Loans

12 Months Ended

Dec. 31, 2013

Loans

Loans

NOTE 5 Loans

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

	2013			2012
Commercial, industrial, and municipal	$	130,220		$	132,633
Commercial real estate mortgage		212,850			183,818
Commercial construction and development		13,672			28,482
Residential real estate mortgage		123,980			105,579
Residential construction and development		18,277			15,247
Residential real estate home equity		20,677			21,756
Consumer and individual		3,567			4,715
Subtotals – Gross loans		523,243			492,230
Loans in process of disbursement		(6,895	)		(7,039	)
Subtotals – Disbursed loans		516,348			485,191
Net deferred loan costs		315			231
Allowance for loan losses		(6,783	)		(7,431	)
Net loans receivable	$	509,880		$	477,991

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, 2013 and 2012, PSB held $4,553 and $5,954, respectively, of variable rate loans with interest rate caps. At December 31, 2013 and 2012, 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:

	2013			2012
Loans outstanding at beginning	$	7,371		$	9,958
New loans		3,519			4,485
Repayments		(4,227	)		(7,072	)
Loans outstanding at end	$	6,663		$	7,371

At December 31, 2013 and 2012, PSB had total loans receivable of approximately $4,595 and $4,875, respectively, from one related party

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

	December 31,
	2013		2012		2011
Impaired loans without a valuation allowance	$	9,303	$	3,410	$	5,474
Impaired loans with a valuation allowance		6,472		9,029		11,745
Total impaired loans before valuation allowances		15,775		12,439		17,219
Valuation allowance related to impaired loans		2,108		2,434		3,178
Net impaired loans	$	13,667	$	10,005	$	14,041

	Years Ended December 31,
	2013		2012		2011
Average recorded investment, net of allowance for loan losses	$	14,109	$	12,026	$	12,965
Interest income recognized	$	534	$	569	$	597
Interest income recognized on a cash basis on impaired loans	$	0	$	0	$	0

At December 31, 2013, $201 of funds were committed to be advanced on remaining available lines of credit in connection with impaired loans, while $214 of funds were committed to be advanced on remaining available lines of credit in connection with impaired loans at December 31, 2012.

Total loans receivable (including nonaccrual impaired loans) maintained on nonaccrual status as of December 31, 2013 and 2012 were $7,340 and $7,715, respectively. There were no loans past due 90 days or more but still accruing income at December 31, 2013 and 2012.

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

	2013			2012			2011
Balance, January 1	$	7,431		$	7,941		$	7,960
Provision charged to operating expense		4,015			785			1,390
Recoveries on loans		80			37			178
Loans charged off		(4,743	)		(1,332	)		(1,587	)
Balance, December 31	$	6,783		$	7,431		$	7,941

Detailed allowance for loan losses activity for the years ended December 31, 2013, 2012, and 2011, follows:

	2013
				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	3,014		$	2,803		$	1,511		$	103		$	0	$	7,431
Provision		3,435			(9	)		556			33			0		4,015
Recoveries		29			33			6			12			0		80
Charge-offs		(3,650	)		(174	)		(850	)		(69	)		0		(4,743	)
Ending balance	$	2,828		$	2,653		$	1,223		$	79		$	0	$	6,783
Individually evaluated for impairment	$	1,167		$	695		$	228		$	18		$	0	$	2,108
Collectively evaluated for impairment	$	1,661		$	1,958		$	995		$	61		$	0	$	4,675
Loans receivable (gross):
Individually evaluated for impairment	$	8,102		$	5,527		$	2,129		$	17		$	0	$	15,775
Collectively evaluated for impairment	$	122,118		$	220,995		$	160,805		$	3,550		$	0	$	507,468

	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

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, 2013 and 2012, follows:

	2013
			Commercial		Construction
	Commercial		Real Estate		& Development		Agricultural		Government		Total
High quality (risk rating 1)	$	44	$	0	$	0	$	0	$	0	$	44
Minimal risk (2)		24,085		19,249		120		1,115		78		44,647
Average risk (3)		51,745		145,673		8,863		2,563		6,512		215,356
Acceptable risk (4)		26,395		34,154		2,917		424		357		64,247
Watch risk (5)		8,146		7,572		1,632		0		0		17,350
Substandard risk (6)		654		815		0		0		0		1,469
Impaired loans (7)		4,860		5,387		140		152		3,090		13,629
Totals	$	115,929	$	212,850	$	13,672	$	4,254	$	10,037	$	356,742

	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

The consumer credit exposure based on payment activity at December 31, 2013 and 2012, follows:

	2013
	Residential-		Residential-		Construction and
	Prime		HELOC		Development		Consumer		Total
Performing	$	122,408	$	20,167	$	18,230	$	3,550	$	164,355
Impaired loans		1,572		510		47		17		2,146
Totals	$	123,980	$	20,677	$	18,277	$	3,567	$	166,501

	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

The payment age analysis of loans receivable disbursed at December 31, 2013 and 2012, follows:

	2013
	30-59		60-89		90+		Total				Total		90+ and
Loan Class	Days		Days		Days		Past Due		Current		Loans		Accruing
Commercial:
Commercial and industrial	$	284	$	57	$	610	$	951	$	114,978	$	115,929	$	0
Agricultural		0		0		152		152		4,102		4,254		0
Government		0		0		0		0		10,037		10,037		0
Commercial real estate:
Commercial real estate		376		547		1,276		2,199		210,651		212,850		0
Construction and development		0		0		0		0		11,434		11,434		0
Residential real estate:
Residential – Prime		369		87		335		791		123,189		123,980		0
Residential – HELOC		45		14		314		373		20,304		20,677		0
Construction and development		37		0		0		37		13,583		13,620		0
Consumer		15		10		9		34		3,533		3,567		0
Totals	$	1,126	$	715	$	2,696	$	4,537	$	511,811	$	516,348	$	0

	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

The impaired loans at December 31, 2013 and 2012, and during the years then ended, by loan class, follows:

	2013
	Unpaid						Average		Interest
	Principal		Related		Recorded		Recorded		Income
	Balance		Allowance		Investment		Investment		Recognized
With no related allowance recorded:
Commercial and industrial	$	2,906	$	0	$	2,861	$	2,172	$	135
Commercial real estate		2,555		0		2,376		1,740		85
Commercial construction and development		1		0		0		0		0
Agricultural		0		0		0		0		0
Government		3,090		0		3,090		1,545		150
Residential – Prime		979		0		866		845		14
Residential – HELOC		110		0		110		55		3
Residential construction and development		0		0		0		0		0
Consumer		0		0		0		0		0
With an allowance recorded:
Commercial and industrial	$	2,231	$	1,112	$	1,999	$	2,813	$	43
Commercial real estate		3,143		621		3,011		2,955		81
Commercial construction and development		142		74		140		171		8
Agricultural		152		55		152		153		0
Residential – Prime		749		101		706		1,085		9
Residential – HELOC		412		119		400		453		5
Residential construction and development		49		8		47		106		1
Consumer		19		18		17		22		0
Totals:
Commercial and industrial	$	5,137	$	1,112	$	4,860	$	4,985	$	178
Commercial real estate		5,698		621		5,387		4,695		166
Commercial construction and development		143		74		140		171		8
Agricultural		152		55		152		153		0
Government		3,090		0		3,090		1,545		150
Residential – Prime		1,728		101		1,572		1,930		23
Residential – HELOC		522		119		510		508		8
Residential construction and development		49		8		47		106		1
Consumer		19		18		17		22		0

	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
Residential – Prime		824		0		824		493		9
Residential – HELOC		0		0		0		0		3
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

The loans on nonaccrual status at December 31, follows:

	2013		2012
Commercial:
Commercial and industrial	$	1,575	$	3,023
Agricultural		152		154
Commercial real estate:
Commercial real estate		4,103		2,001
Construction and development		17		1
Residential real estate:
Residential – Prime		1,059		2,021
Residential – HELOC		387		365
Construction and development		30		133
Consumer		17		17
Totals	$	7,340	$	7,715

The following table presents information concerning modifications of troubled debt made during 2013 and 20112:

					Postmodification
			Premodification		Outstanding
			Outstanding		Recorded
	Number of		Recorded		Investment
As of December 31, 2013	contracts		Investment		at Period-End
Commercial and industrial		7		$1,012		$642
Commercial and real estate		5		587		564
Residential real estate - Prime		5		867		852

During the year ended December 31, 2013, approximately $1,272, or 52%, of the modified loan principal was restructured to capitalize unpaid property taxes, and $1,194, or 48%, 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, 2013, specific loan loss reserves maintained on loans modified or restructured during 2013 totaled $258.

The following table outlines past troubled debt restructurings that subsequently defaulted during 2013 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		1		$ 0
Commercial real estate		1		80
Residential real estate - Prime		1		87

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, 2013.

					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 - Prime		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 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.

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, 2013, PSB serviced payments on $23,709 of first lien residential loan principal under these terms for the FHLB. At December 31, 2013, the maximum PSB obligation for such guarantees would be approximately $949 if total foreclosure losses on the entire pool of loans exceed approximately $1,593. Management believes the likelihood of reimbursement for credit loss payable to the FHLB on loans underwritten according to program requirements 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 credit enhancement losses.

PSB had originated and sold $5,202 and $5,438 of commercial and commercial real estate loans to other participating financial institutions at December 31, 2013 and 2012, respectively, to accommodate customer credit needs and maintain compliance with internal and external large borrower limits. Likewise, PSB had purchased $27,404 and $20,601 of commercial and commercial real estate loans originated by other Wisconsin-based financial institutions at December 31, 2013 and 2012, respectively, 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.