Edgar Filing: PSB HOLDINGS INC /WI/

FORM 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 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.

www.psbholdingsinc.com

WISCONSIN

39-1804877

1905 Stewart Avenue

Wausau, Wisconsin 54401

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes ☐ No ☒

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data 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 ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £

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 ☒

The aggregate market value of the voting stock held by non-affiliates as of June 30, 2014, was approximately $49,609,000. For purposes of this calculation, the registrant has assumed its directors, executive officers, and employee 401(k) profit-sharing plan are affiliates. As of March 1, 2015, 1,630,228 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

FORM 10-K

PSB HOLDINGS, INC.

TABLE OF CONTENTS

PART I

	ITEM

	1.	Business	1
	1A.	Risk Factors.	15
	1B.	Unresolved Staff Comments.	22
	2.	Properties	22
	3.	Legal Proceedings	22
	4.	Mine Safety Disclosures	22

PART II

	5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	23
	6.	Selected Financial Data	24
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	7A.	Quantitative and Qualitative Disclosures About Market Risk	77
	8.	Financial Statements and Supplementary Data	F-1
	9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	78
	9A.	Controls and Procedures	78
	9B.	Other Information	78

PART III

	10.	Directors and Executive Officers of the Registrant	79
	11.	Executive Compensation	81
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	85
	13.	Certain Relationships and Related Transactions	86
	14.	Principal Accounting Fees and Services	87

PART IV

	15.	Exhibits, Financial Statement Schedules	89

PART I

Item 1. BUSINESS.

Business Operations and Products

PSB Holdings, Inc. (“PSB”) owns and operates Peoples State Bank (“Peoples”), a commercial community bank formed in 1962 and headquartered in Wausau, Wisconsin. For 52 years, Peoples has sought to meet the financial needs of local business owners and their families for the betterment of our communities by providing a wide range of beneficial products delivered with fair prices and integrity. Through its 143 full time employees, Peoples serves approximately 17,000 retail households and commercial businesses with our north central Wisconsin network of nine full service locations including five in the greater Wausau, Wisconsin area, and locations in Rhinelander, Minocqua, and Eagle River. Our primary market area has a combined population of approximately 192,000. PSB held $735 million in total assets at December 31, 2014 and maintained the second highest deposit market share in Marathon County, Wisconsin.

We operate as a local community bank, but offer virtually the same products as larger regional banks. We are engaged in general commercial and retail banking and serve individuals, businesses, and governmental units. We offer most forms of commercial lending, including lines and letters of credit, secured and unsecured term loans, equipment and lease financing, and commercial mortgage lending. Commercial customers may use available cash management, lockbox, and merchant banking products, including tools to protect deposit accounts against fraud and facilitate on-site electronic commercial deposits. In addition, we provide a full range of personal banking services, including checking accounts, savings and time deposit accounts, a local network of automated teller machines, online computer banking, mobile banking, credit and debit cards, installment and other personal loans, as well as long-term fixed rate mortgage loans. New services are regularly added to our commercial and retail banking product line-ups. In addition to these traditional banking products, we offer brokerage and financial advisory services including the sale of annuities, mutual funds, other investments, and retirement financial planning consultation services to our customers and the general public. We recognize many opportunities for continued growth in products, customers, assets, and profits both within north central Wisconsin and nearby markets.

Commercial-related loans represent our largest type of asset and approximately 69% of our gross loans receivable. Our typical commercial customers are local small to medium sized business owners with annual sales of less than $25 million. We provide a growing suite of deposit and cash management products in addition to meeting customer credit needs. We build customer relationships on a frequent face to face basis and deliver value by providing capital and liquidity management advice and recommendations specific to our customers’ businesses. Since inception, we have maintained low loan loss ratios through conservative lending practices, emphasis on knowing our customer by establishing deep relationships with each of them, and maintaining focus on serving communities with which we are familiar.

Peoples has a long tradition of strong retail banking products. This emphasis has allowed us to be a leader in local residential real estate lending consistently resulting in number one or number two market share based on mortgage filings. The majority of our residential real estate loans are sold on the secondary market with servicing rights retained. We also maintain a diversified portfolio of local core deposits, including noninterest bearing deposits, savings and retail time deposits less than $100,000, and money market deposits, which make up approximately 84% of total deposits and 71% of total assets. We believe the combination of competitively priced residential mortgage financing and low cost transactional deposit accounts builds a profitable core retail customer base with ongoing growth potential.

We meet the needs of customers with an emphasis on customer service, flexibility, and local decision making. Customers and prospects are identified and served on a face to face basis through relationships directly with bank staff. The vast majority of our customers live or work or have relationships with those within our Bank’s primary market area in north central Wisconsin. Our employees are substantial participants in community activities, averaging over 40 hours of community service per employee during 2014 and 2013, for the betterment of our market area.

More information on PSB, its operations and financial results including past annual and quarterly reports on Forms 10-K and 10-Q, is available free of charge at our investor relations website, www.psbholdingsinc.com. Alternatively, you may contact us directly at 1-888-929-9902 to receive paper or electronic copies of information filed with the United States Securities and Exchange Commission without cost. On November 25, 2014, we filed Form 15 with the SEC to voluntarily deregister our common stock from SEC registration. Therefore, financial reports will no longer be filed with the SEC following February 23, 2015 except for the final filing of our Annual Report on Form 10-K for the year ended December 31, 2014. However, we will continue to post quarterly financial information on our investor relations website, www.psbholdingsinc.com for investors. Bid and ask prices for purchase or sale of PSB common stock are quoted on the OTC Markets Exchange (www.OTCMarkets.com) under the stock symbol PSBQ.

Competitive Position

There is a mix of retail, health care, manufacturing, agricultural, and service businesses in the areas we serve. We have substantial competition in our market areas. Much of this competition comes from companies that are larger and have greater resources than us. We compete for deposits and other sources of funds with other banks, savings associations, credit unions, finance companies, mutual funds, life insurance companies, and other financial and non financial companies. Many of these nonbank competitors offer products and services which are functionally equivalent to the products and services we offer, and new bank and nonbank competitors continue to enter our markets on a regular basis.

Our relative size (compared to other area community banks, thrifts, and credit unions) allows us to offer a wide array of financial service products. Although we are larger than a typical community bank, traditional community bank customer service and flexibility differentiate us from larger financial service providers. Therefore, we can offer better service to customers disenfranchised by poor service received from larger banks, higher-cost retail deposit products, and the perception of government “bailouts” provided to larger banks, while allowing customers to continue their practice of one-stop shopping and local service support. We can compete against smaller local community banks and credit unions by continuing the same level of service these customers expect while providing them an expanded and competitively priced product lineup due in part to economies of scale and access to wholesale funding sources and capital at comparatively lower cost.

Based on publicly available deposit market share information as of June 30, 2014, the following is a list of the largest FDIC insured banks in each of our primary markets and a comparison of our deposit market share to these primary competitors. The Wausau-Marathon County, Wisconsin MSA is our largest market in which we have the second largest market share. As in most Wisconsin communities, BMO Harris Bank holds the largest market share and represents the greatest opportunity to increase deposits from competitors.

	June 30, 2014						June 30, 2013
	Deposit $’s		Market				Deposit $’s		Market
	($000s)		Share				($000s)		Share

Marathon County, Wisconsin						Marathon County, Wisconsin

BMO Harris Bank	$	545,469		19.2	%	BMO Harris Bank	$	513,500		18.2	%
Peoples State Bank (2nd of 22)		461,256		16.2	%	Peoples State Bank (2nd of 23)		444,520		15.8	%
Associated Bank		316,466		11.2	%	River Valley Bank		323,611		11.5	%
River Valley Bank		315,890		11.1	%	Associated Bank		316,222		11.2	%
All other FDIC insured institutions		1,203,206		42.3	%	All other FDIC insured institutions		1,217,836		43.3	%
Totals	$	2,842,287		100.0	%	Totals	$	2,815,689		100.0	%

Oneida County, Wisconsin						Oneida County, Wisconsin

BMO Harris Bank	$	163,344		23.5	%	BMO Harris Bank	$	166,335		24.8	%
Associated Bank		115,785		16.7	%	Peoples State Bank (2nd of 8)		116,497		17.4	%
Peoples State Bank (3rd of 8)		114,951		16.6	%	Associated Bank		107,428		15.9	%
River Valley Bank		88,394		12.7	%	River Valley Bank		85,602		12.8	%
All other FDIC insured institutions		211,279		30.5	%	All other FDIC insured institutions		195,375		29.1	%
Totals	$	693,753		100.0	%	Totals	$	671,237		100.0	%

Vilas County, Wisconsin						Vilas County, Wisconsin

BMO Harris Bank	$	91,334		21.9	%	BMO Harris Bank	$	96,973		22.9	%
First National Bank of Eagle River		85,881		20.6	%	First National Bank of Eagle River		85,317		20.2	%
Headwaters State Bank		55,764		13.4	%	Headwaters State Bank		55,580		13.2	%
Peoples State Bank (6th of 10)		25,516		6.1	%	Peoples State Bank (7th of 10)		19,467		4.6	%
All other FDIC insured institutions		158,716		38.0	%	All other FDIC insured institutions		165,482		39.1	%
Totals	$	417,211		100.0	%	Totals	$	422,819		100.0	%

Our primary source of income is loan interest income earned on commercial and residential loans made to local customers, which together represented a range of approximately 66% to 69% of our gross revenue during the past three years. We originate and sell long-term fixed rate mortgage loans to the secondary market and service future payments on these loans for a substantial amount of fee income which is reported as mortgage banking income. Depositors pay us various service fees, including overdraft charges and commercial service fees, which contribute to noninterest income. Deposits raised from local customers provide the most significant source of funding to provide loans and credit products to customers. Loan product sales in excess of local deposit growth are supplemented by wholesale and national funding such as brokered deposits, FHLB advances, and repurchase agreements. We do not have a dependence on any major customers. The primary sources of revenue are outlined below:

	2014					2013						2012
Revenue source	$		% of revenue			$			% of revenue			$		% of revenue

Interest on commercial related loans	$	15,243		47.2	%	$	15,767			48.6	%	$	16,253		48.1	%
Interest on residential mortgage loans		6,798		21.1	%		6,532			20.2	%		6,172		18.3	%
Interest on securities		3,902		12.1	%		3,609			11.1	%		3,695		10.9	%
Service fees and charges		1,656		5.1	%		1,580			4.9	%		1,648		4.9	%
All other revenue		1,394		4.3	%		1,206			3.7	%		1,221		3.6	%
Mortgage banking		1,373		4.2	%		1,591			4.9	%		1,795		5.3	%
Investment and insurance sales commissions		946		2.9	%		944			2.9	%		736		2.2	%
Increase in cash surrender value of life insurance		404		1.3	%		402			1.3	%		407		1.2	%
Loan fees		391		1.2	%		522			1.6	%		724		2.1	%
Interest on consumer loans		202		0.6	%		305			0.9	%		310		0.9	%
Gain on sale of securities		3		0.0	%		12			0.0	%		–		0.0	%
Gain on bargain purchase		–		0.0	%		–			0.0	%		851		2.5	%
Loss on sale of credit card loan principal		–		0.0	%		(31	)		-0.1	%		–		0.0	%

Total gross revenue	$	32,312		100.0	%	$	32,439			100.0	%	$	33,812		100.0	%

During 2014, we purchased the Rhinelander, Wisconsin branch of the Northwoods National Bank, a branch of The Baraboo National Bank (“Northwoods Rhinelander”), adding $21 million in loans and $41 million in deposits. During 2012, we acquired Marathon State Bank (“Marathon”), a privately owned bank with $107 million in assets and combined it with our existing Peoples’ branch located in Marathon City, Wisconsin. The acquisition of Marathon was our first “whole bank” purchase and our first merger and acquisition activity. Historically, we had pursued a market expansion plan that included de novo (start-up) branching into adjacent market areas. Full-service bank de novo branches were opened in Eagle River, Rhinelander, Minocqua, and Weston, Wisconsin, during 2001 through 2005, in part to expand our market area into northern Wisconsin. During those periods, we believed opening in adjacent markets capitalized on existing management resources and minimized costs for name recognition and awareness while increasing the speed in which customers are obtained via new locations while improving convenience of service for existing customers. No new branch locations have been opened since 2005. We intend to pursue opportunities to acquire additional bank subsidiaries or banking offices in new or adjacent markets so that, at any time, we may be engaged in some tentative or preliminary discussions for such purposes with officers, directors, or principal stockholders of other holding companies or banks. We also actively search for key sales personnel in new or adjacent markets which would permit us to open a de novo lending operation or branch location to generate new market growth.

Current banking law provides us with a competitive environment, and competition for our products and services is likely to continue. For example, current federal law permits adequately capitalized and managed bank holding companies to engage in interstate banking on a broad scale. In addition, financial holding companies are permitted to conduct a broad range of banking, insurance, and securities activities. Banking regulators generally permit the formation of new banks if those banks are able to raise the necessary capital, and some large financial institutions such as investment banks also hold banking charters. We believe that the combined effects of more interstate banking and expansion via branching of existing competitors and large investment banks are likely to increase the overall level of competition and attract competitors who will compete for our customers.

In addition to competition, our business is and will continue to be affected by general economic conditions, including the level of interest rates and the monetary policies of the Federal Reserve and actions of the U.S. Treasury Department (see “Regulation and Supervision”). This competition may cause us to seek out opportunities to provide additional financial services to replace or supplement traditional net interest income or deposit fee income.

Organizational Structure

Our organizational structure is commonly referred to as a “one bank holding company.” PSB was formed in a 1995 tax-free reorganization and is the 100% owner of Peoples State Bank, its only significant subsidiary. This holding company structure permits more active market-based trading of the banking operation’s common stock as well as providing various vehicles in which to obtain equity capital to inject into the bank subsidiary. To facilitate the issuance of junior subordinated debentures in connection with a pooled trust preferred capital issue during 2005, the holding company also owns common stock in PSB Holdings Statutory Trust I. The holding company has no significant revenue producing activities other than ownership of Peoples State Bank.

Since its formation in 1962, all day to day revenue and expense producing activities are conducted by Peoples State Bank. Peoples employs a wholly owned Nevada subsidiary, PSB Investments, Inc., to hold and manage virtually all of the Bank’s investment securities portfolio including the activities of pledging securities against customer deposits and repurchase agreements as needed.

All of our products and services are directly or indirectly related to the business of community banking and all of our activity is reported as one segment of operations. Therefore, revenues, profits and losses, and assets are all reported in one segment and represent our entire operations. We maintain a traditional retail and commercial banking business model and do not regularly employ or sell stand-alone derivative instruments to hedge our cash flow and fair value risks. As of March 1, 2015, we operated with 143 full-time equivalent (“FTE”) employees, including 16 FTE employed on a part time basis. As is common in the banking industry, none of our employees is covered by a collective bargaining agreement.

Regulation and Supervision

PSB Holdings, Inc. (“PSB”) and Peoples State Bank (“Peoples”) are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws and regulations are generally intended to protect depositors and not stockholders. Legislation and related regulations promulgated by government agencies influence, among other things:

	●	how, when, and where we may expand geographically;

	●	into what product or service markets we may enter;

	●	how we must manage our assets; and

●

under what circumstances money may or must flow between the parent bank holding company (PSB) and the subsidiary bank (Peoples).

Set forth below is an explanation of the major pieces of legislation and regulation affecting the banking industry and how that legislation and regulation affects our actions. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects, and legislative changes and the policies of various regulatory authorities may significantly affect our operations. We cannot predict the effect that fiscal or monetary policies, or new federal or state legislation may have on our future business and earnings.

Regulation of PSB Holdings, Inc.

Because PSB owns all of the capital stock of Peoples State Bank, it is a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, PSB is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company located in Wisconsin, the Wisconsin Department of Financial Institutions (“WDFI”) also regulates and monitors all significant aspects of its operations.

Acquisitions of Banks

The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

	●	acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

	●	acquiring all or substantially all of the assets of any bank; or

●

merging or consolidating with any other bank holding company.

Additionally, The Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly, substantially lessen competition, or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved in the transaction and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Under The Bank Holding Company Act, if adequately capitalized and adequately managed, PSB or any other bank holding company located in Wisconsin may purchase a bank located outside of Wisconsin. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Wisconsin may purchase a bank located inside Wisconsin. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.

Change in Bank Control

Subject to various exceptions, The Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

	●	the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or

●

no other person owns a greater percentage of that class of voting securities immediately after the transaction.

Permitted Activities

The Bank Holding Company Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a financial holding company. Under the regulations implementing the Gramm-Leach-Bliley Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activities. Those activities include, among other activities, certain insurance and securities activities. PSB has not elected to become a financial holding company at this time.

Support of Subsidiary Institutions

Under Federal Reserve policy, PSB is required to act as a source of financial strength for Peoples and to commit resources to support Peoples. This support may be required at times when, without this Federal Reserve policy, PSB might not be inclined to provide it. In addition, any capital loans made by PSB to Peoples will be repaid only after Peoples’ deposits and various other obligations are repaid in full. In the unlikely event of its bankruptcy, any commitment that PSB gives to a bank regulatory agency to maintain the capital of Peoples will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Sarbanes-Oxley Act of 2002

On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) was signed into law with sweeping federal legislation addressing accounting, corporate governance, and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant requirements for public company governance and disclosure requirements.

In general, the Sarbanes-Oxley Act mandated important new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and created a new regulatory body to oversee auditors of public companies. It backed these requirements with new SEC enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. It also increased the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and provided new federal corporate whistleblower protection.

The economic and operational effects of this legislation on public companies, including us, are significant in terms of the time, resources and costs associated with complying with this law. Because the Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller public companies, we are presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in its market.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law and included a permanent delay of the implementation of section 404(b) of the Sarbanes-Oxley Act for companies with non-affiliated public float under $75 million. Section 404(b) is the requirement to have an independent accounting firm audit and attest to the effectiveness of a company’s internal controls. As PSB does not exceed the public float threshold described above, there are no additional costs anticipated for complying with Section 404(b) in 2014.

The Dodd-Frank Act of 2010

The Dodd-Frank Act has had a broad impact on the financial services industry, including significant regulatory and compliance changes previously discussed and including, among other things, (1) enhanced resolution authority of troubled and failing banks and their holding companies; (2) increased regulatory examination fees; and (3) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the OCC, and the FDIC.

Many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of its business activities; require changes to certain of its business practices; impose upon us more stringent capital, liquidity, and leverage ratio requirements; or otherwise adversely affect its business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

Regulation of Peoples State Bank

Because Peoples State Bank is chartered as a state bank with the WDFI, it is primarily subject to the supervision, examination, and reporting requirements of Wisconsin Banking Statute Chapter 221 and related rules and regulations of the WDFI. The WDFI regularly examines Peoples’ operations and has the authority to approve or disapprove mergers, the establishment of branches, and similar corporate actions. The WDFI also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Because Peoples’ deposits are insured by the FDIC to the maximum extent provided by law, it is also subject to FDIC regulations and the FDIC also has examination authority and primary federal regulatory authority over Peoples. Peoples is also subject to numerous other state and federal statutes and regulations that affect its business, activities, and operations.

Branching

Under Wisconsin law, Peoples may open branch offices throughout the state with the prior approval of the WDFI. In addition, with prior regulatory approval, Peoples may acquire branches of existing banks located in Wisconsin or other states. Prior to the enactment of the Dodd-Frank Act, Peoples and any other national- or state-chartered banks were generally permitted to branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. However, interstate branching is now permitted for all national- and state-chartered banks as a result of the Dodd-Frank Act, provided that a state bank chartered by the state in which the branch is to be located would also be permitted to establish a branch.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each category.

As a bank’s capital position deteriorates, federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

A “well-capitalized” bank is one that is not required to meet and maintain a specific capital level for any capital measure, pursuant to any written agreement, order, capital directive, or prompt corrective action directive, and has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% (8% beginning January 1, 2015), and a Tier 1 leverage ratio of at least 5%. Generally, a classification as well capitalized will place a bank outside of the regulatory zone for purposes of prompt corrective action. However, a well-capitalized bank may be reclassified as “adequately capitalized” based on criteria other than capital, if the federal regulator determines that a bank is in an unsafe or unsound condition, or is engaged in unsafe or unsound practices, which requires certain remedial action.

An “adequately-capitalized” bank meets the required minimum level for each relevant capital measure, including a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% (6% beginning January 1, 2015) and a Tier 1 leverage ratio of at least 4%. A bank that is adequately capitalized is prohibited from directly or indirectly accepting, renewing or rolling over any brokered deposits, absent applying for and receiving a waiver from the applicable regulatory authorities. Institutions that are not well capitalized are also prohibited, except in very limited circumstances where the FDIC permits use of a higher local market rate, from paying yields for deposits in excess of 75 basis points above a national average rate for deposits of comparable maturity, as calculated by the FDIC. In addition, all institutions are generally prohibited from making capital distributions and paying management fees to controlling persons if, subsequent to such distribution or payment, the institution would be undercapitalized. Finally, an adequately-capitalized bank may be forced to comply with operating restrictions similar to those placed on undercapitalized banks.

An “undercapitalized” bank fails to meet the required minimum level for any relevant capital measure. A bank that reaches the undercapitalized level is likely subject to a formal agreement, consent order or another formal supervisory sanction. An undercapitalized bank is not only subject to the requirements placed on adequately-capitalized banks, but also becomes subject to the following operating and managerial restrictions, which:

●

prohibit capital distributions;

●

prohibit payment of management fees to a controlling person;

●

require the bank to submit a capital restoration plan within 45 days of becoming undercapitalized;

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require close monitoring of compliance with capital restoration plans, requirements and restrictions by the primary federal regulator;

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restrict asset growth by requiring the bank to restrict its average total assets to the amount attained in the preceding calendar quarter;

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prohibit the acceptance of employee benefit plan deposits; and

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require prior approval by the primary federal regulator for acquisitions, branching and new lines of business.

Finally, an undercapitalized institution may be required to comply with operating restrictions similar to those placed on significantly-undercapitalized institutions.

A “significantly-undercapitalized” bank has a total risk-based capital ratio less than 6%, a Tier 1 risk-based capital less than 3% (4% beginning January 1, 2015), and a Tier 1 leverage ratio less than 3%. In addition to being subject to the restrictions applicable to undercapitalized institutions, significantly undercapitalized banks may, at the discretion of the bank’s primary federal regulator, also become subject to the following additional restrictions, which:

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require the sale of enough capital stock so that the bank is adequately capitalized or, if grounds for conservatorship or receivership exist, the merger or acquisition of the bank;

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restrict affiliate transactions;

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restrict interest rates paid on deposits;

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further restrict growth, including a requirement that the bank reduce its total assets;

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restrict or prohibit all activities that are determined to pose an excessive risk to the bank;

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require the bank to elect new directors, dismiss directors or senior executive officers, or employ qualified senior executive officers to improve management;

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prohibit the acceptance of deposits from correspondent banks, including renewals and rollovers of prior deposits;

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require prior approval of capital distributions by holding companies;

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require holding company divestiture of the financial institution, bank divestiture of subsidiaries and/or holding company divestiture of other affiliates; and

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require the bank to take any other action the federal regulator determines will “better achieve” prompt corrective action objectives.

Finally, without prior regulatory approval, a significantly undercapitalized institution must restrict the compensation paid to its senior executive officers, including the payment of bonuses and compensation that exceeds the officer’s average rate of compensation during the 12 calendar months preceding the calendar month in which the bank became undercapitalized.

A “critically-undercapitalized” bank has a ratio of tangible equity to total assets that is equal to or less than 2%. In addition to the appointment of a receiver in not more than 90 days, or such other action as determined by an institution’s primary federal regulator, an institution classified as critically undercapitalized is subject to the restrictions applicable to undercapitalized and significantly-undercapitalized institutions, and is further prohibited from doing the following without the prior written regulatory approval:

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entering into material transactions other than in the ordinary course of business;

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extending credit for any highly leveraged transaction;

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amending the institution’s charter or bylaws, except to the extent necessary to carry out any other requirements of law, regulation or order;

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making any material change in accounting methods;

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engaging in certain types of transactions with affiliates;

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paying excessive compensation or bonuses, including golden parachutes;

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paying interest on new or renewed liabilities at a rate that would increase the institution’s weighted average cost of funds to a level significantly exceeding the prevailing rates of its competitors; and

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making principal or interest payment on subordinated debt 60 days or more after becoming critically undercapitalized.

In addition, a bank’s primary federal regulator may impose additional restrictions on critically-undercapitalized institutions consistent with the intent of the prompt corrective action regulations. Once an institution has become critically undercapitalized, subject to certain narrow exceptions such as a material capital remediation, federal banking regulators will initiate the resolution of the institution.

FDIC Insurance Assessments

Peoples’ deposits are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC up to the maximum amount permitted by law, which was permanently increased to $250,000 by the Dodd-Frank Act. The FDIC uses the DIF to protect against the loss of insured deposits if an FDIC-insured bank or savings association fails. Pursuant to the Dodd-Frank Act, the FDIC must take steps, as necessary, for the DIF reserve ratio to reach 1.35% of estimated insured deposits by September 30, 2020. Peoples is thus subject to FDIC deposit premium assessments.

Currently, the FDIC uses a risk-based assessment system that assigns insured depository institutions to one of four risk categories based on three primary sources of information — supervisory risk ratings for all institutions, financial ratios for most institutions, including Peoples, and a “scorecard” calculation for large institutions. The FDIC adopted rules, effective April 1, 2011, redefining the assessment base and adjusting the assessment rates. Previously, the assessment base was domestic deposits; the new rule uses an assessment base of average consolidated total assets minus tangible equity, which is defined as Tier 1 Capital. Under the current rules, institutions assigned to the lowest risk category must pay an annual assessment rate now ranging between 2.5 and 9 cents per $100 of the assessment base. For institutions assigned to higher risk categories, assessment rates now range from 9 to 45 cents per $100 of the assessment base. These ranges reflect a possible downward adjustment for unsecured debt outstanding and, in the case of institutions outside the lowest risk category, possible upward adjustments for brokered deposits.

The new rules retain the FDIC Board’s flexibility to, without further notice-and-comment rulemaking, adopt rates that are higher or lower than the stated base assessment rates, provided that the FDIC cannot (1) increase or decrease the total rates from one quarter to the next by more than two basis points, or (2) deviate by more than two basis points from the stated base assessment rates. Although the Dodd-Frank Act requires that the FDIC eliminate its requirement to pay dividends to depository institutions when the reserve ratio exceeds a certain threshold, the FDIC’s new rule establishes a decreasing schedule of assessment rates that would take effect when the DIF reserve ratio first meets or exceeds 1.15%. If the DIF reserve ratio meets or exceeds 1.15% but is less than 2%, base assessment rates would range from 1.5 to 40 basis points; if the DIF reserve ratio meets or exceeds 2% but is less than 2.5%, base assessment rates would range from 1 to 38 basis points; and if the DIF reserve ratio meets or exceeds 2.5%, base assessment rates would range from 0.5 to 35 basis points.

On November 12, 2009, the FDIC adopted a rule requiring nearly all FDIC-insured depository institutions, including Peoples, to prepay their DIF assessments for the fourth quarter of 2009 and for the following three years on December 30, 2009. At that time, the FDIC indicated that the prepayment of DIF assessments was in lieu of additional special assessments; however, there can be no guarantee that continued pressures on the DIF will not result in additional special assessments being collected by the FDIC in the future.

On October 19, 2010, the FDIC adopted a new DIF Restoration Plan that foregoes the uniform three basis point-increase previously scheduled to take effect on January 1, 2011. The FDIC indicated that this change was based on revised projections calling for lower than previously expected DIF losses for the period 2010 through 2014, continued stresses on the earnings of insured depository institutions, and the additional time afforded to reach the DIF reserve ratio required by the Dodd-Frank Act.

The FDIC also collects a deposit-based assessment from insured financial institutions on behalf of The Financing Corporation (“FICO”). The funds from these assessments are used to service debt issued by FICO in its capacity as a financial vehicle for the Federal Savings & Loan Insurance Corporation. The FICO assessment rate is set quarterly and these assessments will continue until the FICO issued debt matures between 2017 and 2019.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

Allowance for Loan Losses (“ALLL”)

The ALLL represents one of the most significant estimates in Peoples’ financial statements and regulatory reports. Because of its significance, we have developed a system by which we develop, maintain, and document a comprehensive, systematic, and consistently applied process for determining the amounts of the ALLL and the provision for loan losses. “The Interagency Policy Statement on the Allowance for Loan and Lease Losses,” issued on December 13, 2006, encourages all banks to ensure controls are in place to consistently determine the ALLL in accordance with GAAP, the bank’s stated policies and procedures, management’s best judgment, and relevant supervisory guidance. Consistent with supervisory guidance, we maintain a prudent and conservative, but not excessive, ALLL at a level appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. Our estimate of credit losses reflects consideration of all significant factors that affect the collectability of the portfolio as of the evaluation date. See “Management’s Discussion and Analysis — Critical Accounting Policies.”

Commercial Real Estate Lending

On December 6, 2006, the federal banking regulators issued final guidance to remind financial institutions of the risk posed by commercial real estate (“CRE”) lending concentrations. CRE loans generally include land development, construction loans, and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for its examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:

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total reported loans for construction, land development and other land represent 100% or more of the institution’s total capital, or

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total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more.

Enforcement Powers

The Financial Institution Reform Recovery and Enforcement Act (“FIRREA”) expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1.1 million per day for such violations. Criminal penalties for some financial institution crimes have been increased to 20 years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties.

Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ power to issue regulatory orders were expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate. The Dodd-Frank Act increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.

Community Reinvestment Act

The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the federal banking agencies evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on us. Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related agreements.

Other Regulations

Interest and other charges collected or contracted for by us are subject to state usury laws and federal laws concerning interest rates. Our loan operations are also subject to federal laws applicable to credit transactions, such as the:

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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

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Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit;

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Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;

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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

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National Flood Insurance Act and Flood Disaster Protection Act, requiring flood insurance to extend or renew certain loans in flood plains;

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Real Estate Settlement Procedures Act, requiring certain disclosures concerning loan closing costs and escrows, and governing transfers of loan servicing and the amounts of escrows in connection with loans secured by one-to-four family residential properties;

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Soldiers’ and Sailors’ Civil Relief Act of 1940, as amended, governing the repayment terms of, and property rights underlying, secured obligations of persons currently on active duty with the United States military;

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Talent Amendment in the 2007 Defense Authorization Act, establishing a 36% annual percentage rate ceiling, which includes a variety of charges including late fees, for certain types of consumer loans to military service members and their dependents;

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Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), imposing requirements and limitations on specific financial transactions and account relationships, intended to guard against money laundering and terrorism financing;

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sections 22(g) and 22(h) of the Federal Reserve Act which set lending restrictions and limitations regarding loans and other extensions of credit made to executive officers, directors, principal shareholders and other insiders; and

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rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

Our deposit operations are subject to federal laws applicable to depository accounts, such as the following:

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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

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Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;

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Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

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rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

As part of the overall conduct of the business, we must comply with:

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privacy and data security laws and regulations at both the federal and state level; and

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anti-money laundering laws, including the USA Patriot Act.

The Consumer Financial Protection Bureau

The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “Bureau”) within the Federal Reserve Board. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions.

Ability-to-Repay and Qualified Mortgage Rule

Pursuant to the Dodd-Frank Act, the Bureau issued a final rule on January 10, 2013 (effective on January 10, 2014) amending Regulation Z as implemented by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (i) current or reasonably expected income or assets; (ii) current employment status; (iii) the monthly payment on the covered transaction; (iv) the monthly payment on any simultaneous loan; (v) the monthly payment for mortgage-related obligations; (vi) current debt obligations, alimony and child support; (vii) the monthly debt-to-income ratio or residual income; and (viii) credit history. Alternatively, the mortgage lender can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a qualified mortgage is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Qualified mortgages that are “higher priced” (e.g. subprime loans) are given a safe harbor of compliance. Peoples is predominantly an originator of compliant qualified mortgages.

Capital Adequacy

PSB and Peoples are required to comply with the capital adequacy standards established by the Federal Reserve Board, in the case of PSB, and the WDFI and FDIC, in the case of Peoples. The Federal Reserve Board has established a risk-based and a leverage measure of capital adequacy for bank holding companies. Peoples is also subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by the Federal Reserve Board for bank holding companies.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The minimum guideline for the ratio of total capital to risk-weighted assets, and classification as adequately capitalized, is 8%. A bank that fails to meet the required minimum guidelines is classified as undercapitalized and subject to operating and management restrictions. A bank, however, that exceeds its capital requirements and maintains a ratio of total capital to risk-weighted assets of 10% is classified as well capitalized.

Total capital consists of two components: Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common stockholders’ equity, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 capital must equal at least 4% of risk-weighted assets (6% of risk-weighted assets beginning January 1, 2015). Tier 2 capital generally consists of subordinated debt, other preferred stock and hybrid capital, and a limited amount of loan loss reserves. The total amount of Tier 2 capital is limited to 100% of Tier 1 capital. Refer to Note 20 of the Notes to Consolidated Financial Statements for information on our current regulatory capital ratios at December 31, 2014.

In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies, which are intended to further address capital adequacy. The FDIC has adopted substantially similar requirements for banks. These guidelines provide for a minimum ratio of Tier 1 capital to average assets, less goodwill and other specified intangible assets, of 3% for institutions that meet specified criteria, including having the highest regulatory rating and implementing the risk-based capital measure for market risk. All other institutions generally are required to maintain a leverage ratio of at least 4%. The guidelines also provide that institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The banking regulators consider the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.

Through a provision known as “The Collins Amendment,” the Dodd-Frank Act establishes certain regulatory capital deductions with respect to hybrid capital instruments, such as trust preferred securities, that will effectively disallow the inclusion of such instruments in Tier 1 capital for all such capital instruments issued on or after May 19, 2010. However, securities issued prior to May 19, 2010 by bank holding companies with less than $15 billion in total consolidated assets as of December 31, 2009, such as PSB, are “grandfathered” and therefore not subject to these required capital deductions. Finally, bank holding companies subject to the Federal Reserve Board’s Small Bank Holding Company Policy Statement as in effect on May 19, 2010 — generally, holding companies with less than $500 million in consolidated assets — are exempt from the trust preferred treatment changes required by the Dodd-Frank Act.

On July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations as required by the Dodd-Frank Act. The new rules are effective for us on January 1, 2015 and include increases to the minimum regulatory capital ratios and introduction of a capital “buffer”. In addition, the definition of capital included in determination of regulatory capital ratios was changed. Lastly, the standardized approach for risk weighting assets was changed which increased the risk weights on certain higher risk assets, effectively requiring greater minimum levels of capital for those assets. The more significant changes impacting our regulatory capital ratios under the final rule include:

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Beginning in 2016, and phased in through 2019, a new common equity to risk weighted assets Tier 1 capital ratio was introduced with a minimum ratio of 4.5% for capital adequacy. In general, common equity includes that represented by common stock and surplus and retained earnings less the majority of regulatory capital deductions.

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The minimum for capital adequacy was increased for the Tier 1 to risk weighted assets ratio, from 4% to 6%.

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A new “capital conservation buffer” equal to 2.5% of risk weighted assets above the minimum capital ratios for capital adequacy must now be considered before payment of certain executive compensation or distributions to shareholders or stock repurchases are allowed. The amount of payout as a percentage of eligible retained income based on the amount of the capital conservation buffer is shown in the table below:

	Capital Conservation Buffer		Maximum Payout % of Eligible Retained Income

	Less than or = .625%		0%
	Less than or = 1.25% and greater than .625%		20%
	Less than or = 1.875% and greater than 1.25%		40%
	Less than or = 2.50% and greater than 1.875%		60%
	Greater than 2.5%		no payment limit applies

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Mortgage servicing rights and deferred tax assets are subject to more stringent limits and a 250% risk weighting.

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Delinquent loans and certain “high volatility” commercial real estate development loans are subject to a 150% risk weighting (up from 100% weighting previously).

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Unused commercial lines of credit or other commitments with an original maturity of one year or less are now subject to a 20% risk weighting (up from 0% risk weighting previously).

Our expected impact of the new regulatory capital framework is to increase risk weighted assets primarily from greater risk weights related to past due loan exposures, unused loan commitments, and construction and land development loans. Because we manage regulatory capital levels to remain above those to be considered well capitalized (rather than to simply to remain above those for capital adequacy) and because we intend to continue our historical cash dividend payments, our internally targeted regulatory capital minimums are 7.0% for common equity Tier 1 capital ratio (a new ratio), 6.5% for the Tier 1 leverage ratio (up from 5.0%), 8.5% for the Tier 1 risk weighted capital ratio (up from 6.0%), and 10.5% for the Tier 2 total risk weighted capital ratio (up from 10.0%). We continue to research the specific impacts on our regulatory capital levels and operations due to these changes but remained significantly above these new ratios upon implementation on January 1, 2015.

Another significant new requirement originating from these new capital rules is that capital “stress testing” will be required for all banking organizations, including PSB, with the level and complexity of analysis varying significantly based on asset size. For community banks such as PSB with total assets under $10 billion, stress testing must be conducted annually although specific timing, due dates, and disclosure of findings are still to be determined by regulation. The stress test must consider capital impacts over a two year planning horizon and estimate loan losses under stress scenarios with estimated impacts on earnings. Results of stress test scenarios could also impact our ability to pay shareholder dividends or conduct share repurchases even if regulatory capital levels were currently above well capitalized minimums and the capital conservation buffer.

Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements. See “Prompt Corrective Action” above.

The WDFI, the Federal Reserve Board, and the FDIC have authority to compel or restrict certain actions if our capital should fall below adequate capital standards as a result of operating losses, or if its regulators otherwise determine that it has insufficient capital. Among other matters, the corrective actions may include, removing officers and directors; and assessing civil monetary penalties; and taking possession of and closing and liquidating Peoples.

Payment of Dividends

PSB is a legal entity separate and distinct from Peoples. The principal source of PSB’s cash flow, including cash flow to pay dividends to its shareholders, are dividends that Peoples State Bank pays to PSB as Peoples State Bank’s sole shareholder. Statutory and regulatory limitations apply to Peoples’ payment of dividends to PSB as well as to PSB’s payment of dividends to its shareholders. If, in the opinion of the FDIC or WDFI, Peoples State Bank was engaged in or about to engage in an unsafe or unsound practice, the WDFI or FDIC could require that Peoples stop or refrain from engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level, would be an unsafe and unsound banking practice. In addition, as noted previously, new capital rules that begin to phase in effective January 1, 2016 would prevent us from paying any cash dividends if regulatory capital ratios do not maintain at least some portion of the 2.5% capital conservation buffer (fully phased in during 2019) above those minimum ratios required to be considered adequately capitalized.

Peoples is required by federal law to obtain prior approval of the WDFI for payment of dividends if the total of all dividends declared by Peoples in any year will exceed the total of its net profits for that year if, during any of the preceding two years, Peoples dividends also exceeded the total of net profits during that preceding year. The payment of dividends by PSB and Peoples may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines, any conditions or restrictions that may be imposed by regulatory authorities in connection with their approval of a merger, or the requirements of any written agreements that either PSB or Peoples may enter into with their respective regulatory authorities.

Furthermore, the Federal Reserve Board clarified its guidance on dividend policies for bank holding companies through the publication of a Supervisory Letter, dated February 24, 2009. As part of the letter, the Federal Reserve Board encouraged bank holding companies to consult with the Federal Reserve Board prior to dividend declarations and redemption and repurchase decisions even when not explicitly required to do so by federal regulations. This guidance is largely consistent with prior regulatory statements encouraging bank holding companies to pay dividends out of net income and to avoid dividends that could adversely affect the capital needs or minimum regulatory capital ratios of the bank holding company and its subsidiary bank.

Any future determination relating to PSB’s dividend policy will be made at the discretion of the Board of Directors and will depend on many of the statutory and regulatory factors mentioned above.

Restrictions on Transactions with Affiliates

PSB and Peoples are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:

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a bank’s loans or extensions of credit to affiliates;

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a bank’s investment in affiliates;

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assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve Board;

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loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and

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a bank’s guarantee, acceptance, or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. Peoples must also comply with other provisions designed to avoid taking low-quality assets.

PSB and Peoples are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

Peoples is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders, and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features. Effective July 21, 2011, an insured depository institution will be prohibited from engaging in asset purchases or sales transactions with its officers, directors, or principal shareholders unless (1) the transaction is on market terms and, (2) if the transaction represents greater than 10% of the capital and surplus of the bank, a majority of the disinterested directors has approved the transaction.

Limitations on Senior Executive Compensation

In June of 2010, federal banking regulators issued guidance designed to help ensure that incentive compensation policies at banking organizations do not encourage excessive risk-taking or undermine the safety and soundness of the organization. In connection with this guidance, the regulatory agencies announced that they will review incentive compensation arrangements as part of the regular, risk-focused supervisory process. Regulatory authorities may also take enforcement action against a banking organization if (1) its incentive compensation arrangement or related risk management, control, or governance processes pose a risk to the safety and soundness of the organization and (2) the organization is not taking prompt and effective measures to correct the deficiencies. To ensure that incentive compensation arrangements do not undermine safety and soundness at insured depository institutions, the incentive compensation guidance sets forth the following key principles:

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incentive compensation arrangements should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose the organization to imprudent risk;

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incentive compensation arrangements should be compatible with effective controls and risk management; and

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incentive compensation arrangements should be supported by strong corporate governance, including active and effective oversight by the board of directors.

As noted previously for payment of dividends, new rules effective January 1, 2016 will also limit certain executive compensation involving discretionary bonus payments if regulatory capital ratios do not maintain at least some portion of the 2.5% capital conservation buffer (fully phased in during 2019) above those minimum ratios required to be considered adequately capitalized.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations, and competitive relationships of financial institutions operating and doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which its business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments, and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks, and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

Our Participation in Federal Government Support Programs Targeted to the Banking Industry

Beginning in 2008, the banking industry experienced dramatic governmental intervention in an effort to support the capital needs of certain large banks, to spur growth in bank lending, and to increase consumer and business confidence in the banking industry through passage of the Troubled Asset Relief Program (“TARP”). TARP provided various support to the industry, some available to all banks, and some available to specific large institutions deemed to require exceptional assistance. Through programs generally available to all banks, TARP increased the insurance limit on certain deposit accounts and provided an FDIC guarantee for certain debt issued by banks and bank holding companies through the Temporary Liquidity Guarantee Program (“TLGP”), and invested government funds into some banks in the form of preferred stock through the Capital Purchase Program (“CPP”), among other actions. During 2009, our application to receive TARP CPP capital from the U.S. Treasury was approved. However, we declined participation due to concern such capital would be perceived by customers or prospects as a bailout due to negative perceptions of many of larger national banks receiving such funds. PSB also retained the right to issue unsecured capital notes with FDIC guarantees under the TLGP program, but did not exercise this right or issue such unsecured notes.

Peoples was a participant in the TLGP Program within the Transaction Account Guarantee (“TAG”) Program of TLGP and continued participation in the Program through December 31, 2012 as required by Dodd-Frank. The TAG program expired following December 31, 2012. Under the program, customers in noninterest bearing demand accounts were fully 100% guaranteed against loss by the FDIC.

In December 2010, the U.S. Treasury introduced a new small bank capital program known as the “Small Business Lending Fund (SBLF)” established by the Small Business Jobs Act with funding up to $30 billion in an effort to spur small business lending. Under the program, only available to well performing banks less than $10 billion in assets such as Peoples, banks may issue preferred stock to the U.S. Treasury with a variable dividend rate that could later be fixed as low as 1% depending on the level of small business lending growth during the first 10 quarters following issuance of the preferred stock. The preferred stock dividend later resets to 9% on the 4 ½ year anniversary of the preferred stock issue until repaid. Although our application for SBLF capital was approved by the Treasury, we declined participation in the program due to low projected local loan growth demand and significant limitations on use of the SBLF capital for purposes other than small business loan growth.

Item 1A. RISK FACTORS.

Forward-Looking Statements

This Annual Report on Form 10-K, including “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements that involve risks, uncertainties, and assumptions. Forward-looking statements are not guarantees of performance. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of PSB Holdings, Inc. and its consolidated subsidiaries (hereinafter referred to as “PSB,” or “Peoples” or “we,” or “our,” or “us”) may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Forward-looking statements may be identified by, among other things, expressions of beliefs or expectations that certain events may occur or are anticipated, and projections or statements of expectations. Risks, uncertainties, and assumptions relating to forward-looking statements include, among other things, actions or changes by competitors in our markets that put us at a competitive disadvantage, public perception of economic prospects and the banking industry, failure to comply with or changes in government regulations, changes in interest rates, deterioration of the credit quality of our loan portfolio, the adequacy of our allowance for loan losses, exposure to small and mid-size business credits, inadequate liquidity, disruptions in the financial markets, inability to operate profitably because of competition, the inability to execute expansion plans, changes in economic conditions within our market area, increased deposit insurance costs due to an increase in failure of FDIC insured banks, the potential of dilutive common stock issues due to increased regulatory capital minimums, the inability to implement required technologies, problems in the operation of our information technology systems, the inability of our principal subsidiary to pay dividends, potential credit risk associated with our large investment in debt issued by federal, state, and local municipalities, environmental and fraud risk associated with our credit arrangements with customers, increased funding costs, changes in customers’ preferences for types and sources of financial services, loss of key personnel, the rights of debt holders senior to common shareholders upon liquidation, lack of FDIC insurance available to common shareholders over their investment in our common stock, failure to maintain and enforce adequate internal controls, unforeseen liabilities arising from current or prospective claims or litigation, lack of marketability of our common or other equity stock, the effect of certain organizational anti-takeover provisions, changes in accounting principles and tax laws, and unexpected disruptions in our business. These and other risks, uncertainties, and assumptions are described under the caption “Risk Factors” in Item 1A of this Annual Report on Form 10-K and from time to time in our other filings with the Securities and Exchange Commission after the date of this report. We assume no obligation, and do not intend, to update these forward-looking statements.

An investment in PSB Holdings, Inc. common stock involves a significant degree of risk. The following paragraphs describe what we believe are the most significant risks of investing in PSB common stock. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. We cannot assure you that any of the events discussed in the risk factors below will not occur. If they do, our business, financial condition or results of operations could be materially and adversely affected.

The impact of the current economic environment on performance of other financial institutions in our markets; actions taken by our competitors to address continued slow economic conditions; and public perception of and confidence in the economy generally, and the banking industry specifically, may present significant challenges for us and could adversely affect our performance.

We operate in a challenging and uncertain economic environment, including generally uncertain national conditions and slow local conditions in our primary markets. Financial institutions continue to be affected by depressed valuations in real estate markets and community banks are faced with constrained financial and capital markets. While we take steps to decrease and limit our exposure to certain types of loans secured by commercial real estate collateral, we nonetheless retain direct exposure to the real estate markets, and are affected by these events. Continued declines in real estate values and financial stress on borrowers as a result of the uncertain economic environment, including job losses, could have an adverse effect on our borrowers or their customers, which could adversely affect our financial condition and results of operations.

In addition, the market value of the real estate securing our loans as collateral has been adversely affected by the slowing economy and unfavorable changes in economic conditions in our market areas and could be further adversely affected in the future. As of December 31, 2014, approximately 46% of our loans were secured by commercial-based real estate and 36% of our loans receivable were secured by residential real estate. Any sustained period of increased payment delinquencies, foreclosures, or losses caused by the adverse market and economic conditions, including the downturn in the real estate market, within our markets will continue to adversely affect the value of our assets, revenues, results of operations, and financial condition.

The overall deterioration in economic conditions may subject us to increasing regulatory scrutiny. In addition, further deterioration in national economic conditions or the economic conditions in our local markets could drive losses beyond the amount provided for in our allowance for loan losses, resulting in the following other consequences: increased loan delinquencies, problem assets, and foreclosures; decline in demand for our products and services; decrease in deposits, adversely affecting our liquidity position; and decline in value of collateral, reducing our customers’ borrowing power and the value of assets and collateral associated with our existing loans. These consequences could also result in decreased earnings or a decline in the market value of our common stock. As a community bank, we are less able to spread the risk of unfavorable economic conditions than larger national or regional banks. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas even if they do occur.

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations, including compliance with our regulatory commitments, is costly and may restrict certain of our activities, including the declaration and payment of cash dividends to stockholders, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth and operations.

The laws and regulations applicable to the banking industry have recently changed and may continue to change, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect our ability to operate profitably. The Dodd-Frank Act was enacted on July 21, 2010. The full implications of the Dodd-Frank Act, or its implementing regulations, on our business are unclear at this time, but it may adversely affect our business, results of operations, and the underlying value of our stock. New regulatory capital rules called for by Dodd-Frank became effective for us on January 1, 2015 and are expected to decrease our regulatory capital ratios upon implementation, which could impact our ability to grow via merger and acquisition activities. The full effect of this legislation will not be even reasonably certain until all implementing regulations are promulgated, which could take several years in some cases.

To be considered “well capitalized” by banking regulatory agencies, we are subject to minimum capital levels defined by banking regulation that are based on total assets and risk adjusted assets. This highest regulatory capital designation is required to unilaterally participate in the brokered certificate of deposit market. In addition, being considered well capitalized is a key component of risk classification used by the Federal Home Loan Bank (“FHLB”) and the Federal Reserve concerning the amount of credit available to us and the type and amount of collateral required against such advances. Maintaining well capitalized status is also required by the covenants of our holding company line of credit. Failure to retain the well capitalized regulatory designation would both limit the availability of, and increase the cost of wholesale funding, which has been an important source of funding for growth. In addition, banks not considered to be well capitalized are subject to a cap on interest rates paid to depositors as published by the FDIC. Such depositor interest rate caps could impede our ability to raise local deposits to replace wholesale funding sources no longer available if we were not considered to be well capitalized which could have a material adverse effect on our business, liquidity, financial condition, and results of operations.

Some or all of the changes, including the new rulemaking authority granted to the newly-created Consumer Financial Protection Bureau, may result in greater reporting requirements, assessment fees, operational restrictions, capital requirements, and other regulatory burdens for us while many of our competitors that are not banks or bank holding companies may remain free from such limitations. This could affect our ability to attract and maintain depositors, to offer competitive products and services, and to expand our business. Congress may consider additional proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies. Such legislation may change existing banking statutes and regulations, as well as the current operating environment significantly. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.

Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could have an adverse effect on our deposit levels, loan demand, stock price, ability to pay dividends, business or earnings. See “Regulation and Supervision” earlier in this Annual Report on Form 10-K.

Changes in the interest rate environment could reduce our net interest income, which could reduce our profitability.

As a financial institution, our earnings significantly depend on net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, affects us more than non-financial institutions and can have a significant effect on our net interest income and total income. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on our net interest margin and results of operations.

In addition, we cannot predict whether interest rates will continue to remain at present levels. Changes in interest rates may cause significant changes, up or down, in our net interest income. Depending on our portfolio of loans and investments, our results of operations may be adversely affected by changes in interest rates. If there is a substantial increase in interest rates, our investment portfolio is at risk of experiencing price declines that may negatively impact our total capital position through changes in other comprehensive income. During a rising rate period, it is likely our funding costs would reprice to new rates more quickly than our fixed rate loan portfolio. In addition, any significant increase in prevailing interest rates could adversely affect our mortgage banking business because higher interest rates could cause customers to request fewer refinancings and purchase money mortgage originations.

Management uses simulation analysis to produce an estimate of interest rate exposure based on assumptions and judgments related to balance sheet growth, new products, and pricing. Simulation analysis involves a high degree of subjectivity and requires estimates of future risks and trends. Accordingly, there can be no assurance that actual results will not differ from those derived in simulation analysis due to the timing, magnitude, and frequency of interest rate changes, changes in balance sheet composition, and the possible effects of unanticipated or unknown events. Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected, and/or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.

We are subject to credit risk and changes in the allowance for loan losses could adversely affect our profitability.

Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a substantial likelihood that we will experience credit losses. The risk of loss will vary with, among other things, general economic conditions, the type of loan, the creditworthiness of the borrower over the term of the loan, and, in the case of a collateralized loan, the quality of the collateral for the loan.

We provide credit services within our local communities. Our ability to diversify our economic risks is limited by our own local markets and economies. We lend primarily to individuals and small to medium-sized businesses, which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories. We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval and review procedures.

Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, we may experience significant loan losses, which could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses in an attempt to cover any loan losses that may occur. In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information.

If management’s assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and we may need to make adjustments to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease our net income. We expect our allowance to continue to fluctuate; however, given current and future market conditions, we can make no assurance that our allowance will be adequate to cover future loan losses.

In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulators could have a negative effect on our operating results.

We are subject to liquidity risk in our operations.

Liquidity risk is the possibility of being unable, at a reasonable cost and within acceptable risk tolerances, to pay obligations as they come due, to capitalize on growth opportunities as they arise, or to pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis. Liquidity is required to fund various obligations, including credit obligations to borrowers, mortgage originations, withdrawals by depositors, repayment of debt, dividends to stockholders, operating expenses, and capital expenditures. Liquidity is derived primarily from retail deposit growth and retention, principal and interest payments received on loans and investment securities, net cash provided from operations, and access to other funding sources. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption in the financial markets or negative views and expectations about the prospects for the financial services industry as a whole, such as the turmoil faced by banking organizations in the domestic and worldwide credit markets during 2008 through 2010. Currently, we have access to liquidity to meet our current anticipated needs; however, our access to additional borrowed funds could become limited in the future, and we may be required to pay above market rates for additional borrowed funds, if we are able to obtain them at all, which may adversely affect our results of operations.

Competition in the banking industry is intense and we face strong competition from larger, more established competitors.

The banking business is highly competitive, and we experience strong competition from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other financial institutions that operate in our primary market areas and elsewhere.

We compete with these institutions both in attracting depositors and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, much larger financial institutions. While we believe we can successfully compete with these other financial institutions in our markets, we may face a competitive disadvantage as compared to large national or regional banks as a result of our smaller size and lack of geographic diversification.

Although we compete by concentrating our marketing efforts in our primary market area with local advertisements, personal contacts, and greater flexibility in working with local customers, we can give no assurance that this strategy will be successful.

Potential acquisitions may disrupt our business and dilute shareholder value.

Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:

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potential exposure to unknown or contingent liabilities of the acquired company;

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exposure to potential asset quality issues of the acquired company;

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difficulty and expense of integrating the operations and personnel of the acquired company;

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potential disruption to our business;

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potential diversion of our management’s time and attention;

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the possible loss of key employees and customers of the acquired company;

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difficulty in estimating the value (including goodwill) of the acquired company;

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difficulty in estimating the fair value of acquired assets, liabilities, and derivatives of the acquired company; and

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potential changes in banking or tax laws or regulations that may affect the acquired company.

We may evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, future mergers or acquisitions involving cash, or debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over the target’s book value or include a portion of goodwill “blue sky,” and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.

Our success depends upon local and regional economic conditions.

The core industries in our market area are healthcare, building supplies, industrial fans, education, retail distribution, paper, insurance, and tourism. Our success depends primarily on economic conditions in the markets in which we operate due to concentrations of loans and other business activities in geographic areas where our branches are principally located. In addition, the residential and commercial real estate markets throughout these areas depend primarily on the strength of these core industries.

The regional economic conditions in areas in which we conduct our business have an impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, an act of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets, or other factors, such as severe declines in the value of homes and other real estate, could also impact these regional economies and, in turn, have a material adverse effect on our financial condition and results of operations. A material decline in any of the core industries in our market area will affect the communities we serve and could negatively impact our financial results and have a negative impact on profitability.

The FDIC Deposit Insurance assessments that we are required to pay may materially increase in the future, which would have an adverse effect on our earnings.

As a member institution of the FDIC, we are assessed a quarterly deposit insurance premium. Failure of a large national bank or series of other bank failures could deplete the insurance fund and reduced the ratio of reserves to insured depositors. As a result, we may be required to pay significantly higher premiums or additional special assessments that could adversely affect our earnings if the number of bank failures were to increase.

On October 19, 2010, the FDIC adopted a Deposit Insurance Fund (“DIF”) Restoration Plan, which requires the DIF to attain a 1.35% reserve ratio by September 30, 2020. In addition, the FDIC modified the method by which assessments are determined and, effective April 1, 2011, adjusted assessment rates, which will range from 2.5 to 45 basis points (annualized), subject to adjustments for unsecured debt and, in the case of small institutions outside the lowest risk category and certain large and highly complex institutions, brokered deposits. Further increased FDIC assessment premiums, due to a change in our risk classification, emergency assessments, or implementation of the modified DIF reserve ratio, could adversely impact our earnings.

We may need to raise additional capital in the future for several factors, including through the increased minimum capital thresholds effective January 1, 2015 established by our regulators as part of their implementation of the Dodd-Frank Act, but that capital may not be available when it is needed or may be dilutive to our shareholders.

We are required by federal and state regulatory authorities to maintain adequate capital levels to support our operations. New regulations implementing the Dodd-Frank Act capital standards require financial institutions to maintain higher minimum capital rations and place a greater emphasis on common equity as a component of Tier 1 capital. In order to support our operations and comply with regulatory standards, we may need to raise capital in the future. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on favorable terms. The capital and credit markets have experienced significant volatility in recent years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of volatility occur, our ability to raise additional capital may be disrupted. If we cannot raise additional capital when needed, our results of operations and financial condition may be adversely affected, and our banking regulators may subject us to regulatory enforcement action, including receivership. In addition, the issuance of additional shares of our equity securities under these adverse conditions would dilute the economic ownership interest of our common shareholders.

We continually encounter technological change and we may have fewer resources than our competition to continue to invest in technological improvements; our information systems may experience an interruption or breach in security.

The banking and financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that enhance customer convenience, as well as create additional efficiencies in operations. Many of our competitors have greater resources to invest in technological improvements, and we may not be able to effectively implement new technology-driving products and services, which could reduce our ability to effectively compete.

In addition, we rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in customer relationship management, general ledger, deposit, loan functionality and the effective operation of other systems. While we have policies and procedures designed to prevent or limit the effect of a failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

We rely on dividends from our Peoples State Bank subsidiary for virtually all of our funds.

PSB is a legal entity separate and distinct from its subsidiary, Peoples State Bank. PSB receives substantially all of its cash flow from dividends from Peoples State Bank. These dividends are PSB’s principal source of funds to pay interest and principal on its debt and dividends on its common stock. Various laws and regulations limit the amount of dividends that Peoples State Bank may pay to PSB. Also, PSB’s right to participate in a distribution of assets upon Peoples State Bank’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event Peoples State Bank is unable to pay dividends to PSB, PSB may not be able to service its debt, pay its other obligations, or pay dividends on its common stock. The inability to receive dividends from Peoples State Bank could have a material adverse effect on PSB’s financial condition and results of operations.

Investments in debt issued by government-sponsored agencies subject us to risk from government action and legal changes.

Peoples State Bank invests a portion of its assets in obligations of the Federal Home Loan Bank (FHLB), Federal National Mortgage Association (FNMA, or “Fannie Mae”), Federal Home Loan Mortgage Corporation (FHLMC, or “Freddie Mac”), and other U.S. government-sponsored entities; as well as state, county, and municipal obligations, and federal funds sold. While the FHLB, FNMA, and FHLMC are U.S. government-sponsored agencies, investments in these securities are not guaranteed by the U.S. Government. The investments are purchased and held in relation to our loan demand and deposit growth and are generally used to provide for the investment of excess funds at reduced yields and risks, relative to yields and risks of the loan portfolio. The investments may also provide liquidity to fund increases in loan demand or to offset fluctuations in deposits. If the financial performance of one of the U.S. government-sponsored agencies, or state, county, or municipal entities declines, it could have a negative economic impact on our business and expose us to credit losses.

We rely on the accuracy and completeness of information about customers and counterparties, and inaccurate or incomplete information could negatively impact our financial condition and results of operations.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, Peoples State Bank may rely on information provided by such customers and counterparties, including financial statements and other financial information. It may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. Our financial condition and results of operations could be negatively impacted to the extent Peoples State Bank relies on financial statements that do not comply with generally accepted accounting principles or that are inaccurate or misleading.

Our funding costs may increase if consumers decide not to use banks as their primary source to invest liquid or other personal assets.

While the banking industry has historically held a majority of available deposits, generational factors and trends in using other non-banking providers for investment of funds may reduce the level of deposits available to fund banking assets and increase the cost of funding over the long term. Demographic trends in the United States point to a growing transfer of wealth to the next generation in the following decades that could accelerate this transfer of wealth out of the banking system and into other non-banking providers. If this change occurs, our funding costs could increase and adversely affect our results of operations.

During recent years, the banking industry has seen a large increase in deposits as consumers sought to increase liquidity and reduce investment risk. When consumer confidence in the economy grows, it is likely much of these increased deposits will be withdrawn for reinvestment in equity securities or for purchase of increased goods and services supported by a stronger economy, reducing our liquidity or increasing our deposit costs.

We may lose fee income and deposits if a significant portion of consumers decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, consumers can now pay bills and transfer funds directly without banks. In addition, regulation now allows retail merchants to accept payment on in-store debit or credit cards in an effort to reduce bank interchange income. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and income generated from investment of those deposits.

We may not be able to attract and retain skilled people.

Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people can be intense and we may not be able to hire or retain the people we want or need. Although we maintain employment agreements with certain key employees, and have incentive compensation plans aimed, in part, at long-term employee retention, the unexpected loss of services of one or more of our key personnel could still occur, and such events may have a material adverse impact on our business because of the loss of the employee’s skills, customer contacts, technical knowledge, knowledge of our market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.

Holders of our subordinated debentures have rights that are senior to those of our common stockholders.

We have supported our continued growth by issuing trust preferred securities and accompanying junior subordinated debentures, as well as senior subordinated notes. As of December 31, 2014, we had outstanding trust preferred securities and associated junior subordinated debentures with aggregate principal of $7.7 million, senior subordinated notes of $4 million, and a correspondent bank term senior note of $0.5 million.

We have unconditionally guaranteed the payment of principal and interest on our trust preferred securities. Also, the junior debentures issued to the special purpose trusts that relate to those trust preferred securities, as well as the senior subordinated notes outstanding, are senior to our common stock. As a result, we must make payments on the senior subordinated notes and junior subordinated debentures before we can pay any dividends on our common stock, and in the event of our bankruptcy, dissolution or liquidation, holders of our senior subordinated notes and junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We do have the right to defer distributions on our junior subordinated debentures (and related trust preferred securities) for up to five years, but during that time would not be able to pay dividends on our common or preferred stock.

Ownership of our common stock securities is not FDIC insured.

Our securities are not savings or deposit accounts or other obligations of Peoples State Bank and are not insured by the Deposit Insurance Fund, or any other agency or private entity and are subject to investment risk, including the possible loss of some or all of the value of your investment.

We are subject to operational risk, and our internal controls and procedures may fail or be circumvented.

We, like all businesses, are subject to operational risk, which represents the risk of loss resulting from human error, inadequate or failed internal processes and systems, and external events. Operational risk also encompasses compliance (legal) risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards. Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Although we seek to mitigate operational risk through a system of internal controls, resulting losses from operational risk could take the form of explicit charges, increased operational costs, harm to our reputation, or foregone opportunities, any and all of which could have a material adverse effect on our financial condition and results of operations.

Unexpected liabilities resulting from current or future claims or contingencies may have a material adverse effect on our business, financial condition, and results of operations.

We may be involved from time to time in a variety of litigation arising out of our business. Our insurance may not cover all claims that may be asserted against us, regardless of merit or eventual outcome, and such claims may harm our reputation. In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all. Should the ultimate judgments or settlements in any actual or threatened claims or litigation exceed our insurance coverage, they could have a material adverse effect on our business, operating results, and financial condition.

Investors may not be able to liquidate their PSB common stock when desired because there is no active public trading market for PSB stock.

There is no active public established trading market for PSB stock. As a result, investors may not be able to resell shares at the price or time they desire. In addition, because our shares are thinly traded, there is oftentimes a significant spread between the “bid” and “ask” prices for our shares, often ranging from 1% to 3% of the bid price. Lack of an active market and other factors limit, to some extent, our ability to raise capital by selling additional shares of our stock.

Our articles of incorporation could make more difficult or discourage an acquisition of PSB.

Our articles of incorporation require the approval of two-thirds of all shares outstanding in order to effect a merger, share exchange, or other reorganization of PSB. This provision may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price, or otherwise adversely affect the market price of our common stock.

Our earnings may be adversely affected by changes in accounting principles and in tax laws.

Changes in U.S. generally accepted accounting principles could have a significant adverse effect on our reported financial results. Although these changes may not have an economic impact on our business, they could affect our ability to attain targeted levels for certain performance measures, which could reduce our ability to meet existing financial covenants, obtain additional funding, or raise capital. We, like all businesses, are subject to tax laws, rules, and regulations. Changes to tax laws, rules, and regulations, including changes in the interpretation or implementation of tax laws, rules, and regulations by the Internal Revenue Service (the “IRS”) or other governmental bodies, could affect us in substantial and unpredictable ways. The Federal government could also choose to assess excise or other income related taxes targeted at the banking industry in response to widespread financial disruptions or perceived industry abuses that impacted taxpayers as a whole. Such changes could subject us to additional costs, among other things. Failure to appropriately comply with tax laws, rules, and regulations could result in sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have a material adverse effect on our business, financial condition, and results of operations.

Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business.

Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, impair our ability to process or complete customer transactions, and/or cause us to incur additional expenses. Although management has established disaster recovery plans and procedures, the occurrence of any such event could have a material adverse effect on our business, financial condition, and results of operations.

Item 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

Item 2. PROPERTIES.

Our administrative offices are housed in the same building as Peoples State Bank’s primary customer service location at 1905 Stewart Avenue in Wausau, Wisconsin, which was constructed in 2004. Our other Wisconsin branch locations, in the order they were first purchased or opened for business, include Rib Mountain, Wausau (Eastside), Eagle River (in the Trig’s grocery store), Rhinelander Anderson Street, Minocqua, Weston, Marathon City, and Rhinelander Lincoln Street. The branch in the Trig’s grocery store occupies leased space within the supermarket designed for community banking operations. We own the other eight locations without encumbrance, and these locations are occupied solely by us and are suitable for current operations.

Based on information filed with regulators by other banking organizations headquartered in Wisconsin with at least $100 million in total assets, the average age of our banking facilities is comparable with other banks. In addition, our average revenues and number of accounts per branch are similar to the state average, giving us adequate capacity for organic growth within existing markets reducing the need for significant further investment in existing facilities.

Item 3. LEGAL PROCEEDINGS.

We are subject to claims and litigation in the ordinary course of business, but we do not believe that any of these claims or litigation matters that are currently outstanding will have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market

PSB common stock bid and ask prices are quoted on the OTC Markets Exchange under the stock symbol “PSBQ.” There is no active established public trading market in our common stock and transactions in the stock are limited and sporadic. Approximately 11% of average shares outstanding traded during 2014 compared to 7% during 2013 and 10% during 2012.

Although our primary focus is to preserve existing capital for growth, merger and acquisition activities, and new regulation which increases regulatory capital requirements, we periodically repurchase our shares of common stock on the open market or directly from shareholders. During 2014, we repurchased 27,244 shares of our common stock (1.6% of total average shares outstanding) at an average cost of $33.54 per share. During 2013, we repurchased 10,030 shares of our common stock (0.6% of total average shares outstanding) at an average cost of $26.78 per share. During 2012, we repurchased 10,210 shares of our common stock at an average cost of $25.68 per share (0.6% of total average shares outstanding).

Holders

As of December 31, 2014, there were 769 holders of record of our common stock. Some of our shares are held in “street” name brokerage accounts and the number of beneficial owners of these shares is not known and therefore not included in the foregoing number.

Dividends

We have paid regular and increasing dividends since our inception in 1995. We expect to continue our practice of paying semi-annual dividends on our common stock, although the payment of future dividends will continue to depend upon our earnings, capital requirements, financial condition, and other factors. The principal source of funds for our payment of dividends is dividend income received from our bank subsidiary. When declared, dividends are paid to all stockholders, including employees holding shares of unvested restricted stock as described in Item 8, Note 19 of the Notes to Consolidated Financial Statements. Payment of dividends by Peoples State Bank to PSB Holdings, Inc. is subject to various limitations under banking laws and regulations. To maintain regulatory capital ratios above the minimums to be considered “well capitalized”, the maximum amount of dividends that could have been paid by Peoples State Bank at December 31, 2014, was approximately $23 million. Furthermore, any Bank dividend distributions to PSB above customary or historical levels are subject to approval by the FDIC, the Bank’s primary federal regulator, and the Wisconsin Department of Financial Institutions, the Bank’s state regulator.

Market Prices and Dividends

Price ranges of over-the-counter quotations and dividends declared per share on our common stock for the periods indicated are:

	2014 Prices						2013 Prices
Quarter	High		Low		Dividends		High		Low		Dividends
1^st	$	32.00	$	30.10	$	–	$	28.10	$	25.25	$	–
2^nd	$	32.76	$	31.75	$	0.40	$	29.60	$	27.80	$	0.39
3^rd	$	33.60	$	32.10	$	–	$	31.50	$	29.40	$	–
4^th	$	36.15	$	33.65	$	0.40	$	31.00	$	29.75	$	0.39

Prices detailed for the common stock represent the bid prices reported on the OTC Markets Exchange. The prices do not reflect retail mark-up, mark-down, or commissions, and may not necessarily represent actual transactions.

Item 6. SELECTED FINANCIAL DATA.

Table 1: Earnings Summary and Selected Financial Data (dollars in thousands, except per share data)

Consolidated summary of earnings:
Years ended December 31,	2014		2013		2012		2011		2010

Total interest income	$	26,618	$	26,816	$	27,244	$	28,314	$	29,665
Total interest expense		4,486		5,511		7,091		8,757		10,566

Net interest income		22,132		21,305		20,153		19,557		19,099
Provision for loan losses		560		4,015		785		1,390		1,795

Net interest income after loan loss provision		21,572		17,290		19,368		18,167		17,304
Total noninterest income		5,694		5,623		6,568		5,337		5,363
Total noninterest expense		17,920		16,506		17,392		15,778		15,925

Net income before income taxes		9,346		6,407		8,544		7,726		6,742
Provision for income taxes		2,906		1,663		2,535		2,421		1,988

Net income	$	6,440	$	4,744	$	6,009	$	5,305	$	4,754

Consolidated summary balance sheets:
As of December 31,	2014		2013		2012		2011		2010

Cash and cash equivalents	$	25,106	$	31,522	$	48,847	$	38,205	$	40,331
Securities		144,157		133,279		145,209		108,677		108,379
Total loans receivable, net of allowance		525,583		509,880		477,991		437,557		431,801
Premises and equipment, net		10,841		9,669		10,240		9,928		10,464
Cash surrender value of life insurance		13,230		12,826		11,813		11,406		10,899
Other assets		15,450		14,365		17,866		17,094		19,219

Total assets	$	734,367	$	711,541	$	711,966	$	622,867	$	621,093

Total deposits	$	622,951	$	577,514	$	565,442	$	481,509	$	465,257
FHLB advances		20,271		38,049		50,124		50,124		57,434
Other borrowings		10,324		20,441		20,728		19,691		31,511
Senior subordinated notes		4,000		4,000		7,000		7,000		7,000
Junior subordinated debentures		7,732		7,732		7,732		7,732		7,732
Other liabilities		7,628		7,052		6,493		6,449		5,469
Stockholders’ equity		61,461		56,753		54,447		50,362		46,690

Total liabilities and stockholders’ equity	$	734,367	$	711,541	$	711,966	$	622,867	$	621,093

Performance ratios:	2014			2013			2012			2011			2010

Basic earnings per share	$	3.90		$	2.87		$	3.61		$	3.21		$	2.89
Diluted earnings per share	$	3.90		$	2.87		$	3.61		$	3.21		$	2.89
Common dividends declared per share	$	0.80		$	0.78		$	0.74		$	0.71		$	0.69
Dividend payout ratio		20.43	%		27.17	%		20.75	%		22.02	%		23.73	%
Tangible net book value per share at year-end	$	37.52		$	34.36		$	32.93		$	30.44		$	28.43
Average common shares outstanding		1,651,045			1,652,700			1,663,147			1,652,861			1,642,469

Return on average stockholders’ equity		10.75	%		8.37	%		11.33	%		10.78	%		10.59	%
Return on average assets		0.90	%		0.68	%		0.91	%		0.87	%		0.79	%
Net interest margin (tax adjusted)		3.38	%		3.38	%		3.41	%		3.55	%		3.51	%
Net loan charge-offs to average loans		0.18	%		0.92	%		0.28	%		0.32	%		0.33	%
Noninterest income to average assets		0.79	%		0.81	%		1.00	%		0.88	%		0.89	%
Noninterest income to tax adjusted net interest margin		24.70	%		25.25	%		31.23	%		26.29	%		26.93	%

Efficiency ratio (tax adjusted)		62.33	%		59.17	%		63.02	%		61.55	%		63.01	%
Salaries and benefits expense to average assets		1.37	%		1.31	%		1.39	%		1.37	%		1.40	%
Other expenses to average assets		1.12	%		1.07	%		1.25	%		1.23	%		1.23	%
FTE employees at year-end		143			131			131			124			126
Non-performing loans to gross loans at year-end		2.40	%		1.67	%		2.20	%		3.19	%		2.60	%
Allowance for loan losses to loans at year-end		1.20	%		1.31	%		1.53	%		1.78	%		1.81	%
Allowance for loan losses to non-performing loans		50.22	%		78.52	%		69.55	%		55.80	%		69.62	%
Average common equity to average assets		8.34	%		8.16	%		8.04	%		8.11	%		7.43	%
Non-performing assets to common equity and allowance for loan losses at year-end		21.25	%		16.35	%		20.13	%		30.67	%		29.99	%

Item 7. 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 and results of our operations for each of the three years in the period ended December 31, 2014. 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; and,

●

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 indicative of future performance.

Management’s discussion and analysis, like other portions of this Annual Report on Form 10-K, 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 this Annual Report on Form 10-K. This discussion and analysis should be considered in light of that cautionary statement.

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.

EXECUTIVE LEVEL OVERVIEW

Results of Operations

Earnings reached a record high of $3.90 per share (on net income of $6,440) during 2014 compared to earnings of $2.87 per share (on net income of $4,744) during 2013, an increase of 36% per share. Earnings in 2014 benefited from significantly lower provision for loan losses expense compared 2013, which included a $3,340 credit write-down related to customer fraud. However, 2014 included $371 of merger and acquisition expense on the purchase of the Northwoods National Bank, Rhinelander, Wisconsin branch of The Baraboo National Bank (“Northwoods Rhinelander”). As shown in Table 2, excluding these non-recurring items and other gains and losses, proforma 2014 earnings would have been $4.06 per share (on proforma net income of $6,698), compared to proforma 2013 earnings of $3.91 per share (on proforma net income of $6,463), an increase of 4% per share. Compared to 2013 before special items, an $827 increase in net interest income due to asset growth and a $310 decline in 2014 credit costs, down 28%, offset an $824 increase in operating costs, up 5%.

During 2015, we expect net interest income to increase slightly compared to 2014 on slower loan growth with similar net interest margin. Mortgage banking revenue is also expected to increase over 2014 on an improving local real estate market and continued increase in market share. Operating expenses are anticipated to grow an inflationary amount. In addition, an accelerated stock buyback program during 2015 is expected to support earnings per share growth. Taken together, 2015 earnings per share are expected to increase slightly from 2014 earnings of $3.90 per share but could be negatively impacted by an increase in short-term interest rates by the Federal Reserve expected to occur during 2015 which could reduce net interest margin.

Earnings declined during 2013 to $2.87 per share (on net income of $4,744) compared to earnings in 2012 of $3.61 per share (on net income of $6,009), a decrease of 21% per share. Earnings during 2013 and 2012 were significantly impacted by special items including a $3,340 credit write-down related to customer fraud during 2013 and nonrecurring income and expense from our acquisition of Marathon State Bank during 2012. As shown in Table 2, excluding non-recurring items and other gains and losses, proforma 2013 earnings per share would have been $3.91 (on proforma net income of $6,463), compared to proforma 2012 earnings of $3.48 per share (on proforma net income of $5,783), an increase of 12% per share. Increased 2013 proforma earnings were driven by increased net interest income on earning assets during 2013 compared to 2012.

Earnings reached a then record high of $3.61 per share in 2012 (on net income of $6,009) compared to earnings of $3.21 per share in 2011 (on net income of $5,305), an increase of 13% per share. Earnings benefited significantly from the acquisition of Marathon State Bank in June 2012, and approximately $463, or 66%, of the 2012 increase in net income over 2011 was due to the purchase of Marathon. We recorded an $851 gain on bargain purchase of Marathon ($726 after tax effects), but also incurred $670 of data conversion expense and professional fees due to the merger ($498 after tax effects) during 2012. Excluding these non-recurring items associated with the Marathon acquisition and other items as shown in Table 2, proforma earnings per share would have been $3.48 per share during 2012 (on proforma net income of $5,783), an increase of 9% per share over proforma 2011 earnings of $3.19 per share (on proforma net income of $5,277).

Credit Quality

During 2014, the total provision for loan losses and loss on foreclosed assets (“credit costs”) were $793, compared to $4,443 during 2013. The 2013 credit costs included a $3,340 provision for loan losses due to the write down of a loan to a grain commodities dealer who was discovered to have misrepresented financial statements, inventory records, and federal warehouse receipts taken as collateral in a fraud that impacted several banks. Total credit costs before the large grain loss were $1,103 in 2013 compared to $793 in 2014, a decline of $310, down 28% on a proforma basis. Total 2014 net loan charge-offs were .18% of average loans outstanding compared to .92% of average loans (.26% excluding the large grain charge-off) during 2013. During 2014, nonperforming assets increased $4,034, or 39%, led by a $3,092 increase in performing but restructured loans on the addition of a $2,775 restructured municipal loan. Total nonperforming assets were $14,423, or 1.96%, of total assets at December 31, 2014 compared $10,389, or 1.46% of total assets at December 31, 2013.

During 2015, total credit costs are expected to remain similar to those during 2014 as loss on foreclosed assets is expected to decline slightly due to a smaller inventory of foreclosed assets and projected lower write-down of foreclosed asset values compared to 2014, while the provision for loan losses is expected to increase slightly due to loan growth. However, we continue to work through existing problem loans and foreclosed assets with uncertain outcomes, which could increase nonperforming assets and credit and foreclosure costs greater than expected, negatively impacting 2015 net income.

During 2013, the total provision for loan losses and loss on foreclosed assets were $4,443, which included the $3,340 large grain loan loss. Total credit costs before the large grain loss were $1,103 compared to $1,358 during 2012. Total 2013 net loan charge-offs were ..92% of average loans outstanding (.26% excluding the large grain charge-off) compared to .28% during 2012. During 2013, nonperforming assets declined $2,065, or 17%, led by a decline in restructured loans accruing interest while nonaccrual loans also declined slightly. Total nonperforming assets were $10,389, or 1.46%, of total assets at December 31, 2013 compared to $12,454, or 1.75%, of total assets at December 31, 2012.

During 2012, total credit costs of $1,358 declined $1,229, or 48% compared to 2011 due to recognition of fewer new problem loans, and lower holding costs and write-downs of foreclosed assets. The reduction in credit costs was a significant driver of increased net income during 2012. During 2012, total nonperforming assets declined $5,429, or 30%, due to favorable resolution of three problem credit relationships and sale of our largest foreclosed asset. Resolution of these four problem assets represented $5,375, or 99% of the net decline in total nonperforming assets during 2012 compared to 2011. Total nonperforming assets were $12,454, or 1.75% of total assets at December 31, 2012 compared to $17,883, or 2.87% of total assets at December 31, 2011.

Asset Growth and Liquidity

Total assets were $734,367 at December 31, 2014 compared to $711,541 at December 31, 2013, up $22,826, or 3.2%, due to an increase in net loans receivable of $15,703, up 3.1%. The loan increase included $16,591 of purchased Northwoods branch loans held at December 31, 2014, and an $888 decline in existing market loans year to date. In addition to loan growth, a $10,878 increase in investment securities was primarily funded by a $6,416 decline in cash and cash equivalents during the year ended December 31, 2014. Total local deposits increased $52,658 during the year ended December 31, 2014 due in part to $33,054 in purchased Northwoods branch deposits retained at December 31, 2014 (approximately 82% of the original purchased deposits) with other existing market deposits increasing $19,604, or 3.8% since December 31, 2013. In addition to funding loan growth, the increase in total deposits was used to repay $32,999 of wholesale funding year to date. Wholesale funding (including brokered certificates of deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements) was $75,909 (10.3% of total assets) at December 31, 2014 compared to $108,908 (15.3% of total assets) at December 31, 2013. During 2015, loan growth is expected to increase slightly on increased customer demand but be limited by a very competitive lending market, which could reduce net interest margins. A decline in loan growth or in net interest margin compared to 2014 would likely reduce net interest income, negatively impacting 2015 net income.

During the year ended December 31, 2013, cash and cash equivalents and investment securities declined $29,255 to fund $12,777 in commercial related loan growth, up 3.7%, and $18,878 in residential real estate loan growth, up 13.5%. Since December 31, 2012, local deposits increased $9,170, up 1.8%, which were used to pay down maturing wholesale funding by $9,173, down 7.8%. Wholesale funding (including brokered certificates of deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements) was $108,908 (15.3% of total assets) at December 31, 2013 compared to $118,081 (16.6% of total assets) at December 31, 2012.

Our most significant sources of liquidity and wholesale funding include federal funds purchased from correspondent banks, FHLB advances, brokered and national certificates of deposit, and Federal Discount Window advances. In addition to our existing $25,106 in cash and cash equivalents at December 31, 2014, we have $347,823 of unused funding available at December 31, 2014, which is considered adequate to meet customer, operational, and growth needs during 2015. Most of our wholesale funding sources require either pledging of assets, maintenance of well-capitalized regulatory status, or additional purchases of FHLB capital stock (or all of these items) to continue or expand participation in the funding program. In particular, $138,881 of potential FHLB advance funding considered available at December 31, 2014, would require additional purchase of up to $4,388 of additional FHLB capital stock, which pays a nominal dividend and for which no trading market exists.

Capital Resources

During the year ended December 31, 2014, stockholders’ equity increased $4,708 primarily from $5,124 of retained net income during the period after payment of $1,316 in shareholder dividends. During 2014, the company repurchased 27,244 shares of common stock at an average cost of $33.54 per share which reduced equity $913, while 10,030 shares were repurchased at an average cost of $26.78 per share during the year ended December 31, 2013 which reduced equity $269. PSB intends to continue its quarterly stock buyback plan during 2015 quarter with shares purchased directly from shareholders or on the open market at prevailing prices as opportunities arise. All other increases to stockholders’ equity during 2014 total $497 including a $288 increase in other comprehensive income.

Tangible net book value increased to $37.52 per share at December 31, 2014, compared to $34.36 per share at December 31, 2013, an increase of 9.2%. Our stockholders’ equity to assets ratio increased to 8.37% at December 31, 2014 compared to 7.98% at December 31, 2013 due to increased retained earnings with modest asset growth during 2014. 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. PSB’s subsidiary, Peoples State Bank, was considered “well capitalized” under banking regulations at December 31, 2014.

In July 2013, the banking regulatory agencies finalized new regulatory rules applicable to all banks which were described previously in Item 1 to this Annual Report on Form 10-K under the subheading Capital Adequacy. The new rules expand the number of capital measurements and the new minimums over which a bank may pay dividends, certain executive compensation, or be considered adequately capitalized. Other changes addressed the amount of capital required on a “risk adjusted” basis for certain assets and other obligations. The new rules were effective on January 1, 2015, with an extended implementation period for certain measures. 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.

During 2015, we expect to continue payment of our semi-annual cash dividend assuming continued profits and adequate regulatory capital ratios after consideration of risk, new regulatory capital demands, and growth potential. Because our primary growth focus is on market and core deposit expansion via merger and acquisition of other banks with relatively low credit risk profiles and near our current markets, we could retain capital for potential acquisitions. However, if value added merger and acquisition options do not materialize in the near term, we expect to expand our repurchase of treasury stock on the open market under a discretionary buyback program. Stock buybacks would decrease existing capital ratios but would be expected to increase current earnings or net book value per share. Any future growth through merger and acquisition activities should be expected to drain excess capital levels and could increase the likelihood of a new common or preferred stock capital raise, potentially diluting existing stockholders.

During 2013, total stockholders’ equity increased $2,306, primarily from $4,744 of net income less $1,289 of dividends declared and further offset by a $1,204 reduction in unrealized gains on fixed rate securities as national interest rates increased in response to expected actions by the Board of Governors of the Federal Reserve if national economic conditions improve. During 2013 we repurchased 10,030 shares of treasury stock on the open market at an average price of $26.78 per share, which reduced equity $269. Tangible net book value increased to $34.36 per share at December 31, 2013 compared to $32.93 per share at December 31, 2012, an increase of 4.3%. Common stockholders’ equity was 7.98% of total assets at December 31, 2013 compared to 7.65% of assets at December 31, 2012. During 2013, we refinanced $7 million of 8% senior subordinated notes with $1 million of cash and $6 million in proceeds from issuance of new debt. The new debt included $4 million of privately placed senior subordinated notes carrying a 3.75% fixed interest rate with interest only payments, due in 2018, and $2 million in a fully amortizing term note with a correspondent bank carrying a floating rate of interest and maturing in 2015. Although the previous 8% notes qualified as Tier 2 regulatory capital, the new $6 million in notes do not qualify as regulatory capital. The refinancing reduced 2013 interest expense by $340 compared to 2012 and contributed to increased proforma net income (prior to the large grain loss) in 2013 compared to the prior year.

Off-Balance-Sheet Arrangements and Contractual Obligations

Our largest volume off-balance sheet activity involves our servicing of payments and related collection activities on $279,865 of residential 1 to 4 family mortgages sold to FHLB and FNMA at December 31, 2014, up $7,585, or 2.8%, from $272,280 at December 31, 2013, which was up 1.0% from $269,554 at December 31, 2012. In general, we are paid an annualized servicing fee of .25% of serviced principal which is recorded as a component of mortgage banking revenue. We expect to see lower mortgage refinance activity during 2015 and serviced mortgage loan principal is likely to grow at a slower pace than seen during 2014.

At December 31, 2014, we have provided a credit enhancement against FHLB loss on $18,834, or 6.7%, of the serviced principal, up to a maximum guarantee of $949 in the aggregate. However, we would incur such loss only if the FHLB first lost $1,412 on this loan pool as part of their “First Loss Account”. We have not provided a credit enhancement guarantee on any loans sold to the FHLB since prior to 2009 and we have no intentions of originating future loans with the guarantee. Loan pools containing our guarantees were originated during 2000 through 2008 and have incurred cumulative life to date principal losses of $631 out of $424,452 of loan principal originated with guarantees, all of which has been borne by the FHLB within their First Loss Account. We do not maintain any recourse liability for credit enhancement guarantee losses because we do not expect to incur any significant future losses under this 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 for representation and warranty losses were $8, $294, and $0 during 2014, 2013, and 2012, respectively. We maintained a reserve liability for potential future representation and warranty losses of $85 at December 31, 2014.

We provide various commitments to extend credit for both commercial and consumer purposes totaling approximately $124 million at December 31, 2014 compared to $119 million at December 31, 2013 and $105 million at December 31, 2012. 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.

Our primary long-term contractual obligations are related to repayment of funding sources such as FHLB advances, long-term other borrowings, and customer time deposits, which make up 93% of our total long-term contractual obligations. For all contractual obligations outstanding at December 31, 2014, $94 million, or 44%, will require repayment, or extension through refinancing, during 2015, including $10 million of FHLB advances and $84 million of time deposits, both of which are regularly renewed in the normal course of business.

We offer certain high credit quality customers fixed interest rate swaps to hedge their risk on variable rate commercial real estate loans with us. Fixed interest rate swaps sold to customers (in which we pay a variable rate and receive a fixed rate) are simultaneously offset by our purchase of a variable interest rate swap from a correspondent bank (in which we pay a fixed rate and receive a variable rate). Such swap sale programs are often referred to “back to back” interest rate swaps as the resulting fixed interest rate risk with our customer is offset by our variable interest rate risk with our counterparty. At December 31, 2014 and 2013, there were $13,646 and $14,323, respectively, in back to back swaps outstanding with variable rate commercial real estate loan customers.

RESULTS OF OPERATIONS

Earnings

Table 1 of Item 6 of this Annual Report on Form 10-K presents various financial performance ratios and measures for each of the five years in the period ended December 31, 2014. A number of separate or nonrecurring factors impacted our earnings during this period. Table 2 presents our net income for each of the five years in the period ended December 31, 2014, before certain tax-adjusted nonrecurring income and expense items.

Table 2: Summary Operating Income

	Year ended December 31,
($000s)			2014			2013			2012			2011		2010

Net income before special items, net of tax		$	6,698		$	6,463		$	5,783		$	5,277	$	4,770

Net gain (loss) on sale of assets:

Net gain (loss) on write-down and sale of securities			2			7			–			19		(12	)
Net gain (loss) on sale of premises and equipment			(35	)		–			(2	)		9		(4	)
Net loss on sale of credit card loan principal			–			(19	)		–			–		–

Total net gain (loss) on sale of assets, net of tax			(33	)		(12	)		(2	)		28		(16	)

Large grain customer fraud credit loss:

Provision for grain credit loss			–			(2,031	)		–			–		–
Grain credit loss legal and collection expense			–			(27	)		–			–		–
Reduced employee benefits related to grain credit loss			–			278			–			–		–

Total large grain customer fraud credit loss, net of tax			–			(1,780	)		–			–		–

Nonrecurring merger and acquisition income (expense):

Gain on bargain purchase			–			–			726			–		–
Merger and acquisition professional expense			(89	)		–			(233	)		–		–
Data processing conversion expense			(136	)		–			(265	)		–		–
Benefit from amendment of acquired bank tax returns			–			73						–		–

Total nonrecurring merger and acquisition income, net of tax			(225	)		73			228			–		–

Net income as reported		$	6,440		$	4,744		$	6,009		$	5,305	$	4,754

Diluted earnings per share before special items		$	4.06		$	3.91		$	3.48		$	3.19	$	2.90
Diluted earnings per share as reported		$	3.90		$	2.87		$	3.61		$	3.21	$	2.89

2014 compared to 2013

Earnings per share increased 35.9% during 2014 to $3.90 per share compared to earnings of $2.87 per share during 2013. Prior year earnings were reduced $1,780 after tax benefits from a fraudulent large grain credit write-down. During 2014, earnings were also impacted by merger and conversion costs related to our purchase of Northwoods Rhinelander. Table 2 above outlines these significant nonrecurring items and displays proforma 2014 net income before these items of $6,698 ($4.06 per share) compared to proforma net income of $6,463 ($3.91 per share) during 2013, an increase of 3.8% per share. Return on average assets was .90% (.93% before the special items outlined in Table 2) and .68% (.93% before the special items) during 2014 and 2013, respectively. Return on average stockholders’ equity was 10.75% (11.18% before the special items outlined in Table 2) and 8.37% (11.40% before the special items) during 2014 and 2013, respectively. Compared to the prior year before the special items, an $827 increase in net interest income due to asset growth and a $310 decline in 2014 credit costs, down 28%, offset an $824 increase in operating costs, up 5%.

During 2015, we expect net interest margin to remain similar to that seen during 2014 but for loan growth to be challenging. Total noninterest income and noninterest expense are expected to increase similar amounts, resulting in net operating expense to be similar to 2014. Because 2015 earnings growth is likely to be dependent on loan growth and stable net interest margin, strong levels of competition amount lenders in our market and the timing of an expected increase in short-term interest rates by the Federal Reserve Open Markets Committee could have a negative impact on 2015 net income.

2013 compared to 2012

Earnings per share declined 20.5% during 2013 to $2.87 per share compared to record earnings of $3.61 per share during 2012. Both periods included significant non-recurring items which impacted net income, including a $1,780 reduction to net income in 2013 related to a fraudulent large grain credit write-down of $3,340 while our purchase of Marathon State Bank during 2012 increased net income by $228 primarily due to a gain on bargain purchase. Table 2 above outlines these significant nonrecurring items and displays proforma 2013 net income before these items of $6,463 ($3.91 per share) compared to proforma net income of $5,783 ($3.48 per share) during 2012, an increase of 12.3% per share. Return on average assets was .68% (.93% before the special items outlined in Table 2) and .91% (.88% before the special items) during 2013 and 2012, respectively. Return on average stockholders’ equity was 8.37% (11.40% before the special items outlined in Table 2) and 11.33% (10.91% before the special items) during 2013 and 2012, respectively.

Excluding the 2013 special items outlined in Table 2, proforma 2013 net income benefited from a $1,245 increase in tax adjusted net interest income, up 5.9% and a $215 reduction in credit costs (including provision for loan losses and loss on foreclosed assets), down 15.8% compared to 2012. Offsetting these income increases was a $346 increase in proforma operating expense (excluding losses on foreclosed assets for both 2013 and 2012), up 2.1%. Proforma noninterest income before gain (loss) on sale of other assets declined $84, or 1.5% during 2013 compared to 2012 as a $204 decline (11.4%) in mortgage banking income was offset by a $208 increase (28.3%) in investment and insurance sales commissions.

2012 compared to 2011

Earnings were a then record high $3.61 per diluted share during 2012 but were significantly impacted by non-recurring income and expense associated with the purchase of Marathon State Bank during 2012. An $851 gain on the purchase was recorded, which increased net income $726 after tax expense. Separately, we incurred $233 of merger and acquisition legal and other professional fees which reduced net income $233 after taxes as such costs were treated as an adjustment to the Marathon cost basis under tax rules and were therefore not deductible. Lastly, we incurred $438 of data conversion expense associated with placing Marathon customer and account information on our operating system, which reduced net income $265 after tax benefits. As shown in Table 2, diluted earnings per share before special items were $3.48 during 2012 compared to $3.19 during 2011, an increase of 9.1%. Return on average assets was .91% (.88% before the special items outlined in Table 2) and .87% during 2012 and 2011, respectively. Return on average stockholders’ equity was 11.33% (10.91% before the special items outlined in Table 2) and 10.78% during 2012 and 2011, respectively.

Separate from Marathon’s special acquisition items noted above, Marathon’s recurring operations increased our net interest income and operating expense during the seven months following our purchase. Net interest income of $20,153 during 2012 increased $596, or 3.0%, compared to 2011. Our noninterest income before the gain on purchase of Marathon increased $380, or 7.1%, during 2012, compared to 2011, from a $422 increase in mortgage banking income on customer refinance activity. Lastly, income benefited significantly from a decline in credit costs (provision for loan losses and loss on foreclosed assets) of $1,229, or 47.5%, during 2012 compared to 2011. Offsetting these income gains was an increase in operating expense before Marathon’s special items and credit costs of $1,567, or 10.7%. The expense increase was led by higher wages and benefits, up $832, or 10.0%, and higher data processing expense (excluding the Marathon conversion costs) of $476, up 34.4%, as one-time fee reductions we enjoyed following our bank-wide data processing conversion during 2010 and 2011 expired.

Net Interest Income

Net interest income is our largest source of revenue from operations. Net interest income represents the difference between interest earned on loans, securities, and other interest-earning assets, and the interest expense associated with the deposits and borrowings that fund them. Interest rate fluctuations together with changes in volume and types of earning assets and interest-bearing liabilities combine to affect total net interest income. Additionally, net interest income is impacted by the sensitivity of the balance sheet to change in interest rates, contractual maturities, and repricing frequencies. Net interest income is our most significant item of revenue generated by operations.

Table 3 presents changes in the mix of average earning assets and interest bearing liabilities for the three years ending December 31, 2014. In general, net interest income earned on loans funded by savings and demand deposits is greater than that earned on securities funded by time deposits. Therefore, a balance sheet that contains a growing allocation of loans funded by a growing allocation of savings and demand deposits would normally provide greater net interest income than a growing allocation of securities funded by a growing allocation of time deposits.

Table 3: Mix of Average Interest Earning Assets and Average Interest Bearing Liabilities

Year ending December 31,	2014			2013			2012

Loans		76.8	%		77.1	%		75.0	%
Taxable securities		12.9	%		12.6	%		14.9	%
Tax-exempt securities		7.9	%		8.1	%		6.8	%
FHLB stock		0.4	%		0.5	%		0.5	%
Other		2.0	%		1.7	%		2.8	%

Total interest earning assets		100.0	%		100.0	%		100.0	%

Savings and demand deposits		32.3	%		31.4	%		29.4	%
Money market deposits		25.3	%		22.1	%		21.0	%
Time deposits		31.2	%		29.9	%		33.5	%
FHLB advances		5.7	%		10.4	%		9.7	%
Other borrowings		3.4	%		4.0	%		3.6	%
Senior subordinated notes		0.7	%		0.8	%		1.3	%
Junior subordinated debentures		1.4	%		1.4	%		1.5	%

Total interest bearing liabilities		100.0	%		100.0	%		100.0	%

Tables 4, 5, and 6 present average balance sheet data and related average interest rates on a tax equivalent basis and the impact of changes in the earnings assets base for the three years in the period ended December 31.

Table 4: Average Balances and Interest Rates

	2014								2013								2012
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Assets
Interest-earning assets:
Loans^(1)(2)(3)	$	523,712		$	22,784		4.35	%	$	508,454		$	23,316		4.59	%	$	462,237		$	23,667		5.12	%
Taxable securities		87,930			2,398		2.73	%		83,049			2,098		2.53	%		91,747			2,402		2.62	%
Tax-exempt securities⁽²⁾		53,822			2,279		4.23	%		53,549			2,289		4.27	%		41,825			1,959		4.68	%
FHLB stock		2,556			13		0.51	%		3,138			14		0.45	%		2,817			9		0.32	%
Other		14,208			69		0.49	%		11,542			67		0.58	%		17,445			82		0.47	%

Total⁽²⁾		682,228			27,543		4.04	%		659,732			27,784		4.21	%		616,071			28,119		4.56	%

Non-interest-earning assets:
Cash and due from banks		10,410								10,476								17,979
Premises and equipment, net		10,579								9,935								10,078
Cash surrender value life insurance		13,014								12,257								11,597
Other assets		9,434								9,557								11,427
Allowance for loan losses		(6,821	)							(7,426	)							(7,799	)

Total	$	718,844							$	694,531							$	659,353

Liabilities & stockholders’ equity
Interest-bearing liabilities:
Savings and demand deposits	$	179,449		$	296		0.16	%	$	172,249		$	383		0.22	%	$	154,428		$	782		0.51	%
Money market deposits		140,248			368		0.26	%		121,351			406		0.33	%		110,587			586		0.53	%
Time deposits		172,784			2,171		1.26	%		164,392			2,262		1.38	%		176,187			2,793		1.59	%
FHLB borrowings		31,591			601		1.90	%		57,035			1,285		2.25	%		50,941			1,414		2.78	%
Other borrowings		18,649			560		3.00	%		21,862			650		2.97	%		19,190			596		3.11	%
Senior subordinated notes		4,000			150		3.75	%		4,600			184		4.00	%		7,000			578		8.26	%
Junior subordinated debentures		7,732			340		4.40	%		7,732			341		4.41	%		7,732			342		4.42	%

Total		554,453			4,486		0.81	%		549,221			5,511		1.00	%		526,065			7,091		1.35	%

Non-interest-bearing liabilities:
Demand deposits		97,884								82,506								73,135
Other liabilities		6,583								6,117								7,128
Stockholders’ equity		59,924								56,687								53,025

Total	$	718,844							$	694,531							$	659,353

Net interest income				$	23,057							$	22,273							$	21,028
Rate spread							3.23	%							3.21	%							3.21	%
Net yield on interest-earning assets							3.38	%							3.38	%							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%.

⁽³⁾Loan fees are included in total interest income as follows: 2014 - $391, 2013 - $522, 2012 - $724.

Table 5: Interest Income and Expense Volume and Rate Analysis

	2014 compared to 2013									2013 compared to 2012
	increase (decrease) due to ⁽¹⁾									increase (decrease) due to ⁽¹⁾
	Volume			Rate			Net			Volume			Rate			Net

Interest earned on:
Loans⁽²⁾	$	664		$	(1,196	)	$	(532	)	$	2,121		$	(2,472	)	$	(351	)
Taxable securities		133			167			300			(220	)		(84	)		(304	)
Tax-exempt securities⁽²⁾		12			(22	)		(10	)		501			(171	)		330
FHLB stock		(3	)		2			(1	)		1			4			5
Other interest income		13			(11	)		2			(34	)		19			(15	)

Total		819			(1,060	)		(241	)		2,369			(2,704	)		(335	)

Interest paid on:
Savings and demand deposits		12			(99	)		(87	)		39			(438	)		(399	)
Money market deposits		49			(87	)		(38	)		36			(216	)		(180	)
Time deposits		106			(197	)		(91	)		(163	)		(368	)		(531	)
FHLB borrowings		(483	)		(201	)		(684	)		137			(266	)		(129	)
Other borrowings		(96	)		6			(90	)		79			(25	)		54
Senior subordinated notes		(23	)		(11	)		(34	)		(96	)		(298	)		(394	)
Junior subordinated debentures		–			(1	)		(1	)		–			(1	)		(1	)

Total		(435	)		(590	)		(1,025	)		32			(1,612	)		(1,580	)

Net interest earnings	$	1,254		$	(470	)	$	784		$	2,337		$	(1,092	)	$	1,245

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

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

Table 6: Yield on Earning Assets

Year ended December 31,	2014						2013						2012
	Yield			Change			Yield			Change			Yield			Change

Yield on earning assets		4.04	%		-0.17	%		4.21	%		-0.35	%		4.56	%		-0.52	%

Effective rate on all liabilities as a percent of earning assets		0.66	%		-0.17	%		0.83	%		-0.32	%		1.15	%		-0.38	%

Net yield on earning assets		3.38	%		0.00	%		3.38	%		-0.03	%		3.41	%		-0.14	%

2014 compared to 2013

During the year ended December 31, tax adjusted net interest income totaled $23,057 (on net margin of 3.38%) during 2014 and $22,273 (3.38%) during 2013, up $784, or 3.5%. During 2014, net interest income increased $1,254 from higher asset volume (on the purchase of Northwoods Rhinelander in April 2014), offsetting a $470 reduction to net interest income from changes in loan yields and funding costs. The decrease in asset yields and interest bearing funding costs during 2014 compared to the prior year was less than that seen during the prior 2 years, as asset and funding costs settled into current market interest rate levels following several years of falling interest rates. Both yield on earning assets and rate paid on liabilities declined .17% during 2014 compared to 2013. Since the 2014 effective rate on interest bearing liabilities of .66% of earning assets is near a functional rate floor of 0%, a continued prolonged period of low rates or a decline in rates would negatively impact net interest income as asset yields would fall faster than funding costs.

Repayment or refinance of maturing high cost FHLB advances during 2014 was a significant contributor to increased net interest income. Reduced FHLB advance interest expense contributed to 87% of the increase in net interest income during the year ended December 31, 2014 compared to 2013. Interest expense savings from maturing high cost wholesale funding will decline significantly during 2015 compared to 2014. Therefore, continued declines in loan yields may decrease net interest margin or reduce net interest income during 2015, particularly if loan growth does not materialize.

During 2014, net interest margin benefited from interest rate floors on certain commercial-related loans and retail residential home equity lines of credit. The coupon rate on approximately $69 million, or 13.0%, of gross loans at December 31, 2014 was supported by an average interest rate floor approximately 111 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 $762 and .11%, respectively, based on those existing loan floors and average total earning assets during the year ended December 31, 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. 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 above the floor more quickly, impacting net interest income less adversely than if short-term rates rose slowly or deliberately.

Because a future increase in short-term funding rates could cause a mismatch between floating rate loan yields and short-term funding costs due to existing interest rate floors, such positions are modeled and reviewed as part of our asset-liability management strategy each quarter. Current interest rate simulations based on more extreme rate scenarios such as short-term rates up 500 basis points combined with a flattening of the yield curve during a 24 month period could reduce net interest income by 4.9% to 7.0% ($676 to $962 after tax impacts) per year during the first two years of the rate increase. Refer to Table 9 for projected net interest income percentage changes under other rate change scenarios. We seek to minimize this interest rate risk exposure in part by maintaining the fixed rate period of wholesale funding longer than the average term for local deposit funding. Wholesale funding is approximately 10% of total assets and carried an approximately 27 month weighted average fixed rate remaining term as of December 31, 2014.

The Dodd-Frank Wall Street Reform Act of 2010 repealed the prohibition on paying interest on commercial checking accounts. We currently provide an earnings credit against account fees in lieu of an interest payment and do not expect costs to increase because of this change in the short term. Despite the law change, we do not promote an interest bearing commercial checking account at this time. However, the change could have greater long-term implications as competitor banks begin to use premium interest rate levels on commercial deposits in attempts to raise deposits in coming years.

2013 compared to 2012

Tax adjusted net interest income totaled $22,273 during 2013 compared to $21,028 in 2012, an increase of $1,245, or 5.9%, from a 7.1% increase in average earning assets during 2013, which offset a decline in net interest margin from 3.41% during 2012 to 3.38% during 2013. Compared to 2012, loan yield declined from 5.12% to 4.59% (53 basis points) while the tax adjusted investment security yield declined from 3.26% to 3.21% (5 basis points). Securities yields were supported by a greater allocation in higher yielding tax exempt securities in 2013 compared to 2012 although yield on these tax exempt securities declined from 4.68% in 2012 to 4.27% in 2013. Continued low overall interest rate levels and very low investment security reinvestment rates caused yield on earning assets to decline 35 basis points during 2013, which was offset by a 35 basis point decline in the cost of interest bearing liabilities, allowing the rate spread to remain at 3.21% during both 2013 and 2012. However, because average earning assets grew 7.1% while average interest bearing liabilities grew 4.4%, net yield on earning assets (net margin) declined 3 basis points during 2013 as a greater amount of assets experienced declining yields than the amount of liabilities that experienced declining costs. The increase in 2013 average earning assets was due in part to a full year of ownership of the assets purchased with Marathon State Bank on June 1, 2012 (approximately 20% of the 2013 earnings asset growth), and in part from net organic loan growth (approximately 80% of the 2013 earning asset growth).

During 2013, net interest margin benefited from interest rate floors on certain commercial-related loans and retail residential home equity lines of credit. The coupon rate on approximately $71 million, or 13.7%, of gross loans at December 31, 2013 was supported by an average interest rate floor approximately 114 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 $807 and .12%, respectively, based on those existing loan floors and average total earning assets during the year ended December 31, 2013.

2012 compared to 2011

Tax adjusted net interest income totaled $21,028 during 2012 compared to $20,297 in 2011, an increase of $731, or 3.6%, from a 7.7% increase in average earning assets during 2012 which offset a decline in net interest margin from 3.55% during 2011 to 3.41% during 2012. The increase in 2012 average earnings assets was the result of the acquisition of Marathon on June 1, 2012. Compared to 2011, loan yield declined from 5.55% to 5.12% (43 basis points) while the tax adjusted investment security yield declined from 3.87% to 3.26% (61 basis points). Continued low overall interest rate levels and very low investment security reinvestment rates caused yield on earning assets to decline as did the cost of paying liabilities, which declined from 1.77% to 1.35% (42 basis points). The long-term market rate decline first seen in the national economy during the 2008-2009 recession continued during 2012, and loans, securities, and funding continued to reprice to lower levels.

During 2012, net interest margin benefited from interest rate floors on certain commercial-related loans and retail residential home equity lines of credit. The coupon rate on approximately $85 million, or 17.5%, of gross loans at December 31, 2012 was supported by an average interest rate floor approximately 129 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 $1,095 and .18%, respectively, based on those existing loan floors and average total earning assets during the year ended December 31, 2012.

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 Item 8, Note 23 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. However, a sudden and substantial change in interest rates may 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. Table 7 represents our earnings sensitivity to changes in interest rates at December 31, 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 lower rate 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.

Table 7 reflects a liability sensitive (“negative”) gap position during as of December 31, 2014, with a cumulative one-year gap ratio of 98.2% compared to a “negative” gap (liability sensitive position) of 85.4% at December 31, 2013. In general, a current negative gap position would be favorable in a falling 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. This factor can result in changes to net interest income from changing interest rates different than expected from review of the gap table.

Table 7: Interest Rate Sensitivity Analysis

	December 31, 2014
(dollars in thousands)	0-90 Days			91-180 days			181-365 days			1-2 yrs.			Beyond. 2-5 yrs.			Beyond 5 yrs.			Total

Earning assets:
Loans	$	182,741		$	42,500		$	67,859		$	84,770		$	117,632		$	36,590		$	532,092
Securities		9,604			6,228			9,995			22,317			51,267			44,746			144,157
FHLB stock																	2,556			2,556
CSV bank-owned life insurance																	13,230			13,230
Other earning assets		8,225			496			1,736												10,457

Total	$	200,570		$	49,224		$	79,590		$	107,087		$	168,899		$	97,122		$	702,492
Cumulative rate sensitive assets	$	200,570		$	249,794		$	329,384		$	436,471		$	605,370		$	702,492

Interest-bearing liabilities
Interest-bearing deposits	$	96,547		$	25,399		$	198,627		$	26,977		$	60,473		$	100,125		$	508,148
FHLB advances		10,000												10,271						20,271
Other borrowings		4,824												5,500						10,324
Senior subordinated notes														4,000						4,000
Junior subordinated debentures														7,732						7,732

Total	$	111,371		$	25,399		$	198,627		$	26,977		$	87,976		$	100,125		$	550,475
Cumulative interest sensitive liabilities	$	111,371		$	136,770		$	335,397		$	362,374		$	450,350		$	550,475

Interest sensitivity gap for the individual period	$	89,199		$	23,825		$	(119,037	)	$	80,110		$	80,923		$	(3,003	)
Ratio of rate sensitive assets to rate sensitive liabilities for the individual period		180.1	%		193.8	%		40.1	%		397.0	%		192.0	%		97.0	%

Cumulative interest sensitivity gap	$	89,199		$	113,024		$	(6,013	)	$	74,097		$	155,020		$	152,017
Cumulative ratio of rate sensitive assets to rate sensitive liabilities		180.1	%		182.6	%		98.2	%		120.4	%		134.4	%		127.6	%

We use financial modeling policies and techniques to measure interest rate risk. These policies are intended to limit exposure of earnings at risk. A formal liquidity contingency plan exists that directs management to the least expensive liquidity sources to fund sudden and unanticipated liquidity needs (Refer to the section labeled “Asset Growth and Liquidity” contained in this Annual Report on Form 10-K). We also use various policy measures to assess interest rate risk as described below.

Interest Rate Risk Limits

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. Table 8 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 8: Net Interest Margin Rate Simulation Impacts

As of December 31:	2014			2013			2012

Cumulative 1 year gap ratio
Base		98	%		85	%		94	%
Up 200		95	%		82	%		89	%
Down 200		100	%		87	%		95	%

Change in Net Interest Income – Year 1
Up 200 during the year		-4.2	%		-2.8	%		-1.4	%
Down 200 during the year		-0.4	%		-0.1	%		0.4	%

Change in Net Interest Income – Year 2
No rate change (base case)		-1.0	%		0.8	%		-2.5	%
Following up 200 in year 1		-3.0	%		-0.2	%		-2.8	%
Following down 200 in year 1		-5.1	%		-2.4	%		-3.8	%

Note: Simulations reflect net interest income changes from a down 100 basis point scenario, rather than a down 200 basis point scenario, reflecting functional interest floors in the current low rate environment.

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 capital. Core deposits including DDA, NOW, and non-maturity savings accounts (except 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 50.8% at December 31, 2014 compared to 53.8% and 60.5% at December 31, 2013 and 2012, respectively.

At December 31, 2014, internal interest rate simulations that project the impact of interest rate on our net interest income estimated that income is projected to decline in both rising and falling rate scenarios. Changes that maintain the current shape of the yield curve (often referred to as “parallel yield curve shifts”) estimated relatively modest projected reductions to future years’ net interest income. The impact of various rate simulations on projected “base” net interest income are shown in Table 9 below. However, if interest rates were to increase more quickly than anticipated and if the yield curve flattened at the same time, such as in a “flat up 500 basis point” change occurring during year 1, net interest income would decline during the first two years of the simulation in amounts ranging from 4.9% in year 1 to a decline of 7.0% in year 2 of the base simulation’s net interest income ($1,116 in year 1 and $1,588 in year 2). 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. At December 31, 2013, similar “flat up 500 basis point” projections indicated net interest income would decline during the first two years of the simulation in amounts ranging from 6.0% in year 1 to 12.7% in year 2 of the base simulation’s net interest income.

Although the flat up 500 basis points simulation is projected to negatively impact net interest income during the first two years of the simulation, we also have risk to a prolonged period of low or falling rates in the already low rate environment beginning in year 2 of a falling rate scenario. In this situation, 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 in response to heighted market competition for new borrowers.

Table 9: Projected Changes To Net Interest Income Under Various Rate Change Simulations

	During next 12M			During next 24M			During next 24M			During next 24M
	Down 100 bp			Flat up 200 bp			Parallel up 400 bp			Flat up 500 bp

Year 1	-0.4		%	-4.6		%	-3.9		%	-4.9		%
Year 2		-4.1	%		-4.5	%		-4.8	%		-7.0	%
Year 3		-7.7	%		-0.6	%		1.4	%		-0.4	%
Year 4		-10.5	%		5.2	%		15.7	%		15.0	%
Year 5		-12.0	%		8.6	%		30.5	%		31.7	%

Consistent with market expectations, we believe short-term interest rates will begin to increase during the second half of 2015 in response to Federal Reserve actions to increase their discount rate. However, rate increases are expected to be measured and modest, approximating the “flat up 200 bp” scenario shown in Table 9 above. We consider a falling rate scenario such as that shown above for “down 100 bp” to be unlikely.

Noninterest Income

Table 10 presents a common size income statement showing the changing mix of income and expense relative to traditional loan and deposit product net interest income (before tax adjustment) for the five years ending December 31, 2014. This analysis highlights the reliance on, or diversification of, noninterest or fee income to net interest income.

Table 10: Summary of Earnings as a Percent of Net Interest Income

	2014			2013			2012			2011			2010

Net interest income		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Provision for loan losses		2.5	%		18.8	%		3.9	%		7.1	%		9.4	%

Net interest income after loan loss provision		97.5	%		81.2	%		96.1	%		92.9	%		90.6	%
Total noninterest income		25.7	%		26.4	%		32.6	%		27.3	%		28.1	%
Total noninterest expenses		81.0	%		77.5	%		86.3	%		80.7	%		83.4	%

Net income before income taxes		42.2	%		30.1	%		42.4	%		39.5	%		35.3	%
Provision for income taxes		13.1	%		7.8	%		12.6	%		12.4	%		10.4	%

Net income		29.1	%		22.3	%		29.8	%		27.1	%		24.9	%

Table 11 presents a breakdown of the components of noninterest income during the three years ended December 31.

Table 11: Noninterest Income

	2014						2013						2012
				% of pre-tax						% of pre-tax						% of pre-tax
Years Ended December 31,	Amount			Income			Amount			Income			Amount			Income

Service fees	$	1,656			17.72	%	$	1,580			24.66	%	$	1,648			19.29	%
Mortgage banking income		1,373			14.69	%		1,591			24.83	%		1,795			21.01	%
Merchant and debit card interchange fee income		1,044			11.17	%		859			13.40	%		851			9.96	%
Retail investment sales commissions		932			9.97	%		927			14.47	%		712			8.34	%
Increase in cash surrender value of life insurance		404			4.32	%		402			6.27	%		407			4.76	%
Other operating income		325			3.48	%		266			4.15	%		283			3.31	%
Insurance annuity sales commissions		14			0.15	%		17			0.27	%		24			0.28	%
Net gain on sale of securities		3			0.03	%		12			0.19	%		–			0.00	%
Gain on bargain purchase		–			0.00	%		–			0.00	%		851			9.96	%
Loss on sale of credit card loan principal		–			0.00	%		(31	)		-0.48	%		–			0.00	%
Loss on sale of premises and equipment		(57	)		-0.61	%		–			0.00	%		(3	)		-0.03	%

Total noninterest income	$	5,694			60.92	%	$	5,623			87.76	%	$	6,568			76.87	%

2014 compared to 2013

Total noninterest income for the year ended December 31, 2014 was $5,694 compared to $5,623 during 2013, up $71, or 1.3%, despite a decline in residential mortgage banking of $218, or 13.7%. Fewer mortgage loan originations led the decline in mortgage banking revenue 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. Offsetting the year to date mortgage banking decline were higher service fees, up $76, and higher debit and credit card interchange income, up $185. 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 62% of the increased interchange income during the year ended December 31, 2014. Prior to the sale of the credit card portfolio, card income was categorized as loan interest income.

During 2015, we expect to see an increase in mortgage banking income from increased home sale activity as well as increased retail investment sales commissions from an additional investment advisor salesperson. Separate from other gains (losses) on property sales, noninterest income is expected to increase 4% to 6%.

2013 compared to 2012

Total noninterest income for the year ended December 31, 2013 was $5,623 compared $6,568 during 2012, a decline of $945, or 14.4%. However, the prior year period included an $851 nonrecurring gain on purchase of Marathon. Excluding this special gain, noninterest income would have been $5,623 and $5,717 in 2013 and 2012, respectively, a decrease of $94, or 1.6%, including a $204 decrease in mortgage banking (down 11.4%) offset by a $208 increase in retail investment and annuity sales commissions (up 28.3%). Service fees declined $68, or 4.1%, on lower overdraft fee income.

Due the increase in long term U.S. Treasury rates during 2013, residential mortgage refinance activity declined significantly after several years of consistently falling rates which prompted customers to refinance, causing mortgage banking to decline during 2013.

2012 compared to 2011

Total noninterest income during 2012 was $6,568 compared to $5,337 in 2011, an increase of $1,231, or 23.1%. However, 2012 included an $851 gain on purchase of Marathon State Bank, which is a nonrecurring item. Excluding the purchase gain, noninterest income increased $380, or 7.1% from a $422 (30.7%) increase in mortgage banking. After significant long-term rate declines during 2011 and 2010, residential mortgage fixed rates declined further in 2012, prompting a new wave of customer refinancing activity, which increased mortgage banking income. Other operating income declined $192 during 2012 from a reduction in commissions earned on the sale of interest rate swaps to floating rate commercial loan customers after introducing the product during 2011.

Noninterest Expense

Table 12 outlines the components of noninterest expenses for the three years ending December 31.

Table 12: Noninterest Expense

Years Ended December 31,	2014						2013						2012
				% of net						% of net						% of net
				margin &						margin &						margin &
	Amount			other income*			Amount			other income*			Amount			other income*

Wages, except incentive compensation	$	7,318			25.45	%	$	7,026			25.19	%	$	6,684			24.22	%
Health and dental insurance		925			3.22	%		1,130			4.05	%		1,078			3.91	%
Incentive compensation		650			2.26	%		295			1.06	%		657			2.38	%
Payroll taxes and other employee benefits		761			2.65	%		694			2.49	%		631			2.29	%
Profit sharing and retirement plan expense		521			1.81	%		446			1.60	%		509			1.84	%
Deferred compensation plan expense		220			0.77	%		160			0.57	%		178			0.65	%
Restricted stock plan vesting expense		166			0.58	%		145			0.52	%		105			0.38	%
Deferred loan origination costs		(682	)		-2.37	%		(827	)		-2.96	%		(673	)		-2.44	%

Total salaries and employee benefits		9,879			34.37	%		9,069			32.52	%		9,169			33.23	%
Data processing other office operations		2,224			7.74	%		1,862			6.67	%		2,296			8.32	%
Occupancy expense		1,828			6.36	%		1,762			6.32	%		1,622			5.88	%
FDIC insurance expense		523			1.82	%		452			1.62	%		464			1.68	%
Debit card processing and losses expense		519			1.81	%		394			1.41	%		387			1.40	%
Legal and professional expenses		393			1.37	%		295			1.06	%		567			2.05	%
Advertising and promotion		376			1.31	%		335			1.20	%		327			1.18	%
Directors fees and benefits		356			1.24	%		354			1.27	%		384			1.39	%
Loss on foreclosed assets		233			0.81	%		428			1.53	%		573			2.08	%
Other expenses		1,589			5.50	%		1,555			5.57	%		1,603			5.81	%

Total noninterest expense	$	17,920			62.33	%	$	16,506			59.17	%	$	17,392			63.02	%

* Net interest income (net margin) is calculated on a tax equivalent basis using a tax rate of 34%.

2014 compared to 2013

During the year ended December 31, 2014, noninterest expense totaled $17,920 compared to $16,506 during 2013. However, both periods included special items including $371 of nonrecurring Northwoods Rhinelander merger and conversion costs during 2014 and a $458 reduction in employee incentive costs during 2013 due to recognition of the large grain loan loss. Excluding the pro-forma impact of these items as well as the loss on foreclosed assets, noninterest expense during the year ended December 31, 2014 would have been $17,316 compared to $16,536 during 2013, an increase of $780, or 4.7%. Approximately $317 of the increase was from recurring Northwoods branch wage and other direct operating costs following the acquisition. Separate from Northwoods wage costs, pro-forma salaries and employee benefits increased an additional $244, or 2.6%. Data processing and office operations costs increased $130 (excluding the Northwoods branch acquisition conversion and operating costs), up 7.0%, and FDIC insurance premiums increased $71 related to the grain loan charge-off and increased deposits. All other net operating expense increases totaled $18.

During 2015, we expect salaries and benefits to lead the growth in expense due to a full year of operations of the Northwoods Rhinelander branch as well additional staff to support commercial product sales growth. However, we expect to see savings in professional fees and data processing costs in 2015 compared to 2014 which include those merger and conversion costs. Professional fees are also expected to decline in response to our November 25, 2014 election to deregister from the SEC under the JOBS Act of 2012, eliminating our reporting to the SEC and related audit and legal costs. Considering all items, we expect total 2015 noninterest expense to increase an inflationary amount over 2014.

2013 compared to 2012

Noninterest expenses totaled $16,506 during the year ended December 31, 2013 compared to $17,392 during 2012. Both years included special items including a $458 reduction in employee incentive costs during 2013 on recognition of the large grain charge-off, $45 of grain loss legal expense during 2013, and $674 of acquisition and conversion expenses associated with the purchase of Marathon during 2012. Excluding the proforma effect of the grain loss wage reduction and legal expense in 2013, the special 2012 Marathon items, and loss on foreclosed assets, noninterest expense would have been $16,491 during 2013 and $16,145 during 2012, an increase of $346, or 2.1%. The majority of the increase in proforma noninterest expense during 2013 would have been due to a $359 increase in wage expense, primarily from performance incentives that would have existed prior to recognition of the large 2013 grain loan loss and charge-off.

2012 compared to 2011

Noninterest expenses totaled $17,392 during the year ended December 31, 2012 compared to $15,778 during 2011, up $1,614. Excluding the loss on foreclosed assets for both periods, $438 in Marathon data conversion costs, and $233 in Marathon merger professional fees, 2012 expenses would have been $16,148 compared to $14,581 during 2011, an increase of $1,567, or 10.7%.

Marathon operating expenses, primarily wages and monthly data processing costs, added approximately $535 in normal recurring operating expenses following the acquisition by PSB. Separate from Marathon, other increases to wages and benefits included higher health and dental insurance costs, up $226, or 26.5%, due to higher claims experience under our self insured plan, and higher incentive plan, profit sharing, and other incentive benefit plan costs, up $176, or 13.8%. Excluding Marathon related expenses, our data processing and other office operations increased $350, or 23.6%, over 2011 due to higher costs associated with our outsourced information processing system as vendor monthly discounts previously in place following the 2010 original data conversion expired during the September 2011 quarter.

Income Taxes

The effective tax rate was 31.1% during 2014 compared to 26.0% during 2013 and 30.0% during 2012. The 2013 effective rate declined compared to the other years as the percentage of tax-exempt income from securities and bank owned life insurance increased while total pre-tax income declined from the large grain credit loss. During 2012, the effective income tax rate recorded with the gain on purchase of Marathon was 14.7% due to the large gain recognized on purchase of their tax exempt securities portfolio. Excluding the after tax gain on purchase of Marathon, the 2012 effective tax rate would have been 31.3%, the same as seen during 2011. Refer to Item 8, Note 17 of the Notes to Consolidated Financial Statements for additional tax information. We expect the 2015 effective tax rate to approximate the 31.1% seen during 2014.

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. An allowance for loan losses is maintained for incurred losses inherent but yet unidentified in the loan portfolio due to past conditions, as well as specific allowances for loss related to individual problem loans. The allowance for loan losses represents our estimate of an amount adequate to provide for probable credit losses in the loan portfolio based on current economic conditions and past events that will result in future losses. Provisions to the allowance for loan losses are recorded as a reduction to income. Actual loan loss charge offs are charged against the allowance for loan losses when incurred.

The adequacy of the allowance for loan losses is assessed via ongoing credit quality review and grading of the loan portfolio, past loan loss experience, trends in past due and nonperforming loans, existing economic conditions, loss exposure by loan category, results of independent and internal loan reviews, and estimated future losses on specifically identified problem loans. We have an internal risk analysis and review staff that continuously reviews loan quality. Accordingly, the amount charged to expense is based on our multi-factor 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. In addition to coverage from the allowance for loan losses, nonperforming loans are secured by various collateral including business, real estate and consumer collateral. Loans charged off are subject to ongoing review and specific efforts are taken to maximize recovery of principal, accrued interest, and related expenses.

The allocation of the year-end allowance for loan losses for each of the past five years based on our estimate of loss exposure by category of loans is shown in Table 13. Our allocation methodology focuses on changes in the size and character of the loan portfolio, current economic conditions, the geographic and industry mix of the loan portfolio, and historical losses by category. The total allowance is available to absorb losses from any segment of the portfolio. Management allocates the allowance for loan losses by pools of risk and by loan type. We combine estimates of the allowance needed for loans analyzed individually and loans analyzed on a pool basis. The determination of allocated reserves for larger commercial loans involves a review of individual higher-risk transactions, focused on loan grading, and assessment of projected cash flows and possible resolutions of problem credits. While we use available information to recognize losses on loans, future adjustments may be necessary based on changes in economic conditions and future impacts to specific borrowers.

Table 13: Allocation of Allowance for Loan Losses

As of December 31,	2014					2013					2012					2011					2010
			% of					% of					% of					% of					% of
	Dollar		principal			Dollar		principal			Dollar		principal			Dollar		principal			Dollar		principal

Commercial, industrial,
municipal, and agricultural	$	925		0.74	%	$	1,661		1.36	%	$	1,687		1.32	%	$	1,743		1.44	%	$	2,736		2.14	%
Commercial real estate mortgage		1,783		0.78	%		1,958		0.89	%		2,129		1.02	%		2,290		1.17	%		3,304		1.72	%
Residential real estate mortgage		1,366		0.84	%		995		0.62	%		1,104		0.79	%		627		0.56	%		211		0.19	%
Consumer and individual		77		2.14	%		61		1.72	%		77		1.64	%		103		2.81	%		213		5.42	%
Impaired loans		2,258		11.79	%		2,108		13.36	%		2,434		19.57	%		3,178		18.46	%		1,496		13.10	%

Totals	$	6,409		1.20	%	$	6,783		1.31	%	$	7,431		1.53	%	$	7,941		1.78	%	$	7,960		1.81	%

The following table presents our allowance for loan loss activity by loan category during the five years ended December 31, 2014.

Table 14: Loan Loss Experience

Years ended December 31	2014			2013			2012			2011			2010

Average balance of loans for period	$	523,712		$	508,454		$	462,237		$	443,709		$	443,293

Allowance for loan losses at beginning of year	$	6,783		$	7,431		$	7,941		$	7,960		$	7,611

Loans charged off:

Commercial, industrial, municipal, and agricultural		215			3,650			128			867			454
Commercial real estate mortgage		41			174			518			236			448
Residential real estate mortgage		694			850			629			367			462
Consumer and individual		19			69			57			117			101

Total charge-offs		969			4,743			1,332			1,587			1,465

Recoveries on loans previously charged-off:

Commercial, industrial, municipal, and agricultural		4			29			6			166			7
Commercial real estate mortgage		3			33			4			6			–
Residential real estate mortgage		19			6			21			–			8
Consumer and individual		9			12			6			6			4

Total recoveries		35			80			37			178			19

Net loans charged-off		934			4,663			1,295			1,409			1,446
Provision for loan losses		560			4,015			785			1,390			1,795

Allowance for loan losses at end of year	$	6,409		$	6,783		$	7,431		$	7,941		$	7,960

Ratio of net charge-offs during the year to average loans		0.18	%		0.92	%		0.28	%		0.32	%		0.33	%

Ratio of allowance for loan losses to loans receivable at end of year		1.20	%		1.31	%		1.53	%		1.78	%		1.81	%

2014 compared to 2013

Provision for estimated loan losses was $560 during 2014 compared to $4,015 during 2013, which included $3,340 provision for the large grain credit loss. Excluding this provision from 2013, provision for loan losses declined $115, or 17.0%, during 2014 compared to proforma 2013. The loss on foreclosed assets during 2014 was $233 compared to $428 in 2013, a decline of $195, or 45.6%, on a $236 decline in loss on sale of foreclosed assets and partial charge-offs from declines in market value during 2014. Taken together 2014 total credit losses were $793 in 2014 compared to $1,103 in 2013 (excluding the $3,340 large grain loss), a decline of $310, or 28.1%. Refer to Note 6 of the Notes to Consolidated Financial Statements for a summary of activity in foreclosed assets during the three years ended December 31, 2014. Improving general credit trends within our portfolio and a slowly improving local economy contributed to the decline in credit costs during 2014.

Net charge-offs of loan principal were $934 during 2014 compared to $4,663 ($1,323 excluding the large grain loss). The most significant charge-off during 2014 included a $497 partial charge-off (equal to 46% of loan principal) of a jumbo single family residential mortgage loan to reflect net realizable value pending potential foreclosure reflecting market value decline. Net loan charge-offs as a percentage of average total loans was .18% during 2014 compared to .92% during 2013 (.26% excluding the large grain loan charge-off). The largest 2013 charge-off was the $3,340 grain loan, which was 72% of total charge-offs. We continue to pursue all available channels for recovery of a portion of the grain credit loss and are cautiously optimistic concerning some amount of significant future recovery, although the timing and amount of such recovery are still uncertain. At December 31, 2014, the allowance for loan losses was $6,409, or 1.20% of total loans (50% of nonperforming loans), compared to $6,783, or 1.31% of total loans (79% of nonperforming loans) at December 31, 2013.

Allowance for inherent loan losses provided for performing loans collectively evaluated for impairment was .80% of loan principal outstanding at December 31, 2014, compared to .92% at December 31, 2013. Required reserves declined during 2014 as losses on commercial related loans, representing 69% of total gross loans declined, as well as continuing a trend of lower net charge-offs in those commercial types, which form the basis for estimated loss needs. In addition, no significant commercial related problem loans were newly identified. However, inherent losses on residential real estate loans increased from .62% of loan principal at December 31, 2013 to .84% of loan principal at December 31, 2014, reflecting a trend of higher loss rates. The loan loss provision during 2015 is expected to increase slightly from the $560 recorded during 2014 on increased organic loan growth during 2015 compared to 2014. However, future provisions could be impacted by loan competition, which could reduce reserve needs, and the actual amount of impaired and other problem loans identified by internal procedures or regulatory agencies, which could increase reserve needs.

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. Nonperforming assets aggregating to $500 or more, measured by gross principal outstanding per credit relationship, included six relationships at December 31, 2014 totaling $6,227, compared to three relationships at December 31, 2013 totaling $2,031. The majority of the increase during 2014 in large problem relationships was due to the restructuring of the $2,775, municipal loan. Specific reserves maintained on these large problem loans were $802 at December 31, 2014 and $462 at December 31, 2013.

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 4.5% at December 2014 compared to 5.7% at December 2013. The unemployment rate in Oneida County, Wisconsin was 8.3% at December 2014 compared to 8.6% at December 2013. The unemployment rate in Vilas County, Wisconsin was 9.4% at December 2014 compared to 10.7% at December 2013. The unemployment rate for all of Wisconsin (not seasonally adjusted) was 5.0% at December 2014 compared to 5.8% at December 2013.

A local economic outlook survey of business owners recently published by the Chamber of Commerce for our market area points to expectations of continued slow improvement in the local economy but with modest local capital expansion by businesses. The greatest limitation to growth according to local business owners is the inability to find well trained or qualified labor, and economic expansion is expected to occur later in 2015. While the general credit quality of our loan portfolio and the level of identified problem loans continues to improve, the local economic conditions are fragile with slower growth in central and northern Wisconsin compared to many areas in the United States. During 2012, 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 have, 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.

2013 compared to 2012

Provision for estimated loan losses increased significantly to $4,015 during 2013 compared to $785 in 2012, up 3,230, or 411%. We recorded a $3,340 provision for loan losses during the September 2013 quarter due to the write down of a loan to a grain commodities dealer who was discovered to have misrepresented inventory collateral, financial statements, inventory records, and federal warehouse receipts taken as collateral which impacted several banks. The borrower and its operations remain under investigation by the authorities. Separate from the large grain loss, we recorded a $675 provision for loan losses during 2013 compared to a provision of $785 during 2012, a decline of $110, or 14.0%. The loss on foreclosed assets was $428 during 2013 compared to $573 during 2012, a decline of $145, or 25.3%. Taken together, 2013 credit costs excluding the large grain loss were $1,103 compared to $1,358 in 2012, a decline of $255, or 18.8%.

Net charge-offs of loan principal were $4,663 during 2013 ($1,323 if the large grain charge-off is excluded) compared to $1,295 during 2012. The most significant loan charge-offs during 2013 included the large $3,340 grain charge-off (outlined in detail below and equal to 100% of the unpaid loan principal at time of charge-off), $143 related to a residential 2^nd mortgage used to fund a plumbing contractor (85% of loan principal), $125 related to business financing for a beautician (74% of loan principal), and $105 related to financing mobile home park rental real estate (51% of loan principal), which together represented 80% of all 2013 net charge-offs. The most significant loan charge-offs during 2012 were $282 (equal to 40% of the unpaid loan principal at time of charge-off) related to a restaurant operation including its owner occupied commercial real estate, $147 (83% of loan principal) related to a property owner and manager of non-owner occupied low cost 1 to 4 family rental housing, and $125 (73% of loan principal) related to a retail power equipment sales operation including its owner occupied commercial real estate. These three foreclosures represented 43% of all 2012 net charge-offs.

Allowance for inherent loan losses provided for performing loans collectively evaluated for impairment was .92% of loan principal outstanding at December 31, 2013, compared to 1.04% at December 31, 2012. Required reserves declined during 2013 as nonperforming loans declined 16.6% and no significant new problem loans were identified. Net loan charge-offs as a percentage of average loans outstanding were .92% during 2013 (.26% excluding the large grain loan charge-off) compared to .28% during 2012.

The $3,340 commercial line of credit loss recorded in 2013 resulted from a customer fraud associated with pledges of single party grain inventory represented by federal warehouse receipts or other inventory records to multiple parties as collateral and misrepresented inventory records and financial statements. We had a lending relationship with the borrower for several years, dating back to 2008. Our monitoring of the loan relationship included weekly debtor’s certificates demonstrating weekly collateral position of the Bank’s loans. In addition, as grain was sold and proceeds came to reduce the Bank’s loan balance, we normally would re-advance on the revolving lines of credit based on new collateral pledged (federal warehouse receipts and contracts for sale of grain pledged to the Bank). The loans had performed as required from the origination date until August 2013 when the misrepresentation was uncovered. Three other unrelated banks were also involved in the collateral based financing arrangement. One of the parties was a loan participant with us, and the other two parties operated independently from all the other banks in the arrangement. Our loan participant held an inventory line of credit outstanding of $2.0 million at the time the problem was uncovered, and the other two banks held approximately $5.0 million and $3.7 million, respectively. In total, including our $3.3 million of loan principal, there was $14.0 million in debt financing the collateral operations at the time the misrepresentation was uncovered. Based on information provided to us by others, the borrower also owed an additional $15.2 million on real estate mortgage debt outstanding at the time the collateral misrepresentation was uncovered, none of which was held by us or our loan participant.

In addition, recovery of our value from remaining collateral was hurt by poorly worded inter-creditor agreements related to the collateral and its cash proceeds as well as procedural problems related to lien perfections. To identify if similar risks remain with other borrowers in our loan portfolio, we considered which factors were most significant in allowing the current large credit loss to occur. The primary factors contributing to the loss included:

●

Multiple inventory and line of credit financing lenders in the relationship, none of which were considered to be the clearly stated lead lender.

●

Failure to maintain an interbank creditor agreement with all line of credit lenders that allowed completed inventory collateral audits to be concurrently reconciled to inventory records and financial statements provided to all lenders at the time of the inventory audit.

●

Failure to require audited year-end financial statements rather than relying on reviewed year-end financial statements.

●

Failure to identify counterfeit federal warehouse grain receipts not normally taken by us as collateral.

Based on these heightened risk factors, we reviewed our existing loan portfolio to identify individual notes with a principal balance or outstanding principal commitment of at least $500 in which a significant collateral type in the borrowing relationship included one of the following collateral types:

●

Fungible inventory (i.e., commodities such as fuel, agricultural products, timber, etc.)

●

Readily saleable retail inventory units (i.e., vehicles, boats, etc.)

●

Accounts receivable

●

Other nontraditional collateral types

From this population, we selected all loans having at least one of the following characteristics for in-depth credit review:

●

Borrower is not required to provide audited year-end financial statements.

●

Existence of multiple unrelated lenders involved in the aggregated borrower relationship.

●

Independent collateral audits are not regularly performed, or those that are performed are not also concurrently reconciled back to the borrower’s financial statements taking into account the debt positions with all lenders involved in the relationship.

Based on these selection criteria conducted during the December 2013 quarter, we identified 44 individual notes with $53,493 in outstanding total principal (representing 10.2% of company-wide gross loans receivable) and $23,876 in additional unused commitments at September 30, 2013. Included in this total were 16 notes with $24,795 in outstanding principal (and $14,215 in unused commitments) for which either an audited financial statement or a periodic collateral field audit are currently obtained, but not both. Separate from these 44 notes, there were an additional 15 individual lines of credit with no outstanding principal outstanding but unused commitments of $11,188 at September 30, 2013. The financial statement attestation level, credit documentation, and collateral arrangements for each borrower included in this selection were reviewed to determine if areas of unidentified credit risk existed, and whether they could be reduced by eliminating or mitigating these risk factors.

The review of these specific credits did reveal 4 total borrowers (including 6 total notes) with outstanding aggregate principal of $16,054 and unused commitments of $7,546 that required follow-up to increase the level of financial statement attestation or conduct a current audit of collateral. The detailed credit reviews of all 59 loans noted above having similar risk characteristics to the large 2013 grain loss did not identify any significant unknown elevated risk factors that would require the credit to be classified as an impaired loan. In addition, the results of this credit review over the selected loans resulted in no increase to the provision for loan losses during 2013.

In addition to actions with the specific borrowers noted above, we implemented lending policy changes as outlined below. Many of these procedures were already utilized on most of our credits as needed but had not yet been incorporated as part of the written loan policy requirements until now.

●

Requirement for independent document and credit review upon origination for loans above a certain principal commitment, and, for loans of any significant size, whenever a relationship is being downgraded from a performing loan grade (grades 1 through 4) to the watch grade or lower (grades 5 through 7).

●

Require borrowers to which we make a large loan principal commitment over a certain dollar amount to provide audited financial statements, or, in the case of loans secured by inventory or accounts receivable, periodic collateral audits in lieu of an audited year-end financial statement if appropriate.

●

In the case of multiple unrelated lenders providing credit secured by inventory or accounts receivable, require all lenders to agree to a combined inter-creditor agreement to coordinate collateral audit activities, loan servicing, and other management functions.

We continue to seek recovery of principal associated with the large grain loss although the intended grain commodity collateral represented by federal warehouse receipts was liquidated under the administration of the United States Department of Agriculture for the payment of debts to farmers who had consigned grain to our loan customer and had not yet been paid. In addition, the remaining operating cash from accounts receivable on sale of grain is being sought by several independent banks with competing claims of various documentation quality. Owners and principals of our customer are not expected to have significant remaining personal assets available to their creditors for collection. We have also filed a claim under our fidelity insurance policy for loss reimbursement, although it is not yet known whether loss coverage will be extended, and if extended, the extent of coverage available. Due to these challenges, extended recovery timeline, and unknowns associated with principal recovery, the entire loan balance of $3,340 was charged off against the allowance for loan losses during 2013. Any future recovery of principal would be recorded as an increase to the allowance for loan losses, which would likely result in increased income from a reduction to the regular provision for loan losses expense.

2012 compared to 2011

Provision for estimated loan losses declined to $785 in 2012 from $1,390 in 2011, down 43.5%. The provision for loan losses decreased during 2012 as fewer new problem loans were identified and some large existing problem loans were favorably resolved or resolved within projected loss parameters using existing reserves expensed in prior years. During 2012, approximately $3.8 million of new loans were added to nonperforming loans, down 57% from approximately $8.9 million in loans added to nonperforming loans during 2011. In addition, losses on foreclosed assets declined $624, or 52.1%, to $573 during 2012 compared to $1,197 during 2011. The decline was due to a decrease in partial write-downs of foreclosed assets as local real estate values stabilized. During 2012, provision for partial write-downs charged to loss on foreclosed assets was $485 compared $992 during 2011, down $507. Total credit costs as represented by the provision for loan losses and loss on foreclosed assets were $1,358 during 2012 and $2,587 during 2011, down $1,229, or 47.5%.

Net charge-offs of loan principal were $1,295 during 2012 compared to $1,409 during 2011, a decline of $114, or 8.1%. The most significant loan charge-offs during 2012 were $282 (equal to 40% of the unpaid loan principal at time of charge-off) related to a restaurant operation including its owner occupied commercial real estate, $147 (83% of loan principal) related to a property owner and manager of non-owner occupied low cost 1 to 4 family rental housing, and $125 (73% of loan principal) related to a retail power equipment sales operation including its owner occupied commercial real estate. These three foreclosures represented 43% of all 2012 net charge-offs. The next six largest 2012 charge-off relationships incurred $380 in aggregate charge-offs, averaging $63 per relationship. Therefore, the nine largest charge-off relationships totaled $934, or 72% of all 2012 net charge-offs. The majority of gross loan charge-offs during 2011 were related to six borrowers totaling $1,143, or 72% of all charge-offs, with the largest charge off of $700 related to a line of credit to a building supply company.

Nonperforming 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 15 presents nonperforming loans and assets by category for the five years ended December 31.

Table 15: Nonperforming Loans and Foreclosed Assets

As of December 31,	2014			2013			2012			2011			2010

Nonaccrual loans (excluding restructured loans)	$	3,983		$	3,704		$	6,491		$	5,893		$	7,127
Nonaccrual restructured loans		4,388			3,636			1,224			2,081			1,912
Restructured loans not on nonaccrual		4,391			1,299			2,965			6,220			2,383
Accruing loans past due 90 days or more		–			–			–			–			–

Total nonperforming loans		12,762			8,639			10,680			14,194			11,422
Nonaccrual trust preferred investment security		–			–			–			750			–
Foreclosed assets		1,661			1,750			1,774			2,939			4,967

Total nonperforming assets	$	14,423		$	10,389		$	12,454		$	17,883		$	16,389
Impaired loans considered to be performing	$	6,386		$	7,136		$	1,969		$	3,026		$	6,398

Total nonperforming loans as a percent of gross loans		2.40	%		1.67	%		2.20	%		3.19	%		2.60	%
Total nonperforming assets as a percent of total assets		1.96	%		1.46	%		1.75	%		2.87	%		2.64	%

Loans are placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Previously accrued and uncollected interest on such loans is reversed, and future payments received are applied in full to reduce remaining loan principal. No income is accrued or recorded on future payments until the loan is returned to accrual status. 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.

Upon return to accrual status, the interest portion of past payments that were applied to reduce nonaccrual principal is taken back into income. The interest that would have been reported in 2014 if all such loans had been current throughout the year in accordance with their original terms was approximately $487 in comparison to $32 actually recorded in income. The interest that would have been reported in 2013 if all such loans had been current throughout the year in accordance with their original terms was approximately $505 in comparison to $108 actually recorded in income. The interest that would have been reported in 2012 if all such loans had been current throughout the year in accordance with their original terms was approximately $564 in comparison to $125 actually recorded in income.

Troubled debt restructured loans (“TDR”) are also included in nonperforming loans. Restructured loans involve the granting of concessions to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate, or capitalization of unpaid real estate taxes or unpaid interest that the lender would not normally grant. The majority of restructured loans represent conversion of amortizing commercial purpose loans to interest only loans for a temporary period to increase the problem borrower’s cash flow. The remaining restructured loans granted a lower interest rate to borrowers for a temporary period to increase borrower operating cash flow. Such loans are subject to management review and ongoing monitoring and are made in cases where the borrower’s delinquency is considered short-term from circumstances the borrower is believed able to overcome or which would reduce our estimated total credit loss on the relationship. All restructured loans, both nonaccrual and accrual status, remain classified as nonperforming loans. Therefore, some borrowers continue to make substantially all required payments while maintained as nonperforming loans.

Substantially all of our residential mortgage loans originated for and held in our loan portfolio were based on conventional and long standing underwriting criteria and are secured by first mortgages on homes in our local markets. We were never an originator of higher risk loans such as option ARM products, high loan-to-value ratio mortgages, interest only loans, subprime loans, or loans with initial teaser rates that can have a greater risk of non-collection than other loans. At December 31, 2014, approximately $898 of loans receivable were 1 – 4 family home equity or junior lien mortgage loans in which the maximum commitment amount of the line of credit plus existing senior liens is greater than 100% of the underlying real estate value, or the loan was in a 3^rdmortgage position or lower, compared to $760 at December 31, 2013, and $1,554 at December 31, 2012. Such loans were not originated as part of a program to add higher yielding loans to our portfolio but were loans made on a case by case basis and individually underwritten based on the credit quality of the individual borrower. We do not maintain a formal residential mortgage modification program for delinquent residential mortgage borrowers.

2014 compared to 2013

Total nonperforming assets increased $4,034, or 38.3%, to $14,423 at December 31, 2014 compared $10,389 at December 31, 2013. The increase in nonperforming assets includes a $2,775 municipal development loan restructured during 2014, representing 69% of the total increase in nonperforming assets during 2014. At December 31, 2014, the allowance for loan losses was $6,409, or 1.20% of total loans (50% of nonperforming loans), compared to $6,783, or 1.31% of total loans (79% of nonperforming loans) at December 31, 2013. Approximately 43% of total nonperforming assets are made up of six individual nonperforming relationships greater than $500 at December 31, 2014 compared to 20% (three relationships) of nonperforming assets at December 31, 2013 and 11% (two relationships) of nonperforming assets at December 31, 2012. Total nonperforming assets as a percentage of tangible common equity including the allowance for loan losses (the “Texas Ratio”) as shown in Table 35 was 21.90% at December 31, 2014 compared to 16.80% at December 31, 2013 and 20.54% at December 31, 2012. For the purpose of this measurement, tangible common equity is equal to total common stockholders’ equity less mortgage servicing right assets.

Approximately 43% of total nonperforming assets were represented by the following aggregate credits or foreclosed properties greater than $500 at December 31, 2014:

Table 16: Largest Nonperforming Assets at December 31, 2014 ($000s)

Collateral Description	Asset Type	Gross Principal			Specific Reserves

Municipal tax incremental financing district (TID) debt issue	Accrual TDR	$	2,775		$	–
Timber byproduct processing equipment and receivables	Nonaccrual		905			316
Non-owner occupied light manufacturing facility real estate	Nonaccrual		682			135
Owner occupied commercial office and residential rentals	Nonaccrual		671			123
Owner occupied multi-use, multi-tenant professional building	Nonaccrual		610			77
Single family residential home first mortgage	Nonaccrual		584			151

Total listed nonperforming assets		$	6,227		$	802
Total bank wide nonperforming assets		$	14,423		$	2,067
Listed assets as a percent of total nonperforming assets			43	%		39	%

The following Table 17 presents the following aggregate credits greater than $500 considered to be impaired but performing loans at December 31, 2014. 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. Such loans are not included in nonperforming assets in Table 16 above.

Table 17: Largest Performing, but Impaired Loans at December 31, 2014 ($000s)

Collateral Description	Asset Type	Gross Principal			Specific Reserves

Timber byproduct processing real estate and transportation equipment	Impaired	$	2,477		$	18
Owner occupied light manufacturing facility and equipment	Impaired		1,678			–
Owner occupied cabinetry contractor real estate and equipment	Impaired		716			–

Total listed performing, but impaired loans		$	4,871		$	18
Total performing, but impaired loans		$	6,386		$	191
Listed assets as a percent of total performing, but impaired loans			76	%		9	%

The following section summarizes activity associated with the three large nonperforming loans shown in Table 18 as of December 31, 2013 and their activity during 2014 as well as three new nonperforming loans added to Table 16 during 2014.

Prior to 2012, we financed a municipal water utility project and other developmental costs within a local tax incremental financing district (TID), in part to bring water to a large paper manufacturing factory within the small village. During 2012, the factory announced it was ceasing production, laying off all employees and shuttering the factory. While the water utility and the residential housing improvements continued to provide some real estate tax cash flow from within the TID, the cash flow was not sufficient to repay the debt according to the original amortization schedule. Therefore, the TID gained permission from the State of Wisconsin during 2014 to extend the life of the TID as “distressed” and we restructured the amortization schedule of the municipal debt. The municipality also made $315 of scheduled principal payments during 2014. Current cash flow on the existing projects within the TID is expected to be able to fully service the debt under the new terms, and the $2,775 remaining principal as shown in Table 16 was classified as an accruing troubled debt restructured loan at December 31, 2014 with no specific allowance reserves for loss.

During 2013, our commercial borrower in the timber byproduct processing industry lost a major customer and experienced significantly reduced cash flow. Loan payments later become delinquent and some of the loans were reclassified to nonaccrual status. We have a traditional commercial lending relationship with this company in addition to a large loan with an 80% guarantee by the United States Department of Agriculture. To assist our borrower in the short term, we consolidated the traditional commercial loans into one loan for a 1 year term with interest only payments while the terms of the USDA guaranteed loan were unchanged. Although the borrower has remained current on the restructured interest only note, a significant collateral shortfall would exist upon foreclosure, so the $905 restructured loan as shown in Table 16 remained on nonaccrual status at December 31, 2014 with a specific loss allowance of $316. Although the borrower appears to be experiencing a recovery with increasing cash flows, we are unable to predict the final timing or resolution of this problem loan relationship. The related USDA guaranteed loan has remained current on its payments since origination and is well collateralized. Therefore, the $2,477 guaranteed loan remains on accrual status as an impaired loan at December 31, 2014 as shown in Table 17.

During 2010, we restructured the loan terms on $754 of loan principal to lower the interest rate on existing debt with a borrower in the cabinetry contracting industry to increase cash flow during a large decline in customer sales. During 2011, the borrower sold the business to a competitor but retained a mortgage on the production facility which was leased to the new business owner. At December 31, 2012 and 2013, this loan was classified as a performing restructured loan with outstanding principal of $752 (Table 20) and $731 (Table 18), respectively. During 2013, the original lessee ceased to use the production facility which sat idle at December 31, 2013. In response, the remaining principal balance was reclassified as a nonaccrual loan at December 31, 2013. The borrower was able to rent the facility to another manufacturer during 2014 and, although the loan remains on nonaccrual status, regular principal payments are being received. The remaining principal balance was $682 at December 31, 2014 as shown in Table 16. The specific allowance associated with this loan increased from $87 at December 31, 2012 to $304 at December 2013 to reflect non-usage of the building, a lower appraisal value, and the likelihood of bank foreclosure and liquidation of the collateral. During 2014, a new appraisal was obtained, which reflected improving commercial real estate fair values, which when combined with the lower principal balance, lowered specific allowances on this loan to $135 at December 31, 2014.

During 2013, we downgraded one borrower’s various non-owner occupied commercial real estate loans totaling $642 to nonaccrual status. The credit extension originally financed the purchase of real estate for rental purposes as well as for equipment and working capital needs for a related new restaurant. During 2013, the restaurant closed and cash flows were negatively impacted by tenant payment delinquencies and the need for building capital improvements which resulted in the borrower falling behind in property tax payments. During 2014, the loan was restructured to pay past due property taxes, resulting in unpaid principal of $671 at December 31, 2014 as shown in Table 16. The customer continues to make payments under the terms of the new note, although the loan is maintained on nonaccrual status and we cannot predict the final timing or resolution of this problem loan. Specific loss allowances on these loans were $123 at December 31, 2014 compared to $51 at December 31, 2013 based on property liquidation values in the potential event of bank foreclosure and liquidation.

During 2011, we restructured an owner occupied commercial real estate loan with an insurance agency. The building was constructed during 2008 and included additional space to rent to unrelated service businesses. The debt was restructured to extend the amortization period to support declining borrower cash flow as portions of the building remained vacant. The restructured loan of $664 was maintained on accrual status as reflected in Table 20 at December 31, 2012 with a specific allowance of $182, and was reflected in Table 18 with restructured principal of $658 and a specific allowance of $107 at December 31, 2013. Customer financial performance deteriorated during 2013 and we reclassified the $658 loan to nonaccrual status due to the increased likelihood of bank foreclosure and liquidation. After reducing the remaining principal balance to $610 as shown in Table 16, the borrower ceased payments during 2014 and foreclosure of the property appears likely. The specific allowance associated with the loan totaled $77 at December 31, 2014, down from $107 at December 31, 2013 on payments of principal, which decreased from $182 at December 31, 2012 from an updated favorable property appraisal obtained during 2013.

During 2014, a $1,075 single family residential jumbo first mortgage loan became delinquent as the borrower is disputing a potential change in ownership of the home via divorce proceedings and ceased payments, causing us to classify the loan as nonaccrual. The mortgage is significantly under collateralized in today’s real estate market although the borrower continues income levels sufficient to service the required debt payments. During 2014, we recorded a $497 partial charge-off of the loan reflecting the collateral shortfall and retain $584 in gross principal as shown in Table 16. We further maintained a $151 specific allowance for loss at December 31, 2014 due to the uncertainty surrounding the resolution of the loan.

2013 compared to 2012

Total nonperforming assets decreased $2,065, or 16.6%, to $10,389 at December 31, 2013 compared to $12,454 at December 31, 2012. At December 31, 2013, the allowance for loan losses was $6,783, or 1.31% of total loans (79% of nonperforming loans), compared to $7,431, or 1.53% of total loans (70% of nonperforming loans) at December 31, 2012. Approximately 20% of total nonperforming assets are made up of three individual nonperforming relationships greater than $500 at December 31, 2013 compared to 11% (two relationships) of nonperforming assets at December 31, 2012 and 52% (nine relationships) at December 31, 2011.

Approximately 20% of total nonperforming assets were represented by the following aggregate credits or foreclosed properties greater than $500 at December 31, 2013:

Table 18: 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	%

The following Table 19 presents the following aggregate credits greater than $500 considered to be impaired but performing loans at December 31, 2013. 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. Such loans are not included in nonperforming assets in Table 18 above.

Table 19: 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	%

The trend of each large nonperforming asset reflected in Table 18 at December 31, 2013 was previously addressed under the subheadings of 2014 compared to 2013 above.

2012 compared to 2011

Total nonperforming assets decreased $5,429, or 30.4%, to $12,454 at December 31, 2012 compared to $17,883 at December 31, 2011. Most of the improvement occurred during the December 2012 quarter when $3,345 from two performing restructured loan relationships held at December 31, 2011 repaid without loss, and our largest foreclosed asset with a basis of $1,280 at December 31, 2011 was sold. These three transactions represented 85% of the decline in nonperforming assets during 2012. At December 31, 2012, the allowance for loan losses was $7,431, or 1.53% of total loans (70% of nonperforming loans), compared to $7,941, or 1.78% of total loans (56% of nonperforming loans) at December 31, 2011.

Approximately 11% of total nonperforming assets were represented by the following aggregate credits or foreclosed properties greater than $500 at December 31, 2012:

Table 20: Largest Nonperforming Assets at December 31, 2012 ($000s)

Collateral Description	Asset Type	Gross Principal			Specific Reserves

Owner occupied cabinetry contractor real estate and equipment	Accrual TDR	$	752		$	87
Owner occupied multi use, multi-tenant real estate	Accrual TDR		664			182

Total listed nonperforming assets		$	1,416		$	269
Total bank wide nonperforming assets		$	12,454		$	2,207
Listed assets as a percent of total nonperforming assets			11	%		12	%

The following Table 21 presents the following aggregate credits greater than $500 considered to be impaired but performing loans at December 31, 2012. 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. Such loans are not included in nonperforming assets in Table 20 above.

Table 21: Largest Performing, but Impaired Loans at December 31, 2012 ($000s)

Collateral Description	Asset Type	Gross Principal			Specific Reserves

Owner occupied cabinetry contractor real estate and equipment	Impaired	$	686		$	25

Total listed performing, but impaired loans		$	686		$	25
Total performing, but impaired loans		$	1,969		$	227
Listed assets as a % of total performing, but impaired loans			35	%		11	%

The trend and resolution of each large non performing asset reflected in Table 20 at December 31, 2012 was previously addressed under the subheading of 2014 compared to 2013 above. However, certain nonperforming loans at December 31, 2011 were resolved during 2012 or were reduced to a remaining asset value less than $500 as outlined below.

During 2011, we restructured commercial mortgage loans collateralized by a hotel in Northern Wisconsin to change borrower payments from amortizing to interest only due to a decline in revenue. Gross loan principal totaled $1,767 at December 31, 2011. During 2012, the borrower used the sale proceeds of an unrelated commercial property to repay the remaining balance in full without loss.

During 2011, we restructured commercial mortgage loans collateralized by cranberry producing agricultural real estate to change from amortizing payments to interest only payments as the property owner sought to sell the operation or partner with new investors. Gross loan principal totaled $1,578 at December 31, 2011. During 2012, the borrower used the proceeds from sale of the cranberry operation to repay the remaining balance in full without loss.

During 2009, $3.3 million of foreclosed properties originally related to a $5.8 million land development loan were sold at auction at a loss of $452 excluding a previously expensed $125 auction marketing fee. The remaining $2,477 foreclosed asset was further written down $427 to an estimated fair value of $2,050 at December 31, 2009 for total valuation losses on the property of $1,004 during 2009 when including the marketing fee. During 2010, one of the four remaining individual properties was sold and the entire $283 sale proceeds were applied to reduce cost basis of the remaining properties. During 2011, the remaining properties were further written down an additional $487 due to declining real estate values for this type of vacation property which left a remaining foreclosed asset of $1,280 at December 31, 2011. During 2012, we recorded a final write-down of value of $280 and later sold the remaining properties for a final loss of $57. Of the original $5.8 million development, credit losses from charge offs, write-down, or marketing costs were $1,004 during 2009, $487 during 2011, and $337 during 2012, for total losses of $1,828, or approximately 32% of the original development.

During 2010, we entered into a restructuring agreement on a $1,177 commercial real estate loan with a local developer and owner of multi-family apartment complexes to extend the amortization period on existing debt to increase cash flow available to the developer to meet real estate tax and other obligations. At December 31, 2011, the $1,240 debt was maintained on accrual status with a specific loss reserve of $302. During 2012, we entered into an agreement with the borrower for the sale of a portion of the collateral and payment of the proceeds on the outstanding balance and recognized a $32 loan charge-off. At December 31, 2012, we retained a junior residential mortgage lien on the borrower’s home totaling $266 classified as an accrual basis restructured loan on which a specific allowance for losses of $186 was maintained. At December 31, 2014, remaining principal totaled $248 on which a $171 specific reserve was maintained and the loan was considered as an accruing troubled debt restructuring.

During 2011, we were informed by Johnson Financial Capital Trust of its intent to defer payment of interest on its 7% trust preferred capital debentures. Johnson Financial Group is the holding company for Johnson Bank, headquartered in Racine, Wisconsin and is the second largest bank headquartered in Wisconsin. Our investment in the $750 debentures was placed on nonaccrual status and no interest income was recorded during 2011. During 2012, the family ownership of Johnson Financial Group recapitalized the bank with approximately $235 million in equity capital and received approval by the regulators to repay all past due interest associated with our investment. During 2012, $105 of interest income was recorded on this investment, reflecting all earned income from 2011 and 2012. The investment was considered to be performing at December 31, 2014, 2013, and 2012.

During 2009, we restructured a $613 loan secured by an owner occupied restaurant to increase borrower cash flow and allow the business to continue operating. During 2012, the restaurant closed and we foreclosed on the remaining assets and incurred a $282 charge-off, which was our largest loan charge-off during 2012. At December 31, 2012, foreclosed assets included $302 of value assigned to the property based on expected future sales proceeds and selling costs but was written down to $225 at December 31, 2013 reflecting a declining fair market value. Foreclosed assets continued to include this $225 asset at December 31, 2014. During January 2015, the largest of the two property parcels was sold and all proceeds were applied against foreclosed assets, reducing the remaining asset to $20. Further write-downs of value on the property are not expected.

During 2007, we entered into a syndicated construction loan agreement sold by Bankers’ Bank Madison, Wisconsin, for construction of vacation condos and an adjacent water park near Hollister, Missouri. The construction loan was intended to be repaid by the proceeds from a municipal tax incremental financing debt issue by the local municipality. When the credit markets for such financing dried up, the project was unable to continue and land development work ceased. The loan participants obtained the property in foreclosure during 2009. The original fair value estimate of the completed project was approximately $24 million. At the time of foreclosure, we valued our asset using a new liquidation value appraisal based on our approximately 7% ownership of the project resulting in a cost basis of $792 at December 31, 2010 and 2009. During 2011 through 2013, several appraisals were obtained, each with a declining value, resulting in a foreclosed asset of $587 at December 31, 2011, $450 at December 31, 2012, and $237 at December 31, 2013 resulting in partial write-downs of $205, $137, and $213 in 2011, 2012, and 2013, respectively. During 2014, a portion of the property was sold with all proceeds applied to reduce foreclosed assets. At December 31, 2014, $133 remains in foreclosed assets. Further write-downs of value on the property are not expected.

ASSET GROWTH AND LIQUIDITY

Balance Sheet Changes and Analysis

Summary balance sheets at December 31 for each of the five years in the period ended December 31, 2014 are presented in Table 1 of Item 6 to this Annual Report on Form 10-K. Total assets increased $22,826, or 3.2%, to $734,367 during 2014 due to the purchase of Northwoods Rhinelander and its $21,365 loan portfolio upon purchase. A portion of deposits acquired with Northwoods Rhinelander were also used to pay down maturing wholesale funding during 2014. Total assets declined $425, less than .01%, to $711,541 during 2013 as cash and cash equivalents and investment securities on hand at the beginning of the year remaining from the Marathon purchase were used to fund loan growth and deposit growth was used to pay down out of area wholesale funding. A breakdown of the assets acquired in the purchase of Northwoods Rhinelander and Marathon are listed in Note 2 of the Notes to Consolidated Financial Statements. Presented in Table 22 below is a summary balance sheet for the five years ended December 31, 2014 as a percentage of total assets.

Table 22: Summary Balance Sheet as a Percent of Total Assets

As of December 31,	2014			2013			2012			2011			2010

Cash and cash equivalents		3.4	%		4.4	%		6.9	%		6.1	%		6.5	%
Securities		19.6	%		18.7	%		20.4	%		17.5	%		17.4	%
Total loans receivable, net of allowance		71.6	%		71.7	%		67.1	%		70.3	%		69.5	%
Premises and equipment, net		1.5	%		1.4	%		1.4	%		1.6	%		1.7	%
Bank owned life insurance		1.8	%		1.8	%		1.7	%		1.8	%		1.8	%
Other assets		2.1	%		2.0	%		2.5	%		2.7	%		3.1	%

Total assets		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Total deposits		84.8	%		81.1	%		79.5	%		77.4	%		75.0	%
FHLB advances		2.8	%		5.3	%		7.0	%		8.0	%		9.2	%
Other borrowings		1.4	%		2.9	%		2.9	%		3.2	%		5.1	%
Senior subordinated notes		0.5	%		0.6	%		1.0	%		1.1	%		1.1	%
Junior subordinated debentures		1.1	%		1.1	%		1.1	%		1.2	%		1.2	%
Other liabilities		1.0	%		1.0	%		0.9	%		1.0	%		0.9	%
Stockholders’ equity		8.4	%		8.0	%		7.6	%		8.1	%		7.5	%

Total liabilities and stockholders’ equity		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

The following table summarizes the sources and uses of cash and cash equivalents during the three years ended December 31 to identify trends in operating, financing, and investing cash flows by asset class and funding source.

Table 23: Summary Sources and Uses of Cash and Cash Equivalents

Year Ended December 31,	2014			2013			2012

Cash flows from operating activities	$	9,035		$	13,034		$	7,556
Payment of dividends to shareholders and purchase of treasury stock		(2,229	)		(1,558	)		(1,509	)

Operating cash flow retained by PSB		6,806			11,476			6,047
Net funds received from retail and local depositors		11,878			9,229			3,375
Net funds received from wholesale depositors		–			2,902			–
Net proceeds from other borrowings		–			–			1,037
Proceeds from additional capital received from shareholders		–			–			9

Cash flow retained from operations and financing before debt repayment		18,684			23,607			10,468
Net funds repaid to wholesale depositors		(7,221	)		–			(20,109	)
Net repayment of FHLB advances		(17,778	)		(12,075	)		–
Net repayment of other borrowings, net		(10,117	)		(287	)		–
Repayment of senior subordinated notes		–			(3,000	)		–

Cash flow retained from (used in) operations and financing after debt repayment		(16,432	)		8,245			(9,641	)
Funds received from sale and maturities of investment securities, net		22,605			49,312			60,068
Net redemption of bank certificates of deposit		–			2,229			–
Net funds received from customer repayment of loans receivable		4,339			–			–
Cash acquired on merger and acquisition activities		17,741			–			14,910
Redemption of FHLB capital stock		–			–			744
Proceeds from sale of nonmonetary assets		789			831			1,527

Cash flow available for investing activities growth		29,042			60,617			67,608

Net funds loaned to customers		–			(36,746	)		(10,349	)
Net funds invested in securities		(33,675	)		(40,201	)		(44,064	)
Purchase of bank certificates of deposit		(1,188	)		–			(1,981	)
Payments for purchase of FHLB capital stock		–			(50	)		–
Funds used to purchase bank-owned life insurance		–			(611	)		–
Premises and equipment capital expenditures		(595	)		(334	)		(572	)

Cash flow used in investing activities growth		(35,458	)		(77,942	)		(56,966	)

Net increase (decrease) in cash and cash equivalents held at beginning of year	$	(6,416	)	$	(17,325	)	$	10,642
Cash and cash equivalents at beginning of year		31,522			48,847			38,205

Cash and cash equivalents at end of year	$	25,106		$	31,522		$	48,847

2014 compared to 2013

Total assets were $734,367 at December 31, 2014 compared to $711,541 at December 31, 2013, up $22,826. During the year ended December 31, 2014, net loans receivable increased $15,703, including $16,591 of Northwoods Rhinelander loans purchased earlier in the year. In addition to loan growth, investment securities grew $10,878 during 2014 while cash and cash equivalents decreased $6,416. All other asset changes increased total assets by $2,661.

Total local deposits increased $52,658 on the acquisition of Northwoods Rhinelander during 2014 which were used to pay down out of area wholesale funding $32,999. All other changes decreased liabilities $1,541 while stockholders’ equity increased $4,708.

During 2015, we expect to use local deposit growth and wholesale funding as needed to fund net commercial related loan growth of $15 million to $20 million year over year compared to 2014. We do not expect to pay down a significant amount of wholesale funding during 2015 and such funding is likely to increase, potentially outpacing the increase in deposit growth.

2013 compared to 2012

Total assets were $711,541 at December 31, 2013 compared to $711,966 at December 31, 2012. During the year ended December 31, 2013, cash and cash equivalents and investment securities declined $29,255 to fund $12,777 in commercial related loan growth, up 3.7%, and $18,878 in residential real estate loan growth, up 13.5%. Since December 31, 2012, local deposits increased $9,170, up 1.8%, which were used to pay down maturing wholesale funding by $9,173, down 7.8%. Wholesale funding (including brokered certificates of deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements) was $108,908 (15.3% of total assets) at December 31, 2013 compared to $118,081 (16.6% of total assets) at December 31, 2012.

Investment Securities Portfolio

The investment securities portfolio is intended to provide us with adequate liquidity, flexible asset/liability management, and a source of stable income. In general, securities classified as available for sale include highly liquid agency issued debentures or mortgage related securities with average lives less than 5 years. Changes in the unrealized gain on available for sale securities is recorded as an adjustment to stockholders’ equity and included in the computation of comprehensive income, net of income tax effects. Conversely, securities held to maturity typically include long-term debt securities issued by municipalities with original terms of 10 to 12 years. Securities held to maturity are less liquid and have traditionally been held until maturity. Due to the long final maturity of these securities, they are more sensitive to increases in market rates which can create unrealized loss positions. Changes in the unrealized gain or loss on securities held to maturity are not reflected as an adjustment to stockholders’ equity and are not included in the computation of comprehensive income. During 2010, the entire municipal security portfolio and nonrated trust preferred securities and senior subordinated notes with fair value totaling $54,130 (including an unrealized gain of $2,552) were transferred from securities available for sale to securities held to maturity. These securities were transferred to better reflect our intent and practice to hold these long-term securities until maturity and to minimize potential volatility to stockholders’ equity from future changes in unrealized gains and losses in a rising interest rate environment. The original unrealized gain of $2,552 on the security transfer date during 2010 is being amortized against the new cost basis (equal to transfer date fair value) over the remaining life of the securities and approximately $695 (27%) of the original gain remains unamortized at December 31, 2014.

Table 24 presents the fair value of securities held by us at December 31, 2014, 2013, and 2012.

Table 24: Investment Securities Distribution – At Fair Value

	As of December 31
	2014					2013					2012
	Fair		% of			Fair		% of			Fair		% of
	Value		Portfolio			Value		Portfolio			Value		Portfolio

Securities available for sale:

U.S. Treasury securities and obligations of U.S. government agencies	$	–		0.00	%	$	999		0.75	%	$	10,027		6.79	%

U.S. agency residential mortgage backed securities		46,336		31.87	%		21,486		16.12	%		14,397		9.75	%

U.S. agency residential collateralized mortgage obligations		27,016		18.58	%		37,904		28.43	%		45,243		30.62	%

Privately issued residential collateralized mortgage obligations		29		0.02	%		105		0.08	%		173		0.12	%

Obligations of states and political subdivisions		–		0.00	%		159		0.12	%		–		0.00	%

Nonrated commercial paper		–		0.00	%		–		0.00	%		5,500		3.72	%

Nonrated SBA loan fund		950		0.65	%		950		0.71	%		–		0.00	%

Other equity securities		47		0.03	%		47		0.04	%		47		0.03	%

Total securities available for sale		74,378		51.15	%		61,650		46.25	%		75,387		51.03	%

Securities held to maturity:

Obligations of states and political subdivisions		69,191		47.60	%		69,876		52.40	%		70,455		47.68	%

Nonrated trust preferred securities		1,414		0.97	%		1,389		1.04	%		1,499		1.01	%

Nonrated senior subordinated notes		404		0.28	%		407		0.31	%		410		0.28	%

Total securities held to maturity		71,009		48.85	%		71,672		53.75	%		72,364		48.97	%

Total investment securities	$	145,387		100.00	%	$	133,322		100.00	%	$	147,751		100.00	%

At December 31, 2014, 2013, and 2012, our securities portfolio did not contain securities of any single issuer where the aggregate carrying value of such securities exceeded 10% of stockholders’ equity, except for combined senior debentures and guaranteed mortgage related securities issued by U.S. Agencies such as the FHLB, FNMA, or FHLMC.

Securities with an approximate fair value of $46,368, and $47,593, at December 31, 2014 and 2013, respectively, were pledged primarily to secure public deposits, customer overnight repurchase agreements (classified as other borrowings), and for other purposes required by law, representing approximately 33% and 36% of securities eligible for pledging at December 31, 2014 and 2013, respectively, before consideration of any pledge “haircuts” or other limitations associated with various types of securities. Securities considered ineligible for pledging include privately issued collateralized mortgage obligations, nonrated commercial paper, other equity securities, nonrated SBA loan fund, and nonrated trust preferred and senior subordinated note securities.

As a member of the FHLB system, we are required to hold stock in the FHLB based on borrowings advanced to Peoples State Bank. This stock has a purchase cost and par value of $100 per share and transfer of the stock is substantially restricted. Therefore, we do not include our FHLB Chicago stock in the investment securities Table above. The stock is recorded at cost which approximates market value. The FHLB may pay dividends in both cash and additional shares of stock. We held $2,556 of FHLB Chicago capital stock at December 31, 2014 and 2013. The current capital stock level supports FHLB total advances of $51,120. An annualized dividend rate of .51% was paid on FHLB stock during 2014 compared to .45% paid during 2013. We cannot predict if the cash dividends will continue or if they may be increased. Due to a heightened level of regulatory oversight and in recognition of stock transfer restrictions, our investment in FHLB stock has been evaluated for impairment, with no other than temporary impairment write-down deemed necessary at December 31, 2014.

Table 25 categorizes securities by scheduled maturity date as of December 31, 2014 and does not take into account the existence of optional calls held by the security issuer. Therefore, actual funds flow from maturing securities may be different than presented below. Maturity of mortgage backed securities and collateralized mortgage obligations, some of which call for scheduled monthly payments of principal and interest, are categorized by average principal life of the security. Yields by security type and maturity are based on amortized security cost.

Table 25: Investment Securities Maturities and Rates

						After one but					After five but
	Within one year					within five years					within ten years					After ten years
As of December 31, 2014	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

Securities available for sale:

U. S. Treasury securities and obligations of U.S. government agencies

U.S. agency residential mortgage backed securities							11,675		3.20	%		32,512		2.33	%		2,149		3.40	%

U.S. agency residential collateralized mortgage obligations		1,879		3.49	%		25,137		2.06	%

Privately issued residential collateralized mortgage obligations							29		5.19	%

Obligations of state and political subdivisions⁽¹⁾

Nonrated Commercial Paper

Nonrated SBA loan fund		950		1.25	%

Other equity securities		47		12.79	%

Totals	$	2,876		2.90	%	$	36,841		2.42	%	$	32,512		2.33	%	$	2,149		3.40	%

As of December 31, 2014

Securities held to maturity:

Obligations of states and political subdivisions⁽¹⁾	$	4,568		3.38	%	$	24,288		3.62	%	$	37,426		3.75	%	$	1,554		4.56	%

Non-rated trust preferred securities																	1,543		4.75	%

Non-rated senior subordinated notes												400		7.99	%

Totals	$	4,568		3.38	%	$	24,288		3.62	%	$	37,826		3.79	%	$	3,097		4.65	%

⁽¹⁾Weighted average yields on tax-exempt securities have been calculated on a tax-equivalent basis using a rate of 34%.

2014 compared to 2013

During 2014, our investment in U.S. agency residential mortgage backed securities increased from purchases of new securities as well as reallocation of securities from U.S. agency residential collateralized mortgage obligations upon their repayment. Maturities and repayments of collateralized mortgage obligations were reinvested in residential mortgage backed securities due to greater relative yield and the greater ability to pledge mortgage backed securities rather than collateralized mortgage obligations against our structured repurchase agreement liability. Because investment in obligations of states and political subdivisions remained the same as in prior years, the increase in mortgage related investments decreased the portfolio allocation to obligations of states and political subdivisions from 52.40% of the portfolio at December 31, 2014 to 47.60% at December 31, 2014. Although repayments of mortgage related securities would extend in a rising rate environment as may occur during 2015, the ability to reinvest principal payments received and the shorter duration of such securities compared to our long term obligations from states and political subdivisions, our interest rate risk is reduced compared to maintain a higher municipal investment portfolio. The majority of our mortgage related securities are fully amortized 15 to 20 year maturity pass through pools or collateralized mortgage obligations designed to return cash flows from repayments similar to those of a 15 to 20 year fully amortizing pool. The weighted average duration of our mortgage back securities portfolio in the current interest rate environment was 5. 1 years and the duration for our collateralized mortgage obligations was 2.6 years at December 31, 2014.

Included with obligations of states and political subdivisions in Table 24 are Qualified School Construction bonds with book value of $4,076 at December 31, 2014 and $4,358 at December 31, 2013. These bonds do not carry a stated interest rate, but instead pay a federal income tax credit as a fixed percentage of the bond principal that we use to offset against our required federal tax payments. Therefore, earnings on this investment are dependent on our continued generation of federal taxable income. At December 31, 2014, this portfolio carried a tax adjusted yield of 4.94% and an average stated maturity of approximately 3.5 years and were considered a general obligation of the issuing local government authority.

We maintain a conservative municipal investment portfolio with concentrations as of December 31, 2014 outlined below.

Municipal Geographical Concentration by Issuer at December 31, 2014:

Wisconsin – 70%

Minnesota – 9%

Illinois – 5%

Iowa – 3%

All other states – 13%

Municipal Type of Issue at December 31, 2014:

Unlimited General Obligation - 94%

Limited General Obligation – 2%

Revenue Bond – 4%

Municipal Bond Principal Quality by Credit Rating at December 31, 2014:

A or better rated – 84%

BBB – 1%

Nonrated – 15%

Our non-rated trust preferred securities were issued by three banks headquartered in Wisconsin with management teams known to us including Johnson Financial Group, Inc., River Valley Bancorporation, Inc., and Northern Bankshares, Inc. The non-rated senior subordinated notes were issued by McFarland State Bank, a subsidiary of Northern Bankshares, Inc. After a significant loss during 2010, Johnson Financial Group, Inc. elected to defer payments of interest on their trust preferred security issue, causing us to classify the $750 par value investment as a nonperforming asset. During 2012, the owners of Johnson Financial Group recapitalized Johnson Bank under an agreement with regulators and repaid all past due interest. We regularly review the financial performance of the banks associated with our trust preferred and senior subordinated note investments. None of the securities were considered other than temporarily impaired at December 31, 2014.

At December 31, 2014, securities fair value was 101.3% of amortized cost compared to 100.0% of amortized cost at December 31, 2013. Unrealized fair value gains over historical amortized cost increased during 2014 due to a decrease in market interest rates for terms of 5 years or longer. Refer to Note 4 of the Notes to Consolidated Financial Statements for additional information on the transferred securities. The net unrealized gain on securities transferred to securities held to maturity and recorded as a component of stockholders’ equity was $413, net of taxes of $267 at December 31, 2014. The net unrealized gain on securities available for sale, recorded as a component of stockholders’ equity, was $421, net of deferred taxes of $273 at December 31, 2014. An increase in market interest rates would decrease the fair value of all fixed rate securities, although only the change in fair value after tax for securities available for sale would reduce stockholders’ equity. Unrealized securities gains and losses, net of income tax effects, do not impact the level of regulatory capital as calculated under current banking regulations. We believe investment security yields have a stabilizing effect on net interest margin during periods of interest rate swings and expect to hold existing securities until maturity or repayment unless such funds are needed for liquidity due to unexpected loan growth or depositor withdrawals, or if the sale is beneficial to our interest rate risk and return profile. Periods of rising interest rates will decrease the fair value of fixed rate securities in our portfolio and associated unrealized gains, negatively impacting net book value per share.

2013 compared to 2012

During 2013, our investment in U.S. agency debentures declined as those securities obtained with the Marathon purchase were reinvested in new loan growth upon maturity. Maturities and repayments of collateralized mortgage obligations were reinvested in residential mortgage backed securities due to greater relative yield and the requirement to pledge mortgage backed securities rather than collateralized mortgage obligations against our structured repurchase agreement liability. Because U.S. Agency debentures were not reinvested upon maturity, the portfolio allocation to obligations of states and political subdivisions increased to 52.40% of the portfolio.

Included with obligations of states and political subdivisions in Table 24 are Qualified School Construction bonds with book value of $4,358 at December 31, 2013 and $4,610 at December 31, 2012. These bonds do not carry a stated interest rate, but instead pay a federal income tax credit as a fixed percentage of the bond principal that we use to offset against our required federal tax payments. Therefore, earnings on this investment are dependent on our continued generation of federal taxable income. At December 31, 2013, this portfolio carried a tax adjusted yield of 4.95% and an average stated maturity of approximately 4.3 years and were considered a general obligation of the issuing local government authority.

Loans Receivable

Total loans as presented in Table 26 include loans held for sale to the secondary market and expected final fully disbursed principal on construction loans not yet fully disbursed at year-end.

Table 26: Loan Composition

	2014					2013					2012					2011					2010
As of			% of					% of					% of					% of					% of
December 31,	Amount		Total			Amount		Total			Amount		Total			Amount		Total			Amount		Total

Commercial, industrial, municipal, and agricultural	$	134,768		25.01	%	$	130,220		24.88	%	$	132,633		26.90	%	$	127,192		28.26	%	$	129,063		29.00	%

Commercial real estate mortgage		203,501		37.77	%		212,850		40.67	%		183,818		37.27	%		184,360		40.96	%		180,937		40.65	%

Construction and development (commercial and residential)		45,075		8.36	%		31,949		6.10	%		43,729		8.87	%		33,497		7.44	%		35,310		7.93	%

Residential real estate mortgage		128,347		23.81	%		123,980		23.69	%		105,579		21.41	%		78,114		17.35	%		71,675		16.10	%

Residential real estate mortgage held for sale		100		0.02	%		150		0.03	%		884		0.18	%		39		0.01	%		436		0.10	%

Residential real estate home equity		23,517		4.36	%		20,677		3.95	%		21,756		4.41	%		23,193		5.15	%		23,774		5.34	%

Consumer and individual		3,627		0.67	%		3,567		0.68	%		4,715		0.96	%		3,732		0.83	%		3,929		0.88	%

Totals	$	538,935		100.00	%	$	523,393		100.00	%	$	493,114		100.00	%	$	450,127		100.00	%	$	445,124		100.00	%

Commercial real estate loans are originated for a broad range of business purposes including non-owner occupied office rental or retail space, multi-family rental units, owner occupied manufacturing facilities, and owner occupied retail sales space. We have little lending activity for agricultural purposes. Our management is involved in the communities we serve and believes it has a strong understanding of the local economy, its business leaders, and trends in successful business development. Based on this knowledge, we offer flexible terms and efficient approvals which have allowed us to grow and manage this type of lending.

Loans for the purpose of construction, land development, and other land loans (including residential construction and development) were $45,075 at December 31, 2014, and $31,949 at December 31, 2013 (including loan principal not yet disbursed) and represented 8.4% of total gross loans at December 31, 2014 compared to 6.1% at December 31, 2013. Commercial real estate loans, including disbursed commercial construction and land development loans, were equal to 374% of total common stockholders’ equity at December 31, 2014 compared to 395% of total common stockholders’ equity at December 31, 2013. This allocation of capital to commercial real estate loans has declined steadily since 2009 when the ratio was 477% of stockholders’ equity. Our experience in such lending allows us to minimize credit risk with annual net charge-offs on commercial real estate lending ranging from 0.02% to 0.48% of the average commercial real estate portfolio during the six years ended December 31, 2014. The large grain loss recorded during 2013 was not related to our commercial real estate lending activities.

As part of the asset/liability and interest rate sensitivity management strategy, we generally do not retain long-term 20 to 30 year fixed rate mortgages in our own portfolio. Therefore, it is our practice to sell the majority of long-term fixed rate mortgage loan originations to secondary market agencies in exchange for a fee. From time to time, we retain second mortgage loans, on certain high value homes requiring total financing above the conforming secondary market limit, after selling the first mortgage into the secondary market. In addition, some local borrowers require mortgage financing that does not fit one of the secondary market programs, cannot qualify for secondary market financing because they cannot obtain a qualifying appraisal due to lack of comparable sales, or the borrower prefers us to hold the loan in our own portfolio. First and second mortgage loans on the balance sheet generally carry fixed rate balloon payment terms of five years or less or are adjustable rate mortgages following an initial fixed rate period of five years or less.

Consumer and individual loans include short-term personal loans, automobile and recreational vehicle installment loans. Home equity lines of credit are often used by customers for retail purposes but are classified in Table 26 above separately from consumer and individual loans. We experience extensive competition from local credit unions offering low rates on installment loans delivered they deliver through income tax advantaged lower cost channels making consumer installment loan originations less profitable for us after incurring our income tax expense. Therefore, we direct our resources toward lending categories such as residential mortgages and commercial related lending which are more profitable on an after basis.

2014 compared to 2013

Loans held for investment continue to consist primarily of commercial related loans, including commercial and industrial loans, commercial real estate loans, and commercial construction and development loans, representing approximately 69% of total loans at December 31, 2014 compared to 68% of total loans at December 31, 2013. All construction and land development loans, including commercial and 1-4 family residential construction loan commitments were approximately 8.4% of total loans receivable at December 31, 2014 compared to 6.1% at December 31, 2013. Loans in our construction and development classification are primarily short-term loans that provide financing for the construction of single family homes, multi-family apartment complexes, or construction of commercial real estate for office space or retail sales delivery. We retain permanent financing on these projects following completion of construction in many cases and will not enter into a construction loan relationship unless we are able and wish to retain the permanent financing. New residential construction loans are typically sold in the secondary market upon completion of construction.

Our markets have traditionally supplied opportunities for loan growth. Loan participations purchased were $22,404 and $27,404 at December 31, 2014 and December 31, 2013, respectively, representing 4.2% and 5.2% of total loans as shown in Table 26. The majority of our purchased loan participations are arrangements with other banks in Wisconsin that work together to meet the credit needs of each other’s largest credit customers. These loans are underwritten in the same manner as loans originated solely for our own portfolio. At December 31, 2014, no loan participations were purchased from sources other than traditional banks with substantial operations in Wisconsin compared to $407 at December 31, 2013.

Since 2010, local loan growth opportunities have been limited resulting in sporadic or limited net commercial loan growth. Competition from larger banks in our markets is strong as such banks with higher capital levels and substantial deposit growth look to lending for higher yielding assets as investment security returns remain very low. Banks including BMO Harris Bank (the acquirer of M&I Bank and the bank having the largest deposit market share in our markets), U.S. Bank, Associated Bank, and Chase Bank appear to have relaxed credit terms for high credit quality borrowers and lowered lending interest rate spreads in an effort to aggressively increase their loan market share. In addition, local demand for commercial capital expansion remains low. We expect strong competition to continue during 2015 which could impact the pace of future loan growth and could negatively impact net interest margin and net interest income. To support loan growth, we expect to continue to grow purchased loan participations from other banks in Wisconsin during 2015 and to consider the purchase or origination of loans to borrowers outside of our credit area following our normal underwriting guidelines.

2013 compared to 2012

Commercial related loans, including commercial and industrial loans, commercial real estate loans, and commercial construction and development loans, represented approximately 68% of total loans at December 31, 2013 compared to 70% of total loans at December 31, 2012. All construction and land development loans, including commercial and 1-4 family residential construction loan commitments were approximately 6.1% of total loans receivable at December 31, 2013 compared to 8.9% at December 31, 2012.

Loan participations purchased were $27,404 and $20,601 at December 31, 2013 and December 31, 2012, respectively, representing 5.2% and 4.2% of total loans as shown in Table 26. During 2013, we purchased $3,069 of loans related to elder care facilities and $4,395 of loans collateralized by mobile home park real estate located in North Carolina which were purchased from another community bank in Wisconsin with whom we have several loan participations and were able to participate in underwriting the credit. These purchased loans were a significant source of our commercial related loan growth during 2013. At December 31, 2013, only $407 of loan participations were purchased from sources other than traditional banks with substantial operations in Wisconsin compared to $529 at December 31, 2012.

During 2013 and 2012, to support loan growth and invest low yielding liquid cash and cash equivalents, we maintained a program to originate 15-year fully amortizing fixed rate residential first mortgage loans and retain those loans on our balance sheet rather than selling them to secondary market investors as is our normal practice. The loans were fully underwritten with the majority of loans conforming to secondary market standards. However, if the property was located in a rural area in which an adequate number of recent comparable sales were not available, some of the mortgages may not have been underwritten with a qualifying secondary market appraisal, although a current appraisal was obtained on each loan. We do not intend to securitize these loans for sale on the secondary market. The program originated approximately $26.1 million in residential mortgage loans at a 2.92% weighted average interest rate during the year ended December 31, 2012. We discontinued this program during 2013 but during the year originated approximately $16.5 million in additional residential mortgage loans at a 2.69% weighted average interest rate. At December 31, 2014, $33.7 million of total principal under this 2012 and 2013 program remained on the balance sheet at a 2.81% weighted average interest rate. This in-house fixed rate mortgage program contributed to the net increase in residential mortgage loans in Table 26 above. This program was discontinued during 2013 as excess liquidity declined, commercial related loan growth was available at favorable pricing, and long term market interest rates and potential interest rate risk increased. Retaining residential mortgage loans on the balance sheet, instead of selling them to the secondary market, increases potential interest rate risk in a rising rate environment and adds credit risk from potential problem loan defaults. However, we believe both interest rate and credit risk are mitigated by limiting the program to conforming borrowers able to support the significantly faster 15 year principal amortization compared to a traditional 30 year amortizing loan.

Loans Receivable Maturities

Table 27 categorizes loan principal by scheduled maturity at December 31, 2014, and does not take into account any prepayment options held by the borrower. The loan portfolio is widely diversified by types of borrowers and industry groups. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic conditions. At December 31, 2014, no concentrations existed in our portfolio in excess of 10% of total loans except for a geographical concentration of borrowers and collateral located in Marathon County, Wisconsin in which we have the majority of our branches and operations representing the majority of our loan portfolio.

Table 27: Loan Maturity Distribution and Interest Rate Sensitivity

	Loan Maturity
	One year		Over one year		Over
As of December 31, 2014:	or less		to five years		five years

Commercial, industrial, municipal, and agricultural	$	73,185	$	46,835	$	14,748
Commercial real estate mortgage		44,917		135,195		23,389
Real estate construction		25,469		18,324		1,282
Residential real estate mortgage		17,156		36,947		74,244
Residential real estate mortgage held for sale						100
Residential real estate home equity		608		22,909		–
Consumer and individual		1,643		1,984		–

Totals	$	162,978	$	262,194	$	113,763

Fixed rate			$	203,129	$	93,403
Variable rate				59,065		20,360

Totals			$	262,194	$	113,763

Deposits

Core retail deposits are our largest source of funds. We consider core retail deposits to include noninterest-bearing demand deposits, interest bearing demand and savings deposits, money market demand deposits, and retail time deposits less than $100. Core retail deposits represented 71.0% and 66.6% of total assets as of December 31, 2014 and 2013, respectively. In addition to core certificates of deposit, funding from local certificates with balances greater than $100 made up 7.0% and 6.5% of total assets at December 31, 2014, and 2013, respectively. Despite being held by local customers, these large certificates are not considered core funds as the balances may be temporary and subject to placement with any financial institution offering the highest interest rate bid. Our retail deposit growth is continuously influenced by competitive pressure from other financial institutions, as well as other investment opportunities available to customers. Table 28 outlines the average distribution of deposits during the three years ending December 31, 2014.

Table 28: Average Deposits Distribution

	2014						2013						2012
				Interest						Interest						Interest
Year Ended December 31,	Amount			Rate paid			Amount			Rate paid			Amount			Rate paid

Noninterest-bearing demand deposits	$	97,884			n/a		$	82,506			n/a		$	73,135			n/a

Interest-bearing demand and savings deposits		179,449			0.16	%		172,249			0.22	%		154,428			0.51	%

Money market demand deposits		140,248			0.26	%		121,351			0.33	%		110,587			0.53	%

Retail and local time deposits		118,768			0.93	%		105,462			1.01	%		110,488			1.10	%

Wholesale and national time deposits		54,016			1.97	%		58,930			2.02	%		65,699			2.40	%

Totals	$	590,365			0.48	%	$	540,498			0.56	%	$	514,337			0.81	%

Average retail and local deposit growth		11.38	%					7.34	%					17.44	%
Average total deposit growth		9.23	%					5.09	%					12.75	%

We hold retail and local time deposits collected under the “Certificate of Deposit Account Registry System” (CDARS), a nation-wide program in which network banks work together to obtain greater FDIC insurance on deposits through sharing of banking charters. Such deposits are typically greater than $100 in balance and average balances of CDARS deposits were $3,783 during 2014, $6,906 during 2013, and $11,681 during 2012. Average CDARS balances have declined in recent years as local customers that fueled CDARS growth seeking 100% FDIC protection during the last recession have withdrawn balances for operational needs as well as to invest in other deposit products outside the CDARS program for higher yields. For regulatory purposes, CDARS deposits are considered brokered deposits and disclosed as such on quarterly regulatory filings. However, for internal and external reporting other than for Call Report purposes, these deposits are considered to be retail deposits since the terms of the account are set directly between us and our local customer on a retail basis. Accordingly, these deposits are included as “Retail time deposits $100 and over” in the Tables in this section. Total CDARS deposits totaled $3,037 and $4,292 at December 31, 2014 and 2013, respectively.

Table 29 provides a breakdown of deposit categories as of December 31, 2014 and 2013.

Table 29: Period-End Deposit Composition

As of December 31,	2014					2013
	$		%			$		%

Non-interest bearing demand	$	114,803		18.4	%	$	102,644		17.8	%
Interest-bearing demand and savings		188,638		30.3	%		176,427		30.5	%
Money market deposits		146,996		23.6	%		136,797		23.7	%
Retail time deposits less than $100		71,232		11.4	%		57,897		10.0	%

Total core deposits		521,669		83.7	%		473,765		82.0	%
Retail time deposits $100 and over		51,144		8.2	%		46,390		8.0	%
Broker and national time deposits less than $100		198		0.0	%		542		0.1	%
Broker and national time deposits $100 and over		49,940		8.1	%		56,817		9.9	%

Totals	$	622,951		100.0	%	$	577,514		100.0	%

Table 30 provides a summary of changes in key deposit categories during 2014 and 2013.

Table 30: Change in Deposit Composition

					% Change from prior year
At December 31,	2014		2013		2014			2013

Total time deposits $100 and over	$	101,084	$	103,207		-2.1	%		0.8	%
Total broker and wholesale deposits		50,138		57,359		-12.6	%		5.3	%
Total retail time deposits		122,376		104,287		17.3	%		-6.4	%
Core deposits, including money market deposits		521,669		473,765		10.1	%		2.5	%

Table 31 outlines maturities of time deposits of $100 or more, including broker and retail time deposits as of December 31, 2014 and 2013.

Table 31: Maturity Distribution of Certificates of Deposit of $100 or More

	2014					2013
As of December 31,	Balance		Rate			Balance		Rate

3 months or less	$	10,639		1.32	%	$	13,940		1.11	%
Over 3 months through 6 months		13,312		1.35	%		8,510		1.04	%
Over 6 months through 12 months		19,523		0.98	%		21,944		1.28	%
Over 1 year through 5 years		56,441		1.49	%		55,907		1.84	%
Over 5 years		1,169		2.82	%		2,906		2.69	%

Totals	$	101,084		1.37	%	$	103,207		1.58	%

2014 compared to 2013

Total deposits increased $45,437, or 7.9%, to $622,951 at December 31, 2014 compared to $577,514 at December 31, 2013. Local deposits increased $52,658, or 10.1%, on the purchase of Northwoods Rhinelander, while out of area and brokered deposits decreased $7,221, or 12.6%. The original Northwoods Rhinelander purchase included $40,780 of deposit principal, of which $33,054 was retained at December 31, 2014, down $7,726, or 19%. The decline consisted primarily of matured certificates of deposit not reinvested, as certificates of deposit declined $5,153 following the purchase at December 31, 2014, or 67% of the total decline. We ceased the sale of our Rewards Checking NOW deposit account during 2011 and have seen balances in the product decline over the years. During 2014, Reward Checking balances declined $3,113 to $33,339 at December 31, 2014 after declining $7,290 during 2013. Although this account type was once an important provider of deposit growth, we expect Rewards Checking customer balances to continue to decline during 2015 at a similar pace seen during 2014.

Deposits held for municipalities were $40,670 at December 31, 2014, down $390, or 0.9%, from $41,060 at December 31, 2013. Many of our municipalities had higher December 31 balances from seasonal property tax collection activity compared to other periods during the year. At December 31, 2014 we held $56.0 million of total nonmaturity deposits and overnight repurchase agreement amounts from our ten largest deposit customers, making up approximately 10% of our total local deposits and overnight repurchase agreements. Our concentration of deposits with these largest depositors has increased slightly during the past several years from 8% at December 31, 2012 and 9% at December 31, 2013. Many of the balances at year-end were seasonal deposits and expected to be withdrawn during the first several months of 2015 but contributed to the large cash and cash equivalents balance at December 31, 2014.

2013 compared to 2012

Total deposits increased $12,072, or 2.1%, to $577,514 at December 31, 2013 compared to $565,442 at December 31, 2012. Local deposits increased $9,170, or 1.8%, while out of area and brokered deposits increased $2,902, or 5.3%. Non-interest bearing demand deposits increased $12,825, or 14.3%, led by commercial demand deposit growth. Interest-bearing demand and money market deposits increased $3,520, or 1.1%, including a $7,290 decline in Rewards Checking balances, which ceased being sold by us during 2011. Interest-bearing demand and money market balances excluding Rewards Checking increased 4.1%. Reward Checking balances at December 31, 2013 totaled $36,452. Retail and local certificates of deposit declined $7,175, or 6.4%, primarily from $7,710 of net deposit run-off from the purchased Marathon location as acquired Marathon location certificates matured into normal local market rates.

Deposits held for municipalities were $41,060 at December 31, 2013, up $5,423, or 15.2%, from $35,637 at December 31, 2012 primarily from growth in our high yield uncollateralized municipal money market account. Many of our municipalities had higher December 31 balances from seasonal property tax collection activity. At December 31, 2013 we held $47.5 million of total nonmaturity deposits and overnight repurchase agreement amounts from our ten largest deposit customers, making up approximately 9% of our total local deposits and overnight repurchase agreements. Many of the balances at year-end were seasonal deposits and withdrawn during the first several months of 2014.

Wholesale Funding Sources and Available Liquidity

Wholesale funding includes FHLB advances, brokered and national time deposits, wholesale repurchase agreements, and federal funds purchased. These sources of wholesale funding are limited by the wholesale lender’s ability to raise individual depositor funds, our regulatory capital classification, our ability to generate positive earnings performance, our sources of collateral acceptable to the wholesale lender, by our internal policy limitations on aggregate exposure to use of such funds, and in the case of the FHLB, our level of FHLB capital stock relative to our aggregate amount of FHLB advances.

Our asset-liability management process provides a unified approach to management of liquidity, capital, and interest rate risk, as well as providing adequate funds to support the borrowing requirements and deposit flow of our customers. We 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.

The primary short-term and long-term funding sources we use other than retail deposits include federal funds purchased from other correspondent banks, advances from the FHLB, and issuance of brokered and national time deposits. Table 33 outlines the available and unused portion of these funding sources (based on collateral and/or company policy limitations) as of December 31, 2014 and 2013. Currently unused but available funding sources along with a significant amount of overnight liquid funds at December 31, 2014 are considered sufficient to fund anticipated 2015 asset growth, repay maturing liabilities, and manage customer deposit demands and withdrawals.

We maintain formal policies to address liquidity contingency needs and to manage a liquidity crisis. Table 32 below provides a summary of how the wholesale funding sources normally available to us would be impacted by various operating conditions.

Table 32: 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
Fed 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 33 summarizes the availability of various wholesale funding sources at December 31, 2014 and 2013.

Table 33: Available but Unused Funding Sources other than Retail Deposits:

	December 31, 2014						December 31, 2013
	Unused, but			Amount			Unused, but			Amount
	Available			Used			Available			Used

Overnight federal funds purchased	$	28,000		$	–		$	28,000		$	–
Federal Reserve discount window advances		81,207			–			89,875			–
FHLB advances under blanket mortgage lien		81,282			20,271			54,944			38,049
Repurchase agreements and other FHLB advances		57,599			9,824			35,822			20,441
Wholesale and national deposits		96,735			50,138			84,949			57,359
Holding company secured line of credit		3,000			–			3,000			–

Totals	$	347,823		$	80,233		$	296,590		$	115,849

Funding as a percent of total assets		47.4	%		10.9	%		41.7	%		16.3	%
Percentage of gross available funding used at period-end		n/a			18.7	%		n/a			28.1	%

The following discussion examines each of the available but unused funding sources listed in Table 33 above and the factors that may directly or indirectly influence the timing or the amount ultimately available to us.

2014 compared to 2013

Overnight federal funds purchased

Our consolidated federal funds purchase 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. Peoples’ (our subsidiary bank) composite ratio was approximately 13% at December 31, 2014 and 2013, and less than the 40% benchmark used by Bankers’ Bank.

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. During 2014 and 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 $81,207 at December 31, 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 2014 or 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. At December 31, 2014, we could borrow up to approximately 71% of the loan principal offered as collateral in 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 December 31, 2014, $29,904 of advances were available from the FHLB without the purchase of additional FHLB stock. Further advances of the remaining $51,378 available at December 31, 2014 would have required us to purchase additional FHLB stock totaling $2,569. At December 31, 2013, $5,206 of advances were available from the FHLB without the purchase of additional FHLB stock. Further advances of the remaining $49,738 available at December 31, 2013 would have required us to purchase additional FHLB stock totaling $2,487. 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 December 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 December 31, 2014 or December 31, 2013.

No FHLB stock was purchased or sold by us during 2014. In connection with the lifting of their regulatory consent order, the FHLB of Chicago announced a capital stock conversion plan and repurchased $1,038 of our stock in 2013 and $744 of our stock during 2012. A member must continue to hold capital stock no less than 5% of outstanding FHLB advances. Our FHLB capital stock shares are considered “B-2” capital shares. Excess holdings of B-2 shares may be redeemed by the FHLB at the request of a member following a five year redemption period.

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 December 31, 2014, $5,500 of our repurchase agreements are wholesale agreements with correspondent banks and $4,324 are overnight repurchase agreements with local customers using our treasury management services. At December 31, 2013, $13,500 of our repurchase agreements are wholesale agreements with correspondent banks and $5,441 are overnight repurchase agreements with local customers.

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 December 31, 2014, $57,599 of additional FHLB advances were available based on pledging of securities if an additional $2,880 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. The amount of available advances based on security pledging increased during 2014 from repurchase of our $8,000 wholesale repurchased agreement and increased mortgage backed securities purchased during 2014.

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 $96,735 at December 31, 2014 and $84,949 at December 31, 2013. Brokered and national certificates were 6.8% and 8.1% of assets at December 31, 2014 and December 31, 2013, respectively. 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 is 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 unsecured line of credit

We maintained a $3,000 line of credit with Bankers’ Bank in Madison, Wisconsin as a contingency liquidity source at December 31, 2014 and December 31, 2013. No amounts were drawn on the line during 2014 or 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 were 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 assets (excluding accruing troubled debt restructured loans).

At December 31, 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 2015.

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.

2013 compared to 2012

Overnight federal funds purchased

Our aggregate federal funds purchased availability totaled $28,000 from three correspondent banks at December 31, 2013 and 2012, and no amounts were drawn on these federal funds lines at those dates. Our subsidiary bank’s composite ratio was approximately 13% at December 31, 2013 and 2012, and less than the 40% benchmark used by Bankers’ Bank.

Federal Reserve discount window advances

We maintained a $100,000 line of credit with the Federal Reserve Discount Window supported by a pledge of both commercial and commercial real estate loans to the Federal Reserve under their Borrower in Custody (“BIC”) program. During 2013 and 2012, the annualized interest rate applicable to Discount Window advances was .75%. We were limited to a maximum advance of $89,875 and $70,141 at December 31, 2013 and December 31, 2012, respectively, based on the BIC loan collateral pledged. No Discount Window advances were used during 2013 or 2012. The available line increase during 2013 as more loans were pledged against to the Discount Window compared to 2012.

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

Based on the existing $2,556 capital stock investment at December 31, 2013, total FHLB advances in excess of $50,124 required us to purchase additional FHLB stock equal to 5% of the advance amount. At December 31, 2013, $5,206 of advances were available from the FHLB without the purchase of additional FHLB stock. Further advances of the $49,738 available at December 31, 2013, would have required us to purchase additional FHLB stock totaling $2,487. Under the 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 December 31, 2013 or December 31, 2012.

Repurchase agreements and FHLB advances collateralized by investment securities

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 using our treasury management services. At December 31, 2012, $13,500 of our repurchase agreements were wholesale agreements with correspondent banks and $7,228 were overnight repurchase agreements with local customers. 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. At December 31, 2012, $44,634 of additional FHLB advances were available based on pledging of securities if an additional $2,232 of member capital stock were purchased.

Wholesale market deposits

Our internal policy that limits use of brokered deposits to 20% of total assets, gave us availability of $84,949 at December 31, 2013 and $87,936 at December 31, 2012. Brokered and national certificates were 8.1% and 7.6% of assets at December 31, 2013 and December 31, 2012, respectively. 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. Following our purchase of Marathon State Bank in 2012, our reliance on brokered deposits declined as excess cash and cash equivalents from their deposits and maturing investment securities were used to repay maturing brokered deposits.

Holding company unsecured line of credit

We maintained a $3,000 line of credit with Bankers’ Bank in Madison, Wisconsin as a contingency liquidity source at December 31, 2013 and December 31, 2012. No amounts were drawn on the line during 2013 or 2012. 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.

We were 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 assets (excluding accruing troubled debt restructured loans). This covenant was added effective December 31, 2012.

At December 31, 2013 and December 31, 2012, we were not in violation of any of the line of credit covenants.

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 December 31, 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 18.3%, 11.6%, and 14.4% at December 31, 2014, 2013, and 2012, respectively. The basic surplus increased significantly at December 31, 2014 compared to 2013 from pay down of maturing FHLB advances during 2014 with deposits acquired on the purchase of Northwoods Rhinelander which increase the amount of available FHLB funding used to calculate the basic surplus ratio.

CAPITAL RESOURCES

Increased retained earnings from net income after payment of dividends is our primary source of capital to support asset growth. During the three years ended December 31, 2014 total stockholders’ equity increased $11,099, or 22.0%. During this period, retained net income after payment of shareholder dividends represented $13,341 of this growth in equity which was primarily offset by a decline in unrealized gains on securities available for sale of $1,297 and $802 of net treasury stock purchases. Assuming a baseline equity to assets ratio of 8%, this growth in equity during the past three years would have supported maximum total asset growth of $138,738 ($11,099 equity growth divided by 8% assumed capital ratio). A detailed listing of stockholders’ equity activity during the three years ended December 31, 2014 may be found in Item 8, Consolidated Statements of Changes in Stockholders’ Equity. Average tangible common stockholders’ equity to total assets was 8.34% during 2014, 8.16% during 2013, and 8.04% during 2012.

Unrealized gains on securities available for sale, net of tax, reflected as accumulated other comprehensive income, represented approximately $0.51, or 1.4% of total net book value per share at December 31, 2014 compared to $0.37, or 1.1% of total net book value per share at December 31, 2013. If market interest rates increased during 2015, unrealized gains on fixed rate investment securities would decline, which would reduce equity since changes in unrealized gains on securities available for sale are recorded through equity. This would negatively impact total stockholders’ equity and net book value per share.

During 2014, we issued 6,400 shares of restricted stock having a grant date value of $200 to certain key employees as a retention tool and to align employee performance with shareholder interests, compared to 8,076 shares of restricted stock having a grant date value of $210 issued during 2013. The shares vest over a six year service period using a straight-line method and unvested shares are forfeited if the employee is no longer employed by the Bank. Refer to Note 19 of the Notes to Consolidated Financial Statements for more information on the restricted stock plan and related activity. Total restricted stock plan expense recognized was $166, $145, and $105, during 2014, 2013, and 2012, respectively.

We purchased 27,244 shares of our common stock on the open market and directly from shareholders at an average price of $33.54 per share during 2014. We purchased 10,030 shares of our common stock on the open market at an average price of $26.78 per share during 2013. We purchased 10,210 shares of our common stock on the open market at an average price of $25.68 per share during 2012. Industry wide, the cost of capital has increased significantly compared to prior years and many sources of previously low cost capital, such as trust preferred offerings like our $7. 7 million junior subordinated debentures, are no longer available. We expect to continue a similar level of share repurchases during 2015 unless equity capital is required by merger and acquisition activities.

We declared a 5% stock dividend to shareholders on June 19, 2012 to celebrate the 50^th anniversary of our subsidiary Peoples State Bank, which was paid in additional shares of our common stock on July 30, 2012 to shareholders of record on July 16, 2012. All references to per share information in this Annual Report on Form 10-K have been updated to reflect the 5% stock dividend.

We are also required to maintain minimum levels of capital to be considered well-capitalized under current banking regulation. Table 34 presents a reconciliation of stockholders’ equity as presented in the consolidated balance sheets for the three years ended December 31, 2014 to regulatory capital. Our subsidiary bank, Peoples State Bank, was considered “well capitalized” under applicable capital regulations at December 31, 2014, 2013, and 2012. Refer to Item 8, Note 20 of the Notes to Consolidated Financial Statements for these regulatory requirements and our current capital position relative to these requirements. Failure to remain well-capitalized could prevent us from obtaining future wholesale brokered time deposits which have been an important source of funding.

For regulatory purposes, certain long-term debt may be reclassified as regulatory capital. At December 31, 2014, our $7.7 million in floating rate junior subordinated debentures maturing in September 2035 were considered Tier 1 regulatory capital. The floating payments required by the junior debentures have been hedged with a fixed rate interest rate swap resulting in a total fixed interest cost of 4.42% through September 2017. At December 31, 2012, we had two subordinated debt issues that were considered regulatory capital including the $7.7 million junior subordinated debentures and $7 million of 8% senior subordinated notes maturing July 2019. During 2013, we refinanced the $7 million of 8% senior subordinated notes with a $2 million floating rate correspondent bank note and a new $4 million 3.75% fixed rate senior note due February 2018 issued to three of our directors and a large local shareholder. We also paid down $1 million of the debt with existing cash on hand at December 31, 2012. The refinancing saved $340 of interest expense during 2013 compared to 2012. However, the structure of the refinance did not permit any of the $6 million in new notes to be considered as total regulatory capital as were the prior $7 million 8% senior notes due July 2019.

During 2013, the banking regulatory agencies finalized new regulatory capital rules that will increase our capital needs beginning January 1, 2015. The new rules are outlined under Item 1 of this Annual Report on Form 10-K, in Regulation and Supervision under Capital Adequacy. In addition, the minimum capital ratios to be considered well capitalized and to cover the newly required “capital buffer,” which phases in beginning in 2016 and growing .625% during 2016 through 2019 to 2.50%, 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 imitations 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.

The 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 near our book value, issuance of new common stock shares, such as for an acquisition, could dilute the book value per share of existing shareholders. Initial implementation of the new capital rules first measured on March 31, 2015 are expected reduce our existing regulatory capital ratios by less than 1.00% and will remain significantly greater than the well capitalized minimum level, including the capital buffer.

Table 34: Capital Ratios

At December 31,	2014			2013			2012

Stockholders’ equity	$	61,461		$	56,753		$	54,447
Junior subordinated debentures, net		7,500			7,500			7,500
Disallowed mortgage servicing right assets		(174	)		(170	)		(123	)
Accumulated other comprehensive (income) loss		(637	)		(349	)		(1,394	)

Tier 1 regulatory capital		67,876			63,734			60,430
Senior subordinated notes		–			–			7,000
Add: allowance for loan losses		6,494			6,314			6,206

Total regulatory capital	$	74,370		$	70,048		$	73,636

Average tangible assets	$	729,484		$	703,261		$	689,974

Risk-weighted assets (as defined by current regulations)	$	522,352		$	504,561		$	495,287

Tier 1 capital to average tangible assets (leverage ratio)		9.30	%		9.06	%		8.76	%
Tier 1 capital to risk-weighted assets		12.99	%		12.63	%		12.20	%
Total capital to risk-weighted assets		14.24	%		13.88	%		14.87	%

Capital Ratios – Peoples State Bank – Subsidiary Bank:

Tier 1 capital to average tangible assets (leverage ratio)		9.44	%		9.39	%		9.35	%
Tier 1 capital to risk-weighted assets		13.20	%		13.10	%		13.11	%
Total capital to risk-weighted assets		14.45	%		14.35	%		14.36	%

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 presents the calculation of our Texas Ratio.

Table 35: Calculation of “Texas Ratio” (a non-GAAP measure) as of December 31,

(dollars in thousands)	2014			2013			2012

Total nonperforming assets	$	14,423		$	10,389		$	12,454

Total stockholders’ equity	$	61,461		$	56,753		$	54,447
Less: Mortgage servicing rights, net (intangible assets)		(1,738	)		(1,696	)		(1,233	)
Less: Goodwill and other intangible assets		(274	)		–			–
Less: Preferred stock capital elements		–			–			–
Add: Allowance for loan losses		6,409			6,783			7,431

Total tangible common stockholders’ equity and reserves	$	65,858		$	61,840		$	60,645

Total nonperforming assets as a percentage of total tangible common stockholders’ equity and reserves		21.90	%		16.80	%		20.54	%

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 December 31, 2014, our credit guarantee covered $18,834 of loan principal on which we would incur credit losses up to $949 if the FHLB first loss exceeds $1,412 on foreclosure of loans within this pool. Refer to Item 8, Notes 5, 7, and 18 of the Notes to Consolidated Financial Statements for information on the FHLB MPF program. 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 December 31, 2014, the average remaining first mortgage principal balance for loans on which we provided the credit enhancement was $64.

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 36. 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 FHLB recourse obligation 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 December 31, 2014 and 2013, and $1,859 at December 31, 2012. 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 36.

Other significant off-balance sheet financial instruments include the various loan commitments outlined in Item 8, Note 18 of the Notes to Consolidated Financial Statements. 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.

Use of Interest Rate Swap Derivatives

From time to time, we will sell an interest rate swap to a high credit quality commercial borrower that allows the adjustable rate borrower to fix their interest rate with an interest rate swap. Refer to Item 8, Note 14 of the Consolidated Financial Statements for details on the program. There were $13,646 and $14,323 of interest rate swaps associated with customer floating rate commercial loan principal at December 31, 2014 and 2013, respectively, under the program. These swaps with customers are offset with equal and matching swaps between us and a correspondent bank. Because the terms of the swap agreements offset each other, these swaps are not designated as hedges of interest rates and the changes in fair value of the swaps are recorded in income. If our borrower were to default on loan repayment or on their swap payments, the swap between us and our loan customer would decline in value, creating a mismatch with our correspondent bank swap fair value and negatively impact net income.

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 14 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 service $279,865 and $272,280 of residential real estate loans which have been sold to the FHLB and FNMA at December 31, 2014 and 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. Refer to Item 8, Note 7 of the Notes to Consolidated Financial Statements for a breakdown of mortgage banking revenue. We recognize a mortgage servicing right asset due to the substantial volume of loans serviced for the FHLB and FNMA. Refer to Note 1 of the Notes to Consolidated Financial Statements for a summary of our mortgage servicing right accounting policies.

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 for mortgage banking losses from required repurchase was $8, $294, and $0 during 2014, 2013, and 2012, respectively. We provided a liability of $85 and $108 at December 31, 2014 and 2013, respectively, for potential future representation and warranty losses.

Table 36 summarizes the various programs and investors for which we serviced loans as of December 31, 2014 and 2013.

Table 36: Residential Mortgage Loan Servicing for Others

At December 31, 2014:
					Weighted Average			Avg. Monthly		PSB Credit		Agency Funded First		Mortgage
Agency	Principal		Loan		Coupon			Payment		Enhancement		Loss		Servicing Right, net
Program	Serviced		Count		Rate			Seasoning		Guarantee		Account		$		%

FHLB MPF 100	$	6,333		152		5.38	%		140	$	94	$	291	$	12		0.19	%
FHLB MPF 125		16,749		206		5.75	%		87		855		1,121		67		0.40	%
FHLB XTRA		167,095		1,378		3.75	%		39		n/a		n/a		980		0.59	%
FNMA		89,688		607		3.63	%		19		n/a		n/a		679		0.76	%

Totals	$	279,865		2,343		3.87	%		38	$	949	$	1,412	$	1,738		0.62	%

At December 31, 2013:

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

During 2013 and 2012, certain 15 year fixed rate residential mortgage loans normally sold to the secondary market were retained within our loan portfolio as discussed previously under the section labeled, “Asset Growth and Liquidity” in this Annual Report on Form 10-K. Because market mortgage interest rates are expected to increase during 2015, secondary market mortgage origination activity could decline and customer repayments on existing serviced loans could cause serviced loan principal could decline during 2015 compared to 2014.

Contractual Obligations

We are a party to various contractual obligations requiring use of funds as part of our normal operations. Table 37 outlines the principal amounts and timing of these obligations, excluding amounts due for interest, if applicable. Nonmaturity deposits and overnight federal funds purchased and overnight repurchase obligations are not included in Table 37 because they are not classified as long-term obligations. Most of these obligations shown in the Table, including FHLB advances and time deposits, are routinely refinanced into a similar replacement obligation without requiring any substantial outflow of cash. However, renewal of these obligations is dependent on our ability to offer competitive market equivalent interest rates or availability of collateral for pledging such as retained mortgage loans or securities as in the case of advances from the FHLB. Our funds management policy includes a formal liquidity contingency plan to identify low cost and liquid funds available in the event of a liquidity crisis as outlined under the section labeled, “Asset Growth and Liquidity” in this Annual Report on Form 10-K. Except for contractual deferred compensation agreement payments, the obligations shown in Table 37 do not include payments for interest.

Table 37: Long-Term Contractual Obligations at December 31, 2014

	Principal payments due by period
	Total		< 1 year		1-3 years		3-5 years		> 5 years

Federal Home Loan Bank advances	$	20,271	$	10,000	$	1,350	$	8,921	$	–
Long-term other borrowings		5,500		–		5,500		–		–
Junior subordinated debentures		7,732		–		–		–		7,732
Senior subordinated notes		4,000		–		–		4,000		–
Deferred compensation agreements		3,427		103		248		469		2,607
Post-retirement health insurance benefits plan		31		5		8		7		11
Long-term charitable contribution commitments		11		5		6		–		–
Branch bank operating lease commitments		87		61		26		–		–

Total long-term contractual obligations before time deposits		41,059		10,174		7,138		13,397		10,350
Time deposits		172,514		83,896		50,204		37,246		1,168

Total long-term contractual obligations including time deposits	$	213,573	$	94,070	$	57,342	$	50,643	$	11,518

Critical Accounting Policies

Allowance for Loan Losses

Current accounting standards call for the allowance for loan losses to include both specific losses on identified impaired problem loans and inherent contingent losses on existing loan pools not yet considered problem loans. Determination of the allowance for loan losses at period-end is based primarily on subjective factors and management assessment of risk in the existing portfolio. Actual results, if significantly different from those using estimates at period-end, could have a material impact on the results of operations. For example, losses incurred on loans not previously identified as carrying significant loss potential would increase the provision for loan losses expense equal to the amount of the loan principal charged off. Refer to Item 8, Note 5 of the Notes to Consolidated Financial Statements for additional information on allocation of the allowance for loan losses between different credit risk categories and for impaired loans as well as our system to review changes in credit risk on individual loans.

Loans receivable, for the purpose of estimating the allowance for loan losses, are separated into 12 loan categories:

Performing loans (5 categories, all of which are assigned inherent loss reserves):

●

Residential mortgages

●

Home equity lines of credit

●

Consumer and individual loans

●

Commercial real estate loans – credit risk grades 1 (“high quality”) through grade 4 (“acceptable risk”)

●

Commercial and industrial loans – grades 1 through 4

Problem loans assigned inherent loss reserves (4 categories):

●

Commercial real estate loans – grade 5 (“watch”) and grade 6 (“substandard”) loans

●

Commercial and industrial loans – grade 5 (“watch”) and grade 6 (“substandard”) loans

Impaired loans assigned specific reserves (3 categories):

●

Commercial real estate loans - grade 7 (“impaired”)

●

Commercial and industrial loans – grade 7 (“impaired”)

●

Residential mortgage, consumer, and other personal loans – grade 7 (“impaired”)

Commercial purpose loans are subcategorized into the credit risk “grades” based on an internal determination of risk established during credit analysis and updated no less than annually. Determination of risk grades takes into account several factors including collateral, cash flow, borrower’s industry environment, financial statement strength, and other factors. Identified impaired problem loans under current accounting standards are classified into the lowest quality risk grade (grade 7). 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.

Inherent loss reserves are assigned as a percentage of estimated loss on principal within each category and are based on the following historical and subjective factors:

	●	Weighted average historical net charge-off of principal by category during the past 12 quarters.

	●	Our written policy regarding the provision and maintenance of appropriate allowance for loan losses allows an exceptionally significant and non-recurring loan charge-off or recovery to be noted in the written policy and then excluded from determination of historical net charge-offs used for estimating inherent loss reserves if inclusion of the special charge-off or recovery in the calculation would significantly overstate or understate appropriate allowance levels based on current risk factors. Based on our review of the 2013 large grain charge off of $3,340 related to customer fraud and consideration of related potential credit risk within our portfolio for customers with similar risk factors (as outlined following Table 14 under the subheading Credit Quality and Provision for Loan Losses), we consider the $3,340 loss to meet the exceptional requirements to be excluded from historical losses as provided for by policy. Therefore, during 2013, our written policy was updated to address this loss and the justification for its exclusion from historical net losses in the allowance for loan losses calculation. Exclusion of this loss from the December 31, 2013 allowance calculation reduced the calculated allowance for loan losses by $1,383 before an estimated income tax benefit of $545. If this policy action had not been taken, the December 31, 2013 allowance for loan losses would have increased by $1,383, and 2013 net income would have decreased by $838. However, if the policy action had not been taken, we believe the proforma calculated allowance would have been significantly overstated at December 31, 2013 because we did not identify similar risk of loss in our review of other borrowers within our loan portfolio as led to the $3,340 charge off during 2013.

	●	Additional contingency reserves based on subjective assessment of external factors including: changes in economic conditions, changes in nature/volume of portfolio, changes in collateral values, changes in regulatory requirements, and changes in peer data.

●

Additional contingency reserves based on subjective assessment of internal factors including: changes in bank policies, changes in underwriting criteria, changes in volume of past due loans, changes in internal local review processes, and management turnover.

Inherent loss reserves for loan categories graded 5 (watch) and grade 6 (substandard) are provided additional contingency reserves beyond those described above to reflect the emerging credit risk represented by loans within these categories. These additional contingency reserves are based on the average specific reserves calculated for impaired loans by category at period end. Grade 5 (watch ) loans are assigned an additional contingency reserve equal to 25% of the average reserve allocation percentage given to impaired loans (Grade 7) within that loan category. Grade 6 (substandard) loans are assigned an additional contingency reserve equal to 50% of the average reserve allocation percentage given to impaired loans (Grade 7) within that loan category.

Specific reserves are calculated on each individual impaired borrower by estimating future cash flows associated with borrower payments and foreclosure value of collateral associated with the loan. Cash flows expected from foreclosure of collateral are discounted for closing costs and based on estimated current collateral and property values. Estimated cash flows are discounted by the loan contract rate to determine the present value of future cash flows. For loans considered to be restructurings of troubled debt, the cash flows are discounted using the loan contract rate in place prior to any loan modifications. Loans considered collateral dependent are assigned reserves based on the net cash value of collateral without consideration of discounted estimated cash flows.

After calculating the estimate of required allowances for loan losses using the steps above, a further subjective analysis of current and projected economic conditions, problem loan trends, and other factors may cause additional unallocated reserves to be recorded to reflect this additional risk of loss before it is recognized by the change in commercial credit risk grades, or the increase in the historical inherent loss percentage assigned to loan categories. As of December 31, 2014 and 2013, no unallocated loan loss allowances were recorded.

Estimates of inherent losses on non-problem loans are a significant accounting estimate due to the many economic and subjective factors involved in estimating future losses based on existing negative factors associated with unidentified future problem loans currently making payments. Reliance on historical charge off activity and subjective factors related to external and internal factors is expected to increase volatility in allowance for loan losses, which could increase volatility in quarterly net income as conditions change and increase or decrease the existing allowance for loan losses. For example, if the actual inherent losses on the five performing loan categories evaluated using inherent loss estimates as described above were 25% greater than those currently applied to meet reserve needs, the December 31, 2014 allowance for loan losses would have increased $855 (13.3%) and have decreased 2014 net income by approximately $518 after income taxes.

In addition, an unexpected downgrade of loans classified grade 5 (watch) and grade 6 (substandard) to impaired status (grade 7) could significantly increase total allowance for loan losses as those downgraded loans are allocated allowances based on projected cash flow or collateral values on an individualized basis. For example, at December 31, 2014, if all of the loans graded 6 (substandard) and 50% of loan principal graded 5 (watch) were reclassified as impaired loans and experienced the average loss allocation currently reflected in the impaired loan portfolio, the allowance for loan losses at December 31, 2014 would have increased $552 (8.6%) and decreased 2014 net income by approximately $335 after income taxes.

Mortgage Servicing Rights

As required by current accounting standards, we record a mortgage servicing right asset (“MSR”) when we continue to service borrower payments and perform maintenance activities in exchange for an annual servicing fee of .25% of average serviced mortgage principal on loans in which the principal has been sold to the FHLB or other secondary market investors. Our initial value of servicing rights is calculated on an individual loan level basis and uses public financial market information for many of the significant estimates. In the period in which the principal is sold to the secondary market investors, we increase the gain on sale of the loan by the value of the initial MSR. If the actual value was less than we recorded, such as if the estimated future servicing period or average serviced principal was less than estimated, the gain recorded on origination of the MSR would be overstated. Recognition of impairment of excess mortgage servicing rights would decrease income, causing our accounting for mortgage servicing rights to be a critical accounting policy. For example, if the actual value of initial MSR on 2014 secondary market sales were 25% less than that recorded, gain on sale of loans (a component of mortgage banking income) during 2014 would have declined approximately $85 before income taxes (reducing 2014 net income by $51). In addition, if the actual value of the entire December 31, 2014 MSR were 25% less than recorded, net servicing revenue (a component of mortgage banking income) would have declined approximately $435 before income taxes and 2014 net income would have been reduced $264.

We make the following estimates and perform the following procedures when accounting for MSRs:

Serviced loans are stratified by risk of prepayment criteria. Currently, strata are first based on the year in which the loan was originated, then on term, and then on the range of interest rates within that term.

We use a discount approach to generate the initial value for the OMSR. The calculation takes the average of the current dealer consensus on prepayment speeds as reported by Andrew Davidson & Company or the prepayment speed implied in the mortgage backed security prices for newly created loans along with other assumptions to generate an estimate of future cash flows. The present value of estimated cash flows equals the fair value of the OMSR. We capitalize the lower of fair value or cost of the OMSR.

Refer to Note 23 of the Notes to Consolidated Financial Statements for significant fair value and cost estimates other than the estimate of public dealer consensus of prepayment speeds. Changes in these estimates and assumptions would change the initial value recorded for OMSRs and change the gain on sale of mortgage loans recorded in the income statement.

Amortization of the OMSR is calculated based on actual payment activity on a per loan basis. Because all loans are handled individually, curtailments decrease MSRs as well as regularly scheduled payments. The loan servicing value is amortized on a level yield basis.

Significant declines in current market mortgage interest rates decrease the fair value of existing MSRs due to the increase in anticipated prepayments above the original assumed speed. Accounting standards require that impairment testing be performed and that MSRs be recorded at the lower of fair value or amortized cost. We perform quarterly impairment testing on our MSRs. Actual prepayment speeds (based on our actual customer activity on a loan level basis) are compared to the assumed prepayment speed on the date of the last quarterly impairment testing (or the origination prepayment speed if a recently originated loan). The fair value assumptions other than prepayment speed are combined with the new estimated prepayment speed to create a new fair value. An impairment allowance is recorded for any shortfall between the new fair value and the original cost after adjusting for past amortization and curtailments.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

Board of Directors

PSB Holdings, Inc.

Wausau, Wisconsin

We have audited the accompanying consolidated balance sheets of PSB Holdings, Inc. and Subsidiary (PSB) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. These financial statements are the responsibility of PSB’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. PSB is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerations of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of PSB’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PSB Holdings, Inc. and Subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States.

Wipfli LLP

February 20, 2015

Wausau, Wisconsin

F-1

Consolidated Balance Sheets

December 31, 2014 and 2013

(dollars in thousands except per share data)

Assets	2014			2013

Cash and due from banks	$	18,073		$	13,800
Interest-bearing deposits and money market funds		652			977
Federal funds sold		6,381			16,745

Cash and cash equivalents		25,106			31,522
Securities available for sale (at fair value)		74,378			61,650
Securities held to maturity (fair value of $71,009 and $71,672, respectively)		69,779			71,629
Bank certificates of deposit		3,424			2,236
Loans held for sale		100			150
Loans receivable, net of allowance for loan losses		525,583			509,880
Accrued interest receivable		2,074			2,076
Foreclosed assets		1,661			1,750
Premises and equipment, net		10,841			9,669
Mortgage servicing rights, net		1,738			1,696
Federal Home Loan Bank stock (at cost)		2,556			2,556
Cash surrender value of bank-owned life insurance		13,230			12,826
Other assets		3,897			3,901

TOTAL ASSETS	$	734,367		$	711,541

Liabilities and Stockholders’ Equity

Deposits:
Non-interest-bearing	$	114,803		$	102,644
Interest-bearing		508,148			474,870

Total deposits		622,951			577,514

Federal Home Loan Bank advances		20,271			38,049
Other borrowings		10,324			20,441
Senior subordinated notes		4,000			4,000
Junior subordinated debentures		7,732			7,732
Accrued expenses and other liabilities		7,628			7,052

Total liabilities		672,906			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 – 1,630,913 and 1,651,518 shares, respectively		1,830			1,830
Additional paid-in capital		6,997			6,967
Retained earnings		57,556			52,432
Accumulated other comprehensive income, net of tax		637			349
Treasury stock, at cost – 199,353 and 178,748 shares, respectively		(5,559	)		(4,825	)

Total stockholders’ equity		61,461			56,753

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	734,367		$	711,541

See accompanying notes to consolidated financial statements.

F-2

Consolidated Statements of Income

Years Ended December 31, 2014, 2013, and 2012

(dollars in thousands except per share data)

	2014		2013		2012

Interest and dividend income:
Loans, including fees	$	22,634	$	23,126	$	23,458
Securities:
Taxable		2,398		2,098		2,402
Tax-exempt		1,504		1,511		1,293
Other interest and dividends		82		81		91

Total interest and dividend income		26,618		26,816		27,244

Interest expense:
Deposits		2,835		3,051		4,161
Federal Home Loan Bank advances		601		1,285		1,414
Other borrowings		560		650		596
Senior subordinated notes		150		184		578
Junior subordinated debentures		340		341		342

Total interest expense		4,486		5,511		7,091

Net interest income		22,132		21,305		20,153
Provision for loan losses		560		4,015		785

Net interest income after provision for loan losses		21,572		17,290		19,368

Noninterest income:
Service fees		1,656		1,580		1,648
Mortgage banking, net		1,373		1,591		1,795
Investment and insurance sales commissions		946		944		736
Net gain on sale of securities		3		12		0
Increase in cash surrender value of bank-owned life insurance		404		402		407
Gain on bargain purchase		0		0		851
Other operating income		1,312		1,094		1,131

Total noninterest income		5,694		5,623		6,568

Noninterest expense:
Salaries and employee benefits		9,879		9,069		9,169
Occupancy and facilities		1,828		1,762		1,622
Loss on foreclosed assets		233		428		573
Data processing and other office operations		2,224		1,862		2,296
Advertising and promotion		376		335		327
FDIC insurance premiums		523		452		464
Other operating expense		2,857		2,598		2,941

Total noninterest expense		17,920		16,506		17,392

Income before income taxes		9,346		6,407		8,544
Provision for income taxes		2,906		1,663		2,535

Net income	$	6,440	$	4,744	$	6,009

Basic earnings per share	$	3.90	$	2.87	$	3.61
Diluted earnings per share	$	3.90	$	2.87	$	3.61

See accompanying notes to consolidated financial statements.

F-3

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2014, 2013, and 2012

(dollars in thousands except per share data)

	2014			2013			2012

Net income	$	6,440		$	4,744		$	6,009

Other comprehensive income, net of tax:

Unrealized gain (loss) on securities available for sale		420			(961	)		(191	)

Reclassification adjustment for net gain, included in net income		(2	)		(7	)		0

Amortization of unrealized gain on securities available for sale transferred to securities held to maturity included in net income		(200	)		(236	)		(274	)

Unrealized gain (loss) on interest rate swap		(44	)		46			(179	)

Reclassification adjustment of interest rate swap settlements included in earnings		114			113			104

Other comprehensive income (loss)		288			(1,045	)		(540	)

Comprehensive income	$	6,728		$	3,699		$	5,469

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2014, 2013, and 2012

(dollars in thousands except per share data)

									Accumulated
			Additional						Other
	Common		Paid-In			Retained			Comprehensive			Treasury
	Stock		Capital			Earnings			Income (Loss)			Stock			Totals

Balance, January 1, 2012	$	1,830	$	7,140		$	44,215		$	1,934		$	(4,757	)	$	50,362

Net income							6,009									6,009
Other comprehensive loss										(540	)					(540	)
Purchase of treasury stock													(262	)		(262	)
Proceeds from stock options issued out of treasury				(6	)								15			9
Grants of restricted stock				(230	)								230			0
Vesting of restricted stock				116												116
Fractional cash dividends paid with 5% stock dividend							(10	)								(10	)
Cash dividends declared $.742 per share							(1,211	)								(1,211	)
Cash dividends declared on unvested restricted stock							(26	)								(26	)

Balance, December 31, 2012	$	1,830	$	7,020		$	48,977		$	1,394		$	(4,774	)	$	54,447

F-4

									Accumulated
			Additional						Other
	Common		Paid-In			Retained			Comprehensive			Treasury
	Stock		Capital			Earnings			Income (Loss)			Stock			Totals

Balance, December 31, 2012	$	1,830	$	7,020		$	48,977		$	1,394		$	(4,774	)	$	54,447
(Brought Forward)

Net income							4,744									4,744
Other comprehensive loss										(1,045	)					(1,045	)
Purchase of treasury stock													(269	)		(269	)
Grants of restricted stock				(218	)								218			0
Vesting of restricted stock				165												165
Cash dividends declared $.78 per share							(1,263	)								(1,263	)
Cash dividends declared on unvested restricted stock							(26	)								(26	)

Balance, December 31, 2013	$	1,830	$	6,967		$	52,432		$	349		$	(4,825	)	$	56,753

									Accumulated
			Additional						Other
	Common		Paid-In			Retained			Comprehensive		Treasury
	Stock		Capital			Earnings			Income (Loss)		Stock			Totals

Balance, December 31, 2013	$	1,830	$	6,967		$	52,432		$	349	$	(4,825	)	$	56,753
(Brought Forward)

Net income							6,440								6,440
Other comprehensive income										288					288
Purchase of treasury stock												(913	)		(913	)
Grants of restricted stock				(173	)							173			0
Vesting of restricted stock				203											203
Directors fees paid in grants of stock				0								6			6
Cash dividends declared $.80 per share							(1288	)							(1,288	)
Cash dividends declared on unvested restricted stock							(28	)							(28	)

Balance, December 31, 2014	$	1,830	$	6,997		$	57,556		$	637	$	(5,559	)	$	61,461

See accompanying notes to consolidated financial statements.

F-5

Consolidated Statements of Cash Flows

Years Ended December 31, 2014, 2013, and 2012

(dollars in thousands except per share data)

	2014			2013			2012

Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income	$	6,440		$	4,744		$	6,009
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and net amortization		2,262			2,516			2,604
Provision (benefit) for deferred income taxes		(93	)		(33	)		400
Provision for loan losses		560			4,015			785
Deferred net loan origination costs		(417	)		(514	)		(443	)
Proceeds from sales of loans held for sale		41,591			63,510			102,080
Originations of loans held for sale		(40,882	)		(61,950	)		(101,812	)
Gain on sale of loans		(1,047	)		(1,373	)		(1,918	)
Provision for (recapture of) mortgage servicing rights valuation allowance		19			(259	)		199
Net loss on sale of premises and equipment		57			0			3
Realized gain on sale of securities available for sale		(3	)		(12	)		0
Net loss on sale and provision for write-down of foreclosed assets		65			301			443
Increase in cash surrender value of bank-owned life insurance		(404	)		(402	)		(407	)
Gain on bargain purchase		0			0			(851	)
Changes in operating assets and liabilities:
Accrued interest receivable		50			81			313
Other assets		80			1,590			386
Accrued expenses and other liabilities		757			820			(235	)

Net cash provided by operating activities		9,035			13,034			7,556

Cash flows from investing activities:
Proceeds from maturities of securities available for sale		15,606			41,824			49,290
Proceeds from sale of securities available for sale		1,774			986			0
Proceeds from maturities of securities held to maturity		5,225			6,502			10,778
Payment for purchase of securities available for sale		(29,710	)		(31,241	)		(32,368	)
Payment for purchase of securities held to maturity		(3,965	)		(8,960	)		(11,696	)
Cash acquired on acquisitions		17,741			0			14,910
Net redemption (net purchase) of bank certificates of deposit		(1,188	)		2,229			(1,981	)
Net redemption (purchase) of FHLB stock		0			(50	)		744
Net (increase) decrease in loans		4,339			(36,746	)		(10,349	)
Capital expenditures		(595	)		(334	)		(572	)
Proceeds from sale of premises and equipment		7			0			0
Proceeds from sale of foreclosed assets		782			831			1,527
Purchase of bank-owned life insurance		0			(611	)		0

Net cash provided by (used in) investing activities		10,016			(25,570	)		20,283

F-6

Consolidated Statements of Cash Flows (Continued)

Years Ended December 31, 2014, 2013, and 2012

(dollars in thousands except per share data)

	2014			2013			2012

Cash flows from financing activities:
Net increase (decrease) in non-interest-bearing deposits	$	8,269		$	12,825		$	(9,902	)
Net decrease in interest-bearing deposits		(3,612	)		(694	)		(6,832	)
Net decrease in Federal Home Loan Bank advances		(17,778	)		(12,075	)		0
Net increase (decrease) in other borrowings		(10,117	)		(287	)		1,037
Repayment of senior subordinated notes		0			(3,000	)		0
Dividends declared		(1,316	)		(1,289	)		(1,247	)
Proceeds from exercise of stock options		0			0			9
Purchase of treasury stock		(913	)		(269	)		(262	)

Net cash used in financing activities		(25,467	)		(4,789	)		(17,197	)

Net increase (decrease) in cash and cash equivalents		(6,416	)		(17,325	)		10,642
Cash and cash equivalents at beginning		31,522			48,847			38,205

Cash and cash equivalents at end	$	25,106		$	31,522		$	48,847

Supplemental cash flow information:
Cash paid during the year for:
Interest	$	4,632		$	5,645		$	7,177
Income taxes		2,560			759			2,146

Noncash investing and financing activities:
Loans charged off	$	969		$	4,743		$	1,332
Loans transferred to foreclosed assets		801			1,342			1,295
Loans originated on sale of foreclosed properties		43			234			490
Grants of unvested restricted stock at fair value		200			210			200
Vesting of restricted stock grants		203			165			116
Amortization of unrealized gain on securities held to maturity transferred from securities available for sale		330			420			452

See accompanying notes to consolidated financial statements.

F-7

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

NOTE 1 Summary of Significant Accounting Policies

Principal Business Activity

PSB Holdings, Inc. operates Peoples State Bank (the “Bank”), a full-service financial institution chartered as a Wisconsin commercial bank with nine locations in a primary service area including, but not limited to, Marathon, Oneida, and Vilas counties in Wisconsin. PSB operates as a community bank and provides a variety of retail consumer and commercial banking products, including uninsured investment and insurance products, long-term fixed-rate residential mortgages, and commercial treasury management services.

Principles of Consolidation

The consolidated financial statements include the accounts of PSB Holdings, Inc. and its subsidiary, Peoples State Bank. Peoples State Bank owns and operates a Nevada subsidiary, PSB Investments, Inc., to manage the Bank’s investment securities. All significant intercompany balances and transactions have been eliminated. The accounting and reporting policies of PSB conform to accounting principles generally accepted in the United States (GAAP) and to the general practices within the banking industry. Any reference to “PSB” refers to the consolidated or individual operations of PSB Holdings, Inc. and its subsidiary, Peoples State Bank.

Use of Estimates in Preparation of Financial Statements

The preparation of the consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are susceptible to significant change include the determination of the allowance for loan losses, mortgage servicing rights assets, and the valuation of investment securities.

Cash Equivalents

For purposes of reporting cash flows in the consolidated financial statements, cash and cash equivalents include cash and due from banks, interest-bearing deposits and money market funds, and federal funds sold, all of which have original maturities of three months or less.

Securities

Securities are assigned an appropriate classification at the time of purchase in accordance with management’s intent. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Amortization of the net unrealized gain on securities held to maturity that were transferred from securities available for sale is recognized in other comprehensive income using the interest method over the estimated lives of the securities. Trading securities include those securities bought and held principally for the purpose of selling them in the near future. PSB has no trading securities. Securities not classified as either securities held to maturity or trading securities are considered available for sale and reported at fair value determined from estimates of brokers or other sources. Unrealized gains and losses are excluded from earnings but are reported as other comprehensive income, net of income tax effects. Amortization of premiums and accretion of discounts is recognized in interest income using the interest method over the estimated lives of the securities.

Gains and losses on the sale of securities are recorded on the trade date and determined using the specific-identification method.

Declines in fair value of securities that are deemed to be other than temporary, if applicable, are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers the length of time and the extent to which fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of PSB to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans Held for Sale

PSB sells substantially all 20- and 30-year long-term fixed-rate single-family mortgage loans and the majority of

15-year fixed-rate mortgage loans it originates to the secondary market. The gain or loss associated with sales of single-family mortgage loans is recorded as a component of mortgage banking revenue.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method using quoted market prices.

F-8

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

For sales of mortgage loans to the Federal Home Loan Bank (FHLB) prior to 2009, PSB retained a secondary portion of the credit risk on the underlying loans in exchange for a credit enhancement fee. When applicable, PSB records a recourse liability to provide for potential credit losses. PSB also provides representations and warranties regarding all originated loans sold to secondary market buyers including the FHLB and the Federal National Mortgage Association (FNMA). These representations and warranties can lead to additional credit risk for which PSB records a recourse liability. Because the loans involved in these transactions are similar to those in PSB’s loans held for investment, the review of the adequacy of the recourse liability is similar to the review of the adequacy of the allowance for loan losses (refer to “Allowance for Loan Losses”).

Loans

Loans that management has the intent to hold for the foreseeable future or until maturity or pay-off generally are 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 all loans that have a nonaccrual status or have had their terms restructured, meet this definition. Loans currently maintained on accrual status but expected to be placed on nonaccrual or have their terms restructured in the near term are also considered impaired. Large groups of homogeneous loans, such as mortgage and consumer loans, are not collectively evaluated for impairment. 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.

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 and changes in any valuation allowance are included in loss on foreclosed assets.

F-9

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Premises and Equipment

Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed principally on the straight-line method and is based on the estimated useful lives of the assets varying primarily from 15 to 40 years on buildings, 5 to 10 years on furniture and equipment, and 3 years on computer hardware and software. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of property and equipment are reflected in income.

Mortgage Servicing Rights

PSB services the single-family mortgages it sells to the FHLB and FNMA. Servicing mortgage loans includes such functions as collecting monthly payments of principal and interest from borrowers, passing such payments through to third-party investors, maintaining escrow accounts for taxes and insurance, and making such payments when they are due. When necessary, servicing mortgage loans also includes functions related to the collection of delinquent principal and interest payments, loan foreclosure proceedings, and disposition of foreclosed real estate. PSB generally earns a servicing fee of 25 basis points (.25% annually) on the outstanding loan balance for performing these services as well as fees and interest income from ancillary sources such as delinquency charges and payment float. Servicing fee income is recorded as a component of mortgage banking revenue, net of the amortization and charges described in the following paragraphs.

PSB records originated mortgage servicing rights (OMSR) as a component of mortgage banking income when the obligation to service such loans has been retained. The initial value recorded for OMSR is based on the fair values of the servicing fee adjusted for expected future costs to service the loans, as well as income and fees expected to be received from ancillary sources, as previously described. The carrying value of OMSR is amortized against service fee income in proportion to estimated gross servicing revenues, net of estimated costs of servicing, adjusted for expected prepayments. In addition to this periodic amortization, the carrying value of OMSR associated with loans that actually prepay is also charged against servicing fee income as amortization. During periods of falling long-term interest rates, prepayments would likely accelerate, increasing amortization of existing OMSR against servicing fee income, and impair the value of OMSR as described below.

The carrying value of OMSR recorded in PSB’s consolidated balance sheets (“mortgage servicing rights” or MSRs) is subject to impairment because of changes in loan prepayment expectations and in market discount rates used to value the future cash flows associated with such assets. In valuing MSRs, PSB stratifies the loans by year of origination, term of the loan, and range of interest rates within each term. If, based on a periodic evaluation, the estimated fair value of the MSRs related to a particular stratum is determined to be less than its carrying value, a valuation allowance is recorded against such stratum and against PSB’s loan servicing fee income, which is included as a component of mortgage banking revenue. If the periodic evaluation of impairment calls for a valuation allowance less than currently recorded, the decrease in the valuation allowance is recaptured, offsetting amortization from loan prepayments during the period and increasing mortgage banking revenue. The valuation allowance is calculated using the current outstanding principal balance of the related loans, long-term prepayment assumptions as provided by independent sources, a market-based discount rate, and other management assumptions related to future costs to service the loans, as well as ancillary sources of income.

Federal Home Loan Bank Stock

As a member of the FHLB system, PSB is required to hold stock in the FHLB of Chicago based on the level of borrowings advanced to PSB. This stock is recorded at cost, which approximates fair value. The stock is evaluated for impairment on an annual basis. Transfer of the stock is substantially restricted.

Bank-Owned Life Insurance

PSB has purchased life insurance policies on certain officers. Bank-owned life insurance is recorded at its cash surrender value. Changes in cash surrender value are recorded in noninterest income.

Retirement Plans

PSB maintains a defined contribution 401(k) profit sharing plan which covers substantially all full-time employees.

Income Taxes

Deferred income taxes have been provided under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences are expected to reverse. Deferred tax expense is the result of changes in the deferred tax asset and liability and is a component of the provision for income taxes.

F-10

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

PSB may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Interest and penalties related to unrecognized benefits are recorded as additional income tax expense.

Advertising and Promotional Costs

Costs relating to PSB’s advertising and promotion are generally expensed when paid.

Derivative Instruments and Hedging Activities

All derivative instruments are recorded at their fair values. If derivative instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in income. The fair value of derivative instruments is not offset against cash collateral paid to secure those instruments but is reflected as gross amounts outstanding on the consolidated balance sheets.

Rate Lock Commitments

PSB enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Rate lock commitments are recorded at fair value at period-end and classified as other assets on the consolidated balance sheets. Changes in the fair value of rate lock commitments during the period are reflected in the current period’s income statement as mortgage banking income. The fair value of rate lock commitments includes the estimated gain on sale of the loan to the secondary market agency plus the estimated value of OMSR on loans expected to be closed.

Fair Values of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 23. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance-sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments.

Segment Information

PSB, through the branch network of its banking subsidiary, provides a full range of consumer and commercial banking services to individuals, businesses, governments, and farms in northcentral Wisconsin. These services include demand, time, and savings deposits; safe deposit services; debit and credit cards; notary services; night depository; money orders, traveler’s checks, and cashier’s checks; savings bonds; secured and unsecured consumer, commercial, and real estate loans; ATM processing; cash management; and wealth management. While PSB’s chief decision makers monitor the revenue streams of various PSB products and services, operations are managed and financial performance is evaluated on a companywide basis. Accordingly, all of PSB’s banking operations are considered by management to be aggregated in one reportable operating segment.

Stock-Based Compensation

PSB uses the fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period, which is normally the vesting period.

Accumulated Other Comprehensive Income (Loss)

PSB’s accumulated other comprehensive income (loss) is composed of the unrealized gain (loss) on securities available for sale, net of tax, unrealized gain (loss) on interest rate swaps used for cash flow hedges after reclassification of settlements of the hedged item, net of tax, and unamortized unrealized gain on securities transferred to securities held to maturity from securities available for sale, net of tax, and is shown on the consolidated statements of comprehensive income.

F-11

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

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.

Reclassifications

Certain prior year balances have been reclassified to conform to the current year presentation.

Subsequent Events

Management has reviewed PSB’s operations for potential disclosure of information or financial statement impacts related to events occurring after December 31, 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 year are required as of the release date.

NOTE 2 Merger and Acquisition Activity

Purchase of the Northwoods National Bank of Rhinelander, Wisconsin, a branch of The Baraboo National Bank

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

Fair value of assets acquired:

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:

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. During 2014, PSB incurred and expensed $371 of non-recurring branch merger and conversion costs with integration of the purchased Northwoods branch, including $224 of data processing conversion costs.

F-12

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Purchase of Marathon State Bank

On June 14, 2012, PSB purchased Marathon State Bank, a privately owned bank with $107 million in total assets located in the village of Marathon City, Wisconsin (“Marathon”). Under the terms of the agreement, PSB paid $5,505 in cash, which was equal to 100% of Marathon’s tangible net book value following a special dividend by Marathon to its shareholders to reduce its book equity ratio to 6% of total assets. The following table outlines the fair value of Marathon assets acquired and liabilities assumed, including determination of the gain on bargain purchase using an accounting date of June 1, 2012. A core deposit intangible was not recorded on the purchase since the fair value calculation determined it was insignificant.

Cash purchase price	$	5,505

Fair value of assets acquired:
Cash and due from banks		20,392
Securities available for sale		50,547
Loans receivable		23,760
Short-term commercial paper and bankers’ acceptances		11,713
Foreclosed assets		0
Premises and equipment		402
Core deposit intangible		0
Accrued interest receivable and other assets		550

Total fair value of assets acquired		107,364

Fair value of liabilities assumed:
Non-interest-bearing deposits		23,255
Interest-bearing deposits		77,611
Accrued interest payable and other liabilities		142

Total fair value of liabilities assumed		101,008

Fair value of net assets acquired		6,356

Gain on bargain purchase	$	851

F-13

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

PSB recorded a total credit markdown of $490 on Marathon’s loan portfolio on the purchase date, or 2.05% of gross purchased loan principal. Purchased impaired loan principal totaled $310 on which a $21 credit write-down was recorded. Due to the insignificant amount of total purchased impaired loans, the entire $490 credit markdown is accreted to income as a yield adjustment based on contractual cash flows over the remaining life of the purchased loans.

The gain on bargain purchase was due primarily to PSB’s recognition of fair value associated with Marathon’s investment securities and premises and equipment that was not previously recognized by Marathon in its stockholders’ equity, upon which the purchase price was factored.

Pro forma combined results of operations as if the combination occurred at the beginning of the year-to-date period ended December 31, 2012, are as follows:

	(pro forma combined at beginning of period)
	Net Interest		Noninterest		Net		Earnings
	Income		Income		Income		Per Share

PSB Holdings, Inc.	$	19,670	$	5,706	$	5,587	$	3.36
Marathon State Bank		1,158		880		468		0.28

Pro forma totals	$	20,828	$	6,586	$	6,055	$	3.64

NOTE 3 Cash and Cash Equivalents

PSB is required to maintain a certain reserve balance, in cash or on deposit with the Federal Reserve Bank, based upon a percentage of transactional deposits. As of December 31, 2014, PSB had a required reserve of $1.064, which was satisfied by cash balances of $1,742.

PSB is also required to provide collateral on interest rate swap agreement liabilities with counterparties. The total required collateral on deposit with counterparties before any offset against related swap liabilities was $430 at December 31, 2014, and $570 at December 31, 2013.

In the normal course of business, PSB maintains cash and due from bank balances with correspondent banks. PSB also maintains cash balances in money market mutual funds. Such balances are not insured. Total uninsured cash and cash equivalent balances totaled $15,987 and $12,045 at December 31, 2014 and 2013, respectively.

F-14

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

NOTE 4 Securities

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

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

December 31, 2014

Securities available for sale

U.S. agency issued residential mortgage-backed securities	$	45,626	$	834	$	124	$	46,336
U.S. agency issued residential collateralized mortgage obligations		27,031		247		262		27,016
Privately issued residential collateralized mortgage obligations		28		1		0		29
Nonrated SBA loan fund		950		0		0		950
Other equity securities		47		0		0		47

Totals	$	73,682		1,082		386	$	74,378

Securities held to maturity

Obligations of states and political subdivisions	$	67,836	$	1,517	$	162	$	69,191
Nonrated trust preferred securities		1,543		26		155		1,414
Nonrated senior subordinated notes		400		4		0		404

Totals	$	69,779	$	1,547	$	317	$	71,009

December 31, 2013

Securities available for sale

U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,001	$	0	$	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		0		105
Obligations of states and political subdivision		159		0		0		159
Nonrated SBA loan fund		950		0		0		950
Other equity securities		47		0		0		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		0		407

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

Fair values of securities are estimated based on financial models or prices paid for similar securities. It is possible future interest rates could change considerably resulting in a material change in the estimated fair value.

F-15

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Nonrated trust preferred securities at December 31, 2014 and 2013, consist of separate obligations issued by three holding companies headquartered in Wisconsin. Nonrated senior subordinated notes at December 31, 2014 and 2013, consist of one obligation issued by a Wisconsin state chartered bank. All issues of nonrated trust preferred securities or senior subordinated notes were current as to principal and interest payments as of December 31, 2014 and 2013.

The following table indicates the number of months securities that are considered to be temporarily impaired have been in an unrealized loss position at December 31:

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss

2014

Securities available for sale

U.S. agency issued residential mortgage-backed securities	$	5,555	$	22	$	6,787	$	102	$	12,342	$	124
U.S. agency issued residential collateralized mortgage obligations		3,267		16		9,844		246		13,111		262

Totals	$	8,822	$	38	$	16,631	$	348	$	25,453	$	386

Securities held to maturity

Obligations of states and political subdivisions	$	4,015	$	38	$	6,103	$	124	$	10,118	$	162
Nonrated trust preferred securities		0		0		706		155		706		155

Totals	$	4,015	$	38	$	6,809	$	279	$	10,824	$	317

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss

2013

Securities available for sale

U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	999	$	2	$	0	$	0	$	999	$	2
U.S. agency issued residential mortgage-backed securities		13,206		424		0		0		13,206		424
U.S. agency issued residential collateralized mortgage obligations		14,179		334		5,830		242		20,009		576
Obligations of states and political subdivisions		159		0		0		0		159		0

Totals	$	28,543	$	760	$	5,830	$	242	$	34,373	$	1,002

Securities held to maturity

Obligations of states and political subdivisions	$	23,017	$	806	$	1,073	$	81	$	24,090	$	887
Nonrated trust preferred securities		368		102		322		63		690		165

Totals	$	23,385	$	908	$	1,395	$	144	$	24,780	$	1,052

F-16

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

At December 31, 2014, 76 debt securities had unrealized losses with aggregate depreciation of 1.90% from the amortized cost basis, compared to 167 debt securities which had unrealized losses with aggregate depreciation of 3.36% from the amortized cost basis at December 31, 2013. These unrealized losses relate principally to an increase in interest rates relative to interest rates in effect at the time of purchase or reclassification from available-for-sale to held-to-maturity classification and are not due to changes in the financial condition of the issuers. However, the unrealized loss on nonrated trust preferred securities is due to an increase in credit spreads for risk on such investments demanded in the market. In analyzing an issuer’s financial condition, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, and internal review of issuer financial statements. Since management does not intend to sell and has the ability to hold debt securities until maturity (or the foreseeable future for securities available for sale), no declines are deemed to be other than temporary.

The amortized cost and estimated fair value of debt securities and nonrated trust preferred securities and senior subordinated notes at December 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Due in one year or less	$	0	$	0	$	4,568	$	4,588
Due after one year through five years		0		0		24,288		24,885
Due after five years through ten years		0		0		37,826		38,531
Due after ten years		0		0		3,097		3,005

Subtotals		0		0		69,779		71,009
Mortgage-backed securities and collateralized mortgage obligations		72,685		73,381		0		0

Totals	$	72,685	$	73,381	$	69,779	$	71,009

Securities with a fair value of $46,368 and 47,593 at December 31, 2014 and 2013, respectively, were pledged to secure public deposits, other borrowings, and for other purposes required by law.

During 2014, PSB realized a gain of $3 ($2 after tax expense) from proceeds totaling $1,774 on the sale of securities available for sale. During 2013, PSB realized a 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 2012.

During 2014, PSB reclassified $3 ($2 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 $3 ($2 after tax impacts) gain on sale of securities on the statement of income during the year. During 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 year.

During 2010, PSB transferred all of its municipal, trust preferred, and senior subordinated note securities from the available-for-sale classification to the held-to-maturity classification to better reflect its intent and practice to hold these long-term debt securities until maturity. Fair value of the securities was $54,130 at the time of the transfer, which included a $2,552 unrealized gain over the existing amortized cost basis. The original unrealized gain on the transfer date is being amortized against the new cost basis (equal to transfer date fair value) over the remaining life of the securities which is recorded as a reduction to other comprehensive income. Amortization of the unrealized gain reduced comprehensive income by $330 ($200 after tax impacts), $430 ($236 after tax impacts), and $452 ($274 after tax impacts) during the three years ended December 31, 2014.

F-17

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Scheduled amortization at December 31, 2014, of the remaining unrealized gain is as follows:

2015	$	274
2016		194
2017		115
2018		68
2019		22
Thereafter		22

Total	$	695

NOTE 5 Loans

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

	2014			2013

Commercial, industrial, and municipal	$	134,768		$	130,220
Commercial real estate mortgage		203,501			212,850
Commercial construction and development		31,364			13,672
Residential real estate mortgage		128,347			123,980
Residential construction and development		13,711			18,277
Residential real estate home equity		23,517			20,677
Consumer and individual		3,627			3,567

Subtotals – Gross loans		538,835			523,243
Loans in process of disbursement		(7,145	)		(6,895	)

Subtotals – Disbursed loans		531,690			516,348
Net deferred loan costs		302			315
Allowance for loan losses		(6,409	)		(6,783	)

Net loans receivable	$	525,583		$	509,880

PSB, in the ordinary course of business, grants loans to its executive officers and directors, including their families and firms in which they are principal owners. All loans to executive officers and directors are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and, in the opinion of management, did not involve more than the normal risk of collectability or present other unfavorable features. Activity in such loans is summarized below:

	2014			2013

Loans outstanding at beginning	$	6,663		$	7,371
New loans		1,500			3,519
Repayments		(1,183	)		(4,227	)

Loans outstanding at end	$	6,980		$	6,663

At December 31, 2014 and 2013, PSB had total loans receivable of approximately $5,723 and $4,595, respectively, from one related party.

F-18

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Allowance for loan losses activity for the years ended December 31, 2014, 2013, and 2012, follows:

	2014
				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total

Allowance for loan losses:

Beginning balance	$	2,828		$	2,653		$	1,223		$	79			–	$	6,783
Provision (credit)		(716	)		(321	)		1,564			33			–		560
Recoveries		4			3			19			9			–		35
Charge-offs		(215	)		(41	)		(694	)		(19	)		–		(969	)

Ending balance	$	1,901		$	2,294		$	2,112		$	102			–	$	6,409

Individually evaluated for impairment	$	976		$	511		$	746		$	25			–	$	2,258

Collectively evaluated for impairment	$	925		$	1,783		$	1,366		$	77			–	$	4,151

Loans receivable (gross):

Individually evaluated for impairment	$	10,542		$	5,378		$	3,203		$	25			–	$	19,148

Collectively evaluated for impairment	$	124,226		$	229,487		$	162,372		$	3,602			–	$	519,687

	2013
				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total

Allowance for loan losses:

Beginning balance	$	3,014		$	2,803		$	1,511		$	103		$	0	$	7,431
Provision (credit)		3,435			(9	)		556			33			0		4,015
Recoveries		29			33			6			12			0		80
Charge-offs		(3,650	)		(174	)		(850	)		(69	)		0		(4,743	)

Ending balance	$	2,828		$	2,653		$	1,223		$	79		$	0	$	6,783

Individually evaluated for impairment	$	1,167		$	695		$	228		$	18		$	0	$	2,108

Collectively evaluated for impairment	$	1,661		$	1,958		$	995		$	61		$	0	$	4,675

Loans receivable (gross):

Individually evaluated for impairment	$	8,102		$	5,527		$	2,129		$	17		$	0	$	15,775

Collectively evaluated for impairment	$	122,118		$	220,995		$	160,805		$	3,550		$	0	$	507,468

F-19

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

	2012
				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total

Allowance for loan losses:

Beginning balance	$	3,406		$	3,175		$	1,242		$	118		$	0	$	7,941
Provision (credit)		(270	)		142			877			36			0		785
Recoveries		6			4			21			6			0		37
Charge-offs		(128	)		(518	)		(629	)		(57	)		0		(1,332	)

Ending balance	$	3,014		$	2,803		$	1,511		$	103		$	0	$	7,431

Individually evaluated for impairment	$	1,327		$	674		$	407		$	26		$	0	$	2,434

Collectively evaluated for impairment	$	1,687		$	2,129		$	1,104		$	77		$	0	$	4,997

Loans receivable (gross):

Individually evaluated for impairment	$	5,263		$	4,204		$	2,946		$	26		$	0	$	12,439

Collectively evaluated for impairment	$	127,370		$	208,096		$	139,636		$	4,689		$	0	$	479,791

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

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

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

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

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

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

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

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

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

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

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

F-20

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

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

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

The commercial credit exposure based on internally assigned credit grade at December 31, 2014 and 2013, follows:

	2014
	Commercial		Commercial Real Estate		Construction & Development		Agricultural		Government		Total

High quality (risk rating 1)	$	147	$	0	$	0	$	0	$	0	$	147
Minimal risk (2)		26,159		19,062		785		1,937		60		48,003
Average risk (3)		49,996		122,875		23,672		2,628		6,980		206,151
Acceptable risk (4)		32,908		50,863		4,725		477		291		89,264
Watch risk (5)		2,259		5,025		2,050		0		0		9,334
Substandard risk (6)		384		430		0		0		0		814
Impaired loans (7)		7,645		5,246		132		122		2,775		15,920

Totals	$	119,498	$	203,501	$	31,364	$	5,164	$	10,106	$	369,633

	2013
	Commercial		Commercial Real Estate		Construction & Development		Agricultural		Government		Total

High quality (risk rating 1)	$	44	$	0	$	0	$	0	$	0	$	44
Minimal risk (2)		24,085		19,249		120		1,115		78		44,647
Average risk (3)		51,745		145,673		8,863		2,563		6,512		215,356
Acceptable risk (4)		26,395		34,154		2,917		424		357		64,247
Watch risk (5)		8,146		7,572		1,632		0		0		17,350
Substandard risk (6)		654		815		0		0		0		1,469
Impaired loans (7)		4,860		5,387		140		152		3,090		13,629

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

The consumer credit exposure based on payment activity at December 31, 2014 and 2013, follows:

	2014
	Residential-		Residential-		Construction and
	Prime		HELOC		Development		Consumer		Total

Performing	$	126,035	$	23,117	$	13,220	$	3,602	$	165,974
Impaired loans		2,312		400		491		25		3,228

Totals	$	128,347	$	23,517	$	13,711	$	3,627	$	169,202

F-21

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

	2013
	Residential-		Residential-		Construction and
	Prime		HELOC		Development		Consumer		Total

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

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

The payment age analysis of loans receivable disbursed at December 31, 2014 and 2013, follows:

	2014
	30-59		60-89		90+		Total				Total		90+ and
Loan Class	Days		Days		Days		Past Due		Current		Loans		Accruing

Commercial:
Commercial and industrial	$	532	$	49	$	470	$	1,051	$	118,448	$	119,498	$	0
Agricultural		0		0		122		122		5,042		5,164		0
Government		0		0		0		0		10,106		10,106		0

Commercial real estate:
Commercial real estate		331		0		793		1,124		202,376		203,501		0
Construction and development		81		0		0		81		26,044		26,125		0

Residential real estate:
Residential – Prime		361		321		1,184		1,866		126,481		128,347		0
Residential – HELOC		79		102		171		352		23,165		23,517		0
Construction and development		111		0		145		256		11,549		11,805		0

Consumer		11		4		0		15		3,612		3,627		0

Totals	$	1,506	$	476	$	2,885	$	4,867	$	526,823	$	531,690	$	0

	2013
	30-59		60-89		90+		Total				Total		90+ and
Loan Class	Days		Days		Days		Past Due		Current		Loans		Accruing

Commercial:
Commercial and industrial	$	284	$	57	$	610	$	951	$	114,978	$	115,929	$	0
Agricultural		0		0		152		152		4,102		4,254		0
Government		0		0		0		0		10,037		10,037		0

Commercial real estate:
Commercial real estate		376		547		1,276		2,199		210,651		212,850		0
Construction and development		0		0		0		0		11,434		11,434		0

Residential real estate:
Residential – Prime		369		87		335		791		123,189		123,980		0
Residential – HELOC		45		14		314		373		20,304		20,677		0
Construction and development		37		0		0		37		13,583		13,620		0

Consumer		15		10		9		34		3,533		3,567		0

Totals	$	1,126	$	715	$	2,696	$	4,537	$	511,811	$	516,348	$	0

F-22

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

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

	December 31,
	2014		2013		2012

Impaired loans without a valuation allowance	$	9,021	$	9,303	$	3,410
Impaired loans with a valuation allowance		10,127		6,472		9,029

Total impaired loans before valuation allowances		19,148		15,775		12,439
Valuation allowance related to impaired loans		2,258		2,108		2,434

Net impaired loans	$	16,890	$	13,667	$	10,005

	Years Ended December 31,
	2014		2013		2012

Average recorded investment, net of allowance for loan losses	$	17,465	$	14,109	$	12,026

Interest income recognized	$	586	$	534	$	569

Interest income recognized on a cash basis on impaired loans	$	0	$	0	$	0

At December 31, 2014, $204 of funds were committed to be advanced on remaining available lines of credit in connection with impaired loans, while $201 of funds were committed to be advanced on remaining available lines of credit in connection with impaired loans at December 31, 2013.

Total loans receivable (including nonaccrual impaired loans) maintained on nonaccrual status as of December 31, 2014 and 2013 were $8,371 and $7,340, respectively. There were no loans past due 90 days or more but still accruing income at December 31, 2014 and 2013.

F-23

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Detailed information on impaired loans by loan class at December 31, 2014 and 2013, and during the years then ended, follows:

	2014
	Unpaid						Average		Interest
	Principal		Related		Recorded		Recorded		Income
	Balance		Allowance		Investment		Investment		Recognized

With no related allowance recorded:

Commercial and industrial	$	2,285	$	0	$	2,235	$	2,549	$	195
Commercial real estate		2,836		0		2,577		2,476		86
Commercial construction and development		0		0		0		0		0
Agricultural		0		0		0		0		0
Government		2,775		0		2,775		2,933		72
Residential – Prime		1,377		0		1,281		1,074		34
Residential – HELOC		153		0		153		132		5
Residential construction and development		0		0		0		0		0
Consumer		0		0		0		0		0

With an allowance recorded:

Commercial and industrial	$	5,697	$	940	$	5,410	$	3,705	$	162
Commercial real estate		3,041		488		2,669		2,840		7
Commercial construction and development		135		23		132		136		6
Agricultural		127		36		122		137		0
Residential – Prime		1,538		390		1,031		869		18
Residential – HELOC		273		186		247		324		0
Residential construction and development		503		170		491		269		1
Consumer		26		25		25		21		0

Totals:

Commercial and industrial	$	7,982	$	940	$	7,645	$	6,254	$	357
Commercial real estate		5,877		488		5,246		5,316		93
Commercial construction and development		135		23		132		136		6
Agricultural		127		36		122		137		0
Government		2,775		0		2,775		2,933		72
Residential – Prime		2,915		390		2,312		1,943		52
Residential – HELOC		426		186		400		456		5
Residential construction and development		503		170		491		269		1
Consumer		26		25		25		21		0

F-24

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

	2013
	Unpaid						Average		Interest
	Principal		Related		Recorded		Recorded		Income
	Balance		Allowance		Investment		Investment		Recognized

With no related allowance recorded:

Commercial and industrial	$	2,906	$	0	$	2,861	$	2,172	$	135
Commercial real estate		2,555		0		2,376		1,740		85
Commercial construction and development		1		0		0		0		0
Agricultural		0		0		0		0		0
Government		3,090		0		3,090		1,545		150
Residential – Prime		979		0		866		845		14
Residential – HELOC		110		0		110		55		3
Residential construction and development		0		0		0		0		0
Consumer		0		0		0		0		0

With an allowance recorded:

Commercial and industrial	$	2,231	$	1,112	$	1,999	$	2,813	$	43
Commercial real estate		3,143		621		3,011		2,955		81
Commercial construction and development		142		74		140		171		8
Agricultural		152		55		152		153		0
Residential – Prime		749		101		706		1,085		9
Residential – HELOC		412		119		400		453		5
Residential construction and development		49		8		47		106		1
Consumer		19		18		17		22		0

Totals:

Commercial and industrial	$	5,137	$	1,112	$	4,860	$	4,985	$	178
Commercial real estate		5,698		621		5,387		4,695		166
Commercial construction and development		143		74		140		171		8
Agricultural		152		55		152		153		0
Government		3,090		0		3,090		1,545		150
Residential – Prime		1,728		101		1,572		1,930		23
Residential – HELOC		522		119		510		508		8
Residential construction and development		49		8		47		106		1
Consumer		19		18		17		22		0

F-25

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

The loans on nonaccrual status at December 31, follows:

	2014		2013

Commercial:
Commercial and industrial	$	2,519	$	1,575
Agricultural		122		152

Commercial real estate:
Commercial real estate		3,505		4,103
Construction and development		18		17

Residential real estate:
Residential – Prime		1,426		1,059
Residential – HELOC		280		387
Construction and development		476		30

Consumer		25		17

Totals	$	8,371	$	7,340

The following table presents information concerning modifications of troubled debt made during 2014 and 2013:

					Postmodification
			Premodification		Outstanding
			Outstanding		Recorded
	Number of		Recorded		Investment
As of December 31, 2014	contracts		Investment		at Period-End
Commercial and industrial		5	$	1,252	$	1,152
Commercial and real estate		7		1,469		1,374
Government		1		2,775		2,775
Residential real estate - Prime		3		401		275

During the year ended December 31, 2014, approximately $1,445, or 25%, of the modified loan principal was restructured to capitalize unpaid property taxes, and $4,452, or 75%, was modified to extend amortization periods or to lower the existing interest rate. No loan principal was charged off or forgiven in connection with the modifications. At December 31, 2014, specific loan loss reserves maintained on loans modified or restructured during 2014 totaled $591.

The following table outlines past troubled debt restructurings that subsequently defaulted during 2014 when the default occurred within 12 months of the last restructuring date. For purposes of this table, default is defined as 90 days or more past due on restructured payments.

	Number of Contracts		Recorded Investment at Period-End
Commercial and industrial		4	$	323
Commercial real estate		3		337
Residential real estate - Prime		2		0

The contracts noted above were originally restructured primarily to lower the interest rate and convert payments to interest only. Collateral supporting the modified loans was in the process of foreclosure at period-end. No specific loan loss reserves were maintained on these impaired loans at December 31, 2014.

F-26

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

					Postmodification
			Premodification		Outstanding
			Outstanding		Recorded
	Number of		Recorded		Investment
As of December 31, 2013	contracts		Investment		at Period-End

Commercial and industrial		7	$	1,012	$	642
Commercial and real estate		5		587		564
Residential real estate - Prime		5		867		852

During the year ended December 31, 2013, approximately $1,272, or 52%, of the modified loan principal was restructured to capitalize unpaid property taxes, and $1,194, or 48%, was modified to extend amortization periods or to lower the existing interest rate. No loan principal was charged off or forgiven in connection with the modifications. At December 31, 2013, specific loan loss reserves maintained on loans modified or restructured during 2013 totaled $258.

The following table outlines past troubled debt restructurings that subsequently defaulted during 2013 when the default occurred within 12 months of the last restructuring date. For purposes of this table, default is defined as 90 days or more past due on restructured payments.

	Number of Contracts		Recorded Investment at Period-End
Commercial and industrial		1	$	0
Commercial real estate		1		80
Residential real estate - Prime		1		87

Under a secondary market loan servicing program with the FHLB, in exchange for a monthly fee, PSB provides a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess of 1% of original loan principal sold to the FHLB. At December 31, 2014, PSB serviced payments on $18,834 of first lien residential loan principal under these terms for the FHLB. At December 31, 2014, the maximum PSB obligation for such guarantees would be approximately $949 if total foreclosure losses on the entire pool of loans exceed approximately $1,412. Management believes the likelihood of reimbursement for credit loss payable to the FHLB on loans underwritten according to program requirements beyond the monthly credit enhancement fee is remote. PSB recognizes the credit enhancement fee as mortgage banking income when received in cash and does not maintain any recourse liability for possible credit enhancement losses.

PSB had originated and sold $3,137 and $5,202 of commercial and commercial real estate loans to other participating financial institutions at December 31, 2014 and 2013, respectively, to accommodate customer credit needs and maintain compliance with internal and external large borrower limits. Likewise, PSB had purchased $22,404 and $27,404 of commercial and commercial real estate loans originated by other Wisconsin-based financial institutions at December 31, 2014 and 2013, respectively, as part of informal reciprocal relationships that allow the originating bank to meet the needs of their large credit customers. PSB does not charge servicing fees to the participating institutions on these traditional loan participations sold by PSB, and no servicing right asset or liability has been recognized on these relationships. Any credit losses incurred on purchased or sold participation loans upon liquidation are shared pro-rata among the participants based on principal owned.

F-27

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

NOTE 6 Foreclosed Assets

A summary of activity in foreclosed assets for the period ended December 31 is as follows:

	2014			2013			2012

Balance at beginning of year	$	1,750		$	1,774		$	2,939

Transfer of loans at net realizable value to foreclosed assets		801			1,342			1,295
Sale proceeds		(782	)		(831	)		(1,527	)
Loans made on sale of foreclosed assets		(43	)		(234	)		(490	)
Net gain (loss) from sale of foreclosed assets		(10	)		105			42
Provision for write-down charged to operations		(55	)		(406	)		(485	)

Balance at end of year	$	1,661		$	1,750		$	1,774

Net gain and loss from the sale of foreclosed assets as well as the provision to expense for the partial write-down of foreclosed assets prior to sale are recorded as loss on foreclosed assets. Loss on foreclosed assets also includes periodic holding costs related to foreclosed assets. The total loss on foreclosed assets was $233, $428, and $573 during the years ended 2014, 2013, and 2012, respectively.

NOTE 7 Mortgage Servicing Rights

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of residential mortgage loans serviced for FHLB and FNMA were $279,865 and $272,280 at December 31, 2014 and 2013, respectively. The following is a summary of changes in the balance of MSRs:

	Originated			Valuation
	MSR			Allowance			Total

Balance at January 1, 2012	$	1,286		$	(81	)	$	1,205

Additions from originated servicing		774			0			774
Amortization charged to earnings		(547	)		0			(547	)
Change in valuation allowance credited to earnings		0			(199	)		(199	)

Balance at December 31, 2012		1,513			(280	)		1,233

Additions from originated servicing		625			0			625
Amortization charged to earnings		(421	)		0			(421	)
Change in valuation allowance charged to earnings		0			259			259

Balance at December 31, 2013		1,717			(21	)		1,696

Additions from originated servicing		339			0			339
Amortization charged to earnings		(278	)		0			(278	)
Change in valuation allowance credited to earnings		0			(19	)		(19	)

Balance at December 31, 2014	$	1,778		$	(40	)	$	1,738

F-28

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

The table below summarizes the components of PSB’s mortgage banking income for the three years ended December 31.

	Years Ending December 31,
	2014			2013			2012

Cash gain on sale of mortgage loans	$	659		$	826		$	1,113
Originated mortgage servicing rights		339			625			774
Increase (decrease) in accrued mortgage rate lock commitments		(7	)		(78	)		31

Gain on sale of mortgage loans		991			1,373			1,918

Mortgage servicing fee income		691			674			649
Provision for representation and warranty losses on serviced loans		(8	)		(294	)		(0	)
Foreclosure servicing losses		(4	)		0			(26	)
Amortization of mortgage servicing rights		(278	)		(421	)		(547	)
Decrease (increase) in servicing right valuation allowance		(19	)		259			(199	)

Loan servicing fee income, net		382			218			(123	)

Mortgage banking income, net	$	1,373		$	1,591		$	1,795

NOTE 8 Premises and Equipment

The composition of premises and equipment at December 31 follows:

	2014		2013

Land	$	2,756	$	2,261
Buildings and improvements		10,466		9,379
Furniture and equipment		2,802		3,084
Computer hardware and software		1,802		1,690

Total cost		17,826		16,414
Less – Accumulated depreciation and amortization		6,985		6,745

Totals	$	10,841	$	9,669

Depreciation and amortization charged to operating expenses amounted to $727 in 2014, $723 in 2013, and $659 in 2012.

Lease Commitments

PSB leases various pieces of equipment under cancelable leases and office space for one branch location under a noncancelable lease. The noncancelable branch location lease expires in May 2016. The lease is classified as operating. Future minimum payments under the noncancelable lease total $61 during 2015 and $26 during 2016.

Rental expense for all operating leases was $78, $76, and $72, for the years ended December 31, 2014, 2013, and 2012, respectively.

F-29

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

NOTE 9 Deposits

The distribution of deposits at December 31 is as follows:

	2014		2013

Non-interest-bearing demand	$	114,803	$	102,644
Interest-bearing demand (NOWs)		123,844		118,769
Savings		64,794		57,658
Money market		146,996		136,797
Retail and local time		122,376		104,287
Wholesale market and national time		50,138		57,359

Total deposits	$	622,951	$	577,514

The scheduled maturities of time deposits at December 31, 2014, are summarized as follows:

2015	$	83,896
2016		26,977
2017		23,227
2018		13,837
2019		23,409
Thereafter		1,168

Total	$	172,514

Time deposits with individual balances of $100 and over totaled $101,084 and $103,207 at December 31, 2014 and 2013, respectively.

Deposits from PSB directors, executive officers, and related parties at December 31, 2014 and 2013 totaled $8,483 and $9,304, respectively.

NOTE 10 Federal Home Loan Bank Advances

FHLB advances at December 31 consist of the following:

						Weighted
	Scheduled		Range of			Average
	Maturity		Rates			Rate			Amount

2014

Fixed rate, interest only		2015		0.13	%		0.13	%	$	10,000
Fixed rate, interest only		2017		0.77%-1.17	%		1.00	%		1,350
Fixed rate, interest only		2018		1.92	%		1.92	%		2,000
Fixed rate, interest only		2019		1.66%-1.89	%		1.72	%		6,921

Totals							0.91	%	$	20,271

2013

Fixed rate, interest only		2014		2.69%-3.45	%		3.18	%	$	31,049
Variable rate, interest only		2014		1.33	%		1.33	%		5,000
Fixed rate, interest only		2018		1.92	%		1.92	%		2,000

Totals							2.87	%	$	38,049

F-30

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

PSB also provides letters of credit to municipal deposit customers which are secured by a FHLB guarantee of payment to the depositor in the event of PSB default. PSB had $2,458 and $6,920 of FHLB public unit deposit letters of credit outstanding at December 31, 2014 and 2013, respectively. All of these letters of credit had original maturities of one year or less upon origination.

FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. PSB may draw upon an FHLB open line of credit or provide public unit deposit letters of credit up to approximately 65% of unencumbered one- to four-family residential first mortgage loans and 40% of residential junior mortgage loans pledged as collateral out of its portfolio. The FHLB advances are also secured by $2,556 of FHLB stock owned by PSB at December 31, 2014. PSB may draw both short-term and long-term advances on a maximum line of credit totaling approximately $101,553 based on pledged performing residential real estate mortgage collateral totaling $175,707 as of December 31, 2014. At December 31, 2014, PSB’s available and unused portion of this line of credit totaled approximately $81,282. PSB also has, under a current agreement with the FHLB, an ability to borrow up to an additional $57,599 by pledging securities.

At December 31, 2014, FHLB advances drawn by PSB and other FHLB credit enhancements provided to PSB totaling greater than $51,120 would require PSB to purchase additional shares of FHLB capital stock. Transfer of FHLB stock is substantially restricted.

NOTE 11 Other Borrowings

Other borrowings consist of the following obligations at December 31 as follows:

	2014		2013

Short-term repurchase agreements	$	4,324	$	5,441
Bank stock term loan		500		1,500
Wholesale structured repurchase agreements		5,500		13,500

Total other borrowings	$	10,324	$	20,441

PSB pledges various securities available for sale as collateral for repurchase agreements. The fair value of securities pledged for repurchase agreements totaled $12,722 and $22,699 at December 31, 2014 and 2013, respectively.

The following information relates to securities sold under repurchase agreements and other borrowings for the years ended December 31:

	2014			2013

As of end of year:
Weighted average rate		2.40	%		3.08	%
For the year:
Highest month-end balance	$	23,698		$	24,100
Daily average balance	$	18,649		$	21,862
Weighted average rate		3.00	%		2.97	%

The wholesale structured repurchase agreement at December 31, 2014 is with JP Morgan Chase Bank N.A. and carries a fixed interest rate of 4.09% which matures in November 2017. The repurchase agreement may be put back by the issuer to PSB for repayment on a quarterly basis.

F-31

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

PSB has an agreement with the Federal Reserve to participate in their “Borrower in Custody” program in which performing commercial and commercial real estate loans may be pledged against short-term Discount Window advances. At December 31, 2014, the maximum amount of available advances from the Discount Window totaled $100,000, subject to available collateral pledged under the Borrower in Custody program or pledge of qualifying investment securities. At December 31, 2014, PSB had pledged $114,157 of commercial purpose loans in the program, which permitted Discount Window advances up to $81,207 against this collateral. No investment securities were pledged against the line at December 31, 2014 or 2013. There were no Discount Window advances outstanding at December 31, 2014 or 2013.

PSB maintains a line of credit at the parent holding company level with Bankers’ Bank, Madison, Wisconsin, for advances up to $3,000 which expires on December 30, 2015, and is secured by a pledge of PSB Holdings, Inc.’s investment in the common stock of the Bank. The line carries a variable rate of interest based on changes in the three-month London InterBank Offered Rate (LIBOR). As of December 31, 2014 and 2013, no advances were outstanding on the line of credit. Draws on the line of credit are subject to several restrictive covenants including minimum regulatory capital ratios, minimum capital and loan loss allowances to nonperforming assets, and minimum loan loss allowances to nonperforming assets. PSB did not violate any of the covenants at December 31, 2014 or 2013.

PSB has a term loan outstanding at the parent holding company level payable to Bankers’ Bank with semiannual installments of principal that was originated during 2013. Principal payments due total $500 in 2015. Total interest expense on the term note totaled $27 during 2014 and $54 during 2013.

NOTE 12 Senior Subordinated Notes

During 2013, PSB issued $4,000 of 3.75% Senior Subordinated Notes (the “Notes”) that along with $1,000 in cash and a $2,000 bank stock term loan repaid $7,000 of 8% Notes issued during 2009. The $4,000 Notes require only interest payments and mature on July 1, 2018. The Notes are held by related parties including directors and a significant shareholder. Total interest expense on senior subordinated notes was $150 during 2014, $184 during 2013, and $578 during 2012.

NOTE 13 Junior Subordinated Debentures

PSB has issued $7,732 of junior subordinated debentures to PSB Holdings Statutory Trust I (the “Trust”) in connection with an issue of trust preferred securities during 2005 which mature in September 2035. The debentures currently pay a variable rate of interest based on changes in the three-month LIBOR plus 1.70%, adjusted quarterly. During 2010, PSB entered into a cash flow hedge to fix the payments of interest (excluding the credit spread) on the debentures for a seven-year period ending September 2017 at a rate of 2.72%. Including the credit spread, the net interest due on the notes until September 2017 will be equal to a fixed rate of 4.42%. Total interest expense on the junior subordinated debentures was $340 in 2014, $341 in 2013, and $342 in 2012. The subordinated debentures may be called by PSB in part or in full on a quarterly basis.

PSB has fully and unconditionally guaranteed all the obligations of the Trust. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the trust preferred securities to the extent of the funds held by the Trust. The trust preferred securities qualify as Tier 1 capital for regulatory capital purposes.

NOTE 14 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.

F-32

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

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 enters into agreements only with primary dealers. These derivative instruments are negotiated 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.

As of December 31, PSB had the following outstanding interest rate swap that was entered into to hedge variable-rate debt:

	2014			2013

Notional amount	$	7,500		$	7,500
Pay fixed rate		2.72	%		2.72	%
Receive variable rate		0.24	%		0.24	%
Maturity		9/15/2017			9/15/2017
Unrealized loss (fair value)	$	325		$	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 in 2014 or 2013. Risk management results for the year ended December 31, 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. At December 31, 2014, the fair value of the interest rate swap of $325 was recorded in other liabilities. Net unrealized loss on the derivative instrument recognized in other comprehensive income during the year ended December 31, 2014, totaled $44, net of tax. The net amount of other comprehensive loss reclassified into interest expense during the year ended December 31, 2014 was $114, net of tax. As of December 31, 2014, approximately $176 of losses reported in other comprehensive income related to the interest rate swap ($107 after tax benefits) are expected to be reclassified into interest expense as a yield adjustment of the hedged borrowings during the 12-month period ending December 31, 2015. The interest rate swap agreement was secured by cash and cash equivalents of $430 and $570 at December 31, 2014 and 2013, respectively.

During 2014, PSB reclassified $188 ($114 after tax impacts) of interest rate swap settlements which increased comprehensive income. The increase to comprehensive net income was recognized as a $188 ($114 after tax impacts) increase to interest expense on junior subordinated debentures on the statement of income during the year. During 2013, PSB reclassified $186 ($113 after tax impacts) of interest rate swap settlements which increased comprehensive income. The increase to comprehensive net income was recognized as a $186 ($113 after tax impacts) increase to interest expense on junior subordinated debentures on the statement of income during the year.

As of December 31, 2014 and 2013, PSB had a number of outstanding interest rate swaps with customers and correspondent banks associated with its lending activities that are not designed as hedges.

F-33

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

At December 31, the following floating interest rate swaps were outstanding with customers:

	2014			2013

Notional amount	$	13,646		$	14,323
Receive fixed rate (average)		2.00	%		2.00	%
Pay variable rate (average)		0.16	%		0.17	%
Maturity		3/2015-10/2021			3/2015-10/2021
Weighted average remaining term		1.9 years			2.9 years
Unrealized gain fair value	$	194		$	276

At December 31, the following offsetting fixed interest rate swaps were outstanding with correspondent banks:

	2014			2013

Notional amount	$	13,646		$	14,323
Pay fixed rate (average)		2.00	%		2.00	%
Receive variable rate (average)		0.16	%		0.17	%
Maturity		3/2015-10/2021			3/2015-10/2021
Weighted average remaining term		1.9 years			2.9 years
Unrealized loss fair value	$	(194	)	$	(276	)

NOTE 15 Retirement and Deferred Compensation Plans

PSB has established a 401(k) profit sharing plan for its employees. PSB matches 100% of employees’ salary deferrals up to the first 1% of pay deferred and 50% of salary deferrals of the next 5% of pay deferrals, for a maximum match of 3.5% of salary. PSB also may declare a discretionary profit sharing contribution. The expense recognized for contributions to the plan for the years ended December 31, 2014, 2013, and 2012 was $521, $446, and $509, respectively.

PSB maintains deferred compensation agreements with certain executives and directors. PSB matches 20% of the amount of employees’ salary deferrals up to the first 15% of pay deferred. PSB directors may elect to defer earned directors’ fees into a separate deferred directors’ fees plan. No PSB match is made on deferred directors’ fees. Cumulative deferred balances earn a crediting rate generally equal to 100% of PSB’s return on average equity until retirement or separation from service. The agreements provide for benefits to be paid in a lump sum at retirement or in monthly installments for a period up to 15 years following each participant’s normal retirement date with interest payable at a fixed interest rate ranging from 7% to 8%. PSB is accruing this liability over each participant’s remaining period of service. The liability outstanding under the agreements was $3,427 and $3,155 at December 31, 2014 and 2013, respectively. The amount charged to operations was $333, $270, and $301 for 2014, 2013, and 2012, respectively.

F-34

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

NOTE 16 Self-Funded Health Insurance Plan

PSB has established an employee medical benefit plan to self-insure claims up to $105 per year during 2014 and 2015 for each individual with no stop-loss per year for participants in the aggregate. PSB and its covered employees contribute to the fund to pay the claims and stop-loss premiums. Medical benefit plan costs are expensed as incurred. The liability recognized for claims incurred but not yet paid was $77 as of December 31, 2014 and 2013. Health and dental insurance expense recorded in 2014, 2013, and 2012, was $925, $1,130, and $1,078, respectively.

NOTE 17 Income Taxes

The components of the provision for income taxes are as follows:

	2014			2013			2012

Current income tax provision:
Federal	$	2,236		$	1,246		$	1,600
State		763			450			535

Total current		2,999			1,696			2,135

Deferred income tax provision (benefit):
Federal		(113	)		(132	)		330
State		20			99			70

Total deferred		(93	)		(33	)		400

Total provision for income taxes	$	2,906		$	1,663		$	2,535

A summary of the source of differences between income taxes at the federal statutory rate and the provision for income taxes for the years ended December 31 follows:

	2014						2013						2012
				Percent						Percent						Percent
				of						of						of
				Pretax						Pretax						Pretax
	Amount			Income			Amount			Income			Amount			Income

Tax expense at statutory rate	$	3,178			34.0		$	2,178			34.0		$	2,905			34.0
Increase (decrease) in taxes resulting from:
Tax-exempt interest		(605	)		(6.5	)		(703	)		(11.0	)		(778	)		(9.1	)
Bank-owned life insurance		(137	)		(1.5	)		(137	)		(2.1	)		(138	)		(1.6	)
State income tax		517			5.6			362			5.7			399			4.7
Merger-related expenses		0			0.0			0			0.0			73			1.0
Other		(47	)		(0.5	)		(37	)		(0.6	)		74			1.0

Provision for income taxes	$	2,906			31.1		$	1,663			26.0		$	2,535			30.0

F-35

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of PSB’s assets and liabilities. The major components of the net deferred tax assets are as follows:

	2014		2013

Deferred tax assets:
Allowance for loan losses	$	2,467	$	2,579
Deferred compensation and directors’ fees		1,424		1,308
Foreclosed assets		248		352
Unrealized loss on interest rate swaps		128		171
Other		307		223

Gross deferred tax assets		4,574		4,633

Deferred tax liabilities:
Premises and equipment		705		769
Mortgage servicing rights		687		673
FHLB stock		120		120
Unrealized gain on securities available for sale		541		400
Deferred net loan origination costs		120		128
Prepaid expenses		88		139

Gross deferred tax liabilities		2,261		2,229

Net deferred tax asset	$	2,313	$	2,404

At December 31, 2014, federal tax returns remained open for Internal Revenue Service (IRS) review for tax years after 2010, while state tax returns remain open for review by state taxing authorities for tax years after 2009. There were no federal or state income tax audits being conducted at December 31, 2014.

The following table presents income tax effects on items of comprehensive income (loss) for the years ended December 31:

	2014						2013						2012
	Pretax			Income Tax			Pretax			Income Tax			Pretax			Income Tax
	Inc.(Exp.)			Exp.(Credit)			Inc.(Exp.)			Exp.(Credit)			Inc.(Exp.)			Exp.(Credit)

Unrealized gain (loss) on securities available for sale	$	693		$	273		$	(1,574	)	$	(613	)	($	310	)	$	(119	)
Reclassification adjustment for net security gain included in net income		(3	)		(1	)		(12	)		(5	)		0			0
Amortization of unrealized gain on securities available for sale transferred to securities held to maturity included in net income		(330	)		(130	)		(420			(184	)		(452	)		(178	)
Unrealized gain (loss) on interest rate swap		(73	)		(29	)		75			29			(295	)		(116	)
Reclassification adjustment of interest rate swap settlements included in earnings		188			74			186			73			172			68

Totals	$	475		$	187		$	(1,745	)	$	(700	)	$	(885	)	$	(345	)

F-36

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

NOTE 18 Commitments, Contingencies, and Credit Risk

Financial Instruments With Off-Balance-Sheet Credit Risk

PSB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets.

PSB’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. PSB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. These commitments at December 31 are as follows:

	2014		2013

Commitments to extend credit – Fixed and variable rates	$	91,206	$	89,645
Commercial standby letters of credit – Variable rate		2,388		4,533
Unused home equity lines of credit – Variable rate		29,034		24,082
Unused credit card commitments – Variable rate		335		234
Credit enhancement under the FHLB of Chicago
Mortgage Partnership Finance program		949		949

Totals	$	123,912	$	119,443

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. PSB evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.

Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which PSB deems necessary. The commitments are generally structured to allow for 100% collateralization on all letters of credit.

Unfunded commitments under home equity lines of credit are commitments for possible future extensions of credit to existing customers. These lines of credit are secured by residential mortgages not to exceed the collateral property fair market value upon origination and may or may not contain a specific maturity date.

Credit card commitments were commitments on credit cards issued by PSB and serviced by Elan Financial Services (a subsidiary of U.S. Bancorp). These commitments were unsecured. During 2013, PSB sold its credit card loan balances to Elan Financial Services at a loss of $31 ($19 after tax benefits) on proceeds of $671. However, PSB provides full recourse to Elan against losses on certain card balances not owned by PSB. Aggregate exposure on the full recourse balances was $335 at December 31, 2014, including $210 of commitments unused by the cardholders.

PSB participates in the FHLB Mortgage Partnership Finance Program (the “Program”) and also originates loans for purchase by FNMA. PSB enters into forward commitments to sell mortgage loans to these various secondary market agency providers under which loans are funded by the agencies and PSB receives an agency fee reported as a component of gain on sale of loans. PSB had approximately $688 and $1,507 in firm commitments outstanding to deliver loans to these providers at December 31, 2014 and 2013, respectively, from rate lock commitments made with customers.

F-37

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Concentration of Credit Risk

PSB grants residential mortgage, commercial, and consumer loans predominantly in Marathon, Oneida, and Vilas counties in Wisconsin. There are no significant concentrations of credit to any one debtor or industry group. Management believes the diversity of the local economy prevents significant losses during economic downturns.

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 19 Stock Based Compensation

PSB granted shares of restricted stock to certain employees having a market value of $200, $210, and $200, during 2014, 2013, and 2012, respectively. The 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 since significantly all restricted shares are expected to vest to employees. As of December 31, 2014, 31,362 shares of restricted stock are outstanding that remained unvested. Unvested shares are subject to forfeiture upon employee termination.

The following table summarizes information regarding unvested restricted stock and shares outstanding during the three years ended December 31, 2014, 2013, and 2012.

	Unvested			Weighted Average
	Shares			Grant Value

January 1, 2012		25,572			17.79
Restricted shares granted		8,895			22.48
Restricted shares vested		(4,058	)		(16.08	)

December 31, 2012		30,409			19.39
Restricted shares granted		8,076			26.00
Restricted shares vested		(5,883	)		(17.85	)

December 31, 2013		32,602			21.30
Restricted shares granted		6,400			31.25
Restricted shares vested		(7,640	)		(18.91	)

December 31, 2014		31,362		$	23.92

During 2014, total compensation expense of $166 (before tax benefits of $65) was recorded from amortization of restricted shares expected to vest. During 2013, total compensation expense of $145 (before tax benefits of $57) was recorded from amortization of restricted shares expected to vest. During 2012, total compensation expense of $105 (before tax benefits of $41) was recorded from amortization of restricted shares expected to vest. Future projected compensation expense (before tax benefits) assuming all restricted shares eventually vest to employees would be as follows:

2015	$	157
2016		162
2017		122
2018		82
2019		40

Total	$	563

F-38

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Under the terms of an incentive stock option plan adopted during 2001, shares of unissued common stock were reserved for options to officers and key employees at prices not less than the fair market value of the shares at the date of the grant. The last outstanding option shares were exercised during 2012. No stock option plan expense was recorded in 2012. The following table summarizes information regarding stock option activity during the year ended December 31, 2012.

				Weighted
				Average
	Shares			Price

January 1, 2012		588		$	16.03
Options granted		0			0.00
Options exercised		(588	)		(16.03	)
Option forfeited		0			0.00

December 31, 2012		0		$	0.00

NOTE 20 Capital Requirements

PSB and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on PSB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, PSB and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require PSB and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2014, PSB and the Bank meet all capital adequacy requirements.

As of December 31, 2014, the most recent regulatory financial report categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

F-39

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

PSB’s and the Bank’s actual and regulatory capital amounts and ratios are as follows:

											To Be Well-
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2014:
Total capital (to risk weighted assets):
Consolidated	$	74,370		14.24	%	$	41,781		8.00	%		N/A		N/A
Peoples State Bank	$	75,373		14.45	%	$	41,729		8.00	%	$	52,161		10.00	%

Tier I capital (to risk weighted assets):
Consolidated	$	67,876		12.99	%	$	20,901		4.00	%		N/A		N/A
Peoples State Bank	$	68,879		13.20	%	$	20,872		4.00	%	$	31,309		6.00	%

Tier I capital (to average assets):
Consolidated	$	67,876		9.30	%	$	29,194		4.00	%		N/A		N/A
Peoples State Bank	$	68,879		9.44	%	$	29,186		4.00	%	$	36,483		5.00	%

As of December 31, 2013:
Total capital (to risk weighted assets):
Consolidated	$	70,048		13.88	%	$	40,365		8.00	%		N/A		N/A
Peoples State Bank	$	72,321		14.35	%	$	40,312		8.00	%	$	50,390		10.00	%

Tier I capital (to risk weighted assets):
Consolidated	$	63,734		12.63	%	$	20,182		4.00	%		N/A		N/A
Peoples State Bank	$	66,015		13.10	%	$	20,156		4.00	%	$	30,234		6.00	%

Tier I capital (to average assets):
Consolidated	$	63,734		9.06	%	$	28,130		4.00	%		N/A		N/A
Peoples State Bank	$	66,015		9.39	%	$	28,130		4.00	%	$	35,163		5.00	%

NOTE 21 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 outstanding stock options. On June 19, 2012, PSB declared a 5% stock dividend to shareholders of record July 16, 2012, which was paid in the form of additional common stock on July 30, 2012. All references in the accompanying consolidated financial statements and footnotes to the number of common shares and per share amounts have been restated to reflect the 5% stock dividend for all periods shown. The computation of earnings per share for the years ended December 31 is as follows:

	2014		2013		2012

Weighted average shares outstanding		1,651,045		1,652,700		1,663,147
Effect of dilutive stock options outstanding		0		0		58

Diluted weighted average shares outstanding		1,651,045		1,652,700		1,663,205

Basic earnings per share	$	3.90	$	2.87	$	3.61

Diluted earnings per share	$	3.90	$	2.87	$	3.61

F-40

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

NOTE 22 Restrictions on Retained Earnings

The Bank is restricted by banking regulations from making dividend distributions above prescribed amounts and is limited in making loans and advances to PSB. At December 31, 2014, management believes that maintaining the regulatory framework of the Bank at the well-capitalized level will effectively restrict potential dividends from the Bank to an amount less than $23,212. Furthermore, any Bank dividend distributions to PSB above customary levels are subject to approval by the FDIC, the Bank’s primary federal regulator, and the Wisconsin Department of Financial Institutions, the Bank’s primary state regulator.

NOTE 23 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.

Nonrated commercial paper is not traded on an active market. However, the original term of each investment is 60 days or less and carries a market rate of interest adjusted for risk. Due to the absence of credit concerns and the short duration, historical cost is assumed to approximate fair value of this investment.

At December 31, 2014 and 2013, Level 3 securities include a common stock investment in Bankers’ Bank, 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.

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.

F-41

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

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 December 31, 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		12.57	%
Weighted average prepayment speed: PSA		249.06	%
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.

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.

F-42

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

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.

Information regarding the fair value of assets and liabilities measured at fair value on a recurring basis as of December 31:

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

2014
Assets:
Securities available for sale:
U.S. agency issued residential MBS and CMO	$	73,352	$	0	$	73,352	$	0
Privately issued residential MBS and CMO		29		0		29		0
Nonrated SBA loan fund		950		0		950		0
Other equity securities		47		0		0		47

Total securities available for sale		74,378		0		74,331		47
Loans held for sale		100		0		100		0
Mortgage rate lock commitment		6		0		6		0
Interest rate swap agreements		194		0		194		0

Total assets	$	74,678	$	0	$	74,631	$	47

Liabilities – Interest rate swap agreements	$	519	$	0	$	519	$	0

2013
Assets:
Securities available for sale:
U.S. Treasury and agency debentures	$	999	$	0	$	999	$	0
U.S. agency issued residential MBS and CMO		59,390		0		59,390		0
Privately issued residential MBS and CMO		105		0		105		0
Obligations of states and political subdivisions		159		0		159		0
Nonrated SBA loan fund		950		0		950		0
Other equity securities		47		0		0		47

Total securities available for sale		61,650		0		61,603		47
Loans held for sale		150		0		150		0
Mortgage rate lock commitments		14		0		14		0
Interest rate swap agreements		276		0		276		0

Total assets	$	62,090	$	0	$	62,043	$	47

Liabilities – Interest rate swap agreements	$	714	$	0	$	714	$	0

F-43

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

The reconciliation of fair value measurements using significant unobservable inputs during the years ended December 31 is as follows:

Balance at January 1, 2013:	$	47
Total realized/unrealized gains (losses):
Included in earnings		0
Included in other comprehensive income		0
Purchases, maturities, and sales		0

Balance at December 31, 2013	$	47

Total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2013	$	0

Balance at January 1, 2014:	$	47
Total realized/unrealized gains (losses):
Included in earnings		0
Included in other comprehensive income		0
Purchases, maturities, and sales		0

Balance at December 31, 2014	$	47

Total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2014	$	0

Information regarding the fair value of assets and liabilities measured at fair value on a nonrecurring basis as of December 31 follows:

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

2014
Assets:
Impaired loans	$	1,956	$	0	$	97	$	1,859
Foreclosed assets		1,661		0		284		1,377
Mortgage servicing rights		1,738		0		0		1,738
Other intangible assets		274		0		0		274

Total assets	$	5,629	$	0	$	381	$	5,248

2013
Assets:
Impaired loans	$	1,720	$	0	$	0	$	1,720
Foreclosed assets		1,750		0		792		958
Mortgage servicing rights		1,696		0		0		1,696

Total assets	$	5,166	$	0	$	792	$	4,374

F-44

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

At December 31, 2014, loans with a carrying amount of $2,517 were considered impaired and were written down to their estimated fair value of $1,956, net of a valuation allowance of $561. 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.

In 2014, foreclosed assets with a fair value of $801 were acquired through or in lieu of foreclosure, which is the fair value net of estimated costs to sell. During 2014, foreclosed assets with a carrying amount of $1,716 were written down to a fair value of $1,661, less costs to sell. As a result, an impairment charge of $55 was included in earnings for the year ended December 31, 2014. In 2013, foreclosed assets with a fair value of $1,342 were acquired through or in lieu of foreclosure, which is the fair value net of estimated costs to sell. During 2013, foreclosed assets with a carrying amount of $2,156 were written down to a fair value of $1,750, less costs to sell. As a result, an impairment charge of $406 was included in earnings for the year ended December 31, 2013.

At December 31, 2014, mortgage servicing rights with a carrying amount of $1,778 were considered impaired and were written down to their estimated fair value of $1,738, resulting in an impairment allowance of $40. 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.

F-45

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

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:

	December 31, 2014
	Carrying		Estimated		Fair Value Hierarchy Level
	Amount		Fair Value		Level 1		Level 2		Level 3

Financial assets:

Cash and cash equivalents	$	25,106	$	25,106	$	25,106	$	0	$	0
Securities		144,157		145,387		0		143,522		1,865
Bank certificates of deposit		3,424		3,446		0		0		5,446
Net loans receivable and loans held for sale		525,683		528,696		0		197		528,499
Accrued interest receivable		2,074		2,074		0		0		2,074
Mortgage servicing rights		1,738		1,738		0		0		1,738
Mortgage rate lock commitments		6		6		0		6		0
FHLB stock		2,556		2,556		0		0		2,556
Cash surrender value of life insurance		13,230		13,230		0		13,230		0
Interest rate swap agreements		194		194		0		194		0

Financial liabilities:

Deposits	$	622,951	$	623,439	$	0	$	0	$	623,439
FHLB advances		20,271		20,316		0		20,316		0
Other borrowings		10,324		10,764		0		5,942		4,822
Senior subordinated notes		4,000		3,604		0		0		3,604
Junior subordinated debentures		7,732		7,248		0		0		7,248
Interest rate swap agreements		519		519		0		519		0
Accrued interest payable		331		331		0		0		331

F-46

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

	December 31, 2013
	Carrying		Estimated		Fair Value Hierarchy Level
	Amount		Fair Value		Level 1		Level 2		Level 3

Financial assets:

Cash and cash equivalents	$	31,522	$	31,522	$	31,522	$	0	$	0
Securities		133,279		133,322		0		131,479		1,843
Bank certificates of deposit		2,236		2,280		0		0		2,280
Net loans receivable and loans held for sale		510,030		514,309		0		150		514,159
Accrued interest receivable		2,076		2,076		0		0		2,076
Mortgage servicing rights		1,696		1,696		0		0		1,696
Mortgage rate lock commitments		14		14		0		14		0
FHLB stock		2,556		2,556		0		0		2,556
Cash surrender value of life insurance		12,826		12,826		0		12,826		0
Interest rate swap agreements		276		276		0		276		0

Financial liabilities:

Deposits	$	577,514	$	578,387	$	0	$	0	$	578,387
FHLB advances		38,049		38,511		0		38,511		0
Other borrowings		20,441		21,251		0		14,364		6,887
Senior subordinated notes		4,000		3,489		0		0		3,489
Junior subordinated debentures		7,732		7,085		0		0		7,085
Interest rate swap agreements		714		714		0		714		0
Accrued interest payable		477		477		0		0		477

NOTE 24 Condensed Parent Company Only Financial Statements

The following are condensed balance sheets as of December 31, 2014 and 2013, and condensed statements of income and cash flows for the years ended December 31, 2014, 2013, and 2012, for PSB Holdings, Inc.

Balance Sheets

December 31, 2014 and 2013

Assets	2014		2013

Cash and due from banks	$	3,826	$	3,502
Investment in Peoples State Bank		70,161		66,801
Other assets		747		840

TOTAL ASSETS	$	74,734	$	71,143

Liabilities and Stockholders’ Equity

Accrued dividends payable	$	652	$	644
Other borrowings		500		1,500
Senior subordinated notes		4,000		4,000
Junior subordinated debentures		7,732		7,732
Other liabilities		389		514
Total stockholders’ equity		61,461		56,753

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	74,734	$	71,143

F-47

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Statements of Income

Years Ended December 31, 2014, 2013, and 2012

	2014		2013		2012

Income:
Dividends from Peoples State Bank	$	3,900	$	4,000	$	7,700
Dividends from other investments		6		6		5
Interest		6		5		10

Total income	$	3,912		4,011		7,715

Expenses:
Interest on other borrowings		27		54		0
Interest expense on senior subordinated notes		150		184		578
Interest expense on junior subordinated debentures		340		341		342
Transfer agent and shareholder communication		52		47		68
Other		85		136		348

Total expenses		654		762		1,336

Income before income taxes and equity in undistributed net income of Peoples State Bank		3,258		3,249		6,379
Recognition of income tax benefit		251		293		431

Net income before equity in undistributed net income of Peoples State Bank		3,509		3,542		6,810
Equity in undistributed net income of Peoples State Bank		2,931		1,202		(801	)

Net income	$	6,440	$	4,744	$	6,009

F-48

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

Statements of Cash Flows

Years Ended December 31, 2014, 2013, and 2012

	2014			2013			2012

Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income	$	6,440		$	4,744		$	6,009
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of Peoples State Bank		(2,931	)		(1,202	)		801
(Increase) decrease in other assets		41			147			(21	)
Decrease in other liabilities		(5	)		(98	)		(2	)
Increase (decrease) in dividends payable		8			644			(583	)

Net cash provided by operating activities		3,553			4,235			6,204

Cash flows from investing activities:
Purchase Marathon State Bank common stock		0			0			(5,482	)
Investment in Peoples State Bank		0			0			(5	)

Net cash used in investing activities		0			0			(5,487	)

Cash flows from financing activities:
Repayment of senior subordinated notes		0			(3,000	)		0
Proceeds from other borrowings		0			2,000			0
Repayment of other borrowings		(1,000	)		(500	)		0
Proceeds from exercise of stock options		0			0			9
Dividends declared		(1,316	)		(1,289	)		(1,247	)
Purchase of treasury stock		(913	)		(269	)		(262	)

Net cash used in financing activities		(3,229	)		(3,058	)		(1,500	)

Net increase (decrease) in cash and due from banks		324			1,177			(783	)
Cash and due from banks at beginning		3,502			2,325			3,108

Cash and due from banks at end	$	3,826		$	3,502		$	2,325

F-49

Notes to Consolidated Financial Statements (dollars in thousands except per share data)

NOTE 25 Summary of Quarterly Results (Unaudited)

	Three Months Ended
	March 31		June 30		September 30		December 31

2014

Interest income	$	6,405	$	6,618	$	6,833	$	6,762
Interest expense		1,231		1,168		1,099		988
Net interest income		5,174		5,450		5,734		5,774
Provision for loan losses		140		140		140		140
Noninterest income		1,320		1,369		1,481		1,524
Net income		1,450		1,403		1,782		1,805
Basic earnings per share*		0.87		0.85		1.08		1.10
Diluted earnings per share*		0.87		0.85		1.08		1.10

2013

Interest income	$	6,624	$	6,692	$	6,772	$	6,728
Interest expense		1,423		1,375		1,350		1,363
Net interest income		5,201		5,317		5,422		5,365
Provision for loan losses		323		352		3,340		0
Noninterest income		1,415		1,523		1,411		1,274
Net income		1,609		1,561		13		1,561
Basic earnings per share*		0.97		0.95		0.01		0.95
Diluted earnings per share*		0.97		0.95		0.01		0.95

2012

Interest income	$	6,695	$	6,679	$	6,933	$	6,937
Interest expense		1,879		1,799		1,770		1,643
Net interest income		4,816		4,880		5,163		5,294
Provision for loan losses		160		165		0		460
Noninterest income		1,242		2,323		1,444		1,559
Net income		1,180		1,918		1,226		1,685
Basic earnings per share*		0.70		1.15		0.74		1.01
Diluted earnings per share*		0.70		1.15		0.74		1.01

* Basic and diluted earnings per share may not foot to the total for the year ended December 31 due to rounding.

F-50

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.

Item 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As required by SEC rules, PSB’s management evaluated the effectiveness, as of December 31, 2014, of PSB’s disclosure controls and procedures. PSB’s Chief Executive Officer and Chief Financial Officer participated in the evaluation. Based on this evaluation, the PSB’s Chief Executive Officer and Chief Financial Officer concluded that PSB’s disclosure controls and procedures were effective as of December 31, 2014.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. As such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that:

●

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thet ransactions and dispositions of assets of PSB;

●

provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of PSB are being made only in accordance with authorizations of management and the directors of PSB; and

●

provide reasonable assurance regarding prevention of unauthorized acquisition, use, or disposition of PSB’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies of procedures may deteriorate. This annual report does not include an attestation report of PSB’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by PSB’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report. Management’s report in internal control over financial reporting should be read with these limitations in mind.

Management conducted an evaluation of the effectiveness of the PSB’s internal control over financial reporting based on the criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. Based on this evaluation under the criteria in Internal Control — Integrated Framework , management concluded that internal control over financial reporting was effective as of December 31, 2014.

Changes in Internal Controls

No change occurred during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, PSB’s internal control over financial reporting.

Item 9B. OTHER INFORMATION.

Not applicable.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

PSB’s executive officers include Peter W. Knitt, age 56, President and Chief Executive Officer of PSB and Peoples State Bank, and Scott M. Cattanach, age 46, Treasurer and Secretary of PSB, and Senior Vice President and Chief Financial Officer of Peoples State Bank.

Our Board of Directors currently has ten directors, each of whom is elected for a one-year term at each annual meeting of shareholders. The following table sets forth information concerning the business background and experience of the Company’s directors. Unless otherwise specified, all current positions listed for a director have been held for at least five years.

		Year Became Director
Name and Age	Principal Occupation	of the Company

William J. Fish, 64	President of BILCO, Inc. (McDonald’s franchisee). We believe that Mr. Fish’s qualifications to serve as a director include his significant holdings of Company stock and his experience in running small business franchises for many years.	1995
Charles A. Ghidorzi, 70	Managing member of Ghidorzi Construction Company, LLC. We believe that Mr. Ghidorzi’s qualifications to serve as a director include his real estate development and construction experience, which allows him to provide perspective as the Bank considers making loans secured by real estate collateral or expansion through brick and mortar branch bank facilities.	1997
Lee A. Guenther, 62	CEO of T. A. Solberg Co., Inc. We believe Mr. Guenther’s knowledge of our northern Wisconsin markets and expertise in leading a large retail company of 1,000 employees within those markets qualify him to serve as a director.	2013
Karla M. Kieffer, 53	Vice President of Sales and co-owner of Sun Press, Inc., d/b/a SUN Printing. We believe that Ms. Kieffer’s qualifications to serve as a director include her experience in managing sales and product development, as well as her experience in operating a local business similar to our customer base, which helps us gauge local business financing and cash management needs.	2011
Peter W. Knitt, 56	President and CEO of the Company and the Bank; formerly Senior Vice President of the Bank (2003-2006). We believe that Mr. Knitt’s qualifications to serve on our Board include his vast experience in the banking industry as both a commercial lender and as our Bank’s president and chief executive officer.	2006
David K. Kopperud, 69	Former President of the Company and the Bank (1999-2006). We believe that Mr. Kopperud’s knowledge of the Company and the Bank, which arises in part from his service as president and chief executive officer and decades of experience in finance and banking, as well as Mr. Kopperud’s knowledge of commercial lending and the market areas served by the Bank in addition to his significant holdings of Company stock qualify him to serve as a director.	1999
Kevin J. Kraft, 37	Chief Executive Officer of JARP Industries, Inc. We believe that Mr. Kraft’s background in public accounting with Ernst & Young, LLP and later experience with public company Bucyrus International, Inc. performing internal financial analysis and benchmarking performance helps bring financial expertise to our directorship. Mr. Kraft’s experience in owning and operating a local manufacturer similar to our customer base also assists us in gauging local business financing and cash management needs.	2011
Thomas R. Polzer, 72	President, Polzer of Wausau, LLC and M & J Sports, Inc. We believe that Mr. Polzer’s decades of experience running small retail business enterprises and his directorship at a local bank prior to Peoples State Bank, as well as his significant holdings of Company stock, qualify him to serve as a director.	1995
William M. Reif, 72	CEO of Wausau Coated Products, Inc. We believe that Mr. Reif’s decades of experience running closely-held manufacturing business enterprises as well as prior directorship experience with a significantly larger banking organization qualify him to serve as a director.	1997
Timothy J. Sonnentag, 48	President, County Materials Corporation. We believe that Mr. Sonnentag’s experience leading a large company with more than 1,200 employees and 40 locations primarily in Wisconsin and Illinois, as well as his business management skills, qualify him to serve as a director.	2009

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and officers and persons who own more than 10% of our common stock (“reporting persons”) to file reports of ownership and changes in ownership with the SEC. Reporting persons are also required by SEC regulations to furnish us with copies of all Section 16(a) forms filed by them with the SEC. Based solely on our review of the copies of the Section 16(a) forms received by us and/or upon written representations from these reporting persons as to compliance with the Section 16(a) regulations, we are of the opinion that during the 2014 fiscal year, all reports required by Section 16(a) were filed on a timely basis except those listed below.

Name		Transaction Date		Filing Date		Shares		Price/Share
Lee A. Guenther		02-10-2014		02-19-2014		200		$30.25

Code of Ethics

PSB has adopted a Code of Ethics Policy for all directors, officers, and employees and a Code of Compliance and Reporting Requirements for Senior Management and Senior Financial Officers which covers PSB’s Chief Executive Officer, Treasurer (the chief financial and accounting officer), each Vice President, and the Secretary. The Code of Compliance and Reporting Requirements for Senior Management and Senior Financial Officers has been posted on PSB’s website at www.psbholdingsinc.com. In the event PSB amends or waives any provision of the Code of Compliance and Reporting Requirements for Senior Management and Senior Financial Officers, PSB intends to disclose such amendment or waiver at the website address where the code may also be found.

Audit Committee

The Board of Directors has appointed an Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Mr. Kraft (Chairman), Mr. Reif, Mr. Fish, and Mr. Polzer serve on the Audit Committee (PSB is not a “listed issuer” as defined in SEC Rule 10A-3).

Financial Expert

The SEC has adopted rules that require PSB to disclose whether one of the members of the Audit Committee qualifies under SEC rules as an “audit committee financial expert.” Based on its review of the SEC rules, the Board has concluded that Kevin J. Kraft is an “audit committee financial expert,” as that term is defined in Item 401(h) of Regulation S-K under the Securities Exchange Act of 1934. In making this determination, the Board considered Mr. Kraft’s educational background (he holds a degree in accounting) and his business experience, which is described above in the listing of our directors. The Board has also determined that Mr. Kraft satisfies the criteria for director independence under the listing standards applicable to companies listed on The Nasdaq National Market.

Item 11. EXECUTIVE COMPENSATION.

Director Compensation

The following table presents the compensation of our directors for 2014. A description of our director compensation policy and plans follows the table.

					Nonqualified
	Fees Earned		Equity		Deferred
	or Paid in		Incentive Plan		Compensation		All Other
Name⁽¹⁾	Cash		Compensation		Earnings		Compensation			Total
	($)		($)⁽²⁾		($)		($)			($)

William J. Fish	$	29,600	$	4,381	$	21,511	$	0		$	55,492
Charles A. Ghidorzi	$	17,600	$	2,253	$	0	$	0		$	19,853
Lee A. Guenther	$	21,975	$	2,813	$	1,810	$	0		$	26,598
Gordon P. Gullickson	$	0	$	0	$	0	$	11,533	⁽³⁾	$	11,533
Karla M. Kieffer	$	20,600	$	2,637	$	4,059	$	0		$	27,296
David K. Kopperud	$	24,950	$	3,194	$	2,786	$	0		$	30,930
Kevin J. Kraft	$	18,700	$	2,394	$	0	$	0		$	21,094
Thomas R. Polzer	$	28,225	$	4,177	$	0	$	0		$	32,402
William M. Reif	$	20,900	$	2,675	$	0	$	0		$	23,575
Timothy J. Sonnentag	$	18,400	$	2,723	$	4,960	$	0		$	26,083

⁽¹⁾Mr. Knitt receives no director fees.

⁽²⁾Amounts paid for achievement of targeted net income and return on equity during 2014 pursuant to the Peoples State Bank Board of Directors’ Focus Rewards Plan. Compensation is paid in shares of Company Common Stock.

⁽³⁾Mr. Gullickson retired as a director of the Company on April 18, 2012. Mr. Gullickson continues to receive certain compensation as a consultant to the Bank’s Board of Directors Loan Committee under a contract that expires in April 2015.

Annual Retainer, Meeting, and Other Fees.

	Company			Bank
Board Retainer
Chairman		–		$	12,000	⁽¹⁾
Other directors		–		$	10,000	⁽¹⁾

Meeting Fees
Board	$	500	⁽²⁾	$	500	⁽³⁾
Loan Committee		N/A		$	225
Other Committee	$	300		$	300
Chairman’s fee	$	50		$	50

Incentive Fees
Directors’ Focus Rewards Incentive Plan		–			Variable award

⁽¹⁾Reduced on a pro rata basis if director fails to attend at least seven meetings of the Board during fiscal year.

⁽²⁾Board meeting fee of $500 paid for Company special meetings held separately from a normally scheduled Bank Board meeting.

⁽³⁾Payment will be made for one excused absence.

Directors’ Focus Rewards Plan. The Peoples State Bank Board of Directors’ Focus Rewards Plan provides an annual incentive opportunity for directors of the Bank. Under the Directors’ Focus Rewards Plan, Bank directors’ incentive compensation is determined under a formula that derives 20% of the incentive compensation amount from achievement of certain customer referral goals, 60% of the incentive compensation amount from the achievement of a net income target for the Bank, and 20% of the incentive compensation amount from the Company’s return on equity when compared against a peer group of publicly reporting bank holding companies. The potential incentive compensation at various levels of net income and qualified director referrals ranges from 0% to 30% of director fees paid during a particular year. Incentive compensation is paid in shares of the Company’s common stock following the determination of results under the plan for the preceding fiscal year.

2005 Deferred Compensation Plan. We maintain a deferred compensation program, the 2005 Deferred Compensation Plan, under which directors may elect prior to each January 1 to defer some or all of the fees otherwise payable by the Company and the Bank during the subsequent year. Amounts deferred become payable in cash in a form as elected by the director with options being a lump sum or in 60 or 120 monthly installments. Amounts deferred are paid the later of (1) the first day of third month following the director’s termination of service or (2) the date specified by the director in the director’s time of payment election (but the specified date can be no later than the first day of the third month following the month in which the director would have attained the director’s mandatory retirement age). The director’s election as to the form and time of payment must be made no later than December 31, 2007 (for individuals who were directors on December 31, 2007) or within 30 days of initial participation in the plan (for directors who joined the Board in 2008 or thereafter). In the event a director’s service terminates because of a change of control of the Company, as defined in the plan, payment of all deferred amounts will be made in a lump sum on the first July 1 following the director’s termination of service. For the 2014 fiscal year, interest was credited on deferred fees at a rate equal to 100% of our return on equity as defined in the plan. During the period following a director’s termination of service, the unpaid balance in a director’s deferral account is credited with interest at a fixed rate of 8% per annum.

Executive Officer Compensation

The following table sets forth the compensation awarded to, earned by, or paid by us and our subsidiaries during the year ended December 31, 2014, to our principal executive officer and each other executive officer as of December 31, 2014, whose total compensation exceeded $100,000:

													Nonqualified
											Non-Equity		Deferred
Name and							Stock		Option		Incentive Plan		Compensation		All Other
Principal	Year		Salary		Bonus		Awards		Award(s)		Compensation		Earnings		Compensation			Total
Position			($)⁽¹⁾		($)⁽¹⁾		($)⁽²⁾		($)		($)⁽¹⁾⁽³⁾		($)		($)			($)

Peter W. Knitt		2014	$	255,600	$	0	$	30,000	$	0	$	37,800	$	44,435	$	30,922	(4)	$	398,757
President, CEO, and a		2013	$	248,500	$	0	$	30,000	$	0	$	9,319	$	17,569	$	24,015		$	329,403
director of the Company		2012	$	241,200	$	0	$	35,000	$	0	$	35,694	$	41,117	$	30,609		$	383,620
and the Bank

Scott M. Cattanach		2014	$	175,800	$	0	$	35,000	$	0	$	26,000	$	2,469	$	21,794	(5)	$	261,063
Secretary and Treasurer		2013	$	170,000	$	0	$	37,000	$	0	$	6,375	$	1,006	$	15,201		$	229,582
of the Company and		2012	$	164,000	$	0	$	35,000	$	0	$	24,272	$	2,452	$	21,810		$	247,534
Chief Financial Officer
of the Bank

⁽¹⁾Includes compensation deferred by officers under 401(k) plan and other deferred compensation plans.

⁽²⁾The amounts indicated represent the grant date fair value for awards of restricted stock computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Subtopic 718-10. For Mr. Knitt, the number of shares granted was 845 for 2014, 960 for 2013, and 1,346 for 2012. For Mr. Cattanach, the number of shares granted was 986 for 2014, 1,184 for 2013, and 1,346 for 2012. These shares vest at the rate of 20% each year beginning on the second anniversary of the grant date, with 20% vesting on each anniversary date thereafter until the shares become fully vested. While the shares are unvested, the grantee maintains voting rights on the shares and receives dividends on the shares at the same amount and timing as all other common stock shares. All unvested restricted stock will immediately vest upon a change in control as defined in the grant agreement. All unvested shares are forfeited if the grantee’s employment with the bank is terminated for any reason.

⁽³⁾Cash incentive compensation awards were made under the Focus Rewards Plan based on achievement of net income and other Bank-wide financial and non-financial goals.

⁽⁴⁾Represents Company 401(k) contribution of $21,815, Company matching contribution of $5,000 under the Executive Deferred Compensation Plan, and $4,107 of dividends paid on unvested restricted stock.

⁽⁵⁾Represents Company 401(k) contribution of $17,657 and $4,137 of dividends paid on unvested restricted stock.

Incentive Compensation, Deferred Compensation, and Other Compensation Arrangements

Focus Rewards Plan. The Bank’s Focus Rewards Plan provides an annual cash incentive opportunity for executive officers of the Company in their capacities as Bank officers. Incentive compensation is determined under a formula that derives 60% of the incentive compensation amount from the achievement of the Bank’s net income target, 20% from the achievement of specific Bank-wide financial and non-financial goals, and 20% from the Bank’s return on equity when measured against a peer group of publicly reporting banks. The potential incentive compensation at various levels of net income ranges from 0% to 30% of the Bank officer’s base salary. Incentive compensation is paid in cash following the determination and audit of results under the plan for the preceding fiscal year.

Peter W. Knitt Executive Deferred Compensation Agreement. Mr. Knitt participates in the Bank’s Executive Deferred Compensation Plan. The Plan terms in effect for Mr. Knitt permit him to elect to defer up to 20% of his base salary and up to 70% of his bonus incentive compensation. The Plan provides a matching grant contribution equal to 20% of the amount deferred up to a maximum annual matching contribution of 3% of Mr. Knitt’s base pay. Deferrals made by Mr. Knitt and the Plan’s matching contribution, if any, are credited to Mr. Knitt’s unfunded account. Plan interest is credited on the accumulated account balance at a rate equal to 100% of the Bank’s return on equity for the year and at a fixed rate equal to 7% per year after his termination while the accumulated account balance is paid to Mr. Knitt. The accumulated balance in Mr. Knitt’s account will be paid in 130 biweekly installments as elected by Mr. Knitt upon termination of his employment for any reason. Mr. Knitt is fully vested in the accumulated account balance as well as any future matching grants or interest credited under the Plan. However, no Plan matching contribution or any interest credited would be paid if Mr. Knitt’s employment is terminated for cause as defined by the Plan. The Bank may, in its sole discretion and prior to commencement of benefits following Mr. Knitt’s termination, suspend the Plan. Upon suspension of the Plan, Mr. Knitt would not be permitted to make any further voluntary deferrals of base pay or incentive into the Plan and would receive no other credit to the Plan account except the annual interest credit on the accumulated balance.

Scott M. Cattanach Executive Deferred Compensation Agreement. Mr. Cattanach also participates in the Bank’s Executive Deferred Compensation Plan. The Plan terms in effect for Mr. Cattanach permit him to elect to defer up to 20% of his base salary and up to 70% of his bonus incentive compensation. The Plan provides a matching grant contribution equal to 20% of the amount deferred up to a maximum annual matching contribution of 3% of Mr. Cattanach’s base pay. Deferrals made by Mr. Cattanach and the Plan’s matching contribution, if any, are credited to Mr. Cattanach’s unfunded account. Plan interest while Mr. Cattanach is employed is credited on the accumulated account balance at a rate equal to 100% of the Bank’s return on equity for the year. Following termination of employment after reaching normal retirement age, the Plan will provide an annual fixed interest credit of 7% while benefits are paid over 130 biweekly installments. The Plan accumulated balance would be paid to Mr. Cattanach in a lump sum in the event of termination of employment from death, disability, or following a change in control. Mr. Cattanach is fully vested in the accumulated account balance as well as any future matching grants or interest credited under the Plan. However, no Plan matching contribution or any interest credited would be paid if Mr. Cattanach’s employment is terminated for cause as defined by the Plan. The Bank may, in its sole discretion and prior to commencement of benefits, suspend the Plan. Upon suspension of the Plan, Mr. Cattanach would not be permitted to make any further voluntary deferrals of base pay or incentive into the Plan and would receive no other credit to the Plan account except the annual interest credit on the accumulated balance.

Survivor Income Benefit Plan. The Bank maintains a Survivor Income Benefit Plan, which was originally adopted as an inducement to encourage the Bank’s executive officers to permit the Bank to purchase life insurance policies on their lives, with the Bank as beneficiary on the policies. Under this plan, the Bank has purchased life insurance on the lives of a number of its senior officers, including Messrs. Knitt and Cattanach, and all premiums on these policies have been fully paid. Under the plan, the Bank has agreed to pay to the executive’s named beneficiary a one-time split-dollar life insurance death benefit, which is a multiple of the employee’s base salary up to a maximum amount. The payment is made out of insurance proceeds received, and no payment is made unless the Bank holds an insurance policy on the executive’s life and the executive dies while employed by the Bank. The maximum payment obligation under the plan is capped at $900,000 (for Mr. Knitt) and $450,000 (for Mr. Cattanach).

Outstanding Equity Awards at Fiscal Year-End 2014

Stock options and unvested restricted stock awards held by our named executive officers at December 31, 2014, are indicated in the following table. Unvested restricted stock awards become fully vested upon a change in control.

Option Awards

Stock Awards

Name

Number of Securities Underlying Unexercised Options Exercisable

Option Exercise Price

Option Expiration Date

Number of Shares or Units of Stock That Have Not Vested

Market Value of Shares or Units of Stock That Have Not Vested

Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not Vested

Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested

(#)

($)

(#)

($)

(#)

($)

Mr. Knitt

–

5,199

⁽¹⁾

184,565

⁽²⁾

–

Mr. Cattanach

–

5,237

⁽¹⁾

185,914

⁽²⁾

–

⁽¹⁾Awards vest at the rate of 20% each year, beginning on the second anniversary of the date of grant.

⁽²⁾Market value is based on the closing market price of the Company’s common stock on December 31, 2014 ($35.50 per share).

Termination and Change in Control Arrangements

In order to promote stability and continuity of senior management, the Company has entered into employment and change of control agreements with Mr. Knitt and Mr. Cattanach.

Employment Terms and Severance Benefits. The agreements of Mr. Knitt and Mr. Cattanach are substantially similar in operation, but differ with respect to the amounts of salary and benefits. The current agreements provided for an initial term of employment lasting through June 30, 2009, with automatic extensions thereafter on a year-to-year basis unless either party notifies the other that the contract will no longer be extended or the executive reaches a certain age (64 for Mr. Knitt and 66 for Mr. Cattanach). The agreements provide for the provision of base salaries and participation by the executives in the various plans offered to other employees. Mr. Knitt is also entitled to the use of a Bank-provided automobile and a social membership at a country club.

In the event of his termination without cause, Mr. Knitt is entitled to receive an amount equal to 110% of the amount he would have been paid as salary under the agreement which would be paid monthly for a term of 12 months following termination. In the event of his termination without cause, Mr. Cattanach is entitled to receive the amount he would have been entitled to receive as salary under his agreement, but in no event for a period of less than twelve months. Each officer is also entitled to coverage under the Bank’s health insurance plan for the period of the severance benefit or until the executive becomes eligible for coverage under the plan of another employer. In the event of termination for cause, the executive is entitled to no further benefits under the agreement. “Cause” is defined under the agreements as (1) acts that result in the payment of a claim under a blanket banker fidelity bond policy; (2) the willful and continuing failure to perform the executive’s duties; (3) the commission of certain crimes, including theft, embezzlement, misapplication of funds, unauthorized issuance of obligations, and false entries; (4) acts or omissions to act that result in the material violation by the executive of any policy established by the Bank that is designed to insure compliance with applicable banking, securities, employment discrimination, or other laws or which cause or result in the Bank’s violation of such laws; or (5) the executive’s physical or mental disability. The agreements provide that the executive will not work in competition with the Bank for a period of one year following termination and must observe a two-year period on the confidentiality of Bank information.

Termination After Change in Control. The agreements also guarantee the executives certain compensation and benefits in the event of their termination following a change in control of the Company. Upon a change in control, the term of employment is reset to two years starting on the date of the change in control. For each year the contract remains in effect following a change in control, the executive will be entitled to annual incentive compensation equal to the average incentive compensation earned in the three years immediately preceding the change in control. In the event Mr. Knitt voluntarily terminates employment as a result of a significant change in his job duties or responsibilities, a relocation of his office of more than 25 miles from the then current location of his principal office, or other “good reason,” as defined in the agreements, or he is involuntarily terminated other than for cause he would be entitled to (1) the base salary accrued through termination plus a pro rata portion of incentive compensation earned for the year of termination (based on amounts earned in the previous fiscal year), (2) a lump sum payment equal to three times the sum of his current base salary plus the average incentive compensation earned for the three most recently completed years, and (3) coverage under the Bank’s health insurance plan until he becomes eligible for coverage under the health insurance plan of another employer up to a maximum period of 36 months following termination. The benefit payable to Mr. Knitt may be greater than the amount considered to be an “excess parachute payment” under Section 280G of the Internal Revenue Code to the extent that prior year elective salary deferrals into the Executive Deferred Compensation Plan lower the amount of the taxable compensation used to determine the excess parachute payment compensation limit specific to Mr. Knitt.

In the event Mr. Cattanach terminates his employment for good reason or is otherwise involuntarily terminated other than for cause, he would be entitled to (1) the base salary accrued through termination plus a pro rata portion of incentive compensation earned for the year of termination (based on amounts earned in the previous fiscal year), (2) a lump sum payment equal to three times his current annual base salary, and (3) coverage under the Bank’s health insurance plan until he becomes eligible for coverage under the health insurance plan of another employer up to a maximum period of 36 months following termination. The benefits payable to Mr. Cattanach cannot, however, be greater than the amount which would cause them to be an “excess parachute payment” under Section 280G of the Internal Revenue Code.

For purposes of these agreements, a “change in control” of the Company means:

●

the acquisition of 30% or more of the Company’s common stock by a person or group (excluding stock acquired by an employee benefit plan sponsored by the Company); or

●

a change in the composition of the Board during any 24 consecutive months so that the incumbent directors (or directors approved by the incumbent directors) no longer constitute a majority of the directors; or

●

the occurrence of a transaction resulting in the acquisition of the Company or the Bank in which the Company’s shareholders will beneficially own less than 60% of the voting shares of the new combined entity; or

●

the liquidation or dissolution of the Company or the Bank.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth, to our knowledge as of December 31, 2014, the name of each person believed by us to own more than 5% of our common stock and the number of shares of common stock held by each person.

	Shares of Bank Stock Beneficially		Percent of
Name and Address	Owned		Class

The Banc Funds Company, L.L.C./ Charles J. Moore⁽¹⁾		83,079		5.1	%
208 S. LaSalle Street
Chicago, IL 60604

Lawrence Hanz, Jr.		92,895		5.7	%
2102 Clarberth
Schofield, WI 54476

⁽¹⁾Shares held in various funds controlled by The Banc Fund Company, LLC, over which Mr. Moore exercises sole voting and dispositive power.

The following table sets forth, to our knowledge as of March 6, 2015, the amount of common stock that is deemed beneficially owned by each of our directors, each of the current executive officers named in the Summary Compensation Table, and our directors and executive officers as a group. The amounts indicated include shares held by spouses and minor children; shares held indirectly in trust for the benefit of the directors and/or their spouses, children, or parents; shares held by businesses or trusts over which directors exercise voting control; and shares subject to exercisable options.

	Shares of Stock			Percent of
Name	Beneficially Owned			Class

William J. Fish		25,254			1.5	%
Charles A. Ghidorzi		1,527			*
Lee A. Guenther		1,445	⁽¹⁾		*
Karla M. Kieffer		3,038	⁽²⁾⁽³⁾		*
Peter W. Knitt		17,341	⁽⁴⁾		1.1	%
David K. Kopperud		25,119			1.5	%
Kevin J. Kraft		2,066			*
Thomas R. Polzer		21,164			1.3	%
William M. Reif		14,032			*
Timothy J. Sonnentag		2,360			*
Scott M. Cattanach		9,326	⁽⁵⁾		*
All directors and officers as a group (11 persons)		122,672	^{(1)(2)(3)(4)(5)}		7.5	%

* Less than 1%.

⁽¹⁾Includes 220 shares held by a limited liability company for which beneficial ownership is disclaimed except to the extent of his pecuniary interest therein.

⁽²⁾Includes 315 shares held by a household member for which beneficial ownership is disclaimed.

⁽³⁾Includes 1,050 shares held by a corporation for which beneficial ownership is disclaimed except to the extent of her pecuniary interest therein.

⁽⁴⁾Includes 4,612 shares of unvested restricted stock granted to Mr. Knitt for which he holds sole voting rights and sole investment power.

⁽⁵⁾Includes 4,881 shares of unvested restricted stock granted to Mr. Cattanach for which he holds sole voting rights and sole investment power.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Director Independence

With the exception of Mr. Knitt, each of our directors satisfies the criteria for director independence under the listing standards applicable to companies listed on The NASDAQ National Market. The Board also considered all loan and other contractual relationships that the Bank had in place with certain Company directors and entities controlled by those directors (including the subordinated notes held by certain of our directors), and, in connection with this consideration, took into account that these transactions were made on terms at least as favorable to the Company as those that are available to unaffiliated parties.

Certain Relationships and Related Transactions

In the ordinary course of business, our directors and officers and the directors and officers of the Bank, and many of their associates and the firms for which they serve as directors and officers, conducted banking transactions with the Bank or provided certain services to the Company. All loans to directors and officers and to persons or firms affiliated with directors and officers were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and did not involve more than normal risk of collectability or present other unfavorable features. In our opinion, all banking and other transactions were made on terms at least as favorable to the Company as those that are available to unaffiliated parties.

We have not adopted any formal policies or procedures for the review, approval, or ratification of transactions that may be required to be reported under the Securities and Exchange Commission (“SEC”) disclosure rules. These transactions, if and when they are proposed or have occurred, have been or will in the future be reviewed by the entire Board (other than the director involved) on a case-by-case basis. The Board’s review considers the importance of the transaction to the Company; the availability of alternative sources or service providers to meet the Company’s requirements; the amount involved in the proposed transaction; the specific interest of the director or executive officer (or immediate family member) in the transaction; whether information concerning the fees, costs, or other terms of substantially similar arms-length transactions between unrelated parties is available; whether the terms of the proposed transaction present any unusual or unfavorable features to the Company; and such other factors as the Board may consider important and appropriate to its determination.

In addition to the ordinary-course-of business transactions described above, the Company issued certain unsecured notes on February 1, 2013, with a total principal amount of $4 million. The proceeds of the notes were used by the Company to prepay certain 8% senior subordinated notes issued by the Company in 2009. The notes bear interest at the rate of 3.75% per annum, and they provide for interest-only payments to be made on a quarterly basis until the notes mature on February 1, 2018. The Company reserved the right to prepay the notes in any amount without penalty on or after August 1, 2014. The notes, each of which is still outstanding in its original principal amount, are held by two of our directors (Messrs. Fish and Polzer), one of our former directors, and Lawrence Hanz, Jr., one of the Company’s shareholders who holds more than 5% of the Company’s common stock. The notes held by Messrs. Fish and Polzer were each made in the principal amount of $250,000, and each of these individuals was paid $9,375 of interest during 2014. The note held by Mr. Hanz was made in the principal amount of $2.5 million, and Mr. Hanz received interest payments from the Company in the amount of $93,750 during 2014. The Company believes that these notes were issued on terms that were at least as favorable to the Company as those that would have been offered by unaffiliated parties.

Nominating Committee and Identification of Candidates

The Board has appointed a Nominating Committee made up of independent directors as determined in accordance with the listing standards applicable to companies listed on The NASDAQ National Market. Mr. Polzer serves as Chairman of the Committee. Messrs. Ghidorzi, Fish, and Reif also serve on the Nominating Committee. Nominations for directors are recommended to the Board by the Nominating Committee. In making recommendations to the Board regarding nominees for director, the Nominating Committee considers the following factors, among other things, important:

●

the Company is engaged almost exclusively in community-based commercial and retail banking within a three-county market area; consequently, there is a need to identify Board members who understand and are involved as users of banking services in the Company’s market area rather than candidates who have national or regional banking experience; and

●

the nature of community-based banking requires directors who can be strong supporters of the Company’s business in its market area.

The Nominating Committee will consider candidates for election from a wide variety of potential sources and may, from time to time, recommend adjustments to the size of the Board to reflect the number of qualified Board candidates. Persons considered for nomination by the Board and inclusion in the Board’s proxy statement may include incumbents whose term will expire at the next annual meeting or persons identified by members of the Nominating Committee or Board, executive officers, and shareholders.

Shareholder Recommendations

To recommend an individual for consideration, a shareholder should mail or otherwise deliver a written recommendation to the Nominating Committee not later than the December 1 immediately preceding the annual meeting for which the individual is to be considered for inclusion as a nominee of the Board. At a minimum, a shareholder recommendation should include the individual’s current and past business or professional affiliations and experience, age, stock ownership, particular banking, or business qualifications, if any, and such other information as the shareholder deems relevant to assist the Board in considering the individual’s potential service as a director.

In reviewing potential nominees, the Nominating Committee considers the qualifications of the nominee and the mix of age, skills, and experience of current Board members. All potential nominees submitted to, or identified by, the Nominating Committee are evaluated on a similar basis for their level of qualifications and experience. While the Nominating Committee has not adopted specific minimum qualification requirements, the Nominating Committee believes that persons nominated for director should possess a combination of relevant experience and skills and, to as great an extent as possible, the following attributes:

●

a reputation for personal and professional integrity and high regard in the community;

●

comprehensive knowledge of our banking market area and customer base;

●

a successful business career and an ability to enhance our banking business;

●

proven sound business judgment and skills;

●

the ability to understand the economic, financial, operational, and regulatory issues affecting our banking business; and

●

a motivation to benefit the organization, rather than obtaining personal gain or prestige.

The Nominating Committee will also evaluate candidates in light of its objective to attain greater gender diversity among its members; however, the Committee does not have any specific policy regarding Board diversity.

Members of the Nominating Committee do not take part in the consideration of their own candidacy as directors. Incumbent Board members are considered by the Nominating Committee on the basis of the qualities outlined above, as well as on the basis of their service during their term in office.

Directors are required to own a minimum of 2,000 shares of our stock by the fifth anniversary of their election to the Board and 6,000 shares of our stock by the tenth anniversary of their election to the Board. Existing directors are subject to the ownership provisions for the five- and ten-year periods beginning March 1, 2013, in accordance with this policy adopted during 2012. The mandatory retirement age for directors first elected to our Board prior to August 2002 is age 77, and the mandatory retirement age is 72 for all directors first elected after July 2002.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Audit Committee Pre-Approval Policies

The Audit Committee of our Board of Directors is required to pre-approve audit and non-audit services performed by the Company’s independent auditor. The Committee has adopted a pre-approval policy under which certain specific services and related fees listed on a schedule of audit, audit-related, and tax services received pre-approval in 2014. In connection with the pre-approval, the Committee reviewed appropriate detailed back-up documentation and received confirmation from management and the independent auditor that each non-audit service included in the schedule may be performed by the independent auditor under applicable SEC and professional standards. Before any services are performed by the independent auditor, they are reviewed by the Company’s Chief Financial Officer to determine whether they have been included on the schedule of pre-approved services or require specific Committee action. Under the Committee’s policy, the Committee has delegated to the Chairman of the Audit Committee the authority to pre-approve specific services, other than internal control services, provided that any such pre-approvals must be presented to the full Committee at its next meeting.

In granting approval for a service, the Audit Committee (or the appropriate designated Committee member) considers the type and scope of service, the fees, whether the service is permitted to be performed by an independent auditor, and whether such service is compatible with maintaining the auditor’s independence.

Independent Auditor and Fees

The Audit Committee appointed Wipfli LLP (“Wipfli”) as independent auditor to audit the financial statements of the Company for the fiscal year ended December 31, 2014. Representatives of Wipfli will be present at the 2015 annual meeting and will have an opportunity to make a statement or respond to appropriate questions.

The following table presents aggregate professional fees paid or accrued during the 2014 and 2013 fiscal years in the categories specified. All services performed received pre-approval by the Audit Committee.

	2014		2013

Audit Fees⁽¹⁾	$	83,200	$	81,425
Audit-Related Fees⁽²⁾		12,748		12,248
Tax Fees⁽³⁾		12,842		44,558
All Other Fees⁽⁴⁾		5,500		5,500
	$	114,290	$	143,731

⁽¹⁾Audit fees consisted of audit work performed in the preparation of financial statements, as well as work generally only the independent auditor can reasonably be expected to provide, such as statutory audits and review of SEC filings.

⁽²⁾Audit-related fees consisted principally of services relating to audit of an employee benefit plan and accounting, merger transaction, and internal control consultation.

⁽³⁾Tax fees represent professional services related to tax compliance and consultation, including 2013 tax fees related to amended and final Marathon State Bank tax returns.

⁽⁴⁾Annual software licensing fee.

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)

Documents filed as part of this report.

(1)

The following consolidated financial statements of PSB and the Independent Auditors’ Report thereon are filed as part of this report:

(i)

Consolidated Balance Sheets as of December 31, 2014 and 2013

(ii)

Consolidated Statements of Income for the years ended December 31, 2014, 2013, and 2012

(iii)

Consolidated States of Comprehensive Income for the years ended December 31, 2014, 2013, and 2012

(iv)

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014, 2013, and 2012

(v)

Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012

(vi)

Notes to Consolidated Financial Statements

(2)

No financial statement schedules are required by Item 15(b).

(3)

The following exhibits required by Item 601 of Regulation S-K are filed as part of this report.

Exhibit
Number		Description

3.1		Second Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K dated December 12, 2008)

3.2		Articles of Amendment dated as of August 8, 2013, to Second Amended and Restated Articles of Incorporation of PSB Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K dated August 8, 2013)

3.3		Bylaws, as amended on February 21, 2006 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K dated February 21, 2006)

4.1		Indenture dated June 28, 2005 between PSB Holdings, Inc. as issuer, and Wilmington Trust Company, as trustee, including Form of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debenture as Exhibit A thereto (incorporated by reference to Exhibit 1.1 to Current Report on Form 8-K dated June 28, 2005)

4.2		Guarantee Agreement dated June 28, 2005 between PSB Holdings, Inc., as guarantor, and Wilmington Trust Company, as guarantee trustee (incorporated by reference to Exhibit 1.2 to Current Report on Form 8-K dated June 28, 2005)

4.3		Amended and Restated Declaration of Trust dated June 28, 2005 among PSB Holdings, Inc., as sponsor, Wilmington Trust Company, as Institutional and Delaware Trustees, and the Administrators named therein, including the terms of trust preferred securities (incorporated by reference to Exhibit 1.3 to Current Report on Form 8-K dated June 28, 2005)

10.1		Bonus Plan of Directors of Peoples State Bank (incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 2002)*

10.2		Non-Qualified Retirement Plan for Directors of Peoples State Bank (incorporated by reference to Exhibit 10.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001)*

10.3		2001 Stock Option Plan as amended March 15, 2005 (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the period ended March 31, 2005)*

10.4		Peoples State Bank Focus Rewards Plan for Executive Officers (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated January 19, 2010)*

10.5		Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K dated November 27, 2007)*

Exhibit
Number		Description

10.6		Amendment to Restricted Stock Plan dated June 17, 2008 (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K dated June 17, 2008)*

10.7		Amended and Restated Employment Agreement dated June 17, 2008, between Peoples State Bank and Scott M. Cattanach (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K dated June 17, 2008)*

10.8		Amendment to Amended and Restated Employment Agreement between Peoples State Bank and Scott M. Cattanach (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K dated December 18, 2009)*

10.9		Directors Deferred Compensation Plan as amended October 17, 2007 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the period ended September 30, 2007)*

10.10		Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated November 27, 2007)*

10.11		Notification of Change to Executive Deferred Compensation Agreement dated December 31, 2013 (Peter W. Knitt) (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated December 17, 2013)*

10.12		2005 Directors Deferred Compensation Plan as amended and restated effective January 1, 2014 (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K dated December 17, 2013)*

10.13		Peoples State Bank Survivor Income Benefit Plan (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004)*

10.14		Executive Officer Post Retirement Benefit Plan (incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the period ended March 31, 2005)*

10.15		Amended and Restated Employment Agreement dated June 17, 2008, between Peoples State Bank and Peter W. Knitt (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated June 17, 2008)*

10.16		Amendment to Amended and Restated Employment Agreement between Peoples State Bank and Peter W. Knitt (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated December 18, 2009)*

10.17		Executive Deferred Compensation Agreement with Peter W. Knitt dated December 31, 2007 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated November 27, 2007)*

10.18		Amendment to Executive Deferred Compensation Agreement dated June 17, 2008 between Peoples State Bank and Peter W. Knitt (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K dated June 17, 2008)*

10.19		Peoples State Bank Board of Directors’ Focus Rewards Plan (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated March 19, 2013)*

21.1		Subsidiaries of PSB (incorporated by reference to Exhibit 21.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 2000)

23.1		Consent of Wipfli LLP

31.1		Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2		Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1		Certifications of CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002

*Denotes Executive Compensation Plans and Arrangements.

(b)

Exhibits.

See Item 15(a)(3).

(c)

Financial Schedules.

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, PSB Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PSB Holdings, Inc.

March 31, 2015	By:	/s/ PETER W. KNITT
		Peter W. Knitt, President
		and Chief Executive Officer

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 31st day of March, 2015.

Signature and Title		Signature and Title

/s/ PETER W. KNITT		/s/ SCOTT M. CATTANACH
Peter W. Knitt, President		Scott M. Cattanach, Vice President, Treasurer and CFO
Chief Executive Officer and a Director		(Principal Financial Officer and Accounting Officer)

DIRECTORS:

/s/ WILLIAM J. FISH		/s/ CHARLES A. GHIDORZI
William J. Fish		Charles A. Ghidorzi

/s/ LEE A. GUENTHER		/s/ KARLA M. KIEFFER
Lee A. Guenther		Karla M. Kieffer

/s/ DAVID K. KOPPERUD		/s/ KEVIN J. KRAFT
David K. Kopperud		Kevin J. Kraft

/s/ THOMAS R. POLZER		/s/ WILLIAM M. REIF
Thomas R. Polzer		William M. Reif

/s/ TIMOTHY J. SONNENTAG
Timothy J. Sonnentag

EXHIBIT INDEX

FORM 10-K

PSB HOLDINGS, INC.

for the fiscal year ended December 31, 2013

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

(17 C.F.R. §232.102(d))

The following exhibits are filed as part of this report:

23.1

Consent of Wipfli LLP

31.1

Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2

Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1

Certifications under Section 906 of Sarbanes-Oxley Act of 2002