Exhibit 99.1 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, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the three years ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PSB Holdings, Inc. and Subsidiary at December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Wipfli Ullrich Bertelson LLP January 25, 2002 Wausau, Wisconsin -1- CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 ASSETS 2001 2000 Cash and due from banks $ 16,736,080 $ 9,225,645 Interest-bearing deposits and money market funds 3,539,125 88,494 Federal funds sold 5,275,000 53,000 Securities: Held to maturity (fair values of $20,354,518 and $14,005,308 in 2001 and 2000 respectively) 20,287,480 13,974,600 Available for sale (at fair value) 50,156,904 48,122,039 Federal Home Loan Bank Stock 2,150,600 2,008,700 Loans held for sale 1,403,400 114,000 Loans receivable, net of allowance for loan losses of $2,968,574 and $2,407,439 in 2001 and 2000, respectively 236,573,861 224,701,647 Accrued interest receivable 1,872,631 2,101,513 Foreclosed assets, net 421,269 17,352 Premises and equipment 4,754,906 4,750,856 OTHER ASSETS 1,124,751 1,080,976 TOTAL ASSETS $344,296,007 $306,238,822 LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest-bearing deposits $ 41,507,579 $ 35,192,386 INTEREST-BEARING DEPOSITS 232,127,810 206,341,892 Total deposits 273,635,389 241,534,278 Short-term borrowings 4,326,850 11,514,743 Long-term borrowings 38,000,000 28,000,000 ACCRUED EXPENSES AND OTHER LIABILITIES 2,984,577 2,915,427 TOTAL LIABILITIES 318,946,816 283,964,448 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 18,185,664 15,726,996 Unrealized gain (loss) on securities available for sale, net of tax 491,335 (124,814) TREASURY STOCK, AT COST - 62,720 SHARES (2,291,163) (2,291,163) TOTAL STOCKHOLDERS' EQUITY 25,349,191 22,274,374 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $344,296,007 $306,238,822 See accompanying notes to consolidated financial statements. -2- CONSOLIDATED STATEMENT OF INCOME Year Ended December 31, 2001, 2000 and 1999 2001 2000 1999 Interest income: Interest and fees on loans $19,262,801 $18,259,930 $14,065,041 Interest on securities: Taxable 2,866,350 2,888,251 2,821,551 Tax-exempt 774,769 597,000 649,901 OTHER INTEREST AND DIVIDENDS 523,563 194,503 134,512 TOTAL INTEREST INCOME 23,427,483 21,939,684 17,671,005 Interest expense: Deposits 9,770,432 10,105,320 7,584,588 Short-term borrowings 431,842 1,140,346 639,760 LONG-TERM BORROWINGS 2,265,842 1,294,350 373,416 TOTAL INTEREST EXPENSE 12,468,116 12,540,016 8,597,764 Net interest income 10,959,367 9,399,668 9,073,241 PROVISION FOR LOAN LOSSES 890,000 600,000 460,000 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,069,367 8,799,668 8,613,241 Noninterest income: Service fees 1,010,352 855,069 708,794 Gain on sale of loans 683,278 66,440 223,002 Investment sales commissions 183,156 195,212 137,621 OTHER OPERATING INCOME 188,294 329,548 195,230 TOTAL NONINTEREST INCOME 2,065,080 1,446,269 1,264,647 Noninterest expense: Salaries and employee benefits 4,419,402 3,841,735 3,621,239 Occupancy 917,048 937,071 858,719 Data processing and other office operations 522,970 459,746 440,588 Advertising and promotion 306,793 211,073 222,435 OTHER OPERATING 1,149,684 1,024,693 1,078,425 TOTAL NONINTEREST EXPENSE 7,315,897 6,474,318 6,221,406 Income before income taxes 4,818,550 3,771,619 3,656,482 PROVISION FOR INCOME TAXES 1,453,000 1,102,000 1,067,500 NET INCOME $3,365,550 $2,669,619 $2,588,982 BASIC AND DILUTED EARNINGS PER SHARE $ 4.01 $ 3.11 $ 2.93 WEIGHTED AVERAGE SHARES OUTSTANDING 839,705 858,286 883,235 See accompanying notes to consolidated financial statements. -3- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2001, 2000 and 1999 UNREALIZED GAIN (LOSS) ADDITIONAL ON SECURITIES COMMON PAID-IN RETAINED AVAILABLE TREASURY STOCK CAPITAL EARNINGS FOR SALE STOCK TOTALS Balance, January 1, 1999 $ 1,804,850 $ 7,158,505 $12,223,043 $ 172,417 $ (802,600) $20,556,215 Comprehensive income: Net income 2,588,982 2,588,982 Unrealized loss on securities available for sale, net of tax of $553,766 (1,215,545) (1,215,545) Total comprehensive income 1,373,437 Cash dividends declared $1.00 PER SHARE (883,235) (883,235) Balance, December 31, 1999 1,804,850 7,158,505 13,928,790 (1,043,128) (802,600) 21,046,417 Comprehensive income: Net income 2,669,619 2,669,619 Unrealized gains on securities available for sale, net of tax of $381,507 918,314 918,314 Total comprehensive income 3,587,933 Purchase of treasury stock (1,488,563) (1,488,563) Cash dividends declared $1.03 PER SHARE (871,413) (871,413) Balance, December 31, 2000 1,804,850 7,158,505 15,726,996 (124,814) (2,291,163) 22,274,374 Comprehensive income: Net income 3,365,550 3,365,550 Unrealized gain on securities available for sale, net of tax of $259,841 616,149 616,149 Total comprehensive income 3,981,699 Cash dividends declared $1.08 PER SHARE (906,882) (906,882) BALANCE, DECEMBER 31, 2001 $ 1,804,850 $ 7,158,505 $18,185,664 $ 491,335 $(2,291,163) $25,349,191 See accompanying notes to consolidated financial statements. -4- CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2001, 2000, and 1999 2001 2000 1999 Cash flows from operating activities: Net income $ 3,365,550 $ 2,669,619 $ 2,588,982 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and net amortization 582,698 570,555 554,059 Benefit from deferred income taxes (54,000) (81,000) (70,000) Provision for loan losses 890,000 600,000 460,000 Proceeds from sales of loans held for sale 60,435,412 4,722,650 21,214,462 Originations of loans held for sale (61,041,534) (4,770,210) (17,871,010) Gain on sale of loans (683,278) (66,440) (223,002) Gain on sale of premises and equipment (48,332) (69,000) Net gain (loss) on sale of foreclosed assets 10,383 (21,461) FHLB stock dividends (141,900) (129,800) Changes in operating assets and liabilities: Accrued interest receivable 228,882 (355,475) (20,695) Other assets (328,883) 75,956 (109,686) ACCRUED EXPENSES AND OTHER LIABILITIES 69,150 540,486 (276,212) NET CASH PROVIDED BY OPERATING ACTIVITIES 3,284,148 3,707,341 6,225,437 Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits and money market funds (3,450,631) (26,715) 679,214 Net decrease (increase) in federal funds sold (5,222,000) (53,000) 3,934,000 Proceeds from sale and maturities of: Held to maturity securities 1,184,789 1,290,001 2,865,000 Available for sale securities 26,571,357 6,393,719 13,262,495 Payment for purchase of: Held to maturity securities (7,523,254) (1,439,927) (2,664,188) Available for sale securities (27,694,871) (7,439,798) (13,609,089) Purchase FHLB stock (1,179,300) (44,300) Net increase in loans (13,523,970) (44,777,534) (32,402,322) Capital expenditures (758,143) (1,442,917) (522,284) Proceeds from sale of premises and equipment 289,218 119,568 PROCEEDS FROM SALE OF FORECLOSED ASSETS 347,456 24,196 76,722 NET CASH USED IN INVESTING ACTIVITIES (29,780,049) (48,531,707) (28,424,752) -5- CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 Cash flows from financing activities: Net increase in non-interest-bearing deposits $ 6,315,193 $ 1,534,788 $ 507,689 Net increase in interest-bearing deposits 25,785,918 37,645,249 2,046,655 Net increase (decrease) in short-term borrowings (7,187,893) (9,700,147) 16,665,382 Proceeds from issuance of long-term borrowings 10,000,000 25,000,000 10,000,000 Repayments of long-term borrowings (10,000,000) (3,000,000) Dividends paid (906,882) (867,301) (846,189) PURCHASE OF TREASURY STOCK (1,488,563) NET CASH PROVIDED BY FINANCING ACTIVITIES 34,006,336 42,124,026 25,373,537 Net increase (decrease) in cash and due from banks 7,510,435 (2,700,340) 3,174,222 CASH AND DUE FROM BANKS AT BEGINNING 9,225,645 11,925,985 8,751,763 CASH AND DUE FROM BANKS AT END $16,736,080 $ 9,225,645 $11,925,985 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest $12,817,043 $12,071,704 $ 8,738,300 Income taxes 1,541,872 983,000 1,416,524 NONCASH INVESTING AND FINANCING ACTIVITIES: Loans charged off 331,200 314,876 432,444 Loans transferred to other real estate 894,397 17,352 79,457 Loans originated on sale of other real estate 132,641 See accompanying notes to consolidated financial statements. -6- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPAL BUSINESS ACTIVITY PSB Holdings, Inc. and Subsidiary (the "Company"), operates Peoples State Bank (the "Bank"), a full-service financial institution with a primary marketing area including, but not limited to, Marathon, Oneida, and Vilas Counties, Wisconsin. It provides a variety of banking products including uninsured investment product sales and long-term fixed rate residential mortgages. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of PSB Holdings, Inc. and its subsidiary Peoples State Bank. 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 certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS For 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 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. -7- 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. After being placed on nonaccrual status, additional income is recorded only to the extent that payments are received or the collection of principal becomes reasonably assured. Interest income recognition on impaired loans is consistent with the recognition on all other loans. Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual life of the underlying loan. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Management believes the allowance for loan losses is adequate to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. In accordance with current accounting standards, the allowance is provided for losses that have been incurred as of the balance sheet date. The allowance is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the subsidiary Bank to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination. LOANS HELD FOR SALE Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method using quoted market prices. MORTGAGE SERVICING RIGHTS Mortgage servicing rights are recognized as separate assets at the time of sale of the related loan. The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate and the anticipated repayment term of the serviced loans. For purposes of measuring impairment, the rights are stratified by interest rate in the year in which the related mortgage loans were sold. Permanent write-down of the value of the servicing right due to prepayments is recorded in the year principal is prepaid. -8- 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 estimated costs to sell. Revenue and expenses from operations and changes in any valuation allowance are included in loss on foreclosed real estate. RETIREMENT PLANS The Company maintains a defined contribution 401(k) profit-sharing plan which covers substantially all full-time employees. INCOME TAXES Deferred income taxes have been provided under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences are expected to reverse. Deferred tax expense is the result of changes in the deferred tax asset and liability. ADVERTISING AND PROMOTIONAL COSTS Costs relating to Company advertising and promotion are generally expensed when paid. EARNINGS PER SHARE Basic earnings per share are based upon the weighted average number of shares outstanding. Diluted earnings per share includes the potential common stock shares issuable under the stock options granted. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to current year presentation. NOTE 2 CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 2001, the Company adopted Statements of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." Under these SFAS, the Company must recognize all material derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in fair value are generally recognized in earnings in the period of the change. The adoption of SFAS No. 133 and No. 138 did not have an impact on the Company's financial condition or results of operations. -9- In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 addresses how intangible assets acquired outside of a business combination should be accounted for upon acquisition and how goodwill and other intangible assets should be accounted for after they have been initially recognized. SFAS No. 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Other intangible assets with a finite life will be amortized over their useful life. Goodwill and other intangible assets with indefinite useful lives shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. SFAS No. 142 is effective for the Company during 2002. The adoption of SFAS No. 141 and No. 142 did not have an impact on the Company's financial condition or results of operations. NOTE 3 CASH AND DUE FROM BANKS Cash and due from banks in the amount of $1,287,000 was restricted at December 31, 2001 to meet the reserve requirements of the Federal Reserve System. In the normal course of business, the Company and its subsidiary maintain cash and due from bank balances with correspondent banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company and its subsidiary also maintain cash balances in money market funds. Such balances are not insured. Uninsured balances at December 31, 2001 totaled $1,623,814. -10- NOTE 4 SECURITIES The amortized cost and estimated fair value of investment securities are as follows: GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE DECEMBER 31, 2001 Securities held to maturity - Obligations of states and political SUBDIVISIONS $ 20,287,480 $ 231,584 $ 164,546 $20,354,518 Securities available for sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 9,516,292 $ 173,455 $ 17,094 $ 9,672,653 Mortgage-backed securities 39,716,764 695,095 100,281 40,311,578 OTHER EQUITY SECURITIES 172,673 172,673 TOTALS $49,405,729 $ 868,550 $117,375 $50,156,904 DECEMBER 31, 2000 Securities held to maturity - Obligations of states and political SUBDIVISIONS $13,974,600 $ 101,316 $ 70,608 $14,005,308 Securities available for sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $24,572,122 $ 194,876 $356,670 $24,410,328 Mortgage-backed securities 23,706,326 42,287 23,664,039 OTHER EQUITY SECURITIES 47,672 47,672 TOTALS $48,326,120 $ 194,876 $398,957 $48,122,039 -11- The amortized cost and estimated fair value of debt securities held to maturity and securities available for sale at December 31, 2001 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. ESTIMATED AMORTIZED FAIR COST VALUE SECURITIES HELD TO MATURITY Due in one year or less $ 886,339 $ 896,302 Due after one year through five years 5,514,648 5,655,995 DUE AFTER FIVE YEARS THROUGH TEN YEARS 13,886,493 13,802,221 TOTALS $ 20,287,480 $20,354,518 SECURITIES AVAILABLE FOR SALE Due in one year or less $ 2,003,080 $ 2,016,453 Due after one year through five years 5,975,656 6,102,150 Due after five years through ten years 1,537,556 1,554,050 MORTGAGE-BACKED SECURITIES 39,716,764 40,311,578 TOTALS $ 49,233,056 $49,984,231 Securities with an approximate carrying value of $9,224,963 and $12,554,863 at December 31, 2001 and 2000, respectively, were pledged to secure public deposits and short-term borrowings and for other purposes required by law. No securities were sold in 2001, 2000, or 1999. NOTE 5 FEDERAL HOME LOAN BANK STOCK As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to hold stock in the FHLB based on the anticipated level of borrowings to be advanced. This stock is recorded at cost which approximates fair value. Transfer of the stock is substantially restricted. Equity securities include $2,150,600 and $2,008,700 of FHLB stock at December 31, 2001 and 2000, respectively. -12- NOTE 6 LOANS The composition of loans is as follows: 2001 2000 Commercial and industrial $ 55,362,878 $ 53,420,913 Real estate mortgage (commercial and residential) 158,848,733 149,859,334 Real estate construction 15,608,734 11,231,393 CONSUMER AND INDIVIDUAL 13,326,858 15,784,138 Subtotals 243,147,203 230,295,778 Net deferred loan costs 132,312 Loans in process of disbursement (3,737,080) (3,186,692) ALLOWANCE FOR LOAN LOSSES (2,968,574) (2,407,439) NET LOANS $ 236,573,861 $ 224,701,647 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: 2001 2000 Loans outstanding, January 1 $ 3,998,278 $ 4,344,679 New loans 2,680,944 2,045,266 REPAYMENTS (1,643,973) (2,391,667) Loans outstanding, December 31 $ 5,035,249 $ 3,998,278 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. -13- An analysis of impaired loans follows: AT DECEMBER 31, 2001 2000 Nonaccrual $ 1,235,248 $ 802,907 ACCRUING INCOME 876,947 1,097,938 Total impaired loans 2,112,195 1,900,845 LESS - ALLOWANCE FOR LOAN LOSSES 550,810 322,104 NET INVESTMENT IN IMPAIRED LOANS $ 1,561,385 $1,578,741 YEARS ENDED DECEMBER 31, 2001 2000 1999 Average recorded investment, net of allowance FOR LOAN LOSSES $ 2,177,185 $ 1,947,806 $ 1,874,008 INTEREST INCOME RECOGNIZED $ 190,998 $ 174,963 $ 118,162 Interest income recognized on a cash basis ON IMPAIRED LOANS $ 88,197 $ 101,618 $ 6,366 An analysis of the allowance for loan losses for the three years ended December 31, follows: 2001 2000 1999 Balance, January 1 $ 2,407,439 $ 2,099,241 $ 1,946,864 Provision charged to operating expense 890,000 600,000 460,000 Recoveries on loans 2,335 23,074 124,821 LOANS CHARGED OFF (331,200) (314,876) (432,444) BALANCE, DECEMBER 31 $ 2,968,574 $ 2,407,439 $ 2,099,241 Under a secondary market loan servicing program, the Company has provided a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of original loan principal sold to the FHLB. At December 31, 2001, the maximum Company obligation for such guarantees would be approximately $131,000 if total foreclosure losses on the entire pool of loans exceed $510,000. NOTE 7 MORTGAGE SERVICING RIGHTS Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of mortgage loans serviced for others was $35,929,282 and $855,088 at December 31, 2001 and 2000, respectively. Mortgage servicing rights of $320,993 were capitalized in 2001. Mortgage servicing rights are stated at amortized cost of $283,750 at December 31, 2001, as fair value exceeded cost. No mortgage servicing rights were recorded at December 31, 2000. Amortization of mortgage servicing rights was $37,243 in 2001. -14- NOTE 8 PREMISES AND EQUIPMENT An analysis of premises and equipment follows: 2001 2000 Land $ 1,381,617 $ 1,605,349 Buildings and improvements 4,024,338 3,793,211 Furniture and equipment 3,835,783 3,526,351 CONSTRUCTION IN PROGRESS 198,020 8,470 Total cost 9,439,758 8,933,381 LESS - ACCUMULATED DEPRECIATION AND AMORTIZATION 4,684,852 4,182,525 TOTALS $ 4,754,906 $ 4,750,856 Depreciation and amortization charged to operating expenses amounted to $513,207 in 2001 and $544,366 in 2000, and $511,047 in 1999. The Company has committed to capital additions in 2002 totaling approximately $1.2 million. NOTE 9 Deposits At December 31, 2001, certificate of deposit and IRA accounts have scheduled maturity dates as follows: 2002 $ 83,620,826 2003 26,798,987 2004 4,636,716 2005 1,014,631 2006 5,391,596 TOTAL $ 121,462,756 Certificate of deposit and IRA accounts with individual balances greater than $100,000 totaled $51,631,238 and $47,228,159 at December 31, 2001 and 2000, respectively. Deposits from Company directors, officers, and related parties at December 31, 2001 and 2000 totaled $6,587,405 and $5,513,988, respectively. -15- NOTE 10 SHORT-TERM BORROWINGS Short-term borrowings consist of the following at December 31: 2001 2000 Securities sold under repurchase agreement $ 4,326,850 $ 7,661,743 FHLB OPEN LINE OF CREDIT 3,853,000 TOTALS $ 4,326,850 $ 11,514,743 The Company pledges U.S. Treasury and agency securities available for sale as collateral for repurchase agreements. The fair value of securities pledged for short-term borrowings totaled $6,885,173 and $8,108,140 at December 31, 2001 and 2000, respectively. Repurchase agreements with Company directors, officers, and related parties at December 31, 2000 totaled $4,500,000. There were no related party repurchase agreements at December 31, 2001. The following information relates to federal funds purchased and securities sold under repurchase agreements for the years ended December 31: 2001 2000 1999 As of end of year: Weighted average rate 5.01% 6.83% 5.90% For the year: Highest month-end balance $ 9,046,563 $ 26,862,797 $ 21,214,890 Daily average balance $ 6,414,054 $ 17,232,498 $ 11,660,602 Weighted average rate 6.73% 6.62% 5.49% -16- NOTE 11 LONG-TERM BORROWINGS Long-term borrowings at December 31, consist of the following: 2001 2000 Note payable to the FHLB, monthly interest payments only at 5.45%, due January 2003 $ 10,000,000 $ Note payable to the FHLB, monthly interest payments only at 6.50%, due November 2003 6,000,000 6,000,000 Note payable to the FHLB, monthly interest payments only at 6.21%, due February 2005, callable beginning February 2001 5,000,000 5,000,000 Note payable to the FHLB, monthly interest payments only at 6.17%, due March 2005, callable beginning March 2001 8,000,000 8,000,000 Note payable to the FHLB, monthly interest payments only at 6.10%, due April 2005, callable beginning January 2001 6,000,000 6,000,000 Note payable to the FHLB, monthly interest payments only at 5.07%, due February 2008, callable beginning FEBRUARY 2001 3,000,000 3,000,000 TOTALS $ 38,000,000 $ 28,000,000 The scheduled principal maturities are: 2003 $ 16,000,000 2005 19,000,000 THEREAFTER 3,000,000 TOTAL $ 38,000,000 The FHLB advances are secured by a blanket lien consisting principally of one- to-four family real estate loans totaling in excess of $63,000,000 and $47,000,000 at December 31, 2001 and 2000, respectively. As a member of the FHLB system, the Company may draw on a line of credit totaling approximately $50,000,000. At December 31, 2001, the Company's available and unused portion of this line of credit totaled approximately $12,000,000. -17- NOTE 12 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS The Company has established a 401(k) profit-sharing contribution pension plan for its employees. The Company matches 50% of employees' salary deferrals up to the first 6% of pay deferred. The Company also may declare a discretionary profit-sharing contribution. The expense recognized for contributions to the plan for the years ended December 31, 2001, 2000, and 1999 was $262,940, $160,166, and $173,858, respectively. The Company also maintained an unfunded retirement plan for its directors. Under the terms of the plan, directors who had at least 15 years of service were eligible for benefits of between 25% and 50% of the fees earned in the last five years of service. Effective December 31, 2000, the plan was terminated and benefits frozen. In 2001, termination vesting was provided to all directors on a pro-rata basis. The liability recognized in the financial statements for this plan was approximately $124,000 and $131,000 at December 31, 2001 and 2000, respectively. The expense recognized in 2001 associated with the plan termination was approximately $104,000. Income of approximately $25,000 was recognized on this plan in 2000. There was no provision for plan expense in 1999. The Company maintains an unfunded postretirement health care benefit plan which covers the officers of the Company. After retirement, the Company will pay between 25% and 50% of the health insurance premiums for former Company officers. To qualify, an officer must have at least 15 years of service, be employed by the Company at retirement, and must be 62 years of age at retirement. The actual amount paid is based upon years of service to the Company. The following tables provide a reconciliation of changes in the postretirement health care benefit plan for the years ended December 31, 2001 and 2000: 2001 2000 Reconciliation of benefit obligations: Obligation at January 1 $ 237,057 $ 201,637 Service cost 17,140 15,466 Interest cost 22,045 21,771 Benefit payments (8,309) (9,213) NET AMORTIZATION OF PRIOR SERVICE COSTS 7,396 7,396 OBLIGATION AT DECEMBER 31 $ 275,329 $ 237,057 -18- The following table provides the components of net periodic benefit cost of the plans for the years ended December 31, 2001, 2000, and 1999: POSTRETIREMENT HEALTH CARE BENEFIT PLAN 2001 2000 1999 Service cost $ 17,140 $ 15,466 $ 13,134 Interest cost 22,045 21,771 19,314 Net amortization transition and PRIOR SERVICE COSTS 7,396 7,396 7,396 NET PERIODIC PENSION COST $ 46,581 $ 44,633 $ 39,844 The assumptions used in the measurement of the Company's benefit obligation are shown in the following table: POSTRETIREMENT HEALTH CARE BENEFIT PLAN 2001 2000 1999 Discount rate 7.50% 7.50% 7.50% Health care cost trend rate 7.00% 7.25% 7.50% The health care cost trend rate is anticipated to be 6.75% in 2002, grading down .25% per year to 5.00%. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care benefit plan. A 1% increase in assumed health care cost trend rates would have the following effects: 2001 2000 1999 Effect on service and interest cost $ 9,330 $ 8,813 $ 8,011 Effect on accumulated benefit obligation at December 31 66,875 65,014 59,971 NOTE 13 SELF-FUNDED HEALTH INSURANCE PLAN The Company has established an employee medical benefit plan to self-insure claims up to $15,000 per year for each individual with a $286,690 stop-loss per year for participants in the aggregate. Coverages will increase in 2002 to $20,000 per individual and $508,218 in the aggregate. The Company and its covered employees contribute to the fund to pay the claims and stop-loss premiums. Medical benefit plan costs are expensed as incurred. The liability recognized for claims incurred but not yet paid was $54,103 and $60,824 as of December 31, 2001 and 2000, respectively. Health insurance expense recorded in 2001, 2000, and 1999 was $272,735, $278,639, and $168,564, respectively. -19- NOTE 14 INCOME TAXES The components of the income tax provision are as follows: 2001 2000 1999 Current income tax provision: Federal $1,414,000 $1,101,000 $1,016,000 STATE 93,000 82,000 121,500 TOTAL CURRENT 1,507,000 1,183,000 1,137,500 Deferred income tax benefit: Federal (43,000) (60,000) (60,000) State (11,000) (21,000) (10,000) TOTAL DEFERRED (54,000) (81,000) (70,000) TOTAL PROVISION FOR INCOME TAXES $1,453,000 $1,102,000 $1,067,500 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: 2001 2000 Deferred tax assets: Allowance for loan losses $ 1,047,400 $ 833,600 Deferred compensation 48,500 51,600 State net operating loss 23,600 16,800 Post-retirement health care benefits 105,100 89,300 Employee pension plan 25,300 29,500 Unrealized loss on securities available for sale 79,267 Other 16,200 LESS - VALUATION ALLOWANCES (23,600) (16,800) GROSS DEFERRED TAX ASSETS 1,242,500 1,083,267 Deferred tax liabilities: Premises and equipment 103,600 117,700 Mortgage servicing rights 111,000 FHLB stock 91,100 51,100 Deferred loan costs 52,000 Unrealized gain on securities available for sale 259,841 OTHER 1,999 6,400 -20- GROSS DEFERRED TAX LIABILITIES 619,540 175,200 NET DEFERRED TAX ASSETS $ 622,960 $ 908,067 The Company and its subsidiary Bank pay state income taxes on individual, unconsolidated net earnings. At December 31, 2001, net operating loss carryforwards at the parent company of approximately $440,000 existed to offset future state taxable income. These net operating losses will begin to expire in 2012. A valuation allowance has been recognized to adjust deferred tax assets to the amount of net operating losses expected to be utilized to offset future income. If realized, the tax benefit for this item will reduce current tax expense for that period. -21- 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: 2001 2000 1999 PERCENT PERCENT PERCENT OF OF OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME Tax expense at statutory rate $ 1,638,000 34.0 $ 1,282,000 34.0 $ 1,243,000 34.0 Increase (decrease) in taxes resulting from: Tax-exempt interest (284,000) (5.9) (215,000) (5.7) (221,900) (6.1) State income tax 54,000 1.1 40,300 1.1 73,600 2.0 OTHER 45,000 1.0 (5,300) (0.2) (27,200) (0.7) Provision for income TAXES $ 1,453,000 30.2 $ 1,102,000 29.2 $ 1,067,500 29.2 NOTE 15 LEASES The Company leases various pieces of equipment under cancelable leases and space for two branch locations under noncancelable leases. The Company has the option to renew the noncancelable branch location leases for an additional term upon expiration. All leases are classified as operating. Future minimum payments under the noncancelable leases are as follows: 2002 $ 80,456 2003 63,360 2004 69,228 2005 74,217 2006 46,656 THEREAFTER 35,480 TOTAL $ 369,397 Rental expense for all operating leases was $57,361, $43,468, and $39,104 for the years ended December 31, 2001, 2000, and 1999, respectively. -22- NOTE 16 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: 2001 2000 Commitments to extend credit: Fixed rate $ 11,748,258 $ 10,122,861 Variable rate 22,302,084 18,085,926 Letters of credit - Variable rate 536,842 651,167 CREDIT CARD COMMITMENTS - FIXED RATE 3,223,471 2,970,366 TOTALS $ 37,810,655 $ 31,830,320 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. The commitments are generally structured to allow for 100% collateralization on all letters of credit. Credit card commitments are commitments on credit cards issued by the Company and serviced by Elan Financial Services. These commitments are unsecured. CONCENTRATION OF CREDIT RISK The Company grants residential mortgage, commercial, and consumer loans predominantly in Marathon, Oneida, and Vilas Counties, Wisconsin. There are no significant concentrations of credit to any one debtor or industry group. Management believes that the diversity of the local economy will prevent significant losses in the event of an economic downturn. -23- 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, 2001, none of the approximately $18,210,000 of variable rate loans had reached the interest rate cap. NOTE 17 STOCK OPTION PLAN Under the terms of an incentive stock option plan adopted during 2001, shares of unissued common stock are reserved for options to officers and key employees of the Company at prices not less than the fair market value of the shares at the date of the grant. Options may be exercised anytime after the option grant's first anniversary. These options expire ten years after the grant date. During 2001, 12,693 options were granted with an exercise price of $33.25. None of the granted options are yet available to be exercised. As of December 31, 2001, 2,307 additional shares of common stock remain reserved for future grants to officers and key employees under the option plan approved by the shareholders. The Company follows the provisions of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and uses the "intrinsic value method" of recording stock-based compensation cost. Because stock options are granted with an exercise price equal to fair value at the date or grant, no compensation expense is recorded. However, had compensation cost for the Company's stock-based plan been determined in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" based on the fair value of the stock options, net income would have decreased $61,307 in 2001. Earnings per share, assuming dilution, would have been $3.94 in 2001. NOTE 18 CAPITAL REQUIREMENTS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject. -24- As of December 31, 2001, 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. -25- The Company's and the Bank's actual capital amounts and ratios are also presented in the table. To Be Well- CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO As of December 31, 2001: Total capital (to risk weighted assets): Consolidated $27,799,000 11.2% $19,900,000 8.0% N/A Subsidiary bank $27,644,000 11.1% $19,900,000 8.0% $24,875,000 10.0% Tier I capital (to risk weighted assets): Consolidated $24,830,000 10.0% $9,950,000 4.0% N/A Subsidiary bank $24,675,000 9.9% $9,950,000 4.0% $14,925,000 6.0% Tier I capital (to average assets): Consolidated $24,830,000 7.4% $13,370,000 4.0% N/A Subsidiary bank $24,675,000 7.4% $13,370,000 4.0% 16,713,000 5.0% As of December 31, 2000: Total capital (to risk weighted assets): Consolidated $24,806,000 12.1% $16,392,000 8.0% N/A Subsidiary bank $24,722,000 12.1% $16,392,000 8.0% $20,491,000 10.0% Tier I capital (to risk weighted assets): Consolidated $22,399,000 10.9% $8,196,000 4.0% N/A Subsidiary bank $22,315,000 10.9% $8,196,000 4.0% $12,294,000 6.0% Tier I capital (to average assets): Consolidated $22,399,000 7.4% $12,122,000 4.0% N/A Subsidiary bank $22,315,000 7.4% $12,122,000 4.0% 15,153,000 5.0% -26- NOTE 19 RESTRICTIONS ON RETAINED EARNINGS The Bank is restricted by banking regulations from making dividend distributions above prescribed amounts and is limited in making loans and advances to the Company. At December 31, 2001, the retained earnings of the subsidiary available for distribution as dividends without regulatory approval was approximately $6,800,000. NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS Current accounting standards require that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial statements: Cash and 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. Securities: Fair values are based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage, and other consumer. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company's repayment schedules for each loan classification. In addition, for impaired loans, marketability and appraisal values for collateral were considered in the fair value determination. The carrying amount of accrued interest approximates its fair value. Mortgage Servicing Rights: Fair values are based on estimated discounted cash flows based on current market rates and anticipated repayment term of the serviced loans. Deposit Liabilities: The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, NOW accounts, and money market accounts, is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate reflects the credit quality and operating expense factors of the Company. Short-Term Borrowings: The fair value of short-term borrowings with no stated maturity, such as federal funds purchased, is equal to the amount payable on demand at the reporting date. Fair value for fixed rate repurchase agreements is estimated using a discounted cash flow calculation that applies interest rates currently being offered on repurchase agreements to a schedule of aggregated expected maturities on the existing agreements. 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. -27- Off-Balance-Sheet Instruments: The fair value of commitments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counter parties. Since this amount is immaterial, no amounts for fair value are presented. The carrying amounts and fair values of the Company's financial instruments consisted of the following at December 31: 2001 2000 CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE Financial assets: Cash and short-term investments $ 25,550,205 $ 25,550,205 $ 9,367,139 $ 9,367,139 Securities 72,594,984 72,662,022 64,105,339 64,136,047 Net loans 237,977,621 239,303,704 224,815,647 227,772,909 Mortgage servicing rights 283,750 283,750 Financial liabilities: Deposits 273,635,389 275,787,818 241,534,278 241,970,455 Short-term borrowings 4,326,850 4,389,910 11,514,743 11,564,152 Long-term borrowings 38,000,000 39,354,608 28,000,000 28,052,483 LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, other assets, and other liabilities. In addition, the tax ramifications related to the realization of the unrealized gains or losses can have a significant effect on fair value estimates and have not been considered in the estimates. -28- NOTE 21 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed balance sheets as of December 31, 2001 and 2000, and condensed statements of income and cash flows for the years ended December 31, 2001, 2000, and 1999, for PSB Holdings, Inc. should be read in conjunction with the consolidated financial statements and footnotes. BALANCE SHEETS December 31, 2001 and 2000 ASSETS 2001 2000 Cash and due from banks $ 669,204 $ 627,714 Investment in subsidiary 25,195,181 22,189,893 OTHER ASSETS 72,599 26,306 TOTAL ASSETS $ 25,936,984 $ 22,843,913 Liabilities and Stockholders' Equity Accrued dividends payable $ 587,793 $ 569,539 TOTAL STOCKHOLDERS' EQUITY 25,349,191 22,274,374 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,936,984 $ 22,843,913 -29- STATEMENTS OF INCOME Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 Income: Dividends from subsidiary $ 1,063,000 $ 2,269,000 $ 909,000 INTEREST 4,317 5,235 8,148 TOTAL INCOME 1,067,317 2,274,235 917,148 Expenses: Interest 8,577 OTHER 134,905 66,342 77,589 TOTAL EXPENSES 134,905 74,919 77,589 Income before income taxes and equity in undistributed net income of subsidiary 932,412 2,199,316 839,559 PROVISION FOR INCOME TAX BENEFIT (44,000) (22,000) (22,000) Net income before equity in undistributed net income of subsidiary 976,412 2,221,316 861,559 Equity in undistributed net income of SUBSIDIARY 2,389,138 448,303 1,727,423 NET INCOME $ 3,365,550 $ 2,669,619 $2,588,982 -30- STATEMENTS OF CASH FLOWS Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 Increase (decrease) in cash and due from banks: Cash flows from operating activities: Net income $ 3,365,550 $ 2,669,619 $ 2,588,982 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed net income of subsidiary (2,389,138) (448,303) (1,727,423) Net amortization 8,965 21,517 (Increase) decrease in other assets (46,293) 302 (9,607) INCREASE IN DIVIDENDS PAYABLE 18,253 NET CASH PROVIDED BY OPERATING ACTIVITIES 948,372 2,230,583 873,469 Cash flows from financing activities: Dividends paid (906,882) (867,301) (846,189) PURCHASE OF TREASURY STOCK (1,488,563) NET CASH USED IN FINANCING ACTIVITIES (906,882) (2,355,864) (846,189) Net increase (decrease) in cash and due from bank 41,490 (125,281) 27,280 CASH AND DUE FROM BANKS AT BEGINNING 627,714 752,995 725,715 CASH AND DUE FROM BANKS AT END $ 669,204 $ 627,714 $ 752,995 -31-