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, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 0-26480
PSB HOLDINGS, INC.
(Exact name of registrant as specified in charter)
1905 W. STEWART AVENUE WISCONSIN
WAUSAU, WI 54401 (State of incorporation)
39-1804877
(Address of principal executive office) (I.R.S. Employer
Identification Number)
Registrant's telephone number, including area code: 715-842-2191
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of each class)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
There is no established trading market for the common stock. As of March 15,
1997, 895,425 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT DATED MARCH 25, 1997 (TO THE EXTENT NOTED HEREIN): PART III
<PAGE>
TABLE OF CONTENTS
PAGE
PART I ...................................................... 3
Item 1. Business ........................................... 3
Item 2. Properties ......................................... 7
Item 3. Legal Proceedings .................................. 7
Item 4. Submission of Matters to a Vote of Security Holders. 8
PART II ..................................................... 8
Item 5. Market for Registrant's Common Equity and Related
Security Holder Matters ............................ 8
Item 6. Selected Financial Data ............................ 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 10
Item 8. Financial Statements and Supplementary Data ........ 23
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................. 50
PART III .................................................... 51
Item 10. Directors and Executive Officers of Registrant ..... 51
Item 11. Executive Compensation ............................. 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 51
Item 13. Certain Relationships and Related Transactions ..... 51
PART IV ..................................................... 52
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................. 52
<PAGE>
PART I
ITEM 1. BUSINESS.
FORMATION
PSB Holdings, Inc., a Wisconsin corporation (the "Company"), is a one-
bank holding company formed in 1995. On May 30, 1995, the Company
acquired 100% of the common stock of Peoples State Bank, Wausau, Wisconsin
(the "Bank") pursuant to the reorganization of the Bank as a subsidiary of
a one-bank holding company.
Prior to its acquisition by the Company, the Bank's common stock was
registered under the provisions of section 12(g) of the Securities
Exchange Act of 1934 (the "Exchange Act") and the Bank filed its annual
and quarterly reports, proxy statements, and reports of beneficial
ownership with the Federal Deposit Insurance Corporation ("FDIC") pursuant
to section 12(i) of the Exchange Act. The Company assumed its status as a
reporting company under the Exchange Act by filing Form 8-K as a successor
to the Bank under Securities and Exchange Commission Rule 12g-3 on May 30,
1995.
BUSINESS OF THE COMPANY
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 the Bank.
BUSINESS OF THE BANK
The Bank was organized as a state banking corporation under the laws
of the state of Wisconsin in 1962. In addition to its main office in
Wausau, the Bank operates branch offices in the city of Wausau, Rib
Mountain Township and Marathon, Wisconsin. The Bank offers personal and
commercial deposit services, including checking and savings accounts of
various kinds, IRA and other deposit instruments, ATM service and night
depository and safety deposit box services. The Bank also engages in
consumer and commercial lending, including secured and unsecured term
loans and real estate financing. New services are frequently added to the
Bank's retail banking business. Since 1995, the Bank has operated a
discount brokerage service at its Wausau branch location, and sells
annuities, mutual funds and other investments to Bank customers and the
general public. Trust services are also provided through affiliations
with other independent financial institutions. The Bank maintains an
investment subsidiary in Nevada to manage, hold and trade cash and
securities.
BANK MARKET AREA AND COMPETITION
The Bank's primary trade area consists of the greater Wausau,
Wisconsin area. The Bank's general trade area encompasses the area within
a fifteen-mile radius of the city of Wausau and the area within a ten-mile
radius of Marathon, Wisconsin. There is a mix of retail, manufacturing,
agricultural and service businesses in the areas served by the Bank.
Commercial and retail banking in the state of Wisconsin, and in the
Wausau area in particular, is highly competitive with respect to price and
services. "Price" includes interest rates paid on deposits, interest
<PAGE>
rates charged on borrowings and fees charged for fiduciary services, while
"services" includes the types of loan, deposit and other products offered,
convenience of banking locations and the quality of service rendered to
customers. In addition to competition from other commercial banks, the
Bank faces significant competition from savings and loan associations,
credit unions and other financial institutions or financial service
companies within its market area. Savings and loan association deposits
constitute a substantial portion of all financial institution deposits
within the state of Wisconsin and these associations compete aggressively
with commercial banks in the important area of consumer lending and
interest-bearing checking accounts.
The Bank is subject to direct competition in its trade area from six
commercial banks which offer a full line of competitive bank services,
loan production offices of banks located outside of the region and
numerous savings and loan associations and credit unions. Several of the
financial institutions with which the Bank competes are subsidiaries of
the three largest state-wide multi-bank holding companies and many of the
other financial institutions are also significantly larger and have more
resources than the Bank.
In addition to competition, the business of the Bank will be affected
by general economic conditions, including the level of interest rates and
the monetary policies of the Board (see "Monetary Policy").
EMPLOYEES
The Company has no employees. Officers of the Company serve as full
time employees of the Bank.
As of December 31, 1996, the Bank had 81 employees, including 16
employed on a part-time basis. All officers, supervisors and full-time
employees are salaried and all part-time employees are paid on an hourly
basis. The Bank considers its relations with its employees to be
excellent. None of the Bank's employees are covered by a collective
bargaining agreement.
REGULATION AND SUPERVISION
The Company and the Bank are subject to regulation under both federal
and state law. The information given below consists of summaries of
certain, but not all statutory provisions which regulate the Company's
business. These summaries are qualified in their entirety by reference to
the statutory provisions.
The Company is directly regulated by the Board pursuant to the BHCA
and must file reports on a periodic basis. Among other limitations
imposed by the BHCA, the Company must obtain prior approval from the Board
before acquiring direct or indirect ownership or control of more than 5%
of any bank or bank holding company. The BHCA also regulates the entry by
the Company into a business other than banking.
The deposits of the Bank are insured under the provisions of the
Federal Deposit Insurance Act, and the Bank is, therefore, subject to
regulation and examination by the Federal Deposit Insurance Corporation
("FDIC"). As a Wisconsin chartered bank, the Bank and the Company are
also subject to periodic examination and the regulations of the Division
of Banking, Wisconsin Department of Financial Institutions (the
"Division").
<PAGE>
State and federal banking authorities regulate the Bank's capital
adequacy, loans and loan policies (including the extension of credit to
affiliates), payment of dividends, establishment of branch offices,
mergers and other acquisitions, management personnel, interlocking
directors and other aspects of the operation of the Bank. The Bank is
subject to civil fines, penalties or imposition of regulatory control for
noncompliance with applicable banking regulations and policies. Other
financial institutions with which the Bank competes, such as national
banking associations, savings and loan associations or credit unions, are
subject to regulations which are generally similar, but may be more or
less restrictive in certain areas or permit activities or practices
unavailable to the Bank.
Banking laws and regulations have undergone periodic revisions which
often have a direct effect on the Bank's operations and its competitive
environment. Certain provisions of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, for example, included a provision
setting the Bank's FDIC deposit insurance premiums at a level which
reflects certain risk factors, included immediate authority to acquire
healthy capital-impaired thrift institutions and eliminated
cross-marketing restrictions on bank holding companies which own thrift
institutions. Some of the provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991, contained substantial changes to the
regulatory framework previously in effect and imposed new standards on
many areas of bank operations, including additional deposit insurance
premiums to recapitalize the bank insurance fund.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") significantly expanded interstate banking
opportunities in Wisconsin. Under a Wisconsin law enacted in 1995 in
response to the Riegle-Neal Act, subject to certain exceptions for banks
which have not been in existence and in continuous operations for at least
five years, bank holding companies may acquire control of an existing or
DE NOVO bank in Wisconsin upon application and approval by the Division.
Under the Riegle-Neal Act, banks will also be permitted to operate
interstate branches beginning on June 1, 1997. The effect of the new
Wisconsin banking provisions will be to increase the level of banking
competition for the Bank by broadening the impact of interstate banking
within Wisconsin.
The activities and operations of the Company and the Bank are subject
to a number of other federal and state laws and regulations, including,
among others, state usury and consumer credit laws, the Truth-In-Lending
Act and Regulation Z, Truth in Savings Act and Regulation DD, the Equal
Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act,
the Community Reinvestment Act, anti-redlining legislation and the
antitrust laws.
MONETARY POLICY
The earnings and growth of the Bank, and therefore the Company, are
affected by the monetary and fiscal policies of the federal government and
governmental agencies. The Board has broad power to expand and contract
the supply of money and credit and to regulate the rates which its member
banks can pay on time and savings deposits. These broad powers are used
to influence inflation and the growth of the economy and directly affect
the growth of bank loans, investments and deposits, and may also affect
the interest rates charged by banks on loans and paid by banks with
respect to deposits. Governmental and Board monetary policies have had a
<PAGE>
significant effect on the operating results of commercial banks in the
past and are expected to do so in the future. Management of the Company
is not able to anticipate the future impact of such policies and practices
on the growth or profitability of the Company.
CHANGES IN FEDERAL REGULATORY SCHEME
From time to time various formal or informal proposals, including new
legislation, relating to, among other things, additional 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. Depending on the scope and timing of future regulatory changes,
it is possible that there may be a significant impact in the future on the
competitive circumstances which will affect the Company. At this time,
the Company is unable to predict whether any such changes will be adopted
or the effect of any such changes on its future business or operations.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 18, 1997, their ages
and principal occupations during the last five years are set forth below.
Gordon C. Gullickson, 68 President of the Company and the Bank.
Kenneth M. Selner, 50 Vice President & Secretary of the Company;
Executive Vice President of the Bank.
Todd R. Toppen, 38 Treasurer of the Company; Vice President of
the Bank since 1994, Assistant Vice President
1988 to 1993.
ITEM 2. PROPERTIES.
The Company shares office space with the Bank. The Bank operates a
total of four office locations. The Bank owns each of the buildings in
which it conducts operations and each building is occupied solely by the
Bank. All buildings are designed for commercial banking operations and
are suitable for current operations and anticipated future needs. Each
facility contains teller and loan facilities and drive-up teller stations.
The Bank's main office was constructed in 1962 and extensively renovated
in 1992. Each other facility was constructed by the Bank since 1989.
ITEM 3. LEGAL PROCEEDINGS.
As of the date of this report, the Company was not involved in any
legal proceedings.
In the ordinary course of its business, the Bank is 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 Bank management, would have a
material adverse effect on the financial condition of the Bank. As of the
date of this report, no director, officer, affiliate of the Bank, or any
associate of any such person, is an adverse party in any legal proceedings
involving the Bank.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
MARKET
There is no active public market for the Company's common stock.
Transactions in the Company's common stock are sporadic and limited and
effected at prices determined by the buyer and seller. Management is not
advised as to the terms of all such transactions.
HOLDERS
As of December 31, 1996 there were approximately 974 holders of record
of the Company's common stock.
<TABLE>
DIVIDENDS
Per share dividends declared by the Company, during 1996 and 1995 are
as follows:
<CAPTION>
1996 1995
<S> <C> <C>
Second Quarter $.33 $.30
Fourth Quarter $.52 $.52
</TABLE>
The Company's source of funds for the payment of dividends is
dividends paid by the Bank. The payment of dividends by the Bank is
regulated by state and federal law. There are no contractual limits
presently in effect which limit the Bank's ability to pay dividends to the
Company or which limit the Company's ability to pay dividends to its
shareholders.
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents consolidated financial data of the
Company and its subsidiary. This information and the following discussion
and analysis should be read in conjunction with other financial
information presented elsewhere in this report.
FINANCIAL SUMMARY
AT PERIOD END
<CAPTION>
($ in thousands, except per share amounts)
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Interest Income $ 10,954 $ 11,136 $ 11,103 $ 11,555 $ 13,654 $ 14,824
Net Interest Margin 4,686 5,703 6,347 6,619 6,599 7,055
Net Income 1,466 1,778 2,100 1,951 2,020 2,157
Total Assets 132,619 146,320 158,108 171,470 190,781 204,158
Mortgages 54,075 59,653 70,194 75,953 84,221 93,450
Total Capital Base 12,628 14,055 16,015 16,742 19,232 20,214
Shareholders Equity 11,743 12,958 14,644 15,098 17,452 18,289
Income from operations
per share $ 1.67 $ 2.01 $ 2.28 $ 2.17 $ 2.24 $ 2.39
Cash dividends per
share .65 .65 .75 .80 .82 .85
Book value per share 13.39 14.76 16.32 16.73 19.34 20.42
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion relates to PSB Holdings, Inc. (the "Company")
and its subsidiary, Peoples State Bank (the "Bank"). The Company was
formed in 1995 and, unless noted, references to "the Company" mean the
Company and the Bank on a consolidated basis. Years prior to 1995 refer
to the Bank.
LIQUIDITY
Management has no knowledge of any trends, demands, commitments,
events or uncertainties which could result in the Company's liquidity
increasing or decreasing.
The availability of adequate funds to meet loan commitments, deposit
withdrawals, and maturing liabilities is a result of asset and liability
management. The liquidity to meet these demands is provided by maturing
assets, both short and long-term. Another contributing factor is the
availability of funds from external sources, primarily short-term
deposits.
Liquidity posture provided by external sources of funds such as
certificates of deposit of $100,000 or more, short-term borrowed funds,
and other managed liabilities changes from time to time depending on the
need to maintain short-term money market assets. It often is a matter of
matching the cost of a short-term liability to the benefit of an available
short-term earning asset.
<PAGE>
CAPITAL
One of the primary objectives of management always has been to
maintain a conservative capital position, one sufficient to endure
economic and financial disturbances without greatly impairing financial
strength. Management has always tried to maintain high quality assets to
generate sufficient earnings to support not only asset growth, but also
increasingly larger payments of dividends to shareholders.
RESULTS OF OPERATIONS
Net income for 1996 was $2,156,597 compared with $2,020,170 in 1995,
and $1,950,689 in 1994. Net income increased 6.7% in 1996 from 1995 and
increased 3.6% in 1995 from 1994. Earnings per share was $2.39 in 1996
compared to $2.24 in 1995, and $2.17 in 1994. The Bank's funding
liabilities reprice quickly, while Bank assets reprice over a longer
horizon. During unstable rates, something usually lags. Bank deposits
are interest sensitive so rising rates tend to reduce balances making less
money for loans and investments.
Return on assets amounted to 1.10% in 1996, 1.13% in 1995, and 1.21%
in 1994.
Return on average common stockholders' equity amounted to 11.98% in
1996 compared to 12.15% in 1995, and 12.66% in 1994.
Loans to deposits ratio was approximately 76% in 1996, 77% in 1995 and
79% in 1994.
<TABLE>
STATISTICAL INFORMATION
The principal sources of income for the Bank are interest and fees on
loans, interest on short-term investments and interest on securities. The
total operating income and the percentage of each to total operating
income is shown below:
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Item of Income
Interest and fees on
loans and short-term
borrowings 74.3% 75.2% 73.2% 73.3% 71.0%
Interest on securities 18.2% 18.8% 21.0% 21.1% 23.9%
Total operating
income $15,814 $14,336 $12,218 $11,762 $11,722
(000's omitted)
</TABLE>
The Bank does not have any foreign deposits or operations.
<PAGE>
<TABLE>
INTEREST INCOME & EXPENSE VOLUME & RATE CHANGE
<CAPTION>
1996 compared to 1995 1995 compared to 1994 1994 compared to 1993 1993 compared to 1992
increase (decrease) increase (decrease) increase (decrease) increase (decrease)
due to (1) due to (1) due to (1) due to (1)
($ in thousands) VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans (2) $ 994 (30) 964 $1,244 608 1,852 $ 643 (305) 338 $1 ,299 (1,101) 198
Taxable investment
securities 227 (14) 213 72 47 119 261 (151) 110 (114) (163) (277)
Non-taxable investment
securities (2) 31 (51) (20) 29 (16) 13 4 ( 14) ( 10) 89 (112) (23)
Other interest income ( 1) ( 2) ( 3) 74 51 125 4 11 15 (15) ( 5) (20)
Total 1,251 (97) 1,154 1,419 690 2,109 912 (459) 453 1,259 (1,381) (122)
Interest paid on:
Savings and
demand deposits 101 (64) 37 (58) 213 155 157 ( 35) 122 231 (227) 4
Time deposits 616 94 710 795 984 1,779 160 (174) ( 14) (56) (692) (748)
Short-term borrowings (29) ( 4) ( 33) 55 130 185 44 28 72 159 ( 92) 67
Total 688 26 714 792 1,327 2,119 361 (181) 180 334 (1,011) (677)
Net interest earnings $ 563 (123) 440 $ 627 (637) (10) $ 551 ( 278) 273 $ 925 ( 370) 555
<FN>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of change in each.
(2) The amount of interest income on non-taxable loans and investment
securities has been adjusted to its fully taxable equivalent using a 34%
tax rate.
</TABLE>
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
Year Ended December 31
($ IN THOUSANDS) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest Income $14,824 $13,654 $11,555 $11,103 $11,136
Interest Expense 7,769 7,055 4,936 4,757 5,433
Net Income 2,157 2,020 1,951 2,100 1,778
Earnings Per Average Share
of Common Stock 2.39 2.24 2.17 2.38 2.01
Dividends Per Share on
Common Stock 0.85 0.82 0.80 0.75 0.65
($ IN THOUSANDS)
Balance Sheet Data:
Total Assets $204,158 $190,781 $171,470 $158,108 $146,320
Total Deposits 178,129 160,445 140,476 133,769 126,044
Common Equity 1,805 1,805 1,805 1,795 1,756
Total Capitalization 18,289 17,452 15,098 14,644 12,958
Book Value Per Share of
Common Stock 20.42 19.34 16.73 16.32 14.76
</TABLE>
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY - INTEREST RATES
AND DIFFERENTIALS
<CAPTION>
1996 1995 1994
Average Yield/ Average Yield/ Average Yield/
($ IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans (1)(2)(3) $130,783 $11,766 9.00% $119,657 $10,802 9.03% $105,209 $ 8,950 8.51%
Taxable investment
securities 38,239 2,376 6.21% 35,428 2,163 6.11% 34,045 2,029 5.96%
Nontaxable investment
securities(2) 11,202 836 7.46% 10,698 856 8.00% 10,242 843 8.19%
Federal funds sold 2,494 139 5.57% 2,515 142 5.65% 757 32 4.23%
Total (2) 182,718 15,117 8.27% 168,298 13,963 8.30% 150,253 11,854 7.89%
Non-interesting earning
assets
Cash and due from banks 8,790 7,958 7,946
Premises & equip. - net 3,742 2,637 2,040
Other assets 3,046 2,212 2,004
Less: Allow. loan loss (1,875) (1,751) (1,506)
Total 196,421 179,354 160,737
Liabilities & Stockholders'
Equity
Interest Bearing liabilities
Savings and
demand deposits 47,179 1,620 3.43% 44,708 1,583 3.54% 46,594 1,428 3.06%
Time deposits 94,179 5,536 5.88% 83,518 4,826 5.78% 66,241 3,047 4.60%
Short-term borrowings 10,169 613 6.03% 10,732 646 6.02% 9,597 461 4.80%
Total 151,527 7,769 5.13% 138,958 7,055 5.08% 122,432 4,936 4.03%
Non-interest bearing
liabilities
Demand deposits 24,729 22,594 21,950
Other liabilities 2,169 1,176 951
Stockholders' equity 17,996 16,626 15,404
Total 196,421 179,354 160,737
Net interest income 7,348 6,908 6,918
Rate Spread 3.14% 3.22% 3.86%
Net yield on interest
earnings assets 4.02% 4.13% 4.60%
<FN>
(1) For purposes of these computations, non-accruing loans are included in the
daily average loan amounts outstanding.
(2) The amount of interest income on non-taxable investment securities and
loans has been adjusted to its fully taxable equivalent.
(3) Loan fees are included in total interest income as follows: 1996-$80,
1995-$55, 1994-$77, 1993-$152, 1992-$262.
</TABLE>
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY - INTEREST RATES
AND DIFFERENTIALS (Continued)
<CAPTION>
1993 1992
Average Yield/ Average Yield/
($ IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans (1)(2)(3) $ 97,705 $ 8,614 8.82% $ 84,296 $ 8,416 9.99%
Taxable investment
securities 29,706 1,916 6.45% 31,341 2,193 7.00%
Nontaxable investment
securities(2) 10,299 853 8.28% 9,347 876 9.37%
Federal funds sold 615 17 2.76% 1,038 37 3.56%
Total (2) 138,325 11,400 8.24% 126,022 11,522 9.14%
Non-interesting earning assets
Cash and due from banks 7,885 7,342
Premises & equip. - net 2,011 1,919
Other assets 1,799 1,915
Less: Allow. loan loss (1,228) (1,018)
Total 148,792 136,180
Liabilities & Stockholders'
Equity
Interest Bearing liabilities
Savings and
demand deposits 41,588 1,306 3.14% 35,326 1,302 3.68%
Time deposits 62,953 3,061 4.86% 63,885 3,809 5.96%
Short-term borrowings 8,622 389 4.51% 5,769 322 5.58%
Total 113,163 4,756 4.20% 104,980 5,433 5.17%
Non-interest bearing liabilities
Demand deposits 20,784 17,620
Other liabilities 916 1,028
Stockholders' equity 13,929 12,552
Total 148,792 136,180
Net interest income 6,644 6,089
Rate Spread 4.04% 3.97%
Net yield on interest earnings
assets 4.82% 4.83%
<FN>
(1) For purposes of these computations, non-accruing loans are included in the
daily average loan amounts outstanding.
(2) The amount of interest income on non-taxable investment securities and
loans has been adjusted to its fully taxable equivalent.
(3) Loan fees are included in total interest income as follows: 1996-$80,
1995-$55, 1994-$77, 1993-$152, 1992-$262.
</TABLE>
<PAGE>
<TABLE>
SUMMARY OF LOAN LOSSES EXPERIENCE
The following table summarizes loan balances at the end of each
period, changes in the allowance for loan losses arising from loans
charged off and recoveries on loans previously charged off, by loan
category and additions to the allowance which have been charged to
expense.
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Average balance of loans
for period ($ in thousands) $ 130,783 $ 119,657 $ 105,027 $ 97,705 $ 84,296
Allowance for loan losses at
beginning of period $1,780,893 $1,643,646 $1,370,621 $1,096,654 $ 885,259
Loans charged off
Commercial & Industrial 47,809 54,088 27,864 95,561 78,299
Agricultural 0 0 0 0 10,000
Real Estate - Mortgage 0 0 10,711 0 0
Installment & Other
Consumer Loans 25,133 15,174 10,100 11,151 21,035
Total Charge Offs (72,942) (69,262) (48,675) (106,712) (109,334)
Recoveries on loans
previously charged off
Commercial & Industrial 33,236 22,168 0 22,583 11,000
Agricultural 0 0 0 0 0
Real Estate - Mortgage 0 0 11,810 0 0
Installment & Other
Consumer Loans 3,499 4,341 9,890 8,096 9,729
Total Recoveries 36,735 26,509 21,700 30,679 20,729
Net loans charged off (36,207) (42,753) (26,975) (76,033) (88,605)
Additions charged to
operations 180,000 180,000 300,000 350,000 300,000
Allowance for loan losses
at end of period $1,924,686 $1,780,893 $1,643,646 $1,370,621 $1,096,654
Ratio of net charge offs
during period to average
loans outstanding 0.03% 0.04% 0.03% 0.08% 0.11%
</TABLE>
<PAGE>
<TABLE>
The following table presents information concerning the aggregate
amount of non-performing loans. Non-performing loans include loans
accounted for on a non-accrual basis and loans contractually past due
ninety days or more as to interest or principal payments, but not included
in the non-accrual loans.
<CAPTION>
DECEMBER 31,
1996 1995 1994 1993 1992
($ in thousands)
<S> <C> <C> <C> <C> <C>
Loans on a
non-accrual basis $247 $376 $646 $1,374 $681
Loans contractually
past due ninety days
or more as to
interest or principal
payments $275 $ 0 $ 0 $ 7 $ 91
</TABLE>
The gross interest income that would have been recognized on non-
accrual loans in 1996 if the loans had been current in accordance with
their original terms was approximately $23,000.
The Bank's rollover policy is such that notes will be written with
limited maturities if they are not in conjunction with amortized payments,
or otherwise tied to a variable rate, to allow the bank to restructure the
terms and interest rate of the notes to correspond with the Bank's cost of
funds.
It is the policy of the Bank to place a loan on non-accrual status
when the loan's principal and accrued interest is not expected to be
collected in full or when the loan becomes contractually past due ninety
days or more as to principal or interest.
The agricultural related loans comprised 1.3% of the Bank's total
loan portfolio as of December 31, 1996. Management feels that the overall
quality of the agricultural portfolio is good and that the amount
allocated in the allowance for loan losses for this type of loan is
adequate. The Bank has no foreign loans outstanding.
As of December 31, 1996, there were no loan concentrations to a
multiple number of borrowers engaged in similar activities which would
cause them to be similarly impacted by economic or other conditions. By
maintaining a diversity of types of borrowers, the Bank has attempted to
prevent losses due to economic difficulties of certain industries.
The allowance for loan losses is an amount that management believes
will be adequate to absorb possible losses on existing loans that may
become uncollectible, based on evaluations of the collectibility of loans
and prior loan loss experience. In determining the additions to the
allowance charged to operating expenses, management considered historical
loss experience, changes in the nature and volume of the loan portfolio,
overall portfolio quality, discounted cash flows of expected payments on
impaired loans, and current economic conditions that may affect the
borrower's ability to pay.
Management does not expect the level of charge-offs in any of the
loan categories to vary significantly from previous years. The ratio of
net charge-offs to average loans outstanding was .03% .04%, .03%, .08%,
.11% from 1996 through 1992 respectively.
<PAGE>
<TABLE>
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
The maturity distribution and interest rate sensitivity of all loans
(excluding those loans in nonaccrual status) at December 31, 1996 are:
<CAPTION>
MATURITY
Over one
($ in thousands) One year year thru Over
OR LESS FIVE YEARS FIVE YEARS
<S> <C> <C> <C>
Commercial, industrial,
and financial $ 23,647 $ 4,569 $ 256
Agricultural 572 1,248 0
Real estate mortgage 45,524 46,407 1 ,331
Installment & other
consumer loans 6,958 6,963 289
Total $ 76,701 $ 59,187 $ 1,876
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
Amounts of loans due after
one year with: Fixed Variable
($ in thousands) RATE RATE
<S> <C> <C>
Commercial, industrial, and financial $ 4,675 $ 150
Agriculture 1,248 0
Real estate mortgage 34,543 13,195
Installment & other
consumer loans 6,644 608
Total $47,110 $13,953
</TABLE>
<TABLE>
The amounts of loans outstanding at the indicated dates are shown in the
following table according to the type of loan.
<CAPTION>
DECEMBER 31
1996 1995 1994 1993 1992
($ in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, industrial
and financial $ 28,531 $ 27,291 $ 23,821 $ 24,432 $18,848
Agricultural 1,820 2,356 2,899 2,566 1,310
Real estate:
Mortgage 93,450 84,221 75,994 70,193 59,653
Installment and other
consumer loans 14,210 11,457 9,960 8,489 9,537
Total $138,011 $125,325 $112,674 $105,680 $89,348
</TABLE>
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
The carrying amounts of investment securities at the dates indicated
are summarized as follows:
<CAPTION>
($ in thousands) DECEMBER 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Government
agencies and corporations $39,224 $ 34,597 $ 35,573 $ 31,327 $ 32,194
State and political
subdivisions
(domestic) 11,714 10,333 10,981 10,259 9,794
Other securities 647 45 94 358 801
Total $51,585 $ 44,975 $ 46,648 $ 41,944 $ 42,789
</TABLE>
<TABLE>
RELATIVE MATURITIES & WEIGHTED AVERAGE INTEREST RATES
The following table shows the relative maturities and weighted average
interest rates on a tax equivalent basis of investment securities as of
December 31, 1996.
<CAPTION>
After one After two After five
Within but within but within but within Over
($ in thousands) ONE YEAR TWO YEARS FIVE YEARS TEN YEARS TEN YEARS
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $1,762 6.41% $1,963 5.04% $ 1,022 6.87% $ -- -- $ -- --
U.S. Government
agencies and
corporations 4,544 6.80% 5,793 6.08% 20,656 6.37% 1,818 6.58% 1,667 6.83%
State and political
subdivisions
(domestic) 2,061 7.64% 1,493 7.10% 4,550 7.11% 3,609 7.05% -- --
Other bonds, notes,
and debentures 647 2.30% -- -- -- -- -- -- -- --
Total $9,014 6.90% $9,249 6.02% $26,228 6.52% $5,427 6.89% $1,667 6.83%
</TABLE>
<PAGE>
<TABLE>
DEPOSITS
The average balances of deposits and the average rate paid on these
deposits during the years ended December 31, 1996, 1995, 1994, 1993, and
1992 are:
<CAPTION>
1996 1995 1994 1993 1992
($ in thousands) BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 24,729 $ 22,594 $ 21,950 $ 20,784 $ 17,620
Interest bearing
demand and
savings deposits 47,179 3.43% 44,708 3.54% 46,593 3.06% 41,588 3.14% 35,326 3.68%
Time deposits 94,179 5.88% 83,518 5.78% 66,241 4.60% 62,953 4.86% 63,885 5.96%
Total $166,087 $150,820 $134,784 $125,325 $116,831
</TABLE>
The amount of time deposits in amounts of $100,000 or more and
outstanding as of December 31, 1996 is approximately $19,384,000. Their
maturity distribution is as follows:
- three months or less $ 7,423,000
- over three months and through twelve months $10,865,000
- over one year through five years $ 996,000
- over five years $ 100,000
The Bank does not have any deposits in foreign banking offices.
<TABLE>
The ratio of net income to average total assets and shareholders' equity
and certain other ratios are presented below for the years ended December 31,
1996, 1995, 1994, 1993, and 1992.
<CAPTION>
1996 1995 1994 1993 1992
Net income as a
percentage of:
<S> <C> <C> <C> <C> <C>
Average total assets 1.10% 1.13% 1.21% 1.41% 1.31%
Average shareholders'
equity 11.98% 12.15% 12.66% 15.08% 14.17%
Dividend payout ratio
(dividends declared
divided by net income) 35.40% 36.63% 37.00% 31.78% 32.08%
Average shareholders'
equity to average 9.16% 9.27% 9.58% 9.36% 9.22%
total assets
</TABLE>
<PAGE>
<TABLE>
SHORT-TERM BORROWINGS
The comparison of short-term borrowings as of December 31, follows:
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Federal funds purchased
and securities sold
under repurchase
agreement $5,766,631 $11,099,498 $14,210,657 $8,418,867 $5,978,661
</TABLE>
<TABLE>
The following information relates to federal funds purchased and securities
sold under repurchase agreements for the years ended December 31:
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
As of end of year:
Weighted average rate 5.53% 6.18% 5.52% 4.64% 5.15%
For the year:
Maximum amount
outstanding $15,503,184 $13,410,236 $14,210,657 $8,377,335 $6,053,349
Average amount
outstanding $10,168,909 $10,732,363 $ 9,594,480 $7,492,218 $5,480,885
Weighted average
rate 6.03% 6.00% 4.80% 4.69% 5.68%
</TABLE>
<TABLE>
SUMMARY QUARTERLY FINANCIAL INFORMATION
The following is a summary of the quarterly results of operations for the
years ended December 31, 1996 and 1995.
<CAPTION>
Three months ended
March 31 June 30 September 30 December 31
($ in thousands, except per share data)
<S> <C> <C> <C> <C>
1996
Interest Income $3,644 $3,624 $3,722 $3,834
Interest expense 1,919 1,912 1,960 1,978
Net interest income 1,725 1,712 1,762 1,856
Provision for loan losses 45 45 45 45
Net income applicable to
common stock 656 495 617 389
Earnings per common share 0.73 0.55 0.68 0.43
1995
Interest Income $3,210 $3,366 $3,477 $3,601
Interest expense 1,535 1,772 1,839 1,909
Net interest income 1,675 1,594 1,638 1,692
Provision for loan losses 75 75 15 15
Net income applicable to
common stock 528 453 606 433
Earnings per common share 0.58 0.51 0.67 0.48
</TABLE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITOR'S REPORT
Board of Directors
PSB Holdings, Inc.
Wausau, Wisconsin
We have audited the accompanying consolidated balance sheets of PSB
HOLDINGS, INC. And Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the three years ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of PSB
HOLDINGS, INC. And Subsidiary at December 31, 1996 and 1995, and the results
of their operations and their cash flows for the three years ended December
31, 1996 in conformity with generally accepted accounting principles.
As described in Note 3 to the consolidated financial statements, in
1996 the Company changed its method of accounting for mortgage servicing
rights and impairment of long-lived assets. In 1995, the Company changed its
method of accounting for impaired loans. In 1994 the Company changed its
method of accounting for investment securities and post retirement benefits
other than pensions.
WIPFLI ULLRICH BERTELSON LLP
January 30, 1997
Wausau, Wisconsin
<PAGE>
<TABLE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,152,277 $ 10,868,428
Federal funds sold 5,683,000
Investment securities:
Held to maturity (fair values of $11,762,878
and $10,428,735, respectively) 11,713,698 10,333,193
Available for sale (at fair value) 39,871,099 34,642,576
Total loans 138,011,133 125,324,694
Less - Allowance for loan losses 1,924,686 1,780,893
Net loans 136,086,447 123,543,801
Premises and equipment 3,701,187 3,444,725
Other assets 2,633,704 2,265,350
TOTAL ASSETS $204,158,412 $190,781,073
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 28,486,255 $ 26,559,435
Interest-bearing deposits 149,642,648 133,885,157
Total deposits 178,128,903 160,444,592
Short-term borrowings 5,766,631 11,099,498
Other liabilities 1,973,954 1,785,419
Total liabilities 185,869,488 173,329,509
Stockholders' equity:
Common stock - No-par value with a
stated value of $2 per share:
Authorized - 1,000,000 shares
Issued - 902,425 shares 1,804,850 1,804,850
Additional paid-in capital 7,158,505 5,926,505
Retained earnings 9,649,112 9,487,936
Net unrealized gain (loss) on
securities available for sale (8,543) 232,273
Treasury stock, at cost - 7,000 shares (315,000)
Total stockholders' equity 18,288,924 17,451,564
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 204,158,412 $190,781,073
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 11,757,028 $ 10,783,294 $ 8,937,418
Interest on investment securities:
Taxable 2,330,456 2,129,632 2,010,603
Tax-exempt 552,324 564,702 556,435
Other interest and dividend income 184,151 175,908 50,676
Total interest income 14,823,959 13,653,536 11,555,132
Interest expense:
Deposits 7,156,077 6,408,608 4,475,535
Short-term borrowings 612,585 646,238 460,851
Total interest expense 7,768,662 7,054,846 4,936,386
Net interest income 7,055,297 6,598,690 6,618,746
Provision for loan losses 180,000 180,000 300,000
Net interest income after
provision for loan losses 6,875,297 6,418,690 6,318,746
Other income:
Service fees 518,271 468,219 502,593
Investment security gains (losses) 26,415 (1,596)
Gain on sale of other real estate 202,398
Other operating income 269,486 188,055 161,542
Total other income 990,155 682,689 662,539
Other expenses:
Salaries and related benefits 2,701,445 2,313,123 2,284,603
Occupancy expenses 708,288 526,912 474,017
Federal deposit insurance premiums 2,000 160,621 289,833
Data processing 195,261 190,864 175,151
Director expense 163,923 138,730 122,499
Other operating expenses 943,938 859,959 810,493
Total other expenses 4,714,855 4,190,209 4,156,596
Income before income taxes 3,150,597 2,911,170 2,824,689
Provision for income taxes 994,000 891,000 874,000
Net income $ 2,156,597 $ 2,020,170 $ 1,950,689
Earnings per share $ 2.39 $ 2.24 $ 2.17
Weighted average shares outstanding 900,641 902,425 900,341
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
Unrealized Gain
(Loss) on
Additional Securities
Common Paid-In Retained Available Treasury
STOCK CAPITAL EARNINGS FOR SALE STOCK
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 1,794,710 $ 4,986,735 $ 7,863,006 $ $
Adoption of SFAS No. 115 369,752
Net income 1,950,689
Employee stock options
exercised 10,140 55,770
Transferred from retained
earnings 81,000 (81,000)
Cash dividend (at $.80
per share) (721,940)
Unrealized loss on securities
available for sale - Net of tax (1,210,543)
Balance December 31, 1994 1,804,850 5,123,505 9,010,755 (840,791)
Net income 2,020,170
Transferred from retained
earnings 803,000 (803,000)
Cash dividend (at $.82
per share) (739,989)
Unrealized gain on securities
available for sale - Net of tax 1,073,064
Balance, December 31, 1995 1,804,850 5,926,505 9,487,936 232,273
Net income 2,156,597
Transferred from retained
earnings 1,232,000 (1,232,000)
Cash dividend (at $.85
per share) (763,421)
Purchase of treasury stock (315,000)
Unrealized loss on securities
available for sale - Net of tax (240,816)
Balance, December 31, 1996 $ 1,804,850 $ 7,158,505 $ 9,649,112 $ (8,543) $ (315,000)
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,156,597 $ 2,020,170 $ 1,950,689
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net
amortization 448,472 315,897 371,830
Benefit from deferred income taxes (52,300) (41,300) (80,000)
Provision for loan losses 180,000 180,000 300,000
Net (gain) loss on sale of other real estate (202,398) 36,364
Changes in operating assets and liabilities:
Other assets (366,173) (97,041) (234,985)
Other liabilities 188,535 101,168 408,591
Net cash provided by operating activities 2,352,733 2,478,894 2,752,489
Cash flows from investing activities:
Proceeds from sale and maturities of:
Held to maturity securities 2,565,079 2,130,000 1,301,222
Available for sale securities 13,109,137 10,309,545 9,328,430
Payment for purchase of:
Held to maturity securities (3,963,240) (1,492,188) (2,298,863)
Available for sale securities (18,583,686) (7,821,452) (15,393,672)
Net increase in loans (12,507,646) (12,693,393) (6,906,080)
Decrease (increase) in federal funds sold 5,683,000 (5,683,000)
Capital expenditures (659,051) (1,494,890) (455,139)
Proceeds from sale of other real estate 14,500
Net cash used in investing activities (14,341,907) (16,745,378) (14,424,102)
Cash flows from financing activities:
Net increase in deposits 17,684,311 19,968,223 6,707,470
Proceeds from exercise of stock options 65,910
Net increase (decrease) in short-term
borrowings (5,332,867) (3,111,159) 5,791,790
Dividends paid (763,421) (739,989) (721,940)
Purchase of treasury stock (315,000)
Net cash provided by financing activities 11,273,023 16,117,075 11,843,230
Net increase (decrease) in cash and cash
equivalents (716,151) 1,850,591 171,617
Cash and cash equivalents at beginning 10,868,428 9,017,837 8,846,220
Cash and cash equivalents at end $10,152,277 $10,868,428 $ 9,017,837
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 7,738,779 $ 6,873,206 $ 4,786,513
Income taxes 960,348 935,424 886,372
Noncash investing and financing activities:
Loans charged off 72,942 69,262 48,675
Loans refinanced from other real estate (215,000) (115,000)
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
The Company, through its subsidiary, operates a full service financial
institution with a primary marketing area including, but not limited to, the
greater Wausau, Wisconsin area and Marathon County. It provides a variety of
banking products.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of PSB
Holdings, Inc., parent company of Peoples State Bank and the bank's wholly-
owned subsidiary, PSB Investments, Inc., after elimination of significant
intercompany accounts and transactions. The accounting and reporting policies
of the Company conform to generally accepted accounting principles and to the
general practices within the banking industry.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, noninterest-bearing deposits in correspondent banks, and interest-
bearing deposits in money market funds.
INVESTMENT SECURITIES
Investment securities are assigned an appropriate classification at the time
of purchase in accordance with management's intent. Securities held to
maturity represent those securities for which the Company has the positive
intent and ability to hold to maturity. Accordingly, these securities are
carried at cost adjusted for amortization of premium and accretion of discount
calculated using the effective yield method. Unrealized gains and losses on
securities held to maturity are not recognized in the financial statements.
Trading securities include those securities bought and held principally for
the purpose of selling them in the near future. The Company has no trading
securities.
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 a separate component of
stockholders' equity, net of income tax effects.
Any gains and losses on sales of securities are recognized at the time of sale
using the specific identification method.
INTEREST AND FEES ON LOANS
Interest on loans is credited to income as earned. Interest income is not
accrued on loans where management has determined collection of such interest
doubtful. When a loan is placed on nonaccrual status, previously accrued but
unpaid interest deemed uncollectible is reversed and charged against current
income. Fees received on loans are credited to income when received.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determination of the adequacy of the allowance is based upon reviews of
individual credits, recent loss experience, current economic conditions,
composition of the loan portfolio, and other relevant factors. Provisions for
loan losses and recoveries on loans previously charged off are added to the
allowance.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost. Maintenance and repair costs are
charged to expense as incurred. Gains or losses on disposition of property
and equipment are reflected in income. Depreciation is computed principally
on the straight-line method and is based on the estimated useful lives of the
assets varying from 5 to 40 years on buildings, 5 to 20 years on equipment,
and 3 years on software.
OTHER REAL ESTATE
Other real estate is carried at the lower of cost or realizable fair market
value at the date of transfer.
INCOME TAXES
Deferred income taxes have been provided under the liability method prescribed
by Statement of Financial Accounting Standards (SFAS) No. 109. 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 related to Company advertising and promotion are expensed when paid.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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.
FUTURE ACCOUNTING CHANGES
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," in June 1996. SFAS
No. 125 requires use of a financial-components approach to recognize financial
assets and liabilities. Under this approach, after a transfer of financial
assets, the Company will recognize the financial and servicing assets and
liabilities based on whether control over the asset and liability was
maintained or surrendered. This statement is required to be adopted by the
Company for transfers and servicing of financial assets and extinguishments of
liabilities effective January 1, 1997. The adoption of SFAS No. 125 is not
anticipated to have a significant impact on the Company's financial condition
or results of operations once implemented.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
outstanding, which includes the common stock equivalents applicable to shares
issuable under the stock options granted.
NOTE 2 - FORMATION OF THE HOLDING COMPANY
During 1995, a bank holding company, PSB Holdings, Inc. (the Company) was
formed to acquire the stock of Peoples State Bank (the bank). On May 24,
1995, the existing bank stockholders voted to exchange their shares of the
bank for shares of the Company. The Peoples State Bank stockholders received
902,425 shares of the Company's common stock in exchange for all the
outstanding shares of Peoples State Bank. This business combination has been
accounted for as a pooling of interests and accordingly, the operations of
Peoples State Bank are included for all years presented.
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets to be Disposed of." There was no impact on net income as a
result of the adoption of SFAS No. 121. The Company had no long-lived assets
considered to be impaired at the time of adopting the standard.
Effective January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." Under this SFAS, the Company is required to
record an asset for the value of retained servicing rights on mortgages sold.
This asset is amortized to expense as serviced loan principal is paid. The
adoption had no effect on the financial statements during the year of
adoption.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures." There was no impact on net
income as a result of the adoption of SFAS No. 114 at January 1, 1995.
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under this SFAS, the
Company must classify its investment securities into one of three different
classifications. Investments classified as available for sale must be carried
at fair market value and the Company must reflect market value changes in its
equity section. The impact of adoption of this statement at January 1, 1994
was to increase the value of securities reflected on the balance sheet by
approximately $583,000, increase deferred tax liabilities by approximately
$213,000, and increase stockholders' equity by approximately $370,000.
Effective January 1, 1994, the Company adopted SFAS No. 106, "Employers'
Accounting for Post Retirement Benefits Other Than Pensions." The adoption
had no effect on the financial statements.
NOTE 4 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $731,000 are restricted at December
31, 1996 to meet the reserve requirements of the Federal Reserve System.
<PAGE>
<TABLE>
NOTE 5 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities are as
follows:
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Securities held to maturity:
Obligations of states and
political subdivisions $ 11,713,698 $ 88,365 $ 39,185 $ 11,762,878
Securities available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 39,233,521 $ 247,027 $ 256,827 $ 39,223,721
Other equity securities 647,378 647,378
Totals $ 39,880,899 $ 247,027 $ 256,827 $ 39,871,099
DECEMBER 31, 1995
Securities held to maturity:
Obligations of states and
political subdivisions $ 10,333,193 $ 118,919 $ (23,377) $ 10,428,735
Securities available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 34,227,943 $ 459,033 $ (89,778) $ 34,597,198
Other equity securities 45,378 45,378
Totals $ 34,273,321 $ 459,033 $ (89,778) $ 34,642,576
</TABLE>
<PAGE>
<TABLE>
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair values of debt securities held to
maturity and securities available for sale at December 31, 1996, 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.
<CAPTION>
Estimated
Amortized Fair
SECURITIES HELD TO MATURITY COST VALUE
<S> <C> <C>
Due in one year or less $ 2,060,743 $ 2,074,276
Due after one year through five years 6,177,357 6,219,202
Due after five years through ten years 3,475,598 3,469,400
Totals $ 11,713,698 $ 11,762,878
SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 6,252,818 $ 6,305,450
Due after one year through five years 28,563,827 28,486,863
Due after five years through ten years 999,379 999,379
Totals 35,816,024 35,791,692
Mortgage-backed securities 3,417,497 3,432,029
Totals $ 39,233,521 $ 39,223,721
</TABLE>
Securities with an approximate carrying value of $9,353,917 and $16,229,069 at
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits, short-term borrowings, and for other purposes required by law.
During 1996, no investment securities were sold. Proceeds from securities
sales in 1995 were $4,543,438. Gross gains of $26,415 were realized on those
sales. Proceeds from securities sales during 1994 were $1,248,672. Gross
losses of $1,596 were realized on those sales.
As a member of the Federal Home Loan Bank (FHLB) system, the banking
subsidiary is required to hold stock in the FHLB based on asset size. This
stock is recorded at cost which approximates fair value. Transfer of the
stock is substantially restricted. Equity securities include $602,000 of FHLB
stock at December 31, 1996.
<PAGE>
<TABLE>
NOTE 6 - LOANS
The composition of loans is as follows:
<CAPTION>
1996 1995
<S> <C> <C>
Commercial $ 30,350,578 $ 29,647,312
Real estate 93,450,237 84,220,917
Consumer 14,210,318 11,456,465
Total loans $138,011,133 $125,324,694
</TABLE>
<TABLE>
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. Substantially all loans to executive officers and directors
were made on the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others and did not
involve more than the normal risk of collectibility or present other
unfavorable features. Activity in such loans is summarized below:
<CAPTION>
1996 1995
<S> <C> <C>
Loans outstanding at beginning of year $ 2,757,077 $ 1,880,372
New loans 474,182 2,165,260
Repayment (636,712) (1,288,555)
Loans outstanding at end of year $ 2,594,547 $ 2,757,077
</TABLE>
The allowance for loan losses should include specific allowances related to
loans which have been judged to be impaired and which fall within the scope of
SFAS No. 114. A loan is impaired when, based on current information, it is
probable that the Company will not collect all amounts due in accordance with
the contractual terms of the loan agreement. These specific allowances are
based on discounted cash flows of expected future payments using the loan's
initial effective interest rate or the fair value of the collateral if the
loan is collateral dependent.
<PAGE>
<TABLE>
NOTE 6 - LOANS (CONTINUED)
An analysis of impaired loans follows:
<CAPTION>
1996 1995
<S> <C> <C>
AT DECEMBER 31,
Nonaccrual $ 42,769 $
Accruing income 269,537 545,590
Total impaired loans 312,306 545,590
Less - Allowance for loan losses 20,000 53,623
Net investment in impaired loans $ 292,306 $ 491,967
YEARS ENDED DECEMBER 31,
Average recorded investment, net of
allowance for loan losses $ 304,400 $ 590,000
Interest income recognized $ 23,001 $ 63,481
</TABLE>
Since the Company evaluates the overall adequacy of the allowance for loan
losses on an ongoing basis, the adoption of SFAS No. 114 during 1995 did not
affect the amount of the allowance for loan losses or the existing income
recognition and charge-off policies for nonperforming loans.
The Company continues to maintain a general allowance for loan losses for
loans outside of the scope of SFAS No. 114. The allowance for loan losses is
maintained at a level which management believes is adequate for possible loan
losses. Management periodically evaluates the adequacy of the allowance using
the Company's past loan loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and
other relevant factors. This evaluation is inherently subjective since it
requires material estimates that may be susceptible to significant change.
<TABLE>
An analysis of the allowance for loan losses for the three years ended
December 31, follows:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance January 1 $ 1,780,893 $ 1,643,646 $ 1,370,621
Provision charged to operating expense 180,000 180,000 300,000
Recoveries on loans 36,735 26,509 21,700
Loans charged off (72,942) (69,262) (48,675)
Balance December 31 $ 1,924,686 $ 1,780,893 $ 1,643,646
</TABLE>
<PAGE>
<TABLE>
NOTE 7 - PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 570,946 $ 570,946
Buildings and improvements 2,949,856 2,937,458
Furniture and equipment 2,414,111 1,715,006
Construction in progress 66,918
Totals 5,934,913 5,290,328
Accumulated depreciation and amortization (2,233,726) (1,845,603)
Net book value $ 3,701,187 $ 3,444,725
</TABLE>
Depreciation and amortization charged to operating expenses amounted to
$402,589 in 1996, $253,596 in 1995, and $229,366 in 1994.
NOTE 8 - OTHER REAL ESTATE
Included in other assets is other real estate of $27,102 at December 31, 1995.
Operating expenses for 1995 and 1994 included charges of $39,708 and $35,691,
respectively for expenses related to other real estate. No other real estate
was held at December 31, 1996.
<TABLE>
NOTE 9 - DEPOSITS
The book values of deposits consisted of the following at December 31:
<CAPTION>
1996 1995
<S> <C> <C>
Noninterest-bearing checking $ 28,486,255 $ 26,559,435
Interest-bearing checking 8,523,796 7,228,998
Savings 24,352,885 23,077,492
Money market accounts 14,832,676 16,628,362
Time deposits 101,933,291 86,950,305
Total deposits $ 178,128,903 $ 160,444,592
</TABLE>
Certificate of deposit accounts with individual balances greater than $100,000
totaled $10,916,231 and $8,033,224 at December 31, 1996 and 1995,
respectively.
Deposits from Company directors, officers and related parties at December 31,
1996 and 1995 totaled $5,608,102 and $5,028,255, respectively.
<TABLE>
At December 31, 1996, time deposits have scheduled maturity dates as follows:
<CAPTION>
<S> <C>
1997 $ 89,747,046
1998 8,601,678
1999 3,169,940
2000 414,627
Total $ 101,933,291
</TABLE>
<PAGE>
<TABLE>
NOTE 10 - SHORT-TERM BORROWINGS
The composition of short-term borrowings at December 31, follows:
<CAPTION>
1996 1995
<S> <C> <C>
Securities sold under repurchase agreements $ 3,569,631 $ 11,099,498
Federal funds purchased 2,197,000
Total short-term borrowings $ 5,766,631 $ 11,099,498
</TABLE>
<TABLE>
The following information relates to federal funds purchased and securities
sold under repurchase agreements for the years ended December 31:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
As of end of year:
Weighted average rate 5.53% 6.18% 5.52%
For the year:
Highest month-end balance $ 15,503,184 $ 13,410,236 $ 14,210,657
Daily average balance 10,101,160 10,732,363 9,594,480
Weighted average rate 6.03% 6.00% 4.80%
</TABLE>
NOTE 11 - RETIREMENT PLANS
The Company sponsors a defined benefit pension plan which covers substantially
all employees. The benefits are based on years of service and the employee's
highest consecutive five-year average earnings. Contributions are intended to
provide not only benefits attributed for service to date but also for those
expected to be earned in the future. The Company's funding policy is to
annually contribute the maximum amount deductible for federal income tax
purposes.
The plan assets are invested primarily in U.S. Treasury and Agency issues,
with approximately $375,000 and $100,000 invested in certificates of deposit
of the Company's subsidiary at December 31, 1996 and 1995, respectively.
Effective January 1, 1997, the Company terminated its defined benefit pension
plan. Monthly benefits currently paid to retirees will not be affected by the
plan's termination. The Company intends to request regulatory approval to
distribute participants' vested defined benefit pension plan balances to
participants or into the bank's 401(k) profit-sharing plan. Any shortfall in
plan assets under the required distribution of vested benefits will be
provided for by the Company.
<PAGE>
<TABLE>
NOTE 11 - RETIREMENT PLANS (CONTINUED)
Under the provisions of Statement of Financial Accounting Standards (SFAS) No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," this transaction constitutes a
curtailment, which resulted in the recognition of a gain to the Company as of
December 31, 1996 determined as follows:
<CAPTION>
Effect of
Before Curtailment After
CURTAILMENT (GAIN) LOSS CURTAILMENT
<S> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation $ (1,544,424) $ $(1,544,424)
Nonvested benefit obligation (50,786) (50,786)
Accumulated benefit obligation (1,595,210) (1,595,210)
Effect of projected future compensation
levels (635,379) 635,379
Projected benefit obligation (2,230,589) 635,379 (1,595,210)
Plan assets at fair value 1,643,439 1,643,439
Projected benefit obligation in excess of
plan assets (587,150) 635,379 48,229
Unrecognized net loss 696,176 (634,047) 62,129
Unrecognized net transition asset (62,129) (62,129)
Prepaid pension cost recognized in the
consolidated balance sheets $ 46,897 $ 1,332 $ 48,229
</TABLE>
<PAGE>
<TABLE>
NOTE 11 - RETIREMENT PLANS (CONTINUED)
The following table sets forth the plan's funded status and the amounts
reflected in the accompanying balance sheets at December 31:
<CAPTION>
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ (1,544,424) $ (1,339,794)
Nonvested benefit obligation (50,786) (18,811)
Accumulated benefit obligation (1,595,210) (1,358,605)
Effect of projected future compensation levels (573,313)
Projected benefit obligation (1,595,210) (1,931,918)
Plan assets at fair value 1,643,439 1,477,034
Plan assets in excess of (less than) projected
benefit obligation 48,229 (454,884)
Unrecognized net loss 62,129 582,342
Unrecognized net transition asset (62,129) (68,915)
Prepaid pension cost recognized in the balance sheet $ 48,229 $ 58,543
</TABLE>
<TABLE>
Net pension cost for December 31 included the following components:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service cost - Benefits earned during the period $ 108,080 $ 93,390 $ 73,026
Interest cost on projected benefit obligation 141,725 131,350 110,826
Actual return on plan assets (79,499) (133,375) (29,473)
Net amortization and deferral ( 9,345) 47,661 (57,996)
Net periodic pension cost $ 160,961 $ 139,026 $ 96,383
</TABLE>
<TABLE>
The following assumptions were used in determining the projected benefit
obligation:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Discount rate 7% 7% 7%
Rates of increase in future compensation levels 0% 5% 5%
Expected long-term rate of return on assets 7% 7% 7%
</TABLE>
The Company also maintains a 401(k) profit-sharing plan for its employees.
The Company matches 50 percent of the employee's deferrals up to the first 4
percent of pay deferred. The expense of the plan for the years ended December
31, 1996, 1995, and 1994 was $30,442, $26,846, and $27,330, respectively.
The Company also maintains an unfunded retirement plan for its directors. The
plan pays directors who have at least 15 years of service at retirement 50
percent of the fees received during their final 5 years as a director.
Currently six directors are eligible for benefits. The plan expense totaled
$40,000 for the year ended December 31, 1996. There was no plan expense in
1995 or 1994. The liability in the financial statements for this plan at
December 31, 1996 was $130,488.
<PAGE>
NOTE 12 - POST-RETIREMENT HEALTH CARE BENEFITS
The Company maintains a post-retirement health care benefit plan which covers
the officers of the Company. After retirement, the Company will pay between
25 percent and 50 percent of the health insurance premiums for Company
officers. To qualify, an officer must have at least 15 years of service, be
at the Company at retirement, and must be at least 62 years of age at
retirement. The actual amount paid is based upon years of service.
<TABLE>
The following table sets forth the plan's funded status and the amounts
reflected in the accompanying balance sheets at December 31:
<CAPTION>
1996 1995
<S> <C> <C>
Accumulated post-retirement benefit obligation (APBO):
Retirees $ (47,212) $ (47,397)
Fully eligible actives (31,299) (27,658)
Other actives (113,264) (100,089)
Total APBO $ (191,775) $ (175,144)
Funded status $ (191,775) $ (175,144)
Unrecognized:
Prior service cost 95,405 102,801
Net gain (14,409) (14,409)
Accumulated post-retirement benefit cost $ (110,779) $ (86,752)
<FN>
The accumulated post-retirement benefit cost is classified on the balance
sheets in other liabilities.
</TABLE>
<TABLE>
Net post-retirement health care cost for December 31 included the following
components:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service cost $ 7,235 $ 5,889 $ 8,481
Interest cost 13,001 11,840 11,120
Amortization of:
Prior service cost 7,396 7,396 7,396
Net gain (1,109)
Net periodic benefit cost $ 27,632 $ 24,016 $ 26,997
</TABLE>
<TABLE>
The following assumptions were used to determine the accumulated benefit
obligation at December 31:
<CAPTION>
1996 1995
<S> <C> <C>
Discount rate 7.5% 7.5%
Health care cost trend rate 7.5% 3.0%
</TABLE>
The health care cost trend rate is anticipated to decrease to 5 percent in
0.25 percent per year decrements over a ten-year period.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Impact of 1 percent increase in medical trend rate:
On service cost and interest cost $ 778 $ 684 $ 400
On APBO, December 31 7,644 6,981 3,800
</TABLE>
<PAGE>
<TABLE>
NOTE 13 - INCOME TAXES
<CAPTION>
The components of the income tax provision are as follows:
1996 1995 1994
<S> <C> <C> <C>
Current income tax provision:
Federal $ 902,300 $ 819,000 $ 838,000
State 144,000 113,300 116,000
Total current 1,046,300 932,300 954,000
Deferred income tax benefit:
Federal (41,300) (32,600) (60,000)
State (11,000) (8,700) (20,000)
Total deferred (52,300) (41,300) (80,000)
Total provision for income taxes $ 994,000 $ 891,000 $ 874,000
</TABLE>
<TABLE>
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:
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 645,000 $ 588,200
Deferred compensation 59,100 44,700
Post-retirement health care benefits 47,400 41,000
Unrealized loss on securities available for sale 663
Other real estate 55,000
Gross deferred tax assets 752,163 728,900
Deferred tax liabilities:
Unrealized gain on securities available for sale
(136,982)
Premises and equipment (115,600) (86,900)
Employee pension plan ( 19,100) (77,500)
Gross deferred tax liabilities (134,700) (301,382)
Net deferred tax assets $ 617,463 $ 427,518
</TABLE>
<PAGE>
<TABLE>
NOTE 13 - INCOME TAXES (CONTINUED)
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:
<CAPTION>
1996 1995 1994
Percent Percent Percent
of of of
Pretax Pretax Pretax
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate $ 1,071,200 34.0% $ 989,800 34.0% $ 960,400 34.0%
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (169,200) (5.4%) (173,400) (6.0%) (174,500) (6.2%)
State income tax 88,000 2.8% 69,000 2.4% 76,600 2.7%
Other 4,000 .1% 5,600 .2% 11,500 .4%
Provision for income taxes $ 994,000 31.5% $ 891,000 30.6% $ 874,000 30.9%
</TABLE>
NOTE 14 - STOCK OPTIONS
On April 18, 1989, the Company's stockholders authorized 131,750 shares of
stock to be set aside for issuance under a stock option plan. Options were
granted to virtually all officers and employees totaling 36,250 shares. The
options were required to be exercised prior to May 1, 1994. The option price
was at the fair market value of the Company's stock as of the date the option
was granted. As of December 31, 1994, all options have been exercised or
expired.
NOTE 15 - 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:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commitments to extend credit $ 14,162,116 $ 8,676,670
Letters of credit 1,341,142 1,192,167
Credit card commitments 1,837,542 1,485,128
Totals $ 17,340,800 $ 11,353,965
</TABLE>
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
<PAGE>
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
CREDIT RISK (CONTINUED)
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 credit-worthiness 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 average amount of these commitments that are collateralized is
80 percent.
Credit card commitments are commitments on credit cards issued by the Company
and serviced by Elan Financial Services. These commitments are unsecured.
CONCENTRATION OF CREDIT RISK
The Company grants residential mortgage, commercial and consumer loans
predominantly in the greater Wausau area and Marathon County. There are no
significant concentrations of credit to any one debtor or industry group. It
is felt that the diversity of the local economy will prevent significant
losses in the event of an economic downturn.
CONTINGENCIES
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
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, 1996, none of the approximately $1,010,300
of variable rate loans had reached the interest rate cap.
NOTE 16 - CAPITAL REQUIREMENTS
Federal banking regulatory agencies have established capital adequacy rules
which take into account risk attributable to balance sheet assets and off-
balance sheet activities. All banks and bank holding companies must meet a
minimum total risk-based capital ratio of 8 percent. Of the 8 percent
required, half must be comprised of core capital elements defined as Tier 1
capital. The federal banking agencies also have adopted leverage capital
guidelines which banking organizations must meet. Under these guidelines, the
most highly rated banking organizations must meet a minimum leverage ratio of
at least 3 percent Tier 1 capital to total assets, while lower rated banking
organizations must maintain a ratio of at least 4 percent to 5 percent.
<PAGE>
NOTE 16 - CAPITAL REQUIREMENTS (CONTINUED)
The subsidiary bank is 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 bank'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, 1996,
the bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, 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 notification that management believes have changed
the institution's category.
The Company's actual capital amounts and ratios as of December 31, 1996, are
presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk
weighted assets) $ 19,878,000 15.7% $ 10,118,000 greater $ 12,647,000 greater
than or than or
equal to equal to
8.0% 10.0%
Tier I capital (to risk
weighted assets) $ 18,297,000 14.5% $ 5,059,000 greater $ 7,588,000 greater
than or than or
equal to equal to
4.0% 6.0%
Tier I capital (to
average assets) $ 18,297,000 9.1% $ 8,061,000 greater $ 10,076,000 greater
than or than or
equal to equal to
4.0% 5.0%
</TABLE>
The subsidiary bank is restricted by banking regulations from making dividend
distributions above prescribed amounts and limited in making loans and
advances to the Company. At December 31, 1996, the retained earnings of the
subsidiary available for distribution as dividends without regulatory approval
was approximately $7,713,000.
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about
Fair Value of Financial Instruments," requires 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.
<PAGE>
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents and short-term investments approximate their fair values.
INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices.
LOANS
For variable rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
other loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. In addition, for impaired loans, marketability and
appraisal values were considered in the fair value determination. The
carrying amount of accrued interest approximates its fair value.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as demand deposits,
NOW accounts, savings and money market accounts is equal to the amount payable
on demand at the reporting date. Fair values for fixed rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected maturities on time deposits.
SHORT-TERM BORROWINGS
The carrying amount of short-term borrowings approximate their fair values.
<TABLE>
The carrying amounts and fair values of the Company's financial instruments
consisted of the following at December 31:
<CAPTION>
1996 1995
Carrying Estimated Carrying Estimated
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 10,152,277 $ 10,152,277 $ 16,551,428 $ 16,551,428
Investment securities 51,584,797 51,633,977 44,975,769 45,071,311
Net loans 136,086,447 136,038,108 123,543,801 124,315,314
Financial liabilities:
Deposits 178,128,903 178,548,854 160,444,592 160,952,607
Short-term borrowings 5,766,631 5,766,631 11,099,498 11,099,498
</TABLE>
<PAGE>
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 credit
worthiness of the counter parties. Since this amount is immaterial, no
amounts for fair value are presented.
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 judgement 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.
<PAGE>
NOTE 18 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets as of December 31, 1996 and 1995, and
condensed statements of income and cash flows for the year ended December 31,
1996 and the seven-month period ended December 31, 1995 (from date of parent
company inception) for PSB Holdings, Inc. should be read in conjunction with
the consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 529,371 $ 486,285
Investment in subsidiary 18,139,868 17,337,057
Other assets 98,516 99,033
Total assets $ 18,767,755 $ 17,922,375
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued dividends payable $ 478,831 $ 470,811
Total stockholders' equity 18,288,924 17,451,564
Total liabilities and stockholders' equity $ 18,767,755 $ 17,922,375
</TABLE>
<TABLE>
STATEMENTS OF INCOME
Year Ended December 31, 1996 and
Seven-Month Period Ended December 31, 1995
<CAPTION>
1996 1995
<S> <C> <C>
Equity in net income of bank $ 2,201,428 $ 2,028,722
Other expense (65,831) (12,552)
Income before credit for income taxes 2,135,597 2,016,170
Credit for income taxes (21,000) (4,000)
Net income $ 2,156,597 $ 2,020,170
</TABLE>
<PAGE>
<TABLE>
NOTE 18 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Year Ended December 31, 1996 and
Seven-Month Period Ended December 31, 1995
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,156,597 $ 2,020,170
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Equity in net income of bank (2,201,428) (2,028,722)
Net amortization 21,517 12,552
Increase in other assets (21,000) (111,584)
Increase in other liabilities 8,020 470,811
Net cash provided by (used in) operating activities (36,293) 363,227
Cash flows from investing activities - Dividends
received from bank 1,157,800 863,047
Cash flows from financing activities:
Dividends paid (763,421) (739,989)
Purchase of treasury stock (315,000)
Net cash used in financing activities (1,078,421) (739,989)
Net increase in cash and cash equivalents 43,086 486,285
Cash and cash equivalents at beginning 486,285
Cash and cash equivalents at end $ 529,371 $ 486,285
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
Information relating to directors of the Company is incorporated into this
Form 10-K by this reference to the material set forth in the table under the
caption "Election of Directors", pages 2 and 3, of the Company's proxy
statement dated March 25, 1997 (the "1997 Proxy Statement"). Information
relating to executive officers is found in Part I of this Form 10-K, page 7.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to director compensation is incorporated into this
Form 10-K by this reference to the 1997 Proxy Statement under the subcaption
"Compensation of Directors", page 4. Information relating to the compensation
of executive officers is incorporated into this Form 10-K by this reference to
(1) the material set forth under the caption "Executive Officer Compensation"
and ending with the material set forth under the subcaption "Pension Plan",
pages 6 through 7, in the 1997 Proxy Statement and (2) the material set forth
under the subcaption "Compensation Committee and Board Interlocks and Insider
Participation", page 8, in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to security ownership of certain beneficial owners
and management is incorporated into this Form 10-K by this reference to the
material set forth under the caption "Beneficial Ownership of Common Stock",
pages 4 and 5, in the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to transactions with management is incorporated into
this Form 10-K by this reference to the material set forth under the caption
"Certain Relationships and Related Transactions", pages 8 and 9, in the 1997
Proxy Statement.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial statements and financial statement schedules filed as part of
this report and required by Item 14(d) are set forth on page 23 herein.
(b) No reports on Form 8-K were filed by the Company during the fourth quarter
of 1996.
(c) Exhibits
The following exhibits required by Item 601 of Regulation S-K are filed
with the Securities and Exchange Commission as part of this report.
Exhibits incorporated by reference are indicated by footnote reference to
incorporated filing.
EXHIBIT (3) - ARTICLES OF INCORPORATION AND BYLAWS
PAGE OR
INCORPORATED
EXHIBIT <dagger>
(a) Restated Articles of Incorporation, as amended ......4(a)(1)
(b) Bylaws ............................................ 4(b)(1)
EXHIBIT (4) - INSTRUMENTS DEFINING THE RIGHTS OF
SECURITY HOLDERS
(a) Articles of Incorporation and
Bylaws (see Exhibits 3(a) and (b))
EXHIBIT (10) - MATERIAL CONTRACTS
(a) Bonus Plan of Directors of the Bank* ............. 10(a)(2)
(b) Bonus Plan of Officers and Employees of the Bank*. 10(b)(2)
(c) Non-Qualified Retirement Plan for Directors of
the Bank* ........................................ 10(c)(2)
EXHIBIT (21) - SUBSIDIARIES OF THE REGISTRANT ......... 22(2)
* Denotes Executive Compensation Plans and Arrangements.
<dagger>Where exhibit has been previously filed and is incorporated
herein by reference, exhibit numbers set forth herein correspond to
the exhibit number where such exhibit can be found in the following
reports of the registrant (Commission File No. 0-26480) filed with
the Securities and Exchange Commission:
(1) Registrant's current report on Form 8-K dated May 30, 1995
(2) Registrant's annual report on Form 10-K for the fiscal year
ended December 31, 1995
The above exhibits are available upon request in writing from the
Secretary, PSB Holdings, Inc., 1905 W. Stewart Avenue, Wausau, WI 54401.
<PAGE>
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: GORDON P. GULLICKSON March 25, 1997
Gordon P. Gullickson, President
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 25th day of March, 1997.
SIGNATURE AND TITLE SIGNATURE AND TITLE
GORDON P. GULLICKSON TODD R. TOPPEN
Gordon P. Gullickson, President Todd R. Toppen, Treasurer
Chief Executive Officer and a (Chief Financial and
Director Principal Accounting Officer)
DIRECTORS:
PATRICK L. CROOKS LAWRENCE HANZ, JR.
Patrick L. Crooks Lawrence Hanz, Jr.
THOMAS R. POLZER THOMAS A. RIISER
Thomas R. Polzer Thomas A. Riiser
EUGENE WITTER
Eugene Witter
<PAGE>
EXHIBIT INDEX<dagger>
TO
FORM 10-K
OF
PSB HOLDINGS, INC.
FOR THE PERIOD ENDED DECEMBER 31, 1996
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. <section>232.102(d))
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
<dagger>Exhibits required by Item 601 of Regulation S-K which have been
previously filed and are incorporated by reference are set forth in Part
IV, Item 14(c) of the Form 10-K to which this Exhibit Index relates.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,152
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,871
<INVESTMENTS-CARRYING> 11,713
<INVESTMENTS-MARKET> 11,762
<LOANS> 138,011
<ALLOWANCE> 1,925
<TOTAL-ASSETS> 204,158
<DEPOSITS> 178,129
<SHORT-TERM> 5,767
<LIABILITIES-OTHER> 1,974
<LONG-TERM> 0
0
0
<COMMON> 1,805
<OTHER-SE> 16,484
<TOTAL-LIABILITIES-AND-EQUITY> 204,158
<INTEREST-LOAN> 11,757
<INTEREST-INVEST> 2,883
<INTEREST-OTHER> 184
<INTEREST-TOTAL> 14,824
<INTEREST-DEPOSIT> 7,156
<INTEREST-EXPENSE> 7,769
<INTEREST-INCOME-NET> 7,055
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,715
<INCOME-PRETAX> 3,150
<INCOME-PRE-EXTRAORDINARY> 3,150
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,156
<EPS-PRIMARY> 2.39
<EPS-DILUTED> 2.39
<YIELD-ACTUAL> 4.02
<LOANS-NON> 247
<LOANS-PAST> 275
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,329
<ALLOWANCE-OPEN> 1,781
<CHARGE-OFFS> 73
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 1,925
<ALLOWANCE-DOMESTIC> 1,925
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
