<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
COMMISSION FILE NO. 0-26480
PSB HOLDINGS, INC.
(Exact name of registrant as specified in charter)
1905 W. STEWART AVENUE WISCONSIN
WAUSAU, WI 54401 (State of incorporation)
39-1804877
(Address of principal executive office) (I.R.S. Employer
Identification Number)
Registrant's telephone number, including area code: 715-842-2191
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of each class)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
There is no established trading market for the common stock. As of March 15,
1998, 883,235 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT DATED MARCH 31, 1998 (PART III)
* TO THE EXTENT NOTED HEREIN
-1-
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business ............................................ 3
Item 2. Properties .......................................... 8
Item 3. Legal Proceedings ................................... 8
Item 4. Submission of Matters to a Vote of Security Holders . 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Security Holder Matters ............................. 9
Item 6. Selected Financial Data ............................. 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 11
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk ......................................... 26
Item 8. Financial Statements and Supplementary Data ......... 28
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ................. 57
PART III
Item 10. Directors and Executive Officers of Registrant ..... 58
Item 11. Executive Compensation ............................. 58
Item 12. Security Ownership of Certain Beneficial Owners
and Management ..................................... 58
Item 13. Certain Relationships and Related Transactions ..... 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................ 59
-2-
<PAGE>
PART I
ITEM 1. BUSINESS.
FORMATION
PSB Holdings, Inc., a Wisconsin corporation (the "Company"), is a one-
bank holding company formed in 1995. The Company owns 100% of the common
stock of Peoples State Bank, Wausau, Wisconsin (the "Bank").
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 City, 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. The Bank offers discount brokerage
services at its Wausau branch location, including the sale of annuities,
mutual funds and other investments to Bank customers and the general
public. 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 City, 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
rates charged on borrowings and fees charged for fiduciary
-3-
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
<PAGE>
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 its primary trade area, the Bank has
approximately 15% of total financial institution assets, deposits and
loans.
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, 1997, the Bank had 91 employees, including 21
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 is 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
-4-
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. Wisconsin law provides that the Company may not acquire more
than 10% of the stock of an existing Wisconsin state bank unless such
acquisition is approved by 75% of the shares of the bank entitled to vote.
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 FDIC. As a Wisconsin chartered bank,
the Bank and the Company are also subject to periodic examination and the
regulations of the Wisconsin Department of Financial Institutions.
<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. Under the Deposit Insurance Funds Act of 1996, the FDIC has
lowered the rates on assessments paid to the Saving Association Insurance
Fund ("SAIF") while simultaneously widening the spread between the lowest
and highest rates to improve the effectiveness of the FDIC's risk-based
premium system. The FDIC also established a process, similar to that
which was applied to the Bank Insurance Fund ("BIF"), for adjusting the
rate schedules for both the SAIF and the BIF within a limited range to
maintain each of the fund balances at the target designated reserve ratio.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") significantly expanded interstate banking
opportunities in Wisconsin. 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 Administrator
of the Division of Banking, Wisconsin Department of Financial
Institutions. Banks are also permitted to operate interstate branches
beginning in Wisconsin. The effect of the new
-5-
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
<PAGE>
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 paid by banks in respect of
deposits. Governmental and Board monetary policies have had a significant
effect on the operating results of commercial banks in the past and are
expected to do so in the future. 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, 1998, their ages
and principal occupations during the last five years are set forth below.
<TABLE>
<CAPTION>
<S> <C>
Gordon C. Gullickson, 69 President of the Company and the Bank.
-6-
Kenneth M. Selner, 51 Vice President & Secretary of the
Company; Executive Vice President of the
Bank.
Todd R. Toppen, 39 Treasurer of the Company; Vice President
of the Bank since 1994, Assistant Vice
President 1988 to 1993.
</TABLE>
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
Certain statements contained in each of the Company's annual reports
to shareholders, Forms 10-K, 8-K and 10-Q, proxy statements, prospectuses
and any other written or oral statement made by or on behalf of the
Company subsequent to filing of this Form 10-K may include one or more
"forward-looking statements" within the meaning of Sections 27A of the
Securities Act of 1933 and 21E of the Securities Exchange Act of 1934 as
enacted in the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). In addition, certain statements in future filings by the
Company with the Securities and Exchange Commission, in press releases,
and in oral and written statements made by or with the approval of the
Company which are not statements of historical fact will constitute
forward-looking statements within the meaning of the Reform Act.
Examples of forward-looking statements include, but are not limited to:
(i) expectations concerning financial performance of the Company, (ii)
<PAGE>
expectations concerning the payment of dividends, (iii) statements of
plans and objectives of the Company, (iv) statements of future economic
performance and (v) statements of assumptions underlying such statements.
Words such as "believes", "anticipates", "expects", "intends", "targeted"
and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
In making forward-looking statements within the meaning of the Reform Act,
the Company undertakes no obligation to publicly update or revise any such
statement.
Forward-looking statements of the Company are based on information
available to the Company as of the date of such statements and reflect the
Company's expectations as of such date, but are subject to risks and
uncertainties that may cause actual results to vary materially. In
addition to specific factors which may be described in connection with any
of the Company's forward-looking statements, factors which could cause
actual results to differ materially from those discussed in the forward-
looking statements include, but are not limited to the following: (i) the
strength of the U.S. economy in general and the strength of the local
economy; (ii) the effects of and changes in government policies, including
interest rate policies of the Board of Governors of the Federal Reserve
System; (iii) inflation, interest rate, market and monetary fluctuations;
(iv) the timely development of and acceptance of new products and
services, (v) changes in consumer spending, borrowing and saving habits;
(vi) increased competition in the Company's principal market area; (vii)
technological changes; (viii) acquisitions; (ix) the effect of changes in
laws and regulations, (x) the effect of changes
-7-
in accounting policies and practices, and (xi) the costs and effects of
litigation and of unexpected or adverse outcomes in such litigation.
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.
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 1997.
-8-
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, 1997 there were approximately 974 holders of record
of the Company's common stock.
DIVIDENDS
Per share dividends declared by the Company in its two most recent
fiscal years were:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Second Quarter $.35 $.33
Fourth Quarter $.55 $.52
</TABLE>
The Company's source of funds for the payment of dividends is
dividends paid by the Bank. The payment of dividends by the Bank is
limited by Wisconsin law to payment from retained earnings. Among other
things, Wisconsin chartered banks cannot pay dividends if (1) the payment
of a dividend would impair the bank's capital structure, (2) in certain
cases, the bank's surplus is not equal to its common capital or (3)
dividends declared in any one year would exceed the total net profits in
that year after deducting losses and bad debts and any required transfers
to surplus. Federal regulatory approval is required if the total
dividends declared by a bank in any year will exceed the total of its net
profits for that year combined with its retained net profits for the
preceding two years less any required transfers to surplus. Federal
regulators also have authority to prohibit a bank from engaging in what,
in their opinion, constitutes an unsafe or unsound practice in conducting
its business, including the payment of dividends. There are no
contractual limits presently in effect which limit the Bank's ability to
pay dividends to the Company or which limit the Company's ability to pay
dividends to its shareholders.
-9-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents consolidated financial data of the
Company and its subsidiary. This information and the following discussion
and analysis should be read in conjunction with other financial
information presented elsewhere in this report.
<TABLE>
FINANCIAL SUMMARY
AT PERIOD END
<CAPTION>
($ in thousands, except per share amounts)
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Interest Income $ 15,744 $ 14,824 $ 13,654 $ 11,555 $ 11,103 $ 11,136
Net Interest Margin 7,491 7,055 6,599 6,619 6,347 5,703
Net Income 2,103 2,157 2,020 1,951 2,100 1,778
Total Assets 215,019 204,158 190,781 171,470 158,108 146,320
Mortgages 103,254 93,450 84,221 75,953 70,194 59,653
Total Capital Base 21,062 20,214 19,232 16,742 16,015 14,055
Shareholders' Equity 19,217 18,289 17,452 15,098 14,644 12,958
Basic and diluted
earnings per share $ 2.37 $ 2.39 $ 2.24 $ 2.17 $ 2.28 $ 2.01
Cash dividends per
share .90 .85 .82 .80 .75 .65
Book value per share 21.76 20.42 19.34 16.73 16.32 14.76
</TABLE>
-10-
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion relates to Company and 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.
Management's discussion and analysis contains forward-looking
statements that are provided to assist in the understanding of anticipated
future financial performance. However, such performance involves risks
and uncertainties which may cause actual results to differ materially from
those in such statements. For a discussion of certain factors that may
cause such forward-looking statements to differ materially from actual
results see Item 1, Cautionary Statement Regarding Forward-Looking
Information.
RESULTS OF OPERATIONS
The Company's consolidated net income for 1997 was $2,102,709 compared
with $2,156,597 in 1996, and $2,020,170 in 1995. Net income decreased
2.5% in 1997 from 1996 and increased 6.7% in 1996 from 1995. The main
factor contributing to the decrease in net earnings in 1997 is that in
1996 a gain was realized on the sale of other real estate. Other factors,
including net interest margin, were higher in 1997. The Company continues
to provide funds for loans in its market area. The Company promotes
quality service in order to attract new customers and build stronger
relationships with existing customers.
<PAGE>
Return on average common stockholders' equity amounted to 11.15% in
1997 compared to 11.98% in 1996, and 12.15% in 1995.
Return on average assets for 1997 amounted to 1.02% compared to 1.10%
for 1996 and 1.13% in 1995.
Net income per share amounted to $2.37 in 1997, compared to $2.39 in
1996 and $2.24 in 1995. Cash dividend declared in 1997 were $.90,
compared to $.85 per share in 1996 and $.82 in 1995. The per share ratio
of dividends to shareholders to net income was 37.85% in 1997, compared to
35.40 in 1996 and 36.63% in 1995.
-11-
<PAGE>
NET INTEREST INCOME
The following table shows how net interest income is impacted by the
change in volume and interest rates. 1997 and 1996 data shows a favorable
spread due to both increased volume and rate changes. Growth in net
interest income will continue to be moderate and interest margins will
need to be managed carefully during 1998.
<TABLE>
INTEREST INCOME & EXPENSE VOLUME & RATE CHANGE
<CAPTION>
1997 compared to 1996 1996 compared to 1995 1995 compared to 1994 1994 compared to 1993
increase (decrease) increase (decrease) increase (decrease) increase (decrease)
due to (1) due to (1) due to (1) due to (1)
($ 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) $ 916 15 931 $ 994 (30) 964 $ 1,244 608 1,852 $ 643 (305) 338
Taxable investment
securities (22) 62 40 227 (14) 213 72 47 119 261 (151) 110
Non-taxable
investment
securities (2) 74 (32) 42 31 (51) (20) 29 (16) 13 4 (14) (10)
Other interest
income (118) 39 ( 79) (1) (2) (3) 74 51 125 4 11 15
Total 850 84 934 1,251 (97) 1,154 1,419 690 2,109 912 (459) 453
Interest paid on:
Savings and
demand deposits 175 72 247 101 (64) 37 (58) 213 155 157 (35) 122
Time deposits 493 (24) 469 616 94 710 795 984 1,779 160 (174) (14)
Other borrowings (235) 2 (233) (29) (4) (33) 55 130 185 44 28 72
Total 433 50 483 688 26 714 792 1,327 2,119 361 (181) 180
Net interest
earnings $ 417 34 451 $ 563 (123) 440 $ 627 (637) (10) $ 551 (278) 273
<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>
The following table demonstrates how the changing interest rate
environment affected the net yield on earning assets (on fully tax
equivalent basis) for the three-year period ending December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
Yield Change Yield Change Yield Change
<S> <C> <C> <C> <C> <C> <C>
Yield on earning assets 8.36% .09% 8.27% -.03% 8.30% + .41
Effective rate on all
liabilities as a % of
earning assets 5.13 .00 5.13 .05 5.08 +1.05
Net yield on earning assets 4.07 .05 4.02 (-.11) 4.13 ( .47)
</TABLE>
-12-
The 1997 figures as a percent of average assets reflect an increase in
interest income. The increase is due to the strategic pricing of loans and
deposits during 1997. The Company will focus on increasing net interest
income in 1998 through continued control of interest expense, maintaining the
level of interest rates on loans, and managing rates on the investment
portfolio.
Average earing assets increased 5.05% to $191,926 in 1997, from
$182,718 in 1995. Included in this increase was a 7.78% increase in
average loans to $140,962 in 1997, up from $130,783 in 1996, and an 8.88%
increase in average tax exempt investments to $12,197 in 1997, up from
$11,202 in 1996.
The following table sets forth average consolidated balance sheet data
and average rate data on a tax equivalent basis for the periods,
indicated.
-13-
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY - INTEREST RATES
AND DIFFERENTIALS
<CAPTION>
1997 1996 1995
Average Yield/ Average Yield/ Average Yield/
($ 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) $140,962 $12,692 9.00% $130,783 $11,766 9.00% $119,657 $10,802 9.03%
Taxable investment
securities 37,877 2,427 6.41% 38,239 2,376 6.21% 35,428 2,163 6.11%
Nontaxable investment
securities(2) 12,197 879 7.21% 11,202 836 7.46% 10,698 856 8.00%
Federal funds sold 890 48 5.39% 2,494 139 5.57% 2,515 142 5.65%
Total (2) 191,926 16,046 8.36% 182,718 15,117 8.27% 168,298 13,963 8.30%
Non-interesting earning
assets
Cash and due from banks 8,347 8,790 7,958
Premises & equip. - net 3,660 3,742 2,637
Other assets 3,981 3,046 2,212
Less: Allow. loan loss (1,846) (1,875) (1,751)
Total 206,068 196,421 179,354
Liabilities & Stockholders'
Equity
Interest Bearing liabili-
ties
Savings and demand
deposits 52,265 1,867 3.57% 47,179 1,620 3.43% 44,708 1,583 3.54%
Time deposits 102,566 6,005 5.85% 94,179 5,536 5.88% 83,518 4,826 5.78%
Short-term borrowings 5,556 343 6.18% 10,169 613 6.03% 10,732 646 6.02%
Long-term Borrowings 638 38 5.96%
Total 161,025 8,253 5.13% 151,527 7,769 5.13% 138,958 7,055 5.08%
Non-interest bearing
liabilities
Demand deposits 24,403 24,729 22,594
Other liabilities 1,788 2,169 1,176
Stockholders' equity 18,852 17,996 16,626
Total 206,068 196,421 179,354
Net interest income 7,793 7,348 6,908
Rate Spread 3.23% 3.14% 3.22%
Net yield on interest
earnings assets 4.07% 4.02% 4.13%
<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: 1997-$164,
1996-$80, 1995-$55, 1994-$77, 1993-$152.
</TABLE>
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY - INTEREST RATES
AND DIFFERENTIALS (Continued)
<CAPTION>
1994 1993
Average Yield/ Average Yield/
($ in thousands) Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans (1)(2)(3) $105,209 $ 8,950 8.51% $ 97,705 $ 8,614 8.82%
Taxable investment
securities 34,045 2,029 5.96% 29,706 1,916 6.45%
Nontaxable investment
securities(2) 10,242 843 8.19% 10,299 853 8.28%
Federal funds sold 757 32 4.23% 615 17 2.76%
Total (2) 150,253 11,854 7.89% 138,325 11,400 8.24%
Non-interesting earning
assets
Cash and due from banks 7,946 7,885
Premises & equip. - net 2,040 2,011
Other assets 2,004 1,799
Less: Allow. loan loss (1,506) (1,228)
Total 160,737 148,792
Liabilities & Stockholders'
Equity
Interest Bearing liabili-
ties
Savings and demand
deposits 46,594 1,428 3.06% 41,588 1,306 3.14%
Time deposits 66,241 3,047 4.60% 62,953 3,061 4.86%
Short-term borrowings 9,597 461 4.80% 8,622 389 4.51%
Long-term Borrowings
Total 122,432 4,936 4.03% 113,163 4,756 4.20%
Non-interest bearing
liabilities
Demand deposits 21,950 20,784
Other liabilities 951 916
Stockholders' equity 15,404 13,929
Total 160,737 148,792
Net interest income 6,918 6,644
Rate Spread 3.86% 4.04%
Net yield on interest
earnings assets 4.60% 4.82%
<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: 1997-$164,
1996-$80, 1995-$55, 1994-$77, 1993-$152.
</TABLE>
-14-
<PAGE>
The preceding table shows a 1997 increase of .05% on net yield on
interest earning assets. The average rate on taxable investment
securities increased .20% in 1997 to 6.41%, up from 6.21% in 1996. Time
deposits decreased slightly by .03% while funds shifted into the more
liquid money market deposit accounts, which the Company offered throughout
1997 in an effort to retain deposits to support loan demand. Total
deposits at December 31, 1997 showed an increase of $8,473,802 increasing
to $186,602,705 from $178,128,903 at December 31, 1996. Average deposits
for 1997 increased $13,473,000 to $154,831,000 from $141,358,000 in 1996.
Average short term borrowing decreased $4,613,000 from $10,169,000 in 1996
to $5,556,000 in 1997. The average rate on all interest bearing
liabilities remained the same in 1997 as in 1996.
Loan growth is expected to increase in 1998 due to the increase in
fixed rate and in house home equity loan products being offered and
promoted. The sale of additional real estate loans in the secondary
market will also provide increased loan servicing income.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Item of income
Interest and fees on loans and
short-term borrowings 76.9% 74.3% 75.2% 73.2% 73.3%
Interest of securities 17.9% 18.2% 18.8% 21.0% 21.1%
Total operating income 16,489 15,814 14,336 12,218 11,762
(000's omitted)
<FN>
The bank does not have any foreign deposits or operations
</TABLE>
NON-INTEREST INCOME
The following table shows the major components of non-interest income.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Noninterest income:
Service fees $483,756 $518,271 $468,219
Net realized gain on sale of
securities available for sale 3,120 26,415
Gain on sale of other real estate 202,398
Other operating income 257,828 269,486 188,055
Total noninterest income 744,704 990,155 682,689
</TABLE>
Service fees decreased to $483,756 in 1997, compared to $518,271 in
1996 primarily because business checking account net charges were lower in
1997 as a result of higher earnings credit rates.
-15-
<PAGE>
NON-INTEREST EXPENSE
The following table shows the major components on non-interest
expense.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Salaries and employee benefits $2,948,292 $2,701,445 $2,313,123
Occupancy 727,583 708,288 526,912
Federal deposit insurance premiums 21,442 2,000 160,621
Data processing 74,701 195,261 190,864
Director expense 179,800 163,923 138,730
Other operating 980,222 943,938 859,959
Total noninterest expense $4,932,040 $4,714,855 $4,190,209
</TABLE>
Salaries increased $246,847 primarily due to the increased number of
employees. The number of full-time equivalent employees at the end of
1997 were 78 compared to 70 at the end of 1996.
Occupancy expense increased slightly in 1997 after a significant
increase in 1996 due to the acquisition of the in-house data processing
system. Data processing costs decreased by 61.7% in 1997 compared to 1996
as a result of efficiencies gained by the in-house system. Other
operating expense increased in 1997 due to an increase in educational,
marketing, and charitable contribution expense.
PROVISIONS FOR LOAN LOSSES
Management determines the adequacy of the allowance for loan losses
based on past loan experience, current economic conditions, composition of
the loan portfolio, and the potential for future loss. Accordingly, the
amount charged to expense is based on management's evaluation of the loan
portfolio. It is the Company's policy that when available information
confirms that specific loans, or portions thereof, including impaired
loans, are uncollectible, these amounts are promptly charged off against
the allowance. The provision for loan losses was $230,000 in 1997;
compared to $180,000 in 1996 and $180,000 in 1995. The allowance for loan
losses as a percentage of gross loans outstanding was 1.24% at December
31, 1997; 1.39% at December 31, 1996; and 1.42% at December 31, 1995. The
increased provision in 1997 is intended to provide adequate reserves for
potential losses. Charge-offs as a percentage of average loans
outstanding were .22% in 1997; .03% in 1996; and .04% in 1995. Charge-
offs have not been concentrated in any industry or business segment as
reflected in the schedule below.
Management feels the allowance for loan losses is adequate as of
December 31, 1997.
-16-
<PAGE>
The allowance for loan losses shown in the following table represents
a general allowance available to absorb future losses within the entire
portfolio.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Average balance of loans
for period ($ in thousands) $140,823 $130,783 $119,657 $105,027 $97,705
Allowance for loan losses at
beginning of period 1,924,686 1,780,893 1,643,646 1,370,621 1,096,654
Loans charged off
Commercial & Industrial (155,650) (47,809) (54,088) (27,864) (95,561)
Agriculture 0 0 0 0 0
Real Estate - Mortgage (136,011) 0 0 (10,711) 0
Installment & Other
Consumer Loans (58,581) (25,133) (15,174) (10,100) (11,151)
Total Charge Offs (350,242) (72,942) (69,262) (48,675) (106,712)
Recoveries on loans
previously charged off
Commercial & Industrial 17,538 33,236 22,168 0 22,583
Agricultural 0 0 0 0 0
Real Estate - Mortgage 18,582 0 0 11,810 0
Installment & Other
Consumer Loans 4,500 3,499 4,341 9,890 8,096
Total Recoveries $40,620 $36,735 $26,509 $21,700 $30,679
Net loans charged off ($309,622) ($36,207) ($42,753) ($26,975) ($76,033)
Additions charged to
operations 230,000 180,000 180,000 300,000 350,000
Allowance for loan losses
at end of period $1,845,064 $1,924,686 $1,780,893 $1,643,646 $1,370,621
Ratio of net charge offs
during period to average
loans outstanding 0.22% 0.03% 0.04% 0.03% 0.08%
</TABLE>
LIQUIDITY AND INTEREST SENSITIVITY
The Company's Asset Liability Management process provides an approach
to management of liquidity, capital and interest rate risk, and to provide
adequate funds to support the borrowing requirements and deposit flow of
its customers. Management views liquidity as the ability to raise cash at
a reasonable cost of with a minimum of loss and as a measure of balance
sheet flexibility to react to market-place, regulatory, and competitive
-17-
changes. The primary sources of the Company's liquidity are marketable
assets maturing within one year. The Company attempts, when possible to
match relative maturities of assets and liabilities, while maintaining the
desired net interest margin. Management believes liquidity is adequate.
<PAGE>
Management's overall strategy is to coordinate the volume of rate
sensitive assets and liabilities to minimize the impact of interest rate
movement on the net interest margin. From time to time, the Bank develops
special term deposit products to attract present and potential customers.
A significant portion of consumer deposits do not reprice or mature on a
contractual basis. These deposit balances and rates are considered to be
core deposits since these balances are generally not susceptible to
significant interest rate changes. The Bank's Asset Liability Committee
distributes these deposits over a number of periods to reflect those
portions of such accounts that are expected to reprice fully with market
rates over the simulation period. The assumptions are based on historical
experience with the Bank's individual markets and customers and include
projections for how management expects to continue to price in response to
marketplace and market changes. However, markets and consumer behavior do
change and adjustments are necessary as customer preferences, competitive
market conditions, liquidity, loan growth rates, and mix change.
Management considers that an acceptable ratio for the rate sensitive
assets to rate sensitive liabilities during periods of extended and less
volatile rate increases or decreases between .75 and 1.25. The Bank is to
generally maintain a one-year ratio of 1.00 - i.e., balanced ratio. At
December 31, 1997 the Company was within the ratio limits.
-18-
<PAGE>
INVESTMENT PORTFOLIO
The following table shows the relative maturities of the investment
portfolio as of December 31, 1997. Weighted average yields on tax-exempt
securities have been calculated on a tax equivalent basis using a tax rate
of 34%
<TABLE>
<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 $1,984 5.04% $ -- -- $ -- -- $ -- -- $ -- --
U.S. Government
agencies and
corporations 4,500 6.40% 3,550 6.89% 18,354 6.33% 3,530 6.83% 5,014 6.41%
State and
political sub-
divisions
(domestic) 1,341 6.99% 2,020 6.91% 3,847 7.18% 5,341 7.09% -- --
Other bonds,
notes, and
debentures 647 5.75% -- -- -- -- -- -- -- --
Total $8,472 6.16% $5,570 6.89% $22,201 6.48% $8,871 6.99% $5,014 6.41%
</TABLE>
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), which specifies the accounting for investments in
securities that have readily determinable fair values. During 1995, the Bank
reclassified all U.S. Treasury and other U.S. Government Agencies &
Corporations as available-for-sale. State and Political subdivisions were
classified as held-to maturity.
At December 31, 1997 the net unrealized gain on securities available for
sale, recorded as a separate component of stockholder's equity, was $100,543,
net of deferred income taxes of $56,747.
Securities with an approximate carrying value of $8,352,470 and
$9,353,917, at December 31, 1997 and 1996 respectively, were pledged primarily
to secure public deposits and for repurchase agreements.
-19-
<PAGE>
The following table sets forth the distribution of investment securities
as of the dates indicated.
<TABLE>
<CAPTION>
($ in
thousands) DECEMBER 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Government
agencies and corporations $36,932 $ 39,224 $ 34,597 $ 35,573 $ 31,327
State and political
subdivisions
(domestic) 12,549 11,714 10,333 10,981 10,259
Other securities 647 647 45 94 358
Total $50,128 $ 51,585 $ 44,975 $ 46,648 $ 41,944
</TABLE>
An investment subsidiary, PSB Investments, Inc., was formed in May 1992,
and currently holds approximately $36,531,815 in securities. Income tax
expense was approximately $112,000 lower as a result of holding these
securities at the subsidiary.
-20-
<PAGE>
LOAN PORTFOLIO
The following table sets forth the approximate maturities of the loan
portfolio, excluding non-accrual loans; and the sensitivity of loans to
interest changes as of December 31, 1997.
<TABLE>
<CAPTION>
MATURITY
Over one
($ in thousands) One year year thru Over
OR LESS FIVE YEARS FIVE YEARS
<S> <C> <C> <C>
Commercial, industrial,
and financial $ 24,190 $ 8,882 $ 250
Agricultural 2,033 41 0
Real estate mortgage $ 46,200 $ 51,770 $ 2 ,928
Installment & other
consumer loans $ 4,598 $ 7,474 $ 116
Total $ 77,021 $ 68,167 $ 3,294
INTEREST SENSITIVITY
Amounts of loans due after
one year with: Fixed Variable
($ IN THOUSANDS) RATE RATE
Commercial, industrial, and
financial $ 8,781 $ 798
Agriculture 41 0
Real estate mortgage 17,808 37,223
Installment & other
consumer loans 6,622 1,023
Total $33,252 $ 39,044
</TABLE>
Loan growth for the year ended December 31, 1997 was 8.19%; increasing
from $138,011,133 at December 31, 1996 to $149,317,462 at December 31, 1997.
The composition of loans outstanding as of the dates indicated are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996 1995 1994 1993
($ in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, industrial
and financial $ 31,314 $ 28,531 $ 27,291 $ 23,821 $ 24,432
Agricultural 2,488 1,820 2,356 2,899 2,566
Real estate:
Mortgage 103,253 93,450 84,221 75,994 70,193
Installment and other
consumer loans 12,262 14,210 11,457 9,960 8,489
Total $149,317 $138,011 $125,325 $112,674 $105,680
</TABLE>
-21
The composition of loans in the loan portfolio shows a decrease in
installment and other consumer loans. Competition in this market area is the
main reason for this decline. All other loan categories have been steadily
increasing every year.
<PAGE>
The Company's process for monitoring loan quality includes monthly
analysis of delinquencies, risk element loans and potential problem loans.
The Company's policy is to place loans on a non-accrual status when they
become contractually past due 90 days or more as to interest or principal
payments. All interest accrued (including applicable impaired loans) but not
collected for loans that are placed on nonaccrual or charged off is reversed
to interest income. The interest on these loans is accounted for on the cash
basis until qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due have been
collected and there is reasonable assurance that repayment will continue
within a reasonable time frame.
A loan is impaired when, based on current information, it is probable that
the Company will not collect all amounts due in accordance with the
contractual terms of the loan agreement. Impairment is based on discounted
cash flows of expected future payments using the loan's initial effective
interest rate or the fair value of the collateral if the loan is collateral
dependent.
The Company maintained generally high loan quality during 1997. The
following table sets forth the amount of risk element loans as of the dates
indicated.
<TABLE>
<CAPTION>
($ in
thousands) DECEMBER 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans on a non-accrual basis $ 835 $ 247 $ 376 $ 646 $1,374
Loans contractually past due
ninety days or more as to
interest or principal payments $ 7 $ 275 $ 0 $ 0 $ 0
</TABLE>
-22-
DEPOSITS
The average balances of deposits and the average rate paid on these
deposits during the years ended December 31, 1997, 1996, 1995, 1994, and
1993 are:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
($ 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 $ 24,403 $ 24,729 $ 22,594 $ 21,950 $ 20,784
Interest bearing
demand and
savings deposits 52,265 3.57% 47,179 3.43% 44,708 3.54% 46,593 3.06% 41,588 3.14%
Time deposits 102,566 5.85% 94,179 5.88% 83,518 5.78% 66,241 4.60% 62,953 4.86%
Total $179,234 $166,087 $150,820 $134,784 $125,325
</TABLE>
<PAGE>
The amount of time certificates of deposit issued in amounts of
$100,000 or more and outstanding as of December 31, 1997 is approximately
$28,046,000. Their maturity distribution is as follows:
<TABLE>
<CAPTION>
<S> <C>
- three months or less $ 8,264,000
- over three months and through twelve months $16,750,000
- over one year through five years $ 3,032,000
- over five years $ -0-
</TABLE>
The Bank does not have any deposits in foreign banking offices.
YEAR 2000
The Company has conducted a comprehensive review of its computer system to
identify the systems that could be affected by the "Year 2000 Issue" and
is developing an implementation plan to resolve the issue. The Year 2000
Issue is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations. The Company presently believes that,
with modifications to existing software and conversions to new software,
the Year 2000 problem will not pose significant operational problems and
that the Company will experience no material adverse effect with respect
to its operation, liquidity or consolidated financial condition. All
costs incurred
-23-
which have been expensed and future costs to be incurred are not expected
to materially impact the Company's results of operations and capital
resources.
FUTURE ACCOUNTING CHANGES
The financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," in June 1997. SFAS No. 130 requires all items recognized under
accounting standards as components of comprehensive income to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The adoption of SFAS No. 130 will not have an impact on
the Company's financial condition or results of operations once implemented.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in June 1997, SFAS No. 131 requires the Company
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment
performance and deciding how to allocated resources to segments. The adoption
of SFAS No. 131 will not have an impact on the Company's financial condition
or results of operations once implemented.
-24-
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
Year Ended December 31
($ IN THOUSANDS) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest Income $15,744 $14,824 $13,654 $11,555 $11,103
Interest Expense 8,253 7,769 7,055 4,936 4,757
Net Income 2,103 2,157 2,020 1,951 2,100
Basic and Diluted Earnings Per
Average Share of Common Stock 2.37 2.39 2.24 2.17 2.38
Dividends Per Share on
Common Stock 0.90 0.85 0.82 0.80 0.75
($ IN THOUSANDS)
Balance Sheet Data:
Total Assets $215,019 $204,158 $190,781 $171,470 $158,108
Total Deposits 186,603 178,129 160,445 140,476 133,769
Common Equity 1,805 1,805 1,805 1,805 1,795
Total Stockholders Equity 19,217 18,289 17,452 15,098 14,644
Book Value Per Share of
Common Stock 21.76 20.42 19.34 16.73 16.32
</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:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net income as a
percentage of:
Average total assets 1.02% 1.10% 1.13% 1.21% 1.41%
Average shareholders'
equity 11.15% 11.98% 12.15% 12.66% 15.08%
Dividend payout ratio
(dividends declared
divided by net income) 37.85% 35.40% 36.63% 37.00% 31.78%
Average shareholders'
equity to average 9.15% 9.16% 9.27% 9.58% 9.36%
total assets
</TABLE>
-25-
<PAGE>
<TABLE>
SUMMARY QUARTERLY FINANCIAL INFORMATION
<CAPTION>
The following is a summary of the quarterly results of operations for the
years ended December 31, 1997, 1996 and 1995.
Three months ended
March 31 June 30 September 30 December 31
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1997
Interest income $3,757 $3,898 $3,977 $4,112
Interest expense $1,978 $2,041 $2,088 $2,146
Net interest income $1,779 $1,857 $1,889 $1,966
Provision for loan losses $45 $45 $65 $75
Net income applicable to common stock $581 $561 $626 $335
Earnings per common share $0.65 $0.63 $0.70 $0.39
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>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest-rate risk
inherent in its lending and deposit taking activities. Management actively
monitors and manages its interest-rate risk exposure. The measurement of then
market risk associated with financial instruments is meaningful only when all
related and offsetting on- and off-balance sheet transactions are aggregated,
and the resulting net positions are identified. Disclosures about the fair
value of financial instruments which reflect changes in market prices and
rates, can be found in footnotes 15 and 18 on the Notes to The Financial
Statements.
-26-
The Company's primary objective in managing interest-rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while adjusting the Company's asset-liability
structure ot obtain the maximum yield-cost spread on that structure. The
Company relies primarily on its asset-liability structure to control interest-
rate risk. However, a sudden and substantial increase in interest rates may
adversely impact the Company's earnings, to the extent that the interest rates
<PAGE>
borne by assets and liabilities do not change at the same speed, to the same
extent, or on the same basis. The Company does not engage in trading
activities.
Additional information required by this Item 7A is set forth in Item 6,
"Selected Financial Data" and under subcaptions "Results of Operations", "Net
Interest Income", "Provision for Loan Losses", "Liquidity and Interest
Sensitivity", "Investment Portfolio", and "Deposits" under Item 7,
Management's Discussion and Analysis of Financial Conditions.
-27
<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, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the three years ended December 31, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for the three years ended December
31, 1997 in conformity with generally accepted accounting principles.
WIPFLI ULLRICH BERTELSON LLP
Wipfli Ullrich Bertelson LLP
February 3, 1998
Wausau, Wisconsin
-28-
<PAGE>
<TABLE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,622,727 $ 9,982,974
Interest-bearing deposits with banks 153,271 169,303
Investment securities:
Held to maturity (fair values of $12,704,104
and $11,762,878, respectively) 12,549,359 11,713,698
Available for sale (at fair value) 37,579,114 39,871,099
Loans held for sale 300,500 279,675
Loans receivable, net of allowance for loan
losses of $1,845,064 and $1,924,686 in
1997 and 1996, respectively 147,171,898 135,806,772
Accrued interest receivable 1,737,493 1,790,905
Premises and equipment 3,746,432 3,701,187
Other assets 1,158,255 842,799
TOTAL ASSETS $ 215,019,049 $ 204,158,412
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 27,564,502 $ 28,486,255
Interest-bearing deposits 159,038,203 149,642,648
Total deposits 186,602,705 178,128,903
Short-term borrowings 3,960,042 5,766,631
Long-term borrowings 3,000,000
Other liabilities 2,239,127 1,973,954
Total liabilities 195,801,874 185,869,488
Stockholders' equity:
Common stock - No-par value with a stated
value of $2 per share:
Authorized - 1,000,000 shares
Issued - 902,425 shares 1,804,850 1,804,850
Additional paid-in capital 7,158,505 7,158,505
Retained earnings 10,955,877 9,649,112
Unrealized gain (loss) on securities
available for sale, net of tax 100,543 (8,543)
Treasury stock, at cost - 19,190 shares
in 1997 and 7,000 shares in 1996 (802,600) (315,000)
Total stockholders' equity 19,217,175 18,288,924
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 215,019,049 $ 204,158,412
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
-29-
<PAGE>
<TABLE> PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 12,688,023 $ 11,757,028 $ 10,783,294
Interest on investment securities:
Taxable 2,370,859 2,330,456 2,129,632
Tax-exempt 580,323 552,324 564,702
Other interest and dividends 104,758 184,151 175,908
Total interest income 15,743,963 14,823,959 13,653,536
Interest expense:
Deposits 7,871,730 7,156,077 6,408,608
Short-term borrowings 343,207 612,585 646,238
Long-term borrowings 37,981
Total interest expense 8,252,918 7,768,662 7,054,846
Net interest income 7,491,045 7,055,297 6,598,690
Provision for loan losses 230,000 180,000 180,000
Net interest income after provision for
loan losses 7,261,045 6,875,297 6,418,690
Noninterest income:
Service fees 483,756 518,271 468,219
Net realized gain on sale of securities
available for sale 3,120 26,415
Gain on sale of other real estate 202,398
Other operating income 257,828 269,486 188,055
Total noninterest income 744,704 990,155 682,689
Noninterest expenses:
Salaries and employee benefits 2,948,292 2,701,445 2,313,123
Occupancy 727,583 708,288 526,912
Federal deposit insurance premiums 21,442 2,000 160,621
Data processing 74,701 195,261 190,864
Director expense 179,800 163,923 138,730
Other operating 980,222 943,938 859,959
Total noninterest expenses 4,932,040 4,714,855 4,190,209
Income before income taxes 3,073,709 3,150,597 2,911,170
Provision for income taxes 971,000 994,000 891,000
Net income $ 2,102,709 $ 2,156,597 $ 2,020,170
Basic and diluted earnings per share $ 2.37 $ 2.39 $ 2.24
Weighted average shares outstanding 887,988 900,641 902,425
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
-30-
<PAGE>
<TABLE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
Unrealized
Gain (Loss)
on Securi-
Additional ties Avail-
Common Paid-In Retained able For Treasury
Stock Capital Earnings For Sale Stock
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $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)
Net income 2,102,709
Cash dividend (at $.90
per share) (795,944)
Purchase of treasury stock (487,600)
Unrealized gain on
securities available
for sale - Net of tax 109,086
Balance, December 31, 1997 $1,804,850 $7,158,505 $10,955,877 $ 100,543 $ (802,600)
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
-31-
<PAGE>
<TABLE> PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,102,709 $ 2,156,597 $ 2,020,170
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net
amortization 482,664 448,472 315,897
Benefit from deferred income taxes (108,900) (52,300) (41,300)
Provision for loan losses 230,000 180,000 180,000
Proceeds from sales of loans held for sale 4,369,580 1,058,993 656,519
Originations of loans held for sale (4,344,817) (1,325,480) (650,000)
Gain on sale of loans (45,588) (13,188) (6,519)
Net gain on sale of other real estate (202,398)
Net gain on sale of securities available for
sale (3,120) (26,415)
Changes in operating assets and liabilities:
Accrued interest receivable 53,412 (248,004) (111,307)
Other assets (285,484) (118,169) 40,681
Other liabilities 265,173 188,535 101,168
Net cash provided by operating activities 2,715,629 2,073,058 2,478,894
Cash flows from investing activities:
Proceeds from sale and maturities of:
Held to maturity securities 2,366,913 2,565,079 2,130,000
Available for sale securities 10,953,084 13,109,137 10,309,545
Payment for purchase of:
Held to maturity securities (3,221,710) (3,963,240) (1,492,188)
Available for sale securities (8,496,561) (18,583,686) (7,821,452)
Net increase in loans (11,595,126) (12,227,971) (12,693,393)
Net (increase) decrease in interest-
bearing deposits with banks 16,032 1,448,830 (1,608,331)
Net decrease (increase) in federal funds sold 5,683,000 (5,683,000)
Capital expenditures (482,177) (659,051) (1,494,890)
Proceeds from sale of other real estate 14,500
Net cash used in investing activities (10,459,545) (12,613,402) (18,353,709)
Cash flows from financing activities:
Net increase (decrease) in noninterest-
bearing deposits (921,753) 1,926,820 1,539,190
Net increase in interest-bearing deposits 9,395,555 15,757,491 18,429,033
Net decrease in short-term borrowings (1,806,589) (5,332,867) (3,111,159)
Proceeds from issuance of long-term
borrowings 3,000,000
Dividends paid (795,944) (763,421) (739,989)
Purchase of treasury stock (487,600) (315,000)
Net cash provided by financing activities 8,383,669 11,273,023 16,117,075
Net increase in cash and due from banks 639,753 732,679 242,260
Cash and due from banks at beginning 9,982,974 9,250,295 9,008,035
Cash and due from banks at end $ 10,622,727 $ 9,982,974 $ 9,250,295
</TABLE>
-32-
<PAGE>
<TABLE> PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
(Continued)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 8,101,757 $ 7,738,779 $ 6,873,206
Income taxes 1,008,124 960,348 935,424
Noncash investing and financing activities:
Loans charged off 350,242 72,942 69,262
Loans refinanced from other real estate (215,000)
Loans transferred to other real estate 300,989
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
-33-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
PSB Holdings, Inc. and Subsidiary (the "Company"), operates Peoples State Bank
(the "Bank"), a full service financial institution with a primary marketing
area including, but not limited to, the greater Wausau, Wisconsin area and
Marathon County. It provides a variety of banking products.
PRINCIPLES OF CONSOLIDATION
All significant intercompany balances and transactions have been eliminated.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to the general practices within the banking
industry.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
For the purpose of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "cash and due from banks."
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.
-34-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost. Maintenance and repair costs are
charged to expense as incurred. Gains or losses on disposition of property
and equipment are reflected in income. Depreciation is computed principally
on the straight-line method and is based on the estimated useful lives of the
assets varying from 5 to 40 years on buildings, 5 to 20 years on equipment,
and 3 years on software.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are
to be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in any valuation allowance are included in loss on
foreclosed real estate.
RETIREMENT PLANS
The Company had a noncontributory defined benefit pension plan which covered
substantially all full-time employees. The Company also maintains a defined
contribution 401(k) profit-sharing plan which covers substantially all full-
time employees.
-35-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences are expected
to reverse. Deferred tax expense is the result of changes in the deferred tax
asset and liability.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
outstanding.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current year
presentation.
NOTE 2 - FORMATION OF THE HOLDING COMPANY
The Company was formed in 1995. The Bank shareholders received the Company's
common stock in exchange for all the outstanding shares of the Bank. This
business combination has been accounted for as a pooling of interests and
accordingly, the operations of the Bank are included for all years presented.
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." In part, this SFAS
changed the method of accounting for serviced loans and superseded SFAS No.
122, "Accounting for Mortgage Servicing Rights," which was adopted by the
Company during 1996. The adoption had no effect on the financial statements
during the year of adoption.
Effective January 1, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." There is no impact on net income as a result of the adoption of SFAS
No. 128. This statement requires the reporting of both basic and diluted
earnings per share.
Effective January 1, 1996, the Company adopted 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, 1995, the Company adopted SFAS 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.
<PAGE>
NOTE 4 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash and due from banks in the amount of $742,000 was restricted at December
31, 1997 to meet the reserve requirements of the Federal Reserve System.
-36-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NOTE 5 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are as
follows:
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
DECEMBER 31, 1997
<S> <C> <C> <C> <C>
Securities held to maturity:
Obligations of states and
political subdivisions $ 12,549,359 $ 156,452 $ 1,707 $ 12,704,104
Securities available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 36,774,446 $ 219,733 $ 62,443 $ 36,931,736
Other equity securities 647,378 647,378
Totals $ 37,421,824 $ 219,733 $ 62,443 $ 37,579,114
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
</TABLE>
-37-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of debt securities held to
maturity and securities available for sale at December 31, 1997, 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.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
SECURITIES HELD TO MATURITY
Due in one year or less $ 1,341,161 $ 1,345,274
Due after one year through five years 5,868,525 5,939,060
Due after five years through ten years 5,339,673 5,419,770
Totals $ 12,549,359 $ 12,704,104
SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 6,487,915 $ 6,484,650
Due after one year through five years 21,284,693 21,402,327
Due after five years through ten years 2,998,447 3,001,046
Totals 30,771,055 30,888,023
Mortgage-backed securities 6,003,391 6,043,713
Totals $ 36,774,446 $ 36,931,736
</TABLE>
Securities with an approximate carrying value of $8,352,470 and $9,353,917 at
December 31, 1997 and 1996, respectively, were pledged to secure public
deposits, short-term borrowings, and for other purposes required by law.
During 1997, proceeds from security sales were $2,351,230. Gross gains and
losses on those sales were $17,656 and $14,536, respectively. 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.
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required
to hold stock in the FHLB based on asset size. 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,
1997 and 1996.
-38-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NOTE 6 - LOANS
The composition of loans is as follows:
<CAPTION>
1997 1996
<S> <C> <C>
Commercial $ 33,801,290 $ 30,350,578
Real estate 102,953,287 93,170,562
Consumer 12,262,385 14,210,318
Subtotals 149,016,962 137,731,458
Allowance for loan losses (1,845,064) (1,924,686)
Net loans $ 147,171,898 $ 135,806,772
</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. All loans to executive officers and directors are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with others and, in
the opinion of management, did not involve more than the normal risk of
collectibility or present other unfavorable features. Activity in such loans
is summarized below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Loans outstanding, January 1 $ 2,594,547 $ 2,757,077
New loans 10,308,486 474,182
Repayment (5,110,047) (636,712)
Loans outstanding, December 31 $ 7,792,986 $ 2,594,547
</TABLE>
The allowance for loan losses includes 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.
-39-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NOTE 6 - LOANS (CONTINUED)
An analysis of impaired loans follows:
<CAPTION>
AT DECEMBER 31, 1997 1996
<S> <C> <C> <C>
Nonaccrual $ 484,290 $ 42,769
Accruing income 639,827 269,537
Total impaired loans 1,124,117 312,306
Less - Allowance for loan losses 178,000 20,000
Net investment in impaired loans $ 946,117 $ 292,306
YEARS ENDED DECEMBER 31, 1997 1996 1995
Average recorded investment, net of
allowance for loan losses $1,191,098 $ 304,400 $ 590,000
Interest income recognized $ 83,195 $ 23,001 $ 63,481
</TABLE>
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>
1997 1996 1995
<S> <C> <C> <C>
Balance, January 1 $ 1,924,686 $ 1,780,893 $ 1,643,646
Provision charged to operating expense 230,000 180,000 180,000
Recoveries on loans 40,620 36,735 26,509
Loans charged off (350,242) (72,942) (69,262)
Balance, December 31 $ 1,845,064 $ 1,924,686 $ 1,780,893
</TABLE>
-40-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NOTE 7 - PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 627,345 $ 570,946
Buildings and improvements 3,163,710 2,949,856
Furniture and equipment 2,623,199 2,414,111
Construction in progress 2,836
Totals 6,417,090 5,934,913
Accumulated depreciation and amortization 2,670,658 (2,233,726)
Net book value $ 3,746,432 $ 3,701,187
</TABLE>
Depreciation and amortization charged to operating expenses amounted to
$436,933 in 1997, $402,589 in 1996, and $253,596 in 1995.
<TABLE>
NOTE 8 - DEPOSITS
At December 31, 1997, certificate and IRA accounts have scheduled maturity
dates as follows:
<CAPTION>
<S> <C>
1998 $ 86,682,202
1999 14,150,354
2000 2,981,157
2001 319,901
Total $ 104,133,614
</TABLE>
Certificate of deposit accounts with individual balances greater than $100,000
totaled $23,045,981 and $10,916,231 at December 31, 1997 and 1996,
respectively.
Deposits from Company directors, officers, and related parties at December 31,
1997 and 1996 totaled $7,866,698 and $5,608,102, respectively.
<TABLE>
NOTE 9 - SHORT-TERM BORROWINGS
The composition of short-term borrowings at December 31, follows:
<CAPTION>
1997 1996
<S> <C> <C>
Securities sold under repurchase agreements $ 3,960,042 $ 3,569,631
Federal funds purchased 2,197,000
Total short-term borrowings $ 3,960,042 $ 5,766,631
</TABLE>
-41-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHORT-TERM BORROWINGS (CONTINUED)
As a member of the FHLB system, the Company may draw on a line of credit
totaling $12,040,000. At December 31, 1997, the Company had drawn $3,000,000
as detailed in Note 10.
<TABLE>
The following information relates to federal funds purchased and securities
sold under repurchase agreements for the years ended December 31:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
As of end of year:
Weighted average rate 6.14% 5.53% 6.18%
For the year:
Highest month-end balance $ 11,983,134 $ 15,503,184 $ 13,410,236
Daily average balance 5,555,857 10,168,909 10,732,363
Weighted average rate 6.18% 6.03% 6.00%
</TABLE>
<TABLE>
NOTE 10 - LONG-TERM BORROWINGS
<CAPTION>
Long-term borrowings at December 31, 1997, consist of the following:
<S> <C>
Note payable to the FHLB, monthly interest payments only at 5.70%,
due April 5, 1999 $ 2,000,000
Note payable to the FHLB, monthly interest payments only at 5.90%,
due April 30, 1999 1,000,000
Totals $ 3,000,000
</TABLE>
The FHLB advances are secured by a blanket lien consisting principally of one-
to-four family real estate loans totaling in excess of $5,000,000 at December
31, 1997.
-42-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - RETIREMENT PLANS
Effective January 1, 1997, the Company terminated its defined benefit pension
plan. Monthly benefits currently paid to retirees were not affected by the
plan's termination. The Company received regulatory approval to distribute
participants' vested defined benefit pension plan balances to participants or
into the Company's 401(k) profit-sharing plan. All assets were distributed in
January 1998.
The benefits were based on years of service and the employee's highest
consecutive five-year average earnings. Contributions were 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 was to
annually contribute the maximum amount deductible for federal income tax
purposes.
The plan assets were invested primarily in U.S. Treasury and Agency issues,
with approximately $250,000 and $375,000 invested in certificates of deposit
of the Bank at December 31, 1997 and 1996, respectively.
<TABLE>
Under the provisions of 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>
-43-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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>
1997 1996
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(1,666,759) $(1,544,424)
Nonvested benefit obligation (50,786)
Accumulated benefit obligation (1,666,759) (1,595,210)
Effect of projected future compensation levels
Projected benefit obligation (1,666,759) (1,595,210)
Plan assets at fair value 1,855,500 1,643,439
Plan assets in excess of projected benefit
obligation 188,741 48,229
Unrecognized net loss 78,411 62,129
Unrecognized net transition asset (55,343) (62,129)
Prepaid pension cost recognized in the balance
sheet $ 211,809 $ 48,229
Net pension cost for December 31 included the
following components:
1997 1996 1995
Service cost - Benefits earned during the period $ $ 108,080 $ 93,390
Interest cost on projected benefit obligation 110,308 141,725 131,350
Actual return on plan assets (87,256) (79,499) (133,375)
Net amortization and deferral (23,068) (9,345) 47,661
Net periodic pension cost $ (16) $ 160,961 $ 139,026
The following assumptions were used in
determining the projected benefit obligation:
1997 1996 1995
Discount rate 7.00% 7.00% 7.00%
Rates of increase in future compensation levels 0.00% 0.00% 5.00%
Expected long-term rate of return on assets 5.79% 7.00% 7.00%
</TABLE>
-44-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NOTE 11 - RETIREMENT PLANS (CONTINUED)
On January 30, 1998, the Company settled the defined benefit pension plan
obligation by transferring existing plan assets to the 401(k) profit-sharing
plan. However, the benefit plan obligation exceeded existing plan assets by
$202,738. This shortfall was eliminated by the Company via a final cash
payment to the plan. Under the provisions of SFAS No. 88, this transaction
constitutes a settlement, which results in the recognition of a loss to the
Company to be recorded during 1998, determined as follows:
<CAPTION>
<S> <C>
Excess of plan benefit obligations over
plan assets at settlement of plan $ 202,738
Prepaid pension cost at settlement date 203,153
Loss on pension settlement $ 405,891
</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. During 1997, the Company also declared a
discretionary profit-sharing contribution. The expense of the plan for the
years ended December 31, 1997, 1996, and 1995 was $143,940, $30,442, and
$26,846, 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 five years as a director.
Currently five directors are eligible for benefits. The plan expense totaled
$46,000 and $40,000 for the years ended December 31, 1997 and 1996,
respectively. There was no plan expense in 1995. The liability in the
financial statements for this plan was $156,285 and $130,488 at December 31,
1997 and 1996, respectively.
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.
-45-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NOTE 12 - POST-RETIREMENT HEALTH CARE BENEFITS (CONTINUED)
The following table sets forth the plan's funded status and the amounts
reflected in the accompanying balance sheets at December 31:
<CAPTION>
1997 1996
<S> <C> <C>
Accumulated post-retirement benefit obligation (APBO):
Retirees $ (46,596) $ (47,212)
Fully eligible actives (35,330) (31,299)
Other actives (127,853) (113,264)
Total APBO $ (209,779) $ (191,775)
Funded status $ (209,779) $ (191,775)
Unrecognized:
Prior service cost 88,009 95,405
Net gain (14,409) (14,409)
Accumulated post-retirement benefit cost $ (136,179) $ (110,779)
</TABLE>
The accumulated post-retirement benefit cost is classified on the balance
sheets in other liabilities.
<TABLE>
Net post-retirement health care cost for December 31 included the following
components:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost $ 7,778 $ 7,235 $ 5,889
Interest cost 14,233 13,001 11,840
Amortization of:
Prior service cost 7,396 7,396 7,396
Net gain (1,109)
Net periodic benefit cost $29,407 $27,632 $24,016
</TABLE>
<TABLE>
The following assumptions were used to determine the accumulated benefit
obligation at December 31:
<CAPTION>
1997 1996
<S> <C> <C>
Discount rate 7.50% 7.50%
Health care cost trend rate 7.25% 7.50%
</TABLE>
-46-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NOTE 12 - POST-RETIREMENT HEALTH CARE BENEFITS (CONTINUED)
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.
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Impact of 1 percent increase in medical trend rate:
On service cost and interest cost $ 847 $ 778 $ 684
On APBO, December 31 8,362 7,644 6,981
</TABLE>
<TABLE>
NOTE 13 - INCOME TAXES
The components of the income tax provision are as follows:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current income tax provision:
Federal $ 965,900 $ 902,300 $ 819,000
State 114,000 144,000 113,300
Total current 1,079,900 1,046,300 932,300
Deferred income tax benefit:
Federal (85,900) (41,300) (32,600)
State (23,000) (11,000) (8,700)
Total deferred (108,900) (52,300) (41,300)
Total provision for income taxes $ 971,000 $ 994,000 $ 891,000
</TABLE>
-47-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NOTE 13 - INCOME TAXES (CONTINUED)
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. The major components of the net deferred tax assets are as
follows:
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 613,600 $ 645,000
Deferred compensation 69,300 59,100
Post-retirement health care benefits 56,500 47,400
Unrealized loss on securities available for sale 663
Gross deferred tax assets 739,400 752,163
Deferred tax liabilities:
Unrealized gain on securities available for sale 56,747
Premises and equipment 151,300 115,600
Employee pension plan 80,200 19,100
Gross deferred tax liabilities 288,247 134,700
Net deferred tax assets $ 451,153 $ 617,463
</TABLE>
<TABLE>
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>
1997 1996 1995
Percent of Percent of Percent of
Pretax Pretax Pretax
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate $1,045,000 34.0% $1,071,200 34.0% $ 989,800 34.0%
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (174,500) (5.7%) (169,200) (5.4%) (173,400) (6.0%)
State income tax 60,000 2.0% 88,000 2.8% 69,000 2.4%
Other 40,500 1.3% 4,000 .1% 5,600 .2%
Provision for income taxes $ 971,000 31.6% $ 994,000 31.5% $ 891,000 30.6%
</TABLE>
-48-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NOTE 14 - LEASES
The Company leases various pieces of equipment under cancelable leases and
space for a branch location under a noncancelable lease. All leases are
classified as operating. Future minimum payments under the noncancelable
lease are as follows:
<CAPTION>
<S> <C>
1998 $ 22,000
1999 24,726
2000 25,540
2001 26,389
2002 27,252
Thereafter 2,277
Total $ 128,184
</TABLE>
Rental expense for all operating leases was $12,735, $10,926, and $10,363 for
the years ended December 31, 1997, 1996, and 1995, respectively.
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.
<TABLE>
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:
<CAPTION>
1997 1996
<S> <C> <C>
Commitments to extend credit $ 17,678,590 $ 14,162,116
Letters of credit 924,841 1,341,142
Credit card commitments 2,388,240 1,837,542
Totals $ 20,991,671 $ 17,340,800
</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
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
<PAGE>
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.
-49-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held varies as
specified above and is required in instances which the Company deems
necessary. The commitments are structured to allow for 100 percent
collateralization on all letters of credit.
Credit card commitments are commitments on credit cards issued by the Company
and serviced by Elan Financial Services. These commitments are unsecured.
CONCENTRATION OF CREDIT RISK
The Company grants residential mortgage, commercial and consumer loans
predominantly in the greater Wausau 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, 1997, none of the approximately $841,873 of
variable rate loans had reached the interest rate cap.
NOTE 16 - CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the bank must meet specific capital guidelines that involve quantitative
measures of the bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
<PAGE>
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
-50-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CAPITAL REQUIREMENTS (CONTINUED)
As of December 31, 1997 and 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 that notification that
management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also
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>
As of December 31, 1997:
Total capital (to risk
weighted assets):
Consolidated $ 20,964,000 14.2% $ 11,818,000 8.0% N/A
Subsidiary bank $ 20,830,000 14.1% $ 11,818,000 8.0% $ 14,772,000 10.0%
Tier I capital (to
risk weighted assets):
Consolidated $ 19,117,000 12.9% $ 5,909,000 4.0% N/A
Subsidiary bank $ 18,983,000 12.8% $ 5,909,000 4.0% $ 8,863,000 6.0%
Tier I capital (to
average assets):
Consolidated $ 19,117,000 9.0% $ 8,492,000 4.0% N/A
Subsidiary bank $ 18,983,000 8.9% $ 8,492,000 4.0% $ 10,615,000 5.0%
As of December 31, 1996:
Total capital (to risk
weighted assets):
Consolidated $ 19,878,000 15.7% $ 10,118,000 8.0% N/A
Subsidiary bank $ 19,729,000 15.6% $ 10,118,000 8.0% $ 12,647,000 10.0%
Tier I capital (to
risk weighted assets):
Consolidated $ 18,297,000 14.5% $ 5,059,000 4.0% N/A
Subsidiary bank $ 18,148,000 14.4% $ 5,059,000 4.0% $ 7,588,000 6.0%
Tier I capital (to
average assets):
Consolidated $ 18,297,000 9.1% $ 8,061,000 4.0% N/A
Subsidiary bank $ 18,148,000 9.0% $ 8,061,000 4.0% $10,076,000 5.0%
</TABLE>
-51-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - RESTRICTIONS ON RETAINED EARNINGS
The Bank is restricted by banking regulations from making dividend
distributions above prescribed amounts and is limited in making loans and
advances to the Company. At December 31, 1997, the retained earnings of the
subsidiary available for distribution as dividends without regulatory approval
was approximately $7,819,000.
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial statements:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the balance
sheets for cash and due from banks, interest-bearing deposits in other
financial institutions, and federal funds sold approximate the fair value of
these assets.
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 value for other loans is 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 value for fixed
rate certificates of deposit is 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
approximates their fair value.
LONG-TERM BORROWINGS: The fair value of the Company's long-term borrowings
(other than deposits) is estimated using discounted cash flow analyses based
on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
OFF-BALANCE SHEET INSTRUMENTS: The fair value of commitments would be
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements, the current
interest rates, and the present credit worthiness of the counter parties.
Since this amount is immaterial, no amounts for fair value are presented.
-52-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments
consisted of the following at December 31:
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 10,775,998 $ 10,775,998 $ 10,152,277 $ 10,152,277
Investment securities 50,128,473 50,283,218 51,584,797 51,633,977
Net loans 147,437,398 147,309,558 136,086,447 136,038,108
Financial liabilities:
Deposits 186,602,705 186,951,870 178,128,903 178,548,854
Short-term borrowings 3,960,042 3,960,042 5,766,631 5,766,631
Long-term borrowings 3,000,000 2,960,274
</TABLE>
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.
-53-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets as of December 31, 1997 and 1996, and
condensed statements of income and cash flows for the years ended December 31,
1997, 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>
BALANCE SHEETS
December 31, 1997 and 1996
<CAPTION>
ASSETS
1997 1996
<S> <C> <C>
Cash and due from banks $ 535,485 $ 529,371
Investment in subsidiary 19,082,913 18,139,868
Other assets 97,001 98,516
Total assets $ 19,715,399 $ 18,767,755
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued dividends payable $ 498,224 $ 478,831
Total stockholders' equity 19,217,175 18,288,924
Total liabilities and stockholders'
equity $ 19,715,399 $ 18,767,755
</TABLE>
-54-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
STATEMENTS OF INCOME
Years Ended December 31, 1997 and 1996, and
Seven-Month Period Ended December 31, 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Income:
Dividends from subsidiary $ 1,311,000 $ 1,157,800 $ 1,238,047
Interest 2,893 11
Total income 1,313,893 1,157,811 1,238,047
Expenses:
Interest 6,782 5,919
Other 58,360 59,923 12,552
Total expenses 65,142 65,842 12,552
Income before income taxes and equity in
undistributed net income of subsidiary 1,248,751 1,091,969 1,225,495
Income tax benefit 20,000 21,000 4,000
Net income before equity in undistributed
net income of subsidiary 1,268,751 1,112,969 1,229,495
Equity in undistributed net income of subsidiary 833,958 1,043,628 790,675
Net income $ 2,102,709 $ 2,156,597 $ 2,020,170
</TABLE>
-55-
<PAGE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and
Seven-Month Period Ended December 31, 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,102,709 $ 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 subsidiary (2,144,958) (2,201,428) (2,028,722)
Net amortization 21,517 21,518 12,552
Increase in other assets (20,003) (21,000) (111,584)
Increase in other liabilities 19,393 8,020 470,811
Net cash provided by (used in) operating
activities (21,342) (36,293) 363,227
Cash flows from investing activities -
Dividends received from subsidiary 1,311,000 1,157,800 863,047
Cash flows from financing activities:
Dividends paid (795,944) (763,421) (739,989)
Purchase of treasury stock (487,600) (315,000)
Net cash used in financing activities (1,283,544) (1,078,421) (739,989)
Net increase in cash and due from banks 6,114 43,086 486,285
Cash and due from banks at beginning 529,371 486,285
Cash and due from banks at end $ 535,485 $ 529,371 $ 486,285
</TABLE>
-56-
<PAGE>
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-57-
<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 31, 1998 (the "1998 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 1998 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 subcaption
"Committee's and Board's Report on Compensation Policies", pages 6 through
7, in the 1998 Proxy Statement and (2) the material set forth under the
subcaption "Compensation Committee and Board Interlocks and Insider
Participation", page 8, in the 1998 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 5 and 6, in the 1998 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", page 8, in the
1998 Proxy Statement.
-58-
<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 28
herein.
(b) No reports on Form 8-K were filed by the Company during the fourth
quarter of 1997.
(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.
EXHIBIT (3) - ARTICLES OF INCORPORATION AND BYLAWS
PAGE OR
INCORPORATED
EXHIBIT<dagger>
(i) Restated Articles of Incorporation, as amended . . . 4(a)(1)
(ii) 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)
EXHIBIT (27) - FINANCIAL DATA SCHEDULE
*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
-59-
<PAGE>
(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
-60-
<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, 1998
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 31st day of March,
1998.
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 Director (Chief Financial and
Principal Accounting Officer)
DIRECTORS:
LEONARD C. BRITTEN
Leonard C. Britten Gordon P. Connor
PATRICK L. CROOKS WILLIAM J. FISH
Patrick L. Crooks William J. Fish
CHARLES A. GHIDORZI GEORGE L. GEISLER
Charles A. Ghidorzi George L. Geisler
LAWRENCE HANZ, JR. THOMAS R. POLZER
Lawrence Hanz, Jr. Thomas R. Polzer
THOMAS A. RIISER
Thomas A. Riiser William M. Reif
EUGENE WITTER
Eugene Witter
<PAGE>
EXHIBIT INDEX<dagger>
TO
FORM 10-K
OF
PSB HOLDINGS, INC.
FOR THE PERIOD ENDED DECEMBER 31, 1997
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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,623
<INT-BEARING-DEPOSITS> 153
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,579
<INVESTMENTS-CARRYING> 12,549
<INVESTMENTS-MARKET> 12,704
<LOANS> 149,317
<ALLOWANCE> 1,845
<TOTAL-ASSETS> 215,019
<DEPOSITS> 186,603
<SHORT-TERM> 3,960
<LIABILITIES-OTHER> 2,239
<LONG-TERM> 3,000
0
8
<COMMON> 1,805
<OTHER-SE> 17,413
<TOTAL-LIABILITIES-AND-EQUITY> 215,019
<INTEREST-LOAN> 12,688
<INTEREST-INVEST> 2,951
<INTEREST-OTHER> 105
<INTEREST-TOTAL> 15,744
<INTEREST-DEPOSIT> 7,872
<INTEREST-EXPENSE> 8,253
<INTEREST-INCOME-NET> 7,491
<LOAN-LOSSES> 230
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 4,932
<INCOME-PRETAX> 3,074
<INCOME-PRE-EXTRAORDINARY> 3,074
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,103
<EPS-PRIMARY> 2.37
<EPS-DILUTED> 2.37
<YIELD-ACTUAL> 4.07
<LOANS-NON> 835
<LOANS-PAST> 7
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 372
<ALLOWANCE-OPEN> 1,925
<CHARGE-OFFS> 350
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 1,845
<ALLOWANCE-DOMESTIC> 1,845
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
