Quarterly Report (10-q)

PSBQ PSB Holdings Inc (QX)

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Share Name	Share Symbol	Market	Type
PSB Holdings Inc (QX)	USOTC:PSBQ	OTCMarkets	Common Stock

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	24.00	23.00	24.50	24.00	23.02	23.02	10,076	21:00:00

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


(Mark One)
T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____________ to _____________

Commission file number: 0-26480

PSB HOLDINGS, INC.

(Exact name of registrant as specified in charter)

WISCONSIN	39-1804877
(State of incorporation)	(I.R.S. Employer Identification Number)

1905 Stewart Avenue

Wausau, Wisconsin 54401

(Address of principal executive office)

Registrant’s telephone number, including area code: 715-842-2191

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.

Yes T No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes T No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	£	Accelerated filer	£

Non-accelerated filer	£	Smaller reporting company	T
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Exchange Act).

Yes £ No T

The number of common shares outstanding at August 1, 2014 was 1,652,557.

PSB HOLDINGS, INC.

FORM 10-Q

Quarter Ended June 30, 2014

			Page No.
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Balance Sheets
		June 30, 2014 (unaudited) and December 31, 2013
		(derived from audited financial statements)	1

		Consolidated Statements of Income
		Three Months and Six Months Ended June 30, 2014 and 2013 (unaudited)	2

		Consolidated Statements of Comprehensive Income
		Three Months and Six Months Ended June 30, 2014 and 2013 (unaudited)	3

		Consolidated Statements of Changes in Stockholders’ Equity
		Six Months Ended June 30, 2014 and 2013 (unaudited)	3

		Consolidated Statements of Cash Flows
		Six Months Ended June 30, 2014 and 2013 (unaudited)	4

		Notes to Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57

	Item 4.	Controls and Procedures	57

PART II.	OTHER INFORMATION

	Item 1A.	Risk Factors	57

	Item 6.	Exhibits	58

- i -

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PSB Holdings, Inc.

Consolidated Balance Sheets

June 30, 2014 unaudited, December 31, 2013 derived from audited financial statements

	June 30,			December 31,
(dollars in thousands, except per share data)	2014			2013
Assets

Cash and due from banks	$	18,961		$	13,800
Interest-bearing deposits and money market funds		913			977
Federal funds sold		1,056			16,745

Cash and cash equivalents		20,930			31,522

Securities available for sale (at fair value)		73,903			61,650
Securities held to maturity (fair value of $71,438 and $71,672 respectively)		70,338			71,629
Bank certificates of deposit		3,672			2,236
Loans held for sale		—			150
Loans receivable, net		521,824			509,880
Accrued interest receivable		2,072			2,076
Foreclosed assets		1,266			1,750
Premises and equipment, net		11,041			9,669
Mortgage servicing rights, net		1,698			1,696
Federal Home Loan Bank stock (at cost)		2,556			2,556
Cash surrender value of bank-owned life insurance		13,025			12,826
Other assets		4,216			3,901

TOTAL ASSETS	$	726,541		$	711,541

Liabilities

Non-interest-bearing deposits	$	99,816		$	102,644
Interest-bearing deposits		498,524			474,870

Total deposits		598,340			577,514

Federal Home Loan Bank advances		27,879			38,049
Other borrowings		22,559			20,441
Senior subordinated notes		4,000			4,000
Junior subordinated debentures		7,732			7,732
Accrued expenses and other liabilities		6,750			7,052

Total liabilities		667,260			654,788

Stockholders’ equity

Preferred stock – no par value:
Authorized – 30,000 shares; no shares issued or outstanding		—			—
Common stock – no par value with a stated value of $1 per share:
Authorized – 6,000,000 shares; Issued – 1,830,266 shares
Outstanding – 1,658,157 and 1,651,518 shares, respectively		1,830			1,830
Additional paid-in capital		6,914			6,967
Retained earnings		54,619			52,432
Accumulated other comprehensive income, net of tax		564			349
Treasury stock, at cost – 172,109 and 178,748 shares, respectively		(4,646	)		(4,825	)

Total stockholders’ equity		59,281			56,753

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	726,541		$	711,541

- 1 -

Index

PSB Holdings, Inc.

Consolidated Statements of Income

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(dollars in thousands, except per share data – unaudited)	2014		2013		2014		2013

Interest and dividend income:
Loans, including fees	$	5,609	$	5,781	$	11,064	$	11,468
Securities:
Taxable		613		516		1,162		1,057
Tax-exempt		374		377		755		750
Other interest and dividends		22		18		42		41

Total interest and dividend income		6,618		6,692		13,023		13,316

Interest expense:
Deposits		717		761		1,429		1,541
FHLB advances		174		324		416		654
Other borrowings		155		168		310		325
Senior subordinated notes		37		37		75		109
Junior subordinated debentures		85		85		169		169

Total interest expense		1,168		1,375		2,399		2,798

Net interest income		5,450		5,317		10,624		10,518
Provision for loan losses		140		352		280		675

Net interest income after provision for loan losses		5,310		4,965		10,344		9,843

Noninterest income:
Service fees		419		387		775		748
Mortgage banking		274		558		590		954
Investment and insurance sales commissions		249		204		493		491
Net gain on sale of securities		—		—		—		12
Increase in cash surrender value of life insurance		100		100		199		198
Other noninterest income		327		274		632		535

Total noninterest income		1,369		1,523		2,689		2,938

Noninterest expense:
Salaries and employee benefits		2,467		2,280		4,793		4,578
Occupancy and facilities		432		419		907		916
Loss on foreclosed assets		38		144		74		150
Data processing and other office operations		615		477		1,229		954
Advertising and promotion		118		76		175		154
FDIC insurance premiums		144		110		279		211
Other noninterest expenses		852		710		1,498		1,335

Total noninterest expense		4,666		4,216		8,955		8,298

Income before provision for income taxes		2,013		2,272		4,078		4,483
Provision for income taxes		610		711		1,225		1,313

Net income	$	1,403	$	1,561	$	2,853	$	3,170
Basic earnings per share	$	0.85	$	0.95	$	1.72	$	1.92
Diluted earnings per share	$	0.85	$	0.95	$	1.72	$	1.92

- 2 -

Index

PSB Holdings, Inc.

Consolidated Statements of Comprehensive Income

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands – unaudited)	2014			2013			2014			2013

Net income	$	1,403		$	1,561		$	2,853		$	3,170

Other comprehensive income (loss), net of tax:

Unrealized gain (loss) on securities available for sale		273			(389	)		297			(515	)

Reclassification adjustment for security gain included in net income		—			—			—			(7	)

Amortization of unrealized gain included in net income on securities available for sale
transferred to securities held to maturity		(49	)		(123	)		(102	)		(191	)

Unrealized gain (loss) on interest rate swap		(29	)		77			(37	)		84

Reclassification adjustment of interest rate swap settlements included in earnings		29			29			57			56

Other comprehensive income (loss)		224			(406	)		215			(573	)

Comprehensive income	$	1,627		$	1,155		$	3,068		$	2,597

PSB Holdings, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

Six months ended June 30, 2014 - unaudited
									Accumulated
									Other
			Additional						Comprehensive
	Common		Paid-in			Retained			Income		Treasury
(dollars in thousands)	Stock		Capital			Earnings			(Loss)		Stock			Totals

Balance January 1, 2014	$	1,830	$	6,967		$	52,432		$	349	$	(4,825	)	$	56,753

Net income							2,853								2,853
Other comprehensive income										215					215
Issuance of new restricted stock grants				(173	)							173			—
Vesting of existing restricted stock grants				120											120
Directors fees paid in grants of stock				—								6			6
Cash dividends declared $.40 per share							(651	)							(651	)
Cash dividends declared on unvested restricted stock grants							(15	)							(15	)

Balance June 30, 2014	$	1,830	$	6,914		$	54,619		$	564	$	(4,646	)	$	59,281

Six months ended June 30, 2013 - unaudited
									Accumulated
									Other
			Additional						Comprehensive
	Common		Paid-in			Retained			Income			Treasury
(dollars in thousands)	Stock		Capital			Earnings			(Loss)			Stock			Totals

Balance January 1, 2013	$	1,830	$	7,020		$	48,977		$	1,394		$	(4,774	)	$	54,447

Net income						$	3,170								$	3,170
Other comprehensive loss										(573	)					(573	)
Purchase of treasury stock													(269	)		(269	)
Issuance of new restricted stock grants				(218	)								218			—
Vesting of existing restricted stock grants				92												92
Cash dividends declared $.39 per share							(632	)								(632	)
Cash dividends declared on unvested restricted stock grants							(13	)								(13	)

Balance June 30, 2013	$	1,830	$	6,894		$	51,502		$	821		$	(4,825	)	$	56,222

- 3 -

Index

PSB Holdings, Inc.

Consolidated Statements of Cash Flows

Six months ended June 30, 2014 and 2013

(dollars in thousands – unaudited)	2014			2013

Cash flows from operating activities:

Net income	$	2,853		$	3,170
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and net amortization		1,128			1,352
Provision for loan losses		280			675
Deferred net loan origination costs		(213	)		(253	)
Gain on sale of loans		(378	)		(840	)
Recapture of servicing right valuation allowance		(3	)		(245	)
Gain on sale of premises and equipment		(2	)		—
Loss on sale of foreclosed assets		8			89
Gain on sale of securities		—			(12	)
Increase in cash surrender value of life insurance		(199	)		(198	)
Changes in operating assets and liabilities:
Accrued interest receivable		52			40
Other assets		(139	)		1,500
Other liabilities		(301	)		309

Net cash provided by operating activities		3,086			5,587

Cash flows from investing activities:

Proceeds from sale and maturities of:
Securities available for sale		8,343			33,962
Securities held to maturity		3,530			2,900
Payment for purchase of:
Securities available for sale		(20,264	)		(20,946	)
Securities held to maturity		(2,538	)		(5,271	)
Cash acquired on branch purchase		17,741			—
Proceeds from (purchase of) other investments		(1,436	)		1,736
Purchase of FHLB stock		—			(1,088	)
Net (increase) decrease in loans		9,211			(27,355	)
Capital expenditures		(359	)		(165	)
Proceeds from sale of premises and equipment		5			—
Proceeds from sale of foreclosed assets		761			651
Purchase of bank-owned life insurance		—			(510	)

Net cash provided by (used in) investing activities		14,994			(16,086	)

- 4 -

Index

PSB Holdings, Inc.

Consolidated Statements of Cash Flows

Six months ended June 30, 2014 and 2013

(continued)

(dollars in thousands – unaudited)	2014			2013

Cash flows from financing activities:

Net decrease in non-interest-bearing deposits		(6,718	)		(5,557	)
Net decrease in interest-bearing deposits		(13,236	)		(28,094	)
Net increase (decrease) in FHLB advances		(10,170	)		16,000
Net increase in other borrowings		2,118			856
Repayment of senior subordinated notes		—			(3,000	)
Dividends declared		(666	)		(645	)
Purchase of treasury stock		—			(269	)

Net cash used in financing activities		(28,672	)		(20,709	)

Net decrease in cash and cash equivalents		(10,592	)		(31,208	)
Cash and cash equivalents at beginning		31,522			48,847

Cash and cash equivalents at end	$	20,930		$	17,639

Supplemental cash flow information:

Cash paid during the period for:
Interest	$	2,453		$	2,939
Income taxes		1,090			745

Noncash investing and financing activities:

Loans charged off	$	146		$	480
Loans transferred to foreclosed assets		285			409
Loans originated on sale of foreclosed assets		—			107
Issuance of unvested restricted stock grants at fair value		200			210
Vesting of restricted stock grants		120			72

- 5 -

Index

PSB Holdings, Inc.

Notes to Consolidated Financial Statements

NOTE 1 – GENERAL

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly PSB Holdings, Inc.’s (“PSB”) financial position, results of its operations, and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Any reference to “PSB” refers to the consolidated or individual operations of PSB Holdings, Inc. and its subsidiary Peoples State Bank. Dollar amounts are in thousands, except per share amounts.

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in PSB’s Annual Report on Form 10-K for the year ended December 31, 2013 should be referred to in connection with the reading of these unaudited interim financial statements.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are susceptible to significant change include the determination of the allowance for loan losses, mortgage servicing right assets, and the valuation of investment securities.

NOTE 2 – PURCHASE OF NORTHWOODS NATIONAL BANK, RHINELANDER, WISCONSIN, BRANCH OF THE BARABOO NATIONAL BANK

On April 11, 2014, Peoples State Bank, subsidiary of PSB Holdings, Inc., purchased the following assets and liabilities of the Northwoods National Bank, Rhinelander, Wisconsin branch:

Fair value of assets acquired ($000s):

Cash and due from banks	$	17,741
Loans receivable, including accrued interest		21,365
Premises and equipment		1,368
Core deposit intangible		231
Goodwill		113

Total fair value of assets acquired	$	40,818

Fair value of liabilities assumed ($000s):

Non-interest bearing deposits	$	3,890
Interest-bearing deposits, including accrued interest		36,912
Other liabilities		16

Fair value of liabilities assumed	$	40,818

The core deposit intangible is being amortized over a five year period using a double declining balance method. In the transaction, net cash received by PSB from the seller was reduced by the purchase premium of $654.

- 6 -

Index

NOTE 3 – SECURITIES

The amortized cost and estimated fair value of investment securities are as follows:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
June 30, 2014	Cost		Gains		Losses		Value

Securities available for sale

U.S. agency issued residential mortgage-backed securities	$	39,249	$	697	$	198	$	39,748
U.S. agency issued residential collateralized mortgage obligations		33,125		400		400		33,125
Privately issued residential collateralized mortgage obligations		32		1		—		33
Nonrated SBA loan fund		950		—		—		950
Other equity securities		47		—		—		47

Totals	$	73,403	$	1,098	$	598	$	73,903

Securities held to maturity

Obligations of states and political subdivisions	$	68,404	$	1,521	$	287	$	69,638
Nonrated trust preferred securities		1,533		32		169		1,396
Nonrated senior subordinated notes		401		3		—		404

Totals	$	70,338	$	1,556	$	456	$	71,438

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2013	Cost		Gains		Losses		Value

Securities available for sale

U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,001	$	—	$	2	$	999
U.S. agency issued residential mortgage-backed securities		21,388		522		424		21,486
U.S. agency issued residential collateralized mortgage obligations		37,998		482		576		37,904
Privately issued residential collateralized mortgage obligations		102		3		—		105
Obligations of states and political subdivisions		159		—		—		159
Nonrated SBA loan fund		950		—		—		950
Other equity securities		47		—		—		47

Totals	$	61,645	$	1,007	$	1,002	$	61,650

Securities held to maturity

Obligations of states and political subdivisions	$	69,704	$	1,059	$	887	$	69,876
Nonrated trust preferred securities		1,524		30		165		1,389
Nonrated senior subordinated notes		401		6		—		407

Totals	$	71,629	$	1,095	$	1,052	$	71,672

Securities with a fair value of $41,987 and $47,593 at June 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits, other borrowings, and for other purposes required by law.

During the quarter ended March 31, 2014, PSB realized a net gain of $0 from proceeds totaling $262 on the sale of securities available for sale. During the quarter ended March 31, 2013, PSB realized a net gain of $12 ($7 after tax expense) from proceeds totaling $986 on the sale of securities available for sale. There were no sales of securities during the quarters ended June 30, 2014 and 2013.

- 7 -

Index

NOTE 4 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans

Loans that management has the intent to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated 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 is doubtful or those loans which are past due 90 days or more as to principal or interest payments. 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 and the collection of principal becomes reasonably assured. Interest income recognition on loans considered to be impaired is consistent with the recognition on all other loans. Loan origination fees and certain direct loan origination costs are deferred and recognized as an adjustment of the related loan yield using the interest method.

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 the collectability of the principal is unlikely.

Management maintains the allowance for loan losses at a level 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 based on events that have occurred 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.

The allowance for loan losses includes specific allowances related to loans which have been judged to be impaired. A loan is impaired when, based on current information, it is probable that PSB will not collect all amounts due in accordance with the contractual terms of the loan agreement. Management has determined that impaired loans include nonaccrual loans, loans identified as restructurings of troubled debt, and loans accruing interest with elevated risk of default in the near term based on a variety of credit factors. Specific allowances on impaired loans 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.

In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require PSB to make additions to the allowance for loan losses based on their judgments of collectability resulting from information available to them at the time of their examination.

- 8 -

Index

The composition of loans categorized by the type of the loan, is as follows:

	June 30, 2014			December 31, 2013

Commercial, industrial, and municipal	$	127,994		$	130,220
Commercial real estate mortgage		211,126			212,850
Commercial construction and development		24,684			13,672
Residential real estate mortgage		130,740			123,980
Residential construction and development		18,366			18,277
Residential real estate home equity		23,005			20,677
Consumer and individual		3,587			3,567

Subtotals – Gross loans		539,502			523,243
Loans in process of disbursement		(11,067	)		(6,895	)

Subtotals – Disbursed loans		528,435			516,348
Net deferred loan costs		318			315
Allowance for loan losses		(6,929	)		(6,783	)

Net loans receivable	$	521,824		$	509,880

The following is a summary of information pertaining to impaired loans at period-end:

	June 30, 2014		December 31, 2013

Impaired loans without a valuation allowance	$	12,118	$	9,303
Impaired loans with a valuation allowance		8,223		6,472

Total impaired loans before valuation allowances		20,341		15,775
Valuation allowance related to impaired loans		2,704		2,108

Net impaired loans	$	17,637	$	13,667

Activity in the allowance for loans losses during the six months ended June 30, 2014 follows:

Allowance for loan losses:	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated		Total

Beginning Balance	$	2,828		$	2,653		$	1,223		$	79		$	—	$	6,783
Provision (credit)		(572	)		(87	)		949			(10	)		—		280
Recoveries		4			—			4			4			—		12
Charge offs		(28	)		—			(117	)		(1	)		—		(146	)

Ending balance	$	2,232		$	2,566		$	2,059		$	72		$	—	$	6,929

Activity in the allowance for loans losses during the six months ended June 30, 2013 follows:

Allowance for loan losses:	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated		Total

Beginning Balance	$	3,014		$	2,803		$	1,511		$	103		$	—	$	7,431
Provision		252			336			73			14			—		675
Recoveries		2						2			10			—		14
Charge offs		(130	)		(27	)		(283	)		(40	)		—		(480	)

Ending balance	$	3,138		$	3,112		$	1,303		$	87		$	—	$	7,640

- 9 -

Index

The following tables provide other information regarding the allowance for loan losses and balances by type of allowance methodology.

	At June 30, 2014
			Commercial		Residential
Allowance for loan losses:	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total

Individually evaluated for impairment	$	1,207	$	630	$	843	$	24	$	—	$	2,704
Collectively evaluated for impairment		1,025		1,936		1,216		48		—		4,225

Total allowance for loan losses	$	2,232	$	2,566	$	2,059	$	72	$	—	$	6,929

Loans receivable (gross):

Individually evaluated for impairment	$	11,166	$	5,513	$	3,637	$	25	$	—	$	20,341
Collectively evaluated for impairment		116,828		230,297		168,474		3,562		—		519,161

Total loans receivable (gross)	$	127,994	$	235,810	$	172,111	$	3,587	$	—	$	539,502

	At December 31, 2013
			Commercial		Residential
Allowance for loan losses:	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total

Individually evaluated for impairment	$	1,167	$	695	$	228	$	18	$	—	$	2,108
Collectively evaluated for impairment		1,661		1,958		995		61		—		4,675

Total allowance for loan losses	$	2,828	$	2,653	$	1,223	$	79	$	—	$	6,783

Loans receivable (gross):

Individually evaluated for impairment	$	8,102	$	5,527	$	2,129	$	17	$	—	$	15,775
Collectively evaluated for impairment		122,118		220,995		160,805		3,550		—		507,468

Total loans receivable (gross)	$	130,220	$	226,522	$	162,934	$	3,567	$	—	$	523,243

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.

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Index

Guarantor (5% weight) – Considers the existence of a guarantor along with PSB’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 interest.

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 June 30, 2014, follows:

			Commercial		Construction
	Commercial		Real Estate		& Development		Agricultural		Government		Total

High quality (risk rating 1)	$	202	$	—	$	—	$	—	$	—	$	202
Minimal risk (2)		22,682		16,790		124		1,693		70		41,359
Average risk (3)		55,189		135,820		19,760		3,072		6,373		220,214
Acceptable risk (4)		23,569		44,858		3,036		514		311		72,288
Watch risk (5)		2,455		7,151		1,629		11		—		11,246
Substandard risk (6)		687		1,129		—		—		—		1,816
Impaired loans (7)		8,196		5,378		135		125		2,845		16,679

Total	$	112,980	$	211,126	$	24,684	$	5,415	$	9,599	$	363,804

The commercial credit exposure based on internally assigned credit grade at December 31, 2013, follows:

			Commercial		Construction
	Commercial		Real Estate		& Development		Agricultural		Government		Total

High quality (risk rating 1)	$	44	$	—	$	—	$	—	$	—	$	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		—		—		17,350
Substandard risk (6)		654		815		—		—		—		1,469
Impaired loans (7)		4,860		5,387		140		152		3,090		13,629

Total	$	115,929	$	212,850	$	13,672	$	4,254	$	10,037	$	356,742

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Index

The consumer credit exposure based on payment activity and internally assigned credit grade at June 30, 2014, follows:

	Residential-		Construction and		Residential-
	Prime		Development		HELOC		Consumer		Total

Performing	$	127,683	$	18,195	$	22,596	$	3,562	$	172,036
Impaired loans		3,057		171		409		25		3,662

Total	$	130,740	$	18,366	$	23,005	$	3,587	$	175,698

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

	Residential-		Construction and		Residential-
	Prime		Development		HELOC		Consumer		Total

Performing	$	122,408	$	18,230	$	20,167	$	3,550	$	164,355
Impaired loans		1,572		47		510		17		2,146

Total	$	123,980	$	18,277	$	20,677	$	3,567	$	166,501

The payment age analysis of loans receivable disbursed at June 30, 2014, follows:

	30-59		60-89		90+		Total				Total		90+ and
Loan Class	Days		Days		Days		Past Due		Current		Loans		Accruing

Commercial:

Commercial and industrial	$	606	$	499	$	277	$	1,382	$	111,598	$	112,980	$	—
Agricultural		22		—		125		147		5,268		5,415		—
Government		—		—		—		—		9,599		9,599		—

Commercial real estate:

Commercial real estate		788		190		823		1,801		209,325		211,126		—
Commercial construction and development		329		—		17		346		15,813		16,159		—

Residential real estate:

Residential – Prime		445		253		1,776		2,474		128,266		130,740		—
Residential – HELOC		31		28		192		251		22,754		23,005		—
Residential – construction and development		185		—		127		312		15,512		15,824		—

Consumer		6		7		9		22		3,565		3,587		—

Total	$	2,412	$	977	$	3,346	$	6,735	$	521,700	$	528,435	$	—

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Index

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

	30-59		60-89		90+		Total				Total		90+ and
Loan Class	Days		Days		Days		Past Due		Current		Loans		Accruing

Commercial:

Commercial and industrial	$	297	$	57	$	610	$	964	$	114,965	$	115,929	$	—
Agricultural		—		—		152		152		4,102		4,254		—
Government		—		—		—		—		10,037		10,037		—

Commercial real estate:

Commercial real estate		376		547		1,276		2,199		210,651		212,850		—
Commercial construction and development		—		—		—		—		11,434		11,434		—

Residential real estate:

Residential – prime		369		87		335		791		123,189		123,980		—
Residential – HELOC		45		14		314		373		20,304		20,677		—
Residential – construction and development		37		—		—		37		13,583		13,620		—

Consumer		2		10		9		21		3,546		3,567		—

Total	$	1,126	$	715	$	2,696	$	4,537	$	511,811	$	516,348	$	—

Impaired loans as of June 30, 2014, and during the six months then ended, by loan class, follows:

	Unpaid						Average		Interest
	Principal		Related		Recorded		Recorded		Income
	Balance		Allowance		Investment		Investment		Recognized
With no related allowance recorded:

Commercial & industrial	$	5,257	$	—	$	5,207	$	4,034	$	127
Commercial real estate		2,951		—		2,726		2,551		36
Government		2,845		—		2,845		2,968		72
Residential – prime		1,379		—		1,223		1,045		8
Residential – HELOC		116		—		115		113		2
Consumer		2		—		2		1		—

With an allowance recorded:

Commercial & industrial	$	3,240	$	1,167	$	2,989	$	2,494	$	18
Commercial real estate		2,887		602		2,652		2,832		2
Commercial construction & development		137		28		135		138		3
Agricultural		127		40		125		139		—
Residential – prime		1,843		664		1,834		1,270		13
Residential – HELOC		309		141		294		347		—
Residential construction & development		174		38		171		109		1
Consumer		24		24		23		20		—

Totals:

Commercial & industrial	$	8,497	$	1,167	$	8,196	$	6,528	$	145
Commercial real estate		5,838		602		5,378		5,383		38
Commercial construction & development		137		28		135		138		3
Agricultural		127		40		125		139		—
Government		2,845		—		2,845		2,968		72
Residential – prime		3,222		664		3,057		2,315		21
Residential – HELOC		425		141		409		460		2
Residential construction & development		174		38		171		109		1
Consumer		26		24		25		21		—

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Index

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

	Unpaid						Average		Interest
	Principal		Related		Recorded		Recorded		Income
	Balance		Allowance		Investment		Investment		Recognized
With no related allowance recorded:

Commercial and industrial	$	2,906	$	—	$	2,861	$	2,172	$	135
Commercial real estate		2,555		—		2,376		1,740		85
Commercial construction and development		1		—		—		—		—
Government		3,090		—		3,090		1,545		150
Residential – Prime		979		—		866		845		14
Residential – HELOC		110		—		110		55		3

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		—
Residential – Prime		749		101		706		1,085		9
Residential – HELOC		412		119		400		453		5
Residential construction and development		49		8		47		100		1
Consumer		19		18		17		22		—

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		—
Government		3,090		—		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		100		1
Consumer		19		18		17		22		—

Loans on nonaccrual status at period-end, follows:

	June 30, 2014		December 31, 2013

Commercial:

Commercial and industrial	$	2,738	$	1,575
Agricultural		125		152

Commercial real estate:

Commercial real estate		4,039		4,103
Commercial construction and development		17		17

Residential real estate:

Residential – prime		2,224		1,059
Residential – HELOC		309		387
Residential construction and development		155		30

Consumer		25		17

Total	$	9,632	$	7,340

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Index

During the quarter and six months ended June 30, 2014, the contracts identified below were modified to capitalize unpaid property taxes, convert amortizing payments to interest only payments, or to extend payment amortization periods, and were categorized as troubled debt restructurings. During the quarter and six months ended June 30, 2013, the contracts identified below were modified to capitalize unpaid property taxes, convert amortizing payments to interest only payments, extend the amortization period, or lower the interest rate. Specific loan reserves maintained in connection with loans restructured during the six months ended June 30 totaled $668 at June 30, 2014, and $173 at June 30, 2013. All modified or restructured loans are classified as impaired loans. Recorded investment as presented in the tables below concerning modified loans represents principal outstanding before specific reserves.

The following table presents information concerning modifications of troubled debt made during the quarter ended June 30, 2014:

		Pre-modification		Post-modification
	Number of	outstanding recorded		outstanding recorded
As of June 30, 2014	contracts	investment		investment at period-end

Commercial & industrial	4	$	1,192	$	1,160
Commercial real estate	1	$	490	$	460

The following table presents information concerning modifications of troubled debt made during the six months ended June 30, 2014:

				Post-modification
		Pre-modification		outstanding
		outstanding		recorded
	Number of	recorded		investment
As of June 30, 2014	contracts	investment		at period-end

Commercial & industrial	1	$	1,252	$	1,218
Commercial real estate	1	$	490	$	460
Residential real estate - prime	2	$	309	$	183

The following table presents information concerning modifications of troubled debt made during the quarter ended June 30, 2013:

		Pre-modification		Post-modification
	Number of	outstanding recorded		outstanding recorded
As of June 30, 2013 ($000s)	contracts	investment		investment at period-end

Commercial & industrial	2	$	358	$	354
Residential real estate - prime	1	$	90	$	90

The following table presents information concerning modifications of troubled debt made during the six months ended June 30, 2013:

				Post-modification
		Pre-modification		outstanding
		outstanding		recorded
	Number of	recorded		investment
As of June 30, 2013 ($000s)	contracts	investment		at period-end

Commercial & industrial	3	$	396	$	390
Commercial real estate	2	$	221	$	214
Residential real estate - prime	1	$	90	$	90

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Index

The following table outlines past troubled debt restructurings that subsequently defaulted within twelve 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
Default during the six months ended June 30, 2014 ($000s)	contracts	investment

Commercial and industrial	1	$	55
Commercial real estate	2	$	124
Residential real estate – prime	2	$	380

NOTE 5 – FORECLOSED ASSETS

Real estate and other property acquired through, or in lieu of, loan foreclosure are initially recorded at fair value (after deducting estimated costs to sell) 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 or other property is carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations of foreclosed assets and changes in any valuation allowance are included in loss on foreclosed assets.

A summary of activity in foreclosed assets is as follows:

	Three months ended						Six months ended
	June 30,						June 30,
($000s)	2014			2013			2014			2013

Balance at beginning of period	$	1,677		$	1,822		$	1,750		$	1,774

Transfer of loans at net realizable value to foreclosed assets		50			132			285			409
Sale proceeds		(449	)		(510	)		(761	)		(651	)
Loans made on sale of foreclosed assets		—			—			—			(107	)
Net gain (loss) from sale of foreclosed assets		(12	)		41			(8	)		60
Provision for write-down charged to operations		—			(149	)		—			(149	)

Balance at end of period	$	1,266		$	1,336		$	1,266		$	1,336

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Index

NOTE 6 – DEPOSITS

The distribution of deposits at period end is as follows:

($000s)	June 30, 2014		December 31, 2013

Non-interest bearing demand	$	99,816	$	102,644
Interest bearing demand (NOWs)		111,341		118,769
Savings		63,907		57,658
Money market		140,141		136,797
Retail and local time		127,710		104,287
Broker and national time		55,425		57,359

Total deposits	$	598,340	$	577,514

NOTE 7 – OTHER BORROWINGS

Other borrowings consist of the following obligations at June 30, 2014, and December 31, 2013:

($000s)	June 30, 2014		December 31, 2013

Federal funds purchased	$	2,539	$	—
Short-term repurchase agreements		5,520		5,441
Bank stock term loan		1,000		1,500
Wholesale structured repurchase agreements		13,500		13,500

Total other borrowings	$	22,559	$	20,441

PSB pledges various securities available for sale as collateral for repurchase agreements. The fair value of securities pledged for repurchase agreements totaled $21,463 at June 30, 2014 and $22,699 at December 31, 2013.

PSB has pledged its common stock ownership of its subsidiary, Peoples State Bank, as collateral for the bank stock term loan. The bank note carries a floating rate of interest with required remaining principal payments following June 30, 2014 of $500 in 2014 and $500 in 2015. In addition, $8,000 of wholesale structured repurchase agreements mature in 2014 with the remaining $5,500 maturing in 2017.

The following information relates to securities sold under repurchase agreements and other borrowings:

	Three months ended				Six months ended
	June 30,				June 30,
($000s)		2014		2013		2014		2013

As of end of period – weighted average rate		2.79%		2.99%		2.79%		2.99%
For the period:
Highest month-end balance	$	22,559	$	22,431	$	22,559	$	23,129
Daily average balance	$	20,641	$	23,769	$	20,584	$	22,299
Weighted average rate		3.01%		2.83%		3.04%		2.94%

NOTE 8 – SENIOR SUBORDINATED NOTES

During the quarter ended March 31, 2013, PSB elected to prepay $7,000 of its 8% senior subordinated notes with $1,000 of cash and $6,000 in proceeds from an issue of new subordinated debt. The new debt included $4,000 of privately placed notes carrying a 3.75% fixed interest rate with semi-annual interest only payments, due in 2018, and $2,000 in a fully amortizing bank stock term loan with Bankers’ Bank, Madison, Wisconsin, carrying a floating rate of interest based on changes in the 90-day LIBOR plus 3.00% and maturing in 2015. The $4,000 of new fixed rate debt is held by related parties, including directors and a significant shareholder. Total interest expense on senior subordinated notes was $75 and $109 during the six months ended June 30, 2014 and 2013, respectively.

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Index

NOTE 9 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

PSB is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate risk associated with PSB’s variable rate junior subordinated debentures. Accounting standards require PSB to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. PSB designates its interest rate swap associated with the junior subordinated debentures as a cash flow hedge of variable-rate debt. For derivative financial instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

From time to time, PSB will also enter into fixed interest rate swaps with customers in connection with their floating rate loans to PSB. When fixed rate swaps are originated with customers, an identical offsetting swap is also entered into by PSB with a correspondent bank. These swap arrangements are intended to offset each other as “back to back” swaps and allow PSB’s loan customer to obtain fixed rate loan financing via the swap while PSB exchanges these fixed payments with a correspondent bank. In these arrangements, PSB’s net cash flows and interest income are equal to the floating rate loan originated in connection with the swap. These customer swaps are not designated as hedging instruments and are accounted for at fair value with changes in fair value recognized in the income statement during the current period.

PSB is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. PSB controls the credit risk of its financial contracts through credit approvals, limits, and monitoring procedures, and does not expect any counterparties to fail their obligations. PSB swaps originated with correspondent banks are over-the-counter (OTC) contracts. Negotiated OTC derivative contracts are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amounts, exercise prices, and maturity.

At period end, the following interest rate swaps to hedge variable-rate debt were outstanding:

($000s)	June 30, 2014	December 31, 2013

Notional amount:	$7,500	$7,500
Pay fixed rate:	2.72%	2.72%
Receive variable rate:	0.23%	0.24%
Maturity:	September 2017	September 2017
Unrealized fair value gain (loss)	$ (405)	$ (438)

This agreement provides for PSB to receive payments at a variable rate determined by the three-month LIBOR in exchange for making payments at a fixed rate. Actual maturities may differ from scheduled maturities due to call options and/or early termination provisions. No interest rate swap agreements were terminated prior to maturity during the six months ended June 30, 2014 or 2013. Risk management results for the six months ended June 30, 2014 related to the balance sheet hedging of variable rate debt indicates that the hedge was 100% effective, and no component of the derivative instrument’s gain or loss was excluded from the assessment of hedge effectiveness.

As of June 30, 2014, approximately $185 of losses ($112 after tax impacts) reported in other comprehensive income related to the interest rate swap are expected to be reclassified into interest expense as a yield adjustment of the hedged borrowings during the 12-month period ending June 30, 2015. The interest rate swap agreement was secured by cash and cash equivalents of $570 at June 30, 2014 and December 31, 2013.

PSB maintains outstanding interest rate swaps with customers and correspondent banks associated with its lending activities that are not designated as hedges. At period end, the following floating interest rate swaps were outstanding with customers:

($000s)	June 30, 2014	December 31, 2013

Notional amount:	$13,986	$14,323
Receive fixed rate (average):	1.99%	2.00%
Pay variable rate (average):	0.15%	0.17%
Maturity:	March 2015 – Oct. 2021	March 2015 – Oct. 2021
Weighted average remaining term	2.4 years	2.9 years
Unrealized fair value gain	$ 267	$ 276

- 18 -

Index

At period end, the following offsetting fixed interest rate swaps were outstanding with correspondent banks:

($000s)	June 30, 2014	December 31, 2013

Notional amount	$13,986	$14,323
Pay fixed rate (average)	1.99%	2.00%
Receive variable rate (average)	0.15%	0.17%
Maturity	March 2015 – Oct. 2021	March 2015 – Oct. 2021
Weighted average remaining term	2.4 years	2.9 years
Unrealized fair value loss	$ (267)	$ (276)

NOTE 10 – INCOME TAX EFFECTS ON ITEMS OF COMPREHENSIVE INCOME

	Three Months Ended							Six Months Ended
	June 30, 2014							June 30, 2014
Period ended June 30, 2014		Pre-tax			Income Tax				Pre-tax			Income Tax
(dollars in thousands)		Inc. (Exp.)			Exp. (Credit)				Inc. (Exp.)			Exp. (Credit)

Unrealized gain on securities available for sale		$	450		$	177			$	490		$	193
Amortization of unrealized gain on securities available for sale transferred
to securities held to maturity included in net income			(81	)		(32	)			(168	)		(66	)
Unrealized loss on interest rate swap			(48	)		(19	)			(61	)		(24	)
Reclassification adjustment of interest rate swap settlements included in earnings			48			19				94			37

Totals		$	369		$	145			$	355		$	140

	Three Months Ended							Six Months Ended
	June 30, 2013							June 30, 2013
Period ended June 30, 2013		Pre-tax			Income Tax				Pre-tax			Income Tax
(dollars in thousands)		Inc. (Exp.)			Exp. (Credit)				Inc. (Exp.)			Exp. (Credit)

Unrealized loss on securities available for sale		$	(642	)	$	(253	)		$	(861	)	$	(346	)
Reclassification adjustment for security gain included in net income			—			—				(12	)		(5	)
Amortization of unrealized gain on securities available for sale transferred
to securities held to maturity included in net income			(210	)		(87	)			(322	)		(131	)
Unrealized gain on interest rate swap			129			52				137			53
Reclassification adjustment of interest rate swap settlements included in earnings			47			18				92			36

Totals		$	(676	)	$	(270	)		$	(966	)	$	(393	)

NOTE 11 – RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME

During the quarter ended June 30, 2014, PSB reclassified $48 ($29 after tax impacts) of interest rate swap settlements which increased comprehensive income. The increase to comprehensive net income was recognized as a $48 ($29 after tax impacts) increase to interest expense on junior subordinated debentures on the statement of income during the quarter.

During the six months ended June 30, 2014, PSB reclassified $94 ($57 after tax impacts) of interest rate swap settlements which increased comprehensive income. The increase to comprehensive net income was recognized as a $94 ($57 after tax impacts) increase to interest expense on junior subordinated debentures on the statement of income during the period.

During the six months ended June 30, 2013, PSB reclassified $12 ($7 after tax impacts) to reduce comprehensive net income following a gain on sale of securities available for sale. The reduction to comprehensive net income was recognized as a $12 ($7 after tax impacts) gain on sale of securities on the statement of income during the period.

During the quarter ended June 30, 2013, PSB reclassified $47 ($29 after tax impacts) of interest rate swap settlements which increased comprehensive income. The increase to comprehensive net income was recognized as a $47 ($29 after tax impacts) increase to interest expense on junior subordinated debentures on the statement of income during the quarter.

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Index

During the six months ended June 30, 2013, PSB reclassified $92 ($56 after tax impacts) of interest rate swap settlements which increased comprehensive income. The increase to comprehensive net income was recognized as a $92 ($56 after tax impacts) increase to interest expense on junior subordinated debentures on the statement of income during the period.

NOTE 12 – STOCK-BASED COMPENSATION

PSB grants restricted stock to certain employees during the first quarter of each year, which had an initial market value of $200 during the six months ended June 30, 2014 compared to $210 granted during the six months ended June 30, 2013. Restricted shares vest to employees based on continued PSB service over a six-year period and are recognized as compensation expense over the vesting period. Cash dividends are paid on unvested shares at the same time and amount as paid to PSB common shareholders. Cash dividends paid on unvested restricted stock shares are charged to retained earnings as significantly all restricted shares are expected to vest to employees. Unvested shares are subject to forfeiture upon employee termination. During the six months ended June 30, compensation expense recorded from amortization of restricted shares expected to vest to employees was $83 and $72 during 2014 and 2013, respectively.

The following tables summarize information regarding restricted stock outstanding at June 30, 2014 and 2013 including activity during the three months then ended.

				Weighted
				Average
	Shares			Grant Price

January 1, 2013		30,409		$	19.39
Restricted stock granted		8,076			26.00
Restricted stock legally vested		(5,883	)		(17.85	)

June 30, 2013		32,602		$	21.30

January 1, 2014		32,602		$	21.30
Restricted stock granted		6,400			31.25
Restricted stock legally vested		(7,640	)		(18.91	)

June 30, 2014		31,362		$	23.92

Scheduled compensation expense per calendar year assuming all restricted shares eventually vest to employees would be as follows:

2014	$	166
2015		157
2016		162
2017		122
2018		82
Thereafter		40

Totals	$	729

NOTE 13 – EARNINGS PER SHARE

Basic earnings per share of common stock are based on the weighted average number of common shares outstanding during the period. Unvested but issued restricted shares are considered to be outstanding shares and used to calculate the weighted average number of shares outstanding and determine net book value per share. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of any outstanding stock options.

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Index

Presented below are the calculations for basic and diluted earnings per share:

	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands, except per share data – unaudited)	2014		2013		2014		2013

Net income	$	1,403	$	1,561	$	2,853	$	3,170

Weighted average shares outstanding		1,658,157		1,651,664		1,658,087		1,653,901
Effect of dilutive stock options outstanding		—		—		—		—

Diluted weighted average shares outstanding		1,658,157		1,651,664		1,658,087		1,653,901

Basic earnings per share	$	0.85	$	0.95	$	1.72	$	1.92
Diluted earnings per share	$	0.85	$	0.95	$	1.72	$	1.92

NOTE 14– CONTINGENCIES

In the normal course of business, PSB 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.

NOTE 15 – FAIR VALUE MEASUREMENTS

Certain assets and liabilities are recorded or disclosed at fair value to provide financial statement users additional insight into PSB’s quality of earnings. Under current accounting guidance, PSB groups assets and liabilities which are recorded at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). All transfers between levels are recognized as occurring at the end of the reporting period.

Following is a brief description of each level of the fair value hierarchy:

Level 1 – Fair value measurement is based on quoted prices for identical assets or liabilities in active markets.

Level 2 – Fair value measurement is based on (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; or (3) valuation models and methodologies for which all significant assumptions are or can be corroborated by observable market data.

Level 3 – Fair value measurement is based on valuation models and methodologies that incorporate at least one significant assumption that cannot be corroborated by observable market data. Level 3 measurements reflect PSB’s estimates about assumptions market participants would use in measuring fair value of the asset or liability.

Some assets and liabilities, such as securities available for sale, loans held for sale, mortgage rate lock commitments, and interest rate swaps, are measured at fair value on a recurring basis under GAAP. Other assets and liabilities, such as impaired loans, foreclosed assets, and mortgage servicing rights are measured at fair value on a nonrecurring basis.

Following is a description of the valuation methodology used for each asset and liability measured at fair value on a recurring or nonrecurring basis, as well as the classification of the asset or liability within the fair value hierarchy.

Securities available for sale – Securities available for sale may be classified as Level 1, Level 2, or Level 3 measurements within the fair value hierarchy and are measured on a recurring basis. Level 1 securities include equity securities traded on a national exchange. The fair value measurement of a Level 1 security is based on the quoted price of the security. Level 2 securities include U.S. government and agency securities, obligations of states and political subdivisions, corporate debt securities, and mortgage-related securities. The fair value measurement of a Level 2 security is obtained from an independent pricing service and is based on recent sales of similar securities and other observable market data and represents a market approach to fair value.

At June 30, 2014 and December 31, 2013, Level 3 securities include a common stock investment in Bankers’ Bancorporation, Inc., Madison, Wisconsin, that is not traded on an active market. Historical cost of the common stock is assumed to approximate fair value of this investment.

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Index

Loans held for sale – Loans held for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value and are measured on a recurring basis. The fair value measurement of a loan held for sale is based on current secondary market prices for similar loans, which is considered a Level 2 measurement and represents a market approach to fair value.

Impaired loans – Loans are not measured at fair value on a recurring basis. Carrying value of impaired loans that are not collateral dependent are based on the present value of expected future cash flows discounted at the applicable effective interest rate and, thus, are not fair value measurements. However, impaired loans considered to be collateral dependent are measured at fair value on a nonrecurring basis. The fair value measurement of an impaired loan that is collateral dependent is based on the fair value of the underlying collateral. Fair value measurements of underlying collateral that utilize observable market data, such as independent appraisals reflecting recent comparable sales, are considered Level 2 measurements. Other fair value measurements that incorporate internal collateral appraisals or broker price opinions, net of selling costs, or estimated assumptions market participants would use to measure fair value, such as discounted cash flow measurements, are considered Level 3 measurements and represent a market approach to fair value.

In the absence of a recent independent appraisal, collateral dependent impaired loans are valued based on a recent broker price opinion generally discounted by 10% plus estimated selling costs. In the absence of a broker price opinion, collateral dependent impaired loans are valued at the lower of last appraisal value or the current real estate tax value discounted by 30%, plus estimated selling costs. Property values are impacted by many macroeconomic factors. In general, a declining economy or rising interest rates would be expected to lower fair value of collateral dependent impaired loans while an improving economy or falling interest rates would be expected to increase fair value of collateral dependent impaired loans.

Foreclosed assets – Real estate and other property acquired through, or in lieu of, loan foreclosure are not measured at fair value on a recurring basis. Initially, foreclosed assets are recorded at fair value less estimated costs to sell at the date of foreclosure. Estimated selling costs typically range from 5% to 15% of the property value. Valuations are periodically performed by management, and the real estate or other property is carried at the lower of carrying amount or fair value less estimated costs to sell. Fair value measurements are based on current formal or informal appraisals of property value compared to recent comparable sales of similar property. Independent appraisals reflecting comparable sales are considered Level 2 measurements, while internal assessments of appraised value based on current market activity, including broker price opinions, are considered Level 3 measurements and represent a market approach to fair value. Property values are impacted by many macroeconomic factors. In general, a declining economy or rising interest rates would be expected to lower fair value of foreclosed assets while an improving economy or falling interest rates would be expected to increase fair value of foreclosed assets.

Mortgage servicing rights – Mortgage servicing rights are not measured at fair value on a recurring basis. However, mortgage servicing rights that are impaired are measured at fair value on a nonrecurring basis. Serviced loan pools are stratified by year of origination and term of the loan, and a valuation model is used to calculate the present value of expected future cash flows for each stratum. When the carrying value of a stratum exceeds its fair value, the stratum is measured at fair value. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, custodial earnings rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value. As a result, the fair value measurement of mortgage servicing rights is considered a Level 3 measurement and represents an income approach to fair value. When market mortgage rates decline, borrowers may have the opportunity to refinance their existing mortgage loans at lower rates, increasing the risk of prepayment of loans on which PSB maintains mortgage servicing rights. Therefore, declining long-term interest rates would decrease the fair value of mortgage servicing rights. Significant unobservable inputs at June 30, 2014, used to measure fair value included:

Direct annual servicing cost per loan	$60
Direct annual servicing cost per loan in process of foreclosure	$600
Weighted average prepayment speed: CPR	22.01%
Weighted average prepayment speed: PSA	448.85%
Weighted average cash flow discount rate	7.91%
Asset reinvestment rate	4.00%
Short-term cost of funds	0.25%
Escrow inflation adjustment	1.00%
Servicing cost inflation adjustment	1.00%

Other intangible assets – The fair value and impairment of other intangible assets, including core deposit intangible assets and goodwill, is measured annually as of December 31 or more frequently if conditions indicate that impairment may have occurred. The evaluation of possible impairment of other intangible assets involves significant judgment based upon short-term and long-term projections of future performance, which is a Level 3 fair value measurement, and represents an income approach to fair value.

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Index

Mortgage rate lock commitments – The fair value of mortgage rate lock commitments is measured on a recurring basis. Fair value is based on current secondary market pricing for delivery of similar loans and the value of OMSR on loans expected to be delivered, which is considered a Level 2 fair value measurement.

Interest rate swap agreements – Fair values for interest rate swap agreements are based on the amounts required to settle the contracts based on valuations provided by third-party dealers in the contracts, which is considered a Level 2 fair value measurement, and are measured on a recurring basis.

			Recurring Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(dollars in thousands)			(Level 1)		(Level 2)		(Level 3)

Assets measured at fair value on a recurring basis at June 30, 2014:

Securities available for sale:

U.S. agency issued residential MBS and CMO	$	72,873		—	$	72,873		$–
Privately issued residential MBS and CMO		33		—		33		—
Solomon Hess SBA loan fund (CDFI Fund)		950		—		950		—
Other equity securities		47		—		—		47

Total securities available for sale		73,903		—		73,856		47
Mortgage rate lock commitments		6		—		6		—
Interest rate swap agreements		267		—		267		—

Total assets	$	74,176		—	$	74,129	$	47

Liabilities – Interest rate swap agreements	$	672	$	—	$	672	$	—

Assets measured at fair value on a recurring basis at December 31, 2013:

Securities available for sale:

U.S. Treasury and agency debentures	$	999	$	—	$	999	$	—
Obligations of states and political subdivisions		159				159		—
U.S. agency issued residential MBS and CMO		59,390		—		59,390		—
Privately issued residential MBS and CMO		105		—		105		—
Solomon Hess SBA loan fund (CDFI Fund)		950				950		—
Other equity securities		47		—		—		47

Total securities available for sale		61,650		—		61,603		47
Loans held for sale		150		—		150		—
Mortgage rate lock commitments		14		—		14		—
Interest rate swap agreements		276		—		276		—

Total assets	$	62,090	$	—	$	62,043	$	47

Liabilities – Interest rate swap agreements	$	714	$	—	$	714	$	—

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Index

Reconciliation of fair value measurements using significant unobservable inputs:

	Securities
	Available
(dollars in thousands)	For Sale

Balance at January 1, 2013:	$	47
Total realized/unrealized gains and (losses):
Included in earnings		—
Included in other comprehensive income		—
Purchases, maturities, and sales		—
Transferred from Level 2 to Level 3		—
Transferred to held to maturity classification		—

Balance at June 30, 2013	$	47

Total gains or (losses) for the period included in earnings attributable to the
change in unrealized gains or losses relating to assets still held at June 30, 2013	$	—

Balance at January 1, 2014	$	47
Total realized/unrealized gains and (losses):
Included in earnings		—
Included in other comprehensive income		—
Purchases, maturities, and sales		—
Transferred from Level 2 to Level 3		—
Transferred to held to maturity classification		—

Balance at June 30, 2014	$	47

Total gains or (losses) for the period included in earnings attributable to the
change in unrealized gains or losses relating to assets still held at June 30, 2014	$	—

			Nonrecurring Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	($000s)		(Level 1)		(Level 2)		(Level 3)

Assets measured at fair value on a nonrecurring basis at June 30, 2014:

Impaired loans	$	2,070	$	—	$	644	$	1,426
Foreclosed assets		1,266		—		319		947
Mortgage servicing rights		1,698		—		—		1,698
Other intangible assets		321		—		—		321

Total assets	$	5,355	$	—	$	963	$	4,392


Assets measured at fair value on a nonrecurring basis at December 31, 2013:

Impaired loans	$	1,720	$	—	$	—	$	1,720
Foreclosed assets		1,750		—		792		958
Mortgage servicing rights		1,696		—		—		1,696

Total assets	$	5,166	$	—	$	792	$	4,374

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Index

At June 30, 2014, loans with a carrying amount of $2,787 were considered impaired and were written down to their estimated fair value of $2,070 net of a valuation allowance of $717. At December 31, 2013, loans with a carrying amount of $2,119 were considered impaired and were written down to their estimated fair value of $1,720, net of a valuation allowance of $399. Changes in the valuation allowances are reflected through earnings as a component of the provision for loan losses or as a charge-off against the allowance for loan losses.

At June 30, 2014, foreclosed assets with a carrying amount of $1,932 had been written down to a fair value of $1,266, less costs to sell. During the six months ended June 30, 2014, foreclosed assets with a fair value of $285 were acquired through or in lieu of foreclosure, which is the fair value net of estimated costs to sell. No write-downs to fair value were included in earnings during the six months ended June 30, 2014.

At December 31, 2013, foreclosed assets with a carrying amount of $2,735 had been written down to a fair value of $1,750, less costs to sell. During the six months ended June 30, 2013, foreclosed assets with a fair value of $409 were acquired through or in lieu of foreclosure, which is the fair value net of estimated costs to sell. Impairment charges recorded as a reduction to earnings totaled $149 during the six months ended June 30, 2013.

At June 30, 2014, mortgage servicing rights with a carrying amount of $1,716 were considered impaired and were written down to their estimated fair value of $1,698, resulting in an impairment allowance of $18. At December 31, 2013, mortgage servicing rights with a carrying amount of $1,717 were considered impaired and were written down to their estimated fair value of $1,696, resulting in an impairment allowance of $21. Changes in the impairment allowances are reflected through earnings as a component of mortgage banking income.

PSB estimates fair value of all financial instruments regardless of whether such instruments are measured at fair value. The following methods and assumptions were used by PSB to estimate fair value of financial instruments not previously discussed.

Cash and cash equivalents – Fair value reflects the carrying value of cash, which is a Level 1 measurement.

Securities held to maturity – Fair value of securities held to maturity is based on dealer quotations on similar securities near period-end, which is considered a Level 2 measurement. Certain debt issued by banks or bank holding companies purchased by PSB as securities held to maturity is valued on a cash flow basis discounted using market rates reflecting credit risk of the borrower, which is considered a Level 3 measurement.

Bank certificates of deposit – Fair value of fixed rate certificates of deposit included in other investments is estimated by discounting future cash flows using current rates at which similar certificates could be purchased, which is a Level 3 measurement.

Loans – Fair value of variable rate loans that reprice frequently are based on carrying values. Loans with an active sale market, such as one- to four-family residential mortgage loans, estimate fair value based on sales of loans with similar structure and credit quality. Fair value of other loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. Fair value of impaired and other nonperforming loans is estimated using discounted expected future cash flows or the fair value of underlying collateral, if applicable. Except for collateral dependent impaired loans valued using an independent appraisal of collateral value, reflecting a Level 2 fair value measurement, fair value of loans is considered to be a Level 3 measurement due to internally developed discounted cash flow measurements.

Federal Home Loan Bank stock – Fair value is the redeemable (carrying) value based on the redemption provisions of the Federal Home Loan Bank, which is considered a Level 3 fair value measurement.

Accrued interest receivable and payable – Fair value approximates the carrying value, which is considered a Level 3 fair value measurement.

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Index

Cash value of life insurance – Fair value is based on reported values of the assets by the issuer which are redeemable to the insured, which is considered a Level 2 fair value measurement.

Deposits – Fair value of deposits with no stated maturity, such as demand deposits, savings, and money market accounts, by definition, is the amount payable on demand on the reporting date. Fair value of fixed rate time deposits is estimated using discounted cash flows applying interest rates currently offered on issue of similar time deposits. Use of internal discounted cash flows provides a Level 3 fair value measurement.

FHLB advances and other borrowings – Fair value of fixed rate, fixed term borrowings is estimated by discounting future cash flows using the current rates at which similar borrowings would be made as calculated by the lender or correspondent. Fair value of borrowings with variable rates or maturing within 90 days approximates the carrying value of these borrowings. Fair values based on lender provided settlement provisions are considered a Level 2 fair value measurement. Other borrowings with local customers in the form of repurchase agreements are estimated using internal assessments of discounted future cash flows, which is a Level 3 measurement.

Senior subordinated notes and junior subordinated debentures – Fair value of fixed rate, fixed term notes and debentures are estimated internally by discounting future cash flows using the current rates at which similar borrowings would be made, which is a Level 3 fair value measurement.

The carrying amounts and fair values of PSB’s financial instruments consisted of the following at June 30, 2014:

	June 30, 2014
	Carrying		Estimated		Fair Value Hierarchy Level
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets ($000s):

Cash and cash equivalents	$	20,930	$	20,930	$	20,930	$	—	$	—
Securities		144,241		145,341		—		143,494		1,847
Bank certificates of deposit		3,672		3,712		—		—		3,712
Net loans receivable and loans held for sale		521,824		525,688		—		644		525,044
Accrued interest receivable		2,072		2,072		—		—		2,072
Mortgage servicing rights		1,698		1,698		—		—		1,698
Mortgage rate lock commitments		6		6		—		6		—
FHLB stock		2,556		2,556		—		—		2,556
Cash surrender value of life insurance		13,025		13,025		—		13,025		—
Interest rate swap agreements		267		267		—		267		—

Financial liabilities ($000s):

Deposits	$	598,340	$	599,291	$	—	$	—	$	599,291
FHLB advances		27,879		28,028		—		28,028		—
Other borrowings		22,559		23,201		—		14,153		9,048
Senior subordinated notes		4,000		3,559		—		—		3,559
Junior subordinated debentures		7,732		7,185		—		—		7,185
Interest rate swap agreements		672		672		—		672		—
Accrued interest payable		431		431		—		—		431

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Index

The carrying amounts and fair values of PSB’s financial instruments consisted of the following at December 31, 2013:

	December 31, 2013
	Carrying		Estimated		Fair Value Hierarchy Level
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets ($000s):

Cash and cash equivalents	$	31,522	$	31,522	$	31,522	$	—	$	—
Securities		133,279		133,322		—		131,479		1,843
Bank certificates of deposit		2,236		2,280		—		—		2,280
Net loans receivable and loans held for sale		510,030		514,309		—		150		514,159
Accrued interest receivable		2,076		2,076		—		—		2,076
Mortgage servicing rights		1,696		1,696		—		—		1,696
Mortgage rate lock commitments		14		14		—		14		—
FHLB stock		2,556		2,556		—		—		2,556
Cash surrender value of life insurance		12,826		12,826		—		12,826		—
Interest rate swap agreements		276		276		—		276		—

Financial liabilities ($000s):

Deposits	$	577,514	$	578,387	$	—	$	—	$	578,387
FHLB advances		38,049		38,511		—		38,511		—
Other borrowings		20,441		21,251		—		14,364		6,887
Senior subordinated notes		4,000		3,489		—		—		3,489
Junior subordinated debentures		7,732		7,085		—		—		7,085
Interest rate swap agreements		714		714		—		714		—
Accrued interest payable		477		477		—		—		477

NOTE 16 – CURRENT ACCOUNTING CHANGES

FASB ASC Topic 210, “Balance Sheet.” In January 2013, clarifications were issued of new authoritative accounting guidance first issued in December 2011 concerning disclosure of information about offsetting and related arrangements associated with derivative instruments. The clarifications and originally issued guidance require additional disclosures associated with offsetting and collateral arrangements with derivative instruments to enable users of PSB’s financial statements to understand the effect of those arrangements on its financial position beginning March 31, 2013. These new disclosures were added as necessary during the quarter ended March 31, 2013 and did not have a significant impact to the reporting of PSB’s financial results upon adoption.

FASB ASC Topic 805, Business Combinations. In October 2012, new authoritative accounting guidance was issued that addressed accounting for an indemnification asset acquired as a result of a government-assisted acquisition of a financial institution when a subsequent change in cash flows expected to be collected is identified. After identification of the new cash flows, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as accounting for the change in the assets subject to the indemnification. Amortization of these changes in value is limited to the remaining contractual term of the indemnification agreement. These new rules became effective for changes in cash flows identified beginning January 1, 2013. Adoption of this new guidance did not have an impact on PSB’s financial statements.

FASB ASC Topic 220, Comprehensive Income. In February 2013, new authoritative accounting guidance was issued which required PSB to report the effect of significant reclassifications out of accumulated other comprehensive income in a footnote to the financial statements. The disclosure was effective beginning March 31, 2013 on a prospective basis. The change did not have a significant impact on PSB’s financial reporting or results of operations upon adoption.

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Index

NOTE 17 – FUTURE ACCOUNTING CHANGES

FASB ASC Topic 310, Receivables. In January 2014, new authoritative accounting guidance was issued that defined when a lender has obtained physical possession of residential real estate collateral, requiring charge-off of the loan and recognition as foreclosed property. In addition, additional disclosures on the amount of residential real estate included in foreclosed assets as well as the amount of residential loans in the process of foreclosure are required for each period end. These new rules become effective for quarterly periods beginning January 1, 2015. Adoption of this new guidance is not expected to have a significant impact on PSB’s results of operations or financial statements.

FASB ASC Topic 606, Revenue from Contracts with Customers. In May 2014, new authoritative accounting guidance was issued that provides guidance on when it is appropriate to recognize customer sales agreements as revenue. This large standard has limited impact on PSB as loans, deposits, and other financial instruments are excluded from the scope of the standard. However sales of foreclosed property and certain noninterest income from contracts with customers, such as insurance contracts, are subject to new rules applied on an individual transaction basis. The standard is effective for quarterly periods beginning January 1, 2017. Adoption of this new guidance is not expected to have a significant impact on PSB’s results of operations or financial statements.

NOTE 18 – SUBSEQUENT EVENTS

Management has reviewed PSB’s operations for potential disclosure of information or financial statement impacts related to events occurring after June 30, 2014 but prior to the release of these financial statements. Based on the results of this review, no subsequent event disclosures or financial statement impacts to the recently completed quarter are required as of the release date.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis (“MD&A”) reviews significant factors with respect to our financial condition as of June 30, 2014 compared to December 31, 2013 and results of our operations for the three months and six months ended June 30, 2014 compared to the results of operations for the three months and six months ended June 30, 2013. The following MD&A concerning our operations is intended to satisfy three principal objectives:

•

Provide a narrative explanation of our financial statements that enables investors to see the company through the eyes of management.

•

Enhance the overall financial disclosure and provide the context within which our financial information should be analyzed.

•

Provide information about the quality of, and potential variability of, our earnings and cash flow, so that investors can ascertain the likelihood that past performance is, or is not, indicative of future performance.

Management’s discussion and analysis, like other portions of this Quarterly Report on Form 10-Q, includes forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, our anticipated future financial performance involves risks and uncertainties that may cause actual results to differ materially from those described in our forward-looking statements. A cautionary statement regarding forward-looking statements is set forth under the caption “Forward-Looking Statements” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, and, from time to time, in our other filings with the Securities Exchange Commission. We do not intend to update forward-looking statements. This discussion and analysis should be considered in light of that cautionary statement. Additional risk factors relating to an investment in our common stock are also described under Item 1A of the 2013 Annual Report on Form 10-K.

This discussion should be read in conjunction with the consolidated financial statements, notes, tables, and the selected financial data presented elsewhere in this report. All figures are in thousands, except per share data and per employee data.

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Index

EXECUTIVE OVERVIEW

Results of Operations

June 2014 quarterly earnings were $.85 per share on net income of $1,403 compared to earnings of $.95 per share on net income of $1,561 during the June 2013 quarter. Earnings during the six months ended June 30, 2014 were $1.72 per share on net income of $2,853 compared to earnings of $1.92 per share on net income of $3,170 during the six months ended June 30, 2013.

Earnings during the six months ended June 30, 2014 were reduced $225 after tax benefits by acquisition and conversion costs related to Peoples State Bank’s purchase of the Northwoods National Bank Rhinelander, Wisconsin branch of The Baraboo National Bank completed April 11, 2014. In addition, earnings during the six months ended June 30, 2013 benefited $73 from tax savings related to the 2012 purchase of Marathon State Bank. Excluding these merger related non-recurring items, June 2014 quarterly pro-forma net income would have been $.93 per share on net income of $1,550 compared to June 2013 quarterly net income of $.95 per share on net income of $1,561, a decline of 2.1% per share. Proforma net income during the six months ended June 30, 2014 would have been $1.86 per share on net income of $3,078 compared to pro-forma net income of $1.87 per share on net income of $3,097 during 2013, a decline of 0.5% per share. Compared to the prior year for the six months ended June 30, a $471 decline in 2014 credit costs, down 57%, offset a $364 decline in mortgage banking revenue, down 38%, resulting in similar net income during the six months ended June 30, 2014 and 2013 on a pro-forma basis.

Looking ahead to the September 2014 quarter, earnings are expected to increase slightly over that seen during the March 2014 and June 2014 quarters due to lower noninterest expenses after completing the integration of the new Northwoods Rhinelander, Wisconsin branch in the June 2014 quarter. In addition, net loan growth bank wide is expected to increase net interest income. However, earnings will continue to be challenged by lower mortgage banking income, and downward pressure on net interest margin, compared to the prior year periods.

Credit Quality

Total nonperforming assets increased $1,849, or 17.9%, at June 30, 2014 compared to March 31, 2014, reaching $12,172, or 1.68% of total assets. The increase was due to placing a $1,075 single family jumbo residential mortgage and a $959 commercial loan onto nonaccrual status during the June 2014 quarter. Recognition of the two problem loans also increased allowance for loan loss needs by $547 during the June 2014 quarter. Offsetting these new problem loans was continued improvement in general loan quality, allowing a portion of the existing allowance for loan losses to be recaptured, offsetting the negative impact of new reserves recognized on the two problem loans. Net loan charge-offs totaled $134 during the six months ended June 30, 2014 (.05% of average loans on an annualized basis) compared to $466 during the six months ended June 30, 2013 (.19% of average loans).

PSB’s provision for loan losses was $140 during the June 2014 and March 2014 quarters, totaling $280 for the six months ended June 30, 2014. Provision for loan losses was $352 and $675 during the quarter and six months ended June 30, 2013, respectively. Although there was no provision for partial write-downs of foreclosed assets during the six months ended June 30, 2014, there was a partial write-down of $149 during the June 2013 quarter, and totaled $149 for the six months ended June 30, 2013. Taken together, credit costs (the provision for loan losses and loss on foreclosed assets) totaled $178 during the June 2014 quarter compared to $496 during the June 2013 quarter, a decline of $318, or 64.1%. Credit costs totaled $354 during the six months ended June 30, 2014 compared to $825 during the six months ended June 30, 2013, a decline of $471, or 57.1%. The decline in 2014 credit costs compared to the prior year offset a significant decline in 2014 mortgage banking income on much lower refinanced mortgage loan activity, allowing net income before merger and acquisition costs to remain near levels seen in the prior year periods when mortgage refinancing income was much greater.

Total nonperforming assets were $12,172 at June 30, 2014 (1.68% of total assets) compared to $10,389 at December 31, 2013 (1.46% of total assets). At June 30, 2014, the allowance for loan losses was $6,929, or 1.31% of total loans (64% of nonperforming loans), compared to $6,783, or 1.31% of total loans (79% of nonperforming loans) at December 31, 2013. During the September 2014 quarter, PSB nonperforming loans may increase $2,845 from the addition of a municipal tax financing district development loan upon restructuring of the debt issue to extend the amortization term. At June 30, 2014, PSB classified this municipal loan as an impaired but performing loan and maintained no specific reserves applicable to this credit. The credit is expected to remain on accrual status following the restructuring and no principal loss is anticipated.

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Asset Growth and Liquidity

Total assets were $726,541 at June 30, 2014 compared to $711,541at December 31, 2013, up $15,000, or 2.1%, due to an increase in net loans receivable of $11,944, up 2.3%. The loan increase included $21,468 of purchased Northwoods branch loans held at June 30, 2014, offset by a $9,524 decline in existing market loans year to date. The organic loan decline was led by an $8,288 payoff from a multi-family housing developer who refinanced into permanent low fixed rate financing but who continues to maintain lending relationships with PSB. In addition, a $10,962 increase in investment securities was funded by a $10,592 decline in cash and cash equivalents during the six months ended June 30, 2014.

Total local deposits increased $22,760 year to date due to $37,982 in purchased Northwoods branch deposits retained at June 30, 2014 with other existing market deposits declining $15,222, or 2.9% since January 1, 2014, including a $12,373 decline in seasonal government tax deposits. In addition to funding loan growth, the increase in total deposits was used to repay $9,565 of wholesale funding year to date. Wholesale funding (including federal funds purchased, brokered certificates of deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements) was $99,343 (13.7% of total assets) at June 30, 2014 compared to $108,908 (15.3% of total assets) at December 31, 2013.

During the upcoming September 2014 quarter, total loans are expected to increase modestly from growth in residential mortgage loans retained on the balance sheet in addition to commercial related loan growth. Loan growth is expected to be funded by a mix of new wholesale funding, local certificate of deposit growth, and existing cash and cash equivalents.

Capital Resources

During the six months ended June 30, 2014, stockholders’ equity increased $2,528 primarily from $2,187 of retained net income net of $666 in cash dividends declared during the period. No shares of common stock were repurchased during the six months ended June 30, 2014, while 10,030 shares of stock were repurchased on the open market at an average price of $26.78 per share during the six months ended June 30, 2013. We continue to maintain a stock buyback plan and during the September 2014 quarter expect to purchase up to 10,000 shares on the open market at prevailing prices as opportunities arise.

Tangible net book value increased to $35.56 per share at June 30, 2014, compared to $34.36 per share at December 31, 2013, an increase of 3.5%. On the purchase of the Northwoods Rhinelander, Wisconsin branch in the June 2014 quarter, we recorded $344 of core deposit intangible assets and goodwill, which reduced tangible net book value by $.21 per share at the acquisition date. At June 30, 2014, $321 of these intangibles remain with the core deposit intangible to be amortized over five years using a double declining balance method. Despite the increase in total assets from the Northwoods acquisition, our stockholders’ equity to assets ratio increased to 8.16% at June 30, 2014 compared to 7.98% at December 31, 2013 due to increased retained earnings and modest asset growth. PSB was considered “well capitalized” under banking regulations at June 30, 2014.

New regulatory capital rules applicable to all banks will become effective for us beginning January 1, 2015. The new rules expand the number of capital measurements and new minimum ratios over which a bank may pay dividends, repurchase common stock, or pay certain executive compensation. Other changes addressed the amount of capital required on a “risk adjusted” basis for certain assets and other obligations. We expect regulatory capital ratios to be negatively impacted when the changes are fully implemented, but do not expect to issue additional common stock solely to meet the new requirements or that recurring operations or growth potential will be significantly impacted.

We regularly maintain access to wholesale markets to fund loan originations and manage local depositor needs. At June 30, 2014, unused and available wholesale funding was approximately $321 million, or 44% of total assets, compared to $297 million, or 42% of total assets at December 31, 2013. Unused wholesale funding sources include federal funds purchased lines of credit, Federal Reserve Discount Window advances, FHLB advances, brokered and national certificates of deposit, and a holding company correspondent bank line of credit.

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Off Balance –Sheet Arrangements and Contractual Obligations

Our largest volume off-balance sheet activity involves our servicing of payments and related collection activities on approximately $273 million of residential 1 to 4 family mortgages sold to FHLB and FNMA at June 30, 2014 compared to $272 million at December 31, 2013. At June 30, 2014, we provided a credit enhancement against FHLB loss under five separate “master commitments” associated with 8% of the total serviced principal (down from 9% at December 31, 2013), up to a maximum guarantee of $949 in the aggregate. However, we would incur such loss only if the FHLB first lost $1,517 on this remaining loan pool of $20,781 as part of their “First Loss Account” (discussed here in the aggregate, although the guarantee is applied on an individual master commitment basis). No loans have been sold by us to the FHLB with our credit enhancement since October 2008 and we do not intend to originate future loans with the guarantee.

All loans sold to FHLB or FNMA in which we retain the loan servicing are subject to underwriting representations and warranties made by us as the originator and we are subject to annual underwriting audits from both entities. Our representations and warranties would allow FHLB or FNMA to require us to repurchase inadequately originated loans for any number of underwriting violations even if we had not provided a credit enhancement on the mortgage. Provision (credit) for representation and warranty losses were ($2) and $204 during the six months ended June 30, 2014 and 2013, respectively. We first began to recognize a reserve liability for representation and warranty losses during the quarter ended March 31, 2013 when a provision for representation and warranty losses of $203 was recorded. We maintained a reserve liability for potential future representation and warranty losses of $87 at June 30, 2014 and $108 at December 31, 2013.

We also utilize interest rate swaps to hedge costs associated with certain variable rate debt (notional amount of $7,500 at June 30, 2014) and as a tool for our customers to obtain long-term fixed rate commercial loan financing (offsetting notional amounts of $13,986 at June 30, 2014). These arrangements and related off balance sheet commitments are outlined in Note 9 in the Notes to Consolidated Financial Statements. Aggregate net unrealized losses on fair value of all interest rate swaps determined by offsetting all swap positions were $405 and $438 at June 30, 2014 and December 31, 2013, respectively before tax impacts. Cash held on deposit with swap counterparties against these liabilities totaled $570 at June 30, 2014 and December 31, 2013.

We provide various commitments to extend credit for both commercial and consumer purposes totaling approximately $125 million at June 30, 2014 compared to $119 million at December 31, 2013. These lending commitments are a traditional and customary part of lending operations and many of the commitments are expected to expire without being drawn upon.

RESULTS OF OPERATIONS

Earnings

Quarter ended June 30, 2014 compared to June 30, 2013

June 2014 quarterly earnings were $.85 per share on net income of $1,403 compared to earnings of $.95 per share on net income of $1,561 during the June 2013 quarter. Earnings during the June 2014 quarter were reduced $147 after tax benefits by acquisition and conversion costs related to Peoples State Bank’s purchase of the Northwoods National Bank Rhinelander, Wisconsin branch of The Baraboo National Bank completed April 11, 2014. Excluding these merger and acquisition related non-recurring items, June 2014 quarterly pro-forma net income would have been $.93 per share on net income of $1,550 compared to June 2013 pro-forma net income of $.95 per share on net income of $1,561, a decrease of 2.1% per share. Prior to the merger and acquisition costs, a $318 decline in credit related costs during the June 2014 quarter compared to the prior year was offset by an $284 decline in mortgage banking income, resulting in similar pro-forma net income levels compared to the June 2013 quarter. Refer to Table 1 below for a presentation of net income and earnings per share both before and after non-recurring items. Table 2 below outlines key financial performance metrics for five linked quarters ending June 30, 2014.

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Index

Six months ended June 30, 2014 compared to June 30, 2013

Earnings during the six months ended June 30, 2014 were $1.72 per share on net income of $2,853 compared to earnings of $1.92 per share on net income of $3,170 during the six months ended June 30, 2013. Earnings during the six months ended June 30, 2014 were reduced $225 after tax benefits by acquisition and conversion costs related to Peoples State Bank’s purchase of the Northwoods National Bank Rhinelander, Wisconsin branch of The Baraboo National Bank. In addition, net income during the six months ended June 30, 2013 increased $73 from tax savings related to our 2012 purchase of Marathon State Bank. Excluding these merger and acquisition related non-recurring items, pro-forma net income during the six months ended June 30, 2014 would have been $1.86 per share on net income of $3,078 compared to pro-forma net income of $1.87 per share on net income of $3,097, a decrease of 0.6% per share. Prior to the merger and acquisition costs, a $471 decline in credit related costs during the June 2014 quarter compared to the prior year was offset by an $364 decline in mortgage banking income, and a $79 increase in fraudulent debit card and check losses, resulting in similar pro-forma net income levels compared to the prior year to date period. Refer to Table 1 below for a presentation of net income and earnings per share both before and after non-recurring items.

Table 1: Impact of Special Income and Expense Items on Continuing Operations (a non-GAAP measure)

	Quarter ended June 30,						Six months ended June 30,
($000s, net of income tax effects)	2014			2013			2014			2013

Net income from recurring operations before credit costs	$	1,658		$	1,862		$	3,293		$	3,597
Less: Credit costs		(108	)		(301	)		(215	)		(500	)

Net income from recurring operations after credit costs		1,550			1,561			3,078			3,097
Add: Benefit from amendment of Marathon State Bank tax returns		—			—			—			73
Less: Merger related expenses and data processing conversion		(147	)		—			(225	)		—

Net income	$	1,403		$	1,561		$	2,853		$	3,170


	Quarter ended June 30,						Six months ended June 30,
(per diluted share, net of income tax effects)	2014			2013			2014			2013

Net income from recurring operations before credit costs	$	1.00		$	1.13		$	1.99		$	2.17
Less: Credit costs		(0.07	)		(0.18	)		(0.13	)		(0.30	)

Net income from recurring operations after credit costs		0.93			0.95			1.86			1.87
Add: Benefit from amendment of Marathon State Bank tax returns		—			—			—			0.05
Less: Merger related expenses and data processing conversion		(0.08	)		—			(0.14	)		—

Net income	$	0.85		$	0.95		$	1.72		$	1.92

Proforma return on average assets and equity from net income from recurring operations after credit costs:

Proforma return on average assets from recurring operations	0.87%	0.91%	0.88%	0.91%
Return on average assets - as reported	0.79%	0.91%	0.81%	0.93%

Proforma return on average equity from recurring operations	10.46%	10.94%	10.59%	11.09%
Return on average equity - as reported	9.47%	10.94%	9.81%	11.35%

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The following Table 2 presents PSB’s consolidated quarterly summary financial data.

Table 2: Financial Summary

(dollars in thousands, except per share data)	Quarter ended
	June 30		March 31,		December 31,		September 30,		June 30,
Earnings and dividends:	2014		2014		2013		2013		2013

Net interest income	$	5,450	$	5,174	$	5,365	$	5,422	$	5,317
Provision for loan losses	$	140	$	140	$	—	$	3,340	$	352
Other noninterest income	$	1,369	$	1,320	$	1,274	$	1,411	$	1,523
Other noninterest expense	$	4,666	$	4,289	$	4,391	$	3,817	$	4,216
Net income	$	1,403	$	1,450	$	1,561	$	13	$	1,561

Basic earnings per share ⁽³⁾	$	0.85	$	0.87	$	0.95	$	0.01	$	0.95
Diluted earnings per share ⁽³⁾	$	0.85	$	0.87	$	0.95	$	0.01	$	0.95
Dividends declared per share ⁽³⁾	$	0.40	$	—	$	0.39	$	—	$	0.39
Tangible net book value per share ⁽⁴⁾	$	35.56	$	35.15	$	34.36	$	33.92	$	34.04

Semi-annual dividend payout ratio		23.34%		n/a		40.91%		n/a		20.32%
Average common shares outstanding		1,658,157		1,658,017		1,651,518		1,651,518		1,651,664

Balance sheet – average balances:

Loans receivable, net of allowances for loss	$	513,163	$	498,957	$	507,898	$	510,937	$	499,425
Assets	$	716,477	$	698,127	$	704,559	$	695,344	$	688,353
Deposits	$	592,377	$	567,500	$	557,639	$	537,836	$	525,158
Stockholders’ equity	$	59,424	$	57,710	$	57,243	$	56,907	$	57,223

Performance ratios:

Return on average assets ⁽¹⁾		0.79%		0.84%		0.88%		0.01%		0.91%
Return on average stockholders’ equity ⁽¹⁾		9.47%		10.19%		10.82%		0.09%		10.94%
Average stockholders’ equity less
accumulated other comprehensive
income (loss) to average assets		8.24%		8.22%		8.07%		8.09%		8.18%
Net loan charge-offs to average loans ⁽¹⁾		0.07%		0.03%		0.27%		2.97%		0.12%
Nonperforming loans to gross loans		2.06%		1.75%		1.67%		1.66%		1.89%
Allowance for loan losses to gross loans		1.31%		1.39%		1.31%		1.36%		1.49%
Nonperforming assets to tangible equity
plus the allowance for loan losses ⁽⁴⁾		18.96%		16.27%		16.80%		16.73%		17.75%
Net interest rate margin ⁽¹⁾⁽²⁾		3.34%		3.31%		3.32%		3.40%		3.41%
Net interest rate spread ⁽¹⁾⁽²⁾		3.19%		3.15%		3.14%		3.23%		3.24%
Service fee revenue as a percent of
average demand deposits ⁽¹⁾		1.83%		1.68%		1.76%		2.01%		2.02%
Noninterest income as a percent of gross revenue		17.14%		17.09%		15.92%		17.24%		18.54%
Efficiency ratio ⁽²⁾		66.19%		63.75%		63.87%		53.94%		59.52%
Noninterest expenses to average assets ⁽¹⁾		2.61%		2.49%		2.47%		2.18%		2.46%

Stock price information:

High	$	33.85	$	34.50	$	31.25	$	31.50	$	31.00
Low	$	31.75	$	30.10	$	29.75	$	29.40	$	27.76
Last trade value at quarter-end	$	32.42	$	32.00	$	31.25	$	29.76	$	29.25

⁽¹⁾ Annualized

⁽²⁾ The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.

⁽³⁾ Due to rounding, cumulative quarterly per share performance may not equal annual per share totals.

⁽⁴⁾ Tangible stockholders’ equity excludes intangible assets and any preferred stock capital elements.

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Net Interest Income

Quarter ended June 30, 2014 compared to June 30, 2013

Net interest income is the most significant component of earnings. Tax adjusted net interest income totaled $5,680 (on net margin of 3.34%) during the June 30, 2014 quarter compared to $5,560 (3.41%) in the June 2013 quarter, an increase of $120, or 2.2%. Net margin has declined from prior quarters as loan yields have declined slightly faster than funding costs, which are already near functional interest rate floors. A 4.0% increase in earning assets increased net interest income by $403 during the June 2014 quarter compared to the June 2013 quarter, but the decline in net interest margin decreased net interest income by $283 during the June 2014 quarter compared to the June 2013 quarter. Refer to Table 3 for more information on average balances, rates, and yields by product for the quarters ended June 30, 2014 and 2013.

Looking ahead, net margin is likely to remain under pressure from falling loan yields while non-maturity deposit funding costs remain at functional interest rate floors. However, certificate of deposit and FHLB advance funding costs are expected to continue their decline, resulting in September 2014 quarterly tax adjusted net interest margin similar to that seen during the six months ended June 30, 2014 (3.33% of average earning assets). Stable net interest margin combined with continued average loan growth is expected to increase net interest income during the coming quarter.

During the June 2014 and June 2013 quarters, net interest margin benefited from interest rate floors on certain commercial-related loans and retail residential home equity lines of credit. At June 30, 2014, the coupon rate on approximately $76 million, or 14.3%, of gross loans at June 30, 2014 was supported by an average interest rate floor approximately 117 basis points greater than the normal adjustable rate. If current interest rate levels were assumed to remain the same, the annualized increase to net interest income and net interest margin was approximately $885 and .13%, respectively, based on those existing loan floors and average total earning assets during the quarter ended June 30, 2014. During a period of rising short-term interest rates, we expect average funding costs (which are not currently subject to contractual caps on the interest rate) to rise while the yield on loans with interest rate floors would remain the same until those loans’ adjustable rate index caused coupon rates to exceed the loan rate floor. For these particular loans, the speed in which short-term interest rates increase is expected to have a significant impact on net interest income from loans with interest rate floors. Quickly rising short-term rates would allow adjustable rate loans with floors to reprice to rates higher than the existing floor more quickly, impacting net interest income less adversely than if short-term rates rose slowly or deliberately.

At June 30, 2013, the coupon rate on approximately $73 million, or 14.2%, of gross loans at June 30, 2013 was supported by an average interest rate floor approximately 120 basis points greater than the normal adjustable rate. The annualized increase to net interest income and net interest margin was approximately $870 and .13%, respectively, based on those existing loan floors and average total earning assets during the quarter ended June 30, 2013.

Six months ended June 30, 2014 compared to June 30, 2013

Tax adjusted net interest income totaled $11,088 (on net margin of 3.33%) during the six months ended June 30, 2014 compared to $11,005 (3.39%) in the six months ended June 30, 2013, an increase of $83, or 0.8%. Net margin has declined from the prior year period as loan yields have declined slightly faster than funding costs, which are already near functional interest rate floors. A 2.6% increase in earning assets increased net interest income by $642 during the 2014 year to date compared to the six months ended June 30, 2013, but the decline in net interest margin decreased net interest income by $559 during the six months ended June 30, 2014 compared to the prior year period. Refer to Table 4 for more information on average balances, rates, and yields by product for the six months ended June 30, 2014 and 2013.

The following Tables present a schedule of yields and costs for the quarter and six months ended June 30, 2014, compared to the prior year periods ended June 30, 2013, and the interest income and expense volume and rate analysis for the six months ended June 30, 2014, compared to the six months ended June 30, 2013.

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Table 3: Net Interest Income Analysis (Quarter)

(dollars in thousands)	Quarter ended June 30, 2014							Quarter ended June 30, 2013
	Average					Yield/		Average					Yield/
	Balance			Interest		Rate		Balance			Interest		Rate
Assets
Interest-earning assets:
Loans ⁽¹⁾⁽²⁾	$	520,135		$	5,646		4.35%	$	506,962		$	5,830		4.61%
Taxable securities		90,206			613		2.73%		84,150			516		2.46%
Tax-exempt securities ⁽²⁾		53,696			567		4.24%		53,291			571		4.30%
FHLB stock		2,556			3		0.47%		3,289			3		0.37%
Other		14,512			19		0.53%		6,943			15		0.87%

Total ⁽²⁾		681,105			6,848		4.03%		654,635			6,935		4.25%

Non-interest-earning assets:
Cash and due from banks		9,199							9,585
Premises and equipment, net		10,720							10,040
Cash surrender value insurance		12,963							12,056
Other assets		9,462							9,574
Allowance for loan losses		(6,972	)						(7,537	)

Total	$	716,477						$	688,353

Liabilities and stockholders’ equity
Interest-bearing liabilities:
Savings and demand deposits	$	179,069		$	71		0.16%	$	171,306		$	92		0.22%
Money market deposits		140,387			87		0.25%		114,855			95		0.33%
Time deposits		180,979			559		1.24%		162,317			574		1.42%
FHLB borrowings		26,129			174		2.67%		64,476			324		2.02%
Other borrowings		20,641			155		3.01%		23,769			168		2.83%
Senior subordinated notes		4,000			37		3.71%		4,000			37		3.71%
Junior subordinated debentures		7,732			85		4.41%		7,732			85		4.41%

Total		558,937			1,168		0.84%		548,455			1,375		1.01%

Non-interest-bearing liabilities:
Demand deposits		91,942							76,680
Other liabilities		6,174							5,995
Stockholders’ equity		59,424							57,223

Total	$	716,477						$	688,353

Net interest income				$	5,680						$	5,560
Rate spread							3.19%							3.24%
Net yield on interest-earning assets							3.34%							3.41%

⁽¹⁾ Nonaccrual loans are included in the daily average loan balances outstanding.

⁽²⁾ The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.

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Table 4: Net Interest Income Analysis (Six months)

(dollars in thousands)	Six months ended June 30, 2014							Six months ended June 30, 2014
	Average					Yield/		Average					Yield/
	Balance			Interest		Rate		Balance			Interest		Rate
Assets
Interest-earning assets:
Loans ⁽¹⁾⁽²⁾	$	513,023		$	11,139		4.38%	$	500,008		$	11,569		4.67%
Taxable securities		85,345			1,162		2.75%		87,713			1,057		2.43%
Tax-exempt securities ⁽²⁾		54,194			1,144		4.26%		52,641			1,136		4.35%
FHLB stock		2,556			6		0.47%		2,984			4		0.27%
Other		16,915			36		0.43%		11,558			37		0.65%

Total ⁽²⁾		672,033			13,487		4.05%		654,904			13,803		4.25%

Non-interest-earning assets:
Cash and due from banks		9,733							9,758
Premises and equipment, net		10,170							10,123
Cash surrender value insurance		12,913							11,954
Other assets		9,416							9,700
Allowance for loan losses		(6,924	)						(7,509	)

Total	$	707,341						$	688,930

Liabilities and stockholders’ equity
Interest-bearing liabilities:
Savings and demand deposits	$	180,703		$	155		0.17%	$	176,508		$	206		0.24%
Money market deposits		140,777			196		0.28%		118,302			199		0.34%
Time deposits		169,302			1,078		1.28%		161,234			1,136		1.42%
FHLB borrowings		30,271			416		2.77%		58,610			654		2.25%
Other borrowings		20,584			310		3.04%		22,299			325		2.94%
Senior subordinated notes		4,000			75		3.78%		5,000			109		4.40%
Junior subordinated debentures		7,732			169		4.41%		7,732			169		4.41%

Total		553,369			2,399		0.87%		549,685			2,798		1.03%

Non-interest-bearing liabilities:
Demand deposits		89,023							77,051
Other liabilities		6,319							5,850
Stockholders’ equity		58,630							56,344

Total	$	707,341						$	688,930

Net interest income				$	11,088						$	11,005
Rate spread							3.18%							3.22%
Net yield on interest-earning assets							3.33%							3.39%

⁽¹⁾ Nonaccrual loans are included in the daily average loan balances outstanding.

⁽²⁾ The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.

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Table 5: Interest Expense and Expense Volume and Rate Analysis (Year to Date)

Six months ended June 30, 2014

	2014 compared to 2013
	increase (decrease) due to (1)
(dollars in thousands)		Volume			Rate			Net

Interest earned on:
Loans ⁽²⁾		$	283		$	(713	)	$	(430	)
Taxable securities			(32	)		137			105
Tax-exempt securities ⁽²⁾			33			(25	)		8
FHLB stock			(1	)		3			2
Other interest income			11			(12	)		(1	)

Total			294			(610	)		(316	)

Interest paid on:
Savings and demand deposits			4			(55	)		(51	)
Money market deposits			31			(34	)		(3	)
Time deposits			51			(109	)		(58	)
FHLB borrowings			(389	)		151			(238	)
Other borrowings			(26	)		11			(15	)
Senior subordinated notes			(19	)		(15	)		(34	)
Junior subordinated debentures			—			—			—

Total			(348	)		(51	)		(399	)

Net interest earnings		$	642		$	(559	)	$	83

⁽¹⁾	The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

⁽²⁾	The yield on tax-exempt loans and investment securities has been adjusted to its fully taxable equivalent using a 34% tax rate.

Interest Rate Sensitivity

We incur market risk primarily from interest-rate risk inherent in our lending and deposit taking activities. Market risk is the risk of loss from adverse changes in market prices and rates. We actively monitor and manage our interest-rate risk exposure. The measurement of the market risk associated with financial instruments (such as loans and deposits) is meaningful only when all related and offsetting on- and off-balance sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments that reflect changes in market prices and rates can be found in Note 15 of the Notes to Consolidated Financial Statements.

Our primary objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on net interest income and capital, while adjusting the asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure reflected on the Consolidated Balance Sheets to control interest-rate risk. In general, longer-term earning assets are funded by shorter-term funding sources allowing us to earn net interest income on both the credit risk taken on assets and the yield curve of market interest rates. In general, a sudden and substantial change in interest rates could adversely impact earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. We do not engage in significant trading activities to enhance earnings or for hedging purposes.

Our overall strategy is to coordinate the volume of rate sensitive assets and liabilities to minimize the impact of interest rate movement on the net interest margin. The following Table represents our earnings sensitivity to changes in interest rates at June 30, 2014. It is a static indicator which does not reflect various repricing characteristics and may not indicate the sensitivity of net interest income in a changing interest rate environment, particularly during periods when the interest yield curve is flattening or steepening. The following repricing methodologies should be noted:

Public or government fund MMDA and NOW accounts are considered fully repriced within 60 days. Higher yielding retail and non-governmental money market and NOW deposit accounts are considered fully repriced within 90 days. Rewards Checking NOW accounts and other money market deposit accounts are considered fully repriced within one year. Other NOW and savings accounts are considered “core” deposits as they are generally insensitive to interest rate changes. These core deposits are generally considered to reprice beyond five years.

Nonaccrual loans are considered to reprice beyond 5 years.

Assets and liabilities with contractual calls or prepayment options are repriced according to the likelihood of the call or prepayment being exercised in the current interest rate environment.

Measurements taking into account the impact of rising or falling interest rates are based on a parallel yield curve change that is fully implemented within a 12-month time horizon.

Bank owned life insurance is considered to reprice beyond 5 years.

The gap analysis reflects a liability sensitive gap position during the next year, with a cumulative negative one-year gap ratio at June 30, 2014 of 87.5% compared to a negative gap of 85.4% at December 31, 2013. In general, a current negative gap would be favorable in a falling interest rate environment but unfavorable in a rising rate environment. However, net interest income is impacted not only by the timing of product repricing, but the extent of the change in pricing which could be severely limited from local competitive pressures. If we held an asset sensitive gap position, the existence of our “in the money” floating rate loan floors discussed previously could also lessen the impact of an asset sensitive gap position in a rising interest rate environment. These factors can result in change to net interest income from changing interest rates different than expected from review of the gap table.

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Table 6: Interest Rate Sensitivity Gap Analysis

	June 30, 2014
(dollars in thousands)	0-90 Days		91-180 days		181-365 days			1-2 yrs.		2-5 yrs.		Beyond 5 yrs.		Total

Earning assets:
Loans	$	172,523	$	52,925	$	58,343		$	84,368	$	117,746	$	42,848	$	528,753
Securities		6,823		5,825		11,124			20,779		52,077		47,613		144,241
FHLB stock													2,556		2,556
CSV bank-owned life insurance													13,025		13,025
Other earning assets		1,969		248		1,688			1,736						5,641

Total	$	181,315	$	58,998	$	71,155		$	106,883	$	169,823	$	106,042	$	694,216
Cumulative rate sensitive assets	$	181,315	$	240,313	$	311,468		$	418,351	$	588,174	$	694,216

Interest-bearing liabilities
Interest-bearing deposits	$	91,313	$	24,072	$	198,808		$	32,835	$	50,222	$	101,274	$	498,524
FHLB advances		18,200		6,540		—					3,139				27,879
Other borrowings		9,059				8,000					5,500				22,559
Senior subordinated notes									1,000		3,000				4,000
Junior subordinated debentures											7,732				7,732

Total	$	118,572	$	30,612	$	206,808		$	33,835	$	69,593	$	101,274	$	560,694
Cumulative interest
sensitive liabilities	$	118,572	$	149,184	$	355,992		$	389,827	$	459,420	$	560,694

Interest sensitivity gap for
the individual period	$	62,743	$	28,386	$	(135,653	)	$	73,048	$	100,230	$	4,768
Ratio of rate sensitive assets to
rate sensitive liabilities for
the individual period		152.9%		192.7%		34.4%			315.9%		244.0%		104.7%

Cumulative interest
sensitivity gap	$	62,743	$	91,129	$	(44,524	)	$	28,524	$	128,754	$	133,522
Cumulative ratio of rate sensitive
assets to rate sensitive liabilities		152.9%		161.1%		87.5%			107.3%		128.0%		123.8%

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We use financial modeling techniques that measure interest rate risk. These policies are intended to limit exposure of earnings to risk. A formal liquidity contingency plan exists that directs management to the least expensive liquidity sources to fund sudden and unanticipated liquidity needs. We also use various policy measures to assess interest rate risk as described below.

We balance the need for liquidity with the opportunity for increased net interest income available from longer term loans held for investment and securities. To measure the impact on net interest income from interest rate changes, we model interest rate simulations on a quarterly basis. Our policy is that projected net interest income over the next 12 months will not be reduced by more than 15% given a change in interest rates of up to 200 basis points. The following table presents the projected impact to net interest income by certain rate change scenarios and the change to the one year cumulative ratio of rate sensitive assets to rate sensitive liabilities.

Table 7: Net Interest Margin Rate Simulation Impacts

Period Ended:	June 2014	December 2013	June 2013

Cumulative 1 year gap ratio
Base	88%	85%	85%
Up 200	84%	82%	82%
Down 100	89%	87%	87%

Change in Net Interest Income – Year 1
Up 200 during the year	-5.0%	-2.8%	-2.3%
Down 100 during the year	-0.3%	-0.1%	0.0%

Change in Net Interest Income – Year 2
No rate change (base case)	-0.5%	-0.8%	1.6%
Following up 200 in year 1	-5.4%	-0.2%	-1.4%
Following down 100 in year 1	-3.9%	-2.4%	-1.3%

Note: Simulations since June 2008 reflect net interest income changes from a down 100 basis point scenario, rather than a down 200 basis point scenario as dictated by internal policy due to the currently low level of relative short-term rates.

We completed a non-maturity deposit study following March 31, 2014 and used the current report findings to update certain key assumptions in our June 30, 2014 interest margin simulations. The findings called for slightly higher average rate change (beta) in rising rate simulations as well as extending the projected average life of core deposits under normal operations based on historical experience. The increase in non-maturity deposit beta rates in a rising rate environment lowered projected net interest income in the up 200 basis point increase simulations as shown in Table 7 above. At June 30, 2014, if the change in beta assumptions had not been made, the change in net interest income in Year 1 would have been (-3.1%) compared to (-5.0%) shown in Table 7, and the change in Year 2 would have been (-1.2%) compared to (-5.4%).

To assess whether interest rate sensitivity beyond one year helps mitigate or exacerbate the short-term rate sensitive position, a quarterly measure of core funding utilization is made. Core funding is defined as liabilities with a maturity in excess of 60 months and stockholders’ equity capital. Core deposits including DDA, lower yielding NOW, and non-maturity savings accounts (not including high yield NOW such as Rewards Checking deposits and money market accounts) are also considered core long-term funding sources. The core funding utilization ratio is defined as assets that reprice in excess of 60 months divided by core funding. Our target for the core funding utilization ratio is to remain at 80% or below given the same 200 basis point changes in rates that apply to the guidelines for interest rate risk limits exposure described previously. Our core funding utilization ratio after a projected 200 basis point increase in rates was 57.2% at June 30, 2014 compared to 53.8% at December 31, 2013.

We also measure internal interest rate simulations that project interest rate changes that maintain the current shape of the yield curve (often referred to as “parallel yield curve shifts”) as well as rising rate environments that create a “flattening” yield curve. We also project the potential impacts of extreme periods of interest rate changes such as up 400 basis points during a 24 month period. The impact of various rate simulations on projected “base” net interest income are shown in the Table below. When the yield curve flattens, repriced short-term funding cost, such as for terms of one year or less increases, while maturing fixed rate balloon loans, such as with terms from 3 to 5 years, increase much less. During flattening periods, assets and liabilities may reprice at the same time but to a much different extent. In addition, although market expectations are for interest rates to rise during the next several years, we also have risk to a prolonged period of low or falling rates in the currently low rate environment. If interest rates remain low, loan and security yields continue to decline while funding costs reach effective lows, reducing net interest margin, particularly if average credit spreads were to decline to levels seen prior to 2008 (pre-recessionary levels).

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The table below summarizes the percentage change to current “base case” net interest income as a result of certain alternative interest simulations:

Table 8: Projected Changes to Net Interest Income Under Various Rate Change Simulations

	During next 12M	During next 24M	During next 24M	Yield Curve
	Down 100 bp	Parallel up 400 bp	Flat up 500 bp	Twist*

Year 1	-0.3%	-4.9%	-6.1%	1.2%
Year 2	-3.5%	-9.1%	-12.3%	3.2%
Year 3	-7.0%	-4.2%	-8.1%	-6.6%
Year 4	-11.0%	12.1%	9.3%	0.2%
Year 5	-13.5%	27.5%	25.9%	14.9%

*Yield curve steepens over the first 18 months of the simulation (10 year CMT Treasury = 3.75%) and flattens over months 19-36 to the average slope from 2005-2007 (with Fed Funds targeted at 4.00%)

Noninterest Income

Quarter ended June 30, 2014 compared to June 30, 2013

Total noninterest income for the quarter ended June 30, 2014 was $1,369, compared to $1,523 earned during the June 2013 quarter, a decrease of $154, or 10.1%, as residential mortgage banking declined $284, or 50.9%. Mortgage banking includes the gain on sale of residential mortgage loans to secondary market investors as well as the net loan servicing income associated with those loans. Offsetting the mortgage banking decline were higher investment and insurance sales commissions, up $45, and higher debit and credit card interchange income, up $63. During December 2013, PSB sold its credit card loan principal portfolio in exchange for greater interchange fee income on those retained credit card customers, accounting for 44% of the increased interchange income during the June 2014 quarter. Prior to the sale of the credit card portfolio, card income was categorized as loan interest income. All other changes increased noninterest income by $22 compared to the prior year quarter.

Mortgage banking income declined significantly during the June 2014 quarter compared to the June 2013 quarter on significantly lower residential loan refinance activity due to an increase in long term interest rates in response to expected actions by the Federal Reserve. Gain on sale of mortgage loans (a component of mortgage banking revenue) was $154 and $224 during the quarters ended June 30, and March 31, 2014, respectively. Gain on mortgage sales is expected to increase back to March 2014 quarterly levels due to positive seasonal sales factors and conclusion of a temporary program to retain (rather than sell) certain fixed rate mortgages loans in our own loan portfolio. Total mortgage banking income during all of 2014 is expected to decline 25% to 30% from amounts seen during the year ended December 31, 2013 and could cause total noninterest income to decline during 2014 compared to that seen during 2013.

Six months ended June 30, 2014 compared to June 30, 2013

Total noninterest income for the six months ended June 30, 2014 was $2,689 compared to $2,938 during the comparable prior year period, down $249, or 8.5%. Mortgage banking led the decline, down $364, or 38.2%. Gain on sale of mortgage loans (a component of mortgage banking revenue) was $378 and $841 during the six months ended June 30, 2014 and 2013, respectively, down $463, or 55.1%. Offsetting a portion of the decline in sale gains is increased mortgage servicing fee income during 2014 from slower amortization of mortgage servicing rights as refinance activity sharply declines. Offsetting the mortgage banking decline was $104 of higher debit and credit card interchange income. Increased credit card interchange income accounted for 53% of the total increase in interchange income. All other changes increased year to date noninterest income by $11 compared to the prior year.

Noninterest Expense

Quarter ended June 30, 2014 compared to June 30, 2013

Noninterest expenses totaled $4,666 during the June 2014 quarter compared to $4,216 during the June 2013 quarter. The June 2014 quarter included $243 of nonrecurring Northwoods Rhinelander merger and conversion costs. If these costs were excluded, noninterest expense during the June 2014 quarter would have been $4,423 compared to $4,216 in June 2013, an increase of $207, or 4.9%. Approximately $89 of the increase was due to Northwoods branch direct operating costs since the acquisition, including $23 in core deposit intangible asset amortization. Excluding $119 in merger data conversion costs, total data processing and other office operations expense was $496 during the June 2014 quarter compared to $477 during June 2013 quarter, an increase of $19, or 4.0%, primarily from monthly recurring data service bureau costs associated with the new Northwoods Rhinelander branch but not allocated to the branch as direct operating costs. All other operating costs increased $99 compared to the June 2013 quarter, including $88 in increased fraudulent debit card and check losses not expected to recur during the September 2014 quarter.

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Six months ended June 30, 2014 compared to June 30, 2013

During the six months ended June 30, 2014, noninterest expense totaled $8,955 compared to $8,298 during the prior year period. However, the year to date period included $371 of nonrecurring Northwoods Rhinelander merger and conversion costs. If these costs were excluded, noninterest expense during the six months ended June 30, 2014 would have been $8,584 compared to $8,298 during 2013, an increase of $286, or 3.4%. As noted previously, approximately $108 of the increase was from recurring direct Northwoods branch operating costs following the acquisition plus $79 of increased fraudulent debit card and check losses compared to the six months ended June 30, 2013. All other increases totaled $99, led by a $68 increase in FDIC insurance premiums from impacts of the large September 2013 loan charge-off associated with a customer fraud which increased deposit insurance premiums.

CREDIT QUALITY AND PROVISION FOR LOAN LOSSES

The loan portfolio is our primary asset subject to credit risk. Our process for monitoring credit risk includes quarterly analysis of loan quality, delinquencies, nonperforming assets, and potential problem loans. Loans are placed on a nonaccrual status when they become contractually past due 90 days or more as to interest or principal payments. All interest accrued but not collected for loans (including applicable impaired loans) that are placed on nonaccrual status or charged off is reversed against interest income. Nonaccrual loans and restructured loans maintained on accrual status remain classified as nonperforming loans until the uncertainty surrounding the credit is eliminated. In general, uncertainty surrounding the credit is eliminated when the borrower has displayed a history of regular loan payments using a market interest rate that is expected to continue as if a typical performing loan. Some borrowers continue to make loan payments while maintained on non-accrual status. We apply all payments received on nonaccrual loans to principal until the loan is returned to accrual status or repaid. Total nonperforming assets as a percentage of total tangible common equity including the allowance for loan losses was 18.96%, 16.80%, and 17.75% at June 30, 2014, December 31, 2013, and June 30, 2013, respectively (refer to Table 25). For the purpose of this measurement, tangible common equity is equal to total common stockholders’ equity less mortgage servicing right assets, goodwill, and core deposit intangible assets.

Nonperforming assets include: (1) loans that are either contractually past due 90 days or more as to interest or principal payments, on a nonaccrual status, or the terms of which have been renegotiated to provide a reduction or deferral of interest or principal (restructured loans), (2) investment securities in default as to principal or interest, and (3) foreclosed assets.

Table 9: Nonperforming Assets

	June 30,				December 31,
(dollars in thousands)	2014		2013		2013

Nonaccrual loans (excluding restructured loans)	$	4,689	$	5,504	$	3,704
Nonaccrual restructured loans		4,943		1,503		3,636
Restructured loans not on nonaccrual		1,274		2,707		1,299
Accruing loans past due 90 days or more		—		—		—

Total nonperforming loans		10,906		9,714		8,639
Foreclosed assets		1,266		1,336		1,750

Total nonperforming assets	$	12,172	$	11,050	$	10,389

Nonperforming loans as a % of gross loans receivable		2.06%		1.89%		1.67%
Total nonperforming assets as a % of total assets		1.68%		1.59%		1.46%
Allowance for loan losses as a % of nonperforming loans		63.53%		78.65%		78.52%

Total nonperforming assets increased $1,849, or 17.9%, during the quarter ended June 2014 to $12,172, compared to $10,323 at March 31, 2014 and $10,389 at December 31, 2013. The increase was due to placing a $1,075 single family jumbo residential mortgage and a $959 commercial loan onto nonaccrual status during the June 2014 quarter. Recognition of the two problem loans also increased allowance for loan loss needs by $547 during the June 2014 quarter. Offsetting these significant new problem loans was continued improvement in general loan quality, allowing a portion of the existing allowance for loan losses to be recaptured, offsetting the negative impact of new reserves recognized on the two problem loans. At June 30, 2014, the allowance for loan losses was $6,929, or 1.31% of total loans (64% of nonperforming loans), compared to $6,783, or 1.31% of total loans (79% of nonperforming loans) at December 31, 2013.

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The $1,075 single family residential jumbo mortgage loan became 30 to 59 days delinquent during the March 2014 quarter and was classified as an impaired, but performing loan at March 31, 2014. During the June 2014 quarter, the borrower was placed on nonaccrual status due to nonpayment and is classified as a nonaccrual loan at June 30, 2014. The borrower is disputing a potential change in ownership of the home via divorce proceedings. This mortgage is significantly under collateralized although the borrower continues income levels sufficient to service the required debt payments. Refer to Table 10 below for more information on this loan relationship and specific reserves maintained on this nonaccrual loan. During the six months ended June 30, 2014, total past due residential - prime loans increased $1,683, to $2,474, compared to $791 at December 31, 2013, as shown in Note 4 of the Notes to Consolidated Financial Statements. This $1,075 nonaccrual jumbo mortgage loan represented 64% of the delinquent residential –prime mortgage principal increase and 49% of the total loan portfolio delinquent loan principal increase during the six months ended June 30, 2014.

Separately, a commercial and industrial loan relationship that includes a significant government agency guarantee of principal became past due during the March 2014 quarter but was classified as a performing loan and credit risk rating 5 (“Watch”) as of March 31, 2014. This borrower was negatively impacted by loss of a large customer during 2013 that has resulted in strained cash flow. The full borrower relationship includes loans receivable totaling $3,533 at June 30, 2014, of which $2,574 carries an 80% principal guarantee by the United States Department of Agriculture (“USDA”). During the June 2014 quarter, the unguaranteed portion of this loan was restructured to convert to interest only payments and was reclassified as a nonaccrual loan of $959 at June 30, 2014. The guaranteed portion of the loan totaling $2,574 was not restructured and continues to be classified as an impaired but performing loan at June 30, 2014. Refer to Table 10 below for more information on this loan relationship and specific reserves maintained on this nonaccrual loan.

While the general credit quality of our loan portfolio and identified problem loans continues to improve, improved local economic conditions are slow growing in central and northern Wisconsin, and during the past several years, large local employers in the paper manufacturing, window manufacturing, and insurance claim processing industries announced plant closures, job reductions, or loss of key customer contracts. Our market area has a higher than typical allocation of resources in the manufacturing sector, although the greatest economic growth for many years has been in health and education services. The local paper and wood industries had, and continue to experience, a long-term production decline. The local retail sales environment also declined during 2013 as J.C. Penney Company, Inc., Gap, Inc., and Abercrombie & Fitch, Co. brand Hollister announced store closures within our primary markets.

We expect these conditions to restrain economic growth as some borrowers continue to carefully manage cash flows and debt servicing ability. In addition, the loss of the significant employers mentioned previously may have a significant negative impact on small local municipalities that depended on these closed manufacturing plants for tax assessment base and utility revenue. At June 30, 2014, $2,845 of tax exempt general obligation and tax incremental financing district development loans receivable reflected in Table 12 with a local municipality expected to be significantly negatively impacted due to a plant closure were classified as performing, but impaired loans with no specific reserve. We expect to restructure this loan to extend the life of the tax incremental financing district so that existing property tax collections from real estate located within the district continue for a period long enough to fully pay the original district development costs. This debt restructuring is expected to be classified as a troubled debt restructuring, which would increase non performing loans in Table 9.

Nonperforming loans are reviewed to determine exposure for potential loss within each loan category. The adequacy of the allowance for loan losses is assessed based on credit quality and other pertinent loan portfolio information. The adequacy of the allowance and the provision for loan losses is consistent with the composition of the loan portfolio and recent internal credit quality assessments. We maintain our headquarters and one branch location in the City of Wausau, Wisconsin, and maintain the majority of our deposits (including five of our nine locations), and loan customers in Marathon County, Wisconsin. The significant majority of our customers and borrowers live and work in Marathon, Oneida, and Vilas Counties, Wisconsin, in which we have branch locations. The unemployment rate (not seasonally adjusted) in the Wausau-Marathon County, Wisconsin MSA was 5.5% at May 2014 (the most recent data available) compared to 6.5% at May 2013. The unemployment rate in Oneida County, Wisconsin was 6.9% at May 2014 compared to 8.3% at May 2013. The unemployment rate in Vilas County, Wisconsin was 8.1% at May 2014 compared to 9.2% at May 2013. The unemployment rate for all of Wisconsin (not seasonally adjusted) was 5.5% at May 2014 compared to 6.5% at May 2013. A local economic outlook survey of business owners for our market area published in the December 2013 quarter points to expectations of an improving local economy with some businesses considering a local capital expansion, although an overall economic rebound is considered further out in the future towards the end of 2014.

At June 30, 2014, all nonperforming assets aggregating to $500 or more measured by gross principal outstanding per credit relationship are summarized in the following table and represented 33% of all nonperforming assets compared to 20% of nonperforming assets at December 31, 2013. In the table, loans presented as “Accrual TDR” represent troubled debt restructured loans maintained on accrual status. During the six months ended June 30, 2014, there were two loans added to the large nonperforming assets table, including $1,075 residential jumbo mortgage loan and the $959 unguaranteed portion of a USDA guaranteed loan, discussed previously.

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Table 10: Largest Nonperforming Assets at June 30, 2014 ($000s)

		Gross		Specific
Collateral Description	Asset Type	Principal		Reserves

Single family residential home first mortgage	Nonaccrual	$	1,075	$	528
Timber byproduct processing equipment and receivables	Nonaccrual		959		453
Owner occupied commercial office and residential rentals	Nonaccrual		711		157
Owner occupied cabinetry contractor real estate and equipment	Nonaccrual		707		280
Owner occupied multi use, multi-tenant professional building	Nonaccrual		625		92

Total listed nonperforming assets		$	4,077	$	1,510
Total bank wide nonperforming assets		$	12,172	$	2,614
Listed assets as a percent of total nonperforming assets			33%		58%

Table 11: Largest Nonperforming Assets at December 31, 2013 ($000s)

Collateral Description	Asset Type	Gross Principal		Specific Reserves

Owner occupied cabinetry contractor real estate and equipment	Nonaccrual	$	731	$	304
Owner occupied multi use, multi-tenant real estate	Nonaccrual		658		107
Owner occupied commercial office and residential rentals	Nonaccrual		642		51

Total listed nonperforming assets		$	2,031	$	462
Total bank wide nonperforming assets		$	10,389	$	1,936
Listed assets as a percent of total nonperforming assets			20%		24%

In addition to nonperforming loans, we have classified certain performing loans as impaired loans under accounting standards due to heightened risk of nonperformance within the next year or other factors. In general, loans not classified as nonaccrual or restructured may be classified as impaired due to elevated potential credit risk but still be considered performing. At June 30, 2014, all impaired but performing loans aggregating to $500 or more measured by gross principal outstanding per credit relationship are summarized in the following table. During the June 2014 quarter, a new $2,574 commercial loan guaranteed by the USDA as discussed previously was added to the large impaired loan list at June 30, 2014.

Table 12: Largest Performing, but Impaired Loans at June 30, 2014 ($000s)

		Gross		Specific
Collateral Description	Asset Type	Principal		Reserves

Municipal tax incremental financing district (TID) debt issue	Impaired	$	2,845	$	—
Timber byproduct processing real estate and transportation equipment	Impaired		2,574
Owner occupied light manufacturing facility and equipment	Impaired		1,700		—
Owner occupied cabinetry contractor real estate and equipment	Impaired		723		—

Total listed performing, but impaired loans		$	7,842	$	—
Total performing, but impaired loans		$	9,436	$	90
Listed assets as a percent of total performing, but impaired loans			83%		0%

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Table 13: Largest Performing, but Impaired Loans at December 31, 2013 ($000s)

Collateral Description	Asset Type	Gross Principal		Specific Reserves

Municipal tax incremental financing district (TID) debt issue	Impaired	$	3,090	$	—
Owner occupied light manufacturing facility and equipment	Impaired		1,725		—
Owner occupied cabinetry contractor real estate and equipment	Impaired		700		—

Total listed performing, but impaired loans		$	5,515	$	—
Total performing, but impaired loans		$	7,136	$	172
Listed assets as a percent of total performing, but impaired loans			77%		0%

Provision for Loan Losses and Loss of Foreclosed Assets

We determine the adequacy of the provision for loan losses based on past loan loss experience, current economic conditions, and composition of the loan portfolio. Accordingly, the amount charged to expense is based on management’s evaluation of the loan portfolio. It is our policy that when available information confirms that specific loans, or portions thereof, including impaired loans, are uncollectible, these amounts are promptly charged off against the allowance.

Due to improving general credit trends within its portfolio and a slowly improving local economy, our provision for loan losses during the quarter and six months ended June 30, 2014 respectively was $140 and $280, a decline from the $352 and $675 recorded during the quarter and six months ended June 30, 2013, respectively. A reduction in total credit costs, including the provision for loan losses and loss on foreclosed assets, has been an important sustainer of income during 2014 offsetting significant declines in mortgage banking revenue. Total credit costs were $178 and $496 during the quarters ended June 30, 2014 and 2013, respectively, a reduction of $318, or 64.1% during 2014. Likewise, total credit costs were $354 and $825 during the six months ended June 30, 2014 and 2013, respectively, a reduction of $471, or 57.1%. At June 30, 2014, the allowance for loan losses was $6,929, or 1.31% of total loans (64% of nonperforming loans), compared to $6,783, or 1.31% of total loans (79% of nonperforming loans) at December 31, 2013.

Provision for loan losses during the September 2014 quarter may increase from that recorded during the June 2014 quarter due to potential loan growth, although the provision will be significantly less than the $3,340 provision for loan losses recorded during the September 2013 quarter on identification of a large grain commodities dealer inventory loan associated with a large fraud impacting several banks as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2013. Future provisions are also impacted by the actual amount of newly impaired and other problem loans identified by internal procedures or regulatory agencies which are not yet known.

Table 14: Allowance for Loan Losses

	Three months ended						Six months ended
	June 30,						June 30,
(dollars in thousands)	2014			2013			2014			2013

Allowance for loan losses at beginning	$	6,882		$	7,434		$	6,783		$	7,431

Provision for loan losses		140			352			280			675
Recoveries on loans previously charged-off		4			6			12			14
Loans charged off		(97	)		(152	)		(146	)		(480	)

Allowance for loan losses at end	$	6,929		$	7,640		$	6,929		$	7,640

Net loan charge-offs totaled $93 during the June 2014 quarters (.07% of average loans on an annualized basis) compared to $146 during the June 2013 quarter (.12 of average loans). Net loan charge-offs totaled $134 during the six months ended June 30, 2014 (.05% of average loans) compared to $466 during the six months ended June 30, 2013 (.19% of average loans).

The largest loan charge-off during the six months ended June 2014 was a non-owner occupied residential mortgage made to a low income housing owner totaling $63, representing 47% of all charged-off loan principal.

Three unrelated credit relationships including a commercial loan, a non-owner occupied single family residential mortgage loan, and an owner occupied single family residential mortgage loan totaling $292 were charged off year to date through June 30, 2013, representing 63% of all charged-off loan principal.

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ASSET GROWTH AND LIQUIDITY

Balance Sheet Changes and Analysis

Total assets were $726,541 at June 30, 2014 compared to $711,541at December 31, 2013, up $15,000, or 2.1%, due to an increase in net loans receivable of $11,944, up 2.3%. The loan increase included $21,468 of purchased Northwoods branch loans held at June 30, 2014, offset by a $9,524 decline in existing market loans year to date. The organic loan decline was led by an $8,300 payoff from a multi-family housing developer who refinanced into permanent low fixed rate financing but who continues to maintain lending relationships with PSB. In addition, a $10,962 increase in investment securities was funded by a $10,592 decline in cash and cash equivalents during the six months ended June 30, 2014.

Changes in assets during the three months and six months ended June 30, 2014 are listed in Table 15 below.

Table 15: Change in Balance Sheet Assets Composition

	Three months ended					Six months ended
Increase (decrease) in assets ($000s)	June 30, 2014					June 30, 2014
	$			%		$			%

Commercial real estate mortgage loans	$	13,799			6.5%	$	3,005			1.3%
Residential real estate mortgage and home equity loans		12,807			8.2%		11,142			7.0%
Commercial, industrial and agricultural loans		6,544			5.4%		(2,227	)		-1.7%
Other assets (various categories)		1,638			5.3%		1,274			4.1%
Investment securities		(54	)		0.0%		10,962			8.2%
Bank certificates of deposit		(252	)		-6.4%		1,436			64.2%
Cash and cash equivalents		(1,690	)		-7.5%		(10,592	)		-33.6%

Total increase (decrease) in assets	$	32,792			4.7%	$	15,000			2.1%

A significant portion of the increase in loans during the three months ended June 30, 2014 came from the acquisition of the Northwoods Rhinelander branch, which increased commercial real estate mortgages by $7,753 (56% of the quarterly increase), increased residential real estate mortgages and related loans by $12,215 (95% of the quarterly increase), and increased commercial and related loans by $1,207 (18% of the quarterly increase).

During the six months ended June 30, 2014, the increase in investment securities included an additional $10,357 investment in federal agency issued residential mortgage backed securities purchased at a slight discount to par value with a weighted average purchased yield of 2.80% and an expected average principal life of 5.4 years under current interest rate levels. These securities are subject to extension of principal payments in a rising rate scenario with average principal life increasing up to 7.2 years in connection with a significant increase in interest rates such as the 10 year U.S. Treasury rate. The majority of the purchased mortgage backed securities were represented by fully amortizing 15 year residential mortgage collateral. While the purchase is expected to increase 2014 net income by approximately $40 per quarter, the purchase was made with existing overnight funds and slightly increased our interest rate risk position in future years.

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Changes in net assets during the three months and six months ended June 30, 2014, impacted funding sources as listed in Table 16 below.

Table 16: Change in Balance Sheet Liabilities and Equity Composition

	Three months ended					Six months ended
Increase (decrease) in liabilities and equity ($000s)	June 30, 2014					June 30, 2014
	$			%		$			%

Core deposits (including MMDA)	$	21,774			4.7%	$	14,933			3.2%
Retail certificates of deposit > $100		9,794			22.0%		7,827			16.9%
Other borrowings		2,140			10.5%		2,118			10.4%
Stockholders’ equity		1,004			1.7%		2,528			4.5%
Other liabilities and debt (various categories)		862			6.3%		(302	)		-2.0%
Wholesale and national deposits		(542	)		-1.0%		(1,934	)		-3.4%
FHLB advances		(2,240	)		-7.4%		(10,170	)		-26.7%

Total increase (decrease) in liabilities and stockholders’ equity	$	32,792			4.7%	$	15,000			2.1%

Loans Receivable

Table 17: Period-End Loan Composition

	June 30,				June 30,				December 31, 2013
	Dollars		Dollars		Percentage of total						Percentage
(dollars in thousands)	2014		2013		2014		2013		Dollars		of total

Commercial, industrial and agricultural	$	127,993	$	131,243		24.2%		25.6%	$	130,220		25.2%
Commercial real estate mortgage		227,604		221,592		43.0%		43.1%		224,599		43.5%
Residential real estate mortgage		146,564		135,627		27.7%		26.4%		137,600		26.6%
Residential real estate loans held for sale		—		132		0.0%		0.0%		150		0.0%
Consumer home equity		23,005		20,618		4.4%		4.0%		20,677		4.0%
Consumer and installment		3,587		4,403		0.7%		0.9%		3,567		0.7%

Totals	$	528,753	$	513,615		100.0%		100.0%	$	516,813		100.0%

Loans held for investment continue to consist primarily of commercial related loans, including commercial and industrial and commercial real estate loans, representing 67% of total loans as shown in the Table above at June 30, 2014 and 69% of total loans at December 31, 2013. Refer to Note 4 of the Notes to Consolidated Financial Statements for more information on the composition of loans at period-end.

Following a March 2014 quarter characterized by a $19,565 decline in commercial related loans receivable, total loans increased $33,530 (6.8%) during the June 2014 quarter, from $21,468 of purchased Northwoods Rhinelander loans held at June 30, 2014 and $12,062 of existing market organic growth, up 2.4% from March 31, 2014. Factors contributing to the organic loan balance changes during the six months ended June 30, 2014 are listed below:

Commercial real estate loans declined $8,288 during the March 2014 quarter from the refinance of a multi-family housing development loan with a national lender at low long-term fixed interest rates. We continue to serve as the lender for this developer during the construction and development periods and continue to have ongoing lending relationships for this purpose totaling $2,306 at June 30, 2014.

At June 30, 2014, we had $49.5 million of combined line of credit commitments to our seven largest line of credit customers. Most of these lines are used to manage seasonal business factors and fluctuate in balance during the year. These seven customers increased their drawn balances by $1,834 during the June 2014 quarter after reducing their lines $4,663 during the March 2014 quarter. Year to date, usage of these large lines of credit is down $2,829 since December 31, 2013 and totaled $13,768 at June 30, 2014. This activity reduced commercial and industrial loans at June 30, 2014 compared to December 31, 2013.

During the six months ended June 30, 2014 total participation loans purchased decreased $673, from $27,404 at December 31, 2013 to $26,731 at June 30, 2014. At the beginning of 2014, participation purchased loans included $5,547 of purchased loans from a Wisconsin community bank lead lender collateralized by out of market mobile home park real estate. During the March 2014 quarter, this position declined $2,130 when the loan was refinanced with another lender on a long-term basis. During the June 2014 quarter, we repurchased $1,563 of similar loans from the same Wisconsin lender. Together, during the six months ended June 30, 2014, this position in mobile home park purchased real estate loans declined $567, to $4,980 held at June 30, 2014, accounting for the majority of change in purchased participation loans during 2014 year to date.

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Separate from the purchased Northwoods Rhinelander branch loans and the other loan changes discussed above, all other loans increased $2,262 during the six months ended June 30, 2014 from commercial related lending activity for a variety of factors.

During the upcoming September 2014 quarter, we expect to experience modest additional organic net loan growth from increased seasonal use of commercial lines of credit, new commercial real estate loans both within and out of our markets, and commercial equipment lending.

Competition from larger banks in our markets is strong as such banks with higher capital levels and substantial excess deposits look to lending for higher yielding assets as investment security returns remain very low. Banks including BMO Harris Bank (having the largest deposit market share in our markets), U.S. Bank, and Associated Bank aggressively pursue high credit quality borrowers with low lending interest rate spreads in an effort to aggressively increase their loan market share. We expect strong competition to continue during the next several quarters which could impact the pace of future loan growth and could negatively impact net interest margin and net interest income. To support local loan growth, we may increase purchased loan participations from other banks in Wisconsin during 2014.

Deposits and Wholesale Funding Sources

Liquidity refers to the ability to generate adequate amounts of cash to meet our need for cash at a reasonable cost. We manage our liquidity to provide adequate funds to support borrowing needs and deposit flow of our customers. We also view liquidity as the ability to raise cash at a reasonable cost or with a minimum of loss and as a measure of balance sheet flexibility to react to marketplace, regulatory, and competitive changes. Retail and local deposits and repurchase agreements are the primary source of funding. Retail and local deposits and repurchase agreements were 75.5% of total assets at June 30, 2014, compared to 73.9% of total assets at December 31, 2013 and 68.6% of total assets at June 30, 2013. This percentage increased compared to the prior year periods due to the purchase of the Northwoods Rhinelander branch deposits in April 2014 as well as continued pay down of wholesale funding.

Table 18: Period-end Deposit Composition

	June 30,								December 31,
(dollars in thousands)	2014				2013				2013
	$		%		$		%		$		%

Non-interest bearing demand	$	99,816		16.7%	$	84,262		15.8%	$	102,644		17.8%
Interest-bearing demand and savings		175,248		29.3%		168,018		31.6%		176,427		30.5%
Money market deposits		140,141		23.4%		116,300		21.9%		136,797		23.7%
Retail and local time deposits less than $100		73,493		12.3%		59,640		11.2%		57,897		10.0%

Total core deposits		488,698		81.7%		428,220		80.5%		473,765		82.0%
Retail and local time deposits $100 and over		54,217		9.1%		42,899		8.1%		46,390		8.1%
Broker and national time deposits less than $100		198		0.0%		542		0.1%		542		0.1%
Broker and national time deposits $100 and over		55,227		9.2%		60,071		11.3%		56,817		9.8%

Totals	$	598,340		100.0%	$	531,732		100.0%	$	577,514		100.0%

Total deposits increased $20,826, or 3.6%, to $598,340 at June 30, 2014 compared to $577,514 at December 31, 2013. The majority of the increase was from the purchase of the Northwoods Rhinelander branch, which included $37,982 of deposits at June 30, 2014. Other deposits declined $17,156, or 3.0% of total deposits at June 30, 2014 compared to December 31, 2013. The decline included a $1,934 reduction in brokered and national certificates of deposit, and a $15,222 decline in local deposits. The local deposit decline was led by a reduction of $12,373 in seasonal municipal tax deposits since December 31, 2013.

Wholesale funding often carries higher interest rates than local core deposit funding, so loan growth supported by wholesale funds can generate lower net interest spreads than loan growth supported by local funds. However, wholesale funds provide us the ability to quickly raise large funding blocks and to match loan terms to minimize interest rate risk and avoid the higher incremental cost to existing deposits from simply increasing retail rates to raise local deposits. Rates paid on local deposits are significantly impacted by competitor interest rates and the local economy’s ability to grow in a way that supports the deposit needs of all local financial institutions. Current brokered certificate of deposit rates available to us are often less costly to us than equivalent local deposits due to very low rates of return available on the most conservative fixed income investments and as national wholesale funds place a premium on FDIC insurance available on their large deposit when placed with brokers. Consequently, local certificate of deposit rates in many markets are priced higher than equivalent wholesale brokered deposits due to a limited supply of retail deposits. We expect this difference in pricing between wholesale and local certificates of deposit to be removed by the wholesale funding market as the banking industry is considered to be well capitalized and regains consistent profits. An improving national economy will likely increase wholesale rates relative to local core deposit rates which could increase the volatility of our interest expense due to a significant portion of our funding coming from wholesale sources.

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Our internal policy is to limit broker and national time deposits (not including CDARS) to 20% of total assets. Broker and national deposits as a percentage of total assets were 7.6%, 8.1%, and 8.7% at June 30, 2014, December 31, 2013, and June 30, 2013, respectively. Limited loan growth and the purchase of the Northwoods Rhinelander branch during April 2014 have provided local deposits used to regularly repay maturing brokered deposits and other wholesale funding for the past several quarters, reducing the ratio of brokered deposits to total assets. However, during the September quarter, we expect to utilize wholesale funding, including brokered deposits, to fund expected loan growth to the extent such growth is not supported by local deposit growth. The ratio of wholesale funding to total assets may increase during the remainder of 2014. Beyond the use of brokered and national time deposits, secondary wholesale sources also include federal funds purchased, FHLB advances, Federal Reserve Discount Window advances, and pledging of investment securities against wholesale repurchase agreements.

Table 19: Summary of Balance by Significant Deposit Source

	June 30,				December 31,
(dollars in thousands)	2014		2013		2013

Total time deposits $100 and over	$	109,444	$	102,970	$	103,207
Total broker and national deposits		55,425		60,613		57,359
Total retail and local time deposits		127,710		102,539		104,287
Core deposits, including money market deposits		488,698		428,220		473,765

Table 20: June 30, 2014 Change in Deposit Balance since Period Ended:

	June 30, 2013					December 31, 2013
(dollars in thousands)	$			%		$			%

Total time deposits $100 and over	$	6,474			6.3%	$	6,237			6.0%
Total broker and national deposits		(5,188	)		-8.6%		(1,934	)		-3.4%
Total retail and local time deposits		25,171			24.5%		23,423			22.5%
Core deposits, including money market deposits		60,478			14.1%		14,933			3.2%

As a supplement to local deposits, we use short-term and long-term funding sources other than retail deposits including federal funds purchased from other correspondent banks, advances from the FHLB, use of wholesale and national time deposits, advances taken from the Federal Reserve’s Discount Window, and repurchase agreements from security pledging. Table 21 below outlines the available and unused portion of these funding sources (based on collateral and/or company policy limitations) as of June 30, 2014 and December 31, 2013. Currently unused but available funding sources at June 30, 2014 are considered sufficient to fund anticipated asset growth and meet contingency funding needs during the next several quarters. We also maintain formal policies to address liquidity contingency needs and to manage a liquidity crisis. The following Table 21 provides a summary of how the wholesale funding sources normally available to us would be impacted by various operating conditions.

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Table 21: Environmental Impacts on Availability of Wholesale Funding Sources:

	Normal	Moderately	Highly
	Operating	Stressed	Stressed
	Environment	Environment	Environment

Repurchase Agreements	Yes	Likely*	Not Likely
FHLB (primary 1-4 REM collateral)	Yes	Yes*	Less Likely*
FHLB (secondary loan collateral)	Yes	Likely*	Not Likely
Brokered CDs	Yes	Likely*	Not Likely
National CDs	Yes	Likely*	Not Likely
Federal Funds Lines	Yes	Less Likely*	Not Likely
FRB (Borrow-In-Custody)	Yes	Yes	Less Likely*
FRB (Discount Window securities)	Yes	Yes	Yes
Holding Company line of credit	Yes	Yes	Less Likely*

* May be available but subject to restrictions

Table 22 summarizes the availability of various wholesale funding sources at June 30, 2014, and December 31, 2013.

Table 22: Available but Unused Funding Sources other than Retail Deposits

	June 30, 2014				December 31, 2013
	Unused, but		Amount		Unused, but		Amount
(dollars in thousands)	Available		Used		Available		Used

Overnight federal funds purchased	$	25,461	$	2,539	$	28,000	$	—
Federal Reserve discount window advances		81,970		—		89,875		—
FHLB advances under blanket mortgage lien		71,763		27,879		54,944		38,049
Repurchase agreements and other FHLB advances		48,833		20,020		35,822		20,441
Wholesale and national deposits		89,883		55,425		84,949		57,359
Holding company secured line of credit		3,000		—		3,000		—

Totals	$	320,910	$	105,863	$	296,590	$	115,849

Funding as a percent of total assets		44.2%		14.6%		41.7%		16.3%
Percentage of gross available funding used at period-end		n/a		24.8%		n/a		28.1%

The following discussion examines each of the available but unused funding sources listed in the table above and the factors that may directly or indirectly influence the timing or the amount ultimately available to us.

June 30, 2014 compared to December 31, 2013

Overnight federal funds purchased

Our maximum federal funds purchased availability totals $28,000 from three correspondent banks. The most significant portion of the total is $15,000 from our primary correspondent bank, Bankers’ Bank located in Madison, Wisconsin. We make regular use of the Bankers’ Bank line as part of our normal daily cash settlement procedures, but rarely have used the lines offered by the other two correspondent banks. Federal funds must be repaid each day and borrowings may be renewed for up to 14 consecutive business days. To unilaterally draw on the existing federal funds line, we need to maintain a “composite ratio” as defined by Bankers’ Bank of 40% or less. Bankers’ Bank defines the composite ratio to be nonaccrual loans and foreclosed assets divided by tangible capital including the allowance for loan losses calculated at our subsidiary bank level. Due to existence of the composite ratio, an increase in nonaccrual loans or foreclosed assets could impact availability of the line or subject us to further review. In addition, a rising composite ratio could cause our other two correspondent banks to reconsider their federal funds line with us since they do not also serve as our primary correspondent bank. Our subsidiary bank’s composite ratio was approximately 15% at June 30, 2014 and 13% at December 31, 2013, and less than the 40% benchmark used by Bankers’ Bank.

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Federal Reserve discount window advances

We have a $100,000 line of credit with the Federal Reserve Discount Window supported by both commercial and commercial real estate collateral provided to the Federal Reserve under their Borrower in Custody (“BIC”) program. At June 30, 2014 and December 31, 2013, the annualized interest rate applicable to Discount Window advances was .75%. Under the BIC program, we provide a monthly listing of detailed loan information on the loans provided as collateral. We are subject to annual review and certification by the Federal Reserve to retain participation in the program. The Discount Window represents the primary source of liquidity on a daily basis following our federal funds purchased lines of credit discussed above. We were limited to a maximum advance of $81,970 at June 30, 2014 compared to $89,875 at December 31, 2013 based on the BIC loan collateral pledged. Discount Window advances must be repaid or renewed each day. No Discount Window advances were used during the six months ended June 30, 2014 or during 2013.

Only performing loans are permitted as collateral under the BIC and each individual loan is subject to a haircut to collateral value based on the Federal Reserve’s review of the listing each month. In general, approximately 75% of the loan principal offered as collateral is able to support Discount Window advances. Similar to the federal funds purchased lines of credit, an increase in nonperforming loans would decrease the amount of collateral available for Discount Window advances.

Federal Home Loan Bank (FHLB) advances under blanket mortgage lien and other FHLB advances

We maintain an available line of credit with the FHLB of Chicago based on a pledge of 1 to 4 family mortgage loan collateral, both first and secondary lien positions. We may borrow on the line to the lesser of the blanket mortgage lien collateral provided, or 20 times our existing FHLB capital stock investment. Based on our existing $2,556 capital stock investment, total FHLB advances in excess of $51,124 require us to purchase additional FHLB stock equal to 5% of the advance amount. At June 30, 2014, $15,823 of advances were available from the FHLB without the purchase of additional FHLB stock. Further advances of the remaining $55,940 available at June 30, 2014 would have required us to purchase additional FHLB stock totaling $2,797. FHLB stock currently pays an annualized dividend of .50% with expectations of continuing this dividend level. Therefore, additional FHLB advances carry additional cost relative to other wholesale borrowing alternatives due to the requirement to hold relatively low yielding FHLB stock.

Similar to the Discount Window, only performing residential mortgage loans may be pledged to the FHLB under the blanket lien. In addition, we were subject to a haircut of approximately 36% on first mortgage collateral and 60% on secondary lien collateral at both March 31, 2014 and December 31, 2013. The FHLB conducts periodic audits of collateral identification and submission procedures and adjusts the collateral haircuts higher in response to negative exam findings. The FHLB also assigns a credit risk grade to each member based on a quarterly review of the member’s regulatory CALL report. Our current credit risk is within the normal range for a healthy member bank. Negative financial performance trends such as reduced capital levels, increased nonperforming assets, net operating losses, and other factors can increase a member’s credit risk grade. Higher risk grades can require a member to provide detailed loan collateral listings (rather than a blanket lien), physical collateral, and other restrictions on the maximum line usage. FHLB advances are available on a daily basis and along with Discount Window advances represent a primary source of liquidity following our federal funds purchased lines of credit.

FHLB advances carry substantial penalties for early prepayment that are generally not recovered from the lower interest rates in refinancing. The amount of early prepayment penalty is a function of the difference between the current borrowing rate, and the rate currently available for refinancing. Under a new collateral and pledging agreement we maintain with the FHLB effective April 12, 2011, we are also permitted to pledge commercial related collateral for advances. However, we did not pledge any commercial loan collateral to the FHLB at June 30, 2014 or December 31, 2013.

Repurchase agreements and FHLB advances collateralized by investment securities

Wholesale repurchase agreements may be available from a correspondent bank counterparty for both overnight and longer terms. Such arrangements typically call for the agreement to be collateralized by us at 110% of the repurchase principal. In the current market, repurchase counterparty providers are extremely limited and would likely require a minimum $10 million transaction. Repurchase agreements could require up to several business days to receive funding. Due to the lack of availability of counterparties offering the product, wholesale repurchase agreements are not a reliable source of liquidity. At June 30, 2014, $13,500 of our repurchase agreements are wholesale agreements with correspondent banks and $5,520 are overnight repurchase agreements with local customers using our treasury management services. At December 31, 2013, $13,500 of our repurchase agreements were wholesale agreements with correspondent banks and $5,441 were overnight repurchase agreements with local customers.

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In addition to availability of FHLB advances under the blanket mortgage lien, we also have the ability to pledge investment securities as collateral against FHLB advances. Advances secured by investments are also subject to the FHLB stock ownership requirement as described previously. Due to the need to purchase additional FHLB member stock, FHLB advances secured by investments are not considered a primary source of liquidity. At June 30, 2014, $48,833 of additional FHLB advances were available based on pledging of securities if an additional $2,442 of member capital stock were purchased. At December 31, 2013, $35,822 of additional FHLB advances were available based on pledging of securities if an additional $1,791 of member capital stock were purchased.

Wholesale market deposits

Due to the strength of our capital position, balance sheet, and ongoing earnings, we enjoy the lowest possible costs when purchasing wholesale certificates of deposit on the brokered market. We have an internal policy that limits use of brokered deposits to 20% of total assets, which gave availability of $89,883 at June 30, 2014 and $84,949 at December 31, 2013. Brokered and national certificates were 7.6% of total assets at June 30, 2014 and 8.1% at December 31, 2013. Due to a limited number of providers of repurchase agreement funding as well as our desire to retain unencumbered securities for liquidity purposes and adverse impacts from holding additional FHLB capital stock, loan growth in past years was often funded with brokered certificate of deposit funding.

Participants in the brokered certificate market must be considered “well capitalized” under current regulatory capital standards to acquire brokered deposits without approval of their primary federal regulator. We regularly acquire brokered deposits from three market providers and maintain relationships with other providers to obtain required funds at the lowest possible cost. Ten business days are typically required between the request for brokered funding and settlement. Therefore, brokered deposits are a reliable, but not daily, source of liquidity. Brokered deposits represent our largest source of wholesale funding and we would see significant negative impacts if capital levels or earnings were to decline to levels not considered to be well capitalized. In addition to the requirement to be considered well-capitalized, banks under regulatory consent orders are not permitted to participate in the brokered deposit market without approval of their primary federal regulator even if they maintain a well-capitalized capital classification.

Holding company line of credit

We maintained a $3,000 line of credit secured by a pledge of our bank subsidiary common stock with Bankers’ Bank in Madison, Wisconsin as a contingency liquidity source at June 30, 2014 and December 31, 2013. No amounts were drawn on the line at June 30, 2014 or December 31, 2013. Although our bank subsidiary has in the past provided the holding company’s liquidity needs through semi-annual upstream cash dividend of profits, losses or other negative performance trends could prevent the bank from providing these dividends as cash flow. Because our bank holding company has approximately $1,500 of debt financing payments per year as well as approximately $150 of other expenses (before tax benefits), the holding company line of credit is a critical source of potential liquidity.

We are subject to financial covenants associated with the line which require our bank subsidiary to:

•

Maintain Tier 1 leverage, Tier 1 risk based capital, and Tier 2 risk based capital ratios above 8%, 10%, and 12%, respectively.

•

Maintain nonperforming assets (excluding accruing troubled debt restructured loans) as a percentage of tangible equity plus the allowance for loan losses to less than 20%.

•

Maintain an allowance for loan losses no less than 70% of nonperforming loans (excluding accruing troubled debt restructured loans).

At June 30, 2014 and December 31, 2013, we were not in violation of any of the line of credit covenants. A violation of any covenant could prevent us from utilizing the unused balance of the line of credit. The line of credit expires during December 2014.

If liquidity needs persist after exhausting all available funds from the sources described above, we would consider more drastic methods to raise funds including, but not limited to, sale of investment securities at a loss, cessation of lending to new or existing customers, sale of branch real estate in a sale-leaseback transaction, surrender of bank owned life insurance to obtain the cash surrender value net of taxes due, packaging and sale of residential mortgage loan pools held in our portfolio, sale of foreclosed assets at a loss, and sale of mortgage servicing rights. Such actions could generate undesirable sale losses or income tax impacts. While sale of additional common stock or issuance of other types of capital could provide additional liquidity, the ability to find significant buyers of such capital issues during a liquidity crisis would be difficult making such a source of funding unlikely or unreliable if the liquidity crisis was caused by our deteriorating financial condition.

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Liquidity Measurements and Contingency Plan

Our liquidity management and contingency plan calls for quarterly measurement of key funding, capital, problem loan, and liquidity contingency ratios at our banking subsidiary level. The measurements are compared to various risk levels that direct management to further responses to declining liquidity measurements as outlined below:

Risk Level 1 is defined as circumstances that create the potential for elevated liquidity risk, thus requiring an assessment of possible funding deficiencies. Normal business operations, plans and strategies are not anticipated to be immediately impacted.

Risk Level 2 is defined as circumstances that point to an increased potential for disruptions in the Bank’s funding plans, needs and/or resources. Assessment of the probability of a liquidity crisis is more urgent, and identification and prioritization of pre-emptive alternatives and actions may be both warranted and time sensitive.

Risk Level 3 is defined as circumstances that create a likely funding problem, or are symptomatic of circumstances that are highly correlated with impending funding problems; and, therefore, are expected to require some level of immediate action depending upon the situation.

These risk parameters and other qualitative and environmental factors are considered to determine whether a “Stress Level” response is required. Identification of a risk trigger does not automatically call for a stress level response. The following summarizes our response plans to various degrees of liquidity stress:

Stress Level A – Management provides a written summary evaluating the warning indicators and why it is deemed unlikely that there will be a resulting liquidity challenge.

Stress Level B – Management provides an assessment of the probability of a liquidity crisis and completes a sources and uses of funds report to estimate the impact on pro forma liquidity. Liquidity stress tests will be reviewed to ensure the scenarios being simulated are sufficiently robust and that there is adequate funding to satisfy potential demands for cash. Various pre-emptive actions will be considered and acted on as needed.

Stress Level C – Management has determined a funding crisis is likely and documents detailed assessments of the current liquidity situation and future liquidity needs. The Board approved action plan is carried out with vigor and may call for one or all of the following steps, among others, to mitigate the liquidity concern: sale of loans, intensify local deposit gathering programs, transferring unencumbered securities and loans to the Federal Reserve for Discount Window borrowings, curtail all lending except for specifically approved loans, reduce or suspend stock dividends, and investigate opportunities to raise new capital.

No Risk Level triggers were exceeded at June 30, 2014 or December 31, 2013 and no liquidity stress levels were considered to exist at those dates.

As part of our formal quarterly asset-liability management projections, we also measure basic surplus as the amount of existing net liquid assets (after deducting short-term liabilities and coverage for anticipated deposit funding outflows during the next 30 days) divided by total assets. The basic surplus calculation does not consider unused but available correspondent bank federal funds purchased, as those funds are subject to availability based on the correspondent bank’s own liquidity needs and therefore are not guaranteed contractual funds. However, basic surplus does include unused but available FHLB advances under the open line of credit supported by a blanket lien on mortgage collateral. Basic surplus does not include available brokered certificate of deposit funding as those funds generally may not be obtained within one business day following the request for funding. Our policy is to maintain a basic surplus of at least 5%. Basic surplus was 14.8% and 11.6% at June 30, 2014 and December 31, 2013, respectively. Basic surplus increased since December 31, 2013 as excess cash and cash equivalent funds from loan pay downs were used to repay maturing FHLB advances, increasing FHLB borrowing capacity during the quarter.

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CAPITAL RESOURCES

During the six months ended June 30, 2014, stockholders’ equity increased $2,528, or 4.5%, primarily from $2,187 in retained net income net of $666 of cash dividends declared. Tangible net book value per share at June 30, 2014 was $35.56 compared to $34.36 at December 31, 2013, and increase of 3.5%. The stockholders’ equity ratio declined at June 30, 2014 to 8.16% compared to 8.40% at March 31, 2014, but increased compared to 7.98% at December 31, 2013. The decline in the equity ratio since March 31, 2014 was due to the purchased of the Northwoods branch which added approximately $41 million of assets at the acquisition date without the issuance of additional equity capital. On the purchase of the Northwoods Rhinelander, Wisconsin branch, we recorded $344 of core deposit intangible assets and goodwill, which reduced tangible net book value by $.21 per share at the acquisition date. At June 30, 2014, $321 of these intangibles remain with the core deposit intangible to be amortized over five years using a double declining balance method.

For regulatory purposes, the $7.7 million junior subordinated debentures maturing September 2035 reflected as debt on the Consolidated Balance Sheet are reclassified as Tier 1 regulatory equity capital. The floating rate payments required by the junior subordinated debentures have been hedged with a fixed rate interest rate swap resulting in a total interest cost of 4.42% through September 2017. The adequacy of our capital is regularly reviewed to ensure sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. As of June 30, 2014 and December 31, 2013, the Bank’s Tier 1 risk-weighted capital ratio, total risk-weighted capital, and Tier 1 leverage ratio were in excess of regulatory minimums and were classified as “well-capitalized.” Refer to Table 23 for specific regulatory capital ratios at period-end. Failure to remain well-capitalized could prevent us from obtaining future whole sale brokered time deposits which are an important source of funding.

During the March 2014 quarter, we issued 6,400 shares of restricted stock having a grant date value of $200, or $31.25 per share, to certain key employees as a retention tool and to align employee performance with shareholder interests. The shares vest over the service period using a straight-line method and unvested shares are forfeited if, prior to vesting, the employee is no longer employed with the Bank. Refer to Note 12 of the Notes to Consolidated Financial Statements for more information on the restricted shares.

We did not repurchase any shares of our common stock during the six months ended June 30, 2014. However, we purchased 10,030 shares of our common stock on the open market at a price of $26.78 per share during the six months ended June 30, 2013. For a community bank such as us, the cost of capital remains very high, particularly related to issue of new common stock as our current stock price is valued at less than our net book value per share. In addition, many sources of previously low cost capital such as pooled trust preferred offerings are no longer available. In addition, new regulatory capital rules become effective for us on January 1, 2015 which are expected to decrease existing capital ratios. The priority use of excess capital is to support continued growth through acquisition activities as such opportunities become available. However, we continue to maintain a quarterly program to repurchase up to 10,000 shares of our common stock on the open market at prevailing prices.

During 2013, the banking regulatory agencies finalized new regulatory capital rules that will increase our capital needs beginning January 1, 2015. The minimum capital ratios to be considered well capitalized and to cover the newly required “capital buffer,” would be 6.50% for the leverage ratio, 8.50% for the Tier 1 to risk adjusted capital ratio, and 10.50% for the total risk adjusted capital ratio, up from 5.00%, 6.00%, and 10.00%, respectively under current capital regulation.

The most significant factors of the rules changes include:

Requirement to meet minimum capital ratios for a new regulatory capital ratio defined as the “Common equity Tier 1 capital ratio”.

Institution of a new “capital conservation buffer” which provides a buffer between the minimum regulatory capital ratios to be considered “adequately capitalized” and capital ratios that allow the bank to pay certain levels of shareholder dividends, purchase treasury stock, or fund certain executive management incentive plans.

Potential limitations on mortgage servicing right assets and deferred income tax assets allowed as regulatory capital as well as a greater risk weight applied to the amount allowed for regulatory capital purposes.

Past due loans would be subject to a 150% risk weighting, up from the 100% risk weighting currently applied.

Unused lines of credit not unconditionally cancellable by the bank would be subject to a 20% risk weighting, up from the 0% risk weighting current applied.

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If the new capital rules were applied to our reported consolidated December 31, 2013 regulatory capital position and made effective immediately, the proforma new capital ratios are projected to change as follows:

	Actual as of:	Proforma as of:	Targeted minimum
	Dec 31, 2013	Dec 31, 2013	with capital buffer

Tier 1 leverage ratio to average assets	9.06%	9.06%	6.50%
Common equity Tier 1 ratio (new)	n/a	10.62%	7.00%
Tier 1 risk adjusted capital ratio	12.63%	12.04%	8.50%
Tier 2 total risk adjusted capital ratio	13.88%	13.29%	10.50%

We continue to internally review the timing and extent of the proposed changes on our regulatory capital position and the final capital ratios at January 1, 2015, may be different than the proforma capital ratios shown above. Increased regulatory capital requirements could impact our ability to pay shareholder cash dividends, repurchase shares of treasury stock, or the pace of which we could grow in assets, both organically and via merger and acquisition activities. While we do not expect to be required to raise common stock capital solely to meet these new requirements, the new rules would increase the likelihood we would need capital through the issuance of new common stock if we continued merger and acquisition activity for growth. Because the market price of our stock currently trades at less than our book value, issuance of new common stock shares, such as for an acquisition, could dilute the book value per share of existing shareholders.

Table 23: Capital Ratios – PSB Holdings, Inc. – Consolidated

	June 30,						December 31,
(dollars in thousands)	2014			2013			2013

Stockholders’ equity	$	59,281		$	56,222		$	56,753
Junior subordinated debentures, net		7,500			7,500			7,500
Disallowed mortgage servicing right assets		(170	)		(160	)		(170	)
Disallowed other intangible assets		(321	)		—			—
Accumulated other comprehensive ( income) loss		(564	)		(821	)		(349	)

Tier 1 regulatory capital		65,726			62,741			63,734
Allowance for loan losses		6,386			6,323			6,314

Total regulatory capital	$	72,112		$	69,064		$	70,048

Total quarterly average assets (as defined by current regulations)	$	716,393		$	687,646		$	704,448
Disallowed mortgage servicing right assets		(170	)		(160	)		(170	)
Disallowed other intangible assets		(321	)		—			—
Accumulated other comprehensive (income) loss		(1,337	)		(1,827	)		(1,017	)

Quarterly average tangible assets (as defined by current regulations)	$	714,565		$	685,659		$	703,261

Risk-weighted assets (as defined by current regulations)	$	510,271		$	504,447		$	504,561

Tier 1 capital to average tangible assets (leverage ratio)		9.20%			9.15%			9.06%
Tier 1 capital to risk-weighted assets		12.88%			12.44%			12.63%
Total capital to risk-weighted assets		14.13%			13.69%			13.88%

Table 24: Capital Ratios – Peoples State Bank – Subsidiary

Tier 1 capital to average tangible assets (leverage ratio)	9.44%	9.63%	9.39%
Tier 1 capital to risk-weighted assets	13.24%	13.10%	13.10%
Total capital to risk-weighted assets	14.49%	14.36%	14.35%

As a measurement of the adequacy of a bank’s capital base related to its level of nonperforming assets, many investors use a “non-GAAP” measure commonly referred to as the “Texas Ratio.” We also track changes in our Texas Ratio against our internal capital and liquidity risk parameters to highlight negative capital trends that could impact our ability for future growth, payment of dividends to shareholders, or other factors. As noted previously, correspondent bank providers of our daily federal funds purchased line of credit and the holding company operating line of credit use similar measures that impact our ability to continued use of those lines of credit if our level of nonperforming assets to capital were to rise above prescribed levels. The following Table 25 presents the calculation of our Texas Ratio.

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Table: 25: Calculation of “Texas Ratio” (a non-GAAP measure)

	As of Quarter End
		June 30,			March 31,			December 31,			September 30,			June 30,
(dollars in thousands)		2014			2014			2013			2013			2013

Total nonperforming assets		$	12,172		$	10,323		$	10,389		$	10,285		$	11,050

Total stockholders’ equity		$	59,281		$	58,277		$	56,753		$	56,012		$	56,222
Less: Mortgage servicing rights, net (intangible assets)			(1,698	)		(1,707	)		(1,696	)		(1,662	)		(1,604	)
Less: Goodwill and other intangible assets			(321	)		—			—			—			—
Add: Allowance for loan losses			6,929			6,882			6,783			7,126			7,640

Total tangible common stockholders’ equity and reserves		$	64,191		$	63,452		$	61,840		$	61,476		$	62,258

Total nonperforming assets as a percentage of
total tangible common stockholders’ equity and reserves			18.96%			16.27%			16.80%			16.73%			17.75%

OFF BALANCE-SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Off Balance Sheet Arrangements

We service residential mortgage loans originated by our lenders and sold to the FHLB and FNMA. As a FHLB Mortgage Partnership Finance (“MPF”) loan servicer, we provide a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of the original loan principal sold to the FHLB prior to 2009. At June 30, 2014, our credit guarantee covered $20,781 of loan principal on which we would incur credit losses up to $949 if the FHLB first loss exceeds $1,517 on foreclosure of loans within this pool. At December 31, 2013, our credit guarantee covered $23,709 of loan principal on which we would incur credit losses up to $949 if the FHLB first loss exceeds $1,593 on foreclosure of loans within this pool. These first mortgage loans are underwritten using standardized criteria we consider to be conservative on residential properties in our local communities. We believe loans serviced for the FHLB will realize minimal foreclosure losses in the future and that we will experience no loan losses related to charge-offs in excess of the FHLB 1% First Loss Account. The north central Wisconsin residential real estate market experiences housing price changes similar to the state of Wisconsin as a whole, and we do not have a significant reliance on vacation homes located in our northern markets. The average residential first mortgage originated by us under the FHLB program which required a credit enhancement was approximately $154 in 2008 and $140 during 2007, the last two years of the program. At June 30, 2014, the average remaining first mortgage principal balance for loans on which we provided the credit enhancement was $61.

Ten years after the original pool master commitment date, the FHLB First Loss Account and our Credit Enhancement Guarantee are reset to current levels based on loans remaining in the pool. These factors are further reset every subsequent five years until the pool is repaid. During 2012, a MPF 125 program pool reached its ten year anniversary and the First Loss Account and Credit Enhancement Guarantee associated with that program were reset to the new level shown in Table 26. The next First Loss Account reset date for any individual master commitment containing our Credit Enhancement Guarantee is scheduled for July 2017.

Under bank regulatory capital rules, this recourse obligation to the FHLB is risk-weighted for the purposes of the total capital to risk-weighted assets capital calculation. Total risk-based capital required to be held for the recourse obligations under the FHLB MPF programs for capital adequacy purposes was $864 at June 30, 2014 and December 31, 2013. During October 2008, we ceased origination and sale of loans to the FHLB that required a credit enhancement and no additional risk-based capital will be required to support such loans. More information on all loans serviced for other investors, including FHLB and FNMA, is outlined in Table 26.

Use of Interest Rate Swap Derivatives

From time to time, we sell interest rate swaps to certain adjustable rate commercial loan customers to fix the interest rate on their floating rate loan. There were $13,986 and $14,323 of interest rate swaps associated with customer floating rate commercial loan principal at June 30, 2014 and December 31, 2013, respectively, under the program. When the fixed rate swap is originated with customer, an identical offsetting swap is also entered into by us with a correspondent bank. Refer to Note 9 of the Notes to Consolidated Financial Statements for more information on the program.

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We also maintain an interest rate swap to convert floating interest payments on our $7.7 million junior subordinated debentures to a fixed rate which matures during September 2017. Refer to Note 9 of the Notes to Consolidated Financial Statements for further information on this swap, which is designated as a cash flow hedge of interest rate payments.

Residential Mortgage Loan Servicing

We serviced $273,194 and $272,280 of residential real estate loans which have been sold to the FHLB and FNMA at June 30, 2014, and December 31, 2013, respectively. Loans sold to FHLB and FNMA are not reflected on our Consolidated Balance Sheets. An annualized servicing fee equal to .25% of outstanding principal is retained from payments collected from the customer as compensation for servicing the loan for the FHLB and FNMA. Mortgage loan servicing fees are an important source of mortgage banking income. We recognize a mortgage servicing right asset due to the substantial volume of loans serviced for the FHLB and FNMA.

All loans sold to FHLB or FNMA in which we retain the loan servicing are subject to underwriting representations and warranties made by us as the originator and we are subject to annual underwriting audits from both entities. Our representations and warranties would allow FHLB or FNMA to require us to repurchase inadequately originated loans for any number of underwriting violations. Provision (credit) for mortgage banking losses from required repurchase was ($2) and $204 during the six months ended June 30, 2014 and 2013, respectively and reduced mortgage banking income for those periods. We have provided a liability of $87 at June 30, 2014 compared to $108 at December 31, 2013 for potential future representation and warranty losses. Actual representation and warranty losses were $19 and $126 during the six months ended June 30, 2014 and 2013, respectively.

The following tables summarize loan principal serviced for the FHLB under various MPF programs and for FNMA as of June 30, 2014 and December 31, 2013.

Table 26: Residential Mortgage Loans Serviced for Others as of June 30, 2014 ($000s)

					Weighted		Average Monthly		PSB Credit		Agency		Mortgage
Agency	Principal		Loan		Average		Payment		Enhancement		Funded First		Servicing Right, net
Program	Serviced		Count		Coupon Rate		Seasoning		Guarantee		Loss Account		$		%

FHLB MPF 100	$	7,360		167		5.38%		134	$	94	$	291	$	15		0.21%
FHLB MPF 125		17,288		213		5.75%		84		855		1,226		69		0.40%
FHLB XTRA		176,845		1,428		3.75%		33		n/a		n/a		1,054		0.60%
FNMA		71,701		488		3.50%		178		n/a		n/a		560		0.78%

Totals	$	273,194		2,296		3.85%		35	$	949	$	1,517	$	1,698		0.62%

Table 27: Residential Mortgage Loans Serviced for Others as of December 31, 2013 ($000s)

					Weighted		Average Monthly		PSB Credit		Agency		Mortgage
Agency	Principal		Loan		Average		Payment		Enhancement		Funded First		Servicing Right, net
Program	Serviced		Count		Coupon Rate		Seasoning		Guarantee		Loss Account		$		%

FHLB MPF 100	$	8,493		184		5.38%		128	$	94	$	291	$	19		0.22%
FHLB MPF 125		18,748		226		5.75%		81		855		1,302		77		0.41%
FHLB XTRA		185,283		1,472		3.75%		27		n/a		n/a		1,133		0.61%
FNMA		59,756		409		3.50%		15		n/a		n/a		467		0.78%

Totals	$	272,280		2,291		3.88%		31	$	949	$	1,593	$	1,696		0.62%

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the information provided in response to Item 7A of our Form 10-K for the year ended December 31, 2013.

Item 4. Controls and Procedures

As of the end of the period covered by this report, management, under the supervision, and with the participation, of our President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) pursuant to Exchange Act Rule 13a 15. Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

In addition to the other information set forth in this report, this report should be considered in light of the risk factors referenced in Part I of PSB’s Annual Report on Form 10-K for the year ended December 31, 2013, under the caption “Forward-Looking Statements.” These and other risk factors could materially affect PSB’s business, financial condition, or future results of operations. The risks referenced in PSB’s Annual Report on Form 10-K are not the only risks facing PSB. Additional risks and uncertainties not currently known to PSB or that it currently deems to be immaterial also may materially adversely affect PSB’s business, financial condition, and/or operating results.

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Item 6. Exhibits

Exhibits required by Item 601 of Regulation S-K.

Exhibit
Number	Description

31.1	Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2	Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1	Certifications under Section 906 of Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PSB HOLDINGS, INC.


August 14, 2014	SCOTT M. CATTANACH
	Scott M. Cattanach
	Treasurer

	(On behalf of the Registrant and as Principal Financial Officer)

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EXHIBIT INDEX

FORM 10-Q

PSB HOLDINGS, INC.

for the quarterly period ended June 30, 2014

Pursuant to Section 102(d) of Regulation S-T

(17 C.F.R. §232.102(d))

The following exhibits are filed as part this report:

31.1	Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2	Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1	Certifications under Section 906 of Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

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Default during the quarter ended June 30, 2014 (000s)

investment

Residential real estate – prime