FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ................ to .........................
Commission file number: 0-26480
PSB HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1804877
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1905 W. Stewart Avenue
Wausau, Wisconsin 54401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (715) 842-2191
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
As of March 22, 2002, 839,416 shares of common stock were outstanding and the
total aggregate market value of the common stock held by nonaffiliates of the
Registrant was approximately $26,159,000.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 29, 2002 (to the extent specified herein): Part III
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FORM 10-K
PSB HOLDINGS, INC.
TABLE OF CONTENTS
PART I
ITEM
1. Business 3
2. Properties 8
3. Legal proceedings 8
4. Submission of matters to a vote of security holders 8
PART II
5. Market for registrant's common equity and related stockholder
matters 9
6. Selected financial data 10
7. Management's discussion and analysis of financial condition
and results of operations 11
7A. Quantitative and qualitative disclosures about market risk 36
8. Financial statements and supplementary data 36
9. Changes in and disagreements with accountants on accounting
and financial disclosure 36
PART III
10. Directors and executive officers of the registrant 37
11. Executive compensation 37
12. Security ownership of certain beneficial owners and
management 37
13. Certain relationships and related transactions 37
PART IV
14. Exhibits, financial statement schedules, and reports on Form
8-K 38
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PART I
ITEM 1. BUSINESS.
PSB HOLDINGS, INC.
PSB Holdings, Inc., a Wisconsin corporation (the "Company"), was formed
in 1995. The Company is a one-bank holding company regulated by the
Board of Governors of the Federal Reserve System (the "Board") under the
authority of the Bank Holding Company Act of 1956, as amended (the
"BHCA"). The Company's sole business is the ownership and management of
Peoples State Bank (the "Bank"). Except as may otherwise be noted, this
Annual Report on Form 10-K describes the business of the Company and the
Bank as in effect on December 31, 2001.
ACQUISITIONS
The Company intends to pursue opportunities to acquire additional bank
subsidiaries or banking offices so that, at any time, it may be engaged
in some tentative or preliminary discussions for such purposes with
officers, directors or principal shareholders of other holding companies
or banks. There are no plans, understandings, or arrangements, written
or oral, regarding other acquisitions as of the date hereof.
THE BANK
GENERAL
The Bank was organized as a state banking corporation under the laws of
the state of Wisconsin in August, 1962. The Bank's principal office is
located at 1905 West Stewart Avenue, Wausau, Wisconsin, 54401. The
Bank's principal branch offices are located in the communities of
Wausau, Rib Mountain, Marathon, Rhinelander and Eagle River, Wisconsin.
The Bank provides various commercial and consumer banking services for
customers located principally in Marathon, Lincoln, Oneida and Vilas
Counties, Wisconsin.
The Bank is engaged in general commercial and retail banking. The Bank
serves individuals, businesses, and governmental units and offers most
forms of commercial and consumer lending, including lines of credit,
secured and unsecured term loans, real estate financing and mortgage
lending. In addition, the Bank provides a full range of personal
banking services, including checking accounts, savings and time
accounts, installment and other personal loans, as well as mortgage
loans. The Bank offers automated teller machines and online computer
banking to its customers to expand its services to customers on a 24-
hour basis. New services are frequently added to the Bank's retail
banking departments.
The Bank offers discount brokerage services at its Wausau branch
location, including the sale of annuities, mutual funds and other
investments to Bank customers and the general public. The Bank
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maintains an investment subsidiary in Nevada to manage, hold and trade
cash, securities, and loans.
PRINCIPAL SOURCES OF REVENUE
The table below shows the amount and percentages of the Bank's total
consolidated operating revenues resulting from interest on loans and
leases and interest on investment securities for each of the last three
years:
Interest on loans Interest on securities
% of total % of total
operating operating
(dollars in thousands) AMOUNT REVENUE AMOUNT REVENUE
Year ended December 31,
2001 $ 19,263 75.6% $ 3,641 14.3%
2000 18,260 78.1% 3,485 14.9%
1999 14,065 74.3% 3,471 18.3%
BANK MARKET AREA AND COMPETITION
There is a mix of retail, manufacturing, agricultural and service
businesses in the area served by the Bank. The Bank has substantial
competition in its market area. Much of this competition comes from
companies which are larger and have greater resources than the Company.
The Bank competes for deposits and other sources of funds with other
banks, savings associations, credit unions, finance companies, mutual
funds, life insurance companies and other financial and non-financial
companies. Many of these nonbank competitors offer products and
services which are functionally equivalent to the products and services
offered by the Bank.
Recent changes in banking laws have had a significant effect on the
competitive environment in which the Bank operates and are likely to
continue to increase competition for the Bank. For example, current
federal law permits adequately capitalized and managed bank holding
companies to engage in interstate banking on a much broader scale than
in the past. Banks are also permitted to create interstate branching
networks in states which do not "opt out" of the new laws. The Gramm-
Leach-Bliley Act of 1999 has also increased the competitive environment
for the Bank. Under this act, financial holding companies are now
permitted to conduct a broad range of banking, insurance and securities
activities. The Company believes that the combined effects of more
interstate banking and the development of greater "one-stop"
availability for banking, insurance and securities services will both
increase the overall level of competition and attract competitors with
which the Bank may not now compete for its customers.
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In addition to competition, the business of the Bank will be affected by
general economic conditions, including the level of interest rates and
the monetary policies of the Board (see "Regulation and Supervision -
Monetary Policy").
EMPLOYEES
The Company has no employees. Officers of the Company serve as full
time employees of the Bank.
As of March 15, 2002, the Bank had 100 full-time equivalent employees,
including 24 employed on a part-time basis. None of the Bank's
employees is covered by a collective bargaining agreement.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 19, 2002, their ages
and principal occupations during the last five years are set forth
below.
David K. Kopperud, 56 - President of the Company and the Bank since
July, 1999; previously Executive Vice President of the Bank (1994-1999).
David A. Svacina, 55 - Vice-President of the Company since March, 2002;
Vice President of the Bank.
Todd R. Toppen, 43 - Secretary of the Company since March 2002;
Treasurer of the Company (1995- March 2002); Vice President of the Bank.
Scott M. Cattanach, 33 - Treasurer of the Company since March 2002;
Chief Financial Officer of the Bank since March 2002. Prior to March
2002, certified public accountant at regional public accounting firm.
REGULATION AND SUPERVISION
REGULATION
The Company and the Bank are subject to regulation under both federal
and state law. The Company is a registered bank holding company and is
subject to regulation and examination by the Board pursuant to the BHCA.
The Bank is subject to regulation and examination by the Federal Deposit
Insurance Corporation ("FDIC") and, as a Wisconsin chartered bank, by
the Wisconsin Department of Financial Institutions.
The Board expects a bank holding company to be a source of strength for
its subsidiary banks. As such, the Company may be required to take
certain actions or commit certain resources to the Bank when it might
otherwise choose not to do so. Under federal and state banking laws,
the Company and the Bank are also subject to regulations which
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govern the Company's and the Bank's capital adequacy, loans and loan policies
(including the extension of credit to affiliates), deposits, payment of
dividends, establishment of branch offices, mergers and other
acquisitions, investments in or the conduct of other lines of business,
management personnel, interlocking directorates and other aspects of the
operation of the Company and the Bank. Bank regulators having
jurisdiction over the Company and the Bank generally have the authority
to impose civil fines or penalties and to impose regulatory sanctions
for noncompliance with applicable banking regulations and policies. In
particular, the FDIC has broad authority to take corrective action if
the Bank fails to maintain required minimum capital. Information
concerning the Company's compliance with applicable capital requirements
is set forth in Note 18 of the Notes to Consolidated Financial
Statements.
Banking laws and regulations have undergone periodic revisions that
often have a direct or indirect effect on the Bank's operations and its
competitive environment. From time to time various formal or informal
proposals, including new legislation, relating to, among other things,
changes with respect to deposit insurance, permitted bank activities and
restructuring of the federal regulatory scheme have been made and may be
made in the future. The Gramm-Leach-Bliley Act of 1999, which
eliminated many of the barriers to affiliation among banks, insurance
companies and other securities or financial services companies, is an
example of legislation which may, and often does, materially affect the
operation of the Company's business. Depending on the scope and timing
of future regulatory changes, it is likely they will affect the
competitive environment in which the Company operates or increase costs
of regulatory compliance and, accordingly, may have a material adverse
effect on the Company's consolidated financial condition, liquidity or
results of operations.
MONETARY POLICY
The earnings and growth of the Bank, and therefore the Company, are
affected by the monetary and fiscal policies of the federal government
and governmental agencies. The Board has a direct and indirect
influence on the costs of funds used by the Bank for lending and its
actions have a substantial effect on interest rates, the general
availability of credit and the economy as a whole. These policies
therefore affect the growth of bank loans and deposits and the rates
charged for loans and paid for deposits. Governmental and Board
monetary policies have had a significant effect on the operating results
of commercial banks in the past and are expected to do so in the future.
The Company is not able to anticipate the future impact of such policies
and practices on the growth or profitability of the Company.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
In addition, certain statements in future filings by the Company with
the Securities and Exchange Commission, reports to shareholders, press
releases, and in other oral and written statements made by or with the
approval of the Company which are not statements of historical fact will
constitute forward-looking statements within the meaning of the Reform
Act.
Examples of forward-looking statements include, but are not limited to:
(1) expectations concerning financial performance of the Company, (2)
expectations concerning the payment of dividends, (3) statements of
plans and objectives of the Company, (4) statements of future economic
performance and (5) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects,"
"intends," "targeted" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of
identifying such statements. In making forward-looking statements
within the meaning of the Reform Act, the Company undertakes no
obligation to publicly update or revise any such statement.
Forward-looking statements of the Company are based on information
available to the Company as of the date of such statements and reflect
the Company's expectations as of such date, but are subject to risks and
uncertainties that may cause actual results to vary materially. In
addition to specific factors which may be described in connection with
any of the Company's forward-looking statements, factors which could
cause actual results to differ materially from those discussed in the
forward-looking statements include, but are not limited to the
following:
(1) the strength of the U.S. economy in general and the strength of
the local economies in the markets served by the Bank;
(2) the effects of and changes in government policies, including
interest rate policies of the Board;
(3) inflation, interest rate, market and monetary fluctuations;
(4) the timely development of and acceptance of new products and
services;
(5) changes in consumer spending, borrowing and saving habits;
(6) increased competition in the Company's principal market area;
(7) technological changes;
(8) acquisitions and the inability to successfully integrate acquired
institutions or branches into current operations;
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(9) the effect of changes in laws and regulations which increase
operating costs or increase competition;
(10) the effect of changes in accounting policies and practices; and
(11) the costs and effects of litigation and of unexpected or adverse
outcomes in such litigation.
ITEM 2. PROPERTIES.
The Company's operations are carried out at the Bank's administrative
office facility at 1905 West Stewart Avenue, Wausau, Wisconsin. The
Company does not maintain any separate offices.
The Bank operates a total of six office locations. The Bank owns four
of the buildings in which it conducts operations and each building is
occupied solely by the Bank. All four buildings are designed for
commercial banking operations and are suitable for current operations.
The Rhinelander and Eagle River branches occupy leased space within
supermarkets which are designed for commercial banking operations. A
new Rhinelander facility is under construction and will open in 2002.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 2001, the Company was not involved in any legal
proceedings, nor was it aware of any threatened litigation.
In the ordinary course of its business, the Bank is or may be engaged
from time to time in legal actions as both a plaintiff and a defendant.
In some cases, claims for significant compensatory or punitive damages,
or unspecified damages, may be made against the Bank. As of the date of
this report, the Bank was not a party to any legal or administrative
proceedings which, in the opinion of Company management, would have a
material adverse effect on the operations, liquidity or consolidated
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 2001.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET
There is no active established public trading market in the Company
common stock. Bid and ask prices are quoted by one regional broker-
dealer on the OTC Bulletin Board under the symbol "PSBQ.OB."
Transactions in the Company common stock are limited and sporadic.
On January 10, 2000, the Board of Directors authorized the Company to
repurchase up to 45,000 shares of its issued and outstanding common
stock. As of March 22, 2002, the Company had repurchased all shares
covered by that authorization. As of December 31, 2001, and March 12,
2002, there were 839,705 shares and 839,416 shares of the Company's
common stock outstanding, respectively.
HOLDERS
As of December 31, 2001 there were approximately 970 holders of record
of the Company's common stock. Some of the Company's shares are held in
"street" name and the number of beneficial owners of such shares is not
known nor included in the foregoing number.
DIVIDENDS
The Company's bylaws provide that, subject to the provisions of
applicable law, the Board of Directors may declare dividends from
unreserved and unrestricted earned surplus, at such times and in such
amounts as the board shall deem advisable.
The Company's ability to pay dividends depends upon the receipt of
dividends from the Bank. Payment of Bank dividends is subject to
various limitations under banking laws and regulations. At December 31,
2001, the Bank could have paid approximately $6.8 million in additional
dividends to the Company without prior regulatory approval. The
declaration of dividends by the Company is discretionary and will depend
upon operating results and financial condition, regulatory limitations,
tax considerations and other factors. The Company has paid regular
dividends since its inception in 1995.
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MARKET PRICES AND DIVIDENDS
Price ranges of over-the-counter quotations and dividends declared per
share on the Company common stock for the periods indicated are:
2001 PRICES 2000 PRICES
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
1st $29.50 $27.00 $ - $34.00 $34.00 $ -
2nd $40.00 $29.00 $0.38 $34.00 $33.75 $0.38
3rd $31.75 $29.00 $ - $34.00 $29.00 $ -
4th $33.40 $30.75 $0.70 $33.00 $28.00 $0.65
Prices detailed for the common stock represent the bid prices reported
on the OTC Bulletin Board. The prices do not reflect retail mark-up,
mark-down or commissions, and may not necessarily represent actual
transactions. There is no active established trading market. The
common stock was first quoted on the OTC Bulletin Board during January
2000.
ITEM 6. SELECTED FINANCIAL DATA
Table 1: Earnings Summary and Selected Financial Data
2001 2000 1999 1998 1997
CONSOLIDATED SUMMARY OF EARNINGS: (dollars in thousands, except per share data)
Years ended December 31,
Total interest income $ 23,428 $ 21,940 $ 17,671 $ 16,746 $ 15,744
Total interest expense 12,468 12,540 8,598 8,722 8,253
Net interest income 10,960 9,400 9,073 8,024 7,491
Provision for loan losses 890 600 460 300 230
Net interest income
after provision for loan losses 10,070 8,800 8,613 7,724 7,261
Total noninterest income 2,065 1,446 1,265 1,408 745
Total noninterest expenses 7,316 6,474 6,221 6,115 4,932
Provision for income taxes 1,453 1,102 1,068 928 971
Net income $ 3,366 $ 2,670 $ 2,589 $ 2,089 $ 2,103
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CONSOLIDATED SUMMARY BALANCE SHEETS:
As of December 31, 2001 2000 1999 1998 1997
Total assets $ 344,296 $ 306,239 $259,889 $ 233,491 $ 215,019
Total loans receivable,
net of loan loss allowances 236,574 224,702 180,524 148,582 147,172
Total deposits 273,635 241,534 202,354 199,800 186,603
Short-term borrowings 4,327 11,515 21,215 4,549 3,960
Long-term borrowings 38,000 28,000 13,000 6,000 3,000
Stockholders' equity 25,349 22,274 21,046 20,556 19,217
PERFORMANCE RATIOS:
Basic and diluted earnings per share $ 4.01 $ 3.11 $ 2.93 $ 2.36 $ 2.37
Common dividends declared per share $ 1.08 $ 1.03 $ 1.00 $ 0.93 $ 0.90
Return on average stockholders' equity 13.96% 12.33% 12.31% 10.62% 11.15%
Return on average assets 1.05% 0.94% 1.08% 0.96% 1.02%
Dividend payout ratio 26.94% 32.64% 34.12% 39.33% 37.85%
Average equity to average assets 7.53% 7.63% 8.75% 9.06% 9.15%
Net book value per share at year-end $ 30.19 $ 26.53 $ 23.83 $ 23.27 $ 21.76
Net loan charge-offs to average loans 0.14% 0.14% 0.19% 0.13% 0.22%
Allowance for loan losses to loans
at year-end 1.24% 1.06% 1.15% 1.27% 1.24%
Average common shares outstanding 839,705 858,286 883,235 883,235 887,988
Shareholders of record at year-end 970 980 990 975 974
FTE employees at year-end 100 86 91 87 78
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis reviews significant
factors with respect to the Company's financial condition and results of
operations at and for the three-year period ended December 31, 2001.
This discussion should be read in conjunction with the consolidated
financial statements, notes, tables, and the selected financial data
presented elsewhere in this report. All figures are in thousands,
except per share data.
Management's discussion and analysis contains forward-looking statements
that are provided to assist in the understanding of anticipated future
financial performance. However, such performance involves risks and
uncertainties that may cause actual results to differ materially from
those in such statements. For a discussion of certain factors that may
cause such forward-looking statements to differ materially from actual
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results see Item 1, Cautionary Statement Regarding Forward-Looking
Information, in this Annual Report on Form 10-K for the year ended
December 31, 2001.
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
The Company's consolidated net income for 2001 was $3,366, an increase
of $696 or 26.1% higher than 2000. Basic and diluted earnings per share
for 2001 were $4.01, a 28.9% increase over 2000 basic and diluted
earnings per share of $3.11. Return on average common stockholders'
equity and return on average assets were 13.96% and 1.05% for 2001
compared to 12.33% and .94% for 2000. Cash dividends paid in 2001
increased by 4.9% to $1.08 per share over the $1.03 per share paid in
2000. Current year profits were significantly impacted by the following
factors:
Taxable equivalent net interest income grew $1,665, or 17.1% from $9,732
in 2000 to $11,397 in 2001. Taxable equivalent interest income was
$23,865 for 2001, $1,593 or 7.2% higher than 2000. However, interest
expense decreased by $72. Increases in volume and changes in product
mix added $1,703 to taxable equivalent net interest income, whereas
changes in the rate environment of 2001 resulted in a $38 decrease.
The allowance for loan losses increased $562 from $2,407 in 2000 to
$2,969 in 2001. Net loan charge-offs increased $37 from $292 in 2000 to
$329 in 2001 and were .14% of average loans outstanding in both 2001 and
2000. The ratio of allowance for loan losses to loans increased to
1.24% from 1.06% due to additional provisions to the allowance for loan
losses beyond that needed for new loan growth. Provision for loan
losses grew $290, from $600 in 2000 to $890 in 2001.
Noninterest income was $2,065 for 2001, $619 or 42.8% higher than 2000.
The primary reason for the increase was additional income from the sale
of long-term fixed rate secondary market loans. Gain on sale of such
loans was $683 in 2001 compared to $66 in 2000. Separate from this
activity, noninterest income increased $2 during 2001.
Noninterest expense was $7,316 in 2001, $842 or 13.0% higher than 2000.
Salaries and employee benefits increased $578, while data processing and
office operations increased $63, and advertising and promotion increased
$96. Separate from these activities, noninterest expense increased $105
during 2001.
2000 COMPARED TO 1999
The Company's consolidated net income for 2000 was $2,670 compared with
$2,588 in 1999. Net income increased 3.1% in 2000 from 1999. Return on
average common stockholders' equity was 12.33% in 2000 compared to
12.31% in 1999. Return on average assets for 2000 was .94% compared to
1.08% for 1999.
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Net income per share amounted to $3.11 in 2000, compared to $2.93 in
1999. Cash dividends declared in 2000 was $1.03 per share, compared to
$1.00 in 1999. The per share ratio of dividends to shareholders to net
income was 32.64% in 2000, compared to 34.12% in 1999.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest-
rate risk inherent in its lending and deposit taking activities.
Management actively monitors and manages its interest-rate risk
exposure. The measurement of the market risk associated with financial
instruments is meaningful only when all related and offsetting on- and
off-balance sheet transactions are aggregated, and the resulting net
positions are identified. Disclosures about the fair value of financial
instruments that reflect changes in market prices and rates can be found
in footnote 20 on the Notes to the Financial Statements.
The Company's primary objective in managing interest-rate risk is to
minimize the adverse impact of changes in interest rates on the
Company's net interest income and capital, while adjusting the Company's
asset-liability structure to obtain the maximum yield-cost spread on
that structure. The Company relies primarily on its asset-liability
structure to control interest-rate risk.
However, a sudden and substantial change in interest rates may adversely
impact the Company's earnings, to the extent that the interest rates
borne by assets and liabilities do not change at the same speed, to the
same extent, or on the same basis. The Company does not engage in
trading activities.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income represents the difference between interest earned on
loans, securities and other interest-earning assets, and the interest
expense associated with the deposits and borrowings that fund them.
Interest rate fluctuations together with changes in volume and types of
earning assets and interest-bearing liabilities combine to affect total
net interest income. Additionally, net interest income is impacted by
the sensitivity of the balance sheet to change in interest rates,
contractual maturities, and repricing frequencies.
2001 COMPARED TO 2000
Fully taxable equivalent net interest income was $11,397 for 2001, an
increase of $1,665 or 17.1% from 2000. The increase in fully taxable
equivalent net interest income was due primarily to an increase in
earning assets of 13.5% during 2001. To a lesser extent, taxable
equivalent net interest income increased due to an increased interest
rate spread caused by a liability sensitive repricing gap during 2001's
falling interest rate environment.
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As indicated in tables 2 and 3, increases in volume and changes in the
mix of both earning assets and interest bearing liabilities added $1,703
to fully taxable equivalent net interest income, and the changes in the
interest rates resulted in a $38 decrease, for a net increase of $1,665.
The net interest margin and interest rate spread improved to 3.73% and
3.02% compared to 3.62% and 2.83% in 2000.
For 2001, the yield on earning assets decreased 47 basis points,
decreasing interest income by $1,654 while the cost of interest bearing
liabilities decreased 66 basis points, decreasing interest expense by
$1,616 for a net decrease of $38 in fully taxable equivalent net
interest income as a result in changes in interest rates. The decrease
in net interest margin was impacted by the interest rate environment of
2001 causing the liability sensitive balance sheet of the Company to
reprice at the declining interest rates. However, the Company had a
substantial portion of earning assets in liquid and overnight funds
which earned interest at currently declining interest rates despite
maintaining a liability sensitive balance sheet.
The growth and composition change of earning assets contributed an
additional $3,247 to fully taxable equivalent net interest income, while
the growth and composition of interest bearing liabilities cost an
additional $1,544, netting a $1,703 increase in fully taxable equivalent
net interest income.
Average earning assets were $305,499 in 2001, an increase of $36,429 or
13.5%, from 2000. Average interest bearing liabilities increased
$30,596, or 13.3% from 2000. The composition of interest bearing
liabilities shifted from higher cost short-term borrowings to more core
deposit lower interest rate products and fixed rate long term
borrowings. Total borrowings were $44,178 on average for 2001, up
$5,212 or 13.4%. Total interest bearing deposits cost 4.52% on average
for 2001 (77 basis points less than last year), while wholesale
borrowings cost 6.11% (14 basis points less than last year).
2000 COMPARED TO 1999
The 2000 figures as a percent of average earning assets reflect an
increase in interest rates during 2000. Loans are the largest component
of earning assets. On average, loans grew $43,598 to $207,527 for 2000,
and represented 77.13% of earning assets. A change in the total yield
on the loan portfolio generally has the largest impact on net interest
income. The yield on total loans increased 23 basis points to 8.81% in
2000. The yield was strongly impacted by the loans tied to the prime
lending rate repricing immediately with a change in the rate. The prime
rate increased 1.0% during 2000 from 6.5% to 7.5%.
Deposits are the largest component of interest bearing liabilities.
Deposit growth has not kept pace with asset growth, in part because of a
low rate of personal savings by households and competition for depositor
funds from higher-yielding investments. On average, total deposits grew
$22,636 for 2000, and represented 83.05% of interest bearing
liabilities, compared to 89.92% for 1999. As a result, the Bank had
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greater dependence on wholesale funds to fund the asset growth. On
average, borrowed funds increased $20,137 to $38,966 in 2000.
During 2000 the gross yield on interest earning assets increased 32
basis points. The average rate on taxable investment securities
increased 12 basis points in 2000 to 6.20%, up from 6.08% in 1999. Time
deposits rates increased by 66 basis points while funds shifted into the
more liquid Money Market deposit accounts, which the Company continued
to promote throughout 2000 in an effort to retain deposits to support
loan demand. The average rate on all interest bearing liabilities
increased by 85 basis points in 2000 to 5.45% up from 4.60% in 1999.
The table on the following page sets forth average consolidated balance
sheet data and average rate data on a tax equivalent basis for the
periods, indicated.
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Table 2: Average Balances and Interest Rates
(dollars in thousands) 2001 2000 1999
Average Yield/ Average Yield/ Average Yield/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
Assets
Interest earning assets:
Loans (1)(2)(3) $ 226,819 $ 19,301 8.51% $ 207,527 $ 18,283 8.81% $ 163,929 $14,065 8.58%
Taxable securities 48,272 2,866 5.94% 46,568 2,889 6.20% 46,406 2,821 6.08%
Tax-exempt securities (2) 17,191 1,174 6.83% 13,074 905 6.92% 14,251 985 6.91%
Other interest income 13,217 524 3.96% 1,901 195 10.26% 1,496 135 9.02%
Total (2) 305,499 23,865 7.81% 269,070 22,272 8.28% 226,082 18,006 7.96%
Non-interest earning assets:
Cash and due from banks 9,223 8,467 8,694
Premises and equipment,
Net 4,557 4,352 3,892
Other assets 3,447 4,178 3,843
Allowance for loan
Losses (2,642) (2,280) (2,085)
Total $ 320,084 $ 283,787 $ 240,426
Liabilities &
stockholders' equity
Interest bearing
liabilities:
Savings and demand
Deposits $ 101,238 $ 3,261 3.22% $ 86,926 $ 3,972 4.57% $ 74,835 $ 2,712 3.62%
Time deposits 115,093 6,509 5.66% 104,021 6,134 5.90% 93,069 4,873 5.24%
Short-term borrowings 6,414 432 6.74% 17,233 1,140 6.62% 11,661 640 5.49%
Long-term borrowings 37,764 2,266 6.00% 21,733 1,294 5.95% 7,168 373 5.20%
Total 260,509 12,468 4.79% 229,913 12,540 5.45% 186,733 8,598 4.60%
Non-interest bearing
liabilities:
Demand deposits 32,710 30,209 30,616
Other liabilities 2,757 2,005 2,039
Stockholders' equity 24,108 21,660 21,038
Total $ 320,084 $ 283,787 $ 240,426
Net interest income 11,397 9,732 9,408
Rate spread 3.02% 2.83% 3.36%
Net yield on interest earning assets 3.73% 3.62% 4.16%
<FN>
(1) Non-accrual loans are included in the daily average loan balances
outstanding.
(2) The yield on tax-exempt loans and securities is computed on a tax-
equivalent basis using a tax rate of 34%
(3) Loan fees are included in total interest income as follows: 2001-$344,
2000-$240, 1999-$172.
-16-
Table 3: Interest Income and Expense Volume and Rate Analysis
2001 compared to 2000 2000 compared to 1999
increase (decrease) due to (1) increase (decrease) due to (1)
(dollars in thousands) VOLUME RATE NET VOLUME RATE NET
Interest earned on:
Loans (2) $ 1,698 $ (680) $ 1,018 $ 3,741 $ 477 $ 4,218
Taxable securities 103 (126) (23) 12 56 68
Tax-exempt securities (2) 284 (15) 269 (81) 1 (80)
Other interest income 1,162 (833) 329 36 24 60
Total 3,247 (1,654) 1,593 3,708 558 4,266
Interest paid on:
Savings and demand deposits 656 (1,367) (711) 434 826 1,260
Time deposits 651 (276) 375 574 687 1,261
Short-term borrowings (716) 8 (708) 305 195 500
Long-term borrowings 953 19 972 758 163 921
Total 1,544 (1,616) (72) 2,071 1,871 3,942
Net interest earnings $ 1,703 (38) $ 1,665 $ 1,637 $ (1,313) $ 324
<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 the change in each.
(2)The yield on tax-exempt loans and investment securities has been adjusted
to its fully taxable equivalent using a 34% tax rate.
Table 4: Yield on Earning Assets
Year ended December 31, 2001 2000 1999
YIELD CHANGE YIELD CHANGE YIELD CHANGE
Yield on earning assets 7.81% -0.47% 8.28% 0.32% 7.96% -0.31%
Effective rate on all liabilities as
a percent of earning assets 4.08% -0.58% 4.66% 0.86% 3.80% -0.43%
Net yield on earning assets 3.73% 0.11% 3.62% -0.54% 4.16% 0.12%
-17-
Table 5: Mix of Average Interest-Earning Assets and Average Interest-
Bearing Liabilities
Year ended December 31 2001 2000 1999
Loans 74.25% 77.13% 72.51%
Taxable securities 15.80% 17.31% 20.53%
Tax-exempt securities 5.63% 4.86% 6.30%
Other 4.32% 0.70% 0.66%
Total interest earning assets 100.00% 100.00% 100.00%
Savings and demand deposits 38.86% 37.81% 40.08%
Time deposits 44.18% 45.24% 49.84%
Short-term borrowings 2.46% 7.50% 6.24%
Long-term borrowings 14.50% 9.45% 3.84%
Total interest bearing liabilities 100.00% 100.00% 100.00%
NONINTEREST INCOME
Noninterest income was $2,065 for 2001, $619 or 42.8% higher than 2000.
Noninterest income as a percentage of total revenues was 8.1% for 2001
compared to 6.2% last year.
Table 6: Noninterest Income
% Change from
Years Ended December 31, prior year
(dollars in thousands) 2001 2000 1999 2001 2000
Noninterest income:
Service fees $ 1,010 $ 855 $ 709 18.1% 20.6%
Gain on sale of loans 683 66 223 934.8% -70.4%
Investment sales commissions 183 195 138 -6.2% 41.3%
Other 189 330 195 -42.7% 69.2%
Total noninterest income $ 2,065 $ 1,446 $ 1,265 42.8% 14.3%
Service fees were $1,010, $155 or 18.1% higher than 2000. Service fees
as a percent of average noninterest bearing demand deposits were 3.1% in
2001 compared to 2.8% in 2002. due in part to an increase in the annual fee
to maintain an overdraft protection account.
-18-
Noninterest income from the sale of long-term fixed rate residential
mortgage loans increased from $66 in 2000 to $683 during 2001. The
increase was largely a result of historically low long-term fixed rates
for residential mortgages. Consequently, many existing customers and
new customers refinanced existing adjustable rate mortgages or purchased
new homes to take advantage of these historically low mortgage rates.
During 2001 a total of $60,251 of fixed rate residential mortgages were
sold to outside investors and the Federal Home Loan Bank.
Investment product commissions consist of annuity sales, brokerage
services, mutual fund sales, life insurance commissions, and self-
directed IRA fees. Investment product commissions decreased $12 or 6.2%
from last year. The change was predominantly due to a decrease in the
fair market value of assets under management, primarily from the
declines in the stock and bond markets during 2001.
Other operating income during 2000 included $39 from a gain on sale of
student loans. There were no student loan sales during 2001. In
addition, during the third quarter 2001, the annual check card and bank
credit card fees were discontinued, decreasing 2001 other income by $20
compared to 2000. Gain on sale of premises and equipment is also
included in other income and was $48 in 2001 and $69 in 2000. Separate
from these items, other income decreased $61 compared to 2000.
NONINTEREST EXPENSE
Total noninterest expense increased $842 to $7,316 during 2001,
representing a 13.0% increase over 2000.
Table 7: Noninterest Expense
% Change from
Years Ended December 31, prior year
(dollars in thousands) 2001 2000 1999 2001 2000
Noninterest expense:
Salaries and employee benefits $ 4,419 $ 3,842 $ 3,621 15.0% 6.1%
Occupancy 917 937 859 -2.1% 9.1%
Data processing and office operations 523 460 441 13.7% 4.3%
Advertising and promotion 307 211 222 45.5% -5.0%
Other 1,150 1,024 1,078 12.3% -5.0%
Total noninterest expense $ 7,316 $ 6,474 $ 6,221 13.0% 4.1%
Salaries and employee benefits increased $577 or 15.0% over 2000 and
represented 60.4% of total noninterest expense in 2001 compared to 59.3%
in 2000. The increase includes an additional $103 in 401(k) profit
sharing expense for 2001 over 2000. The increase also includes
-19-
incentive compensation pay earned by employees in 2001 under the
incentive plan totaling $294. There was no incentive compensation pay
earned in 2000. The average number of full time equivalent employees
increased from 89 in 2000 to 93 in 2001. Separate from the increase in
profit sharing expense and incentive pay noted above, average salaries
and benefits per full time equivalent employee increased .2% during
2001.
Occupancy expense was $917 for 2001 decreasing 2.1% from last year. The
majority of the decrease was due to reduced depreciation expense of $31,
much of it related to original furniture and fixtures costs at the
Bank's Rib Mountain, and Marathon branch locations now being fully
depreciated. The Eagle River branch location opened later in 2001 and
had minimal impact on 2001 occupancy costs.
Data processing costs increased $63 or 13.7% during 2001 reflecting the
increasing cost of software maintenance contracts and paper and forms
supplies. Advertising and promotion expense increased $96, or 45.5%
during 2001. The Bank expanded its internal marketing staff and
contracted with an independent consultant to improve and expand ongoing
marketing initiatives. Additional advertising costs were also incurred
in connection with opening of the new Eagle River branch location.
Other operating expense increased $126 or 12.3% in 2001. The majority
of the change is due to $104 of expense related to settlement related to
benefits vested under the previously terminated directors' retirement
plan. Separate from this expense, other operating expense increased
$22, or 2.1% over 2000.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is assessed based upon
credit quality, existing economic conditions and loss exposure by loan
category. Management determines the allowance for loan losses based on
past loan experience, current economic conditions, composition of the
loan portfolio, and the potential for future loss. Accordingly, the
amount charged to expense is based on management's evaluation of the
loan portfolio. It is the Company's policy that when available
information confirms that specific loans, or portions thereof, including
impaired loans, are uncollectible, these amounts are promptly charged
off against the allowance. The provision for loan losses was $890 in
2001; compared to $600 in 2000 and $460 in 1999. See additional
discussion under section, "Allowance for Loan Losses."
INCOME TAXES
The effective tax rate was 30.2% in 2001, 29.2% in 2000, and 29.2% in
1999. See footnote 14 to the financial statements for additional tax
information.
-20-
SUMMARY OF QUARTERLY RESULTS
Year ended December 31, 2001 Three months ended
(dollars in thousands, except per share data) MARCH 31 JUNE 30 SEPT 30 DEC 31
2001
Interest income $ 6,046 $ 5,979 $ 5,833 $ 5,570
Interest expense 3,559 3,349 2,924 2,636
Net interest income 2,487 2,630 2,909 2,934
Provision for loan losses 150 150 150 440
Net income applicable to common stock 769 839 885 873
Basic and diluted earnings per share $ 0.91 $ 1.00 $ 1.05 $ 1.05
2000
Interest income $ 4,907 $ 5,305 $ 5,666 $ 6,062
Interest expense 2,576 2,991 3,414 3,559
Net interest income 2,331 2,314 2,252 2,503
Provision for loan losses 150 150 150 150
Net income applicable to common stock 573 680 545 872
Basic and diluted earnings per share $ 0.64 $ 0.78 $ 0.65 $ 1.04
1999
Interest income $ 4,179 $ 4,281 $ 4,547 $ 4,664
Interest expense 2,050 2,093 2,208 2,247
Net interest income 2,129 2,188 2,339 2,417
Provision for loan losses 75 75 105 205
Net income applicable to common stock 635 722 759 473
Basic and diluted earnings per share $ 0.72 $ 0.82 $ 0.86 $ 0.53
BALANCE SHEET ANALYSIS
INVESTMENT PORTFOLIO
The investment securities portfolio is intended to provide the Company
with adequate liquidity, flexible asset/liability management and a
source of stable income. All but tax-exempt municipal securities are
classified as available for sale and reported at fair value. Unrealized
gains and losses are excluded from earnings but are reported as other
comprehensive income in a separate component of stockholders' equity,
net of income tax. Tax-exempt municipal securities are considered held
to maturity and are recorded at net amortized cost. The investment
-21-
portfolio represented 21% and 22% of average earning assets in 2001 and
2000, respectively.
Table 8: Investment Securities Portfolio Maturities
After one but After five but
Within one year within five years within ten years After ten years
(dollars in thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
U. S. Treasury securities
and obligations of U.S.
government $ 2,017 6.15% $ 6,102 5.35% $ 1,554 5.37%
Mortgage backed securities 6,727 6.15% 33,585 5.96%
Obligations of states and
political subdivisions (1) 886 7.28% 5,515 6.90% 13,886 6.60%
Other equity securities 173 0.95%
Totals $ 3,076 6.18% $ 11,617 6.09% $ 22,167 6.38% $ 33,585 5.96%
At December 31, 2001, the Company's securities portfolio did not contain
securities of any single issuer where the aggregate carrying value of
such securities exceeded 10% of stockholders' equity.
Securities with an approximate carrying value of $9,225 and $12,555, at
December 31, 2001 and 2000, respectively, were pledged primarily to
secure public deposits, short-term borrowings, and for other purposes
required by law.
-22-
Table 9: Investment Securities Distribution
Years Ended Dec. 31
(dollars in thousands) 2001 2000 1999
Amortized Fair Amortized Fair Amortized Fair
COST VALUE COST VALUE COST VALUE
U.S. Treasury securities
and obligations of U.S.
government $ 9,516 $ 9,673 $ 24,572 $ 24,410 $ 26,798 $ 25,826
Mortgage backed securities 39,717 40,312 23,706 23,664 20,448 19,916
Obligations of states and
political subdivisions 20,287 20,355 13,975 14,005 13,843 13,473
Other equity securities 173 173 48 48 48 48
Total $ 69,693 $ 70,513 $ 62,301 $ 62,127 $ 61,137 $ 59,263
The market value of the investment portfolio as a percentage of book
value has increased due to the decrease in overall market interest
rates. At December 31, 2001 market value was 101.2% of book value. The
net unrealized gain on securities available for sale, recorded as a
separate component of stockholders' equity, was $491, net of deferred
taxes of $260 compared to a loss of $125, net of deferred income taxes
of $79 at December 31, 2000.
During 2000, the interest rates beyond one year decreased. The market
value of the fixed income portion on the investment portfolio as a
percentage of book value increased due to the decrease in interest
rates. At December 31, 2000, market value was 99.73% of book value.
The net unrealized loss on securities available for sale, recorded as a
separate component of stockholders' equity, was $125, net of deferred
income taxes of $79, compared to a loss of $1,043, net of deferred taxes
of $461 at December 31, 1999.
The Bank's investment subsidiary, PSB Investments, Inc., was formed in
May, 1992, and currently holds approximately $64,456 in investment
securities and loans at book value. Income tax expense for 2001 was
approximately $213 lower as a result of holding these investments and
loans at the subsidiary.
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is
required to hold stock in the FHLB based on total assets and anticipated
level of long-term borrowings to be advanced to the Bank. This stock
has a purchase cost and par value of $100 per share. The stock is
recorded at cost which approximates market value. Transfer of the stock
is substantially restricted. The stock earns a quarterly dividend
generally approximating .75% over the moving average of one-year LIBOR.
-23-
The dividend rate paid on FHLB stock was 6.34%, 7.47%, and 6.69% in
2001, 2000, and 1999, respectively.
LOANS
Total loans as presented in Table 10 include loans held for sale to the
secondary market and construction loans not yet fully disbursed. Total
loans were $244,551 at December 31, 2001, an increase of $14,142 or 6.1%
over December 31, 2000.
Table 10: Loan Composition
(dollars in thousands) 2001 2000 1999 1998 1997
% of % of % of % of % of
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
Commercial,
industrial and
agricultural $ 55,363 22.64% $ 53,421 23.19% $ 51,054 27.45% $ 40,514 26.37% $ 33,801 22.64%
Real estate
mortgage
(commercial and
residential) 158,849 64.96% 149,859 65.04% 111,923 60.17% 89,617 58.33% 95,442 63.92%
Real estate loans
held for sale 1,403 0.57% 114 0.05% 0.00% 3,120 2.03% 301 0.20%
Real estate
construction 15,609 6.38% 11,231 4.87% 9,654 5.19% 8,643 5.63% 7,511 5.03%
Consumer and
individual 13,327 5.45% 15,784 6.85% 13,375 7.19% 11,755 7.64% 12,262 8.21%
Totals $ 244,551 100.00% $ 230,409 100.00% $186,006 100.00% $ 153,649 100.00% $149,317 100.00%
Retained, in-house real estate mortgage loans totaled $158,849 at the
end of 2001 and $149,859 at the end of 2000. Loans in this
classification include $72,299 of loans secured by 1-to-4 family
residential properties. Residential real estate loans consist of home
mortgages, home equity lines, and second mortgages.
In addition to residential real estate loans retained by the Company and
recognized on the balance sheet, the Company also services approximately
$36 million of residential real estate loans which have been sold to the
Federal Home Loan Bank (FHLB) under the Mortgage Partnership Finance
Program. As part of the asset/liability and interest rate sensitivity
management strategy, the Company does not retain long term 15 to 30 year
fixed rate mortgages in their own portfolio. These serviced loans are
not recognized on the Company's balance sheet. A servicing fee equal to
.25% of outstanding principal is retained from payments collected from
the customer as payment for servicing the loan for the FHLB.
-24-
Historically low long-term fixed rate mortgage interest rates during
2001 increased the amount of loans originated and subsequently sold to
the FHLB from approximately $1 million at December 31, 2000.
During 2001, the Company recognized a mortgage servicing right asset due
to the substantial volume of loans now serviced for the FHLB.
Recognition of initial mortgage servicing rights of $320 increased the
gain on sale of loans during 2001. The mortgage servicing right is
amortized as a reduction to loan servicing income over the estimated
servicing life of the loan in proportion to the amount of servicing fees
collected. The amortization period takes into account the likelihood
that the loan will be prepaid or refinanced prior to the original term.
The anticipated servicing period used to amortize mortgage servicing
rights ranges from 6 years for a 15 year fixed rate loan up to 10 years
for a 30 year fixed rate loan. These amortization periods are based on
Company experience and standards recognized within the mortgage
servicing industry and would be accelerated in the event repayment
occurred faster than originally anticipated.
Mortgage servicing rights are recorded at the lower of amortized cost or
fair value. At December 31, 2001, mortgage servicing rights included in
Other Assets on the balance sheet were $284. Mortgage servicing right
amortization of $37 was recorded during 2001. There were no mortgage
servicing rights recorded during 2000.
Commercial loans were $55,363 at the end of 2001, up $1,942 since year-
end 2000, but comprising 22.6% of the total loans outstanding, down from
23.2% at the end of 2000. The commercial, industrial, and agricultural
loan classification primarily consists of commercial loans to small
businesses. Loans of this type are in a broad range of industries.
Loans to finance agricultural production totaled just $2,908 or 1.2% of
total loans.
Real estate construction loans grew 39.0% to $15,609 at the end of 2001
compared to $11,231 at the end of 2000. Loans in this classification
are primarily short-term loans that provide financing for the
acquisition or development of commercial real estate, such as multi-
family or other commercial development projects.
Installment loans to consumers and individuals totaled $13,327, down
from $15,784 at year-end 2000. Installment loans include short-term
installment loans, automobile loans, recreational vehicle loans, credit
card loans, and other personal loans. The Bank experiences extensive
competition from local credit unions offering low rates on installment
loans.
-25-
Table 11: Loan Maturity Distribution and Interest Rate Sensitivity
(dollars in thousands) Loan Maturity
One year Over one year Over
OR LESS TO FIVE YEARS FIVE YEARS
Commercial, industrial and agricultural $ 28,915 $ 24,728 $ 1,720
Real estate mortgage (commercial and residential) 63,475 93,616 1,758
Real estate loans held for sale 1,403
Real estate construction 15,609
Consumer and individual 1,124 11,107 1,096
Totals $ 110,526 $ 129,451 $ 4,574
Fixed rate $ 81,598 $ 2,541
Variable rate 47,853 2,033
Totals $ 129,451 $ 4,574
The loan portfolio is widely diversified by types of borrowers, industry
groups, and market areas. Significant loan concentrations are
considered to exist for a financial institution when there are amounts
loaned to numerous borrowers engaged in similar activities that would
cause them to be similarly impacted by economic conditions. At December
31, 2001, no concentrations existed in the Company's portfolio in excess
of 10% of total loans.
ALLOWANCE FOR LOAN LOSSES
The loan portfolio is the primary asset subject to credit risk. Credit
risk is controlled through the use of credit standards, review of
potential borrowers, and loan payment performance. During 2001, the
allowance for loan losses grew from $2,407 at December 31, 2000 to
$2,969 at December 31, 2001. As of December 31, 2001 the allowance for
loan losses as a percentage of total loans outstanding was 1.24% and was
60.4% of nonperforming loans, compared to 1.06% and 55.1%, respectively,
at December 31, 2000. In addition to coverage from the allowance for
loan losses, nonperforming loans are secured by various collateral
including real estate and consumer collateral.
-26-
Table 12: Loan Loss Experience
(dollars in thousands) Years ended December 31
2001 2000 1999 1998 1997
Average balance of loans
for period $ 226,819 $ 207,527 $ 163,929 $ 148,806 $ 140,962
Allowance for loan losses
at beginning of year $ 2,407 $ 2,099 $ 1,947 $ 1,845 $ 1,925
Loans charged off:
Commercial, industrial
and agricultural (148) (250) (322) (138) (156)
Real estate mortgage
(commercial and residential) (75) (14) (72) (136)
Consumer and individual (107) (51) (38) (69) (59)
Total charge-offs (330) (315) (432) (207) (351)
Recoveries on loans
previously charged-off:
Commercial, industrial
and agricultural 1 16 67 17
Real estate mortgage
(commercial and residential) 3 7 19
Consumer and individual 1 4 50 9 5
Total recoveries 2 23 124 9 41
Net loans charged-off (328) (292) (308) (198) (310)
Provision for loan losses 890 600 460 300 230
Allowance for loan losses
at end of year $ 2,969 $ 2,407 $ 2,099 $ 1,947 $ 1,845
-27-
Ratio of net charge-offs
during the year to average loan 0.14% 0.14% 0.19% 0.13% 0.22%
Ratio of allowance for loan
losses to loans receivable
at end of year 1.24% 1.06% 1.15% 1.27% 1.24%
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses in the loan portfolio.
Adequacy of the allowance for loan losses is based on management's
ongoing review and grading of the loan portfolio, past loan loss
experience, trends in past due and nonperforming loans, and current
economic conditions. The Company has an internal risk analysis and
review staff that continuously reviews loan quality.
The allocation of the year-end allowance for loan losses for each of the
past five years based on management's estimates of loss exposure by
category of loans is shown in Table 13. The allocation methodology
applied by the Company focuses on changes in the size and character of
the loan portfolio, current and expected economic conditions, the
geographic and industry mix of the loan portfolio and historical losses
by category. The total allowance is available to absorb losses from any
segment of the portfolio. Management allocates the allowance for credit
losses by pools of risk. The Company combines estimates of the
allowance needed for loans analyzed individually and loans analyzed on a
pool basis. The determination of allocated reserves for larger
commercial loans involves a review of individual higher-risk
transactions, focusing on loan grading, and assessment of specific loss
content and possible resolutions of problem credits. During 2001, the
Company expanded ongoing credit review and risk rating procedures. As a
result, loan loss allowance allocations were updated on a basis
different than prior years. The new basis is considered to more
accurately match loss allowance with nonperforming, or other loans with
heightened risk factors. The primary impact of this allocation change
was to decrease allowances allocated to consumer and individual loans,
and to increase allowances allocated to real estate mortgage loans.
As a FHLB Mortgage Partnership Finance loan servicer (as described in
the LOANS section above), the Company has provided a credit enhancement
guarantee to reimburse the FHLB for foreclosure losses in excess of 1%
of the original loan principal sold to the FHLB. At December 31, 2001,
the maximum Company obligation for such guarantees would be
approximately $131 if total foreclosure losses on the entire pool of
approximately $36 million loans exceeded $510. In exchange for this
guarantee, the Company is paid a "credit enhancement" fee of .07% of
outstanding serviced principal in addition to the .25% collected for
servicing the loan for the FHLB. These first mortgage loans are
underwritten using standardized and conservative criteria on residential
properties in the Bank's local communities. As an indicator of
foreclosure loss exposure on these FHLB guaranteed loans, CUMULATIVE net
loan charge-offs on mortgage loans retained by the bank in their own
portfolio were approximately .15% of average mortgage principal during
the 5 years ended December 31, 2001. Management believes loans serviced
for the FHLB will realize minimal foreclosure losses in the future and
-28-
that the Company will experience no loan losses related to charge-offs
in excess of the FHLB 1% loss pool.
In the opinion of management, the allowance for loan losses is adequate
as of December 31, 2001. While management uses available information to
recognize losses on loans, future adjustments may be necessary based on
changes in economic conditions.
Table 13: Allocation of the Allowance for Loan Losses
As of December 31,
(dollars in thousands) 2001 2000 1999 1998 1997
Commercial, industrial and agricultural $ 1,738 $ 1,467 $ 1,263 $ 1,120 $ -
Real estate mortgage (commercial and residential) 591 249 217 201
Consumer and individual 89 369 322 298
Impaired loans 551 322 297 328 178
Unallocated - - - - 1,667
Totals $ 2,969 $ 2,407 $ 2,099 $ 1,947 $1,845
Net loans charged off were $328 or .14% of average loans for 2001,
compared to $292 or .14% of average loans for 2000, and were $308 or
.19% of average loans for 1999. Loans charged off are subject to
continuous review and specific efforts are taken to achieve maximum
recovery of principal, accrued interest, and related expenses.
Nonperforming loans are defined as nonaccrual loans, loans 90 days or
more past due but still accruing, loans defined as impaired under
current accounting standards, and restructured loans. Loans are
generally placed on nonaccrual status when contractually past due 90
days or more as to interest or principal payments. Previously accrued
and uncollected interest on such loans is reversed, and income is
recorded only to the extent that interest payments are subsequently
received and principal is collectible.
Loans past due 90 days or more but still accruing interest are also
included in nonperforming loans. Also included in nonperforming loans
are restructured loans. Restructured loans involve the granting of
concession to the borrower involving the modification of terms of the
loan, such as changes in payment schedule or interest rate. The
majority of restructured loans represent capitalized loan principal
and/or interest that borrowers were unable to repay according to the
original repayment terms. Such loans are subject to senior management
review and ongoing monitoring and are made in cases where the borrower's
delinquency is considered short-term from circumstances the borrower is
believed able to overcome.
-29-
Table 14: Nonperforming Loans and Foreclosed Assets
December 31,
(dollars in thousands) 2001 2000 1999 1998 1997
Nonaccrual loans not considered impaired $ 1,801 $ 1,123 $ 620 $ 582 $ 835
Impaired loans 2,112 1,901 2,206 970 1,124
Accruing loans past due 90 days or more - - - - 7
Restructured loans 999 1,348 278 296 618
Total non-performing loans $ 4,912 $ 4,372 $ 3,104 $ 1,848 $ 2,584
Foreclosed assets $ 421 $ 17 $ 24 $ - $ 336
Nonperforming loans at December 31, 2001, were $4,912, an increase of
$540 from December 31, 2000.
Interest payments on nonaccrual and impaired loans are typically applied
to principal unless collectability of the principal amount is fully
assured, in which case interest is recognized on the cash basis. The
interest that would have been reported in 2001 if all such loans had
been current throughout the year in accordance with their original terms
was $228 in comparison to $160 actually collected. The total reduction
in interest income during 2000 as a result of discontinuing the accrual
of interest on loans that are delinquent for over 90 days was $135,000.
DEPOSITS
Deposits are the Company's largest source of funds. At December 31,
2001, deposits were $273,635, up $32,101 or 13.3% over last year. At
year-end, noninterest bearing demand deposits were approximately $9
million greater than the 2001 average balance due to collections of
municipal deposits and increased seasonal consumer retail demand
deposits.
The Company's retail deposit growth is continuously influenced by
competitive pressure from other financial institutions, as well as other
investment opportunities available to customers. During 2001, the
Company experienced a shift of deposit mix to more short-term liquid
accounts from time deposits due to the interest rate environment.
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Table 15: Average Deposits Distribution
2001 2000 1999
Interest Interest Interest
(dollars in thousands) AMOUNT RATE PAID AMOUNT RATE PAID AMOUNT RATE PAID
Noninterest bearing
demand deposits $ 32,710 n/a $ 30,209 n/a $ 30,616 n/a
Interest bearing demand
and savings deposits 101,238 3.22% 86,926 4.57% 74,835 3.62%
Time deposits 115,093 5.66% 104,021 5.90% 93,069 5.24%
Totals $ 249,041 3.92% $ 221,156 4.57% $ 198,520 3.82%
On average, deposits were $249,041 for 2001, up $27,885 or 12.6% over
the average for 2000. Average savings deposits, including money
markets, increased $14,312 or 16.5% over 2000.
Table 16: Maturity Distribution of Certificates of Deposit of $100,000
42,327 or More
(dollars in thousands) DECEMBER 31, 2001
3 months or less $ 10,759
Over 3 months through 6 months 9,668
Over 6 months through 12 months 16,445
Over 1 year through 5 years 16,359
Totals $ 53,231
OTHER FUNDING SOURCES
Other funding sources, including short-term borrowings and long-term
debt, were $42,327 at December 31, 2001 up $2,812 from $39,515 at
December 31, 2000. Short-term borrowings at December 31, 2001 consist
of securities sold under repurchase agreements. The repurchase
agreements are payable on demand. Other available short-term borrowings
include federal funds purchased and the FHLB open line of credit, which
were not used at December 31, 2001. During 2001, higher rate repurchase
agreement borrowings were replaced with long-term fixed rate FHLB
advances. Long-term debt at December 31, 2001, was $38,000 up from
$28,000 at the end of last year.
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The mix of other funding sources shifted toward longer-term borrowings,
with average long-term debt representing 85.5% of other funding sources
from 55.8% last year, in response to asset/liability objectives.
Average long-term debt increased $16,031 during 2001. Within the short-
term borrowing category average, draws on the FHLB open line of credit
and securities sold under repurchase agreements were down $10,819.
Table 17: Short-term Borrowings
December 31,
(dollars in thousands) 2001 2000 1999
Securities sold under repurchase agreements $ 4,327 $ 7,662 $ 10,738
Federal funds purchased 10,477
FHLB open line of credit 3,853
Totals $ 4,327 $ 11,515 $ 21,215
Average amounts outstanding during the year $ 6,414 $ 17,233 $ 11,661
Avg. interest rates on amounts outstanding
during year 6.74% 6.62% 5.49%
Maximum month-end amounts outstanding $ 9,047 $ 26,863 $ 21,215
Average interest rate on amounts outstanding
at end of year 5.01% 6.83% 5.90%
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Bank's Asset Liability Management process provides a unified
approach to management of liquidity, capital and interest rate risk, and
to provide adequate funds to support the borrowing requirements and
deposit flow of its customers. Management views liquidity as the
ability to raise cash at a reasonable cost or with a minimum of loss and
as a measure of balance sheet flexibility to react to marketplace,
regulatory, and competitive changes.
The Bank's primary funding source is deposits. Average deposits as a
percentage of other funding sources used were 84.9% at December 31, 2001
and 85.0% at December 31, 2000. Other funding sources represent the
balance of the Bank's total funding needs. The primary funding sources
utilized are long-term fixed rate and short-term variable rate Federal
Home Loan Bank advances, federal funds purchased, brokered CDs, and
repurchase agreements from a base of individuals, businesses, and public
entities.
Management's overall strategy is to coordinate the volume of rate
sensitive assets and liabilities to minimize the impact of interest rate
movement on the net interest margin. Table 18 represents the Company's
earning sensitivity to changes in interest rates at December 31, 2001.
It is a static indicator which does not reflect various repricing
characteristics and may not indicate the sensitivity of net interest
income in a changing interest rate environment.
-32-
Table 18 reflects a positive gap position in all individual (not
cumulative) categories except 91 to 180 days, and 181 to 365 days. The
cumulative one-year gap ratio is negative at 88.24%. The Bank believes
the cumulative gap position at December 31, 2001 was adequate
considering anticipated changes in interest rates in the upcoming 1 year
period. A significant portion of consumer deposits do not re-price or
mature on a contractual basis. Rather, the Bank has the ability to re-
price or change these deposits on demand. These deposit balances and
rates are considered to be core deposits since these balances are
generally not susceptible to significant interest rate changes. The
Bank's Asset/Liability Committee attempts to distribute these deposits
over a number of periods to reflect those portions of such accounts that
are expected to re-price fully with market rates over the simulation
period. The assumptions are based on historical experience with the
Bank's individual markets and customers and include projections for how
management expects to continue to price in response to marketplace and
market changes. These assumptions allocate interest bearing demand
deposits and money market funds as 30%, 20%, 20%, and 30% of balances to
the 0-90 days, 181-365 days, 1-5 years, and beyond 5 year categories,
respectively. The assumptions also allocate savings (excluding time
deposits) balances as 10%, 15%, 15%, and 60% of balances to the 0-90
days, 181-365 days, 1-5 years, and beyond 5 year categories,
respectively.
The Asset/Liability Committee uses financial modeling techniques that
measure the interest rate risk. Policies established by the Bank's
Asset/Liability Committee are intended to limit exposure of earnings at
risk. Management considers that an acceptable range for the rate
sensitivity ratio is 70-150%.
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Table 18: Interest rate sensitivity gap analysis
December 31, 2001
(dollars in thousands) 0-90 DAYS 91-180 DAYS 181-365 DAYS 1-5 YRS. BEYOND 5 YRS. TOTAL
Earning assets:
Loans $ 56,111 $ 21,949 $ 28,861 $ 129,451 $ 4,574 $ 240,946
Securities 1,791 749 536 11,617 55,752 70,445
Other earning assets 10,965 10,965
Total $ 68,867 $ 22,698 $ 29,397 $ 141,068 $ 60,326 $ 322,356
Cumulative rate
sensitive assets $ 68,867 $ 91,565 $ 120,962 $ 262,030 $ 322,356
Interest-bearing
liabilities
Interest-bearing
deposits $ 51,154 $ 24,564 $ 58,598 $ 59,248 $ 38,564 $ 232,128
Other interest-bearing
borrowings 1,361 773 640 36,553 3,000 42,327
Total $ 52,515 $ 25,337 $ 59,238 $ 95,801 $ 41,564 $ 274,455
Cumulative interest
sensitive liabilities $ 52,515 $ 77,852 $ 137,090 $ 232,891 $ 274,455
Interest sensitivity
gap for the individual
period $ 16,352 $ (2,639) $ (29,841) $ 45,267 $ 18,762
Cumulative interest
sensitivity gap $ 16,352 $ 13,713 $ (16,128) $ 29,139 $ 47,901
Cumulative ratio of
rate sensitive assets
to rate sensitive
liabilities 131.14% 117.61% 88.24% 112.51% 117.45%
CAPITAL ADEQUACY
Stockholders' equity at December 31, 2001, increased to $25,349, or
$30.19 per share compared with $22,274 or $26.53 per share at the end of
2000. The primary increase in stockholders' equity in 2001 was net
income ($3,366) in excess of cash dividends paid to shareholders ($907),
of $2,459. Cash dividends paid in 2001 were $1.08 per share compared to
$1.03 per share in 2000. The 2001 dividend payout ratio as a percentage
of net income was 26.94% in 2001 compared to $32.64% in 2000. Capital
at year-end 2001 included $491 related to unrealized gains on securities
AFS, net of their tax effect. Stockholders' equity increased $616
during 2001 due to unrealized gains on securities AFS.
The adequacy of the Company's capital and the Bank's capital is
regularly reviewed to ensure that sufficient capital is available for
current and future needs and is in compliance with regulatory
guidelines. As of December 31, 2001, 2000, and 1999, the Company's
-34-
and the Bank's Tier 1 leverage ratios, Tier 1 risk-based capital ratios, and
total risk-based capital ratios were well in excess of regulatory
requirements to be considered well-capitalized under regulatory
requirements (see note 18 of the notes to Consolidated Financial
Statements). Management feels the capital structure of the Company and
Bank is adequate.
Table 19: Capital Ratios
The following table presents a reconciliation of Company stockholders'
equity as presented in the December 31, 2001 consolidated balance sheets
to regulatory capital.
(dollars in thousands) 2001 2000 1999
Stockholders' equity $ 25,349 $ 22,274 $ 21,046
Disallowed mortgage servicing right assets (28) - -
Unrealized (gain) loss on securities AFS (491) 125 1,043
Tier 1 regulatory capital 24,830 22,399 22,089
Add: allowance for loan losses 2,969 2,407 2,099
Total regulatory capital $ 27,799 $ 24,806 $ 24,188
Total assets $ 344,296 $ 306,239 $ 259,889
Unrealized (gain) loss on securities AFS (491) 125 1,043
Tangible assets $ 343,805 $ 306,364 $ 260,932
Risk-weighted assets (as defined by
current regulations) $ 248,620 $ 204,725 $ 180,711
Add: Recourse obligation under FHLB
loan servicing program 131 - -
Adjusted risk-weighted assets $ 248,751 $ 204,725 $ 180,711
Tier 1 capital to year-end tangible
assets (leverage ratio) 7.2% 7.3% 8.5%
Tier 1 capital to adjusted risk-weighted
assets 10.0% 10.9% 12.2%
Total capital to adjusted risk-weighted
assets 11.2% 12.1% 13.4%
-35-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item 7A is set forth in Item 6,
"Selected Financial Data" and under sub captions "Results of
Operations", "Market Risk", "Net Interest Income", "Provision for Loan
Losses", "Investment Portfolio", "Deposits", and "Liquidity and Interest
Sensitivity" under Item 7, Management's Discussion and Analysis of
Financial Conditions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company for the years ended
December 31, 2001, 2000, and 1999 are incorporated by reference to
Exhibit 99.1 to this Annual Report on Form 10-K. Exhibit 99.1 is
located immediately following page 40.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
-36-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to directors of the Company is incorporated into
this Form 10-K by this reference to the disclosure in the Company's
proxy statement dated March 29, 2002 relating to the 2002 annual meeting
of shareholders (the "2002 Proxy Statement") under the caption "Election
of Directors." Information relating to the identification of executive
officers of the Company is found in Part I of this Form 10-K.
Information required under Rule 405 of Regulation S-K is incorporated
into this Form 10-K by this reference to the disclosure in the 2002
Proxy Statement under the subcaption "Section 16(a) Beneficial Ownership
Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to director compensation is incorporated into this
Form 10-K by this reference to the disclosure in the 2002 Proxy
Statement under the subcaption "Compensation of Directors." Information
relating to the compensation of executive officers is incorporated into
this Form 10-K by this reference to (1) the disclosure in the 2002 Proxy
Statement beginning under the caption "Executive Officer Compensation,"
through the disclosure ending under the subcaption, "Stock Options," and
(2) the disclosure in the 2002 Proxy Statement under the subcaption
"Compensation Committee and Board Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information relating to security ownership of certain beneficial owners
and management is incorporated into this Form 10-K by this reference to
the disclosure in the 2002 Proxy Statement beginning under the caption
"Beneficial Ownership of Common Stock" and ending at the subcaption
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain relationships and related transactions
with directors and officers is incorporated into this Form 10-K by this
reference to the disclosure in the 2002 Proxy Statement under the
caption "Certain Relationships and Related Transactions."
-37-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
K.
(a) Documents filed as part of this report.
(1) The financial statements filed as part of this report are set
forth in Exhibit 99.1.
(2) No financial statement schedules are required by Item 14(d).
(3) The following exhibits required by Item 601 of Regulation S-K are
filed as part of this report.
Exhibit
NUMBER DESCRIPTION
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000)
4.1 Articles of Incorporation and Bylaws (see Exhibits 3.1 and 3.2)
10.1 Bonus Plan of Directors of the Bank (incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000)*
10.2 Non-Qualified Retirement Plan for Directors of the Bank*
10.3 Senior Management Incentive Compensation Plan (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2000)*
10.4 2001 Stock Option Plan (incorporated by reference to Exhibit 10.5
to the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2001)*
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
21.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000)
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99.1 Consolidated financial statements for the years ended December
31, 2001, 2000, and 1999
(b) Reports on Form 8-K.
None.
*Denotes Executive Compensation Plans and Arrangements.
-39-
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PSB Holdings, Inc.
By DAVID K. KOPPERUD March 29, 2002
David K. Kopperud, President
and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 29th day of March,
2001.
SIGNATURE AND TITLE SIGNATURE AND TITLE
DAVID K. KOPPERUD SCOTT M. CATTANACH
David K. Kopperud, President Scott M. Cattanach, Treasurer
Chief Executive Officer and a Director (Principal Financial Officer
and Accounting Officer)
DIRECTORS:
GORDON P. CONNOR PATRICK L. CROOKS
Gordon P. Connor Patrick L. Crooks
WILLIAM J. FISH CHARLES A. GHIDORZI
William J. Fish Charles A. Ghidorzi
GORDON P. GULLICKSON LAWRENCE HANZ, JR.
Gordon P. Gullickson Lawrence Hanz, Jr.
THOMAS R. POLZER THOMAS A. RIISER
Thomas R. Polzer Thomas A. Riiser
WILLIAM M. REIF EUGENE WITTER
William M. Reif Eugene Witter
-40-
EXHIBIT INDEX
TO
FORM 10-K
OF
PSB HOLDINGS, INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. 232.102(d)
Exhibit
NUMBER DESCRIPTION
10.2 Non-Qualified Retirement Plan for Directors of the Bank
99.1 Consolidated financial statements for the years ended
December 31, 2001, 2000, and 1999