-----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, QRW8Yn/lWme/90cOfV+1F+xEKROhkwZiEBrgpBiHwqDLJxQLjRjOQEarQY9/pJJW NtsTttFckK6RXFiZoZlT3Q== 0000916480-03-000041.txt : 20030304 0000916480-03-000041.hdr.sgml : 20030304 20030304154520 ACCESSION NUMBER: 0000916480-03-000041 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030304 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: 03591503 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 12/31/02 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, 2002 [ ] 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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ___ No X The aggregate market value of the voting stock held by non-affiliates as of June 28, 2002, was approximately $30,380,000. For purposes of this calculation, the registrant has assumed its directors and executive officers are affiliates. As of February 12, 2003, 1,666,102 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement dated March 4, 2003 (to the extent specified herein): Part III -1- FORM 10-K PSB HOLDINGS, INC. TABLE OF CONTENTS PART I ITEM 1. Business......................................................1 2. Properties....................................................6 3. Legal proceedings.............................................6 4. Submission of matters to a vote of security holders...........6 PART II 5. Market for registrant's common equity and related stockholder matters.......................................................7 6. Selected financial data.......................................9 7. Management's discussion and analysis of financial condition and results of operations.....................................11 7A. Quantitative and qualitative disclosures about market risk....40 8. Financial statements and supplementary data...................40 9. Changes in and disagreements with accountants on accounting and financial disclosure......................................40 PART III 10. Directors and executive officers of the registrant............41 11. Executive compensation........................................41 12. Security ownership of certain beneficial owners and management and related stockholder matters...............................41 13. Certain relationships and related transactions................42 14. Controls and procedures.......................................42 PART IV 15. Exhibits, financial statement schedules, and reports on Form 8-K...........................................................43 -i- PART I ITEM 1. BUSINESS. PSB HOLDINGS, INC. PSB Holdings, Inc., a Wisconsin corporation (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, 2002, and the term "Company" includes its subsidiaries. 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. BUSINESS GENERAL The Company was organized in 1995 as the holding company of the Bank. The Bank began operations in August, 1962 as a Wisconsin state bank. The Company's principal office is located at 1905 West Stewart Avenue, Wausau, Wisconsin, 54401. The Company's principal branch offices are located in the communities of Wausau, Rib Mountain, Marathon, Rhinelander and Eagle River, Wisconsin. The Company provides various commercial and consumer banking services for customers located principally in Marathon, Lincoln, Oneida and Vilas Counties, Wisconsin. The Company is engaged in general commercial and retail banking. The Company 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 Company 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 Company offers automated teller machines and online computer banking to expand its services to customers on a 24-hour basis. New services are frequently added to the Company's retail banking departments. -1- The Company offers discount brokerage services at its Wausau and Rhinelander branch locations, including the sale of annuities, mutual funds and other investments to Company customers and the general public. The Company maintains an investment subsidiary in Nevada to manage, hold and trade cash, securities, and loans of the Bank. PRINCIPAL SOURCES OF REVENUE The table below shows the amount and percentages of the Company'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, 2002 $ 18,022 72.2% $ 3,622 14.5% 2001 19,263 75.6% 3,641 14.3% 2000 18,260 78.1% 3,485 14.9%
BANK MARKET AREA AND COMPETITION There is a mix of retail, manufacturing, agricultural and service businesses in the areas served by the Company. The Company has substantial competition in its market areas. Much of this competition comes from companies which are larger and have greater resources than the Company. The Company 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 Company. Recent changes in banking laws have had a significant effect on the competitive environment in which the Company operates and are likely to continue to increase competition for the Company. 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 Company. 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 Company may not now compete for its customers. -2- In addition to competition, the business of the Company 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 Officers of the Company serve as full time employees of the Bank. As of February 12, 2003, the Company had 119 full-time equivalent employees, including 34 employed on a part-time basis. None of the Company's employees is covered by a collective bargaining agreement. EXECUTIVE OFFICERS The executive officers of the Company as of February 12, 2003, their ages and principal occupations during the last five years are set forth below. David K. Kopperud, 57 - President of the Company and the Bank since July, 1999; previously Executive Vice President of the Bank (1994-1999). David A. Svacina, 56 - Vice-President of the Company since March, 2002; Vice President of the Bank. Todd R. Toppen, 44 - Secretary of the Company since March 2002; Treasurer of the Company (1995- March 2002); Vice President of the Bank. Scott M. Cattanach, 34 - 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 is 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 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, -3- 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 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 17 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 Company'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 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 Company 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. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, reports to shareholders, press releases, and in other oral and written statements made by or with the approval of the Company which are not statements of historical fact will constitute forward-looking statements within the meaning of the Reform Act. -4- Examples of forward-looking statements include, but are not limited to: (1) expectations concerning financial performance of the Company, (2) expectations concerning the payment of dividends, (3) statements of plans and objectives of the Company, (4) statements of future economic performance and (5) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "targeted" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. In making forward-looking statements within the meaning of the Reform Act, the Company undertakes no obligation to publicly update or revise any such statement. Forward-looking statements of the Company are based on information available to the Company as of the date of such statements and reflect the Company's expectations as of such date, but are subject to risks and uncertainties that may cause actual results to vary materially. In addition to specific factors which may be described in connection with any of the Company's forward-looking statements, factors which could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to the following: (1) the strength of the U.S. economy in general and the strength of the local economies in the markets served by the Bank; (2) the effects of and changes in government policies, including interest rate policies of the Board; (3) inflation, interest rate, market and monetary fluctuations; (4) the effect of changes in laws and regulations which increase operating costs or increase competition; (5) changes in consumer spending, borrowing and saving habits; (6) increased competition in the Company's principal market areas; (7) the timely development of and acceptance of new products and services; (8) the costs associated with required changes or upgrades in our technology; (9) the effect of changes in accounting policies and practices; (10) acquisitions and the inability to successfully integrate acquired institutions or branches into current operations; and (11) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation. -5- ITEM 2. PROPERTIES. The Company's operations are carried out at 1905 West Stewart Avenue, Wausau, Wisconsin. The Company does not maintain any separate offices. The Company operates a total of seven banking office locations. The Company owns five of the buildings in which it conducts operations and each building is occupied solely by the Bank. All five buildings are designed for commercial banking operations and are suitable for current operations. One Rhinelander and the Eagle River branch occupy leased space within supermarkets which are designed for commercial banking operations. An additional Rhinelander facility was constructed and opened during 2002. ITEM 3. LEGAL PROCEEDINGS. As of December 31, 2002, the holding company was not involved in any legal proceedings, nor was it aware of any threatened litigation. In the ordinary course of its business, the Company 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. A special meeting of shareholders was held on November 19, 2002. The sole item of business was an amendment to the Company's restated articles of incorporation to increase the Company's authorized shares to 3,000,000 shares. The amendment was adopted by the following votes: for, 631,852 shares; against, 26,066 shares; withheld, 175,778 shares; abstention, 855 shares, and broker non-votes, 0 shares. -6- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET There is no active established public trading market in the Company common stock. Bid and ask prices are quoted 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 July 12, 2002, Company announced an annual, ongoing share repurchase program of up to 1% of outstanding shares per year. The Company repurchased 19,838 shares during 2002 at an average price per share of $19.88. As of December 31, 2002, and February 12, 2003, there were 1,666,102 shares of the Company's common stock outstanding, respectively. Information required by Item 201(d) of Regulation S-K is set forth under Item 12, Part III, of this Annual Report on Form 10-K. HOLDERS As of December 31, 2002 there were approximately 951 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, 2002, the Bank could have paid approximately $8.1 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. -7- 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:
2002 Prices 2001 Prices Quarter High Low Dividends High Low Dividends 1st $ 18.00 $ 16.63 $ - $ 14.75 $ 13.50 $ - 2nd $ 19.63 $ 17.50 $ 0.190 $ 20.00 $ 14.50 $ 0.190 3rd $ 21.05 $ 19.18 $ - $ 15.88 $ 14.50 $ - 4th $ 25.00 $ 20.55 $ 0.375 $ 16.70 $ 15.38 $ 0.350
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. SALES AND DISTRIBUTION OF STOCK During 2003, the Company distributed 3,422 shares of its common stock (valued for this purpose at $17.50 per share) to its directors in lieu of cash payments under the director's incentive compensation plan. Receipt of stock was mandatory and no investment decision was made by any member of the Board. The Company also issued 3,108 shares of stock pursuant to the exercise of a stock option by a former executive officer of the Bank at a price of $16.625 per share. The option shares were sold pursuant to the exemption from registration afforded under Section 3(a)11 of the Securities Act of 1933, as amended. -8- ITEM 6. SELECTED FINANCIAL DATA
TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA 2002 2001 2000 1999 1998 Consolidated summary of earnings: (dollars in thousands, except per share data) Years ended December 31, Total interest income $ 21,915 $ 23,428 $ 21,940 $ 17,671 $ 16,746 Total interest expense 9,273 12,468 12,540 8,598 8,722 Net interest income 12,642 10,960 9,400 9,073 8,024 Provision for loan losses 1,110 890 600 460 300 Net interest income after provision for loan losses 11,532 10,070 8,800 8,613 7,724 Total noninterest income 3,048 2,065 1,446 1,265 1,408 Total noninterest expenses 8,227 7,316 6,474 6,221 6,115 Provision for income taxes 1,988 1,453 1,102 1,068 928 Net income $ 4,365 $ 3,366 $ 2,670 $ 2,589 $ 2,089
2002 2001 2000 1999 1998 Consolidated balance sheet: (dollars in thousands, except per share data) As of December 31, Total assets $371,469 $344,296 $306,239 $259,889 $233,491 Total loans receivable, net of loan loss allowances 256,015 236,574 224,702 180,524 148,582 Total deposits 297,830 273,635 241,534 202,354 199,800 Long-term FHLB advances 38,000 38,000 28,000 13,000 6,000 Other borrowings 3,303 4,327 11,515 21,215 4,549 Stockholders' equity 29,302 25,349 22,274 21,046 20,556
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2002 2001 2000 1999 1998 Performance ratios: Basic earnings per share $ 2.61 $ 2.00 $ 1.56 $ 1.47 $ 1.18 Diluted earnings per share $ 2.60 $ 2.00 $ 1.56 $ 1.47 $ 1.18 Common dividends declared per share $ 0.565 $ 0.540 $ 0.515 $ 0.505 $ 0.465 Dividend payout ratio 21.65% 26.94% 32.64% 34.12% 39.33% Net book value per share at year-end $ 17.59 $ 15.10 $ 13.27 $ 11.92 $ 11.64 Average common shares outstanding 1,674,523 1,679,410 1,716,572 1,766,470 1,766,470 Return on average stockholders' equity 15.97% 13.96% 12.33% 12.31% 10.62% Return on average assets 1.25% 1.05% 0.94% 1.08% 0.96% Average equity to average assets 7.85% 7.53% 7.63% 8.75% 9.06% Net interest margin (tax adjusted) 3.95% 3.73% 3.62% 4.16% 4.04% Net loan charge-offs to average loans 0.37% 0.14% 0.14% 0.19% 0.13% Non-performing loans to gross loans 0.94% 1.68% 1.44% 0.77% 0.96% Allowance for loan losses to loans at year-end 1.22% 1.24% 1.06% 1.15% 1.27% Noninterest income to average assets 0.88% 0.65% 0.51% 0.53% 0.64% Noninterest income to tax adjusted net interest margin 23.12% 18.12% 14.86% 13.45% 16.86% Efficiency ratio 50.68% 54.50% 58.05% 58.29% 62.69% Noninterest expense to average assets 2.36% 2.29% 2.28% 2.59% 2.73% FTE employees at year-end 116 100 86 91 87
-10- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis reviews significant factors with respect to the Company's financial condition and results of operations at and for the three-year period ended December 31, 2002. This discussion should be read in conjunction with the consolidated financial statements, notes, tables, and the selected financial data presented elsewhere in this report. All figures are in thousands, except per share data and wages per employee. 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 results see Item 1, Cautionary Statement Regarding Forward-Looking Information, in this Annual Report on Form 10-K for the year ended December 31, 2002. RESULTS OF OPERATIONS 2002 COMPARED TO 2001 The Company's consolidated net income for 2002 was $4,365, an increase of $999 or 29.7% higher than 2001. Basic and diluted earnings per share for 2002 were $2.61 and $2.60, respectively, a 30% increase over 2001 basic and diluted earnings per share of $2.00. Return on average common stockholders' equity and return on average assets were 15.97% and 1.25% for 2002 compared to 13.96% and 1.05% for 2001. Cash dividends paid in 2002 increased by 4.6% to $0.565 per share over the $0.54 per share paid in 2001. Current year profits were significantly impacted by the following factors. Taxable equivalent net interest income grew $1,788, or 15.7% from $11,397 in 2001 to $13,185 in 2002. Taxable equivalent interest income was $22,458 for 2002, $1,407 or 5.9% lower than 2001. However, interest expense decreased by $3,195, or 25.6% compared to 2001. Increases in volume and changes in product mix added $1,436 to taxable equivalent net interest income, whereas changes in the rate environment of 2002 added an additional $352. The allowance for loan losses increased $189 from $2,969 in 2001 to $3,158 in 2002. Net loan charge-offs increased $593 from $328 in 2001 to $921 in 2002 and were .37% of average loans outstanding in 2002 compared to .14% in 2001. The ratio of allowance for loan losses to loans decreased to 1.22% from 1.24% as some long-time problem loan relationships were resolved during 2002, while provisions to the allowance for loan losses kept pace with new loan growth. Provision for loan losses grew $220, from $890 in 2001 to $1,110 in 2002. Noninterest income was $3,048 for 2002, $983 or 47.6% higher than 2001. The primary reason for the increase was additional income from the sale of long-term fixed rate secondary market -11- loans. Gain on sale of such loans was $1,492 (before provision for valuation allowance on retained servicing rights of $269) in 2002 compared to $683 in 2001. Separate from this activity,noninterest income increased $443 during 2001 of which $207 was an increase in deposit account service fees from additional overdraft fees collected. Noninterest expense was $8,227 in 2002, $911 or 12.5% higher than 2001. Salaries and employee benefits increased $508, while occupancy and data processing and office operations increased $237. Separate from these activities, noninterest expense increased $166 during 2002. 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 $2.00, a 28.2% increase over 2000 basic and diluted earnings per share of $1.56. 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 $0.54 per share over the $0.515 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 $2,121 to taxable equivalent net interest income, whereas changes in the rate environment of 2001 resulted in a $456 decrease. The allowance for loan losses increased $562 from $2,407 in 2000 to $2,969 in 2001. Net loan charge-offs increased $36 from $292 in 2000 to $328 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. -12- 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. 2002 COMPARED TO 2001 Fully taxable equivalent net interest income was $13,185 for 2002, an increase of $1,788 or 15.7% from 2001. The increase in fully taxable equivalent net interest income was due primarily to an increase in average earning assets of 9.2% during 2002. 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 2002's falling short-term interest rate environment. Beginning in early 2001, the Company began to benefit from a falling interest rate environment as deposits and other borrowings have repriced faster at lower rates than loans with longer terms and maturities. However, during the second half of 2002, it appeared that short-term deposits -13- have been significantly repriced to current levels, but that loans are renewed and originated at continually lower rates. This situation was anticipated and is not unusual in the banking industry. The Company considers the current short-term interest rate environment to be temporary and recognizes it as an historical low point in rates. The primary strategies currently utilized by the Company to manage net interest margin include: 1. Consider national and broker certificate of deposit offering rates when determining local retail certificate pricing. Ensure core deposits are priced appropriately considering existing rates and changes in short-term interest rates in the national markets. 2. Increase interest rate pricing on commercial loans that provide option features to the borrower, such as prepayment without penalty. 3. Originate adjustable rate commercial loans to allow the bank to benefit from anticipated increases in short-term interest rates on which many commercial loans are based. Management recognizes that in the short-term such a strategy would reduce net interest income in the event of future decrease in the prime rate or other short-term rate indexes. As indicated in tables 2 and 3, increases in volume and changes in the mix of both earning assets and interest bearing liabilities added $1,436 to fully taxable equivalent net interest income, and the changes in the interest rates resulted in a $352 increase, for a net increase of $1,788. The net interest margin and interest rate spread improved to 3.95% and 3.42%, compared to 3.73% and 3.02% in 2001. The growth and composition change of earning assets contributed an additional $2,314 to fully taxable equivalent net interest income, while the growth and composition of interest bearing liabilities cost an additional $878, netting a $1,436 increase in fully taxable equivalent net interest income. For 2002, the yield on earning assets decreased 108 basis points, decreasing interest income by $3,721 while the cost of interest bearing liabilities decreased 148 basis points, decreasing interest expense by $4,073 for a net increase of $352 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 2002 causing the liability sensitive balance sheet of the Company to reprice at the declining interest rates. In addition, the Company reduced the percentage of overnight and liquid funds earning interest at currently low interest rates from 3.6% of average earning assets in 2001 to 3.0% of average earning assets in 2002. Average earning assets were $333,574 in 2002, an increase of $28,075 or 9.2%, from 2001. Average interest bearing liabilities increased $20,000, or 7.7% from 2001. The composition of interest bearing liabilities shifted from higher cost other borrowings (repurchase agreements) to more core deposit lower interest rate products and certificates of deposit. Total borrowings were $41,496 on average for 2002, down $2,682 or 6.l%. Total interest bearing deposits cost 2.86% -14- on average for 2002 (166 basis points less than last year),while wholesale borrowings cost 5.88% (23 basis points less than last year). 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. As indicated in tables 2 and 3, increases in volume and changes in the mix of both earning assets and interest bearing liabilities added $2,121 to fully taxable equivalent net interest income, and the changes in the interest rates resulted in a $456 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. The growth and composition change of earning assets contributed an additional $3,866 to fully taxable equivalent net interest income, while the growth and composition of interest bearing liabilities cost an additional $1,745, netting a $2,121 increase in fully taxable equivalent net interest income. For 2001, the yield on earning assets decreased 47 basis points, decreasing interest income by $2,273 while the cost of interest bearing liabilities decreased 66 basis points, decreasing interest expense by $1,817 for a net decrease of $456 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. 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 other borrowings (repurchase agreements) 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). The tables on the following pages set 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) 2002 2001 2000 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets Interest earning assets: Loans (1)(2)(3) $249,247 $18,102 7.26% $226,819 $19,301 8.51% $207,527 $18,283 8.81% Taxable securities 51,664 2,724 5.27% 48,272 2,866 5.94% 46,568 2,889 6.20% Tax-exempt securities (2) 20,466 1,361 6.65% 17,191 1,174 6.83% 13,074 905 6.92% FHLB stock 2,218 109 4.91% 2,097 135 6.44% 1,450 122 8.41% Other interest income 9,979 162 1.62% 11,120 389 3.50% 451 73 16.19% Total (2) 333,574 22,458 6.73% 305,499 23,865 7.81% 269,070 22,272 8.28% Non-interest earning assets: Cash and due from banks 8,865 9,223 8,467 Premises and equipment, net 5,453 4,557 4,352 Other assets 3,258 3,447 4,178 Allowance for loan losses (3,148) (2,642) (2,280) Total $348,002 $320,084 $283,787 Liabilities & stockholders' equity Interest bearing liabilities: Savings and demand deposits $ 32,536 $ 337 1.04% $ 25,685 $ 436 1.70% $ 26,952 $ 573 2.13% Money market deposits 73,629 1,061 1.44% 75,553 2,825 3.74% 59,974 3,399 5.67% Time deposits 132,848 5,437 4.09% 115,093 6,509 5.66% 104,021 6,134 5.90% Long-term FHLB advances 38,000 2,289 6.02% 37,764 2,266 6.00% 21,733 1,294 5.95% Other borrowings 3,496 149 4.26% 6,414 432 6.74% 17,233 1,140 6.62% Total 280,509 9,273 3.31% 260,509 12,468 4.79% 229,913 12,540 5.45% Non-interest bearing liabilities: Demand deposits 38,031 32,710 30,209 Other liabilities 2,127 2,757 2,005 Stockholders' equity 27,335 24,108 21,660 Total $348,002 $320,084 $283,787 Net interest income 13,185 11,397 9,732 Rate spread 3.42% 3.02% 2.83% Net yield on interest earning assets 3.95% 3.73% 3.62% (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: 2002 - $458, 2001 - $344, 2000 - $240.
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TABLE 3: INTEREST INCOME AND EXPENSE VOLUME AND RATE ANALYSIS 2002 compared to 2001 2001 compared to 2000 increase(decrease) due to (1) increase (decrease) due to (1) (dollars in thousands) Volume Rate Net Volume Rate Net Interest earned on: Loans (2) $ 1,917 $ (3,116) $ (1,199) $ 1,698 $ (680) $ 1,018 Taxable securities 204 (346) (142) 103 $ (126) (23) Tax-exempt securities (2) 224 (37) 187 284 $ (15) 269 FHLB stock 8 (34) (26) 54 $ (41) 13 Other interest income (39) (188) (227) 1,727 $ (1,411) 316 Total 2,314 (3,721) (1,407) 3,866 (2,273) 1,593 Interest paid on: Savings and demand deposits 116 (215) (99) (27) (110) (137) Money market deposits (71) (1,693) (1,764) 884 (1,458) (574) Time deposits 1,014 (2,086) (1,072) 651 (276) 375 Long-term FHLB advances 15 8 23 953 19 972 Other borrowings (196) (87) (283) (716) 8 (708) Total 878 (4,073) (3,195) 1,745 (1,817) (72) Net interest earnings $ 1,436 $ 352 $ 1,788 $ 2,121 $ (456) $ 1,665 (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, 2002 2001 2000 Yield Change Yield Change Yield Change Yield on earning assets 6.73% -1.08% 7.81% -0.47% 8.28% 0.32% Effective rate on all liabilities as a percent of earning assets 2.78% -1.30% 4.08% -0.58% 4.66% 0.86% Net yield on earning assets 3.95% 0.22% 3.73% 0.11% 3.62% -0.54%
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TABLE 5: MIX OF AVERAGE INTEREST-EARNING ASSETS AND AVERAGE INTEREST-BEARING LIABILITIES Year ended December 31 2002 2001 2000 Loans 74.72% 74.25% 77.13% Taxable securities 15.49% 15.80% 17.31% Tax-exempt securities 6.14% 5.63% 4.86% FHLB stock 0.66% 0.69% 0.54% Other 2.99% 3.63% 0.16% Total interest earning assets 100.00% 100.00% 100.00% Savings and demand deposits 11.60% 9.86% 11.72% Money market deposits 26.25% 29.00% 26.09% Time deposits 47.35% 44.18% 45.24% Long-term FHLB advances 13.55% 14.50% 9.45% Other borrowings 1.25% 2.46% 7.50% Total interest bearing liabilities 100.00% 100.00% 100.00%
NONINTEREST INCOME Noninterest income was $3,048 for 2002, $983 or 47.6% higher than 2001. Noninterest income as a percentage of total revenues was 12.2% for 2002 compared to 8.1% last year. TABLE 6: NONINTEREST INCOME
% Change from Years Ended December 31, prior year (dollars in thousands) 2002 2001 2000 2002 2001 Noninterest income: Service fees $ 1,217 $ 1,010 $ 855 20.5% 18.1% Gain on sale of loans 1,492 683 66 118.4% 934.8% Provision for mortgage servicing right valuation allowance (269) - n/a n/a Investment and insurance sales commissions 250 183 195 36.6% -6.2% Other 358 189 330 89.4% -42.7% Total noninterest income $ 3,048 $ 2,065 $ 1,446 47.6% 42.8%
-18- 2002 COMPARED TO 2001 Service fees were $1,217, $207 or 20.5% higher than 2001. Service fees as a percent of average noninterest bearing demand deposits were 3.2% in 2002 and 3.1% in 2001. During 2002, the Company began a new overdraft fee program which accounted for the majority of the increase in total service fees. However, due to the Company's growing secondary market mortgage loan servicing activity, increased noninterest bearing balances owned by the Federal Home Loan Bank of Chicago were retained which increased the average balance of noninterest bearing demand deposits during 2002 but did not contribute to service fee income. Noninterest income from the sale of long-term fixed rate residential mortgage loans increased from $683 in 2001 to $1,492 during 2002. 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 mortgages or purchased new homes to take advantage of these historically low mortgage rates. During 2002 approximately $94 million of fixed rate residential mortgages were sold to outside investors and the Federal Home Loan Bank of Chicago. The Company expects that the number of refinancings will decrease in 2003 because it believes a significant number of homeowners have now refinanced and the Company expects mortgage interest rates to increase in the second half of 2003. The Company retains mortgage servicing rights on loans sold to the Federal Home Loan Bank of Chicago. Recognition of these mortgage servicing rights at the time the loan is sold increases the gain on the sale of the loan. The mortgage servicing right asset is amortized to expense in relation to servicing revenue income over the life of the loan. In accordance with current accounting standards, mortgage servicing rights are carried at the lower of amortized cost or fair value. Due to continued decline in long-term mortgage interest rates, many of the loans serviced by the Company are subject to prepayments from refinancing which decreases the current value of servicing rights. During 2002, a provision to mortgage servicing right valuation allowances of $269 was made to recognize reductions in servicing rights from early prepayments of loan principal. Investment and insurance product commissions consist of insurance annuity sales, brokerage services, mutual fund sales, life insurance commissions, and self-directed IRA fees. Investment and insurance product commissions increased $67 or 36.6% from last year. The change was predominantly due to increased sales of insurance annuities, while investment management commissions declined due to a decrease in the fair market value of assets under management, primarily from continued declines in the stock and bond markets during 2002. Other operating income during 2002 included additional income of $46 from debit card and ATM exchange fees. This increase in electronic exchange activity by customers during 2002 was attributable to the discontinuation of annual debit card fees to Bank customers during 2001 and the shifting of these fees to businesses which accept payment by Bank debit card. Separate from these items, other income increased $123 compared to 2001 due to several unrelated factors. -19- 2001 COMPARED TO 2000 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 2000 due in part to an increase in the annual fee to maintain an overdraft protection line of credit account. 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 approximately $60 million of fixed rate residential mortgages were sold to outside investors and the Federal Home Loan Bank of Chicago. Investment product commissions consist of insurance 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 debit card 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 $911 to $8,227 during 2002, representing a 12.5% increase over 2001.
TABLE 7: NONINTEREST EXPENSE Years Ended December 31, (dollars in thousands) 2002 2001 2000 Noninterest expense: Salaries and employee benefits $ 4,927 $ 4,419 $ 3,842 Occupancy 1,094 917 937 Data processing and office operations 583 523 460 Advertising and promotion 319 307 211 Other 1,304 1,150 1,024 Total noninterest expense $ 8,227 $ 7,316 $ 6,474
-20- 2002 COMPARED TO 2001 Salaries and employee benefits increased $508 or 11.5% over 2001 and represented 59.9% of total noninterest expense in 2002 compared to 60.4% in 2001. The increase includes an additional $17 in 401(k) profit sharing expense for 2002 over 2001. The increase also includes incentive compensation pay earned by employees in 2002 under the incentive plan totaling $414, an increase of $120 over a total of $294 during 2001. The average number of full time equivalent employees increased from 93 in 2001 to 106 in 2002. Separate from profit sharing expense, incentive pay, and the impact of capitalized loan origination costs affecting wages, average salaries and benefits per full time equivalent employee were $42,351 during 2002 and $43,208 during 2001. The decrease in wages and benefits per employee was due to maintaining health insurance costs at the same level as 2001 despite having additional employees in the plan (see Note 12 to the Consolidated Financial Statements for a description of the Company's self-funded health insurance plan) and hiring several new positions at the new Rhinelander branch location that earn less than the Company average wage. Occupancy expense was $1,094 for 2002 increasing $177, or 19.3% from last year. Approximately $32 of the increase was additional depreciation expense related to building and equipment investments at the new Rhinelander location. Approximately $59 of the increase was from building maintenance and equipment expense at the Company's Stewart Avenue Wausau home office. The majority of the remainder was related to the Company's Eagle River branch location which opened late in 2001 but incurred a full year of occupancy and equipment costs during 2002. Data processing costs increased $60 or 11.5% during 2002 reflecting the increasing cost of software maintenance contracts and telephone communication expenses from the expanded Bank wide customer service call center. Advertising and promotion expense increased $12, or 3.9% during 2002. The level of internal marketing staff was similar to 2001 as well as budgeted costs directed to the marketing department. Additional costs related to the opening of the new Rhinelander office in 2002 were offset by additional advertising costs incurred in connection with opening of the new Eagle River branch location during 2001. Other operating expense increased $154 or 13.4% in 2002. Significant increases during 2002 in this category included new employee finding fees ($23), increased correspondent bank charges from lower earnings credits in the currently low short-term interest rate market ($12), and consulting fees paid to enhance and update the asset/liability and interest rate projection modeling system ($20). Separate from this expense, other operating expense increased $99, or 8.6% over 2001. 2001 COMPARED TO 2000 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 -21- 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 0.2% 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 $1,110, in 2002; compared to $890 in 2001 and $600 in 2000. See additional discussion under section, "Allowance for Loan Losses." INCOME TAXES The effective tax rate was 31.3% in 2002, 30.2% in 2001, and 29.2% in 2000. The increase in the effective rate was mostly due to overall pre-tax income increasing faster than the relative size of the tax-exempt municipal securities portfolio and earnings at the Nevada investment subsidiary. See Note 13 to the Consolidated Financial Statements for additional tax information. -22- 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. At December 31, 2002, all 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. At December 31, 2001, tax-exempt municipal securities were considered held to maturity and were recorded at net amortized cost. The investment portfolio represented 21.6% and 21.4% of average earning assets in 2002 and 2001, respectively. During December 2002, the Company transferred the entire securities held to maturity portfolio to available for sale status. At the date of transfer, municipal securities had a net book value of $21,027 and fair value of $22,056 for an unrealized gain of $1,029. In accordance with current accounting standards, the transferred municipal securities were recorded at fair value and stockholders' equity increased $673 net of income tax effects at the date of transfer to recognize additional unrealized gain on securities available for sale. The Company reclassified municipal securities to increase available liquidity. Table 8 below categorizes securities by scheduled maturity date and does not take into account the existence of optional calls held by the security issuer. Therefore, actual funds flow from maturing securities may be different than presented below. Maturity of mortgage backed securities and collateralized mortgage obligations, some of which call for scheduled monthly payments of principal and interest, are categorized by average principal life of the security. Yields by security type and maturity are based on amortized security cost. As of December 31, 2002, the Company held a limited amount of variable rate securities including but not limited to "step-up" agency bonds having a net book value of $2,299 and fair value of $2,354. -23-
TABLE 8: INVESTMENT SECURITIES PORTFOLIO MATURITIES After one but After five but December 31, 2002 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 agencies $ 999 1.28% $ 10,902 4.33% $ 300 4.24% Obligations of states and political subdivisions (1) 916 6.24% 6,066 6.85% 14,944 6.53% Mortgage backed securities 4,547 4.94% Collateralized mortgage obligations 17,883 5.94% 23,952 4.53% Trust preferred securities 500 6.00% Other equity securities 48 10.25% Totals $19,846 5.73% $40,920 4.82% $19,791 6.13% $500 6.00% (1) Weighted average yields on tax-exempt securities have been calculated on a tax-equivalent basis using a rate of 34%.
At December 31, 2002 and 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 (fair value) of $7,907 and $9,225, at December 31, 2002 and 2001, respectively, were pledged primarily to secure public deposits, other borrowings, and for other purposes required by law. During 2002, the Company expanded securities ownership into additional categories not previously held. In light of the Company's asset/liability position and expectation of interest rate movements, pass through mortgage backed securities of 15 year single family mortgage pools were purchased as noted in Table 8 above. In addition, the Company purchased a nonrated trust preferred security issued by a bank holding company in Wisconsin. As with non rated municipal securities, the Company considers ownership of such local issues to have no more risk that out of state rated issues due to the Company's understanding of local markets, municipalities, and issuers. Each security purchased by the Company is subject to a full and formal risk analysis considering (among other factors) the liquidity needs of the bank and the credit risk of the issuer. -24-
TABLE 9: INVESTMENT SECURITIES DISTRIBUTION Years Ended December 31 2002 2001 2000 (dollars in thousands) Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value U.S. Treasury securities and obligations of U.S. government agencies $ 11,788 $ 12,201 $ 9,516 $ 9,673 $ 24,572 $ 24,410 Obligations of states and political subdivisions 20,905 21,926 20,287 20,355 13,975 14,005 Mortgage backed securities 4,519 4,547 Collateralized mortgage obligations 41,260 41,835 39,717 40,312 23,706 23,664 Trust preferred securities 500 500 Other equity securities 48 48 173 173 48 48 Total $ 79,020 $ 81,057 $ 69,693 $ 70,513 $ 62,301 $ 62,127
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, 2002 market value was 102.6% of book value compared to 101.2% of book value at December 31, 2001. The net unrealized gain on securities available for sale, recorded as a separate component of stockholders' equity, was $1,306, net of deferred taxes of $730 compared to a gain of $491, net of deferred income taxes of $260 at December 31, 2001. Management believes investment security yields have a stabilizing effect on net interest margin during periods of interest rate swings and expects to hold existing securities until maturity or repayment unless such funds are needed for liquidity due to unexpected loan growth or depositor withdrawals. During 2002, the tax adjusted yield on securities declined to 5.66% from 6.17% during 2001 and 6.36% in 2000 due to declines in overall market interest rates. Management reviews investment alternatives for projected excess funds on a quarterly basis after reviewing interest rate modeling projections and estimates of loan and deposit demand. 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 99.7% 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. -25- The Bank's investment subsidiary, PSB Investments, Inc., was formed in May, 1992, and held approximately $77,017 and $64,456 in investment securities and loans at book value at December 31, 2002 and 2001, respectively. Income tax expense for 2002 was approximately $194 lower compared to $213 lower in 2001 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 at least .75% over the moving average of one-year LIBOR. The FHLB pays dividends in both cash and additional shares of stock. During the three years ended December 31, 2002, FHLB dividends have been in the form of additional shares of stock. In accordance with industry convention, the Company records FHLB dividends in the form of stock as income in the year received. The average dividend rate paid to the Company on FHLB stock was 4.91%, 6.44%, and 8.41% in 2002, 2001, and 2000, 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 $266,556 at December 31, 2002, an increase of $22,006 or 9.0% over December 31, 2001. -26-
TABLE 10: LOAN COMPOSITION December 31, 2002 2001 2000 1999 1998 ($'s in thousands) % of % of % of % of % of Amount Total Amount Total Amount Total Amount Total Amount Total Commercial, industrial, municipal and agricultural $ 64,527 24.21% $ 64,503 26.38% $ 71,414 31.00% $ 60,300 32.42% $ 43,494 28.31% Commercial real estate mortgage 102,238 38.35% 84,150 34.41% 45,157 19.60% 28,046 15.08% 23,310 15.17% Real estate construction (commercial and residential) 26,051 9.77% 15,609 6.38% 11,231 4.87% 9,654 5.19% 8,643 5.63% Residential real estate mortgage 55,078 20.66% 61,787 25.27% 82,309 35.72% 70,556 37.93% 60,236 39.20% Residential real estate mortgage held for sale 949 0.36% 1,403 0.57% 114 0.05% - 0.00% 3,120 2.03% Residential real estate home equity 7,274 2.73% 4,576 1.87% 4,400 1.91% 4,075 2.19% 3,091 2.01% Consumer and individual 10,439 3.92% 12,522 5.12% 15,784 6.85% 13,375 7.19% 11,755 7.65% Totals $266,556 100.00% $244,550 100.00% $230,409 100.00% $186,006 100.00% $153,649 100.00%
Retained, in-house residential real estate mortgage loans totaled $55,078 at the end of 2002 and $61,787 at the end of 2001, continuing a downward trend beginning in 2001. In-house mortgages typically include 1 to 3 year balloon mortgages which have been offered rates no less than longer term 15 to 20 year fixed rates available in the secondary market. Therefore, it appears many of these borrowers have refinanced into a long-term fixed rate mortgage, thereby decreasing residential real estate mortgages held by the Company. Traditionally, in-house balloon mortgages have increased when long-term fixed rates were high. The Company recently updated pricing on retained balloon mortgages to attract borrowers with either lower balances, or anticipated short period to full repayment to increase retained principal in this lending category. In addition to residential real estate loans retained by the Company and recognized on the balance sheet, the Company also serviced $95,408 at December 31, 2002, and $35,929 at December 31, 2001 of residential real estate loans which have been sold to the Federal Home Loan Bank of Chicago (FHLB) under the Mortgage Partnership Finance Program (MPF). As part of the asset/liability and interest rate sensitivity management strategy, the Company generally does not retain long term 15 to 30 year fixed rate mortgages in its 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 -27- servicing the loan for the FHLB. Historically low long-term fixed rate mortgage interest rates during 2002 and 2001 increased the amount of loans originated and subsequently sold to the FHLB from just $1 million at December 31, 2000. The Company's MPF program originated during November 2000. As a FHLB Mortgage Partnership Finance loan servicer (as described under "Loans"), 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, 2002, the maximum Company obligation for such guarantees would be approximately $262 if total foreclosure losses on the entire pool of approximately $95 million loans exceeded $1,280. 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. Management believes loans serviced for the FHLB will realize minimal foreclosure losses in the future and that the Company will experience no loan losses related to charge-offs in excess of the FHLB 1% loss pool. The Company recognizes a mortgage servicing right asset due to the substantial volume of loans serviced for the FHLB. Initial mortgage servicing rights of $840 and $321 were recognized during 2002 and 2001, respectively, which increased the gain on sale of loans. 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. During 2002, the level of prepayments did accelerate and the Company recognized a provision for mortgage servicing right valuation allowance of $269 in light of the faster amortization periods. Mortgage servicing right amortization was $158 and $37 in 2002 and 2001, respectively. Mortgage servicing rights are recorded at the lower of amortized cost or fair value on the balance sheets. There were no mortgage servicing rights recorded during 2000. Commercial loans were $64,527 at the end of 2002, up $24 since year-end 2001, but comprised 24.2% of the total loans outstanding, down from 26.4% at the end of 2001. The commercial, industrial, municipal, 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 $2,120 at December 31, 2002 or .80% of total loans, compared to $2,908 at December 31, 2001. Commercial real estate lending continued to be a focus of the Company during 2002. Commercial real estate mortgages increased $18,088 over 2001 to $102,238 at December 31, 2002 for an increase of 21.5%. Commercial real estate loans are the largest category of loans -28- held by the Company, at 38.4% of total loans. Loan loss experience of this lending category has been excellent with no loan losses incurred during the five year period ended December 31, 2002. Real estate construction loans grew $10,442, or 66.9% during 2002 to $26,051 compared to an increase of $4,378, or 39.0% to $15,609 at the end of 2001. 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. The Company retains permanent financing on these projects following completion of construction in a majority of cases. Installment loans to consumers and individuals totaled $10,439, down $2,083 from $12,522 at year-end 2001. Installment loans include short-term installment loans, automobile loans, recreational vehicle loans, credit card loans, and other personal loans. The Company experiences extensive competition from local credit unions offering low rates on installment loans and has directed resources toward more profitable lending categories during the past two years.
TABLE 11: LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY Loan Maturity December 31, 2002 One year Over one year Over (dollars in thousands) or less to five years five years Commercial, industrial, municipal and agricultural $ 34,147 $ 29,423 $ 957 Commercial real estate mortgage 42,254 55,756 4,228 Real estate construction 26,051 Residential real estate mortgage 21,181 32,832 1,065 Residential real estate mortgage held for sale 949 - - Residential real estate home equity 7,215 - 59 Consumer and individual 3,350 6,176 913 Totals $135,147 $124,187 $ 7,222 Fixed rate $116,174 $ 7,222 Variable rate 8,013 - Totals $124,187 $ 7,222
Table 11 above categorizes loan principal by scheduled maturity and does not take into account any prepayment options held by the borrower. 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 -29- in similar activities that would cause them to be similarly impacted by economic conditions. At December 31, 2002, 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 2002, the allowance for loan losses grew from $2,969 at December 31, 2001 to $3,158 at December 31, 2002. As of December 31, 2002 the allowance for loan losses as a percentage of total loans outstanding was 1.22% and was 129.8% of nonperforming loans, compared to 1.24% and 73.6%, respectively, at December 31, 2001. In addition to coverage from the allowance for loan losses, nonperforming loans are secured by various collateral including real estate and consumer collateral.
TABLE 12: LOAN LOSS EXPERIENCE Years ended December 31 (dollars in thousands) 2002 2001 2000 1999 1998 Average balance of loans for period $ 249,247 $ 226,819 $ 207,527 $ 163,929 $148,806 Allowance for loan losses at beginning of year $ 2,969 $ 2,407 $ 2,099 $ 1,947 $ 1,845 Loans charged off: Commercial, industrial, municipal, and agricultural 628 148 250 374 138 Commercial real estate mortgage - - - - - Residential real estate mortgage 201 75 14 20 - Consumer and individual 156 107 51 38 69 Total charge-offs 985 330 315 432 207 Recoveries on loans previously charged-off: Commercial, industrial, municipal, and agricultural 33 1 16 74 - Commercial real estate mortgage - - - - - Residential real estate mortgage 6 - 3 - - Consumer and individual 25 1 4 50 9 Total recoveries 64 2 23 124 9 Net loans charged-off 921 328 292 308 198 Provision for loan losses 1,110 890 600 460 300 Allowance for loan losses at end of year $ 3,158 $ 2,969 $ 2,407 $ 2,099 $ 1,947 Ratio of net charge-offs during the year to average loans 0.37% 0.14% 0.14% 0.19% 0.13% Ratio of allowance for loan losses to loans receivable at end of year 1.22% 1.24% 1.06% 1.15% 1.27%
-30- 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 and by loan type. 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. As a FHLB Mortgage Partnership Finance loan servicer (as described under "Loans"), 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, 2002, the maximum Company obligation for such guarantees would be approximately $262. In the opinion of management, the allowance for loan losses is adequate as of December 31, 2002. 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) 2002 2001 2000 1999 1998 Commercial, industrial, municipal, and agricultural $ 1,919 $ 1,738 $ 1,467 $ 1,263 $ 1,120 Commercial real estate mortgage 569 417 87 61 62 Residential real estate mortgage 167 174 162 156 139 Consumer and individual 72 89 369 322 298 Impaired loans 431 551 322 297 328 Unallocated - - - - - Totals $ 3,158 $ 2,969 $ 2,407 $ 2,099 $ 1,947
-31- Net loans charged off were $921, or .37% in 2002 compared to $328 or .14% of average loans for 2001, and $292 or .14% of average loans for 2000. Loans charged off are subject to continuous review and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses. During 2002, the Company was notified of the bankruptcy of a commercial loan customer in which the Bank was not the lead lender. Due to inadequate collateral protection, an additional $270 of loan loss provisions were recorded to cover estimated principal losses not specifically identified and reserved previously. A charge-off of $376 was also recorded. The remaining principal balance on this relationship of approximately $211 is fully reserved in the allowance for loan losses at December 31, 2002 pending sale of remaining borrower collateral. Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past due but still accruing, nonaccrual 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 concessions to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate, or capitalization of unpaid real estate taxes or unpaid interest. The majority of restructured loans represent capitalized loan principal and/or interest and real estate taxes 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.
TABLE 14: NONPERFORMING LOANS AND FORECLOSED ASSETS December 31, (dollars in thousands) 2002 2001 2000 1999 1998 Nonaccrual loans not considered impaired $ 750 $ 1,801 $ 1,123 $ 620 $ 582 Nonaccrual impaired loans 1,036 1,235 803 510 564 Accruing loans past due 90 days or more - - - - - Restructured loans 647 999 1,348 278 296 Total non-performing loans $ 2,433 $ 4,035 $ 3,274 $ 1,408 $ 1,442 Foreclosed assets $ 573 $ 421 $ 17 $ 24 $ - Impaired loans accruing income $ 385 $ 877 $ 1,098 $ 1,696 $ 406 Total non-performing loans as a percent of gross loans receivable 0.94% 1.68% 1.44% 0.77% 0.96%
-32- Nonperforming loans at December 31, 2002, improved to $2,433 from $4,035 at December 31, 2001, for a decrease of $1,602. Management worked aggressively with problem credits during 2002 and expects the level of non performing loans to total loans to remain favorable during 2003. 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 2002 if all such loans had been current throughout the year in accordance with their original terms was $273 in comparison to $219 actually collected. The total reduction in interest income during 2001 and 2000 as a result of discontinuing the accrual of interest on loans that are delinquent for 90 days or more was $68 and $135, respectively. DEPOSITS Deposits are the Company's largest source of funds. At December 31, 2002, deposits were $297,830, up $24,195 or 8.8% over 2001. At December 31, 2001, deposits were $273,635, up $32,101 or 13.3% over 2000. During 2002 average noninterest bearing deposits increased substantially due in part to funds held in an account owned by the Federal Home Loan Bank of Chicago as part of the Company's mortgage loan servicing program. 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.
TABLE 15: AVERAGE DEPOSITS DISTRIBUTION Year ended December 31, 2002 2001 2000 Interest Interest Interest (dollars in thousands) Amount Rate paid Amount Rate paid Amount Rate paid Noninterest bearing demand deposits $ 38,031 n/a $ 32,710 n/a $ 30,209 n/a Interest bearing demand and savings deposits 32,536 1.04% 25,685 1.70% 26,952 2.13% Money market demand deposits 73,629 1.44% 75,553 3.74% 59,974 5.67% Time deposits 132,848 4.09% 115,093 5.66% 104,021 5.90% Totals $277,044 2.47% $249,041 3.92% $221,156 4.57%
-33- On average, deposits were $277,044 for 2002, up $28,003 or 11.2% over the average for 2001. Average non-maturity savings deposits, including money markets averaged 38.3% of total deposits during 2002 compared to 40.7% of total deposits during 2001.
TABLE 16: MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE December 31, 2002 (dollars in thousands) Balance Rate 3 months or less $ 8,395 3.00% Over 3 months through 6 months 07 3.31% Over 6 months through 12 months 17,934 3.26% Over 1 year through 5 years 26,945 4.46% Over 5 years 2,000 5.00% Totals $ 65,581
TABLE 17: PERIOD-END DEPOSIT COMPOSITION December 31, 2002 2001 (dollars in thousands) $ % $ % Non-interest bearing demand $ 45,458 15.26% $ 41,508 15.17% Interest-bearing demand and savings 38,545 12.94% 33,703 12.32% Money market deposits 74,418 24.99% 76,930 28.10% Retail time deposits less than $100 60,982 20.48% 61,702 22.55% Retail time deposits $100 and over 38,297 12.86% 34,191 12.50% Broker & national time deposits less than $100 12,847 4.31% 9,404 3.44% Broker & national time deposits $100 and over 27,284 9.16% 16,197 5.92% Totals $297,831 100.00% $273,635 100.00%
TABLE 18: CHANGE IN DEPOSIT COMPOSITION December 31, Change from prior year 2002 2001 $ % Total time deposits $100 and over $ 65,581 $ 50,388 $ 15,193 30.15% Total broker and national time deposits 40,131 25,601 14,530 56.76% Total retail time deposits 99,279 95,893 3,386 3.53% Core deposits, including money market deposits 158,421 152,141 6,280 4.13%
-34- Retail deposit growth during 2002 was not sufficient to fund the increase in loans and securities. Consequently, the Company increased use of broker and other wholesale type funding. Such funding was at rates generally more favorable that would have been on deposits acquired in the local markets. The Company expects local retail deposits to increase during 2003 due to the new full service Rhinelander office. OTHER FUNDING SOURCES Other funding sources, including repurchase agreements, and long-term debt, were $41,302, $42,327, and $39,515 at December 31, 2002, 2001, and 2000, respectively. Other borrowings at December 31, 2002 and 2001 consist of securities sold under repurchase agreements. The repurchase agreements generally carry a one year term at inception, although $1,080 of agreements at December 31, 2002 are payable after 2003. Other available short-term borrowings include federal funds purchased and the FHLB open line of credit, which were not used at December 31, 2002. Under the existing credit line with the FHLB, the Company may borrow up to an additional $5 million based on existing mortgage loan collateral. In addition, the Company may pledge certain investment securities to obtain an additional $23 million in FHLB borrowings under the current master borrowing agreement. FHLB advances rates for terms equal to or less than 5 years are generally more favorable that local retail deposits rates or brokered or other wholesale funding. During 2001, higher rate repurchase agreement borrowings were replaced with long-term fixed rate FHLB advances. Long-term FHLB advances were $38,000 at both December 31, 2002 and 2001. FHLB advances were $28,000 at December 31, 2000. FHLB advances carry substantial penalties for early prepayment that are generally not recovered from the lower interest rates in refinancing. The amount of early prepayment penalty is a function of the difference between the current borrowing rate, and the rate currently available for refinancing. Therefore, existing FHLB advances borrowed prior to 2001 were not refinanced in the substantially lower long term rate market experienced during 2002. During January 2003, a $10 million 5 year 5.45% advance of the $38 million in total advances outstanding was refinanced to lower the combined rate to 2.75% by taking out a 1 month 1.59% advance and a 5 year 3.90% advance. The level and term of new advances taken from the FHLB are part of the formal quarterly asset/liability management process and take into account anticipated liquidity funding needs and general interest movements expected. Refer to Note 9 of the Consolidated Financial Statements for more information on individual borrowings terms and rates on FHLB advances held at December 31, 2002 and 2001. -35-
TABLE 19: OTHER BORROWINGS December 31, (dollars in thousands) 2002 2001 2000 Securities sold under repurchase agreements $ 3,302 $ 4,327 $ 7,662 Federal funds purchased - - - FHLB open line of credit - - 3,853 Totals $ 3,302 $ 4,327 $ 11,515 Average amounts outstanding during the year $ 3,496 $ 6,414 $ 17,233 Avg. interest rates on amounts outstanding during year 4.26% 6.74% 6.62% Maximum month-end amounts outstanding $ 4,540 $ 9,047 $ 26,863 Average interest rate on amounts outstanding at end of year 3.98% 5.01% 6.83%
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 87.5% in 2002 compared to 84.9% in 2001 and 85.0% in 2000. As indicated in Table 17 and 18 above, deposits include brokered and national certificates that are essentially wholesale funds in the form of time deposits. Other non-deposit funding sources include long-term fixed rate and short-term variable rate Federal Home Loan Bank advances and federal funds purchased. Repurchase agreements are with a base of local 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 20 represents the Company's earning sensitivity to changes in interest rates at December 31, 2002. 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. The following repricing methodologies should be noted in Table 20: 1. Money market deposit accounts are considered fully repriced within 90 days. Interest bearing demand (NOW) and savings deposits are considered "core" deposits as they are generally insensitive to interest rate changes. These deposits are considered to reprice beyond 5 years. -36- 2. Nonaccrual loans are considered to reprice beyond 5 years. 3. Assets and liabilities with contractual calls or prepayment options are repriced according to the likelihood of the call or prepayment being exercised in the current interest rate environment. Table 20 reflects a positive gap position in all individual (not cumulative) categories except 0 to 90 days, and beyond 5 years. The cumulative one-year gap ratio is positive at 109.4%. The Bank believes the cumulative gap position at December 31, 2002 was adequate considering anticipated changes in interest rates in the upcoming 1 year period.
TABLE 20: INTEREST RATE SENSITIVITY GAP ANALYSIS December 31, 2002 (dollars in thousands) 0-90 Days 91-180 Days 181-365 Days 1-2 yrs. Beyond 2-5 yrs. Beyond 5 yrs. Total Earning assets: Loans $ 84,437 $ 29,704 $ 40,088 $ 56,441 $ 43,088 $ 6,364 $260,122 Securities 9,910 11,720 12,690 14,696 16,611 15,429 81,056 FHLB stock 2,264 2,264 Other earning assets 5,662 5,662 Total $102,273 $ 41,424 $ 52,778 $ 71,137 $ 59,699 $ 21,793 $349,104 Cumulative rate sensitive assets $102,273 $143,697 $196,475 $267,612 $327,311 $ 349,104 Interest-bearing liabilities Interest-bearing deposits $ 95,365 $ 26,655 $ 39,405 $ 20,075 $ 30,323 $ 40,550 $252,373 Short-term borrowings 352 1,336 534 300 780 - 3,302 Long-term FHLB advances 10,000 - 6,000 19,000 3,000 38,000 Total $105,717 $ 27,991 $ 45,939 $ 20,375 $ 50,103 $ 43,550 $293,675 Cumulative interest sensitive liabilities $105,717 $133,708 $179,647 $200,022 $250,125 $ 293,675 Interest sensitivity gap for the individual period $(3,444) $ 13,433 $ 6,839 $ 50,762 $ 9,596 $(21,757) Ratio of rate sensitive assets to rate sensitive liabilities for the individual period 96.7% 148.0% 114.9% 349.1% 119.2% 50.0% Cumulative interest sensitivity gap $(3,444) $ 9,989 $ 16,828 $ 67,590 $ 77,186 $ 55,429 Cumulative ratio of rate sensitive assets to rate sensitive liabilities 96.7% 107.5% 109.4% 133.8% 130.9% 118.9%
-37- During 2002, the Asset/Liability Committee created new financial modeling techniques to measure interest rate risk. Policies established by the Bank's Asset/Liability Committee are intended to limit exposure of earnings at risk. A formal liquidity contingency plan exists that directs management to the least expensive liquidity sources to fund sudden and unanticipated liquidity needs. The Company also uses various policy measures to assess adequacy of the Bank's liquidity and interest rate risk as described below. BASIC SURPLUS The Company measures basic surplus as the amount of existing net liquid assets (after deducting short-term liabilities and coverage for anticipated deposit funding outflows during the next 30 days) divided by total assets. The basic surplus calculation does not consider unused but available correspondent bank federal funds purchased, as those funds are subject to availability based on the correspondent bank's own liquidity needs and therefore are not guaranteed contractual funds. At December 31, 2002, the Company's basic surplus, including available FHLB advances not yet utilized was above the 5% minimum required by policy. INTEREST RATE RISK LIMITS The Company balances the need for liquidity with the opportunity for increased net interest income available from longer term loans held for investment and securities. To measure the impact on net interest income from interest rate changes, the Company models interest rate simulations on a quarterly basis. Company policy is that projected net interest income over the next 12 months will not be reduced by more than 15% given a change in interest rates of up to 200 basis points. At December 31, 2002, projected net income for the next 12 months changed less than the 15% required by policy and was considered acceptable by management. CORE FUNDING UTILIZATION To assess whether interest rate sensitivity beyond one year helps mitigate or exacerbate the short-term rate sensitive position, a quarterly measure of core funding utilization is made. Core funding is defined as liabilities with a maturity in excess of 60 months and capital. "Core" deposits including DDA, NOW and non-maturity savings accounts (except money market accounts) are also considered core long-term funding sources. The core funding utilization ratio is defined as assets with a maturity in excess of 60 months divided by core funding. The Company's target for the core funding utilization ratio is to remain at 80% or below given the same 200 basis point changes in rates that apply to the guidelines for interest rate risk limits exposure described previously. At December 31, 2002, the Company's core fund utilization ratio was within policy requirements. -38- CAPITAL ADEQUACY Stockholders' equity at December 31, 2002, increased $3,953 to $29,302 or $17.59 per share compared with $25,349 or $15.10 per share at December 31, 2001, and $22,274 or $13.27 per share at the end of 2000. The primary increase in stockholders' equity in 2002 was net income ($4,365) in excess of cash dividends paid to shareholders ($944), of $3,421. Equity also increased $815 from an increase in the unrealized gain on securities classified as available for sale during 2002 compared to $616 during 2001. Cash dividends paid in 2002 were $0.565 per share compared to $0.54 in 2001 and $0.515 per share in 2000. The 2002 dividend payout ratio as a percentage of net income was 21.65% in 2002 compared to 26.94% in 2001 and 32.64% in 2000. Capital at year-end 2002 included $1,306 in unrealized gains on securities available for sale, compared to $491 related to unrealized gains on securities at December 31, 2001, net of their tax effect. On July 12, 2002, the Company announced an annual, ongoing share repurchase program of up to 1% of outstanding shares per year. The Company repurchased 19,838 shares during 2002 at an average price per share of $19.88. The Company also anticipates repurchasing approximately 17,000 shares during 2003 at market prices then in effect. There were no shares repurchased during 2001. Current monthly net income allows the Company to increase assets by approximately $5.4 million per month and maintain a leverage capital ratio above 7.0%. Although the Company is currently purchasing treasury shares under the buyback program described above, management is pursuing a growth strategy which may require significant capital to be maintained to support asset growth. Therefore, large scale stock buybacks or dividend payments substantially in excess of past periods are not anticipated. Recently, during 2002, the Bank hired three additional commercial lenders, and opened a new brick and mortar full service branch in Rhinelander, Wisconsin. Previously, the Bank had a grocery store location in Rhinelander which generated significant loan growth even in that limited facility. With the new Rhinelander location and additional lenders, the Bank anticipates needing existing capital to significantly increase loans held for investment in the upcoming year. The adequacy of the Company's capital is regularly reviewed to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. As of December 31, 2002, 2001, and 2000, the Company's 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 17 of the notes to Consolidated Financial Statements). Management feels the capital structure of the Company and Bank is adequate. The following table presents a reconciliation of Company stockholders' equity as presented in the December 31, 2002, 2001, and 2000 consolidated balance sheets to regulatory capital. -39-
TABLE 21: CAPITAL RATIOS December 31, (dollars in thousands) 2002 2001 2000 Stockholders' equity $ 29,302 $ 25,349 $ 22,274 Disallowed mortgage servicing right assets (70) (28) - Unrealized (gain) loss on securities available for sale (1,306) (491) 125 Tier 1 regulatory capital 27,926 24,830 22,399 Add: allowance for loan losses 3,158 2,969 2,407 Total regulatory capital $ 31,084 $ 27,799 $ 24,806 Total assets $371,468 $344,296 $306,239 Disallowed mortgage servicing right assets (70) (28) - Unrealized (gain) loss on securities available for sale (1,306) (491) 125 Tangible assets $370,092 $343,777 $306,364 Risk-weighted assets (as defined by current regulations) $272,377 $248,751 $204,725 Tier 1 capital to period end tangible assets (leverage ratio) 7.55% 7.22% 7.31% Tier 1 capital to adjusted risk-weighted assets 10.25% 9.98% 10.94% Total capital to adjusted risk-weighted assets 11.41% 11.18% 12.12%
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, 2002, 2001, and 2000 are incorporated by reference to Exhibit 99.2 to this Annual Report on Form 10-K. Exhibit 99.2 is located immediately following page 50. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None -40- 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 4, 2003 relating to the 2003 annual meeting of shareholders (the "2003 Proxy Statement") under the caption "Proposal No. 2 - 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 2003 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 2003 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 2003 Proxy Statement beginning under the caption "Executive Officer Compensation," through the disclosure under the subcaption, "Employment and Change of Control Agreements," and (2) the disclosure in the 2003 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 2003 Proxy Statement beginning under the caption "Beneficial Ownership of Common Stock" and ending at the subcaption "Section 16(a) Beneficial Ownership Reporting Compliance." -41- The following table sets forth, as of December 31, 2002, information with respect to compensation plans under which the Company's common stock is authorized for issuance:
Plan category Number of securities to Weighted-average Number of securities be issued upon exercise exercise price of remaining available for of outstanding options, outstanding options, future issuance under warrants and rights warrants and rights equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation 26,892 $16.80 0 plans approved by security holders Equity compensation 0 N/A N/A plans not approved by security holders Total 26,892 $16.80 0
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 2003 Proxy Statement under the caption "Certain Relationships and Related Transactions." ITEM 14. CONTROLS AND PROCEDURES An evaluation of the Company's disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act") was carried out under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer within the 90-day period preceding the filing date of this Annual Report on Form 10-K. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. In the year ended December 31, 2002, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls. -42- PART IV ITEM 15. 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 November 22, 2002 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 10.2 Non-Qualified Retirement Plan for Directors of the Bank (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001)* 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)* 10.5 Employment and Change of Control Agreement with David K. Kopperud 10.6 Employment and Change of Control Agreement with David A. Svacina 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) -43- 99.1 Certification under Section 906 of Sarbanes-Oxley Act of 2002 99.2 Consolidated financial statements for the years ended December 31, 2002, 2001, and 2000 (b) Reports on Form 8-K. Form 8-K dated October 18, 2002. The Company filed a current report on Form 8-K on October 18, 2002, reporting earnings for the quarter ended September 30, 2002 under Item 5 and additional related disclosure under Item 9, Regulation FD Disclosure. *Denotes Executive Compensation Plans and Arrangements. -44- 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 4, 2003 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 4th day of March, 2003. Signature and Title Signature and Title DAVID K. KOPPERUD SCOTT M. CATTANACH David K. Kopperud, President Scott M. Cattanach, Treasurer and CFO 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 JOHN H. SONNENTAG Gordon P. Gullickson John H. Sonnentag THOMAS R. POLZER THOMAS A. RIISER Thomas R. Polzer Thomas A. Riiser WILLIAM M. REIF William M. Reif -45- CERTIFICATIONS I, David K. Kopperud, certify that: 1. I have reviewed this annual report on Form 10-K of PSB Holdings, Inc. (the "registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a 14 and 15d 14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and -46- 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 4, 2003 DAVID K. KOPPERUD David K. Kopperud President and Chief Executive Officer -47- CERTIFICATIONS I, Scott M. Cattanach, certify that: 1. I have reviewed this annual report on Form 10-K of PSB Holdings, Inc. (the "registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a 14 and 15d 14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and -48- 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 4, 2003 SCOTT M. CATTANACH Scott M. Cattanach Treasurer and Chief Financial Officer (Principal Financial Officer) -49- EXHIBIT INDEX to FORM 10-K of PSB HOLDINGS, INC. for the fiscal year ended December 31, 2002 Pursuant to Section 102(d) of Regulation S-T (17 C.F.R. {section}232.102(d)) The following exhibits are filed as part of this report: 3.1 Restated Articles of Incorporation, as amended November 22, 2002 10.1 Bonus Plan of Directors of the Bank 10.5 Employment and Change of Control Agreement with David K. Kopperud 10.6 Employment and Change of Control Agreement with David A. Svacina 99.1 Certification under Section 906 of Sarbanes-Oxley Act of 2002 99.2 Consolidated financial statements for the years ended December 31, 2002, 2001, and 2000 -50- EX-3.1 4 psbex31.txt PSB 10-K EXHIBIT 3.1 - RESTATED ARTICLES OF INCORPORATION, AS AMENDED NOVEMBER 22, 2002 Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PSB HOLDINGS, INC. (As last amended November 22, 2002) Article 1. Name. The name of the Corporation is PSB Holdings, Inc. Article 2. Specific Purpose. The Corporation is organized for the purpose of acting as a bank holding company under the provisions of the Bank Holding Company Act of 1956, as amended, and for any other lawful purpose. Article 3. Authorized Shares. The aggregate number of shares that the Corporation shall have authority to issue is 3,000,000 shares of common stock with no par value. Article 4. Registered Office and Registered Agent. The street address of the Corporation's registered office located in Wisconsin is 1905 West Stewart Avenue, Wausau, Wisconsin, 54401. The name of the Corporation's registered agent at this address is Kenneth M. Selner. Article 5. Directors. The Board of Directors of this Corporation shall consist of not less than five members nor more than seventeen members. The initial Board of Directors shall consist of 10 members. The number of directors may be fixed, from time to time and within the limits prescribed herein, by resolution of the Board of Directors. Article 6. Mergers, Consolidations, Sale or Share Exchange. The affirmative vote or consent of the holders of two-thirds of all voting groups of this Corporation entitled to vote in elections of directors shall be required for (a) the adoption of any agreement for the merger or -1- consolidation of this Corporation with or into any other corporation, (b) the sale of all or substantially all of the assets of this Corporation, or (c) approval of a plan of share exchange of the stock of this Corporation in addition to the vote or consent of the holders of the stock of this Corporation otherwise required by law. Article 7. Amendment of Articles. An amendment of these articles of incorporation shall be effective only if such amendment shall have received the affirmative vote of two-thirds of all voting groups of this Corporation entitled to vote in the election of directors in addition to the vote or consent of the holders of the stock of this Corporation otherwise required by law. Article 8. Supersession of Previous Articles. These articles shall supersede and take the place of the heretofore existing Articles of Incorporation and all amendments thereto. -2- EX-10.1 5 psbex101.txt PSB 10-K EXHIBIT 10.1 - BONUS PLAN OF DIRECTORS OF THE BANK Exhibit 10.1 BONUS PLAN OF DIRECTORS OF PEOPLES STATE BANK Directors of the Bank shall receive $500 upon achievement by the Bank of return on equity targets and upon average asset growth targets. Targets shall be established annually by the Board. Payment of the bonus amount shall be made in stock or cash as the Board shall determine. EX-10.5 6 psbex105.txt PSB 10-K EXHIBIT 10.5 - EMPLOYMENT AND CHANGE OF CONTROL AGREEMENT WITH DAVID K. KOPPERUD Exhibit 10.5 EMPLOYMENT AND CHANGE OF CONTROL AGREEMENT WITH DAVID K. KOPPERUD THIS AGREEMENT, made January 1, 2003, by and between Peoples State Bank, Wausau, Wisconsin, a Wisconsin banking corporation, ("the Bank") and David K. Kopperud, of Wausau, Wisconsin ("Mr. Kopperud"). WITNESSETH: WHEREAS, the Bank has employed Mr. Kopperud for many years and Mr. Kopperud has performed his duties in a highly satisfactory manner; and WHEREAS, the Bank wished to continue to employ Mr. Kopperud and Mr. Kopperud wishes to continue his employment by the Bank on the terms and conditions hereinafter provided; NOW, THEREFORE, in consideration of the premises, covenants and mutual agreements contained herein, the Bank and Mr. Kopperud agree as follows: 1. Employment. Subject to the earlier termination of this agreement pursuant to the terms hereof, Mr. Kopperud is hereby employed as the President and Chief Executive Officer of the Bank and Mr. Kopperud agrees to serve in such capacity on the terms and conditions hereinafter set forth. 2. Term. The term of this agreement shall commence on January 1, 2003 (the "Commencement Date") and shall end at midnight on the Expiration Date. For purposes of this agreement, the term "Expiration Date" shall mean the first to occur of (a) the date of Mr. Kopperud's death, (b) the third anniversary of the Commencement Date and (c) the date to which the term of this agreement has most recently been automatically extended pursuant to the following sentence. On the last day of each calendar month which commences on or after the Commencement Date, the term of this agreement shall automatically be extended for one calendar month; provided, however, that automatic extensions of the term of this agreement (and, consequently, the Expiration Date) pursuant to this sentence shall cease on the first to occur of (x) either the Bank or Mr. Kopperud giving to the other, at any time on or after the Commencement Date, a written notice that no, or no further, as the case may be, automatic extensions of the term of this agreement shall thereafter occur, but the giving of such a notice shall not affect any previous extensions, or (y) Mr. Kopperud's 62nd birthday. -1- The term "Term of Employment" shall mean the period beginning on the Commencement Date and ending on the earlier of the Expiration Date or the date on which Mr. Kopperud's employment is terminated pursuant to paragraphs 5 or 8. 3. Extent of Services. Mr. Kopperud agrees to devote his full-time attention and efforts (except during vacation periods, periods of illness and other approved absences as provided for in paragraph 4(c)) to the duties of any office held by him during the Term of Employment, provided, however, that Mr. Kopperud's devotion of a reasonable and de minimis portion of his attention or efforts to the management of his personal affairs during normal business hours shall not constitute a breach of the foregoing requirement. 4. Compensation and Reimbursement. (a) Salary. The Bank shall pay to Mr. Kopperud a salary based on an annual amount of $170,000. The Bank may increase Mr. Kopperud's salary from the amount specified herein during the Term of Employment, but may not decrease Mr. Kopperud's salary from any previously established amount. Mr. Kopperud's salary shall be payable at such times and in such installments as are consistent with the manner in which the salaries of other executive officers of the Bank are paid. (b) Incentive Compensation. During the Term of Employment, Mr. Kopperud shall be entitled to receive such additional compensation from the Bank as may be provided for officers under the terms of any incentive program from time to time maintained and in effect at the Bank for executive officers. (c) Other Benefits. During the Term of Employment, Mr. Kopperud shall be entitled to receive all benefits and perquisites ordinarily provided to executive officers of the Bank including coverage under an officer's and director's liability insurance policy and Mr. Kopperud shall participate in all employee benefit plans or fringe benefit programs now or hereafter established or maintained by the Bank including, but not limited to, group insurance plans, pension benefit plans, welfare benefit plans, pay practices, and vacation and sick leave benefits. Mr. Kopperud shall be entitled to participate in all plans or programs maintained by the Bank on terms no less favorable than those generally available to officers of the Bank and at a level of participation commensurate with his office. (d) Expenses. The Bank shall pay or reimburse Mr. Kopperud, upon submission of vouchers by him, for all entertainment, travel, meal, hotel accommodation, and miscellaneous expenses reasonably incurred by him in the interest of the Bank's business during the Term of Employment. -2- 5. Termination of Employment. (a) Termination by the Bank for Good Cause. The Bank may terminate Mr. Kopperud's employment prior to the Expiration Date for good cause only upon compliance with the requirements of this paragraph 5(a). "Good cause" for termination of Mr. Kopperud's employment by the Bank shall consist only of one or more of (i) the commission of an act or acts by Mr. Kopperud which results in a payment to the Bank or to PSB Holdings, Inc. ("PSB") of a claim filed by the Bank or PSB under a blanket banker fidelity bond policy as from time to time and at any time maintained; (ii) the willful and continuing failure to perform his duties in accordance with standards or policies established, from time to time, or at any time, by the Board, after a written demand for substantial performance is delivered to Mr. Kopperud by the Board which specifically identifies the manner in which the Board believes that Mr. Kopperud has not substantially performed his duties; (iii) the commission by Mr. Kopperud of any crime of moral turpitude, of dishonesty, of breach of trust, of theft, of embezzlement, of misapplication of funds, of unauthorized issuance of obligations or of false entries; (iv) any intentional, reckless, or negligent act or omission to act by Mr. Kopperud which results in the violation by Mr. Kopperud of any policy established by the Bank which is designed to insure compliance with applicable banking, securities, employment discrimination or other laws or which causes or results in the Bank's violation of such laws, except any act done by Mr. Kopperud in good faith, as determined in the reasonable discretion of the Board of Directors of the Bank, or which results in a violation of such policies or law which is, in the reasonable sole discretion of such Board, immaterial; or (v) Mr. Kopperud's physical or mental disability, if such disability either results in Mr. Kopperud receiving permanent disability payments pursuant to any group disability insurance policy or prevents Mr. Kopperud from the normal performance of his duties for a continuous period of at least six months. Upon the occurrence of any event constituting good cause for which the Bank elects to terminate Mr. Kopperud's employment prior to the Expiration Date, the Bank shall provide written notice to Mr. Kopperud, which shall state the good cause for termination, and Mr. Kopperud's termination of employment shall be effective as of the date specified in such notice. In the event of termination of Mr. Kopperud's employment in accordance with the conditions of this paragraph (a), on the effective date of Mr. Kopperud's termination of employment, the Term of Employment shall end, all of Mr. Kopperud's obligations pursuant to this agreement (except for those provided in paragraphs 6 and 7) shall end and the Bank's obligations to pay compensation or provide benefits to Mr. Kopperud pursuant to paragraph 4 shall end. (b) Termination by the Bank Other Than for Good Cause. The Bank may terminate Mr. Kopperud's employment prior to the Expiration Date for any reason other than good cause (as defined in paragraph 5(a)) upon providing written notice to Mr. Kopperud specifying the effective date of Mr. Kopperud's termination of employment. If the Bank terminates Mr. Kopperud's employment other than for good -3- cause under paragraph 5(a), the Term of Employment and all of Mr. Kopperud's obligations pursuant to this agreement (except for those provided in paragraphs 6 and 7) shall end on the effective date of Mr. Kopperud's termination of employment and the Bank shall provide, for a period beginning on the effective date of Mr. Kopperud's termination of employment, as a severance benefit to Mr. Kopperud and as liquidated damages for breach by the Bank of its otherwise applicable obligations hereunder, (i) a monthly cash payment equal to the amount which would, except for Mr. Kopperud's termination of employment, have been paid to Mr. Kopperud, if then living, as salary under paragraph 4(a) and (ii) until Mr. Kopperud becomes eligible for coverage under the health insurance plan of another employer of Mr. Kopperud, coverage for Mr. Kopperud, under the same terms then available to executive officers of the Bank, under any group health insurance program in which Mr. Kopperud was a participant on the effective date of Mr. Kopperud's termination of employment or under such successor plan or program as maintained after such date for the benefit of the Bank's employees, but in no event longer than the period for which payments are made pursuant to clause (i). Mr. Kopperud shall not, by virtue of his severance benefit and liquidated damages rights, acquire any right, title or interest in particular assets of the Bank, and such rights shall be no greater than the right of any unsecured general creditor of the Bank. Despite any other provision of this agreement, Mr. Kopperud shall not be entitled to any severance benefit or liquidated damages, and the Bank shall not be obligated to pay any such benefit or damages, if Mr. Kopperud violates the provisions of paragraphs 6 or 7. (c) Termination by Mr. Kopperud. Mr. Kopperud may terminate his employment at any time upon providing 30 days prior written notice to the Bank stating the effective date of his termination. In any such event, all obligations of the Bank to Mr. Kopperud under this agreement and all obligations of Mr. Kopperud to the Bank (except those provided for in paragraphs 6 and 7) shall cease and the Term of Employment shall end on the effective date of Mr. Kopperud's termination of employment. 6. Restrictive Covenant. Mr. Kopperud agrees, subject to the provisions of paragraph 8, that during the Term of Employment and during the one-year period which ends on the first anniversary of the effective date of Mr. Kopperud's termination of employment: (a) he will not, within a radius of 25 miles of the principal office of the Bank in Wausau, Wisconsin or any branch or subsidiary office or operation of the Bank, directly or indirectly, solicit loans, deposits or other business on behalf of any depository institution, doing business as a bank, savings and loan association, or otherwise or as a mortgage broker, or on behalf of any other entity which competes for the Bank's retail or commercial loan business (each, a "Financial Institution"); and -4- (b) he will not, directly or indirectly, solicit loans, deposits or other business on behalf of any Financial Institution from any person, corporation, limited liability company, partnership or other entity or organization: (i) who was a customer on the date of his termination of employment or within the one year period ending on the date of his termination of employment; (ii) was identified to management of the Bank by him, or by management of the Bank to him, as a potential customer of the Bank within the six-month period ending on the date of his termination of employment, or (iii)was solicited by him for loans, deposits or other business on behalf of any Financial Institution at any time during the one- year period ending on the date of his termination of employment; and (c) he will not, directly or indirectly, for himself or for any other person induce or attempt to induce any customer of the Bank to cease doing business with the Bank, or in any way interfere with the relationship between any customer of the Bank and the Bank. For purposes of this paragraph 6, the term "directly or indirectly" includes (a) any sale through any medium and (b) the direct or indirect ownership, management, operation, control, service as a director for, or association or employment with, any Financial Institution if such Financial Institution is engaged in the activities prohibited to Mr. Kopperud by the provisions of this paragraph 6 and Mr. Kopperud's activities or services for such Financial Institution involve the activities and services which are the same or substantially similar to those services performed by him for the Bank; provided, however, that an aggregate beneficial ownership interest of Mr. Kopperud of less than 5% of the equity interests in any Financial Institution (or affiliate thereof) whose stock is registered pursuant to the provisions of the Securities Exchange Act of 1934 shall be deemed not to constitute a violation of this provision. Mr. Kopperud further agrees that the restrictions set forth in this agreement are reasonably necessary to protect the reasonable interests of the Bank. 7. Confidential Information. Mr. Kopperud agrees that during the Term of Employment and for a two year period following the termination of his employment he will not reveal to any individual who is not then either employed by, retained by, or on the Board of Directors of PSB, or any of its subsidiaries, without the consent of PSB or the Bank, any confidential or proprietary information of PSB or the Bank, the revealing of which would adversely affect the business of PSB or the Bank, unless Mr. Kopperud discloses such matters in response to a subpoena or to discovery proceedings concerning a matter in litigation or based on advice of counsel acceptable to the Bank that such disclosure is appropriate or necessary under applicable law or regulation. -5- 8. Change of Control. In the event of a Change of Control, the following provisions of this agreement shall apply notwithstanding any other terms or conditions of this agreement: (a) Upon a Change of Control, the "Term of Employment" for purposes of paragraph 2 shall mean the period equal in length to the Term of Employment then remaining on the date immediately prior to the Change of Control and the "Expiration Date" shall mean the first to occur of (i) Mr. Kopperud's death, or (ii) his termination pursuant to paragraph 5, or (iii) his termination pursuant to paragraph 8(b). Notwithstanding any other provision of this agreement or any incentive compensation plan then in effect, Mr. Kopperud shall be awarded, for each fiscal year ending during the Employment Period following the Change in Control, an annual bonus (the "Annual Bonus") in cash at least equal to his average annual bonus under any bonus plan with respect to performance during each of the three full calendar years prior to the effective date of the Change in Control, regardless of when such bonus was actually paid (the "Recent Annual Bonus") and each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded but such amount shall be offset by any amount accrued under any other incentive compensation plan maintained after the Change of Control. (b) Termination of Employment by Mr. Kopperud for Good Reason. Mr. Kopperud's employment may be terminated by Mr. Kopperud during the Term of Employment for Good Reason if, (i) within 60 days of the date of occurrence of a triggering event, Mr. Kopperud notifies the Bank in writing of his intention to treat such event as Good Reason, (ii) within 30 days following receipt of such notice provided for in (i), the Bank fails to cure the triggering event and (iii) within 30 days following the expiration of the 30 day period described in (ii), Mr. Kopperud voluntarily terminates his employment by giving written notice to the Bank. (c) Good Reason. For purposes of this agreement, "Good Reason" shall mean the occurrence of one or more of the following events subsequent to the public announcement of, or actual knowledge of the Bank or PSB of, any actual or proposed transaction which results, directly or indirectly, within 270 days of the date of such announcement or knowledge, in a Change of Control (each of which shall be a "triggering event"): (i) a change in job title or the assignment to Mr. Kopperud of any duties inconsistent in any respect with the duties or responsibilities then held by Mr. Kopperud (except if his status, title, or authority has been increased), or any other action by the Bank which results in a diminution in such duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Bank promptly after receipt of notice thereto given by Mr. Kopperud; -6- (ii) any failure by the Bank to comply with any of the provisions of paragraph 4 of this agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Bank promptly after receipt of notice thereof given by Mr. Kopperud, unless the Bank agrees to fully compensate Mr. Kopperud for any such reduction; (iii) Mr. Kopperud is required to locate his office more than 25 miles from the current location of the Bank's principal office, excluding business travel reasonably consistent with the amount of travel required of him prior to such relocation; (iv) any purported termination by the Bank of Mr. Kopperud's employment otherwise than as expressly permitted by this agreement; (v) any failure of any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank to assume expressly and agree to perform this agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession had taken place; or (vi) the Bank's or PSB's request that Mr. Kopperud perform an illegal, or wrongful act in violation of the Bank's code of conduct policies. (d) Severance Benefit on Termination by Mr. Kopperud for Good Reason. Upon termination of Mr. Kopperud's employment by Mr. Kopperud pursuant to paragraph 8(a) or by the Bank for a reason other than good cause subsequent to the public announcement of, or the Bank's or PSB's actual knowledge of, any actual or proposed transaction which results, directly or indirectly, within 270 days of the date of such announcement or knowledge, in a Change of Control, all obligations of the Bank to Mr. Kopperud under this agreement and all obligations of Mr. Kopperud to the Bank (except those provided for in paragraph 7) shall cease and the Term of Employment shall end (the "Date of Termination") and: (i) subject to paragraph 8(f), the Bank shall pay to Mr. Kopperud in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) the sum of (1) Mr. Kopperud's base salary under paragraph 4(a) through the Date of Termination and any accrued incentive compensation to the extent not theretofore paid, (2) the product of (a) an amount equal to any incentive compensation earned by Mr. Kopperud for the most recently completed fiscal year during the Term of Employment, if any and (b) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of -7- Termination, and the denominator of which is 365 and (3) any compensation previously deferred by Mr. Kopperud (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid; and (B) the amount equal to 300% of the sum of (1) Mr. Kopperud's annual salary as most recently in effect pursuant to paragraph 4(a) and (2) the average incentive compensation earned by Mr. Kopperud in the three most recently completed fiscal years during the Term of Employment; (ii) until Mr. Kopperud becomes eligible for coverage under the health insurance plan of another employer of Mr. Kopperud, coverage for Mr. Kopperud, under the same terms then available to executive officers of the Bank, under any group health insurance program in which Mr. Kopperud was a participant on the effective date of Mr. Kopperud's termination of employment or under such successor plan or program as maintained after such date for the benefit of the Bank's employees; and (iii) to the extent not theretofore paid or provided, the Bank shall timely pay or provide to Mr. Kopperud any other amounts or benefits required to be paid or provided or which he is eligible to receive under any plan, program, policy or practice or contract or agreement of the Bank and its affiliated companies. (e) Definition of Change of Control. For the purpose of this agreement, a "Change of Control" shall be deemed to have occurred: (i) when any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, excluding any employee benefit plan sponsored or maintained by PSB or any subsidiary of PSB (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of PSB or the Bank representing 30% or more of the combined voting power of the Bank's or PSB's then outstanding securities with respect to the election of the directors of the Bank or PSB; or (ii) when, during any period of 24 consecutive months, the individuals who, at the beginning of such period, constitute the Board of Directors of the Bank or PSB (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided, however, that a director who was not a director at the beginning of such 24-month period -8- shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least a majority of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this provision; or (iii)the occurrence of a transaction requiring stockholder approval of the acquisition of the Bank by an entity other than PSB or a 50% or more owned subsidiary of PSB or shareholder approval of the acquisition of PSB through purchase of assets, or by merger, consolidation or otherwise, except in the case of a transaction pursuant to which, immediately after the transaction, PSB's shareholders immediately prior to the transaction own at least 60% of the combined voting power of the surviving entity's then outstanding securities with respect to the election of the directors of such entity solely be reason of such transaction; or (iv) the liquidation or dissolution of the Bank or PSB. (f) Limitation on Benefits. (i) Notwithstanding any other provision of this agreement, the present value of all amounts payable pursuant to this paragraph 8 which would constitute "parachute payments" (as such term is defined in Section 280G of the Internal Revenue Code of 1986 as amended (the "Code"), and any regulations promulgated thereunder), together with the present value of all other benefits payable by the Bank to Mr. Kopperud under any other plans and the Bank which would also constitute "parachute payments," shall in no event equal or exceed an amount (the "Testing Amount") equal to 3 times Mr. Kopperud's "base amount" (as such term is defined in Section 280G of the Code and any regulations promulgated thereunder), it being the intention of the parties that no payment made pursuant to this agreement shall constitute an "excess parachute payment" (as such term is defined in Section 280G of the Code and any regulations promulgated thereunder). In the event that the present value of the payments provided for in this paragraph 8 together with the present value of such other amounts, without taking into account this paragraph (f), equals or exceeds the Testing Amount, then the amount of the payments provided for in this paragraph 8 and under such plans shall be reduced, beginning with the payments which are last in time, until the present value of all such payments is less than the Testing Amount. For purposes of this paragraph 8, present value shall be determined in the manner provided in Section 280G of the Code and the regulations promulgated thereunder. -9- (ii) It is the intention of the parties that the provisions of this paragraph 8 be construed to reduce the amounts otherwise payable hereunder only to the extent necessary to avoid the disallowance of the deduction by the Bank for any such amounts or the imposition of an excise tax on Mr. Kopperud for any such amounts, under federal income tax law as it currently exists or may hereafter be amended. (iii)In the event the provisions of this paragraph 8 require any reduction in the amount to be paid to Mr. Kopperud under this paragraph 8 of this Agreement, the Bank shall deliver to Mr. Kopperud concurrently with such payment a statement signed by a partner or principal of its independent accounting firm setting forth the basis for and computation of such reduction and certifying that such computation is made in good faith. 9. Miscellaneous. (a) Notices. Any notice required or permitted to be given under this agreement shall not be deemed to have been given unless delivered in person or mailed, postage prepaid by certified mail addressed, in the case of Mr. Kopperud, to his last known residence as specified by him in a notice to the Bank, or, in the case of the Bank to its principal office. (b) Benefits and Obligations. This agreement shall be binding upon, shall inure to the benefit of the Bank and its successors or assigns, and, as provided for herein, PSB, and shall be enforceable by the Bank and its respective successors and assigns, and Mr. Kopperud, his heirs, assigns or legal representatives; provided, however, that the obligations of Mr. Kopperud contained herein may not be delegated or assigned. (c) Entire Agreement; Amendment. This agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and may only be amended by an agreement in writing signed by all of the parties hereto. (d) Waiver. The failure of any party hereto to insist, in any one or more instances, upon performance of any of the terms and conditions of this agreement, shall not be construed as a waiver or relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. (e) Severability. In the event that any portion of this agreement may be held to be invalid or unenforceable for any reason, the parties hereto agree that said invalidity or unenforceability, shall not effect the other portions of this agreement and that the remaining covenants, terms and conditions or portions thereof shall remain in full force and effect and any court of competent jurisdiction may so modify the objectionable provision as to make it valid and enforceable. -10- (f) Governing Laws. This agreement shall be governed by and construed in accordance with the internal laws of the State of Wisconsin without reference to conflicts of law principles. (g) Captions. The captions contained in this agreement are for the convenience of the Bank and Mr. Kopperud and shall not be deemed or construed as in any way limiting or extending the language of the provisions to which such captions refer. IN WITNESS WHEREOF, the Bank and Mr. Kopperud have caused this instrument to be executed as of the date first written above. PEOPLES STATE BANK By: DAVID A. SVACINA David A. Svacina As its Vice President DAVID K. KOPPERUD David K. Kopperud -11- EX-10.6 7 psbex106.txt PSB 10-K EXHIBIT 10.6 - EMPLOYMENT AND CHANGE OF CONTROL AGREEMENT WITH DAVID A. SVACINA Exhibit 10.6 EMPLOYMENT AND CHANGE OF CONTROL AGREEMENT WITH DAVID A. SVACINA THIS AGREEMENT, made January 1, 2003, by and between Peoples State Bank, Wausau, Wisconsin, a Wisconsin banking corporation, ("the Bank") and David A. Svacina, of Wausau, Wisconsin ("Mr. Svacina"). WITNESSETH: WHEREAS, the Bank has employed Mr. Svacina for many years and Mr. Svacina has performed his duties in a highly satisfactory manner; and WHEREAS, the Bank wished to continue to employ Mr. Svacina and Mr. Svacina wishes to continue his employment by the Bank on the terms and conditions hereinafter provided; NOW, THEREFORE, in consideration of the premises, covenants and mutual agreements contained herein, the Bank and Mr. Svacina agree as follows: 1. Employment. Subject to the earlier termination of this agreement pursuant to the terms hereof, Mr. Svacina is hereby employed as the Executive Vice President of the Bank; provided, however, that Mr. Svacina may be employed in such other capacity as the Board of Directors of the Bank shall deem appropriate and in the best interests of the Bank. Mr. Svacina agrees to serve in such capacity or capacities on the terms and conditions hereinafter set forth. 2. Term. The term of this agreement shall commence on January 1, 2003 (the "Commencement Date") and shall end at midnight on the Expiration Date. For purposes of this agreement, the term "Expiration Date" shall mean the first to occur of (a) the date of Mr. Svacina's death, or (b) the third anniversary of the Commencement Date and (c) the date to which the term of this agreement has most recently been automatically extended pursuant to the following sentence. On the last day of each calendar month which commences on or after the Commencement Date, the term of this agreement shall automatically be extended for one calendar month; provided, however, that automatic extensions of the term of this agreement (and, consequently, the Expiration Date) pursuant to this sentence shall cease on the first to occur of (x) either the Bank or Mr. Svacina giving to the other, at any time on or after the Commencement Date, a written notice that no, or no further, as the case may be, automatic extensions of the term of this agreement shall thereafter occur, but the giving of such a notice -1- shall not affect any previous extensions, or (y) Mr. Svacina's 62nd birthday. The term "Term of Employment" shall mean the period beginning on the Commencement Date and ending on the earlier of the Expiration Date or the date on which Mr. Svacina's employment is terminated pursuant to paragraphs 5 or 8. 3. Extent of Services. Mr. Svacina agrees to devote his full-time attention and efforts (except during vacation periods, periods of illness and other approved absences as provided for in paragraph 4(c)) to the duties of any office held by him during the Term of Employment, provided, however, that Mr. Svacina's devotion of a reasonable and de minimis portion of his attention or efforts to the management of his personal affairs during normal business hours shall not constitute a breach of the foregoing requirement. 4. Compensation and Reimbursement. (a) Salary. The Bank shall pay to Mr. Svacina a salary based on an annual amount of $110,000. The Bank may increase Mr. Svacina's salary from the amount specified herein during the Term of Employment, but may not decrease Mr. Svacina's salary from any previously established amount. Mr. Svacina's salary shall be payable at such times and in such installments as are consistent with the manner in which the salaries of other executive officers of the Bank are paid. (b) Incentive Compensation. During the Term of Employment, Mr. Svacina shall be entitled to receive such additional compensation from the Bank as may be provided for officers of commensurate position or rank under the terms of any incentive program from time to time maintained and in effect at the Bank for executive officers. (c) Other Benefits. During the Term of Employment, Mr. Svacina shall be entitled to receive all benefits and perquisites ordinarily provided to executive officers of the Bank including coverage under an officer's and director's liability insurance policy and Mr. Svacina shall participate in all employee benefit plans or fringe benefit programs now or hereafter established or maintained by the Bank including, but not limited to, group insurance plans, pension benefit plans, welfare benefit plans, pay practices, and vacation and sick leave benefits. Mr. Svacina shall be entitled to participate in all plans or programs maintained by the Bank on terms no less favorable than those generally available to officers of the Bank and at a level of participation commensurate with his office. (d) Expenses. The Bank shall pay or reimburse Mr. Svacina, upon submission of vouchers by him, for all entertainment, travel, meal, hotel accommodation, and miscellaneous expenses reasonably incurred by him in the interest of the Bank's business during the Term of Employment. -2- 5. Termination of Employment. (a) Termination by the Bank for Good Cause. The Bank may terminate Mr. Svacina's employment prior to the Expiration Date for good cause only upon compliance with the requirements of this paragraph 5(a). "Good cause" for termination of Mr. Svacina's employment by the Bank shall consist only of one or more of (i) the commission of an act or acts by Mr. Svacina which results in a payment to the Bank or to PSB Holdings, Inc. ("PSB") of a claim filed by the Bank or PSB under a blanket banker fidelity bond policy as from time to time and at any time maintained; (ii) the willful and continuing failure to perform his duties in accordance with standards or policies established, from time to time, or at any time, by the Bank, after a written demand for substantial performance is delivered to Mr. Svacina by the Board which specifically identifies the manner in which the Board believes that Mr. Svacina has not substantially performed his duties; (iii) the commission by Mr. Svacina of any crime of moral turpitude, of dishonesty, of breach of trust, of theft, of embezzlement, of misapplication of funds, of unauthorized issuance of obligations or of false entries; (iv) any intentional, reckless, or negligent act or omission to act by Mr. Svacina which results in the violation by Mr. Svacina of any policy established by the Bank which is designed to insure compliance with applicable banking, securities, employment discrimination or other laws or which causes or results in the Bank's violation of such laws, except any act done by Mr. Svacina in good faith, as determined in the reasonable discretion of the Board of Directors of the Bank, or which results in a violation of such policies or law which is, in the reasonable sole discretion of such Board, immaterial; or (v) Mr. Svacina's physical or mental disability, if such disability either results in Mr. Svacina receiving permanent disability payments pursuant to any group disability insurance policy or prevents Mr. Svacina from the normal performance of his duties for a continuous period of at least six months. Upon the occurrence of any event constituting good cause for which the Bank elects to terminate Mr. Svacina's employment prior to the Expiration Date, the Bank shall provide written notice to Mr. Svacina, which shall state the good cause for termination, and Mr. Svacina's termination of employment shall be effective as of the date specified in such notice. In the event of termination of Mr. Svacina's employment in accordance with the conditions of this paragraph (a), on the effective date of Mr. Svacina's termination of employment, the Term of Employment shall end, all of Mr. Svacina's obligations pursuant to this agreement (except for those provided in paragraphs 6 and 7) shall end and the Bank's obligations to pay compensation or provide benefits to Mr. Svacina pursuant to paragraph 4 shall end. (b) Termination by the Bank Other Than for Good Cause. The Bank may terminate Mr. Svacina's employment prior to the Expiration Date for any reason other than good cause (as defined in paragraph 5(a)) upon providing written notice to Mr. Svacina specifying the effective date of Mr. Svacina's termination of employment. If the Bank terminates Mr. Svacina's employment other than for good cause under paragraph 5(a), the Term of Employment and all of Mr. Svacina's obligations pursuant to this agreement (except for those provided in paragraphs 6 and 7) shall end on the -3- effective date of Mr. Svacina's termination of employment and the Bank shall provide, for a period beginning on the effective date of Mr. Svacina's termination of employment, as a severance benefit to Mr. Svacina and as liquidated damages for breach by the Bank of its otherwise applicable obligations hereunder, (i) a monthly cash payment equal to the amount which would, except for Mr. Svacina's termination of employment, have been paid to Mr. Svacina, if then living, as salary under paragraph 4(a) and (ii) until Mr. Svacina becomes eligible for coverage under the health insurance plan of another employer of Mr. Svacina, coverage for Mr. Svacina, under the same terms then available to executive officers of the Bank, under any group health insurance program in which Mr. Svacina was a participant on the effective date of Mr. Svacina's termination of employment or under such successor plan or program as maintained after such date for the benefit of the Bank's employees but in no event longer than the period for which payments are made pursuant to clause (i). Mr. Svacina shall not, by virtue of his severance benefit and liquidated damages rights, acquire any right, title or interest in particular assets of the Bank, and such rights shall be no greater than the right of any unsecured general creditor of the Bank. Despite any other provision of this agreement, Mr. Svacina shall not be entitled to any severance benefit or liquidated damages, and the Bank shall not be obligated to pay any such benefit or damages, if Mr. Svacina violates the provisions of paragraphs 6 or 7. (c) Termination by Mr. Svacina. Mr. Svacina may terminate his employment at any time upon providing 30 days prior written notice to the Bank stating the effective date of his termination. In any such event, all obligations of the Bank to Mr. Svacina under this agreement and all obligations of Mr. Svacina to the Bank (except those provided for in paragraphs 6 and 7) shall cease and the Term of Employment shall end on the effective date of Mr. Svacina's termination of employment. 6. Restrictive Covenant. Mr. Svacina agrees, subject to the provisions of paragraph 8, that during the Term of Employment and during the one-year period which ends on the first anniversary of the effective date of Mr. Svacina's termination of employment: (a) he will not, within a radius of 25 miles of the principal office of the Bank in Wausau, Wisconsin or any branch or subsidiary office or operation of the Bank, directly or indirectly, solicit loans, deposits or other business on behalf of any depository institution, doing business as a bank, savings and loan association, or otherwise or as a mortgage broker, or on behalf of any other entity which competes for the Bank's retail or commercial loan business (each a "Financial Institution"); and (b) he will not, directly or indirectly, solicit loans, deposits or other business on behalf of any Financial Institution from any person, corporation, limited liability company, partnership or other entity or organization: (i) who was a customer on the date of his termination of employment or within the one year period ending on the date of his termination of employment; -4- (ii) was identified to management of the Bank by him, or by management of the Bank to him, as a potential customer of the Bank within the six-month period ending on the date of his termination of employment, or (iii) was solicited by him for loans, deposits or other business on behalf of any Financial Institution at any time during the one-year period ending on the date of his termination of employment; and (c) he will not, directly or indirectly, for himself or for any other person induce or attempt to induce any customer of the Bank to cease doing business with the Bank, or in any way interfere with the relationship between any customer of the Bank and the Bank. For purposes of this paragraph 6, the term "directly or indirectly" includes (a) any sale through any medium and (b) the direct or indirect ownership, management, operation, control, service as a director for, or association or employment with, any Financial Institution if such Financial Institution is engaged in the activities prohibited to Mr. Svacina by the provisions of this paragraph 6 and Mr. Svacina's activities or services for such Financial Institution involve the activities and services which are the same or substantially similar to those services performed by him for the Bank; provided, however, that an aggregate beneficial ownership interest of Mr. Svacina of less than 5% of the equity interests in any Financial Institution (or affiliate thereof) whose stock is registered pursuant to the provision of the Securities Exchange Act of 1934 shall be deemed not to constitute a violation of this provision. Mr. Svacina further agrees that the restrictions set forth in this agreement are reasonably necessary to protect the reasonable interests of the Bank. 7. Confidential Information. Mr. Svacina agrees that during the Term of Employment and for a two year period following the termination of his employment he will not reveal to any individual who is not then either employed by, retained by, or on the Board of Directors of PSB, or any of its subsidiaries, without the consent of PSB or the Bank, any confidential or proprietary information of PSB or the Bank, the revealing of which would adversely affect the business of PSB or the Bank, unless Mr. Svacina discloses such matters in response to a subpoena or to discovery proceedings concerning a matter in litigation or based on advice of counsel acceptable to the Bank that such disclosure is appropriate or necessary under applicable law or regulation. 8. Change of Control. In the event of a Change of Control, the following provisions of this agreement shall apply notwithstanding any other terms or conditions of this agreement: (a) Upon a Change of Control, the "Term of Employment" for purposes of paragraph 2 shall mean the period equal in length to the Term of Employment then remaining on the date immediately prior to the Change of Control and the "Expiration Date" shall mean the first to occur of (i) Mr. Svacina's death, or (ii) his termination pursuant to paragraph 5, or (iii) his termination pursuant to paragraph 8(b). -5- Notwithstanding any other provision of this agreement or any incentive compensation plan then in effect, Mr. Svacina shall be awarded, for each fiscal year ending during the Employment Period following the Change in Control, an annual bonus (the "Annual Bonus") in cash at least equal to his average annual bonus under any bonus plan with respect to performance during each of the three full calendar years prior to the effective date of the Change in Control, regardless of when such bonus was actually paid (the "Recent Annual Bonus") and each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded but such amount shall be offset by any amount accrued under any other incentive compensation plan maintained after the Change of Control. (b) Termination of Employment by Mr. Svacina for Good Reason. Mr. Svacina's employment may be terminated by Mr. Svacina during the Term of Employment for Good Reason if, (i) within 60 days of the date of occurrence of a triggering event, Mr. Svacina notifies the Bank in writing of his intention to treat such event as Good Reason, (ii) within 30 days following receipt of such notice provided for in (i), the Bank fails to cure the triggering event and (iii) within 30 days following the expiration of the 30 day period described in (ii), Mr. Svacina voluntarily terminates his employment by giving written notice to the Bank. (c) Good Reason. For purposes of this agreement, "Good Reason" shall mean the occurrence of one or more of the following events subsequent to the public announcement of, or actual knowledge of the Bank or PSB of, any actual or proposed transaction which results, directly or indirectly, within 270 days of the date of such announcement or knowledge, in a Change of Control (each of which shall be a "triggering event"): (i) the assignment to Mr. Svacina of any duties inconsistent in any respect with the duties or responsibilities then held by Mr. Svacina (except if his status, title, or authority has been increased), or any other action by the Bank which results in a diminution in such duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Bank promptly after receipt of notice thereto given by Mr. Svacina; (ii) any failure by the Bank to comply with any of the provisions of paragraph 4 of this agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Bank promptly after receipt of notice thereof given by Mr. Svacina, unless the Bank agrees to fully compensate Mr. Svacina for any such reduction; (iii) Mr. Svacina is required to locate his office more than 25 miles from the current location of the Bank's principal office, excluding business travel -6- reasonably consistent with the amount of travel required of him prior to such relocation; (iv) any purported termination by the Bank of Mr. Svacina's employment otherwise than as expressly permitted by this agreement; (v) any failure of any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank to assume expressly and agree to perform this agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession had taken place; or (vi) the Bank's or PSB's request that Mr. Svacina perform an illegal, or wrongful act in violation of the Bank's code of conduct policies. (d) Severance Benefit on Termination by Mr. Svacina for Good Reason. Upon termination of Mr. Svacina's employment by Mr. Svacina pursuant to paragraph 8(a) or by the Bank for a reason other than good cause subsequent to the public announcement of, or the Bank's or PSB's actual knowledge of, any actual or proposed transaction which results, directly or indirectly, within 270 days of the date of such announcement or knowledge, in a Change of Control, all obligations of the Bank to Mr. Svacina under this agreement and all obligations of Mr. Svacina to the Bank (except those provided for in paragraph 7) shall cease and the Term of Employment shall end (the "Date of Termination") and: (i) subject to paragraph 8(f), the Bank shall pay to Mr. Svacina in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) the sum of (1) Mr. Svacina's base salary under paragraph 4(a) through the Date of Termination and any accrued incentive compensation to the extent not theretofore paid, (2) the product of (a) an amount equal to any incentive compensation earned by Mr. Svacina for the most recently completed fiscal year during the Term of Employment, if any and (b) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by Mr. Svacina (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid; and (B) the amount equal to 300% of the sum of (1) Mr. Svacina's annual salary as most recently in effect pursuant to paragraph 4(a) and (2) the average incentive compensation earned by Mr. Svacina in the three most recently completed fiscal years during the Term of Employment; -7- (ii) until Mr. Svacina becomes eligible for coverage under the health insurance plan of another employer of Mr. Svacina, coverage for Mr. Svacina, under the same terms then available to executive officers of the Bank, under any group health insurance program in which Mr. Svacina was a participant on the effective date of Mr. Svacina's termination of employment or under such successor plan or program as maintained after such date for the benefit of the Bank's employees; and (iii) to the extent not theretofore paid or provided, the Bank shall timely pay or provide to Mr. Svacina any other amounts or benefits required to be paid or provided or which he is eligible to receive under any plan, program, policy or practice or contract or agreement of the Bank and its affiliated companies. (e) Definition of Change of Control. For the purpose of this agreement, a "Change of Control" shall be deemed to have occurred: (i) when any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, excluding any employee benefit plan sponsored or maintained by PSB or any subsidiary of PSB (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of PSB or the Bank representing 30% or more of the combined voting power of the Bank's or PSB's then outstanding securities with respect to the election of the directors of the Bank or PSB; or (ii) when, during any period of 24 consecutive months, the individuals who, at the beginning of such period, constitute the Board of Directors of the PSB (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided, however, that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least a majority of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this provision; or (iii)the occurrence of a transaction requiring stockholder approval of the acquisition of the Bank by an entity other than PSB or a 50% or more owned subsidiary of PSB or shareholder approval of the acquisition of PSB through purchase of assets, or by merger, consolidation or otherwise, except in the case of a transaction pursuant to which, immediately after the transaction, PSB's shareholders immediately prior to the transaction own at least 60% of the -8- combined voting power of the surviving entity's then outstanding securities with respect to the election of the directors of such entity solely be reason of such transaction; or (iv) the liquidation or dissolution of the Bank or PSB. (f) Limitation on Benefits. (i) Notwithstanding any other provision of this agreement, the present value of all amounts payable pursuant to this paragraph 8 which would constitute "parachute payments" (as such term is defined in Section 280G of the Internal Revenue Code of 1986 as amended (the "Code"), and any regulations promulgated thereunder), together with the present value of all other benefits payable by the Bank to Mr. Svacina under any other plans and the Bank which would also constitute "parachute payments," shall in no event equal or exceed an amount (the "Testing Amount") equal to 3 times Mr. Svacina's "base amount" (as such term is defined in Section 280G of the Code and any regulations promulgated thereunder), it being the intention of the parties that no payment made pursuant to this agreement shall constitute an "excess parachute payment" (as such term is defined in Section 280G of the Code and any regulations promulgated thereunder). In the event that the present value of the payments provided for in this paragraph 8 together with the present value of such other amounts, without taking into account this paragraph (f), equals or exceeds the Testing Amount, then the amount of the payments provided for in this paragraph 8 and under such plans shall be reduced, beginning with the payments which are last in time, until the present value of all such payments is less than the Testing Amount. For purposes of this paragraph 8, present value shall be determined in the manner provided in Section 280G of the Code and the regulations promulgated thereunder. (ii) It is the intention of the parties that the provisions of this paragraph 8 be construed to reduce the amounts otherwise payable hereunder only to the extent necessary to avoid the disallowance of the deduction by the Bank for any such amounts or the imposition of an excise tax on Mr. Svacina for any such amounts, under federal income tax law as it currently exists or may hereafter be amended. (iii)In the event the provisions of this paragraph 8 require any reduction in the amount to be paid to Mr. Svacina under this paragraph 8 of this Agreement, the Bank shall deliver to Mr. Svacina concurrently with such payment a statement signed by a partner or principal of its independent accounting firm setting forth the basis for and computation of such reduction and certifying that such computation is made in good faith. -9- 9. Miscellaneous. (a) Notices. Any notice required or permitted to be given under this agreement shall not be deemed to have been given unless delivered in person or mailed, postage prepaid by certified mail addressed, in the case of Mr. Svacina, to his last known residence as specified by him in a notice to the Bank, or, in the case of the Bank to its principal office. (b) Benefits and Obligations. This agreement shall be binding upon, shall inure to the benefit of the Bank and its successors or assigns, and, as provided for herein, PSB, and shall be enforceable by the Bank and its respective successors and assigns, and Mr. Svacina, his heirs, assigns or legal representatives; provided, however, that the obligations of Mr. Svacina contained herein may not be delegated or assigned. (c) Entire Agreement; Amendment. This agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and may only be amended by an agreement in writing signed by all of the parties hereto. (h) Waiver. The failure of any party hereto to insist, in any one or more instances, upon performance of any of the terms and conditions of this agreement, shall not be construed as a waiver or relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. (i) Severability. In the event that any portion of this agreement may be held to be invalid or unenforceable for any reason, the parties hereto agree that said invalidity or unenforceability, shall not effect the other portions of this agreement and that the remaining covenants, terms and conditions or portions thereof shall remain in full force and effect and any court of competent jurisdiction may so modify the objectionable provision as to make it valid and enforceable. (j) Governing Laws. This agreement shall be governed by and construed in accordance with the internal laws of the State of Wisconsin without reference to conflicts or law principles. (k) Captions. The captions contained in this agreement are for the convenience of the Bank and Mr. Svacina and shall not be deemed or construed as in any way limiting or extending the language of the provisions to which such captions refer. -10- IN WITNESS WHEREOF, the Bank and Mr. Svacina have caused this instrument to be executed as of the date first written above. PEOPLES STATE BANK By: DAVID K. KOPPERUD David K. Kopperud As its President DAVID A. SVACINA David A. Svacina -11- EX-99.1 8 psbex991.txt PSB 10K EXHIBIT 99.1 CERTIFICATION UNDER SECTION 906 OF SARBANES-OXLEY ACT OF 2002 Exhibit 99.1 CERTIFICATION OF PSB HOLDINGS, INC. UNDER SECTION 906 OF SARBANES-OXLEY ACT OF 2002 The undersigned Chief Executive Officer of PSB Holdings, Inc. (the "Company") certifies pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that (1) the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. 78m or 78o(d), and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: March 4, 2003 DAVID K. KOPPERUD David K. Kopperud President and CEO The undersigned Chief Financial Officer of PSB Holdings, Inc. (the "Company") certifies pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that (1) the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. 78m or 78o(d), and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: March 4, 2003 SCOTT M. CATTANACH Scott M. Cattanach Treasurer and Chief Financial Officer EX-99.2 9 psbex992.txt PSB 10 K EXHIBIT 99.2 - CONSOLIDATED FINANCIAL STATEMENTS Exhibit 99.2 PSB HOLDINGS, INC. AND SUBSIDIARY Wausau, Wisconsin CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002, 2001, and 2000 TABLE OF CONTENTS INDEPENDENT AUDITOR'S REPORT.......................................1 FINANCIAL STATEMENTS Consolidated Balance Sheets.....................................2 Consolidated Statements of Income...............................3 Consolidated Statements of Changes in Stockholders' Equity......4 Consolidated Statements of Cash Flows...........................5 Notes to Consolidated Financial Statements......................7 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, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. Wipfli Ullrich Bertelson LLP February 3, 2003 Wausau, Wisconsin -1-
CONSOLIDATED BALANCE SHEETS December 31, 2002 and 2001 ASSETS 2002 2001 Cash and due from banks $ 15,889.553 $ 16,736,080 Interest-bearing deposits and money market funds 5,490,461 3,539,125 Federal funds sold 172,000 5,275,000 Cash and cash equivalents 21,552,014 25,550,205 Securities: Held to maturity (fair value of $20,354,518 in 2001) 20,287,480 Available for sale (at fair value) 81,056,645 50,156,904 Federal Home Loan Bank Stock 2,264,100 2,150,600 Loans held for sale 949,200 1,403,400 Loans receivable, net of allowance for loan losses of $3,158,077 and $2,968,574 in 2002 and 2001, respectively 256,014,657 236,573,861 Accrued interest receivable 1,731,999 1,872,631 Foreclosed assets 572,914 421,269 Premises and equipment 6,158,178 4,754,906 Mortgage servicing rights 696,915 283,750 Other assets 472,126 841,001 TOTAL ASSETS $371,468,748 $344,296,007 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest-bearing $ 45,457,249 $ 41,507,579 Interest-bearing 252,372,910 232,127,810 Total deposits 297,830,159 273,635,389 Long-term Federal Home Loan Bank advances 38,000,000 38,000,000 Other borrowings 3,302,296 4,326,850 Accrued expenses and other liabilities 3,033,949 2,984,577 Total liabilities 342,166,404 318,946,816 Stockholders' equity: Common stock - No par value with a stated value of $1 per share: Authorized - 3,000,000 shares Issued - 1,804,850 shares 1,804,850 1,804,850 Additional paid-in capital 7,149,958 7,158,505 Retained earnings 21,606,862 18,185,664 Accumulated other comprehensive income 1,306,189 491,335 Treasury stock, at cost - 138,748 and 125,440 shares, respectively (2,565,515) (2,291,163) Total stockholders' equity 29,302,344 25,349,191 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $371,468,748 $344,296,007
See accompanying notes to consolidated financial statements. -2-
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2002, 2001, and 2000 2002 2001 2000 Interest income: Interest and fees on loans $ 18,022,243 $ 19,262,801 $ 18,259,930 Interest on securities: Taxable 2,723,696 2,866,350 2,888,251 Tax-exempt 898,160 774,769 597,000 Other interest and dividends 270,986 523,563 194,503 Total interest income 21,915,085 23,427,483 21,939,684 Interest expense: Deposits 6,835,867 9,770,432 10,105,320 Long-term Federal Home Loan Bank advances 2,288,550 2,265,842 1,294,350 Other borrowings 148,877 431,842 1,140,346 Total interest expense 9,273,294 12,468,116 12,540,016 Net interest income 12,641,791 10,959,367 9,399,668 Provision for loan losses 1,110,000 890,000 600,000 Net interest income after provision for loan losses 11,531,791 10,069,367 8,799,668 Noninterest income: Service fees 1,216,734 1,010,352 855,069 Gain on sale of loans 1,492,056 683,278 66,440 Provision for mortgage servicing right valuation allowance (268,579) Investment and insurance sales commissions 250,106 183,156 195,212 Other operating income 357,771 188,294 329,548 Total noninterest income 3,048,088 2,065,080 1,446,269 Noninterest expense: Salaries and employee benefits 4,927,019 4,419,402 3,841,735 Occupancy 1,093,504 917,048 937,071 Data processing and other office operations 582,917 522,970 459,746 Advertising and promotion 318,507 306,793 211,073 Other operating expense 1,304,968 1,149,684 1,024,693 Total noninterest expense 8,226,915 7,315,897 6,474,318 Income before income taxes 6,352,964 4,818,550 3,771,619 Provision for income taxes 1,988,000 1,453,000 1,102,000 Net income $ 4,364,964 $ 3,365,550 $ 2,669,619 Basic earnings per share $ 2.61 $ 2.00 $ 1.56 Diluted earnings per share $ 2.60 $ 2.00 $ 1.56
See accompanying notes to consolidated financial statements. -3-
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2002, 2001, and 2000 ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK TOTALS Balance, January 1, 2000 $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 Other comprehensive income, 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 $.515 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 Other comprehensive income, net of tax of $259,841 616,149 616,149 Total comprehensive income 3,981,699 Cash dividends declared $.54 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 Comprehensive income: Net income 4,364,964 4,364,964 Other comprehensive income, net of tax of $470,469 814,854 814,854 Total comprehensive income 5,179,818 Purchase of treasury stock (394,455) (394,455) Proceeds from stock options issued out of treasury (8,547) 60,218 51,671 Distribution of treasury stock in settlement of liability to Company directors 59,885 59,885 Cash dividends declared $.565 per share (943,766) (943,766) Balance, December 31, 2002 $ 1,804,850 $7,149,958 $21,606,862 $ 1,306,189 $(2,565,515) $29,302,344
See accompanying notes to consolidated financial statements. -4-
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001, and 2000 2002 2001 2000 Cash flows from operating activities: Net income $ 4,364,964 $ 3,365,550 $ 2,669,619 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and net amortization 859,146 582,698 570,555 Provision (benefit) from deferred income taxes 360,000 (54,000) (81,000) Provision for loan losses 1,110,000 890,000 600,000 Proceeds from sales of loans held for sale 94,251,949 60,435,412 4,722,650 Originations of loans held for sale (93,145,600) (61,041,534) (4,770,210) Gain on sale of loans (1,492,056) (683,278) (66,440) Provision for mortgage servicing right valuation allowance 268,579 Loss (gain) on sale of premises and equipment 23,912 (48,332) (69,000) Net (gain) loss on sale of foreclosed assets (28,106) 10,383 Federal Home Loan Bank stock dividends (113,500) (141,900) (129,800) Changes in operating assets and liabilities: Accrued interest receivable 140,632 228,882 (355,475) Other assets (461,595) (328,883) 75,956 Accrued expenses and other liabilities 109,257 69,150 540,486 Net cash provided by operating activities 6,247,582 3,284,148 3,707,341 Cash flows from investing activities: Proceeds from sale and maturities of: Held-to-maturity securities 1,000,000 1,184,789 1,290,001 Available-for-sale securities 20,737,285 26,571,357 6,393,719 Payment for purchase of: Held-to-maturity securities (1,757,959) (7,523,254) (1,439,927) Available-for-sale securities (29,507,134) (27,694,871) (7,439,798) Purchase Federal Home Loan Bank stock (1,179,300) Net increase in loans (20,923,228) (13,523,970) (44,777,534) Capital expenditures (1,957,280) (758,143) (1,442,917) Proceeds from sale of premises and equipment 1,300 289,218 119,568 Proceeds from sale of foreclosed assets 277,577 347,456 24,196 Net cash used in investing activities (32,129,439) (21,107,418) (48,451,92)
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended December 31, 2002, 2001, and 2000 2002 2001 2000 Cash flows from financing activities: Net increase in non-interest-bearing deposits $ 3,949,670 $ 6,315,193 $ 1,534,788 Net increase in interest-bearing deposits 20,245,100 25,785,918 37,645,249 Net decrease in short-term borrowings (1,024,554) (7,187,893) (9,700,147) Proceeds from issuance of long-term FHLB advances 10,000,000 25,000,000 Repayments of long-term FHLB advances (10,000,000) Dividends paid (943,766) (906,882) (867,301) Proceeds from issuance of stock options 51,671 Purchase of treasury stock (394,455) (1,488,563) Net cash provided by financing activities 21,883,666 34,006,336 42,124,026 Net increase (decrease) in cash and cash equivalents (3,998,191) 16,183,066 (2,620,625) Cash and cash equivalents at beginning 25,550,205 9,367,139 11,987,764 Cash and cash equivalents $21,552,014 $25,550,205 $ 9,367,139 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 9,508,099 $12,817,043 $12,071,704 Income taxes 1,700,000 1,541,872 983,000 NONCASH INVESTING AND FINANCING ACTIVITIES: Loans charged off $ 985,028 $ 331,200 $ 314,876 Loans transferred to foreclosed assets 838,996 894,397 17,352 Loans originated on sale of foreclosed assets 531,061 132,641 Distribution of treaury stock in settlement of liability to Company directors 59,885 Transfer of held-to-maturity securities to the available-for-sale category 21,026,697
See accompanying notes to consolidated financial statements. -6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 and insurance products 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. Peoples State Bank also operates a wholly-owned Nevada subsidiary, PSB Investments, Inc., to manage debt and investment securities. All significant intercompany balances and transactions have been eliminated. The accounting and reporting policies of the Company conform to generally accepted accounting principles (GAAP) and to the general practices within the banking industry. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of the consolidated 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 purposes of reporting cash flows, cash and cash equivalents include cash on hand, interest-bearing and non-interest-bearing accounts in other institutions, and federal funds sold, all of which have original maturities of three months or less. SECURITIES Securities are assigned an appropriate classification at the time of purchase in accordance with management's intent. Securities held to maturity represent those debt 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. -7- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) SECURITIES (Continued) Securities not classified as either securities held to maturity or trading securities are considered available for sale and reported at fair value determined from estimates of brokers or other sources. Unrealized gains and losses are excluded from earnings but are reported as other comprehensive income, net of income tax effects, in a separate component of stockholders' equity. Any gains and losses on sales of securities are recognized at the time of sale using the specific identification method. 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 asset size and the anticipated level of borrowings to be advanced to the Company. This stock is recorded at cost which approximates fair value. Transfer of the stock is substantially restricted. 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 or those loans which are past due 90 days or more as to principal or interest payments. When a loan is placed on nonaccrual status, previously accrued but unpaid interest deemed uncollectible is reversed and charged against current income. After being placed on nonaccrual status, additional income is recorded only to the extent that payments are received or the collection of principal becomes reasonably assured. Interest income recognition on loans considered to be impaired under current accounting standards is consistent with the recognition on all other loans. 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. -8- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ALLOWANCE FOR LOAN LOSSES (Continued) Management believes the allowance for loan losses is adequate to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. In accordance with current accounting standards, the allowance is provided for losses that have been incurred as of the balance sheet date. The allowance is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. The allowance for loan losses includes specific allowances related to 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. Management has determined that commercial, financial, agricultural, and commercial real estate loans that have a nonaccrual status or have had their terms restructured meet this definition. Large groups of homogeneous loans, such as mortgage and consumer loans, are collectively evaluated for impairment. 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. Interest income is recognized on the cash basis. 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 and are carried at the lower of amortized cost or market in the aggregate. Mortgage servicing rights are amortized into income 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 prices for similar assets with similar characteristics when available or based on discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum to the extent that fair value is less than the amortized carrying value. -9- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 primarily from 30 to 40 years on buildings, 5 to 10 years on equipment, and 3 years on computer hardware and 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 (after deducting estimated costs to sell) at the date of foreclosure, establishing a new cost basis. Costs related to development and improvement of property are capitalized, whereas costs related to holding property are expensed. After foreclosure, valuations are periodically performed by management and the real estate 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. STOCK-BASED COMPENSATION The Company records expense relative to stock-based compensation using the "intrinsic value method." Since the exercise price is equal to the fair value of the Company's common stock on the date of the award, the intrinsic value of the Company's stock options is "zero" at the time of the award and no expense is recorded. As permitted by generally accepted accounting principles, the Company has not adopted the "fair value method" of expense recognition for stock-based compensation awards. Rather, the effects of the fair value method on the Company's earnings have been disclosed in the footnotes to the financial statements on a pro forma basis. -10- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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 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 $1,900,000 was restricted at December 31, 2002 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 cash and cash equivalent balances at December 31, 2002 totaled $19,560,350. -11- 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, 2002 Securities available for sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $11,788,638 $ 412,702 $ $12,201,340 Obligations of states and political subdivisions 20,904,818 1,021,313 21,926,131 Mortgage-backed securities 4,518,979 28,001 4,546,980 Collateralized mortgage obligations 41,260,038 621,735 47,252 41,834,521 Trust preferred securities 500,000 500,000 Other equity securities 47,673 47,673 Totals $79,020,146 $2,083,751 $ 47,252 $81,056,645 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 Collateralized mortgage obligations 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
-12- NOTE 4 SECURITIES (Continued) The amortized cost and estimated fair value of debt securities available for sale at December 31, 2002, 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 AVAILABLE FOR SALE Due in one year or less $ 1,904,338 $ 1,914,936 Due after one year through five years 16,300,073 16,967,783 Due after five years through ten years 14,489,045 15,244,752 Due after ten years 500,000 500,000 Mortgage-backed securities and collateralized mortgage obligations 45,779,017 46,381,501 Totals $78,972,473 $81,008,972
Securities with a fair value of $7,907,302 and $9,224,963 at December 31, 2002 and 2001, respectively, were pledged to secure public deposits and other borrowings and for other purposes required by law. No securities were sold in 2002, 2001, or 2000. During December 2002, the Company transferred the entire securities held to maturity portfolio to available-for-sale status. Securities held to maturity consisted of municipal securities. At the date of transfer, municipal securities had a net book value of $21,026,697 and a fair value of $22,056,272 for an unrealized gain of $1,029,575. In accordance with current accounting standards, the transferred municipal securities were recorded at fair value and stockholders' equity increased $672,518 net of income tax effects at the date of transfer to recognize additional unrealized gain on securities available for sale. The Company reclassified municipal securities to increase available liquidity. -13- NOTE 5 LOANS The composition of loans categorized by the initial purpose of the loan is as follows:
2002 2001 Commercial and industrial $ 64,527,390 $ 64,503,321 Commercial real estate mortgage 102,238,464 84,150,212 Residential real estate mortgage 55,077,668 61,787,055 Real estate construction 26,051,909 15,608,734 Residential real estate home equity 7,273,728 4,576,194 Consumer and individual 10,439,202 12,521,687 Subtotals 265,608,361 243,147,203 Net deferred loan costs 272,452 132,312 Loans in process of disbursement (6,708,079) (3,737,080) Allowance for loan losses (3,158,077) (2,968,574) Net loans receivable $256,014,657 $236,573,861
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:
2002 2001 Loans outstanding, January 1 $5,035,249 $3,998,278 New loans 1,159,385 2,680,944 Repayments (2,372,890) (1,643,973) Loans outstanding, December 31 $3,821,744 $5,035,249
-14- NOTE 5 LOANS (Continued) The following is a summary of information pertaining to impaired loans:
DECEMBER 31 2002 2001 Impaired loans without a valuation allowance $ 4,831 $ 144,525 Impaired loans with a valuation allowance 1,415,877 1,967,670 Total impaired loans $1,420,708 $2,112,195 Valuation allowance related to impaired loans $ 431,076 $ 550,810
YEARS ENDED DECEMBER 31, 2002 2001 2000 Average recorded investment, net of allowance for loan losses $2,216,672 $2,177,185 $1,947,806 Interest income recognized $ 179,643 $ 190,998 $ 174,963 Interest income recognized on a cash basis on impaired loans $ 144,591 $ 88,197 $ 101,618
Total loans receivable (including nonaccrual impaired loans) placed on nonaccrual status as of December 31, 2002 and 2001 were $1,785,968 and $3,035,668 respectively. There were no loans past due 90 days or more but still accruing income at December 31, 2002 and 2001. An analysis of the allowance for loan losses for the three years ended December 31, follows:
2002 2001 2000 Balance, January 1 $ 2,968,574 $ 2,407,439 $ 2,099,241 Provision charged to operating expense 1,110,000 890,000 600,000 Recoveries on loans 64,531 2,335 23,074 Loans charged off (985,028) (331,200) (314,876) Balance, December 31 $ 3,158,077 $ 2,968,574 $ 2,407,439
-15- NOTE 5 LOANS (Continued) Under a secondary market loan servicing program with the Federal Home Loan Bank (FHLB), the Company provides a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of original loan principal sold to the FHLB in exchange for a monthly fee. At December 31, 2002 the Company serviced payments on $95,408,278 of first lien residential loan principal for the FHLB. At December 31, 2002, the maximum Company obligation for such guarantees would be approximately $262,028 if total foreclosure losses on the entire pool of loans exceed approximately $1,280,000. Management believes the likelihood of a reimbursement for loss payable to the FHLB to be remote and does not maintain any recourse liability for possible losses. NOTE 6 MORTGAGE SERVICING RIGHTS Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $95,408,278 and $35,929,282 at December 31, 2002 and 2001, respectively. Mortgage servicing rights are capitalized when the serviced loans are sold. This asset is amortized over the estimated period that servicing income is recognized. The following is a summary of changes in the balance of mortgage servicing rights at December 31:
2002 2001 Balance at beginning $ 283,750 $ Additions from originated servicing 839,907 320,993 Amortization charged to earnings (158,163) (37,243) Change in valuation allowance charged to earnings (268,579) Balance at end $ 696,915 $ 283,750
A summary of changes in the valuation allowance at December 31, 2002 is as follows: Balance at beginning $ Additions charged to earnings 268,579 Write-down from prepayments of loan principal (153,421) Balance at end $ 115,158
No valuation allowance for impairment of mortgage servicing rights existed at December 31, 2001. The fair market value of mortgage servicing rights at December 31, 2002 and 2001 was $696,915 and $283,750, respectively. -16- NOTE 7 PREMISES AND EQUIPMENT
The composition of premises and equipment follows: 2002 2001 Land $ 1,397,314 $1,381,617 Buildings and improvements 5,451,435 4,024,338 Furniture and equipment 3,121,435 3,835,783 Construction in progress 79,038 198,020 Total cost 10,049,222 9,439,758 Less - Accumulated depreciation and amortization 3,891,044 4,684,852 Totals $ 6,158,178 $4,754,906
Depreciation and amortization charged to operating expenses amounted to $500,112 in 2002, $513,207 in 2001, and $544,366 in 2000. LEASE COMMITMENTS The Company leases various pieces of equipment under cancelable leases and office 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: 2003 $ 66,177 2004 72,073 2005 46,031 2006 14,964 Total $199,245 Rental expense for all operating leases was $62,130, $57,361 and $43,468 for the years ended December 31, 2002, 2001, and 2000, respectively. The Company has committed approximately $143,000 for future fixed asset acquisitions at December 31, 2002. -17- NOTE 8 DEPOSITS
The distribution of deposits at December 31 is as follows: 2002 2001 Non-interest-bearing demand deposits $ 45,457,249 $ 41,507,579 Interest-bearing demand deposits 18,119,125 16,477,410 Savings deposits 20,425,940 17,214,046 Money market deposits 74,418,238 76,973,599 Time deposits 139,409,607 121,462,755 Total deposits $297,830,159 $273,635,389
The scheduled maturities of time deposits at December 31, 2002 are summarized as follows: 2003 $ 86,885,644 2004 20,101,954 2005 7,752,616 2006 9,002,641 2007 13,666,752 Thereafter 2,000,000 Total $139,409,607 Time deposits with individual balances greater than $100,000 totaled $60,501,909 and $51,631,238 at December 31, 2002 and 2001, respectively. Deposits from Company directors, officers, and related parties at December 31, 2002 and 2001 totaled $6,750,565 and $6,587,405, respectively. -18- NOTE 9 LONG-TERM FEDERAL HOME LOAN BANK ADVANCES
Long-term FHLB advances at December 31, consist of the following: 2002 2001 Note payable to the FHLB, monthly interest payments only at 5.45%, due January 2003 (During January 2003, the Company renewed this borrowing for a one-month term for $5 million at 1.59% and for a 5-year term for $5 million at 3.90%) $10,000,000 $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 by the issuer 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 by the issuer 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 by the issuer 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 by the issuer beginning February 2001 3,000,000 3,000,000 Totals $38,000,000 $38,000,000
The scheduled principal maturities are: 2003 $ 11,000,000 2005 19,000,000 2008 8,000,000 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 at December 31, 2002 and 2001. As a member of the FHLB system, the Company may draw both short-term and long-term advances on a maximum line of credit totaling approximately $43,000,000 based on real estate loan collateral. At December 31, 2002, the Company's available and unused portion of this line of credit totaled approximately $5,000,000. The company also has, under a current agreement with the FHLB, an ability to borrow up to $23,000,000 by pledging available securities. -19- NOTE 10 OTHER BORROWINGS Other borrowings consist of securities sold under repurchase agreements totaling $3,302,296 and $4,326,850 at December 31, 2002 and 2001, respectively. The Company pledges U.S. Treasury and agency securities available for sale as collateral for repurchase agreements. The fair value of securities pledged for repurchase agreements totaled $5,444,893 and $6,885,173 at December 31, 2002 and 2001, respectively. Amortized cost of the securities pledged was $5,178,683 at December 31, 2002. The following information relates to federal funds purchased and securities sold under repurchase agreements for the years ended December 31:
2002 2001 2000 As of end of year: Weighted average rate 3.98% 5.01% 6.83% For the year: Highest month-end balance $4,539,864 $9,046,563 $26,862,797 Daily average balance $3,496,105 $6,414,054 $17,232,498 Weighted average rate 4.26% 6.74% 6.62%
Repurchase agreements with related parties totaled $226,524 at December 31, 2002. There were no related party repurchase agreements at December 31, 2001. NOTE 11 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 (4% in 2000). The Company also may declare a discretionary profit- sharing contribution. The expense recognized for contributions to the plan for the years ended December 31, 2002, 2001, and 2000 was $280,203, $262,940 and $160,166 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 $42,069 and $123,167 at December 31, 2002 and 2001, 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. -20- NOTE 11 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued) 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 table provides a reconciliation of changes in the postretirement health care benefit plan for the years ended December 31, 2002 and 2001: 2002 2001 Reconciliation of benefit obligations: Obligation at January 1 $ 275,329 $ 237,057 Service cost 29,145 17,140 Interest cost 31,744 22,045 Benefit payments (13,955) (8,309) Net amortization of prior service costs 13,323 7,396 Obligation at December 31 $ 335,586 $ 275,329
The following table provides the components of net periodic benefit cost of the plans for the years ended December 31, 2002, 2001, and 2000: POSTRETIREMENT HEALTH CARE BENEFIT PLAN 2002 2001 2000 Service cost $29,145 $17,140 $15,466 Interest cost 31,744 22,045 21,771 Net amortization of prior service costs 13,323 7,396 7,396 Net periodic pension cost $74,212 $46,581 $44,633
-21- NOTE 11 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued)
The assumptions used in the measurement of the Company's benefit obligation are shown in the following table: POSTRETIREMENT HEALTH CARE BENEFIT PLAN 2002 2001 2000 Discount rate 6.75% 7.50% 7.50% Health care cost trend rate 6.75% 7.00% 7.25%
The health care cost trend rate is anticipated to be 6.50% in 2003, 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:
2002 2001 2000 Effect on service and interest cost $ 14,956 $ 9,330 $ 8,813 Effect on accumulated benefit obligation at December 31 103,093 66,875 65,014
NOTE 12 SELF-FUNDED HEALTH INSURANCE PLAN The Company has established an employee medical benefit plan to self-insure claims up to $20,000 per year for each individual with a $465,366 stop-loss per year for participants in the aggregate. Coverages in 2003 will be $20,000 per individual and $569,000 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 $70,520 and $54,103 as of December 31, 2002 and 2001, respectively. Health insurance expense recorded in 2002, 2001, and 2000 was $274,539, $272,735 and $278,639, respectively. -22- NOTE 13 INCOME TAXES
The components of the income tax provision are as follows: 2002 2001 2000 Current income tax provision: Federal $ 1,460,000 $ 1,414,000 $ 1,101,000 State 168,000 93,000 82,000 Total current 1,628,000 1,507,000 1,183,000 Deferred income tax expense (benefit): Federal 300,000 (43,000) (60,000) State 60,000 (11,000) (21,000) Total deferred 360,000 (54,000) (81,000) Total provision for income taxes $ 1,988,000 $ 1,453,000 $ 1,102,000
A summary of the source of differences between income taxes at the federal statutory rate and the provision for income taxes for the years ended December 31, follows:
2002 2001 2000 PERCENT PERCENT PERCENT OF OF OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME Tax expense at statutory rate $2,160,000 34.0 $1,638,000 34.0 $1,282,000 34.0 Increase (decrease) in taxes resulting from: Tax-exempt interest (338,000) (5.3) (284,000) (5.9) (215,000) (5.7) State income tax 150,000 2.4 54,000 1.1 40,300 1.1 Other 16,000 0.2 45,000 1.0 (5,300) (0.2) Provision for income taxes $1,988,000 31.3 $1,453,000 30.2 $1,102,000 29.2
-23- NOTE 13 INCOME TAXES (Continued) 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:
2002 2001 Deferred tax assets: Allowance for loan losses $1,054,100 $1,047,400 Deferred compensation 17,000 48,500 State net operating loss 28,600 23,600 Post-retirement health care benefits 128,900 105,100 Employee pension plan 21,000 25,300 Other 2,400 16,200 Valuation allowances (28,600) (23,600) Gross deferred tax assets 1,223,400 1,242,500 Deferred tax liabilities: Premises and equipment 172,200 103,600 Mortgage servicing rights 274,400 111,000 FHLB stock 135,800 91,100 Deferred loan costs 108,300 52,000 Unrealized gain on securities available for sale 730,310 259,840 Other 9,900 2,000 Gross deferred tax liabilities 1,430,910 619,540 Net deferred tax asset (liability) $ (207,510) $ 622,960
The Company and its subsidiary Bank pay state income taxes on individual, unconsolidated net earnings. At December 31, 2002, net operating loss carryforwards of the parent company of approximately $532,000 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. The valuation allowance increased $5,000 in 2002. -24- NOTE 14 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK CREDIT RISK The Company is a party to financial instruments with off-balance- sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. These commitments at December 31, are as follows:
2002 2001 Commitments to extend credit $ 36,695,000 $ 29,512,000 Commercial letters of credit - variable rate 889,000 537,000 Home equity lines of credit - variable rate 5,892,000 4,538,000 Credit card commitments - fixed rate 3,217,000 3,223,000 Totals $ 46,693,000 $ 37,810,000
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. -25- NOTE 14 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued) 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 the diversity of the local economy will prevent significant losses in the event of an economic downturn. CONTINGENCIES In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements. 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, 2002, none of the approximately $14,154,000 of variable rate loans had reached the interest rate cap. OTHER COMMITMENTS On July 12, 2002, the Company announced an annual, ongoing share repurchase program of up to 1% of outstanding shares per year. The Company repurchased 19,838 shares during 2002 at an average price per share of $19.88. The Company anticipates repurchasing approximately 17,000 shares during 2003 at market prices then in effect related to this commitment. There were no shares repurchased during 2001. -26- NOTE 15 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 six month anniversary. These options expire ten years after the grant date. As of December 31, 2002, all 26,892 options outstanding were eligible to be exercised. The following tables summarize information regarding stock options outstanding at December 31, 2002 and activity during the 3 years ended December 31, 2002.
OPTIONS EXERCISABLE EXERCISE PRICES SHARES $16.63 22,278 $17.65 4,614
WEIGHTED AVERAGE SHARES PRICE January 1, 2001 $ $ Options granted 25,386 16.63 December 31, 2001 25,386 16.63 Options granted 4,614 17.65 Options exercised (3,108) (16.63) December 31, 2002 $ 26,892 $ 16.80
As of December 31, 2002, no 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 (APB) Opinion 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 of 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 $9,228 in 2002 and $61,307 in 2001. Earnings per share, assuming dilution, would have been $2.60 in 2002 and $1.97 in 2001. -27- NOTE 16 STOCK SPLIT On November 19, 2002, the Company's shareholders approved an increase in authorized shares from 1,000,000 to 3,000,000, allowing the Board of Directors to effect a 2 for 1 stock split paid on December 2, 2002. All references in the accompanying financial statements to the number of common shares and per share amounts for 2002, 2001, and 2000 have been restated to reflect the split. NOTE 17CAPITAL 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, 2002, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2002, 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. -28- NOTE 17 CAPITAL REQUIREMENTS (Continued) The Company's and the Bank's actual and regulatory capital amounts and ratios are as follows:
TO BE WELL- CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO As of December 31, 2002: Total capital (to risk weighted assets): Consolidated $31,085,000 11.4% $21,790,000 8.0% N/A Subsidiary bank $30,473,000 11.2% $21,790,000 8.0% $27,238,000 10.0% Tier I capital (to risk weighted assets): Consolidated $27,926,000 10.2% $10,895,000 4.0% N/A Subsidiary bank $27,315,000 10.0% $10,895,000 4.0% $16,343,000 6.0% Tier I capital (to average assets): Consolidated $27,926,000 7.7% $14,538,000 4.0% N/A Subsidiary bank $27,315,000 7.5% $14,537,000 4.0% $18,171,000 5.0% 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%
-29- NOTE 18 EARNINGS PER SHARE Basic and diluted earnings per share data are based on the weighted- average number of common shares outstanding during each period. Diluted earnings per share are further adjusted for potential common shares that were dilutive and outstanding during the period. Potential common shares generally consist of stock options outstanding under the incentive plans. The dilutive effect of potential common shares is computed using the treasury stock method. All stock options are assumed to be 100% vested for purposes of the earnings per share computations. The computation of earnings per share for the years ended December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000 Net income $4,364,964 $3,365,550 $2,669,619 Weigted average shares outstanding 1,674,523 1,679,410 1,716,572 Effect of dilutive stock options outstanding 4,261 Diluted weighted average shares outstanding 1,678,784 1,679,410 1,716,572 Basic earnings per share $ 2.61 $ 2.00 $ 1.56 Diluted earnings per share $ 2.60 $ 2.00 $ 1.56
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, 2002, the retained earnings of the subsidiary available for distribution as dividends without regulatory approval was approximately $8,065,000. 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 cash equivalents: The carrying amounts reported in the balance sheets approximate fair value. 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. -30- NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Loans held for sale: Fair value is based on commitments on hand from investors or prevailing market prices. 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 or estimates of similar prices for similar rights. 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. 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. Other Borrowings: The fair value of other 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. 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. -31- NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The carrying amounts and fair values of the Company's financial instruments consisted of the following at December 31:
2002 2001 CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE Financial assets: Cash and cash equivalents $ 21,552,014 $ 21,552,014 $ 25,550,205 $ 25,550,205 Securities 83,320,745 83,320,745 72,594,984 72,662,022 Net loans 256,963,857 259,242,634 237,977,621 239,303,704 Mortgage servicing rights 696,915 696,915 283,750 283,750 Accrued interest receivable 1,731,999 1,731,999 1,872,631 1,872,631 Financial liabilities: Deposits 297,830,159 300,102,590 273,635,389 275,787,818 Long-term borrowings 38,000,000 40,271,501 38,000,000 39,354,608 Other borrowings 3,302,296 3,346,417 4,326,850 4,389,910 Accrued interest payable 931,817 931,817 1,176,815 1,176,815
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. -32- NOTE 21 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed balance sheets as of December 31, 2002 and 2001, and condensed statements of income and cash flows for the years ended December 31, 2002, 2001, and 2000, for PSB Holdings, Inc. should be read in conjunction with the consolidated financial statements and footnotes.
BALANCE SHEETS December 31, 2002 and 2001 ASSETS 2002 2001 Cash and due from banks $ 1,202,867 $ 669,204 Investment in subsidiary 28,690,570 25,195,181 Other assets 33,695 72,599 TOTAL ASSETS $29,927,132 $25,936,984 LIABILITIES AND STOCKHOLDERS' EQUITY Accrued dividends payable $ 624,788 $ 587,793 Total stockholders' equity 29,302,344 25,349,191 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,927,132 $25,936,984
-33- NOTE 21 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
STATEMENTS OF INCOME Years Ended December 31, 2002, 2001, and 2000 2002 2001 2000 Income: Dividends from subsidiary $ 1,750,000 $ 1,063,000 $ 2,269,000 Interest 2,891 4,317 5,235 Total income 1,752,891 1,067,317 2,274,235 Expenses: Interest 8,577 Other 99,862 134,905 66,342 Total expenses 99,862 134,905 74,919 Income before income taxes and equity in undistributed net income of subsidiary 1,653,029 932,412 2,199,316 Provision for income tax benefit (31,400) (44,000) (22,000) Net income before equity in undistributed net income of subsidiary 1,684,429 976,412 2,221,316 Equity in undistributed net income of subsidiary 2,680,535 2,389,138 448,303 Net income $ 4,364,964 $ 3,365,550 $ 2,669,619
-34- NOTE 21 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001, and 2000 2002 2001 2000 Increase (decrease) in cash and due from banks: Cash flows from operating activities: Net income $4,364,964 $3,365,550 $2,669,619 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (2,680,535) (2,389,138) (448,303) Net amortization 8,965 (Increase) decrease in other assets 38,904 (46,293) 302 Increase in dividends payable 36,995 18,253 Net cash provided by operating activities 1,760,328 948,372 2,230,583 Cash flows from financing activities: Dividends paid (943,766) (906,882) (867,301) Proceeds from stock options issued out of treasury 51,671 Proceeds from stock options issued to subsidiary bank out of treasury 59,885 Purchase of treasury stock (394,455) (1,488,563) Net cash used in financing activities (1,226,665) (906,882) (2,355,864) Net increase (decrease) in cash and due from bank 533,663 41,490 (125,281) Cash and due from banks at beginning 669,204 627,714 752,995 Cash and due from banks at end $1,202,867 $ 669,204 $ 627,714
-35-
NOTE 22 SUMMARY OF QUARTERLY RESULTS (UNAUDITED) Three months ended March 31 June 30 Sept 30 Dec 31 2002 Interest income $5,370,000 $5,405,000 $5,601,000 $5,539,000 Interest expense 2,376,000 2,301,000 2,345,000 2,251,000 Net interest income 2,994,000 3,104,000 3,256,000 3,288,000 Provision for loan losses 180,000 180,000 450,000 300,000 Net income applicable to common stock 958,000 1,024,000 1,051,000 1,332,000 Basic and diluted earnings per share * $ 0.57 $ 0.61 $ 0.63 $ 0.80 2001 Interest income $6,046,000 $5,979,000 $5,833,000 $5,570,000 Interest expense 3,559,000 3,349,000 2,924,000 2,636,000 Net interest income 2,487,000 2,630,000 2,909,000 2,934,000 Provision for loan losses 150,000 150,000 150,000 440,000 Net income applicable to common stock 769,000 839,000 885,000 873,000 Basic and diluted earnings per share $ 0.46 $ 0.50 $ 0.53 $ 0.53 2000 Interest income $4,907,000 $5,305,000 $5,666,000 $6,062,000 Interest expense 2,576,000 2,991,000 3,414,000 3,559,000 Net interest income 2,331,000 2,314,000 2,252,000 2,503,000 Provision for loan losses 150,000 150,000 150,000 150,000 Net income applicable to common stock 573,000 680,000 545,000 872,000 Basic and diluted earnings per share $ 0.32 $ 0.39 $ 0.33 $ 0.52 * Basic and diluted earnings per share for the year ended December 31, 2002 were $2.61 and $2.60, respectively. Due to rounding, however, quarterly earnings per share for both measures were the same.
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