81% 40.08% Time deposits 44.18% 45.24% 49.84% Short-term borrowings 2.46% 7.50% 6.24% Long-term borrowings 14.50% 9.45% 3.84% Total interest bearing liabilities 100.00% 100.00% 100.00%
NONINTEREST INCOME Noninterest income was $2,065 for 2001, $619 or 42.8% higher than 2000. Noninterest income as a percentage of total revenues was 8.1% for 2001 compared to 6.2% last year.
Table 6: Noninterest Income % Change from Years Ended December 31, prior year (dollars in thousands) 2001 2000 1999 2001 2000 Noninterest income: Service fees $ 1,010 $ 855 $ 709 18.1% 20.6% Gain on sale of loans 683 66 223 934.8% -70.4% Investment sales commissions 183 195 138 -6.2% 41.3% Other 189 330 195 -42.7% 69.2% Total noninterest income $ 2,065 $ 1,446 $ 1,265 42.8% 14.3%
Service fees were $1,010, $155 or 18.1% higher than 2000. Service fees as a percent of average noninterest bearing demand deposits were 3.1% in 2001 compared to 2.8% in 2002. due in part to an increase in the annual fee to maintain an overdraft protection account. -18- Noninterest income from the sale of long-term fixed rate residential mortgage loans increased from $66 in 2000 to $683 during 2001. The increase was largely a result of historically low long-term fixed rates for residential mortgages. Consequently, many existing customers and new customers refinanced existing adjustable rate mortgages or purchased new homes to take advantage of these historically low mortgage rates. During 2001 a total of $60,251 of fixed rate residential mortgages were sold to outside investors and the Federal Home Loan Bank. Investment product commissions consist of annuity sales, brokerage services, mutual fund sales, life insurance commissions, and self- directed IRA fees. Investment product commissions decreased $12 or 6.2% from last year. The change was predominantly due to a decrease in the fair market value of assets under management, primarily from the declines in the stock and bond markets during 2001. Other operating income during 2000 included $39 from a gain on sale of student loans. There were no student loan sales during 2001. In addition, during the third quarter 2001, the annual check card and bank credit card fees were discontinued, decreasing 2001 other income by $20 compared to 2000. Gain on sale of premises and equipment is also included in other income and was $48 in 2001 and $69 in 2000. Separate from these items, other income decreased $61 compared to 2000. NONINTEREST EXPENSE Total noninterest expense increased $842 to $7,316 during 2001, representing a 13.0% increase over 2000.
Table 7: Noninterest Expense % Change from Years Ended December 31, prior year (dollars in thousands) 2001 2000 1999 2001 2000 Noninterest expense: Salaries and employee benefits $ 4,419 $ 3,842 $ 3,621 15.0% 6.1% Occupancy 917 937 859 -2.1% 9.1% Data processing and office operations 523 460 441 13.7% 4.3% Advertising and promotion 307 211 222 45.5% -5.0% Other 1,150 1,024 1,078 12.3% -5.0% Total noninterest expense $ 7,316 $ 6,474 $ 6,221 13.0% 4.1%
Salaries and employee benefits increased $577 or 15.0% over 2000 and represented 60.4% of total noninterest expense in 2001 compared to 59.3% in 2000. The increase includes an additional $103 in 401(k) profit sharing expense for 2001 over 2000. The increase also includes -19- incentive compensation pay earned by employees in 2001 under the incentive plan totaling $294. There was no incentive compensation pay earned in 2000. The average number of full time equivalent employees increased from 89 in 2000 to 93 in 2001. Separate from the increase in profit sharing expense and incentive pay noted above, average salaries and benefits per full time equivalent employee increased .2% during 2001. Occupancy expense was $917 for 2001 decreasing 2.1% from last year. The majority of the decrease was due to reduced depreciation expense of $31, much of it related to original furniture and fixtures costs at the Bank's Rib Mountain, and Marathon branch locations now being fully depreciated. The Eagle River branch location opened later in 2001 and had minimal impact on 2001 occupancy costs. Data processing costs increased $63 or 13.7% during 2001 reflecting the increasing cost of software maintenance contracts and paper and forms supplies. Advertising and promotion expense increased $96, or 45.5% during 2001. The Bank expanded its internal marketing staff and contracted with an independent consultant to improve and expand ongoing marketing initiatives. Additional advertising costs were also incurred in connection with opening of the new Eagle River branch location. Other operating expense increased $126 or 12.3% in 2001. The majority of the change is due to $104 of expense related to settlement related to benefits vested under the previously terminated directors' retirement plan. Separate from this expense, other operating expense increased $22, or 2.1% over 2000. PROVISION FOR LOAN LOSSES The adequacy of the allowance for loan losses is assessed based upon credit quality, existing economic conditions and loss exposure by loan category. Management determines 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 uncollectible, these amounts are promptly charged off against the allowance. The provision for loan losses was $890 in 2001; compared to $600 in 2000 and $460 in 1999. See additional discussion under section, "Allowance for Loan Losses." INCOME TAXES The effective tax rate was 30.2% in 2001, 29.2% in 2000, and 29.2% in 1999. See footnote 14 to the financial statements for additional tax information. -20-
SUMMARY OF QUARTERLY RESULTS Year ended December 31, 2001 Three months ended (dollars in thousands, except per share data) MARCH 31 JUNE 30 SEPT 30 DEC 31 2001 Interest income $ 6,046 $ 5,979 $ 5,833 $ 5,570 Interest expense 3,559 3,349 2,924 2,636 Net interest income 2,487 2,630 2,909 2,934 Provision for loan losses 150 150 150 440 Net income applicable to common stock 769 839 885 873 Basic and diluted earnings per share $ 0.91 $ 1.00 $ 1.05 $ 1.05 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 Basic and diluted earnings per 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 Basic and diluted earnings per share $ 0.72 $ 0.82 $ 0.86 $ 0.53
BALANCE SHEET ANALYSIS INVESTMENT PORTFOLIO The investment securities portfolio is intended to provide the Company with adequate liquidity, flexible asset/liability management and a source of stable income. All but tax-exempt municipal securities are classified as available for sale and reported at fair value. Unrealized gains and losses are excluded from earnings but are reported as other comprehensive income in a separate component of stockholders' equity, net of income tax. Tax-exempt municipal securities are considered held to maturity and are recorded at net amortized cost. The investment -21- portfolio represented 21% and 22% of average earning assets in 2001 and 2000, respectively.
Table 8: Investment Securities Portfolio Maturities After one but After five but Within one year within five years within ten years After ten years (dollars in thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD U. S. Treasury securities and obligations of U.S. government $ 2,017 6.15% $ 6,102 5.35% $ 1,554 5.37% Mortgage backed securities 6,727 6.15% 33,585 5.96% Obligations of states and political subdivisions (1) 886 7.28% 5,515 6.90% 13,886 6.60% Other equity securities 173 0.95% Totals $ 3,076 6.18% $ 11,617 6.09% $ 22,167 6.38% $ 33,585 5.96%
At December 31, 2001, the Company's securities portfolio did not contain securities of any single issuer where the aggregate carrying value of such securities exceeded 10% of stockholders' equity. Securities with an approximate carrying value of $9,225 and $12,555, at December 31, 2001 and 2000, respectively, were pledged primarily to secure public deposits, short-term borrowings, and for other purposes required by law. -22-
Table 9: Investment Securities Distribution Years Ended Dec. 31 (dollars in thousands) 2001 2000 1999 Amortized Fair Amortized Fair Amortized Fair COST VALUE COST VALUE COST VALUE U.S. Treasury securities and obligations of U.S. government $ 9,516 $ 9,673 $ 24,572 $ 24,410 $ 26,798 $ 25,826 Mortgage backed securities 39,717 40,312 23,706 23,664 20,448 19,916 Obligations of states and political subdivisions 20,287 20,355 13,975 14,005 13,843 13,473 Other equity securities 173 173 48 48 48 48 Total $ 69,693 $ 70,513 $ 62,301 $ 62,127 $ 61,137 $ 59,263
The market value of the investment portfolio as a percentage of book value has increased due to the decrease in overall market interest rates. At December 31, 2001 market value was 101.2% of book value. The net unrealized gain on securities available for sale, recorded as a separate component of stockholders' equity, was $491, net of deferred taxes of $260 compared to a loss of $125, net of deferred income taxes of $79 at December 31, 2000. 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 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 $125, net of deferred income taxes of $79, compared to a loss of $1,043, net of deferred taxes of $461 at December 31, 1999. The Bank's investment subsidiary, PSB Investments, Inc., was formed in May, 1992, and currently holds approximately $64,456 in investment securities and loans at book value. Income tax expense for 2001 was approximately $213 lower as a result of holding these investments and loans at the subsidiary. As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to hold stock in the FHLB based on total assets and anticipated level of long-term borrowings to be advanced to the Bank. This stock has a purchase cost and par value of $100 per share. The stock is recorded at cost which approximates market value. Transfer of the stock is substantially restricted. The stock earns a quarterly dividend generally approximating .75% over the moving average of one-year LIBOR. -23- The dividend rate paid on FHLB stock was 6.34%, 7.47%, and 6.69% in 2001, 2000, and 1999, respectively. LOANS Total loans as presented in Table 10 include loans held for sale to the secondary market and construction loans not yet fully disbursed. Total loans were $244,551 at December 31, 2001, an increase of $14,142 or 6.1% over December 31, 2000.
Table 10: Loan Composition (dollars in thousands) 2001 2000 1999 1998 1997 % of % of % of % of % of AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL Commercial, industrial and agricultural $ 55,363 22.64% $ 53,421 23.19% $ 51,054 27.45% $ 40,514 26.37% $ 33,801 22.64% Real estate mortgage (commercial and residential) 158,849 64.96% 149,859 65.04% 111,923 60.17% 89,617 58.33% 95,442 63.92% Real estate loans held for sale 1,403 0.57% 114 0.05% 0.00% 3,120 2.03% 301 0.20% Real estate construction 15,609 6.38% 11,231 4.87% 9,654 5.19% 8,643 5.63% 7,511 5.03% Consumer and individual 13,327 5.45% 15,784 6.85% 13,375 7.19% 11,755 7.64% 12,262 8.21% Totals $ 244,551 100.00% $ 230,409 100.00% $186,006 100.00% $ 153,649 100.00% $149,317 100.00%
Retained, in-house real estate mortgage loans totaled $158,849 at the end of 2001 and $149,859 at the end of 2000. Loans in this classification include $72,299 of loans secured by 1-to-4 family residential properties. Residential real estate loans consist of home mortgages, home equity lines, and second mortgages. In addition to residential real estate loans retained by the Company and recognized on the balance sheet, the Company also services approximately $36 million of residential real estate loans which have been sold to the Federal Home Loan Bank (FHLB) under the Mortgage Partnership Finance Program. As part of the asset/liability and interest rate sensitivity management strategy, the Company does not retain long term 15 to 30 year fixed rate mortgages in their own portfolio. These serviced loans are not recognized on the Company's balance sheet. A servicing fee equal to .25% of outstanding principal is retained from payments collected from the customer as payment for servicing the loan for the FHLB. -24- Historically low long-term fixed rate mortgage interest rates during 2001 increased the amount of loans originated and subsequently sold to the FHLB from approximately $1 million at December 31, 2000. During 2001, the Company recognized a mortgage servicing right asset due to the substantial volume of loans now serviced for the FHLB. Recognition of initial mortgage servicing rights of $320 increased the gain on sale of loans during 2001. The mortgage servicing right is amortized as a reduction to loan servicing income over the estimated servicing life of the loan in proportion to the amount of servicing fees collected. The amortization period takes into account the likelihood that the loan will be prepaid or refinanced prior to the original term. The anticipated servicing period used to amortize mortgage servicing rights ranges from 6 years for a 15 year fixed rate loan up to 10 years for a 30 year fixed rate loan. These amortization periods are based on Company experience and standards recognized within the mortgage servicing industry and would be accelerated in the event repayment occurred faster than originally anticipated. Mortgage servicing rights are recorded at the lower of amortized cost or fair value. At December 31, 2001, mortgage servicing rights included in Other Assets on the balance sheet were $284. Mortgage servicing right amortization of $37 was recorded during 2001. There were no mortgage servicing rights recorded during 2000. Commercial loans were $55,363 at the end of 2001, up $1,942 since year- end 2000, but comprising 22.6% of the total loans outstanding, down from 23.2% at the end of 2000. The commercial, industrial, and agricultural loan classification primarily consists of commercial loans to small businesses. Loans of this type are in a broad range of industries. Loans to finance agricultural production totaled just $2,908 or 1.2% of total loans. Real estate construction loans grew 39.0% to $15,609 at the end of 2001 compared to $11,231 at the end of 2000. Loans in this classification are primarily short-term loans that provide financing for the acquisition or development of commercial real estate, such as multi- family or other commercial development projects. Installment loans to consumers and individuals totaled $13,327, down from $15,784 at year-end 2000. Installment loans include short-term installment loans, automobile loans, recreational vehicle loans, credit card loans, and other personal loans. The Bank experiences extensive competition from local credit unions offering low rates on installment loans. -25-
Table 11: Loan Maturity Distribution and Interest Rate Sensitivity (dollars in thousands) Loan Maturity One year Over one year Over OR LESS TO FIVE YEARS FIVE YEARS Commercial, industrial and agricultural $ 28,915 $ 24,728 $ 1,720 Real estate mortgage (commercial and residential) 63,475 93,616 1,758 Real estate loans held for sale 1,403 Real estate construction 15,609 Consumer and individual 1,124 11,107 1,096 Totals $ 110,526 $ 129,451 $ 4,574 Fixed rate $ 81,598 $ 2,541 Variable rate 47,853 2,033 Totals $ 129,451 $ 4,574
The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic conditions. At December 31, 2001, no concentrations existed in the Company's portfolio in excess of 10% of total loans. ALLOWANCE FOR LOAN LOSSES 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. During 2001, the allowance for loan losses grew from $2,407 at December 31, 2000 to $2,969 at December 31, 2001. As of December 31, 2001 the allowance for loan losses as a percentage of total loans outstanding was 1.24% and was 60.4% of nonperforming loans, compared to 1.06% and 55.1%, respectively, at December 31, 2000. In addition to coverage from the allowance for loan losses, nonperforming loans are secured by various collateral including real estate and consumer collateral. -26-
Table 12: Loan Loss Experience (dollars in thousands) Years ended December 31 2001 2000 1999 1998 1997 Average balance of loans for period $ 226,819 $ 207,527 $ 163,929 $ 148,806 $ 140,962 Allowance for loan losses at beginning of year $ 2,407 $ 2,099 $ 1,947 $ 1,845 $ 1,925 Loans charged off: Commercial, industrial and agricultural (148) (250) (322) (138) (156) Real estate mortgage (commercial and residential) (75) (14) (72) (136) Consumer and individual (107) (51) (38) (69) (59) Total charge-offs (330) (315) (432) (207) (351) Recoveries on loans previously charged-off: Commercial, industrial and agricultural 1 16 67 17 Real estate mortgage (commercial and residential) 3 7 19 Consumer and individual 1 4 50 9 5 Total recoveries 2 23 124 9 41 Net loans charged-off (328) (292) (308) (198) (310) Provision for loan losses 890 600 460 300 230 Allowance for loan losses at end of year $ 2,969 $ 2,407 $ 2,099 $ 1,947 $ 1,845 -27- Ratio of net charge-offs during the year to average loan 0.14% 0.14% 0.19% 0.13% 0.22% Ratio of allowance for loan losses to loans receivable at end of year 1.24% 1.06% 1.15% 1.27% 1.24%
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, and current economic conditions. The Company has an internal risk analysis and review staff that continuously reviews loan quality. The allocation of the year-end allowance for loan losses for each of the past five years based on management's estimates of loss exposure by category of loans is shown in Table 13. The allocation methodology applied by the Company focuses on changes in the size and character of the loan portfolio, current and expected economic conditions, the geographic and industry mix of the loan portfolio and historical losses by category. The total allowance is available to absorb losses from any segment of the portfolio. Management allocates the allowance for credit losses by pools of risk. The Company combines estimates of the allowance needed for loans analyzed individually and loans analyzed on a pool basis. The determination of allocated reserves for larger commercial loans involves a review of individual higher-risk transactions, focusing on loan grading, and assessment of specific loss content and possible resolutions of problem credits. During 2001, the Company expanded ongoing credit review and risk rating procedures. As a result, loan loss allowance allocations were updated on a basis different than prior years. The new basis is considered to more accurately match loss allowance with nonperforming, or other loans with heightened risk factors. The primary impact of this allocation change was to decrease allowances allocated to consumer and individual loans, and to increase allowances allocated to real estate mortgage loans. As a FHLB Mortgage Partnership Finance loan servicer (as described in the LOANS section above), the Company has provided a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of the original loan principal sold to the FHLB. At December 31, 2001, the maximum Company obligation for such guarantees would be approximately $131 if total foreclosure losses on the entire pool of approximately $36 million loans exceeded $510. In exchange for this guarantee, the Company is paid a "credit enhancement" fee of .07% of outstanding serviced principal in addition to the .25% collected for servicing the loan for the FHLB. These first mortgage loans are underwritten using standardized and conservative criteria on residential properties in the Bank's local communities. As an indicator of foreclosure loss exposure on these FHLB guaranteed loans, CUMULATIVE net loan charge-offs on mortgage loans retained by the bank in their own portfolio were approximately .15% of average mortgage principal during the 5 years ended December 31, 2001. Management believes loans serviced for the FHLB will realize minimal foreclosure losses in the future and -28- that the Company will experience no loan losses related to charge-offs in excess of the FHLB 1% loss pool. In the opinion of management, the allowance for loan losses is adequate as of December 31, 2001. While management uses available information to recognize losses on loans, future adjustments may be necessary based on changes in economic conditions.
Table 13: Allocation of the Allowance for Loan Losses As of December 31, (dollars in thousands) 2001 2000 1999 1998 1997 Commercial, industrial and agricultural $ 1,738 $ 1,467 $ 1,263 $ 1,120 $ - Real estate mortgage (commercial and residential) 591 249 217 201 Consumer and individual 89 369 322 298 Impaired loans 551 322 297 328 178 Unallocated - - - - 1,667 Totals $ 2,969 $ 2,407 $ 2,099 $ 1,947 $1,845
Net loans charged off were $328 or .14% of average loans for 2001, compared to $292 or .14% of average loans for 2000, and were $308 or .19% of average loans for 1999. Loans charged off are subject to continuous review and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses. Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past due but still accruing, loans defined as impaired under current accounting standards, and restructured loans. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Previously accrued and uncollected interest on such loans is reversed, and income is recorded only to the extent that interest payments are subsequently received and principal is collectible. Loans past due 90 days or more but still accruing interest are also included in nonperforming loans. Also included in nonperforming loans are restructured loans. Restructured loans involve the granting of concession to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate. The majority of restructured loans represent capitalized loan principal and/or interest that borrowers were unable to repay according to the original repayment terms. Such loans are subject to senior management review and ongoing monitoring and are made in cases where the borrower's delinquency is considered short-term from circumstances the borrower is believed able to overcome. -29-
Table 14: Nonperforming Loans and Foreclosed Assets December 31, (dollars in thousands) 2001 2000 1999 1998 1997 Nonaccrual loans not considered impaired $ 1,801 $ 1,123 $ 620 $ 582 $ 835 Impaired loans 2,112 1,901 2,206 970 1,124 Accruing loans past due 90 days or more - - - - 7 Restructured loans 999 1,348 278 296 618 Total non-performing loans $ 4,912 $ 4,372 $ 3,104 $ 1,848 $ 2,584 Foreclosed assets $ 421 $ 17 $ 24 $ - $ 336
Nonperforming loans at December 31, 2001, were $4,912, an increase of $540 from December 31, 2000. Interest payments on nonaccrual and impaired loans are typically applied to principal unless collectability of the principal amount is fully assured, in which case interest is recognized on the cash basis. The interest that would have been reported in 2001 if all such loans had been current throughout the year in accordance with their original terms was $228 in comparison to $160 actually collected. The total reduction in interest income during 2000 as a result of discontinuing the accrual of interest on loans that are delinquent for over 90 days was $135,000. DEPOSITS Deposits are the Company's largest source of funds. At December 31, 2001, deposits were $273,635, up $32,101 or 13.3% over last year. At year-end, noninterest bearing demand deposits were approximately $9 million greater than the 2001 average balance due to collections of municipal deposits and increased seasonal consumer retail demand deposits. The Company's retail deposit growth is continuously influenced by competitive pressure from other financial institutions, as well as other investment opportunities available to customers. During 2001, the Company experienced a shift of deposit mix to more short-term liquid accounts from time deposits due to the interest rate environment. -30-
Table 15: Average Deposits Distribution 2001 2000 1999 Interest Interest Interest (dollars in thousands) AMOUNT RATE PAID AMOUNT RATE PAID AMOUNT RATE PAID Noninterest bearing demand deposits $ 32,710 n/a $ 30,209 n/a $ 30,616 n/a Interest bearing demand and savings deposits 101,238 3.22% 86,926 4.57% 74,835 3.62% Time deposits 115,093 5.66% 104,021 5.90% 93,069 5.24% Totals $ 249,041 3.92% $ 221,156 4.57% $ 198,520 3.82%
On average, deposits were $249,041 for 2001, up $27,885 or 12.6% over the average for 2000. Average savings deposits, including money markets, increased $14,312 or 16.5% over 2000. Table 16: Maturity Distribution of Certificates of Deposit of $100,000 42,327 or More (dollars in thousands) DECEMBER 31, 2001 3 months or less $ 10,759 Over 3 months through 6 months 9,668 Over 6 months through 12 months 16,445 Over 1 year through 5 years 16,359 Totals $ 53,231 OTHER FUNDING SOURCES Other funding sources, including short-term borrowings and long-term debt, were $42,327 at December 31, 2001 up $2,812 from $39,515 at December 31, 2000. Short-term borrowings at December 31, 2001 consist of securities sold under repurchase agreements. The repurchase agreements are payable on demand. Other available short-term borrowings include federal funds purchased and the FHLB open line of credit, which were not used at December 31, 2001. During 2001, higher rate repurchase agreement borrowings were replaced with long-term fixed rate FHLB advances. Long-term debt at December 31, 2001, was $38,000 up from $28,000 at the end of last year. -31- The mix of other funding sources shifted toward longer-term borrowings, with average long-term debt representing 85.5% of other funding sources from 55.8% last year, in response to asset/liability objectives. Average long-term debt increased $16,031 during 2001. Within the short- term borrowing category average, draws on the FHLB open line of credit and securities sold under repurchase agreements were down $10,819.
Table 17: Short-term Borrowings December 31, (dollars in thousands) 2001 2000 1999 Securities sold under repurchase agreements $ 4,327 $ 7,662 $ 10,738 Federal funds purchased 10,477 FHLB open line of credit 3,853 Totals $ 4,327 $ 11,515 $ 21,215 Average amounts outstanding during the year $ 6,414 $ 17,233 $ 11,661 Avg. interest rates on amounts outstanding during year 6.74% 6.62% 5.49% Maximum month-end amounts outstanding $ 9,047 $ 26,863 $ 21,215 Average interest rate on amounts outstanding at end of year 5.01% 6.83% 5.90%
LIQUIDITY AND INTEREST RATE 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 Bank's primary funding source is deposits. Average deposits as a percentage of other funding sources used were 84.9% at December 31, 2001 and 85.0% at December 31, 2000. Other funding sources represent the balance of the Bank's total funding needs. The primary funding sources utilized are long-term fixed rate and short-term variable rate Federal Home Loan Bank advances, federal funds purchased, brokered CDs, and repurchase agreements from a base of individuals, businesses, and public entities. 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. Table 18 represents the Company's earning sensitivity to changes in interest rates at December 31, 2001. It is a static indicator which does not reflect various repricing characteristics and may not indicate the sensitivity of net interest income in a changing interest rate environment. -32- Table 18 reflects a positive gap position in all individual (not cumulative) categories except 91 to 180 days, and 181 to 365 days. The cumulative one-year gap ratio is negative at 88.24%. The Bank believes the cumulative gap position at December 31, 2001 was adequate considering anticipated changes in interest rates in the upcoming 1 year period. A significant portion of consumer deposits do not re-price or mature on a contractual basis. Rather, the Bank has the ability to re- price or change these deposits on demand. 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 attempts to distribute 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. These assumptions allocate interest bearing demand deposits and money market funds as 30%, 20%, 20%, and 30% of balances to the 0-90 days, 181-365 days, 1-5 years, and beyond 5 year categories, respectively. The assumptions also allocate savings (excluding time deposits) balances as 10%, 15%, 15%, and 60% of balances to the 0-90 days, 181-365 days, 1-5 years, and beyond 5 year categories, respectively. The Asset/Liability Committee uses financial modeling techniques that measure the interest rate risk. Policies established by the Bank's Asset/Liability Committee are intended to limit exposure of earnings at risk. Management considers that an acceptable range for the rate sensitivity ratio is 70-150%. -33-
Table 18: Interest rate sensitivity gap analysis December 31, 2001 (dollars in thousands) 0-90 DAYS 91-180 DAYS 181-365 DAYS 1-5 YRS. BEYOND 5 YRS. TOTAL Earning assets: Loans $ 56,111 $ 21,949 $ 28,861 $ 129,451 $ 4,574 $ 240,946 Securities 1,791 749 536 11,617 55,752 70,445 Other earning assets 10,965 10,965 Total $ 68,867 $ 22,698 $ 29,397 $ 141,068 $ 60,326 $ 322,356 Cumulative rate sensitive assets $ 68,867 $ 91,565 $ 120,962 $ 262,030 $ 322,356 Interest-bearing liabilities Interest-bearing deposits $ 51,154 $ 24,564 $ 58,598 $ 59,248 $ 38,564 $ 232,128 Other interest-bearing borrowings 1,361 773 640 36,553 3,000 42,327 Total $ 52,515 $ 25,337 $ 59,238 $ 95,801 $ 41,564 $ 274,455 Cumulative interest sensitive liabilities $ 52,515 $ 77,852 $ 137,090 $ 232,891 $ 274,455 Interest sensitivity gap for the individual period $ 16,352 $ (2,639) $ (29,841) $ 45,267 $ 18,762 Cumulative interest sensitivity gap $ 16,352 $ 13,713 $ (16,128) $ 29,139 $ 47,901 Cumulative ratio of rate sensitive assets to rate sensitive liabilities 131.14% 117.61% 88.24% 112.51% 117.45%
CAPITAL ADEQUACY Stockholders' equity at December 31, 2001, increased to $25,349, or $30.19 per share compared with $22,274 or $26.53 per share at the end of 2000. The primary increase in stockholders' equity in 2001 was net income ($3,366) in excess of cash dividends paid to shareholders ($907), of $2,459. Cash dividends paid in 2001 were $1.08 per share compared to $1.03 per share in 2000. The 2001 dividend payout ratio as a percentage of net income was 26.94% in 2001 compared to $32.64% in 2000. Capital at year-end 2001 included $491 related to unrealized gains on securities AFS, net of their tax effect. Stockholders' equity increased $616 during 2001 due to unrealized gains on securities AFS. The adequacy of the Company's capital and the Bank'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, 2001, 2000, and 1999, the Company's -34- and the Bank's Tier 1 leverage ratios, Tier 1 risk-based capital ratios, and total risk-based capital ratios were well in excess of regulatory requirements to be considered well-capitalized under regulatory requirements (see note 18 of the notes to Consolidated Financial Statements). Management feels the capital structure of the Company and Bank is adequate.
Table 19: Capital Ratios The following table presents a reconciliation of Company stockholders' equity as presented in the December 31, 2001 consolidated balance sheets to regulatory capital. (dollars in thousands) 2001 2000 1999 Stockholders' equity $ 25,349 $ 22,274 $ 21,046 Disallowed mortgage servicing right assets (28) - - Unrealized (gain) loss on securities AFS (491) 125 1,043 Tier 1 regulatory capital 24,830 22,399 22,089 Add: allowance for loan losses 2,969 2,407 2,099 Total regulatory capital $ 27,799 $ 24,806 $ 24,188 Total assets $ 344,296 $ 306,239 $ 259,889 Unrealized (gain) loss on securities AFS (491) 125 1,043 Tangible assets $ 343,805 $ 306,364 $ 260,932 Risk-weighted assets (as defined by current regulations) $ 248,620 $ 204,725 $ 180,711 Add: Recourse obligation under FHLB loan servicing program 131 - - Adjusted risk-weighted assets $ 248,751 $ 204,725 $ 180,711 Tier 1 capital to year-end tangible assets (leverage ratio) 7.2% 7.3% 8.5% Tier 1 capital to adjusted risk-weighted assets 10.0% 10.9% 12.2% Total capital to adjusted risk-weighted assets 11.2% 12.1% 13.4%
-35- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item 7A is set forth in Item 6, "Selected Financial Data" and under sub captions "Results of Operations", "Market Risk", "Net Interest Income", "Provision for Loan Losses", "Investment Portfolio", "Deposits", and "Liquidity and Interest Sensitivity" under Item 7, Management's Discussion and Analysis of Financial Conditions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company for the years ended December 31, 2001, 2000, and 1999 are incorporated by reference to Exhibit 99.1 to this Annual Report on Form 10-K. Exhibit 99.1 is located immediately following page 40. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None -36- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information relating to directors of the Company is incorporated into this Form 10-K by this reference to the disclosure in the Company's proxy statement dated March 29, 2002 relating to the 2002 annual meeting of shareholders (the "2002 Proxy Statement") under the caption "Election of Directors." Information relating to the identification of executive officers of the Company is found in Part I of this Form 10-K. Information required under Rule 405 of Regulation S-K is incorporated into this Form 10-K by this reference to the disclosure in the 2002 Proxy Statement under the subcaption "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION. Information relating to director compensation is incorporated into this Form 10-K by this reference to the disclosure in the 2002 Proxy Statement under the subcaption "Compensation of Directors." Information relating to the compensation of executive officers is incorporated into this Form 10-K by this reference to (1) the disclosure in the 2002 Proxy Statement beginning under the caption "Executive Officer Compensation," through the disclosure ending under the subcaption, "Stock Options," and (2) the disclosure in the 2002 Proxy Statement under the subcaption "Compensation Committee and Board Interlocks and Insider Participation." 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 disclosure in the 2002 Proxy Statement beginning under the caption "Beneficial Ownership of Common Stock" and ending at the subcaption "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information relating to certain relationships and related transactions with directors and officers is incorporated into this Form 10-K by this reference to the disclosure in the 2002 Proxy Statement under the caption "Certain Relationships and Related Transactions." -37- 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 in Exhibit 99.1. (2) No financial statement schedules are required by Item 14(d). (3) The following exhibits required by Item 601 of Regulation S-K are filed as part of this report. Exhibit NUMBER DESCRIPTION 3.1 Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000) 3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000) 4.1 Articles of Incorporation and Bylaws (see Exhibits 3.1 and 3.2) 10.1 Bonus Plan of Directors of the Bank (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000)* 10.2 Non-Qualified Retirement Plan for Directors of the Bank* 10.3 Senior Management Incentive Compensation Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000)* 10.4 2001 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001)* 21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000) -38- 99.1 Consolidated financial statements for the years ended December 31, 2001, 2000, and 1999 (b) Reports on Form 8-K. None. *Denotes Executive Compensation Plans and Arrangements. -39- SIGNATURES 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, 2002 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 SCOTT M. CATTANACH David K. Kopperud, President Scott M. Cattanach, Treasurer Chief Executive Officer and a Director (Principal Financial Officer and 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 R. Polzer Thomas A. Riiser WILLIAM M. REIF EUGENE WITTER William M. Reif Eugene Witter -40- EXHIBIT INDEX TO FORM 10-K OF PSB HOLDINGS, INC. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 Pursuant to Section 102(d) of Regulation S-T (17 C.F.R. 232.102(d) Exhibit NUMBER DESCRIPTION 10.2 Non-Qualified Retirement Plan for Directors of the Bank 99.1 Consolidated financial statements for the years ended December 31, 2001, 2000, and 1999 EX-99.1 4 psbex99.txt PSB 10-K EXHIBIT 99.1 - INDEPENDENT AUDITOR'S REPORT Exhibit 99.1 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, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the three years ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of their operations and their cash flows for the three years ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Wipfli Ullrich Bertelson LLP January 25, 2002 Wausau, Wisconsin -1-
CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 ASSETS 2001 2000 Cash and due from banks $ 16,736,080 $ 9,225,645 Interest-bearing deposits and money market funds 3,539,125 88,494 Federal funds sold 5,275,000 53,000 Securities: Held to maturity (fair values of $20,354,518 and $14,005,308 in 2001 and 2000 respectively) 20,287,480 13,974,600 Available for sale (at fair value) 50,156,904 48,122,039 Federal Home Loan Bank Stock 2,150,600 2,008,700 Loans held for sale 1,403,400 114,000 Loans receivable, net of allowance for loan losses of $2,968,574 and $2,407,439 in 2001 and 2000, respectively 236,573,861 224,701,647 Accrued interest receivable 1,872,631 2,101,513 Foreclosed assets, net 421,269 17,352 Premises and equipment 4,754,906 4,750,856 OTHER ASSETS 1,124,751 1,080,976 TOTAL ASSETS $344,296,007 $306,238,822 LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest-bearing deposits $ 41,507,579 $ 35,192,386 INTEREST-BEARING DEPOSITS 232,127,810 206,341,892 Total deposits 273,635,389 241,534,278 Short-term borrowings 4,326,850 11,514,743 Long-term borrowings 38,000,000 28,000,000 ACCRUED EXPENSES AND OTHER LIABILITIES 2,984,577 2,915,427 TOTAL LIABILITIES 318,946,816 283,964,448 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 18,185,664 15,726,996 Unrealized gain (loss) on securities available for sale, net of tax 491,335 (124,814) TREASURY STOCK, AT COST - 62,720 SHARES (2,291,163) (2,291,163) TOTAL STOCKHOLDERS' EQUITY 25,349,191 22,274,374 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $344,296,007 $306,238,822
See accompanying notes to consolidated financial statements. -2-
CONSOLIDATED STATEMENT OF INCOME Year Ended December 31, 2001, 2000 and 1999 2001 2000 1999 Interest income: Interest and fees on loans $19,262,801 $18,259,930 $14,065,041 Interest on securities: Taxable 2,866,350 2,888,251 2,821,551 Tax-exempt 774,769 597,000 649,901 OTHER INTEREST AND DIVIDENDS 523,563 194,503 134,512 TOTAL INTEREST INCOME 23,427,483 21,939,684 17,671,005 Interest expense: Deposits 9,770,432 10,105,320 7,584,588 Short-term borrowings 431,842 1,140,346 639,760 LONG-TERM BORROWINGS 2,265,842 1,294,350 373,416 TOTAL INTEREST EXPENSE 12,468,116 12,540,016 8,597,764 Net interest income 10,959,367 9,399,668 9,073,241 PROVISION FOR LOAN LOSSES 890,000 600,000 460,000 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,069,367 8,799,668 8,613,241 Noninterest income: Service fees 1,010,352 855,069 708,794 Gain on sale of loans 683,278 66,440 223,002 Investment sales commissions 183,156 195,212 137,621 OTHER OPERATING INCOME 188,294 329,548 195,230 TOTAL NONINTEREST INCOME 2,065,080 1,446,269 1,264,647 Noninterest expense: Salaries and employee benefits 4,419,402 3,841,735 3,621,239 Occupancy 917,048 937,071 858,719 Data processing and other office operations 522,970 459,746 440,588 Advertising and promotion 306,793 211,073 222,435 OTHER OPERATING 1,149,684 1,024,693 1,078,425 TOTAL NONINTEREST EXPENSE 7,315,897 6,474,318 6,221,406 Income before income taxes 4,818,550 3,771,619 3,656,482 PROVISION FOR INCOME TAXES 1,453,000 1,102,000 1,067,500 NET INCOME $3,365,550 $2,669,619 $2,588,982 BASIC AND DILUTED EARNINGS PER SHARE $ 4.01 $ 3.11 $ 2.93 WEIGHTED AVERAGE SHARES OUTSTANDING 839,705 858,286 883,235
See accompanying notes to consolidated financial statements. -3-
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2001, 2000 and 1999 UNREALIZED GAIN (LOSS) ADDITIONAL ON SECURITIES COMMON PAID-IN RETAINED AVAILABLE TREASURY STOCK CAPITAL EARNINGS FOR SALE STOCK TOTALS Balance, January 1, 1999 $ 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 gains 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 Comprehensive income: Net income 3,365,550 3,365,550 Unrealized gain on securities available for sale, net of tax of $259,841 616,149 616,149 Total comprehensive income 3,981,699 Cash dividends declared $1.08 PER SHARE (906,882) (906,882) BALANCE, DECEMBER 31, 2001 $ 1,804,850 $ 7,158,505 $18,185,664 $ 491,335 $(2,291,163) $25,349,191
See accompanying notes to consolidated financial statements. -4-
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2001, 2000, and 1999 2001 2000 1999 Cash flows from operating activities: Net income $ 3,365,550 $ 2,669,619 $ 2,588,982 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and net amortization 582,698 570,555 554,059 Benefit from deferred income taxes (54,000) (81,000) (70,000) Provision for loan losses 890,000 600,000 460,000 Proceeds from sales of loans held for sale 60,435,412 4,722,650 21,214,462 Originations of loans held for sale (60,857,566) (4,770,210) (17,871,010) Gain on sale of loans (683,278) (66,440) (223,002) Gain on sale of premises and equipment (48,332) (69,000) Net gain (loss) on sale of foreclosed assets 10,383 (21,461) FHLB stock dividends (141,900) (129,800) Changes in operating assets and liabilities: Accrued interest receivable 228,882 (355,475) (20,695) Other assets (328,883) 75,956 (109,686) ACCRUED EXPENSES AND OTHER LIABILITIES 69,150 540,486 (276,212) NET CASH PROVIDED BY OPERATING ACTIVITIES 3,468,116 3,707,341 6,225,437 Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits and money market funds (3,450,631) (26,715) 679,214 Net decrease (increase) in federal funds sold (5,222,000) (53,000) 3,934,000 Proceeds from sale and maturities of: Held to maturity securities 1,184,789 1,290,001 2,865,000 Available for sale securities 26,571,357 6,393,719 13,262,495 Payment for purchase of: Held to maturity securities (7,523,254) (1,439,927) (2,664,188) Available for sale securities (27,694,871) (7,439,798) (13,609,089) Purchase FHLB stock (1,179,300) (44,300) Net increase in loans (13,523,970) (44,777,534) (32,402,322) Capital expenditures (758,143) (1,442,917) (522,284) Proceeds from sale of premises and equipment 289,218 119,568 PROCEEDS FROM SALE OF FORECLOSED ASSETS 347,456 24,196 76,722 NET CASH USED IN INVESTING ACTIVITIES (29,780,049) (48,531,707) (28,424,752)
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 Cash flows from financing activities: Net increase in non-interest-bearing deposits $ 6,315,193 $ 1,534,788 $ 507,689 Net increase in interest-bearing deposits 25,785,918 37,645,249 2,046,655 Net increase (decrease) in short-term borrowings (7,187,893) (9,700,147) 16,665,382 Proceeds from issuance of long-term borrowings 10,000,000 25,000,000 10,000,000 Repayments of long-term borrowings (10,000,000) (3,000,000) Dividends paid (906,882) (867,301) (846,189) PURCHASE OF TREASURY STOCK (1,488,563) NET CASH PROVIDED BY FINANCING ACTIVITIES 34,006,336 42,124,026 25,373,537 Net increase (decrease) in cash and due from banks 7,510,435 (2,700,340) 3,174,222 CASH AND DUE FROM BANKS AT BEGINNING 9,225,645 11,925,985 8,751,763 CASH AND DUE FROM BANKS AT END $16,736,080 $ 9,225,645 $11,925,985 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest $12,817,043 $12,071,704 $ 8,738,300 Income taxes 1,541,872 983,000 1,416,524 NONCASH INVESTING AND FINANCING ACTIVITIES: Loans charged off 331,200 314,876 432,444 Loans transferred to other real estate 894,397 17,352 79,457 Loans originated on sale of other real estate 132,641
See accompanying notes to consolidated financial statements. -6- 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, Marathon, Oneida, and Vilas Counties, Wisconsin. It provides a variety of banking products including uninsured investment product sales and long-term fixed rate residential mortgages. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of PSB Holdings, Inc. and its subsidiary Peoples State Bank. 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 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. 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. -7- 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. Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual life of the underlying loan. 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. 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 Mortgage servicing rights are recognized as separate assets at the time of sale of the related loan. The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate and the anticipated repayment term of the serviced loans. For purposes of measuring impairment, the rights are stratified by interest rate in the year in which the related mortgage loans were sold. Permanent write-down of the value of the servicing right due to prepayments is recorded in the year principal is prepaid. -8- 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. ADVERTISING AND PROMOTIONAL COSTS Costs relating to Company advertising and promotion are generally expensed when paid. EARNINGS PER SHARE Basic earnings per share are based upon the weighted average number of shares outstanding. Diluted earnings per share includes the potential common stock shares issuable under the stock options granted. 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 Statements of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and 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 an impact on the Company's financial condition or results of operations. -9- In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 addresses how intangible assets acquired outside of a business combination should be accounted for upon acquisition and how goodwill and other intangible assets should be accounted for after they have been initially recognized. SFAS No. 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Other intangible assets with a finite life will be amortized over their useful life. Goodwill and other intangible assets with indefinite useful lives shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. SFAS No. 142 is effective for the Company during 2002. The adoption of SFAS No. 141 and No. 142 did not have an impact on the Company's financial condition or results of operations. NOTE 3 CASH AND DUE FROM BANKS Cash and due from banks in the amount of $1,287,000 was restricted at December 31, 2001 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. Uninsured balances at December 31, 2001 totaled $1,623,814. -10- 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, 2001 Securities held to maturity - Obligations of states and political SUBDIVISIONS $ 20,287,480 $ 231,584 $ 164,546 $20,354,518 Securities available for sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 9,516,292 $ 173,455 $ 17,094 $ 9,672,653 Mortgage-backed securities 39,716,764 695,095 100,281 40,311,578 OTHER EQUITY SECURITIES 172,673 172,673 TOTALS $49,405,729 $ 868,550 $117,375 $50,156,904 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 $24,572,122 $ 194,876 $356,670 $24,410,328 Mortgage-backed securities 23,706,326 42,287 23,664,039 OTHER EQUITY SECURITIES 47,672 47,672 TOTALS $48,326,120 $ 194,876 $398,957 $48,122,039
-11- The amortized cost and estimated fair value of debt securities held to maturity and securities available for sale at December 31, 2001 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 $ 886,339 $ 896,302 Due after one year through five years 5,514,648 5,655,995 DUE AFTER FIVE YEARS THROUGH TEN YEARS 13,886,493 13,802,221 TOTALS $ 20,287,480 $20,354,518 SECURITIES AVAILABLE FOR SALE Due in one year or less $ 2,003,080 $ 2,016,453 Due after one year through five years 5,975,656 6,102,150 Due after five years through ten years 1,537,556 1,554,050 MORTGAGE-BACKED SECURITIES 39,716,764 40,311,578 TOTALS $ 49,233,056 $49,984,231
Securities with an approximate carrying value of $9,224,963 and $12,554,863 at December 31, 2001 and 2000, respectively, were pledged to secure public deposits and short-term borrowings and for other purposes required by law. No securities were sold in 2001, 2000, or 1999. NOTE 5 FEDERAL HOME LOAN BANK STOCK 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 $2,150,600 and $2,008,700 of FHLB stock at December 31, 2001 and 2000, respectively. -12- NOTE 6 LOANS
The composition of loans is as follows: 2001 2000 Commercial and industrial $ 55,362,878 $ 53,420,913 Real estate mortgage (commercial and residential) 158,848,733 149,859,334 Real estate construction 15,608,734 11,231,393 CONSUMER AND INDIVIDUAL 13,326,858 15,784,138 Subtotals 243,147,203 230,295,778 Net deferred loan costs 132,312 Loans in process of disbursement (3,737,080) (3,186,692) ALLOWANCE FOR LOAN LOSSES (2,968,574) (2,407,439) NET LOANS $ 236,573,861 $ 224,701,647
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:
2001 2000 Loans outstanding, January 1 $ 3,998,278 $ 4,344,679 New loans 2,680,944 2,045,266 REPAYMENTS (1,643,973) (2,391,667) Loans outstanding, December 31 $ 5,035,249 $ 3,998,278
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. -13- An analysis of impaired loans follows:
AT DECEMBER 31, 2001 2000 Nonaccrual $ 1,235,248 $ 802,907 ACCRUING INCOME 876,947 1,097,938 Total impaired loans 2,112,195 1,900,845 LESS - ALLOWANCE FOR LOAN LOSSES 550,810 322,104 NET INVESTMENT IN IMPAIRED LOANS $ 1,561,385 $1,578,741
YEARS ENDED DECEMBER 31, 2001 2000 1999 Average recorded investment, net of allowance FOR LOAN LOSSES $ 2,177,185 $ 1,947,806 $ 1,874,008 INTEREST INCOME RECOGNIZED $ 190,998 $ 174,963 $ 118,162 Interest income recognized on a cash basis ON IMPAIRED LOANS $ 88,197 $ 101,618 $ 6,366
An analysis of the allowance for loan losses for the three years ended December 31, follows: 2001 2000 1999 Balance, January 1 $ 2,407,439 $ 2,099,241 $ 1,946,864 Provision charged to operating expense 890,000 600,000 460,000 Recoveries on loans 2,335 23,074 124,821 LOANS CHARGED OFF (331,200) (314,876) (432,444) BALANCE, DECEMBER 31 $ 2,968,574 $ 2,407,439 $ 2,099,241
Under a secondary market loan servicing program, the Company has provided a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of original loan principal sold to the FHLB. At December 31, 2001, the maximum Company obligation for such guarantees would be approximately $131,000 if total foreclosure losses on the entire pool of loans exceed $510,000. NOTE 7 MORTGAGE SERVICING RIGHTS Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of mortgage loans serviced for others was $35,929,282 and $855,088 at December 31, 2001 and 2000, respectively. Mortgage servicing rights of $320,993 were capitalized in 2001. Mortgage servicing rights are stated at amortized cost of $283,750 at December 31, 2001, as fair value exceeded cost. No mortgage servicing rights were recorded at December 31, 2000. Amortization of mortgage servicing rights was $37,243 in 2001. -14- NOTE 8 PREMISES AND EQUIPMENT
An analysis of premises and equipment follows: 2001 2000 Land $ 1,381,617 $ 1,605,349 Buildings and improvements 4,024,338 3,793,211 Furniture and equipment 3,835,783 3,526,351 CONSTRUCTION IN PROGRESS 198,020 8,470 Total cost 9,439,758 8,933,381 LESS - ACCUMULATED DEPRECIATION AND AMORTIZATION 4,684,852 4,182,525 TOTALS $ 4,754,906 $ 4,750,856
Depreciation and amortization charged to operating expenses amounted to $513,207 in 2001 and $544,366 in 2000, and $511,047 in 1999. The Company has committed to capital additions in 2002 totaling approximately $1.2 million. NOTE 9 Deposits At December 31, 2001, certificate of deposit and IRA accounts have scheduled maturity dates as follows: 2002 $ 83,620,826 2003 26,798,987 2004 4,636,716 2005 1,014,631 2006 5,391,596 TOTAL $ 121,462,756 Certificate of deposit and IRA accounts with individual balances greater than $100,000 totaled $51,631,238 and $47,228,159 at December 31, 2001 and 2000, respectively. Deposits from Company directors, officers, and related parties at December 31, 2001 and 2000 totaled $6,587,405 and $5,513,988, respectively. -15- NOTE 10 SHORT-TERM BORROWINGS
Short-term borrowings consist of the following at December 31: 2001 2000 Securities sold under repurchase agreement $ 4,326,850 $ 7,661,743 FHLB OPEN LINE OF CREDIT 3,853,000 TOTALS $ 4,326,850 $ 11,514,743
The Company pledges U.S. Treasury and agency securities available for sale as collateral for repurchase agreements. The fair value of securities pledged for short-term borrowings totaled $6,885,173 and $8,108,140 at December 31, 2001 and 2000, respectively. Repurchase agreements with Company directors, officers, and related parties at December 31, 2000 totaled $4,500,000. There were no related party repurchase agreements at December 31, 2001. The following information relates to federal funds purchased and securities sold under repurchase agreements for the years ended December 31:
2001 2000 1999 As of end of year: Weighted average rate 5.01% 6.83% 5.90% For the year: Highest month-end balance $ 9,046,563 $ 26,862,797 $ 21,214,890 Daily average balance $ 6,414,054 $ 17,232,498 $ 11,660,602 Weighted average rate 6.73% 6.62% 5.49%
-16- NOTE 11 LONG-TERM BORROWINGS
Long-term borrowings at December 31, consist of the following: 2001 2000 Note payable to the FHLB, monthly interest payments only at 5.45%, due January 2003 $ 10,000,000 $ Note payable to the FHLB, monthly interest payments only at 6.50%, due November 2003 6,000,000 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 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 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 6,000,000 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 TOTALS $ 38,000,000 $ 28,000,000
The scheduled principal maturities are: 2003 $ 16,000,000 2005 19,000,000 THEREAFTER 3,000,000 TOTAL $ 38,000,000 The FHLB advances are secured by a blanket lien consisting principally of one- to-four family real estate loans totaling in excess of $63,000,000 and $47,000,000 at December 31, 2001 and 2000, respectively. As a member of the FHLB system, the Company may draw on a line of credit totaling approximately $50,000,000. At December 31, 2001, the Company's available and unused portion of this line of credit totaled approximately $12,000,000. -17- NOTE 12 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 6% 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, 2001, 2000, and 1999 was $262,940, $160,166, and $173,858, respectively. The Company also maintained an unfunded retirement plan for its directors. Under the terms of the plan, directors who had at least 15 years of service were eligible for benefits of between 25% and 50% of the fees earned in the last five years of service. Effective December 31, 2000, the plan was terminated and benefits frozen. In 2001, termination vesting was provided to all directors on a pro-rata basis. The liability recognized in the financial statements for this plan was approximately $124,000 and $131,000 at December 31, 2001 and 2000, respectively. The expense recognized in 2001 associated with the plan termination was approximately $104,000. Income of approximately $25,000 was recognized on this plan in 2000. There was no provision for plan expense in 1999. The Company 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. The following tables provide a reconciliation of changes in the postretirement health care benefit plan for the years ended December 31, 2001 and 2000:
2001 2000 Reconciliation of benefit obligations: Obligation at January 1 $ 237,057 $ 201,637 Service cost 17,140 15,466 Interest cost 22,045 21,771 Benefit payments (8,309) (9,213) NET AMORTIZATION OF PRIOR SERVICE COSTS 7,396 7,396 OBLIGATION AT DECEMBER 31 $ 275,329 $ 237,057
-18- The following table provides the components of net periodic benefit cost of the plans for the years ended December 31, 2001, 2000, and 1999:
POSTRETIREMENT HEALTH CARE BENEFIT PLAN 2001 2000 1999 Service cost $ 17,140 $ 15,466 $ 13,134 Interest cost 22,045 21,771 19,314 Net amortization transition and PRIOR SERVICE COSTS 7,396 7,396 7,396 NET PERIODIC PENSION COST $ 46,581 $ 44,633 $ 39,844
The assumptions used in the measurement of the Company's benefit obligation are shown in the following table: POSTRETIREMENT HEALTH CARE BENEFIT PLAN 2001 2000 1999 Discount rate 7.50% 7.50% 7.50% Health care cost trend rate 7.00% 7.25% 7.50%
The health care cost trend rate is anticipated to be 6.75% in 2002, 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:
2001 2000 1999 Effect on service and interest cost $ 9,330 $ 8,813 $ 8,011 Effect on accumulated benefit obligation at December 31 66,875 65,014 59,971
NOTE 13 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. Coverages will increase in 2002 to $20,000 per individual and $508,218 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 was $54,103 and $60,824 as of December 31, 2001 and 2000, respectively. Health insurance expense recorded in 2001, 2000, and 1999 was $272,735, $278,639, and $168,564, respectively. -19-
NOTE 14 INCOME TAXES The components of the income tax provision are as follows: 2001 2000 1999 Current income tax provision: Federal $1,414,000 $1,101,000 $1,016,000 STATE 93,000 82,000 121,500 TOTAL CURRENT 1,507,000 1,183,000 1,137,500 Deferred income tax benefit: Federal (43,000) (60,000) (60,000) State (11,000) (21,000) (10,000) TOTAL DEFERRED (54,000) (81,000) (70,000) TOTAL PROVISION FOR INCOME TAXES $1,453,000 $1,102,000 $1,067,500
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:
2001 2000 Deferred tax assets: Allowance for loan losses $ 1,047,400 $ 833,600 Deferred compensation 48,500 51,600 State net operating loss 23,600 16,800 Post-retirement health care benefits 105,100 89,300 Employee pension plan 25,300 29,500 Unrealized loss on securities available for sale 79,267 Other 16,200 LESS - VALUATION ALLOWANCES (23,600) (16,800) GROSS DEFERRED TAX ASSETS 1,242,500 1,083,267 Deferred tax liabilities: Premises and equipment 103,600 117,700 Mortgage servicing rights 111,000 FHLB stock 91,100 51,100 Deferred loan costs 52,000 Unrealized gain on securities available for sale 259,841 OTHER 1,999 6,400 -20- GROSS DEFERRED TAX LIABILITIES 619,540 175,200 NET DEFERRED TAX ASSETS $ 622,960 $ 908,067
The Company and its subsidiary Bank pay state income taxes on individual, unconsolidated net earnings. At December 31, 2001, net operating loss carryforwards at the parent company of approximately $440,000 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. If realized, the tax benefit for this item will reduce current tax expense for that period. -21- 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:
2001 2000 1999 PERCENT PERCENT PERCENT OF OF OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME Tax expense at statutory rate $ 1,638,000 34.0 $ 1,282,000 34.0 $ 1,243,000 34.0 Increase (decrease) in taxes resulting from: Tax-exempt interest (284,000) (5.9) (215,000) (5.7) (221,900) (6.1) State income tax 54,000 1.1 40,300 1.1 73,600 2.0 OTHER 45,000 1.0 (5,300) (0.2) (27,200) (0.7) Provision for income TAXES $ 1,453,000 30.2 $ 1,102,000 29.2 $ 1,067,500 29.2
NOTE 15 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 additional term upon expiration. All leases are classified as operating. Future minimum payments under the noncancelable leases are as follows: 2002 $ 80,456 2003 63,360 2004 69,228 2005 74,217 2006 46,656 THEREAFTER 35,480 TOTAL $ 369,397 Rental expense for all operating leases was $57,361, $43,468, and $39,104 for the years ended December 31, 2001, 2000, and 1999, respectively. -22- NOTE 16 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:
2001 2000 Commitments to extend credit: Fixed rate $ 11,748,258 $ 10,122,861 Variable rate 22,302,084 18,085,926 Letters of credit - Variable rate 536,842 651,167 CREDIT CARD COMMITMENTS - FIXED RATE 3,223,471 2,970,366 TOTALS $ 37,810,655 $ 31,830,320
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 generally 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 Marathon, Oneida, and Vilas Counties, Wisconsin. There are no significant concentrations of credit to any one debtor or industry group. Management believes that the diversity of the local economy will prevent significant losses in the event of an economic downturn. -23- 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. 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, 2001, none of the approximately $18,210,000 of variable rate loans had reached the interest rate cap. NOTE 17 STOCK OPTION PLAN Under the terms of an incentive stock option plan adopted during 2001, shares of unissued common stock are reserved for options to officers and key employees of the Company at prices not less than the fair market value of the shares at the date of the grant. Options may be exercised anytime after the option grant's first anniversary. These options expire ten years after the grant date. During 2001, 12,693 options were granted with an exercise price of $33.25. None of the granted options are yet available to be exercised. As of December 31, 2001, 2,307 additional shares of common stock remain reserved for future grants to officers and key employees under the option plan approved by the shareholders. The Company follows the provisions of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and uses the "intrinsic value method" of recording stock-based compensation cost. Because stock options are granted with an exercise price equal to fair value at the date or grant, no compensation expense is recorded. However, had compensation cost for the Company's stock-based plan been determined in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" based on the fair value of the stock options, net income would have decreased $61,307 in 2001. Earnings per share, assuming dilution, would have been $3.94 in 2001. NOTE 18 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, 2001, that the Bank meets all capital adequacy requirements to which it is subject. -24- As of December 31, 2001, 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. -25- 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, 2001: Total capital (to risk weighted assets): Consolidated $27,799,000 11.2% $19,900,000 8.0% N/A Subsidiary bank $27,644,000 11.1% $19,900,000 8.0% $24,875,000 10.0% Tier I capital (to risk weighted assets): Consolidated $24,830,000 10.0% $9,950,000 4.0% N/A Subsidiary bank $24,675,000 9.9% $9,950,000 4.0% $14,925,000 6.0% Tier I capital (to average assets): Consolidated $24,830,000 7.4% $13,370,000 4.0% N/A Subsidiary bank $24,675,000 7.4% $13,370,000 4.0% 16,713,000 5.0% 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%
-26- NOTE 19 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, 2001, the retained earnings of the subsidiary available for distribution as dividends without regulatory approval was approximately $6,800,000. NOTE 20 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. Mortgage Servicing Rights: Fair values are based on estimated discounted cash flows based on current market rates and anticipated repayment term of the serviced loans. 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 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. -27- 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:
2001 2000 CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE Financial assets: Cash and short-term investments $ 25,550,205 $ 25,550,205 $ 9,367,139 $ 9,367,139 Securities 72,594,984 72,662,022 64,105,339 64,136,047 Net loans 237,977,621 239,303,704 224,815,647 227,772,909 Mortgage servicing rights 283,750 283,750 Financial liabilities: Deposits 273,635,389 275,787,818 241,534,278 241,970,455 Short-term borrowings 4,326,850 4,389,910 11,514,743 11,564,152 Long-term borrowings 38,000,000 39,354,608 28,000,000 28,052,483
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 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. -28- NOTE 21 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed balance sheets as of December 31, 2001 and 2000, and condensed statements of income and cash flows for the years ended December 31, 2001, 2000, and 1999, for PSB Holdings, Inc. should be read in conjunction with the consolidated financial statements and footnotes.
BALANCE SHEETS December 31, 2001 and 2000 ASSETS 2001 2000 Cash and due from banks $ 669,204 $ 627,714 Investment in subsidiary 25,195,181 22,189,893 OTHER ASSETS 72,599 26,306 TOTAL ASSETS $ 25,936,984 $ 22,843,913 Liabilities and Stockholders' Equity Accrued dividends payable $ 587,793 $ 569,539 TOTAL STOCKHOLDERS' EQUITY 25,349,191 22,274,374 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,936,984 $ 22,843,913
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STATEMENTS OF INCOME Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 Income: Dividends from subsidiary $ 1,063,000 $ 2,269,000 $ 909,000 INTEREST 4,317 5,235 8,148 TOTAL INCOME 1,067,317 2,274,235 917,148 Expenses: Interest 8,577 OTHER 134,905 66,342 77,589 TOTAL EXPENSES 134,905 74,919 77,589 Income before income taxes and equity in undistributed net income of subsidiary 932,412 2,199,316 839,559 PROVISION FOR INCOME TAX BENEFIT (44,000) (22,000) (22,000) Net income before equity in undistributed net income of subsidiary 976,412 2,221,316 861,559 Equity in undistributed net income of SUBSIDIARY 2,389,138 448,303 1,727,423 NET INCOME $ 3,365,550 $ 2,669,619 $2,588,982
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STATEMENTS OF CASH FLOWS Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 Increase (decrease) in cash and due from banks: Cash flows from operating activities: Net income $ 3,365,550 $ 2,669,619 $ 2,588,982 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed net income of subsidiary (2,389,138) (448,303) (1,727,423) Net amortization 8,965 21,517 (Increase) decrease in other assets (46,293) 302 (9,607) INCREASE IN DIVIDENDS PAYABLE 18,253 NET CASH PROVIDED BY OPERATING ACTIVITIES 948,372 2,230,583 873,469 Cash flows from financing activities: Dividends paid (906,882) (867,301) (846,189) PURCHASE OF TREASURY STOCK (1,488,563) NET CASH USED IN FINANCING ACTIVITIES (906,882) (2,355,864) (846,189) Net increase (decrease) in cash and due from bank 41,490 (125,281) 27,280 CASH AND DUE FROM BANKS AT BEGINNING 627,714 752,995 725,715 CASH AND DUE FROM BANKS AT END $ 669,204 $ 627,714 $ 752,995
-31- EX-10.2 5 psbex102.txt PSB 10-K EXHIBIT 10.2 - NON-QUALIFIED RETIREMENT PLAN Exhibit 10.2 NON-QUALIFIED RETIREMENT PLAN FOR DIRECTORS OF PEOPLES STATE BANK 1. A director who had served the Bank as a director for 15 years or more shall, upon retirement as a director on or before of December 31, 2000, be paid a retirement payment quarterly in an amount equal to one- twentieth of 50% of his total directors' compensation during the five years immediately preceding retirement as such director, such quarterly payment to be made for a period of five years following his retirement; provided, however, that in the event of the death of such director prior to the expiration of said five year period, the balance of said payments shall be paid either in one lump sum, or in payments to his estate, at the discretion of the Board of Directors. 2. Each director who had served the Bank as a director for 15 years or more on December 31, 2000, but whose service terminates after that date, and each director who had served the Bank as a director for fewer than 15 years as of December 31, 2000 shall be entitled to receive his accrued benefit as of December 31, 2000 in one or more installments payable in 2001 or 2002, as elected by the director with the consent of the Board. The accrued benefit of directors who had not completed 15 years of service on December 31, 2000 shall determined on a pro rata basis computed by the number of months served divided by 180. -----END PRIVACY-ENHANCED MESSAGE-----