Loans

12 Months Ended

Dec. 31, 2012

Loans

Loans

NOTE 5 Loans

The composition of loans at December 31 categorized by the type of the loan is as follows:

	2012			2011
Commercial, industrial, and municipal	$	132,633		$	127,192
Commercial real estate mortgage		183,818			184,360
Commercial construction and development		28,482			20,078
Residential real estate mortgage		105,579			78,114
Residential construction and development		15,247			13,419
Residential real estate home equity		21,756			23,193
Consumer and individual		4,715			3,732
Subtotals – Gross loans		492,230			450,088
Loans in process of disbursement		(7,039	)		(4,787	)
Subtotals – Disbursed loans		485,191			445,301
Net deferred loan costs		231			197
Allowance for loan losses		(7,431	)		(7,941	)
Net loans receivable	$	477,991		$	437,557

PSB originates and holds adjustable rate residential mortgage loans and commercial purpose loans with variable rates of interest. The rate of interest on some of these loans is capped over the life of the loan. At December 31, 2012 and 2011, PSB held $5,954 and $4,846, respectively, of variable rate loans with interest rate caps. At December 31, 2012 and 2011, none of the loans had reached the interest rate cap.

PSB, 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:

	2012			2011
Loans outstanding at beginning	$	9,958		$	7,780
New loans		4,485			3,335
Repayments		(7,072	)		(1,157	)
Loans outstanding at end	$	7,371		$	9,958

At December 31, 2012 and 2011, PSB had total loans receivable of approximately $4,875 and $5,170, respectively, from one related party.

The following is a summary of information pertaining to impaired loans and nonperforming loans:

	December 31,
	2012		2011		2010
Impaired loans without a valuation allowance	$	3,410	$	5,474	$	8,773
Impaired loans with a valuation allowance		9,029		11,745		2,643
Total impaired loans before valuation allowances		12,439		17,219		11,416
Valuation allowance related to impaired loans		2,434		3,178		1,496
Net impaired loans	$	10,005	$	14,041	$	9,920

	Years Ended December 31,
	2012		2011		2010
Average recorded investment, net of allowance for loan losses	$	12,026	$	12,965	$	10,122
Interest income recognized	$	569	$	597	$	421
Interest income recognized on a cash basis on impaired loans	$	0	$	0	$	0

At December 31, 2012, $214 of funds were committed to be advanced on remaining available lines of credit in connection with impaired loans, while $211 of funds were committed to be advanced on remaining available lines of credit in connection with impaired loans at December 31, 2011.

Total loans receivable (including nonaccrual impaired loans) maintained on nonaccrual status as of December 31, 2012 and 2011 were $7,715 and $7,974, respectively. There were no loans past due 90 days or more but still accruing income at December 31, 2012 and 2011.

A summary analysis of the allowance for loan losses for the three years ended December 31 follows:

	2012			2011			2010
Balance, January 1	$	7,941		$	7,960		$	7,611
Provision charged to operating expense		785			1,390			1,795
Recoveries on loans		37			178			19
Loans charged off		(1,332	)		(1,587	)		(1,465	)
Balance, December 31	$	7,431		$	7,941		$	7,960

Detailed activity for the years ended December 31, 2012, 2011, and 2010, follows:

	2012
				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	3,406		$	3,175		$	1,242		$	118		$	0	$	7,941
Provision		(270	)		142			877			36			0		785
Recoveries		6			4			21			6			0		37
Charge-offs		(128	)		(518	)		(629	)		(57	)		0		(1,332	)
Ending balance	$	3,014		$	2,803		$	1,511		$	103		$	0	$	7,431
Individually evaluated for impairment	$	1,327		$	674		$	407		$	26		$	0	$	2,434
Collectively evaluated for impairment	$	1,687		$	2,129		$	1,104		$	77		$	0	$	4,997
Loans receivable (gross):
Individually evaluated for impairment	$	5,263		$	4,204		$	2,946		$	26		$	0	$	12,439
Collectively evaluated for impairment	$	127,370		$	208,096		$	139,636		$	4,689		$	0	$	479,791

	2011
				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	3,862		$	3,674		$	211		$	213		$	0	$	7,960
Provision		245			(269	)		1,398			16			0		1,390
Recoveries		166			6			0			6			0		178
Charge-offs		(867	)		(236	)		(367	)		(117	)		0		(1,587	)
Ending balance	$	3,406		$	3,175		$	1,242		$	118		$	0	$	7,941
Individually evaluated for impairment	$	1,663		$	885		$	615		$	15		$	0	$	3,178
Collectively evaluated for impairment	$	1,743		$	2,290		$	627		$	103		$	0	$	4,763
Loans receivable (gross):
Individually evaluated for impairment	$	6,484		$	8,063		$	2,603		$	69		$	0	$	17,219
Collectively evaluated for impairment	$	120,708		$	196,375		$	112,123		$	3,663		$	0	$	432,869

	2010
				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	3,525		$	3,706		$	191		$	189		$	0	$	7,611
Provision		784			416			474			121			0		1,795
Recoveries		7			0			8			4			0		19
Charge-offs		(454	)		(448	)		(462	)		(101	)		0		(1,465	)
Ending balance	$	3,862		$	3,674		$	211		$	213		$	0	$	7,960
Individually evaluated for impairment	$	1,126		$	370		$	0		$	0		$	0	$	1,496
Collectively evaluated for impairment	$	2,736		$	3,304		$	211		$	213		$	0	$	6,464
Loans receivable (gross):
Individually evaluated for impairment	$	5,222		$	6,194		$	0		$	0		$	0	$	11,416
Collectively evaluated for impairment	$	128,085		$	192,739		$	108,519		$	3,929		$	0	$	433,272

PSB maintains an independent credit administration staff that continually monitors aggregate commercial loan portfolio and individual borrower credit quality trends. All commercial purpose loans are assigned a credit grade upon origination, and credit grades for nonproblem borrowers with aggregate credit in excess of $500 are reviewed annually. In addition, all past due, restructured, or identified problem loans, both commercial and consumer purpose, are reviewed and assigned an up-to-date credit grade quarterly.

PSB uses a seven point grading scale to estimate credit risk with risk rating 1, representing the high credit quality, and risk rating 7, representing the lowest credit quality. The assigned credit grade takes into account several credit quality components which are assigned a weight and blended into the composite grade. The factors considered and their assigned weight for the final composite grade is as follows:

Cash flow (30% weight) – Considers earnings trends and debt service coverage levels.

Collateral (25% weight) – Considers loan to value and other measures of collateral coverage.

Leverage (15% weight) – Considers balance sheet debt and capital ratios compared to Robert Morris & Associates (RMA) industry medians.

Liquidity (10% weight) – Considers balance sheet current, quick, and other working capital ratios compared to RMA industry medians.

Management (5% weight) – Considers the past performance, character, and depth of borrower management.

Guarantor (5% weight) – Considers the existence of a guarantor along with a bank’s past experience with the guarantor and his related liquidity and credit score.

Financial reporting (5% weight) – Considers the relative level of independent financial review obtained by the borrower on its financial statements, from audited financial statements down to existence of only tax returns or potentially unreliable financial information.

Industry (5% weight) – Considers the borrower’s industry and whether it is stable or subject to cyclical or seasonal factors.

Nonclassified loans are assigned a risk rating of 1 to 4 and have credit quality that ranges from well above average to some inherent industry weaknesses that may present higher than average risk due to conditions affecting the borrower, the borrower’s industry, or economic development.

Special mention and watch loans are assigned a risk rating of 5 when potential weaknesses exist that deserve management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of repayment prospects or in credit position at some future date. Substandard loans are assigned a risk rating of 6 and are inadequately protected by the current worth and borrowing capacity of the borrower. Well-defined weaknesses exist that may jeopardize the liquidation of the debt. There is a possibility of some loss if the deficiencies are not corrected. At this point, the loan may still be performing and accruing.

Impaired and other doubtful loans assigned a risk rating of 7 have all of the weaknesses of a substandard credit plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of current facts, conditions, and collateral values highly questionable and improbable. Impaired loans include all nonaccrual loans and all restructured loans including restructured loans performing according to the restructured terms. In special situations, an impaired loan with a risk rating of 7 could still be maintained on accrual status such as in the case of restructured loans performing according to restructured terms.

The commercial credit exposure based on internally assigned credit grade at December 31, 2012 and 2011, follows:

	2012
			Commercial		Construction
	Commercial		Real Estate		& Development		Agricultural		Government		Total
High quality (risk rating 1)	$	38	$	0	$	0	$	0	$	0	$	38
Minimal risk (2)		16,360		20,193		305		559		1,575		38,992
Average risk (3)		51,846		103,454		22,573		3,336		12,550		193,759
Acceptable risk (4)		32,002		45,699		3,318		216		0		81,235
Watch risk (5)		8,271		8,291		1,757		0		0		18,319
Substandard risk (6)		617		2,179		327		0		0		3,123
Impaired loans (7)		5,109		4,002		202		154		0		9,467
Totals	$	114,243	$	183,818	$	28,482	$	4,265	$	14,125	$	344,933

	2011
			Commercial		Construction
	Commercial		Real Estate		& Development		Agricultural		Government		Total
High quality (risk rating 1)	$	65	$	0	$	0	$	0	$	0	$	65
Minimal risk (2)		10,404		21,922		205		534		1,660		34,725
Average risk (3)		54,387		103,614		12,981		1,088		6,153		178,223
Acceptable risk (4)		38,381		42,435		2,401		307		0		83,524
Watch risk (5)		7,054		7,972		2,903		0		0		17,929
Substandard risk (6)		675		1,005		937		0		0		2,617
Impaired loans (7)		6,456		7,412		651		28		0		14,547
Totals	$	117,422	$	184,360	$	20,078	$	1,957	$	7,813	$	331,630

The consumer credit exposure based on payment activity at December 31, 2012 and 2011, follows:

	2012
	Residential-		Residential-		Construction and
	Prime		HELOC		Development		Consumer		Total
Performing	$	103,292	$	21,250	$	15,094	$	4,689	$	144,325
Impaired loans		2,287		506		153		26		2,972
Totals	$	105,579	$	21,756	$	15,247	$	4,715	$	147,297

	2011
	Residential-		Residential-		Construction and
	Prime		HELOC		Development		Consumer		Total
Performing	$	75,923	$	22,925	$	13,275	$	3,663	$	115,786
Impaired loans		2,191		268		144		69		2,672
Totals	$	78,114	$	23,193	$	13,419	$	3,732	$	118,458

The payment age analysis of loans receivable disbursed at December 31, 2012 and 2011, follows:

	2012
	30-59		60-89		90+		Total				Total		90+ and
Loan Class	Days		Days		Days		Past Due		Current		Loans		Accruing
Commercial:
Commercial and industrial	$	375	$	83	$	1,795	$	2,253	$	111,990	$	114,243	$	0
Agricultural		0		154		0		154		4,111		4,265		0
Government		0		0		0		0		14,125		14,125		0
Commercial real estate:
Commercial real estate		936		76		1,028		2,040		181,778		183,818		0
Construction  and development		0		20		0		20		25,340		25,360		0
Residential real estate:
Residential – Prime		950		274		1,344		2,568		103,011		105,579		0
Residential – HELOC		64		0		335		399		21,357		21,756		0
Construction and development		0		0		133		133		11,197		11,330		0
Consumer		21		3		15		39		4,676		4,715		0
Totals	$	2,346	$	610	$	4,650	$	7,606	$	477,585	$	485,191	$	0

	2011
	30-59		60-89		90+		Total				Total		90+ and
Loan Class	Days		Days		Days		Past Due		Current		Loans		Accruing
Commercial:
Commercial and industrial	$	670	$	25	$	2,041	$	2,736	$	114,686	$	117,422	$	0
Agricultural		0		0		0		0		1,957		1,957		0
Government		0		0		0		0		7,813		7,813		0
Commercial real estate:
Commercial real estate		542		0		1,229		1,771		182,589		184,360		0
Construction and development		0		0		145		145		17,195		17,340		0
Residential real estate:
Residential – Prime		1,127		173		1,144		2,444		75,670		78,114		0
Residential – HELOC		255		5		129		389		22,804		23,193		0
Construction and development		0		35		77		112		11,258		11,370		0
Consumer		11		0		54		65		3,667		3,732		0
Totals	$	2,605	$	238	$	4,819	$	7,662	$	437,639	$	445,301	$	0

The impaired loans at December 31, 2012 and 2011, and during the years then ended, by loan class, follows:

	2012
	Unpaid						Average		Interest
	Principal		Related		Recorded		Recorded		Income
	Balance		Allowance		Investment		Investment		Recognized
With no related allowance recorded:
Commercial and industrial	$	1,483	$	0	$	1,483	$	1,545	$	88
Commercial real estate		1,103		0		1,103		2,405		194
Commercial construction and development		0		0		0		0		33
Agricultural		0		0		0		0		0
Residential – Prime		824		0		824		493		9
Residential – HELOC		0		0		0		0		3
Residential construction and development		0		0		0		0		0
Consumer		0		0		0		0		0
With an allowance recorded:
Commercial and industrial	$	3,626	$	1,287	$	2,339	$	2,777	$	62
Commercial real estate		2,899		643		2,256		2,634		105
Commercial construction and development		202		31		171		316		21
Agricultural		154		40		114		57		10
Residential – Prime		1,463		277		1,186		1,384		22
Residential – HELOC		506		126		380		259		15
Residential construction and development		153		4		149		129		5
Consumer		26		26		0		27		2
Totals:
Commercial and industrial	$	5,109	$	1,287	$	3,822	$	4,322	$	150
Commercial real estate		4,002		643		3,359		5,039		299
Commercial construction and development		202		31		171		316		54
Agricultural		154		40		114		57		10
Residential – Prime		2,287		277		2,010		1,877		31
Residential – HELOC		506		126		380		259		18
Residential construction and development		153		4		149		129		5
Consumer		26		26		0		27		2

	2011
	Unpaid						Average		Interest
	Principal		Related		Recorded		Recorded		Income
	Balance		Allowance		Investment		Investment		Recognized
With no related allowance recorded:
Commercial and industrial	$	1,606	$	0	$	1,606	$	2,409	$	51
Commercial real estate		3,706		0		3,706		4,515		204
Commercial construction and development		0		0		0		120		0
Agricultural		0		0		0		150		0
Residential – Prime		162		0		162		396		1
Residential – HELOC		0		0		0		23		0
Residential construction and development		0		0		0		12		0
Consumer		0		0		0		11		0
With an allowance recorded:
Commercial and industrial	$	4,850	$	1,635	$	3,215	$	2,050	$	93
Commercial real estate		3,706		694		3,012		1,637		154
Commercial construction and development		651		191		460		386		23
Agricultural		28		28		0		5		2
Residential – Prime		2,029		448		1,581		1,041		53
Residential – HELOC		268		131		137		99		9
Residential construction and development		144		36		108		74		5
Consumer		69		15		54		37		2
Totals:
Commercial and industrial	$	6,456	$	1,635	$	4,821	$	4,459	$	144
Commercial real estate		7,412		694		6,718		6,152		358
Commercial construction and development		651		191		460		506		23
Agricultural		28		28		0		155		2
Residential – Prime		2,191		448		1,743		1,437		54
Residential – HELOC		268		131		137		122		9
Residential construction and development		144		36		108		86		5
Consumer		69		15		54		48		2

The loans on nonaccrual status at December 31, follows:

	2012		2011
Commercial:
Commercial and industrial	$	3,023	$	4,309
Agricultural		154		0
Commercial real estate:
Commercial real estate		2,001		1,585
Construction and development		1		148
Residential real estate:
Residential – Prime		2,021		1,640
Residential – HELOC		365		159
Construction and development		133		78
Consumer		17		55
Totals	$	7,715	$	7,974

The following table presents information concerning modifications of troubled debt made during 2012 and 2011:

			Postmodification
		Premodification	Outstanding
		Outstanding	Recorded
	Number of	Recorded	Investment
As of December 31, 2012	contracts	Investment	at Period-End
Commercial and industrial	6	$661	$614
Commercial and real estate	3	603	570
Residential real estate	1	121	89

During the year ended December 31, 2012, approximately $328, or 24%, of the modified loan principal was restructured to convert the payments from amortizing principal payments to interest only payments, $379, or 27%, was restructured to capitalize unpaid property taxes, and $678, or 49%, was modified to extend amortization periods or to lower the existing interest rate. No loan principal was charged off or forgiven in connection with the modifications. At December 31, 2012, specific loan loss reserves maintained on loans modified or restructured during the year ended December 31, 2012, totaled $254.

The following table outlines past troubled debt restructurings that subsequently defaulted during 2012 when the default occurred within 12 months of the last restructuring date. For purposes of this table, default is defined as 90 days or more past due on restructured payments.

	Number of	Recorded
	Contracts	Investment
Commercial and industrial	2	$  0
Commercial real estate	1	45

The contracts noted above were originally restructured primarily to lower the interest rate and convert payments to interest only. Collateral supporting the modified loans was in the process of foreclosure at period-end. No specific loan loss reserves were maintained on these impaired loans at December 31, 2012.

			Postmodification
		Premodification	Outstanding
		Outstanding	Recorded
	Number of	Recorded	Investment
As of December 31, 2011	Contracts	Investment	at Period-End
Commercial and industrial	7	$1,162	$  903
Commercial and real estate	7	4,371	4,369
Commercial construction and development	2	145	143

During the year ended December 31, 2011, approximately $4,264, or 75%, of the modified loan principal was restructured to convert the payments from amortizing principal payments to interest only payments. The remaining modified principal of $1,414 was modified to extend amortization periods or to lower the existing interest rate. No loan principal was charged off or forgiven in connection with the modifications. At December 31, 2011, specific loan loss reserves maintained on loans modified or restructured during the year ended December 31, 2011, totaled $386.

The following table outlines past troubled debt restructurings that subsequently defaulted during 2011 when the default occurred within 12 months of the last restructuring date. For purposes of this table, default is defined as 90 days or more past due on restructured payments.

	Number of	Recorded
	Contracts	Investment
Commercial real estate	3	$459

The contracts noted above were originally restructured primarily to lower the interest rate and convert payments to interest only. Collateral supporting the modified loans was in the process of foreclosure at period-end. Specific loan loss reserves of $108 were maintained on these impaired loans at December 31, 2011.

Under a secondary market loan servicing program with the FHLB, in exchange for a monthly fee, PSB provides 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, 2012, PSB serviced payments on $36,023 of first lien residential loan principal under these terms for the FHLB. At December 31, 2012, the maximum PSB obligation for such guarantees would be approximately $1,945 if total foreclosure losses on the entire pool of loans exceed approximately $1,765. Management believes the likelihood of reimbursement for loss payable to the FHLB beyond the monthly credit enhancement fee is remote. PSB recognizes the credit enhancement fee as mortgage banking income when received in cash and does not maintain any recourse liability for possible losses.

At December 31, 2012, PSB had originated and sold $5,438 of commercial and commercial real estate loans to other participating financial institutions to accommodate customer credit needs and maintain compliance with internal and external large borrower limits. Likewise, at December 31, 2012, PSB had purchased $20,601 of commercial and commercial real estate loans originated by other Wisconsin-based financial institutions as part of informal reciprocal relationships that allow the originating bank to meet the needs of their large credit customers. PSB does not charge servicing fees to the participating institutions on these traditional loan participations sold by PSB, and no servicing right asset or liability has been recognized on these relationships. Any credit losses incurred on purchased or sold participation loans upon liquidation are shared pro-rata among the participants based on principal owned.