UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 0-26480
PSB HOLDINGS, INC.
(Exact name of registrant as specified in charter)
1905 W. STEWART AVENUE WISCONSIN
WAUSAU, WI 54401 (State of incorporation)
39-1804877
(Address of principal executive office) (I.R.S. Employer
Identification Number)
Registrant's telephone number, including area code: 715-842-2191
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of each class)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
There is no established trading market for the common stock.
<PAGE>
As of March 15, 1999, 883,235 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT DATED MARCH 31, 1999 (TO THE EXTENT NOTED HEREIN):
PART III
-1-
TABLE OF CONTENTS
PAGE
PART I ........................................................3
Item 1.Business ...............................................3
Item 2.Properties .............................................7
Item 3.Legal Proceedings ......................................7
Item 4.Submission of Matters to a Vote of Security Holders ....7
PART II .......................................................8
Item 5.Market for Registrant's Common Equity and Related Stockholder
Matters.................................................8
Item 6.Selected Financial Data ................................9
Item 7.Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................10
Item 7A.Quantitative and Qualitative Disclosures About Market Risk. 27
Item 8.Financial Statements and Supplementary Data ...........28
Item 9.Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure...................................56
PART III .....................................................57
Item 10.Directors and Executive Officers of Registrant .......57
Item 11.Executive Compensation ...............................57
Item 12.Security Ownership of Certain Beneficial Owners and
Management .......................................... 57
Item 13.Certain Relationships and Related Transactions .......57
PART IV ......................................................58
Item 14.Exhibits, Financial Statement Schedules and Reports
on Form 8-K ..........................................58
-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 "FRB") under the authority
of the Bank Holding Company Act of 1956, as amended (the "BHCA"). The
Company's sole business is the ownership and management of 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, Marathon City, and the city of Rhinelander,
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. 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, Marathon County, and Rhinelander, Wisconsin in Oneida
County. 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
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.
-3-
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
<PAGE>
deposits constitute a substantial portion of all financial institution
deposits within the state of Wisconsin and these associations compete
aggressively with commercial banks in the important area of consumer
lending and interest-bearing checking accounts.
The Bank is subject to direct competition in its trade area from
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 FRB (see "Regulation
and Supervision - Monetary Policy").
EMPLOYEES
The Company has no employees. Officers of the Company serve as
full time employees of the Bank.
As of December 31, 1998, the Bank had 105 employees, including 27
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
REGULATION
The Company and the Bank are subject to regulation under both
federal and state law. The Company is a registered bank holding
company and is subject to regulation and examination by FRB pursuant
to the BHCA. The Bank is subject to regulation and examination by the
Federal Deposit Insurance Corporation ("FDIC") and, as a Wisconsin
chartered bank, by the Wisconsin Department of Financial Institutions.
The FRB expects a bank holding company to be a source of strength
for its subsidiary banks. As such, the Company may be required to take
certain actions or commit certain resources to the Bank when it might
otherwise choose not to do so. Under federal and state banking laws,
-4-
the Company and the Bank are also subject to regulations which govern
the Company's and the Bank's capital adequacy, loans and loan policies
(including the extension of credit to affiliates), deposits, payment of
dividends, establishment of branch offices, mergers and other
acquisitions, investments in or the conduct of other lines of business,
management personnel, interlocking directors and other aspects of the
<PAGE>
operation of the Company and the Bank. Bank regulators having
jurisdiction over the Company and the Bank generally have the authority
to impose civil fines or penalties and to impose regulatory control for
noncompliance with applicable banking regulations and policies. In
particular, the FDIC has broad authority to take corrective action if
the Bank fails to maintain required capital. Information concerning
the Company's compliance with applicable capital requirements is set
forth in Note 16 of the Notes to Consolidated Financial Statements.
Banking laws and regulations have undergone periodic revisions that
often have a direct effect on the Bank's operations and its competitive
environment. From time to time various formal or informal proposals,
including new legislation, relating to, among other things, changes
with respect to deposit insurance, permitted bank activities and
restructuring of the federal regulatory scheme have been made and may
be made in the future. Depending on the scope and timing of future
regulatory changes, it is possible that such changes may have a
significant impact on the Company's competitive circumstances and
that such changes may have a material adverse effect on the Company's
consolidated financial condition, liquidity or results of operations.
MONETARY POLICY
The earnings and growth of the Bank, and therefore the Company, are
affected by the monetary and fiscal policies of the federal government
and governmental agencies. The FRB has broad power to expand and
contract the supply of money and credit and to regulate the rates which
its member banks can pay on time and savings deposits. These broad
powers are used to influence inflation and the growth of the economy
and directly affect the growth of bank loans, investments and deposits,
and may also affect the interest rates charged by banks on loans paid
by banks in respect of deposits. Governmental and FRB monetary
policies have had a significant effect on the operating results of
commercial banks in the past and are expected to do so in the future.
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.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 18, 1999, their
ages and principal occupations during the last five years are set forth
below.
Gordon C. Gullickson, 70 President of the Company and the Bank.
-5-
Kenneth M. Selner, 52 Vice President & Secretary of the Company;
Executive Vice President of the Bank.
David K. Kopperud, 53 Executive Vice President of the Bank.
Todd R. Toppen, 40 Treasurer of the Company; Vice President
of the Bank since 1994
<PAGE>
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)
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 in the markets served by the Bank; (ii)
the effects of and changes in government policies, including interest
rate policies of the FRB; (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
-6-
regulations, (x) the effect of changes 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 five office locations. The Bank owns four of the buildings in
which it conducts operations and each building is occupied solely by
<PAGE>
the Bank. All four 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. One location occupies leased space within a
supermarket. The leased space is designed for commercial banking
operations containing teller and loan facilities.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1998, the Company was not involved in any legal
proceedings, nor was it aware of any threatened litigation.
In the ordinary course of its business, the Bank is 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.
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 1998.
-7-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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, 1998 there were approximately 975 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 1998
<S> <C> <C>
Second Quarter $.35 $.35
Fourth Quarter $.55 $.58
</TABLE>
<PAGE>
The Company's source of funds for the payment of dividends is
dividends paid by the Bank. The payment of future dividends to
shareholders of the Company is within the discretion of the Company's
Board of Directors and will depend on various factors, including the
Company's earnings, capital requirements, and the financial condition
of the Company.
-8-
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents consolidated financial data of the
Company and its subsidiary. This information and the following
discussion and analysis should be read in conjunction with other
financial information presented elsewhere in this report.
<TABLE>
FINANCIAL SUMMARY
AT PERIOD END
<CAPTION>
($ in thousands, except per share amounts)
Year Ended December 31
($ IN THOUSANDS) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest Income $ 16,746 $ 15,744 $ 14,824 $ 13,654 $ 11,555
Interest Expense 8,722 8,253 7,769 7,055 4,936
Net Income 2,089 2,103 2,157 2,020 1,951
Basic and Diluted Earnings
Per Share 2.36 2.37 2.39 2.24 2.17
Dividends Per Share on
Common Stock 0.93 0.90 0.85 0.82 0.80
($ IN THOUSANDS)
Balance Sheet Data:
Total Assets $233,491 $215,019 $204,158 $190,781 $171,470
Total Deposits 199,800 186,603 178,129 160,445 140,476
Common Equity 1,805 1,805 1,805 1,805 1,805
Total Stockholders Equity 20,556 19,217 18,289 17,452 15,098
Book Value Per Share of
Common Stock 23.27 21.76 20.42 19.34 16.73
</TABLE>
-9-
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.
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
<PAGE>
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 1998 was $2,088,577
compared with $2,102,709 in 1997, and $2,156,597 in 1996. Net income
decreased .7% in 1998 from 1997 and decreased 2.5% in 1997 from 1996.
The main factor contributing to the decrease in earnings in 1998 is
expense from the termination of our defined benefit pension plan in
1998. 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.
Operations consolidation and standardization continued throughout
1998, eliminating duplication of procedures in all areas of the
Company. The Company installed local and wide area networks in 1996 in
addition to an in-house data processing system, to enable all offices
to communicate and share information. This has enhanced customer
service by providing accurate and timely information as well as
increased productivity. The bank's Voice Response Unit provides the
customer with twenty-four hour, seven-days-a-week access to their
account information. An 800 telephone number has been provided for
customers living outside the local phone area.
Return on average common stockholders' equity amounted to 10.62% in
1998 compared to 11.15% in 1997, and 11.98% in 1996.
Return on average assets for 1998 amounted to .96% compared to
1.02% for 1997 and 1.10% in 1996.
Net income per share amounted to $2.36 in 1998, compared to $2.37
in 1997 and $2.39 in 1996. Cash dividends declared in 1998 were $.93
per share, compared to $.90 in 1997 and $.85 in 1996. The per share
ratio of dividends to shareholders to net income was 39.33% in 1998,
compared to 37.85% in 1997 and 35.40% in 1996.
-10-
NET INTEREST INCOME
The following table shows how net interest income is impacted by
the change in volume and interest rates. 1998 and 1997 data shows a
favorable spread due to increased volume. Growth in net interest
income will continue to be moderate and interest margins will need to
be managed carefully during 1999.
<PAGE>
<TABLE>
INTEREST INCOME & EXPENSE VOLUME & RATE CHANGE
<CAPTION>
1998 compared to 1997 1997 compared to 1996 1996 compared to 1995 1995 compared to 1994
increase (decrease) increase (decrease) increase (decrease) increase (decrease)
due to (1) due to (1) due to (1) due to (1)
($ 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>
Interest earned on:
Loans (2) $ 706 10 716 $ 916 15 931 $ 994 (30) 964 $ 1,244 608 1,852
Taxable investment
securities 110 (86) 24 (22) 62 40 227 (14) 213 72 47 119
Non-taxable investment
securities (2) 88 (20) 68 74 (32) 42 31 (51) (20) 29 (16) 13
Other interest income 436 (217) 219 (118) 39 (79) (1) (2) (3) 74 51 125
Total 1,340 (313) 1,027 850 84 934 1,251 (97) 1,154 1,419 690 2,109
Interest paid on:
Savings and
demand deposits 335 179 514 175 72 247 101 (64) 37 (58) 213 155
Time deposits (108) (102) (210) 493 (24) 469 616 94 710 795 984 1,779
Other borrowings 194 (29) 165 (235) 2 (233) (29) (4) (33) 55 130 185
Total 421 48 469 433 50 483 688 26 714 792 1,327 2,119
Net interest earnings $ 919 (361) 558 $ 417 34 451 $ 563 (123) 440 $ 627 (637) (10)
<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>
-11-
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, 1998.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
Yield Change Yield Change Yield Change
<S> <C> <C> <C> <C> <C> <C>
Yield on earning assets 8.27% - .09% 8.36% .09% 8.27% - .03%
Effective rate on all
liabilities as a % of
earning assets 4.23 - .06 4.29 .04 4.25 .08
Net yield on earning assets 4.04 - .03 4.07 .05 4.02 - .11
</TABLE>
The 1998 figures as a percent of average earning assets reflects a
decrease in interest rates during 1998. The Company will focus on
increasing net interest income in 1999 through continued control of
interest expense, maintaining the level of interest rates on loans, and
managing rates on the investment portfolio.
<PAGE>
Average earning assets increased 7.58% to $206,480 in 1998, from
$191,926 in 1997. Included in this increase was a 5.56% increase in
average loans to $148,806 in 1998, up from $140,962 in 1997, and a
4.63% increase in average taxable investments to $39,631 in 1998, up
from $37,877 in 1997. Federal funds sold increased an average of
419.10% in 1998 from 1997.
The following table sets forth average consolidated balance sheet
data and average rate data on a tax equivalent basis for the periods,
indicated.
-12-
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY -
INTEREST RATES AND DIFFERENTIALS
<CAPTION>
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
($ 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) $148,806 $ 13,404 9.01% $140,962 $ 12,692 9.00% $130,783 $ 11,766 9.00%
Taxable investment
securities 39,631 2,470 6.23% 37,877 2,427 6.41% 38,239 2,376 6.21%
Nontaxable
investment
securities(2) 13,423 947 7.06% 12,197 879 7.21% 11,202 836 7.46%
Federal funds sold 4,620 248 5.37% 890 48 5.39% 2,494 139 5.57%
Total (2) 206,480 17,069 8.27% 191,926 16,046 8.36% 182,718 15,117 8.27%
Non-interesting
earning assets
Cash and due
from banks 8,497 8,347 8,790
Premises & equip.
- net 3,949 3,660 3,742
Other assets 3,578 3,981 3,046
Less: Allow. loan
loss (1,929) (1,846) (1,875)
Total 220,575 206,068 196,421
Liabilities & Stockholders'
Equity
Interest Bearing liabilities
Savings and
demand deposits 61,657 2,381 3.86% 52,265 1,867 3.57% 47,179 1,620 3.43%
Time deposits 100,713 5,795 5.75% 102,566 6,005 5.85% 94,179 5,536 5.88%
Short-term borrowings 3,803 237 6.23% 5,556 343 6.18% 10,169 613 6.03%
Long-term Borrowings 5,724 309 5.40% 638 38 5.96%
Total 171,897 8,722 5.07% 161,025 8,253 5.13% 151,527 7,769 5.13%
Non-interest bearing liabilities
Demand deposits 26,827 24,403 24,729
Other liabilities 1,875 1,788 2,169
Stockholders' equity 19,976 18,852 17,996
Total 220,575 206,068 196,421
Net interest income 8,347 7,793 7,348
Rate Spread 3.20% 3.23% 3.14%
Net yield on interest
earnings assets 4.04% 4.07% 4.02%
<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:
1998-$155, 1997-$164, 1996-$80, 1995-$55, 1994-$77.
</TABLE>
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY -
INTEREST RATES AND DIFFERENTIALS (continued)
<CAPTION>
1995 1994
($ in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning
assets
Loans (1)(2)(3) $119,657 $ 10,802 9.03% $105,209 $ 8,950 8.51%
Taxable investment
securities 35,428 2,163 6.11% 34,045 2,029 5.96%
Nontaxable
investment
securities(2) 10,698 856 8.00% 10,242 843 8.19%
Federal funds sold 2,515 142 5.65% 757 32 4.23%
Total (2) 168,298 13,963 8.30% 150,253 11,854 7.89%
Non-interesting
earning assets
Cash and due
from banks 7,958 7,946
Premises & equip. -
net 2,637 2,040
Other assets 2,212 2,004
Less: Allow. loan
loss (1,751) (1,506)
Total 179,354 160,737
Liabilities & Stockholders'
Equity
Interest Bearing liabilities
Savings and
demand deposits 44,708 1,583 3.54% 46,594 1,428 3.06%
Time deposits 83,518 4,826 5.78% 66,241 3,047 4.60%
Short-term borrowings 10,732 646 6.02% 9,597 461 4.80%
Long-term Borrowings
Total 138,958 7,055 5.08% 122,432 4,936 4.03%
Non-interest bearing liabilities
Demand deposits 22,594 21,950
Other liabilities 1,176 951
Stockholders' equity 16,626 15,404
Total 179,354 160,737
Net interest income 6,908 6,918
Rate Spread 3.22% 3.86%
Net yield on interest
earnings assets 4.13% 4.60%
<FN>
(1) For purposes of these computations, non-accruing loans are included
in the daily average loan amounts outstanding.
(2) The amount of interest income on non-taxable investment securities
and loans has been adjusted to its fully taxable equivalent.
(3) Loan fees are included in total interest income as follows:
1998-$155, 1997-$164, 1996-$80, 1995-$55, 1994-$77.
</TABLE>
<PAGE>
The preceding table shows a 1998 decrease of .03% on net yield on
interest earning assets. The average rate on taxable investment
securities decreased .18% in 1998 to 6.23%, down from 6.41% in 1997.
Time deposits decreased by .10% while funds shifted into the more
liquid Money Market deposit accounts, which the Company offered
throughout 1998 in an effort to retain deposits to support loan demand.
Total deposits at December 31, 1998 showed an increase of $13,197,192
increasing to $199,799,897 from $186,602,705 at December 31, 1997.
Average borrowing increased $3,333,352 increasing from $6,194,145 in
1997 to $9,527,497 in 1998. The average rate on all interest bearing
liabilities decreased by .06% in 1998 to 5.07% down from 5.13% in 1997.
Loan growth is expected to increase in 1999 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, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C>
Item of income
Interest and fees on loans and
short-term borrowings 73.8% 76.9% 74.3% 75.2% 73.2%
Interest on securities 16.6% 17.9% 18.2% 18.8% 21.0%
Total operating income 18,153 16,489 15,814 14,336 12,218
(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>
1998 1997 1996
<S> <C> <C> <C>
Noninterest income:
Service fees $699,144 $483,756 $518,271
Net realized gain on sale of
securities available for sale 35,867 3,120
Gain on sale of loans 332,027 45,588 13,188
Gain on sale of other real estate 4,134 202,398
Other operating income 335,525 212,240 256,298
<FN>
Total noninterest income 1,406,697 744,704 990,155
</TABLE>
Service fees increased to $699,144 in 1998, compared to $483,756 in
1997 primarily due to profit improvement initiative implemented in
1998.
-14-
<PAGE>
NON-INTEREST EXPENSE
The following table shows the major components of non-interest
expense.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Salaries and employee benefits $3,330,964 $2,948,292 $2,701,445
Occupancy 827,558 727,583 708,288
Loss on settlement on pension plan 405,891
Data processing 109,602 74,701 195,261
Director expense 141,671 179,800 163,923
Other operating 1,299,282 1,001,664 945,938
Total noninterest expense $6,114,968 $4,932,040 $4,714,855
</TABLE>
Salaries increased $382,672 primarily due to the increased number
of employees. The number of full-time equivalent employees at the end
of 1998 was 87 compared to 78 at the end of 1997.
Occupancy expense increased in 1998 due to the acquisition of an
additional branch and various remodeling projects increasing office
space. Data processing costs increased by 46.7% in 1998 compared to
1997 as a result of additional computer systems added to the in-house
system and Y2K costs. Other operating expense increased in 1998 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
$300,000 in 1998; compared to $230,000 in 1997 and $180,000 in 1996.
The allowance for loan losses as a percentage of gross loans
outstanding was 1.29% at December 31, 1998; 1.24% at December 31, 1997;
and 1.39% at December 31, 1996. The increased provision in 1998 is
intended to provide adequate reserves for potential losses.
Charge-offs as a percentage of average loans outstanding were .14% in
1998; .22% in 1997; and .03% in 1996. Charge-offs have not been
concentrated in any industry or business segment as reflected
in the schedule below.
Management feels the allowance for loan losses is adequate as of
December 31, 1998.
-15-
<PAGE>
The allowance for loan losses shown in the following table
represents a general allowance available to absorb future losses within
the entire portfolio.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Average balance of loans
for period ($ in thousands) $148,806 $140,823 $130,783 $119,657 $105,027
Allowance for loan losses at
beginning of period 1,845,064 1,924,686 1,780,893 1,643,646 1,370,621
Loans charged off
Commercial & Industrial (138,296) (155,650) (47,809) (54,088) (27,864)
Agriculture 0 0 0 0 0
Real Estate - Mortgage 0 (136,011) 0 0 (10,711)
Installment & Other
Consumer Loans ( 69,154) ( 58,581) ( 25,133) ( 15,174) ( 10,100)
Total Charge Offs (207,450) (350,242) ( 72,942) (69,262) (48,675)
Recoveries on loans previously
charged off
Commercial & Industrial 316 17,538 33,236 22,168 0
Agricultural 0 0 0 0 0
Real Estate - Mortgage 0 18,582 0 0 11,810
Installment & Other
Consumer Loans 8,934 4,500 3,499 4,341 9,890
Total Recoveries $9,250 $40,620 $36,735 $26,509 $21,700
Net loans charged off ($198,200) ($309,622) ($36,207) ($42,753) ($26,975)
Additions charged to
operations 300,000 230,000 180,000 180,000 300,000
Allowance for loan losses
at end of period $1,946,864 $1,845,064 $1,924,686 $1,780,893 $1,643,646
Ratio of net charge offs
during period to average
loans outstanding 0.14% 0.22% 0.03% 0.04% 0.03%
Ratio of allowance for loan
losses to total loans
receivable at end of period 1.29% 1.24% 1.39% 1.42% 1.46%
</TABLE>
-16-
<PAGE>
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 changes. The primary sources of the
Company's liquidity are marketable assets maturing within one year.
The Company attempts, when possible to match relative maturities of
assets and liabilities, while maintaining the desired net interest
margin. Management believes liquidity is adequate.
Management's overall strategy is to coordinate the volume of rate
sensitive assets and liabilities to minimize the impact of interest
rate movement on the net interest margin. From time to time, the Bank
develops special term deposit products that will 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 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, 1998 and 1997 the Company was within the ratio limits.
-17-
INVESTMENT PORTFOLIO
The following table shows the relative maturities of the investment
portfolio as of December 31, 1998. Weighted average yields on
tax-exempt securities have been calculated on a tax equivalent basis
using a tax rate of 34%
<PAGE>
<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 $-- -- $-- -- $517 4.60% $-- -- $-- --
U.S. Government
agencies and
corporations 2,017 6.61% 3,398 5.94% 13,643 6.13% 17,821 6.19% 9,789 6.16%
State and political
subdivisions
(domestic) 2,016 6.91% 1,594 7.39% 3,484 6.93% 6,672 6.98% 302 6.33%
Other bonds, notes,
and debentures 701 6.51% -- -- -- -- -- -- -- --
Total $4,734 6.76% $ 4,992 6.41% $17,644 6.24% $24,493 6.40% $10,091 6.16%
</TABLE>
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. The Bank
classifies all U.S. Treasury and other U.S. Government Agencies &
Corporations as available-for-sale. State and Political subdivisions
were classified as held-to maturity.
At December 31, 1998 the net unrealized gain on securities
available for sale, recorded as a separate component of stockholder's
equity, was $172,417, net of deferred income taxes of $92,992.
Securities with an approximate carrying value of $9,168,461 and
$8,352,470, at December 31, 1998 and 1997 respectively, were pledged
primarily to secure public deposits and for repurchase agreements.
-18-
<PAGE>
The following table sets forth the distribution of investment
securities as of the dates indicated.
<TABLE>
<CAPTION>
($ in
thousands) December 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Government
agencies and corporations $47,185 $ 36,932 $ 39,224 $ 34,597 $ 35,573
State and political
subdivisions
(domestic) 14,068 12,549 11,714 10,333 10,981
Other securities 701 647 647 45 94
Total $61,954 $ 50,128 $ 51,585 $ 44,975 $ 46,648
</TABLE>
An investment subsidiary, PSB Investments, Inc. currently holds
approximately $39,885,776 in securities. Income tax expense was
approximately $113,000 lower as a result of holding these securities at
the subsidiary.
-19-
LOAN PORTFOLIO
The following table sets forth the approximate maturities of the
loan portfolio, excluding non-accrual loans; and the sensitivity of
loans to interest changes as of December 31, 1998.
<TABLE>
<CAPTION>
Maturity
Over one
($ in thousands) One year year thru Over
OR LESS FIVE YEARS FIVE YEARS
<S> <C> <C> <C>
Commercial, industrial,
and financial $ 26,075 $ 11,310 $ 1,307
Agricultural 1,119 214 0
Real estate mortgage 43,764 56,730 851
Installment & other
consumer loans 4,791 6,742 164
Total $ 75,749 $ 74,996 $ 2,322
INTEREST SENSITIVITY
Amounts of loans due after one year with: Fixed Variable
($ IN THOUSANDS) RATE RATE
Commercial, industrial, and financial $ 6,816 $ 6,290
Agriculture 74 140
Real estate mortgage 14,522 43,094
Installment & other
consumer loans 6,012 952
Total $27,424 $50,476
</TABLE>
<PAGE>
Loan growth for the year ended December 31, 1998 was 2.90%;
increasing from $149,317,462 at December 31, 1997 to $153,649,015 at
December 31, 1998. The composition of loans outstanding as of the
dates indicated are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997 1996 1995 1994
($ in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, industrial
and financial $ 38,852 $ 31,314 $ 28,531 $ 27,291 $ 23,821
Agricultural 1,662 2,488 1,820 2,356 2,899
Real estate:
Mortgage 101,380 103,253 93,450 84,221 75,994
Installment and other
consumer loans 11,755 12,262 14,210 11,457 9,960
Total $153,649 $149,317 $138,011 $125,325 $112,674
</TABLE>
-20-
Loans held for sale as of December 31, 1998 were $3,120,450
compared to $300,500 on December 31, 1997. This increase is a result
of market interest rates being lower in 1998, thereby increasing the
number of loans being refinanced in the secondary market.
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. The Company has no foreign loans
outstanding.
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.
<PAGE>
An analysis of impaired loans follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 1997
<S> <C> <C> <C>
Nonaccrual $ 564,414 $ 484,290
Accruing income 406,000 639,827
Total impaired loans 970,414 1,124,117
Less - Allowance for loan losses 328,511 178,000
Net investment in impaired loans $ 641,903 $ 946,117
YEARS ENDED DECEMBER 31, 1998 1997 1996
Average recorded investment, net of
allowance for loan losses $ 819,630 $ 1,191,098 $ 304,400
Interest income recognized $ 39,569 $ 83,195 $ 23,001
</TABLE>
-21-
The Company maintained generally high loan quality during
1998. The following table sets forth the amount of risk element loans
as of the dates indicated.
<TABLE>
<CAPTION>
($ in
thousands) DECEMBER 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans on a non-accrual basis $ 582 $ 835 $ 247 $ 376 $ 646
Loans contractually past due ninety days
or more as to interest or principal payments $ 0 $ 7 $ 275 $ 0 $ 0
</TABLE>
DEPOSITS
The average balances of deposits and the average rate paid on
these deposits during the years ended December 31, 1998, 1997, 1996,
1995, and 1994 are:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
($ 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 $ 26,827 $ 24,403 $ 24,729 $ 22,594 $ 21,950
Interest bearing
demand and
savings deposits 61,657 3.86% 52,265 3.57% 47,179 3.43% 44,708 3.54% 46,593 3.06%
Time deposits 100,713 5.75% 102,566 5.85% 94,179 5.88% 83,518 5.78% 66,241 4.60%
Total $189,197 $179,234 $166,087 $150,820 $134,784
</TABLE>
<PAGE>
The amount of time certificates of deposit issued in amounts of
$100,000 or more and outstanding as of December 31, 1998 is
approximately $28,888,000. Their maturity distribution is as follows:
<TABLE>
<CAPTION>
<S> <C>
- three months or less $11,420,000
- over three months and through twelve months $15,805,000
- over one year through five years $ 1,663,000
- over five years $ -0-
</TABLE>
The Bank does not have any deposits in foreign banking offices.
-22-
SELECTED FINANCIAL DATA
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, 1998, 1997, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net income as a
percentage of:
Average total assets .96% 1.02% 1.10% 1.13% 1.21%
Average shareholders'
equity 10.62% 11.15% 11.98% 12.15% 12.66%
Dividend payout ratio
(dividends declared
divided by net income) 39.33% 37.85% 35.40% 36.63% 37.00%
Average shareholders'
equity to average 9.06% 9.15% 9.16% 9.27% 9.58%
total assets
</TABLE>
-23-
<PAGE>
SUMMARY QUARTERLY FINANCIAL INFORMATION
The following is a summary of the quarterly results of operations for
the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Three months ended
March 31 June 30 September 30 December 31
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
Interest income $4,146 $4,288 $4,252 $4,060
Interest expense $2,164 $2,174 $2,205 $2,179
Net interest income $1,982 $2,114 $2,047 $1,882
Provision for loan losses $75 $75 $75 $75
Net income applicable to common stock $390 $638 $719 $342
Earnings per common share $0.44 $0.72 $0.81 $0.39
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
</TABLE>
-24-
YEAR 2000 DISCLOSURE
YEAR 2000
The Company, like virtually all other financial institutions in the
United States, depends on computer technology to process its various
deposit, loan and investment transactions on a daily basis. Management
has initiated a plan to review and address the potential for failure of
computer applications as a result of the failure of a software program
to properly recognize the year 2000 (the "Year 2000 problem" or "Year
2000 issues"). The term "Year 2000 readiness", or terms of similar
import, mean that the particular software or equipment referred to has
been modified or replaced and the Company believes that such modified
or replaced equipment or processes will operate as designed after 1999
without Year 2000 problems.
The Company assessment of, and corrective actions with respect to,
the possible consequences of Year 2000 issues on its consolidated
financial condition, liquidity or results of operations is referred
<PAGE>
to herein as its "Year 2000 Project." The Year 2000 Project is being
undertaken under the supervision of the Year 2000 Project Committee
(the "Committee"), composed of employees of the Company's wholly-owned
subsidiary, Peoples State Bank (the "Bank"). The Committee reports on
a regular basis to the Board of Directors as to the status of Year 2000
issues and the Company's progress in addressing and/or resolving
identified Year 2000 problems.
In accordance with the Year 2000 Project and a Year 2000 Compliance
Policy adopted by the Committee, an assessment of software and
equipment to determine which major computer components will need to be
updated or replaced has been completed. The Company has undertaken
software and equipment upgrades, including the bank's mainframe
computer, and will continue to monitor vendor certifications as to Year
2000 compliance and to take appropriate steps by July, 1999 to modify
or replace systems which are not Year 2000 compliant. Testing has been
conducted on all major mission critical systems and all such systems
appear to be Year 2000 ready. Testing will continue through the year
2000 on software and equipment upgrades and modifications.
The Year 2000 Project also involves gathering data from Bank
customers to assist the Committee in determining the level of risk to
the Bank which might be expected as a result of Year 2000
noncompliance. Bank operations, such as commercial loan application
procedures, have been modified to address the Year 2000 issue. The
Bank has also attempted to educate its customer base about the Year
2000 issue and has attempted to identify major employers in the Bank's
primary market area to evaluate potential loss to the Bank's business
if those employers' operations would be curtailed or cease due to Year
2000 problems. Inquiries have also been made to the Bank's investment
subsidiary service provider and correspondent banks to determine the
effect of such entities' compliance with Year 2000 issues.
The Committee has determined that it does not have non-information
technology systems, such as embedded controllers, which are material to
the operations of the Company and that all security and building
operations systems can be operated manually or with alternative
controls should a Year 2000 problem occur.
-25-
COSTS
Costs of new software or equipment will be capitalized over the
useful life. All other costs associated with Year 2000 issues are
expensed as incurred. Internal costs of Year 2000 readiness are not
being tracked, but principally relate to payroll costs of Company
personnel. The estimated total cost of evaluation and compliance with
Year 2000 issues in not expected to exceed $150,000 and, in any event,
is not expected to be material to the Company.
RISKS
The Company does not believe that Year 2000 issues will have a
material adverse effect on its consolidated financial condition,
liquidity or results of operations. There are, however, many risks
<PAGE>
associated with Year 2000 that are beyond the control of the Company or
which may not be adequately addressed by others before material
problems are encountered.
The Company, like other financial institutions, depends upon the
Federal Reserve System and other financial institutions to process a
wide variety of financial transactions for itself and its customers and
as a source of credit. The Company must rely upon various federal bank
regulatory agencies to make certain that the U.S. banking and payments
system, as a whole, is Year 2000 compliant. While the Company believes
that the banking system as a whole will be Year 2000 compliant, and it
has inquired into the readiness of its principal correspondents and
service providers, there can be no assurance of that fact or that one
or more of them will not encounter significant Year 2000 problems and
thereby adversely affect the Company. Similarly, while the Company
faces potential disruptions in its operations from Year 2000 problems
as a result of the failure of the power grid, telecommunications, or
other utilities, it is not aware that any material disruption in these
infrastructures is reasonably likely to occur.
The Bank has a diverse customer base. Based on this diversity and
the information received by the Bank to date in response to its
customer surveys and other inquiries, the Company believes that its
customers as a whole will not incur material adverse results from Year
2000 related issues to the extent that the Bank would, in turn, incur
material defaults in its loan portfolio. Nevertheless, there is a risk
which cannot be wholly discounted that Year 2000 problems encountered
by its customers may result in significant losses to the Company as a
result of the inability of certain customers to repay loans or as
a result of reducing the nonloan portion of its customers' banking
business.
To the extent the Company incurs losses arising from Year 2000
issues, it may also have insurance coverage. The scope and amount
of reimbursement for such losses will depend upon the nature of any
claims which arise.
CONTINGENCY PLAN
The Committee is preparing a business resumption contingency plan
which would be implemented, in part, in conjunction with the Bank's
disaster recovery plan in the event of failure of one or more of the
Bank's major systems. The business resumption contingency plan
involves the identification
-26-
by the Committee of core business processes, establishment of event
time lines, and preparation of a risk analysis of mission critical
systems. Work on the business contingency readiness plan continues and
is expected to be completed during the second quarter of 1999.
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
<PAGE>
interest-rate risk inherent in its lending and deposit taking
activities. Management actively monitors and manages its interest-rate
risk exposure. The measurement of the market risk associated with
financial instruments is meaningful only when all related and
offsetting on- and off-balance sheet transactions are aggregated, and
the resulting net positions are identified. Disclosures about the fair
value of financial instruments which reflect changes in market prices
and rates, can be found in footnote 18 of the Notes to Consolidated
Financial Statements.
The Company's primary objective in managing interest-rate risk is
to minimize the adverse impact of changes in interest rates on the
Company's net interest income and capital, while adjusting the
Company's asset-liability structure to obtain the maximum yield-cost
spread on that structure. The Company relies primarily on its
asset-liability structure to control interest- rate risk. However,
a sudden and substantial increase in interest rates may adversely
impact the Company's earnings, to the extent that the interest rates
borne by assets and liabilities do not change at the same speed, to
the same extent, or on the same basis. The Company does not engage in
trading activities.
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-
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, 1998 and 1997, and
the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the three years ended December 31, 1998.
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
<PAGE>
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, 1998 and 1997, and the
results of their operations and their cash flows for the three years
ended December 31, 1998 in conformity with generally accepted
accounting principles.
WIPFLI ULLRICH BERTELSON LLP
Wipfli Ullrich Bertelson LLP
January 22, 1999
Wausau, Wisconsin
-28-
<PAGE>
<TABLE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks $ 8,751,763 $ 10,622,727
Interest-bearing deposits with banks 740,993 153,271
Federal funds sold 3,934,000
Investment securities:
Held to maturity (fair values of $14,345,897
and $12,704,104, respectively) 14,068,362 12,549,359
Available for sale (at fair value) 47,886,132 37,579,114
Loans held for sale 3,120,450 300,500
Loans receivable, net of allowance for loan losses of
$1,946,864 and $1,845,064 in 1998 and 1997,
respectively 148,581,791 147,171,898
Accrued interest receivable 1,725,343 1,737,493
Premises and equipment 3,885,986 3,746,432
Other assets 796,671 1,158,255
TOTAL ASSETS $ 233,491,491 $ 215,019,049
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 33,149,909 $ 27,564,502
Interest-bearing deposits 166,649,988 159,038,203
Total deposits 199,799,897 186,602,705
Short-term borrowings 4,549,508 3,960,042
Long-term borrowings 6,000,000 3,000,000
Other liabilities 2,585,871 2,239,127
Total liabilities 212,935,276 195,801,874
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 12,223,043 10,955,877
Unrealized gain (loss) on securities available
for sale, net of tax 172,417 100,543
Treasury stock, at cost - 19,190 shares (802,600) (802,600)
Total stockholders' equity 20,556,215 19,217,175
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 233,491,491 $ 215,019,049
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
-29-
<TABLE>
<CAPTION>
PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 13,403,646 $ 12,688,023 $ 11,757,028
Interest on investment securities:
Taxable 2,394,816 2,370,859 2,330,456
Tax-exempt 625,428 580,323 552,324
Other interest and dividends 322,546 104,758 184,151
Total interest income 16,746,436 15,743,963 14,823,959
Interest expense:
Deposits 8,175,617 7,871,730 7,156,077
Short-term borrowings 237,058 343,207 612,585
Long-term borrowings 308,913 37,981
Total interest expense 8,721,588 8,252,918 7,768,662
Net interest income 8,024,848 7,491,045 7,055,297
Provision for loan losses 300,000 230,000 180,000
Net interest income after provision for loan losses 7,724,848 7,261,045 6,875,297
Noninterest income:
Service fees 699,144 483,756 518,271
Net realized gain on sale of securities
available for sale 35,867 3,120
Gain on sale of other real estate 4,134 202,398
Gain of sale of loans 332,027 45,588 13,188
Investment sales commissions 146,756 73,873 78,595
Other operating income 188,769 138,367 177,703
Total noninterest income 1,406,697 744,704 990,155
Noninterest expenses:
Salaries and employee benefits 3,330,964 2,948,292 2,701,445
Loss on settlement of pension plan 405,891
Occupancy 827,558 727,583 708,288
Telephone, supplies and postage 311,887 244,752 268,379
Advertising and promotion 201,754 166,415 140,751
Data processing 109,602 74,701 195,261
Director expense 141,671 179,800 163,923
Other operating 785,641 590,497 536,808
Total noninterest expenses 6,114,968 4,932,040 4,714,855
Income before income taxes 3,016,577 3,073,709 3,150,597
Provision for income taxes 928,000 971,000 994,000
Net income $ 2,088,577 $ 2,102,709 $ 2,156,597
Basic and diluted earnings per share $ 2.36 $ 2.37 $ 2.39
Weighted average shares outstanding 883,235 887,988 900,641
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
-30-
<TABLE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income Treasury
STOCK CAPITAL EARNINGS (LOSS) STOCK TOTALS
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 1,804,850 $ 5,926,505 $ 9,487,936 $ 232,273 $ $ 17,451,564
Comprehensive income:
Net income 2,156,597 2,156,597
Unrealized loss on securities
available for sale, net of
tax (240,816) (240,816)
Total comprehensive income 1,915,781
Transfer from retained earnings 1,232,000 (1,232,000)
Purchase of treasury stock (315,000) (315,000)
Cash dividends declared
$.85 per share (763,421) (763,421)
Balance, December 31, 1996 1,804,850 7,158,505 9,649,112 (8,543) (315,000) 18,288,924
Comprehensive income:
Net income 2,102,709 2,102,709
Unrealized gain on securities
available for sale, net of tax 109,086 109,086
Total comprehensive income 2,211,795
Purchase of treasury stock (487,600) (487,600)
Cash dividends declared
$.90 per share (795,944) (795,944)
Balance, December 31, 1997 1,804,850 7,158,505 10,955,877 100,543 (802,600) 19,217,175
Comprehensive income:
Net income 2,088,577 2,088,577
Unrealized gain on securities
available for sale, net of tax 71,874 71,874
Total comprehensive income 2,160,451
Cash dividends declared
$.93 per share ( 821,411) (821,411)
Balance, December 31, 1998 $ 1,804,850 $ 7,158,505 $12,223,043 $ 172,417 $(802,600) $20,556,215
<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, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,088,577 $ 2,102,709 $ 2,156,597
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net
amortization 520,981 482,664 448,472
Benefit from deferred income taxes (169,900) (108,900) (52,300)
Provision for loan losses 300,000 230,000 180,000
Proceeds from sales of loans held for sale 26,186,442 4,369,580 1,058,993
Originations of loans held for sale (28,674,365) (4,344,817) (1,325,480)
Gain on sale of loans (332,027) (45,588) (13,188)
Net gain on sale of other real estate (4,134) (202,398)
Net gain on sale of securities available
for sale (35,867) (3,120)
Changes in operating assets and liabilities:
Accrued interest receivable 12,150 53,412 (248,004)
Other assets (25,811) (285,484) (118,169)
Other liabilities 346,744 265,173 188,535
Net cash provided by operating activities 212,790 2,715,629 2,073,058
Cash flows from investing activities:
Proceeds from sale and maturities of:
Held to maturity securities 1,340,000 2,366,913 2,565,079
Available for sale securities 17,470,126 10,953,084 13,109,137
Payment for purchase of:
Held to maturity securities (2,881,464) (3,221,710) (3,963,240)
Available for sale securities (27,616,227) (8,496,561) (18,583,686)
Net increase in loans (1,709,893) (11,595,126) (12,227,971)
Net (increase) decrease in
interest-bearing deposits
and money market funds (587,722) 16,032 1,448,830
Net decrease (increase) in
federal funds sold (3,934,000) 5,683,000
Capital expenditures (633,488) (482,177) (659,051)
Proceeds from sale of other real estate 503,667 14,500
Net cash used in investing activities (18,049,001) (10,459,545) (12,613,402)
Cash flows from financing activities:
Net increase (decrease) in
noninterest-bearing deposits 5,585,407 (921,753) 1,926,820
Net increase in interest-bearing deposits 7,611,785 9,395,555 15,757,491
Net decrease in short-term borrowings 589,466 (1,806,589) (5,332,867)
Proceeds from issuance of long-term
borrowings 3,000,000 3,000,000
Dividends paid (821,411) (795,944) (763,421)
Purchase of treasury stock (487,600) (315,000)
Net cash provided by financing activities 15,965,247 8,383,669 11,273,023
Net increase (decrease) in cash and due
from banks (1,870,964) 639,753 732,679
Cash and due from banks at beginning 10,622,727 9,982,974 9,250,295
Cash and due from banks at end $ 8,751,763 $ 10,622,727 $ 9,982,974
</TABLE>
<PAGE>
-32-
<TABLE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(Continued)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 8,734,905 $ 8,101,757 $ 7,738,779
Income taxes 877,563 1,008,124 960,348
Noncash investing and financing activities:
Loans charged off 207,450 350,242 72,942
Loans refinanced from other real estate (215,000)
Loans transferred to other real estate 198,544 300,989
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
-33-
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, and Rhinelander, Wisconsin
in Oneida County. It provides a variety of banking products including
investment product sales.
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.
<PAGE>
Actual results could differ from those estimates.
CASH EQUIVALENTS
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents are defined as those amounts included
in the balance sheet caption "cash and due from banks." Cash and due
from banks includes cash on hand and non-interest-bearing deposits at
correspondent banks.
SECURITIES
Investment securities are assigned an appropriate classification at the
time of purchase in accordance with management's intent. Securities
held to maturity represent those securities for which the Company has
the positive intent and ability to hold to maturity. Accordingly,
these securities are carried at cost adjusted for amortization of
premium and accretion of discount calculated using the effective yield
method. Unrealized gains and losses on securities held to maturity are
not recognized in the financial statements.
Trading securities include those securities bought and held principally
for the purpose of selling them in the near future. The Company has no
trading securities.
Securities not classified as either securities held to maturity or
trading securities are considered available for sale and reported at
fair value determined from estimates of brokers or other sources.
Unrealized gains and losses are excluded from earnings but are reported
as other comprehensive income, net of income tax effects, in a separate
component of stockholders' equity.
Any gains and losses on sales of securities are recognized at the time
of sale using the specific identification method.
-34-
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. After being placed on nonaccrued
status, additional income is recorded only to the extent that payments
are received or the collection of principal becomes reasonably assured.
Interest income recognition on impaired loans is consistent with the
recognition on all other loans (as detailed above).
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
<PAGE>
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. Gains and losses on the sale of loans
held for sale are determined using the specific identification method
using quoted market prices. Mortgage servicing rights are not
retained.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost. Maintenance and repair
costs are charged to expense as incurred. Gains or losses on
disposition of property and equipment are reflected in income.
Depreciation is computed principally on the straight-line method and is
based on the estimated useful lives of the assets varying from 5 to 40
years on buildings, 5 to 20 years on equipment, and 3 years on
software.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair
value at the date of foreclosure, establishing a new cost basis.
Costs related to development and improvement of property are
capitalized, whereas costs related to holding property are expensed.
After foreclosure, valuations are periodically performed by management
and the real estate is carried at the lower of carrying amount or fair
value less 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 maintains a defined contribution 401(k) profit-sharing plan
which covers substantially all full-time employees.
-35-
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.
<PAGE>
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
outstanding.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to
current year presentation.
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
Under this SFAS, the Company reports those items defined as
comprehensive income in the statement of changes in stockholders'
equity. The adoption of SFAS No. 130 did not have an impact on the
Company's financial condition or results of operations.
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
which was issued in June 1997. This statement establishes new
standards for reporting information about operating segments in annual
and interim financial statements. The standard also required
descriptive information about the way operating segments are
determined, the products and services provided by the segments
and the nature of differences between reportable segment measurements
and those used for the consolidated enterprise. The disclosure
requirements had no impact on the Company's financial position or
results or operations.
Effective January 1, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits," which was issued in February 1998. This statement revises
employers' disclosures about pension and other postretirement benefit
plans. It did not change the measurement or recognition of those
plans. It standardized the disclosure requirement and required
additional information on changes in benefit obligations and fair value
of plan assets, and eliminated certain disclosures which were no longer
considered useful. The disclosure requirements had no impact on the
Company's financial position or results of operations.
In March, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statements of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The SOP provides guidance
as to when it is or is not appropriate to capitalize the cost of
software developed or obtained for internal use. The Company elected
early adoption of SOP 98-1. The effect of the adoption was not
material.
-36-
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
Effective January 1, 1997, the Company adopted Statement of Financial
<PAGE>
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.
NOTE 3 - CASH AND DUE FROM BANKS
Cash and due from banks in the amount of $754,000 was restricted at
December 31, 1998 to meet the reserve requirements of the Federal
Reserve System.
In the normal course of business, the Company and its subsidiary
maintain cash and due from bank balances with correspondent banks.
Accounts at each institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. The Company and its subsidiary
also maintain cash balances in money market funds. Such balances are
not insured. Total uninsured balances at December 31, 1998 were
$7,695,129.
-37-
<PAGE>
NOTE 4 - SECURITIES
The amortized cost and estimated fair value of investment securities
are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
DECEMBER 31, 1998
<S> <C> <C> <C> <C>
Securities held to maturity:
Obligations of states and
political subdivisions $ 14,068,362 $ 278,490 $ 955 $ 14,345,897
Securities available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 46,920,044 $ 342,097 $ 76,687 $ 47,185,454
Other equity securities 700,678 700,678
Totals $ 47,620,722 $ 342,097 $ 76,687 $ 47,886,132
DECEMBER 31, 1997
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
</TABLE>
-38-
NOTE 4 - SECURITIES (CONTINUED)
The amortized cost and estimated fair value of debt securities held to
maturity and securities available for sale at December 31, 1998, 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.
<PAGE>
<TABLE>
<CAPTION>
Estimated
Amortized Fair
SECURITIES HELD TO MATURITY COST VALUE
<S> <C> <C>
Due in one year or less $ 2,016,365 $ 2,029,325
Due after one year through five years 5,078,132 5,167,710
Due after five years through ten years 6,973,865 7,148,862
Totals $ 14,068,362 $14,345,897
SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 1,998,234 $ 2,017,400
Due after one year through five years 16,910,216 17,055,070
Due after five years through ten years 12,998,154 13,031,900
Mortgage-backed securities 15,013,440 15,081,084
Totals $ 46,920,044 $47,185,454
</TABLE>
Securities with an approximate carrying value of $9,168,461 and
$8,352,470 at December 31, 1998 and 1997, respectively, were pledged
to secure public deposits, short-term borrowings, and for other
purposes required by law.
Proceeds from securities sales in 1998 were $1,533,300. Gross gains of
$35,867 were realized on those sales. 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.
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 $655,300 and
$602,000 of FHLB stock at December 31, 1998 and 1997.
-39-
<PAGE>
<TABLE>
NOTE 5 - LOANS
The composition of loans is as follows:
<CAPTION>
1998 1997
<S> <C> <C>
Commercial $ 40,513,628 $ 33,801,290
Real estate 98,259,990 102,953,287
Consumer 11,755,037 12,262,385
Subtotals 150,528,655 149,016,962
Allowance for loan losses (1,946,864) (1,845,064)
Net loans $ 148,581,791 $147,171,898
</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>
1998 1997
<S> <C> <C>
Loans outstanding, January 1 $ 7,792,986 $ 2,594,547
New loans 6,612,687 10,308,486
Repayment (9,367,162) (5,110,047)
Loans outstanding, December 31 $ 5,038,511 $ 7,792,986
</TABLE>
The allowance for loan losses includes specific allowances related to
commercial loans which have been judged to be impaired as defined by
current accounting standards. A loan is impaired when, based on
current information, it is probable that the Company will not collect
all amounts due in accordance with the contractual terms of the loan
agreement. These specific allowances are based on discounted cash
flows of expected future payments using the loan's initial effective
interest rate or the fair value of the collateral if the loan is
collateral dependent.
-40-
<PAGE>
<TABLE>
NOTE 5 - LOANS (CONTINUED)
An analysis of impaired loans follows:
<CAPTION>
AT DECEMBER 31, 1998 1997
<S> <C> <C> <C>
Nonaccrual $ 564,414 $ 484,290
Accruing income 406,000 639,827
Total impaired loans 970,414 1,124,117
Less - Allowance for loan losses 328,511 178,000
Net investment in impaired loans $ 641,903 $ 946,117
YEARS ENDED DECEMBER 31, 1998 1997 1996
Average recorded investment, net of
allowance for loan losses $ 819,630 $ 1,191,098 $ 304,400
Interest income recognized $ 39,569 $ 83,195 $ 23,001
</TABLE>
The allowance for loan losses (including impaired loans) 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>
1998 1997 1996
<S> <C> <C> <C>
Balance, January 1 $ 1,845,064 $ 1,924,686 $ 1,780,893
Provision charged to operating expense 300,000 230,000 180,000
Recoveries on loans 9,250 40,620 36,735
Loans charged off (207,450) (350,242) (72,942)
Balance, December 31 $ 1,946,864 $ 1,845,064 $ 1,924,686
</TABLE>
-41-
<PAGE>
<TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 627,345 $ 627,345
Buildings and improvements 3,455,946 3,163,710
Furniture and equipment 2,947,739 2,626,035
Total cost 7,031,030 6,417,090
Accumulated depreciation and amortization 3,145,044 2,670,658
Net book value $ 3,885,986 $ 3,746,432
</TABLE>
Depreciation and amortization charged to operating expenses amounted to
$493,934 in 1998, $436,933 in 1997, and $402,589 in 1996.
<TABLE>
NOTE 7 - DEPOSITS
At December 31, 1998, certificate and IRA accounts have scheduled maturity
dates as follows:
<CAPTION>
<S> <C>
1999 $ 87,320,600
2000 9,475,101
2001 1,443,230
2002 287,886
Thereafter 99,000
Total $ 98,625,817
</TABLE>
Certificate of deposit accounts with individual balances greater than
$100,000 totaled $24,688,356 and $23,045,981 at December 31, 1998 and
1997, respectively.
Deposits from Company directors, officers, and related parties at
December 31, 1998 and 1997 totaled $8,483,980 and $7,866,698,
respectively.
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under repurchase
agreements totaling $4,549,508 and $3,960,042 at December 31, 1998 and
1997, respectively. The book value of securities pledged under these
agreements totaled $4,801,348 and $6,297,038 at December 31, 1998 and
1997, respectively.
As a member of the FHLB system, the Company may draw on a line of
credit totaling $13,106,000. At December 31, 1998, the Company's
available and unused portion of this line of credit totaled
$7,106,000.
-42-
<PAGE>
<TABLE>
PSB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SHORT-TERM BORROWINGS (CONTINUED)
The following information relates to federal funds purchased and
securities sold under repurchase agreements for the years ended
December 31:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
As of end of year:
Weighted average rate 5.63% 6.14% 5.53%
For the year:
Highest month-end balance $ 5,220,455 $ 11,983,134 $ 15,503,184
Daily average balance 3,803,415 5,555,857 10,168,909
Weighted average rate 6.23% 6.18% 6.03%
</TABLE>
<TABLE>
NOTE 9 - LONG-TERM BORROWINGS
Long-term borrowings at December 31, consist of the following:
<CAPTION>
1998 1997
<S> <C> <C>
Note payable to the FHLB, monthly
interest payments only at 5.70%,
due April 5, 1999 $ 2,000,000 $ 2,000,000
Note payable to the FHLB, monthly
interest payments only at 5.90%,
due April 30, 1999 1,000,000 1,000,000
Note payable to FHLB, monthly interest
payments only at 5.07%,
due February 19, 2008 3,000,000
Totals $ 6,000,000 $ 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
$10,000,000 at December 31, 1998.
NOTE 10 - RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has established a 401(k) profit-sharing contribution
pension plan for its employees. The Company matches 50% of employees
' salary deferrals up to the first 4% of pay deferred. The Company also
may declare a discretionary profit-sharing contribution. The expense
recognized for contributions to the plan for the years ended December
31, 1998, 1997, and 1996 was $159,014, $143,940, and $30,442,
respectively.
<PAGE>
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% of the fees received during their final five
years as a director. Currently, five directors are eligible for
benefits. Details regarding the actuarial benefit obligation and
related disclosures are not available. The liability recognized in the
financial statements for this plan was $156,285 at December 31, 1998
and 1997. There was no provision for plan expense during 1998. The
plan expense totaled $46,000 and $40,000 for the years ended December
31, 1997 and 1996 respectively.
-43-
NOTE 10 - RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The Company also maintains an unfunded postretirement health care
benefit plan which covers the officers of the Company. After
retirement, the Company will pay between 25% and 50% of the health
insurance premiums for former Company officers. To qualify, an officer
must have at least 15 years of service, be employed by the Company at
retirement, and must be 62 years of age at retirement. The actual
amount paid is based upon years of service to the Company.
Effective January 1, 1997, the Company terminated its defined benefit
pension plan. The Company received regulatory approval to distribute
participants' vested defined benefit pension plan balances to
participants or into the Company's 401(k) profit-sharing plan. During
January 1998, the Company settled the defined benefit pension plan
obligation by transferring existing plan assets of $1,857,740, plus an
additional cash payment of $202,738 to qualified retirement plans or
directly to the plan participants.
<PAGE>
The following tables provide a reconciliation of changes in the
postretirement health care benefit plan and the defined benefit pension
plan obligations and the fair value of assets for the years ended
December 31, 1998 and 1997:
<TABLE>
Postretirement Health Defined Benefit
CARE BENEFIT PLAN PENSION PLAN
<CAPTION>
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Reconciliation of
benefit obligations:
Obligations at January 1 $ 136,179 $ 110,779 $ 1,666,759 $ 1,595,210
Service cost 11,176 7,778
Interest cost 16,658 14,233 9,723 110,308
Benefit payments (3,479) (4,007) (5,820) (15,691)
Net amortization of
prior service costs 7,396 7,396 (16,075) (23,068)
Loss on settlement of plan
due to applicable
benefit payout interest rates
at time of settlement 405,891
Liquidating distributions
to qualified
retirement plans (2,042,103)
Liquidating distributions
to plan participants (18,375)
Obligation at December 31 $ 167,930 $ 136,179 $ $ 1,666,759
Reconciliation of fair value
of plan assets:
Fair value of plan assets
at January 1 $ 1,855,500 $ 1,643,439
Return on plan assets, net of
administrative expenses 8,060 87,256
Employer contributions 140,496
Benefit payments (5,820) (15,691)
Liquidating distributions to
plan participations (1,857,740)
Fair value of plan assets
at December 31 $ $ 1,855,500
</TABLE>
-44-
<PAGE>
NOTE 10 - RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The following table provides the components of net periodic benefit
cost (income) of the plans for the years ended December 31, 1998, 1997,
and 1996:
<TABLE>
<CAPTION>
Postretirement Health Defined Benefit
CARE BENEFIT PLAN PENSION PLAN
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 11,176 $ 7,778 $ 7,235 $ $ $ 108,080
Interest cost 16,658 14,233 13,001 9,723 110,308 141,725
Return on plan assets (8,060) (87,256) (79,499)
Net amortization transition
and prior service costs 7,396 7,396 7,396 (16,075) (23,068) (9,345)
Net periodic pension cost
(income) 35,230 29,407 27,632 (14,412) (16) 160,961
Curtailment gain (1,332)
Settlement loss 405,891
Net periodic benefit cost
after curtailment and
settlement $ 35,230 $ 29,407 $ 27,632 $ 391,479 $ (16) $ 159,629
</TABLE>
The assumptions used in the measurement of the Company's benefit
obligations are shown in the following table:
<TABLE>
Postretirement Health Defined Benefit
CARE BENEFIT PLAN PENSION PLAN
<CAPTION>
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.50% 7.50% 7.50% N/A 7.00% 7.00%
Expected return on plan assets N/A N/A N/A N/A 5.79% 7.00%
Health care cost trend rate 7.25% 7.50% 7.50% N/A N/A N/A
Rate of compensation increases N/A N/A N/A N/A 0.00% 0.00%
</TABLE>
The health care cost trend rate is anticipated to be 7.5% in 1999,
grading down 0.25% per year to 5.0%.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care benefit plan. A 1% increase in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Effect on service and interest cost $ 5,681 $ 847 $ 778
Effect on accumulated benefit obligation at December 31 43,082 8,362 7,644
</TABLE>
<PAGE>
-45-
NOTE 11 -SELF-FUNDED HEALTH INSURANCE PLAN
The Company has established an employee medical benefit plan to
self-insure claims up to $10,000 per year for each individual with a
$129,730 stop-loss per year for participants in the aggregate. The
Company and its covered employees contribute to the fund to pay the
claims and stop-loss premiums. Medical benefit plan costs are expensed
as incurred. As of December 31, 1998, management believes claims
incurred but not yet reported that are not covered by the stop-loss are
insignificant. Health insurance expense recorded in 1998, 1997, and
1996 was $143,969. $126,237, and $105,114, respectively.
NOTE 12 - INCOME TAXES
<TABLE>
The components of the income tax provision are as follows:
<CAPTION>
1998 1997 1996
Current income tax provision:
<S> <C> <C> <C>
Federal $ 991,400 $ 965,900 $ 902,300
State 106,500 114,000 144,000
Total current 1,097,900 1,079,900 1,046,300
Deferred income tax benefit:
Federal (142,400) (85,900) (41,300)
State (27,500) (23,000) (11,000)
Total deferred (169,900) (108,900) (52,300)
Total provision for income taxes $ 928,000 $ 971,000 $ 994,000
</TABLE>
-46-
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:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 653,800 $ 613,600
Deferred compensation 69,300 69,300
State net operating loss 9,500 6,900
Post-retirement health care benefits 64,300 56,500
Employee pension plan 42,800
Other 2,600
Less - Valuation allowance (9,500) (6,900)
Gross deferred tax assets 832,800 739,400
Deferred tax liabilities:
Unrealized gain on securities available for sale 92,992 56,747
Premises and equipment 155,000 151,300
Employee pension plan 80,200
Gross deferred tax liabilities 247,992 288,247
Net deferred tax assets $ 584,808 $ 451,153
</TABLE>
The Company, and its subsidiary, pay state taxes on individual,
unconsolidated net earnings. At December 31, 1998, tax net operating
losses at the parent company of approximately $181,000 existed to
offset future state taxable income. These net operating losses will
begin to expire in 2012. The valuation allowance has been recognized
to adjust deferred tax assets to the amount of tax net operating losses
expected to be realized. If realized, the tax benefit for this item
will reduce current tax expense for that period.
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:
<TABLE>
<CAPTION>
1998 1997 1996
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 $ 1,026,000 34.0% $ 1,045,000 34.0% $ 1,071,200 34.0%
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (194,000) (6.4) (174,500) (5.7) (169,200) (5.4)
State income tax 52,000 1.7 60,000 2.0 88,000 2.8
Other 44,000 1.5 40,500 1.3 4,000 .1
Provision for income taxes $ 928,000 30.8% $ 971,000 31.6% $ 994,000 31.5%
</TABLE>
-47-
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 24,726
2000 25,540
2001 26,389
2002 27,252
2003 2,277
Total $ 106,184
</TABLE>
Rental expense for all operating leases was $32,462, $12,735, and
$10,926 for the years ended December 31, 1998, 1997, and 1996,
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.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies
in making commitments and conditional obligations as it does for
on-balance sheet instruments. These commitments at December 31 are
as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commitments to extend credit $ 18,775,078 $ 17,678,590
Letters of credit 1,470,887 924,841
Credit card commitments 2,278,144 2,388,240
Totals $ 22,524,109 $ 20,991,671
</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 creditworthiness on a case-by-case basis. The amount
<PAGE>
of collateral obtained, if deemed necessary upon extension of credit,
is based on management's credit evaluation of the party. Collateral
held varies but may include accounts receivable, inventory, property,
plant, and equipment, and income-producing commercial properties.
-48-
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% 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, Marathon County, and
Rhinelander, Wisconsin in Oneida County. There are no significant
concentrations of credit to any one debtor or industry group. It is
felt that the diversity of the local economy will prevent significant
losses in the event of an economic downturn.
CONTINGENCIES
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management, any liability
resulting from such proceedings would not have a material adverse
effect on the consolidated financial statements.
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, 1998,
none of the approximately $474,000 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
<PAGE>
bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
-49-
NOTE 16 - CAPITAL REQUIREMENTS (CONTINUED)
As of December 31, 1998 and 1997, 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.
<PAGE>
<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, 1998:
Total capital (to risk
weighted assets):
Consolidated $ 22,304,000 14.5% $ 12,303,000 8.0% N/A
Subsidiary bank $ 22,059,000 14.4% $ 12,284,000 8.0% $ 15,355,000 10.0%
Tier I capital (to risk
weighted assets):
Consolidated $ 20,384,000 13.3% $ 6,152,000 4.0% N/A
Subsidiary bank $ 20,139,000 13.1% $ 6,142,000 4.0% $ 9,213,000 6.0%
Tier I capital (to average
assets):
Consolidated $ 20,384,000 8.9% $ 9,126,000 4.0% N/A
Subsidiary bank $ 20,139,000 8.8% $ 9,117,000 4.0% $ 11,396,000 5.0%
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%
</TABLE>
-50-
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, 1998, the retained
earnings of the subsidiary available for distribution as dividends
without regulatory approval was approximately $7,919,000.
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. The fair value estimates, methods, and
assumptions regarding the Company's financial instruments are shown
below.
<PAGE>
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial statements:
Cash and Short-term Investments: The carrying amounts reported
in the balance sheets for cash and due from banks, interest-bearing
deposits and money market funds, and federal funds sold approximate the
fair value of these assets.
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.
-51-
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
Carrying Estimated Carrying Estimated
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments $ 13,426,756 $ 13,426,756 $ 10,775,998 $ 10,775,998
Investment securities 61,954,494 62,232,029 50,128,473 50,283,218
Net loans 151,702,241 152,613,525 147,437,398 147,309,558
Financial liabilities:
Deposits 199,799,897 200,190,127 186,602,705 186,951,870
Short-term borrowings 4,549,508 4,549,508 3,960,042 3,960,042
Long-term borrowings 6,000,000 6,008,439 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.
-52-
<PAGE>
NOTE 19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets as of December 31, 1998 and
1997, and condensed statements of income and cash flows for the years
ended December 31, 1998, 1997, and 1996 for PSB Holdings, Inc. should
be read in conjunction with the consolidated financial statements and
footnotes.
<TABLE>
BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
ASSETS
1998 1997
<S> <C> <C>
Cash and due from banks $ 725,715 $ 535,485
Investment in subsidiary 20,311,399 19,082,913
Other assets 47,482 97,001
Total assets $ 21,084,596 $ 19,715,399
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued dividends payable $ 528,381 $ 498,224
Total stockholders' equity 20,556,215 19,217,175
Total liabilities and stockholders' equity $ 21,084,596 $ 19,715,399
</TABLE>
-53-
<PAGE>
<TABLE>
NOTE 19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income:
Dividends from subsidiary $ 967,000 $ 1,311,000 $ 1,157,800
Interest 2,383 2,893 11
Total income 969,383 1,313,893 1,157,811
Expenses:
Interest 6,782 5,919
Other 54,418 58,360 59,923
Total expenses 54,418 65,142 65,842
Income before income taxes and equity in
undistributed net income of subsidiary 914,965 1,248,751 1,091,969
Income tax benefit 17,000 20,000 21,000
Net income before equity in undistributed
net income of subsidiary 931,965 1,268,751 1,112,969
Equity in undistributed net income of
subsidiary 1,156,612 833,958 1,043,628
Net income $ 2,088,577 $ 2,102,709 $ 2,156,597
</TABLE>
-54-
<PAGE>
<TABLE>
NOTE 19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
(CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,088,577 $ 2,102,709 $ 2,156,597
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net income of subsidiary (2,123,612) (2,144,958) (2,201,428)
Net amortization 21,517 21,517 21,518
(Increase) decrease in other assets 28,002 (20,003) (21,000)
Increase in other liabilities 30,157 19,393 8,020
Net cash provided by (used in) operating activities 44,641 (21,342) (36,293)
Cash flows from investing activities -
Dividends received from subsidiary 967,000 1,311,000 1,157,800
Cash flows from financing activities:
Dividends paid (821,411) (795,944) (763,421)
Purchase of treasury stock (487,600) (315,000)
Net cash used in financing activities (821,411) (1,283,544) (1,078,421)
Net increase in cash and due from banks 190,230 6,114 43,086
Cash and due from banks at beginning 535,485 529,371 486,285
Cash and due from banks at end $ 725,715 $ 535,485 $ 529,371
</TABLE>
-55-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
-56-
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 through 4, of
the Company's proxy statement dated March 31, 1999 (the "1999 Proxy
Statement"). Information relating to executive officers is found in
Part I of this Form 10-K, page 5. Information required under Rule 405
of Regulation S-K is incorporated into this Form 10-K by this reference
to the material set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" on page 6 of the 1999 Proxy Statement.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to director compensation is incorporated into
this Form 10-K by this reference to the 1999 Proxy Statement under the
subcaption "Compensation of Directors," page 5. Information relating
to the compensation of executive officers is incorporated into this
Form 10-K by this reference to 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 7 and
8, in the 1998 Proxy Statement, including the material set forth under
the subcaption "Compensation Committee and Board Interlocks and Insider
Participation," page 8.
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.
-57-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) Documents filed as part of this report.
(1) The financial statements filed as part of this report are set
forth on pages 28-55 herein.
(2) No financial statement schedules are required by Item 14(d).
(3) Exhibits.
The following exhibits required by Item 601 of Regulation S-K are
filed with the Securities and Exchange Commission as part of this
report.
Exhibit
NUMBER DESCRIPTION
3.1 Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 4(a) to the
Company's Current Report on Form 8-K dated May 30, 1995)
3.2 Bylaws (incorporated by reference to Exhibit 4(b) to the
Company's Current Report on Form 8-K dated May 30, 1995)
4.1 Articles of Incorporation and Bylaws (see Exhibits 3.1
and 3.2)
10.1 Bonus Plan of Directors of the Bank (incorporated by
reference to Exhibit 10(a) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31,
1995)*
10.2 Bonus Plan of Officers and Employees of the Bank*
(incorporated by reference to Exhibit 10(b) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995)*
10.3 Non-Qualified Retirement Plan for Directors of the Bank
(incorporated by reference to Exhibit 10(c) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995)*
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 22 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995)
27.1 Financial Data Schedule
*Denotes Executive Compensation Plans and Arrangements.
-58-
<PAGE>
(b) Reports on Form 8-K. One Form 8-K dated October 9, 1998 was filed
by the Company during the fourth quarter of 1998 for the purpose of
providing Year 2000 disclosure. No financial statements were filed
in connection with the report.
-59-
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, 1999
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, 1999.
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 GORDON P. CONNOR
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 WILLIAM M. REIF
Thomas A. Riiser William M. Reif
EUGENE WITTER
Eugene Witter
-60-
<PAGE>
EXHIBIT INDEX<dagger>
TO
FORM 10-K
OF
PSB HOLDINGS, INC.
FOR THE PERIOD ENDED DECEMBER 31, 1998
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. <section>232.102(d))
EXHIBIT 27.1 - 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,752
<INT-BEARING-DEPOSITS> 741
<FED-FUNDS-SOLD> 3,934
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,886
<INVESTMENTS-CARRYING> 14,068
<INVESTMENTS-MARKET> 14,346
<LOANS> 153,649
<ALLOWANCE> 1,947
<TOTAL-ASSETS> 233,491
<DEPOSITS> 199,800
<SHORT-TERM> 4,550
<LIABILITIES-OTHER> 2,586
<LONG-TERM> 6,000
0
0
<COMMON> 1,805
<OTHER-SE> 18,751
<TOTAL-LIABILITIES-AND-EQUITY> 233,491
<INTEREST-LOAN> 13,404
<INTEREST-INVEST> 3,020
<INTEREST-OTHER> 323
<INTEREST-TOTAL> 16,746
<INTEREST-DEPOSIT> 8,176
<INTEREST-EXPENSE> 8,722
<INTEREST-INCOME-NET> 8,025
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 36
<EXPENSE-OTHER> 6,115
<INCOME-PRETAX> 3,017
<INCOME-PRE-EXTRAORDINARY> 3,017
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,089
<EPS-PRIMARY> 2.36
<EPS-DILUTED> 2.36
<YIELD-ACTUAL> 4.21
<LOANS-NON> 582
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,345
<ALLOWANCE-OPEN> 1,845
<CHARGE-OFFS> 207
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 1,947
<ALLOWANCE-DOMESTIC> 1,947
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
