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, 2013. The following MD&A concerning our operations is intended to satisfy three principal objectives:
|
•
|
Provide a narrative explanation of our financial statements that enables investors to see the company through the eyes of management;
|
|
•
|
Enhance the overall financial disclosure and provide the context within which our financial information should be analyzed;
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 declined during 2013 to $2.87 per share (on net income
of $4,744) compared to earnings 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.
During 2014, we expect net interest income to increase slightly
compared to 2013 on slower loan growth with slightly lower net interest margin. In addition, the increase in long term interest
rates during 2013 has significantly lowered residential mortgage refinance activity, and we project mortgage banking revenue to
decline 25% to 30% during 2014 compared to 2013 which may cause total noninterest income to decline during 2014. Inflationary operating
expense increases during 2014 are expected to be partially offset by a reduction in credit costs during 2014 compared to 2013 (even
if the large 2013 fraud credit loss is disregarded). Taken together, 2014 earnings per share are expected to decline slightly from
the proforma 2013 earnings per share of $3.91 before nonrecurring items as shown in Table 2.
During January 2014, we announced our agreement with The Baraboo
National Bank to purchase their Rhinelander, Wisconsin branch along with its approximately $44 million in deposits and $22 million
in performing loans. We expect this purchase to close during the quarter ended June 30, 2014. Due to approximately $500 in data
conversion, employee severance, and other closing costs, this purchase is likely to decrease companywide 2014 net income as described
in the preceding paragraph by approximately $200 after tax benefits. The extent of 2014 net income or loss from the acquisition
will be impacted by the final closing date and our ability to realize projected branch cost savings.
Earnings reached a 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 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).
Earnings reached a then record high of $3.21 per share in 2011 (on
net income of $5,305) compared to earnings of $2.89 per share in 2010 (on net income of $4,754), an increase of 11% per share.
There were no significant nonrecurring income or expense items during 2011 or 2010. During 2011, higher net interest margin increased
tax equivalent net interest income $386, or 2%, while credit and foreclosure costs remained historically high at $2,587 compared
to $2,644 during 2010. Noninterest and fee income during 2011 was largely unchanged compared to 2010, while operating expenses,
excluding loss on foreclosed assets, declined $495, or 3%, from $277 lower FDIC insurance premium expense and $145 lower debit
card losses following a significant fraud loss during 2010.
Credit Quality
During 2013, the total provision for loan losses and loss on foreclosed
assets (“credit costs”) were $4,443, which 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 an apparent fraud that impacted several banks. 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 2014, loss on foreclosed assets is expected to decline modestly
due to projected lower write-down of foreclosed asset values compared to 2013, while the provision for loan losses is expected
to remain at levels similar to 2013 (before recognition of the large grain loss). However, we continue to work through existing
problem loans and foreclosed assets and expect higher levels of troubled debt restructured loans, which could increase nonperforming
assets and credit and foreclosure costs greater than expected, negatively impacting 2014 net income.
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.
During 2011, credit costs of $2,587 declined $57, or 2%, compared
to 2010 due to a reduction in the provision for loan losses, although the loss on foreclosed assets increased due to higher write-downs
to value of foreclosed assets held. During 2011, total nonperforming assets increased $1,494, or 9%, due to a $3,837 increase in
troubled debt restructured loan principal that continued to pay according to its restructured terms. However, nonaccrual assets
decreased $315, or 4%, and foreclosed assets decreased $2,028, or 41% during 2011. Total nonperforming assets were $17,883, or
2.87% of total assets as of December 31, 2011 compared $16,389, or 2.64% of total assets as of December 31, 2010.
Asset Growth and Liquidity
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. During 2014, asset and loan growth is expected to be challenging due to low customer demand within our markets and very
competitive market conditions. If loans receivable were to decline, it would likely reduce net interest income, negatively impacting
2014 net income.
Total assets were $711,966 at December 31, 2012, up $89,099 (14%)
during the year ended December 31, 2012. During 2012, a $101,385 increase in core deposits, primarily from the acquisition of Marathon,
funded a $20,109 pay down of maturing brokered certificates of deposit and the majority of asset growth. 2012 asset growth consisted
primarily of $10,642 in cash and overnight investments, $26,833 in residential mortgage loans, $12,953 in commercial related loans,
and $36,532 in investment securities. Marathon’s total assets were $107,364 on the June 1, 2012 acquisition date, including
$62,260 of securities and short-term investments. Following the purchase date, maturity proceeds from the acquired Marathon investment
securities were used to pay down wholesale funding. At December 31, 2012, total wholesale funding was $118,081, or 16.6% of total
assets, compared to $138,190, or 22.2% of total assets at December 31, 2011. As outlined in the preceding paragraph, a portion
of the substantial cash and cash equivalents held at December 31, 2012 totaling $48,847 were used to fund 2013 net loan growth.
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 $31,522 in cash and cash equivalents at December 31, 2013, we have $296,590
of unused funding available at December 31, 2013, which is considered adequate to meet customer, operational, and growth needs
during 2014. 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, $90,766 of potential FHLB advance funding considered available at December 31, 2013, would require additional
purchase of up to $3,885 of additional FHLB capital stock, which pays a nominal dividend and for which no trading market exists.
Capital Resources
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. We expect to purchase a similar amount of treasury stock
shares during 2014 on the open market if conditions and prices are beneficial to the Company.
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. For regulatory purposes, we continued to be considered “well
capitalized” under banking regulations at December 31, 2013. Refer to Note 20 of the Notes to Consolidated Financial Statements
for detailed regulatory capital information.
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 are 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 2014, 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 expect to retain capital for potential
acquisitions. However, if value added merger and acquisition options do not materialize in the near term, we may consider expanded
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 2012, total stockholders’ equity increased $4,085,
primarily from $6,009 of net income less $1,247 of shareholder dividends declared. Changes to items of comprehensive income also
reduced equity $540 during 2012, net of tax, due a decline in fair value of securities and an unrealized loss on fair value of
interest rate swaps. After several years of no buybacks of treasury stock, we purchased 10,210 shares of our common stock on the
open market during 2012 at an average price of $25.68 per share, which reduced equity $262. Tangible net book value increased to
$32.93 per share at December 31, 2012 compared to $30.44 per share at December 31, 2011, an increase of 8%. Due to our purchase
of Marathon using existing cash on hand without the issuance of new common stock, our equity to assets ratio declined during 2012.
Common stockholders’ equity was 7.65% of total assets at December 31, 2012 compared to 7.42% of assets at June 30, 2012 (following
the Marathon purchase) and 8.09% of assets at December 31, 2011.
Off-Balance-Sheet Arrangements and Contractual Obligations
Our largest volume off-balance sheet activity involves our servicing
of payments and related collection activities on $272,280 of residential 1 to 4 family mortgages sold to FHLB and FNMA at December
31, 2013, up $2,726, or 1.0%, from $269,554 at December 31, 2012, which was up 3.0% from $261,811 at December 31, 2011. We expect
to see lower mortgage refinance activity during 2014 and serviced mortgage loan principal could stabilize or decline. In general,
we are paid an annualized servicing fee of .25% of serviced principal which is recorded as a component of mortgage banking revenue.
At December 31, 2013, we have provided a credit enhancement against
FHLB loss on $23,709, or 8.7%, 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 $1,593 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 $450 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 $294, $28, and $38 during 2013, 2012, and 2011, respectively. We maintained a reserve
liability for potential future representation and warranty losses of $108 at December 31, 2013.
We provide various commitments to extend credit for both commercial
and consumer purposes totaling approximately $119 million at December 31, 2013 compared to $105 million at December 31, 2012 and
$99 million at December 31, 2011. 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, 2013, $127 million, or 55%, will
require repayment, or extension through refinancing, during 2014, including $36 million of FHLB advances and $82 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, 2013 and 2012, there were $14,323 and $14,979, 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, 2013. 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, 2013, before certain tax-adjusted nonrecurring income and expense items.
Table 2: Summary Operating Income
|
Year ended December 31,
|
($000s)
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net income before special items, net of tax
|
|
$
|
6,463
|
|
|
$
|
5,783
|
|
|
$
|
5,277
|
|
|
$
|
4,770
|
|
|
$
|
2,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on sale of assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on write-down and sale of securities
|
|
|
7
|
|
|
|
|
|
|
|
19
|
|
|
|
(12
|
)
|
|
|
316
|
|
Net gain (loss) on sale of premises and equipment
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
9
|
|
|
|
(4
|
)
|
|
|
(59
|
)
|
Net loss on sale of credit card loan principal
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gain (loss) on sale of assets, net of tax
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
28
|
|
|
|
(16
|
)
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Data processing conversion expense
|
|
|
|
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit from amendment of acquired bank tax returns
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonrecurring merger and acquisition income, net of tax
|
|
|
73
|
|
|
|
228
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income as reported
|
|
$
|
4,744
|
|
|
$
|
6,009
|
|
|
$
|
5,305
|
|
|
$
|
4,754
|
|
|
$
|
3,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share before special items
|
|
$
|
3.91
|
|
|
$
|
3.48
|
|
|
$
|
3.19
|
|
|
$
|
2.90
|
|
|
$
|
1.75
|
|
Diluted earnings per share as reported
|
|
$
|
2.87
|
|
|
$
|
3.61
|
|
|
$
|
3.21
|
|
|
$
|
2.89
|
|
|
$
|
1.90
|
|
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.
During 2014, we expect net interest margin to be pressured lower
while organic loan growth prospects remain slow from low customer demand and intense local competition from various financial providers.
In addition, stabilization of long-term residential mortgage rates point to significantly lower refinance income and lower mortgage
banking income. Inflationary operating expense increases may be partially offset by lower loss on foreclosed assets compared to
2013. Therefore, potentially increased net operating expenses combined with lower net interest margin and a decline in noninterest
income could result in lower earnings during 2014 compared to proforma 2013 earnings of $6,463 as shown in Table 2 above especially
if credit costs increase or loan growth declines.
2012 compared to 2011
Earnings were a 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.
2011 compared to 2010
Earnings reached a then record high during 2011 of $5,305, or $3.21
per diluted share, compared to $4,754, or $2.89 per diluted share during 2010, an increase of $551 ($.32 per share), up 11.6%.
2011 net income increased over the prior year due to increased net interest income of $458, up 2.4%, due to a slight increase in
net margin and average earning assets. Credit costs totaled $2,587 during 2011, a slight decline of $57, or 2.2%, compared to 2010,
primarily from lower provision for loan losses while loss on foreclosed assets increased from higher partial write-downs of value.
Noninterest income decreased $26 during 2011, or 0.5%, from a decline in service charges (primarily overdraft charges) and mortgage
banking totaling $253 which was partially offset by $207 in swap sale commission income (a new product during 2011). Excluding
credit costs, noninterest expenses declined $495, or 3.3%, primarily from a $277 reduction in FDIC insurance premiums. Return on
average assets was .87% and .79% during 2011 and 2010, respectively. Return on average stockholders’ equity was 10.78% and
10.59% during 2011 and 2010, respectively.
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, 2013. 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,
|
2013
|
2012
|
2011
|
|
|
|
|
Loans
|
77.1%
|
75.0%
|
77.6%
|
Taxable securities
|
12.6%
|
14.9%
|
13.9%
|
Tax-exempt securities
|
8.1%
|
6.8%
|
5.7%
|
FHLB stock
|
0.5%
|
0.5%
|
0.6%
|
Other
|
1.7%
|
2.8%
|
2.2%
|
|
|
|
|
Total interest earning assets
|
100.0%
|
100.0%
|
100.0%
|
|
|
|
|
Savings and demand deposits
|
31.4%
|
29.4%
|
25.7%
|
Money market deposits
|
22.1%
|
21.0%
|
20.3%
|
Time deposits
|
29.9%
|
33.5%
|
34.5%
|
FHLB advances
|
10.4%
|
9.7%
|
11.5%
|
Other borrowings
|
4.0%
|
3.6%
|
5.0%
|
Senior subordinated notes
|
0.8%
|
1.3%
|
1.4%
|
Junior subordinated debentures
|
1.4%
|
1.5%
|
1.6%
|
|
|
|
|
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, 2013.
Table 4: Average Balances and Interest Rates
|
|
|
|
2013
|
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)(2)(3)
|
|
$
|
508,454
|
|
|
$
|
23,316
|
|
|
|
4.59
|
%
|
|
$
|
462,237
|
|
|
$
|
23,667
|
|
|
|
5.12
|
%
|
|
$
|
443,709
|
|
|
$
|
24,640
|
|
|
|
5.55
|
%
|
Taxable securities
|
|
|
83,049
|
|
|
|
2,098
|
|
|
|
2.53
|
%
|
|
|
91,747
|
|
|
|
2,402
|
|
|
|
2.62
|
%
|
|
|
79,711
|
|
|
|
2,637
|
|
|
|
3.31
|
%
|
Tax-exempt securities
(2)
|
|
|
53,549
|
|
|
|
2,289
|
|
|
|
4.27
|
%
|
|
|
41,825
|
|
|
|
1,959
|
|
|
|
4.68
|
%
|
|
|
32,625
|
|
|
|
1,705
|
|
|
|
5.23
|
%
|
FHLB stock
|
|
|
3,138
|
|
|
|
14
|
|
|
|
0.45
|
%
|
|
|
2,817
|
|
|
|
9
|
|
|
|
0.32
|
%
|
|
|
3,250
|
|
|
|
4
|
|
|
|
0.12
|
%
|
Other
|
|
|
11,542
|
|
|
|
67
|
|
|
|
0.58
|
%
|
|
|
17,445
|
|
|
|
82
|
|
|
|
0.47
|
%
|
|
|
12,679
|
|
|
|
68
|
|
|
|
0.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(2)
|
|
|
659,732
|
|
|
|
27,784
|
|
|
|
4.21
|
%
|
|
|
616,071
|
|
|
|
28,119
|
|
|
|
4.56
|
%
|
|
|
571,974
|
|
|
|
29,054
|
|
|
|
5.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
10,476
|
|
|
|
|
|
|
|
|
|
|
|
17,979
|
|
|
|
|
|
|
|
|
|
|
|
8,532
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
9,935
|
|
|
|
|
|
|
|
|
|
|
|
10,078
|
|
|
|
|
|
|
|
|
|
|
|
10,216
|
|
|
|
|
|
|
|
|
|
Cash surrender value life insurance
|
|
|
12,257
|
|
|
|
|
|
|
|
|
|
|
|
11,597
|
|
|
|
|
|
|
|
|
|
|
|
11,175
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
9,557
|
|
|
|
|
|
|
|
|
|
|
|
11,427
|
|
|
|
|
|
|
|
|
|
|
|
12,481
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(7,426
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,799
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
694,531
|
|
|
|
|
|
|
|
|
|
|
$
|
659,353
|
|
|
|
|
|
|
|
|
|
|
$
|
606,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and demand deposits
|
|
$
|
172,249
|
|
|
$
|
383
|
|
|
|
0.22
|
%
|
|
$
|
154,428
|
|
|
$
|
782
|
|
|
|
0.51
|
%
|
|
$
|
126,944
|
|
|
$
|
1,109
|
|
|
|
0.87
|
%
|
Money market deposits
|
|
|
121,351
|
|
|
|
406
|
|
|
|
0.33
|
%
|
|
|
110,587
|
|
|
|
586
|
|
|
|
0.53
|
%
|
|
|
100,089
|
|
|
|
810
|
|
|
|
0.81
|
%
|
Time deposits
|
|
|
164,392
|
|
|
|
2,262
|
|
|
|
1.38
|
%
|
|
|
176,187
|
|
|
|
2,793
|
|
|
|
1.59
|
%
|
|
|
171,200
|
|
|
|
3,509
|
|
|
|
2.05
|
%
|
FHLB borrowings
|
|
|
57,035
|
|
|
|
1,285
|
|
|
|
2.25
|
%
|
|
|
50,941
|
|
|
|
1,414
|
|
|
|
2.78
|
%
|
|
|
56,730
|
|
|
|
1,776
|
|
|
|
3.13
|
%
|
Other borrowings
|
|
|
21,862
|
|
|
|
650
|
|
|
|
2.97
|
%
|
|
|
19,190
|
|
|
|
596
|
|
|
|
3.11
|
%
|
|
|
24,499
|
|
|
|
645
|
|
|
|
2.63
|
%
|
Senior subordinated notes
|
|
|
4,600
|
|
|
|
184
|
|
|
|
4.00
|
%
|
|
|
7,000
|
|
|
|
578
|
|
|
|
8.26
|
%
|
|
|
7,000
|
|
|
|
567
|
|
|
|
8.10
|
%
|
Junior subordinated debentures
|
|
|
7,732
|
|
|
|
341
|
|
|
|
4.41
|
%
|
|
|
7,732
|
|
|
|
342
|
|
|
|
4.42
|
%
|
|
|
7,732
|
|
|
|
341
|
|
|
|
4.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
549,221
|
|
|
|
5,511
|
|
|
|
1.00
|
%
|
|
|
526,065
|
|
|
|
7,091
|
|
|
|
1.35
|
%
|
|
|
494,194
|
|
|
|
8,757
|
|
|
|
1.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
82,506
|
|
|
|
|
|
|
|
|
|
|
|
73,135
|
|
|
|
|
|
|
|
|
|
|
|
57,942
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,117
|
|
|
|
|
|
|
|
|
|
|
|
7,128
|
|
|
|
|
|
|
|
|
|
|
|
5,150
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
56,687
|
|
|
|
|
|
|
|
|
|
|
|
53,025
|
|
|
|
|
|
|
|
|
|
|
|
49,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
694,531
|
|
|
|
|
|
|
|
|
|
|
$
|
659,353
|
|
|
|
|
|
|
|
|
|
|
$
|
606,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
22,273
|
|
|
|
|
|
|
|
|
|
|
$
|
21,028
|
|
|
|
|
|
|
|
|
|
|
$
|
20,297
|
|
|
|
|
|
Rate spread
|
|
|
|
|
|
|
|
|
|
|
3.21
|
%
|
|
|
|
|
|
|
|
|
|
|
3.21
|
%
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
Net yield on interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
3.38
|
%
|
|
|
|
|
|
|
|
|
|
|
3.41
|
%
|
|
|
|
|
|
|
|
|
|
|
3.55
|
%
|
(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: 2013 - $522, 2012 - $724, 2011 - $592.
Table 5: Interest Income and Expense Volume and Rate Analysis
|
2013 compared to 2012
|
|
2012 compared to 2011
|
|
increase (decrease) due to
(1)
|
|
increase (decrease) due to
(1)
|
|
Volume
|
|
Rate
|
|
Net
|
|
Volume
|
|
Rate
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(2)
|
|
$
|
2,121
|
|
|
$
|
(2,472
|
)
|
|
$
|
(351
|
)
|
|
$
|
949
|
|
|
$
|
(1,922
|
)
|
|
$
|
(973
|
)
|
Taxable securities
|
|
|
(220
|
)
|
|
|
(84
|
)
|
|
|
(304
|
)
|
|
|
315
|
|
|
|
(550
|
)
|
|
|
(235
|
)
|
Tax-exempt securities
(2)
|
|
|
501
|
|
|
|
(171
|
)
|
|
|
330
|
|
|
|
431
|
|
|
|
(177
|
)
|
|
|
254
|
|
FHLB stock
|
|
|
1
|
|
|
|
4
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
5
|
|
Other interest income
|
|
|
(34
|
)
|
|
|
19
|
|
|
|
(15
|
)
|
|
|
22
|
|
|
|
(8
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,369
|
|
|
|
(2,704
|
)
|
|
|
(335
|
)
|
|
|
1,716
|
|
|
|
(2,651
|
)
|
|
|
(935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and demand deposits
|
|
|
39
|
|
|
|
(438
|
)
|
|
|
(399
|
)
|
|
|
140
|
|
|
|
(467
|
)
|
|
|
(327
|
)
|
Money market deposits
|
|
|
36
|
|
|
|
(216
|
)
|
|
|
(180
|
)
|
|
|
56
|
|
|
|
(280
|
)
|
|
|
(224
|
)
|
Time deposits
|
|
|
(163
|
)
|
|
|
(368
|
)
|
|
|
(531
|
)
|
|
|
79
|
|
|
|
(795
|
)
|
|
|
(716
|
)
|
FHLB borrowings
|
|
|
137
|
|
|
|
(266
|
)
|
|
|
(129
|
)
|
|
|
(161
|
)
|
|
|
(201
|
)
|
|
|
(362
|
)
|
Other borrowings
|
|
|
79
|
|
|
|
(25
|
)
|
|
|
54
|
|
|
|
(165
|
)
|
|
|
116
|
|
|
|
(49
|
)
|
Senior subordinated notes
|
|
|
(96
|
)
|
|
|
(298
|
)
|
|
|
(394
|
)
|
|
|
—
|
|
|
|
11
|
|
|
|
11
|
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
32
|
|
|
|
(1,612
|
)
|
|
|
(1,580
|
)
|
|
|
(51
|
)
|
|
|
(1,615
|
)
|
|
|
(1,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest earnings
|
|
$
|
2,337
|
|
|
$
|
(1,092
|
)
|
|
$
|
1,245
|
|
|
$
|
1,767
|
|
|
$
|
(1,036
|
)
|
|
$
|
731
|
|
(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,
|
|
2013
|
|
2012
|
|
2011
|
|
|
Yield
|
|
Change
|
|
Yield
|
|
Change
|
|
Yield
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield on earning assets
|
|
|
4.21
|
%
|
|
|
-0.35
|
%
|
|
|
4.56
|
%
|
|
|
-0.52
|
%
|
|
|
5.08
|
%
|
|
|
-0.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate on all liabilities as a percent of earning assets
|
|
|
0.83
|
%
|
|
|
-0.32
|
%
|
|
|
1.15
|
%
|
|
|
-0.38
|
%
|
|
|
1.53
|
%
|
|
|
-0.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets
|
|
|
3.38
|
%
|
|
|
-0.03
|
%
|
|
|
3.41
|
%
|
|
|
-0.14
|
%
|
|
|
3.55
|
%
|
|
|
0.04
|
%
|
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. Security portfolio trends point to continued lower
yields during 2014. 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). Due to low loan demand
and intense competition within our markets, a decline in organic loan growth combined with a decline in net interest margin could
reduce net interest income during 2014 compared to 2013. Although net interest margin will continue to be pressured from falling
asset reinvestment rates, savings from maturity of high cost wholesale funding during 2013 is expected to result in 2014 net margin
similar to that seen during 2013, within a range of 3.34% to 3.38% during 2014. Approximately 51% of total wholesale funding held
at December 31, 2013 having a weighted average interest cost of 3.08% is expected to reprice to significantly lower rates during
2014, reducing interest expense.
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. 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 higher than the existing floor faster, 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 6.0% to 12.7% ($768 to $1,651 after tax impacts) per year during the first
three 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 15% of total assets and carried an approximately
21 month weighted average fixed rate remaining term as of December 31, 2013.
The Dodd-Frank Wall Street Reform Act repealed the prohibition on
paying interest on commercial checking accounts during 2011. 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 sell or 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.
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 simulations in effect at December 31, 2012
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 12 month period projected reduced net interest income of 4.2% to 13.9% ($509 to $1,670 after tax impacts) per year during
the first three years of the rate increase.
2011 compared to 2010
Tax adjusted net interest income totaled $20,297 during 2011 compared
to $19,911 in 2010, an increase of $386, or 1.9%, from a 0.7% increase in average earning assets during 2011 and a slight increase
in net margin from 3.51% in 2010 to 3.55% in 2011. Compared to 2010, loan yield declined from 5.77% to 5.55% (22 basis points)
while the tax adjusted investment security yield declined from 4.51% to 3.87% (64 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 2.12% to 1.77% (35 basis points). The market rate decline began during the 2008-2009 national
recession. Average nonaccrual loans totaled $8,086 during 2011 compared to $10,506 during 2010. Based on the average loan yield
during 2011, the decrease in nonaccrual loans during 2011 increased net interest margin by approximately 2 basis points during
2011 compared to 2010. During 2011, cumulative average nonaccrual loans reduced net interest margin by approximately 8 basis points.
Average earning assets grew $4,007, or 0.7% during 2011, driven
by a $6,297 increase in taxable securities, primarily mortgage related investment securities. Average interest bearing liabilities
decreased $4,891, or 1.0% during 2011. The primary funding source that decreased was time deposits, declining $13,287, or 7.2%.
The changes made to the Rewards Checking account structure and removal of the product from our retail deposit lineup were effective
late in 2011, which allowed average product balances to continue to increase during 2011. Average Rewards Checking balances were
$48,674 during 2011 compared to $43,264 in 2010, an increase of $5,410, or 12.5%. Average Rewards Checking balances had increased
$11,651, or 36.9% during 2010 after growing $14,815, or 88.2% during 2009. Since the account changes, product balances continued
to decline and were $36,452 at December 31, 2013 compared to $43,742 at December 31, 2012 and $47,578 at December 31, 2011.
During 2011, 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 $100 million,
or 22.4%, of gross loans at December 31, 2011 was supported by an average interest rate floor approximately 139 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 $1,387 and .24%, respectively, based on those existing loan floors and
average total earning assets during the year ended December 31, 2011. Interest rate simulations in effect at December 31, 2011
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 12 month period projected reduced net interest income of 4.9% to 8.4% ($577 to $958 after tax impacts) per year during
the first three years of the rate increase.
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, 2013. 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:
|
1.
|
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.
|
|
2.
|
Nonaccrual loans are considered to reprice beyond 5 years.
|
|
3.
|
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.
|
|
4.
|
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.
|
|
5.
|
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, 2013, with a cumulative one-year gap ratio of 85.4% compared to a “negative”
gap (liability sensitive position) of 93.7% at December 31, 2012. The one year gap ratio declined during 2013 as maturing short-term
investment securities acquired with Marathon during 2012 were reinvested in longer term loans during 2013 and a greater amount
of FHLB advance liabilities are set to mature during 2014 than matured during 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, 2013
|
(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
|
|
$
|
153,656
|
|
|
$
|
41,461
|
|
|
$
|
69,122
|
|
|
$
|
87,238
|
|
|
$
|
125,059
|
|
|
$
|
40,277
|
|
|
$
|
516,813
|
|
Securities
|
|
|
7,658
|
|
|
|
6,578
|
|
|
|
8,766
|
|
|
|
17,443
|
|
|
|
49,629
|
|
|
|
43,205
|
|
|
|
133,279
|
|
FHLB stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,556
|
|
|
|
2,556
|
|
CSV bank-owned life insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,826
|
|
|
|
12,826
|
|
Other earning assets
|
|
|
17,722
|
|
|
|
500
|
|
|
|
|
|
|
|
1,736
|
|
|
|
|
|
|
|
|
|
|
|
19,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
179,036
|
|
|
$
|
48,539
|
|
|
$
|
77,888
|
|
|
$
|
106,417
|
|
|
$
|
174,688
|
|
|
$
|
98,864
|
|
|
$
|
685,432
|
|
Cumulative rate sensitive assets
|
|
$
|
179,036
|
|
|
$
|
227,575
|
|
|
$
|
305,463
|
|
|
$
|
411,880
|
|
|
$
|
586,568
|
|
|
$
|
685,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
105,920
|
|
|
$
|
18,510
|
|
|
$
|
182,116
|
|
|
$
|
26,952
|
|
|
$
|
49,710
|
|
|
$
|
91,662
|
|
|
$
|
474,870
|
|
FHLB advances
|
|
|
13,834
|
|
|
|
7,475
|
|
|
|
14,740
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
38,049
|
|
Other borrowings
|
|
|
6,941
|
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
5,500
|
|
|
|
|
|
|
|
20,441
|
|
Senior subordinated notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
4,000
|
|
Junior subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,732
|
|
|
|
|
|
|
|
7,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
126,695
|
|
|
$
|
25,985
|
|
|
$
|
204,856
|
|
|
$
|
26,952
|
|
|
$
|
68,942
|
|
|
$
|
91,662
|
|
|
$
|
545,092
|
|
Cumulative interest sensitive liabilities
|
|
$
|
126,695
|
|
|
$
|
152,680
|
|
|
$
|
357,536
|
|
|
$
|
384,488
|
|
|
$
|
453,430
|
|
|
$
|
545,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the individual period
|
|
$
|
52,341
|
|
|
$
|
22,554
|
|
|
$
|
(126,968
|
)
|
|
$
|
79,465
|
|
|
$
|
105,746
|
|
|
$
|
7,202
|
|
|
|
|
|
Ratio of rate sensitive assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rate sensitive liabilities for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the individual period
|
|
|
141.3
|
%
|
|
|
186.8
|
%
|
|
|
38.0
|
%
|
|
|
394.8
|
%
|
|
|
253.4
|
%
|
|
|
107.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest sensitivity gap
|
|
$
|
52,341
|
|
|
$
|
74,895
|
|
|
$
|
(52,073
|
)
|
|
$
|
27,392
|
|
|
$
|
133,138
|
|
|
$
|
140,340
|
|
|
|
|
|
Cumulative ratio of rate sensitive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets to rate sensitive liabilities
|
|
|
141.3
|
%
|
|
|
149.1
|
%
|
|
|
85.4
|
%
|
|
|
107.1
|
%
|
|
|
129.4
|
%
|
|
|
125.7
|
%
|
|
|
|
|
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:
|
2013
|
2012
|
2011
|
|
|
|
|
Cumulative 1 year gap ratio
|
|
|
|
|
Base
|
85%
|
94%
|
108%
|
|
Up 200
|
82%
|
89%
|
104%
|
|
Down 200
|
87%
|
95%
|
111%
|
|
|
|
|
|
Change in Net Interest Income – Year 1
|
|
|
|
|
Up 200 during the year
|
-2.8%
|
-1.4%
|
-2.1%
|
|
Down 200 during the year
|
-0.1%
|
0.4%
|
-0.7%
|
|
|
|
|
|
Change in Net Interest Income – Year 2
|
|
|
|
|
No rate change (base case)
|
0.8%
|
-2.5%
|
-5.1%
|
|
Following up 200 in year 1
|
-0.2%
|
-2.8%
|
-3.5%
|
|
Following down 200 in year 1
|
-2.4%
|
-3.8%
|
-9.8%
|
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 53.8% at December 31, 2013 compared to 60.5% and 61.9% at December 31, 2012 and
2011, respectively. This ratio declined during 2013 as the core deposit categories noted above increased to a greater extent than
assets that reprice in periods in excess of 60 months.
At December 31, 2013, internal interest rate simulations that project
interest rate changes that maintain the current shape of the yield curve (often referred to as “parallel yield curve shifts”)
estimated relatively modest projected reductions to future years’ net interest income, even in more extreme periods of interest
rate changes such as up 400 basis points during a 24 month period. The impact of various rate simulations on projected “base”
net interest income are shown in 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 2014, net
interest income would decline during the first three years of the simulation in amounts ranging from 6.0% in year 1 to a decline
of 12.7% in year 2 of the base simulation’s net interest income ($1,267 in year 1 and $2,725 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. Current net interest income sensitivity to a rising and flattening yield curve
is similar than that seen at December 31, 2012 when 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 4.2% in year 1 to 13.9% in year 3 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 three years of the simulation, we also have risk to a prolonged period of
low or falling rates in the already low rate environment in years 3-5 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 to levels seen prior to 2008 (pre recessionary levels).
Table 9: Projected Changes To Net Interst Income Under Various
Rate Change Simulations
|
During next 12M
|
During next 24M
|
During next 24M
|
Yield Curve
|
|
Down 100 bp
|
Parallel up 400 bp
|
Flat up 500 bp
|
Twist*
|
|
|
|
|
|
Year 1
|
-0.1%
|
|
-2.6%
|
|
-6.0%
|
|
1.1%
|
|
Year 2
|
-3.2%
|
|
-6.9%
|
|
-12.7%
|
|
3.0%
|
|
Year 3
|
-6.8%
|
|
-1.3%
|
|
-7.0%
|
|
-6.4%
|
|
Year 4
|
-10.8%
|
|
15.9%
|
|
10.1%
|
|
0.0%
|
|
Year 5
|
-12.8%
|
|
28.9%
|
|
23.1%
|
|
11.5%
|
|
*Yield curve steepens over the first
18 months of the simulation (10 year CMT Treasury = 3.75% and flattens over months 19-36 to the average slope from 2005-2007 (with
Fed Funds targeted at 4.00%)
Despite recent rate volatility in mid and longer term market interest
rates, we do not consider a falling rate environment to be likely, but we continue to monitor our asset-liability position for
an environment of continued low short-term rates during the next 12 to 24 months.
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, 2013. 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
|
2013
|
2012
|
2011
|
2010
|
2009
|
|
|
|
|
|
|
Net interest income
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
Provision for loan losses
|
18.8%
|
3.9%
|
7.1%
|
9.4%
|
21.8%
|
|
|
|
|
|
|
Net interest income after loan loss provision
|
81.2%
|
96.1%
|
92.9%
|
90.6%
|
78.2%
|
Total noninterest income
|
26.4%
|
32.6%
|
27.3%
|
28.1%
|
32.9%
|
Total noninterest expenses
|
77.5%
|
86.3%
|
80.7%
|
83.4%
|
87.5%
|
|
|
|
|
|
|
Net income before income taxes
|
30.1%
|
42.4%
|
39.5%
|
35.3%
|
23.6%
|
Provision for income taxes
|
7.8%
|
12.6%
|
12.4%
|
10.4%
|
5.2%
|
|
|
|
|
|
|
Net income
|
22.3%
|
29.8%
|
27.1%
|
24.9%
|
18.4%
|
Table 11 presents a breakdown of the components of noninterest income
during the three years ended December 31, 2013.
Table 11: Noninterest Income
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
% of pre-tax
|
|
|
|
% of pre-tax
|
|
|
|
% of pre-tax
|
Years Ended December 31,
|
|
Amount
|
|
Income
|
|
Amount
|
|
Income
|
|
Amount
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income
|
|
$
|
1,591
|
|
|
|
24.83
|
%
|
|
$
|
1,795
|
|
|
|
21.01
|
%
|
|
$
|
1,373
|
|
|
|
17.77
|
%
|
Service fees
|
|
|
1,580
|
|
|
|
24.66
|
%
|
|
|
1,648
|
|
|
|
19.29
|
%
|
|
|
1,632
|
|
|
|
21.12
|
%
|
Retail investment sales commissions
|
|
|
927
|
|
|
|
14.47
|
%
|
|
|
712
|
|
|
|
8.34
|
%
|
|
|
603
|
|
|
|
7.81
|
%
|
Merchant and debit card interchange fee income
|
|
|
859
|
|
|
|
13.40
|
%
|
|
|
851
|
|
|
|
9.96
|
%
|
|
|
722
|
|
|
|
9.35
|
%
|
Increase in cash surrender value of life insurance
|
|
|
402
|
|
|
|
6.27
|
%
|
|
|
407
|
|
|
|
4.76
|
%
|
|
|
415
|
|
|
|
5.37
|
%
|
Other operating income
|
|
|
266
|
|
|
|
4.15
|
%
|
|
|
283
|
|
|
|
3.31
|
%
|
|
|
517
|
|
|
|
6.69
|
%
|
Insurance annuity sales commissions
|
|
|
17
|
|
|
|
0.27
|
%
|
|
|
24
|
|
|
|
0.28
|
%
|
|
|
28
|
|
|
|
0.36
|
%
|
Net gain on sale of securities
|
|
|
12
|
|
|
|
0.19
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
32
|
|
|
|
0.41
|
%
|
Gain on bargain purchase
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
851
|
|
|
|
9.96
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
Gain (loss) on sale of premises and equipment
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
(3
|
)
|
|
|
-0.03
|
%
|
|
|
15
|
|
|
|
0.20
|
%
|
Loss on sale of credit card loan principal
|
|
|
(31
|
)
|
|
|
-0.48
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
5,623
|
|
|
|
87.76
|
%
|
|
$
|
6,568
|
|
|
|
76.87
|
%
|
|
$
|
5,337
|
|
|
|
69.08
|
%
|
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. Because we expect long term rates to remain near current levels, refinance activity is not expected to be a significant
driver of mortgage banking income during 2014. Due to the loss of this income, we estimate mortgage banking to decline 25% to 30%
during 2014 compared to 2013 levels. Partially offsetting this decline, we expect retail investment and annuity commission income
to increase slightly during 2014 compared to 2013.
Initially following 2011 regulation (Dodd-Frank Wall Street Reform
Act) to limit bank debit card interchange and overdraft fees, net fee income on these products after vendor costs initially declined
a slight 1.1% and totaled $1,644 during 2012 compared to $1,662 during 2011. However, our fee income on these products continued
to decline during 2013, totaling $1,562 net of vendor costs, down $82, or 5.0%, compared to 2012. The decline was also influenced
by a reduction in Rewards Checking account customers as we discontinued selling that account to new customers in 2011 and made
changes that removed certain incentives for customers to use their debit card to maximize rewards. In addition, as card payment
systems undergo changes due to regulation and consumer payment habits change, we could see debit card and overdraft fee income
decline further during 2014, negatively impacting net income.
Because we expect mortgage banking to decline during 2014, and because
overdraft service charges and card interchange income face headwinds to significant growth, we expect total noninterest income
to decline 5% to 7% during 2014 compared to 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.
Despite 2011 regulation to limit bank debit card interchange and
overdraft fees (described below in the comparison of 2011 to 2010), net fee income on these products after vendor costs declined
a slight 1.1% and totaled $1,644 and $1,662 during 2012 and 2011, respectively.
2011 compared to 2010
Total noninterest income during 2011 was $5,337 compared to $5,363
in 2010, a decrease of $26, or 0.5%. During 2011, service fees declined $154, or 8.6%, due to lower customer usage of our courtesy
overdraft program (and related overdraft fees) in response to new regulation concerning this product effective in August 2010.
The new regulation requires that certain payments by consumers who did not opt into the bank’s overdraft program are not
paid by the bank, reducing overdraft fee income. In addition, the new regulation and negative publicity concerning banks and their
overdraft protection programs continue to lower customer usage of the product and we could see further service fee income declines
during 2012 related to overdrafts. In addition, mortgage banking income declined $99, or 6.7% as residential mortgage rates began
to settle at historically low levels during 2011. Offsetting these declines was commission income on sale of fixed interest rate
swaps to commercial adjustable rate loan customers of $207 during 2011. The swap product was a new product during 2011 and is included
in other operating income in Table 11 above. Certain commercial customers with adjustable rate loans with us may choose to enter
into an interest rate swap with us to convert their floating rate interest payments to a fixed rate. We simultaneously sell these
fixed rate hedge contracts to a correspondent bank in exchange for a fee.
During 2011, the Federal Reserve finalized regulations to implement
the provisions of the Dodd-Frank Wall Street Reform Act related to debit card interchange income, often referred to as the “Durbin
Amendment.” These new changes cap the amount of debit card interchange income that may be collected by large banks from merchants
for processing card activity. While the new rules technically do not apply to us as a smaller bank, the impacts are expected to
become uniform for the industry over time as merchants use their new authority and options to process customer card activity across
a wider number of providers, which could lower our annualized debit card interchange revenue. In general, the banking industry
responded to the new regulation which lowered debit card fee revenue by reducing customer account reward programs and related costs
and increasing monthly account service fees.
Noninterest Expense
Table 12 outlines the components of noninterest expenses for the
three years ending December 31, 2013.
Table 12: Noninterest Expense
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
% of net
|
|
|
|
% of net
|
|
|
|
% of net
|
|
|
|
|
margin &
|
|
|
|
margin &
|
|
|
|
margin &
|
|
|
Amount
|
|
other income*
|
|
Amount
|
|
other income*
|
|
Amount
|
|
other income*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages, except incentive compensation
|
|
$
|
7,026
|
|
|
|
25.19
|
%
|
|
$
|
6,684
|
|
|
|
24.22
|
%
|
|
$
|
6,121
|
|
|
|
23.88
|
%
|
Health and dental insurance
|
|
|
1,130
|
|
|
|
4.05
|
%
|
|
|
1,078
|
|
|
|
3.91
|
%
|
|
|
852
|
|
|
|
3.32
|
%
|
Incentive compensation
|
|
|
295
|
|
|
|
1.06
|
%
|
|
|
657
|
|
|
|
2.38
|
%
|
|
|
589
|
|
|
|
2.30
|
%
|
Payroll taxes and other employee benefits
|
|
|
694
|
|
|
|
2.49
|
%
|
|
|
631
|
|
|
|
2.29
|
%
|
|
|
587
|
|
|
|
2.29
|
%
|
Profit sharing and retirement plan expense
|
|
|
446
|
|
|
|
1.60
|
%
|
|
|
509
|
|
|
|
1.84
|
%
|
|
|
470
|
|
|
|
1.83
|
%
|
Deferred compensation plan expense
|
|
|
160
|
|
|
|
0.57
|
%
|
|
|
178
|
|
|
|
0.65
|
%
|
|
|
136
|
|
|
|
0.53
|
%
|
Restricted stock plan vesting expense
|
|
|
145
|
|
|
|
0.52
|
%
|
|
|
105
|
|
|
|
0.38
|
%
|
|
|
78
|
|
|
|
0.30
|
%
|
Deferred loan origination costs
|
|
|
(827
|
)
|
|
|
-2.96
|
%
|
|
|
(673
|
)
|
|
|
-2.44
|
%
|
|
|
(496
|
)
|
|
|
-1.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits
|
|
|
9,069
|
|
|
|
32.52
|
%
|
|
|
9,169
|
|
|
|
33.23
|
%
|
|
|
8,337
|
|
|
|
32.52
|
%
|
Occupancy expense
|
|
|
1,762
|
|
|
|
6.32
|
%
|
|
|
1,622
|
|
|
|
5.88
|
%
|
|
|
1,702
|
|
|
|
6.64
|
%
|
Data processing other office operations
|
|
|
1,862
|
|
|
|
6.67
|
%
|
|
|
2,296
|
|
|
|
8.32
|
%
|
|
|
1,382
|
|
|
|
5.39
|
%
|
Loss on foreclosed assets
|
|
|
428
|
|
|
|
1.53
|
%
|
|
|
573
|
|
|
|
2.08
|
%
|
|
|
1,197
|
|
|
|
4.67
|
%
|
FDIC insurance expense
|
|
|
452
|
|
|
|
1.62
|
%
|
|
|
464
|
|
|
|
1.68
|
%
|
|
|
505
|
|
|
|
1.97
|
%
|
Directors fees and benefits
|
|
|
354
|
|
|
|
1.27
|
%
|
|
|
384
|
|
|
|
1.39
|
%
|
|
|
367
|
|
|
|
1.43
|
%
|
Legal and professional expenses
|
|
|
295
|
|
|
|
1.06
|
%
|
|
|
567
|
|
|
|
2.05
|
%
|
|
|
333
|
|
|
|
1.30
|
%
|
Advertising and promotion
|
|
|
335
|
|
|
|
1.20
|
%
|
|
|
327
|
|
|
|
1.18
|
%
|
|
|
291
|
|
|
|
1.14
|
%
|
Debit card processing and losses expense
|
|
|
394
|
|
|
|
1.41
|
%
|
|
|
387
|
|
|
|
1.40
|
%
|
|
|
211
|
|
|
|
0.82
|
%
|
Other expenses
|
|
|
1,555
|
|
|
|
5.57
|
%
|
|
|
1,603
|
|
|
|
5.81
|
%
|
|
|
1,453
|
|
|
|
5.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
16,506
|
|
|
|
59.17
|
%
|
|
$
|
17,392
|
|
|
|
63.02
|
%
|
|
$
|
15,778
|
|
|
|
61.55
|
%
|
* Net interest income (net margin) is calculated on a tax equivalent
basis using a tax rate of 34%.
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.
During 2013, wages and benefits are expected to increase with average
base pay increases of 2.63% granted January 1, 2014 compared to average base pay increases of 2.75% granted for 2013 in addition
to expected new employee positions. Incentive costs are expected to increase modestly if we exceed targeted net income and return
on equity remains in the top 50% of our peer group along with other key financial measurements. If income growth targets are not
met, incentives would be reduced, potentially reducing employee costs. Health and dental insurance costs are incurred under a self-insured
plan subject to a maximum stop loss. Refer to Note 16 of the Notes to Consolidated Financial Statements for more information the
health benefit plans. We expect 2014 health and dental costs to grow at inflationary levels due to plan changes expected to reduce
benefit costs related to certain part time employees.
Data processing and other office operation costs are expected to
increase 4% to 5% during 2014 compared to 2013 from increased customer accounts and new software maintenance charges associated
with our email communication system designed to reduce communication risk associated with business continuity in the event of a
disaster or business interruption. Foreclosed asset expense is expected to decline during 2014 to the extent that partial charge-offs
of foreclosed properties decline as local real estate values stabilize. Partial charge-offs of foreclosed property from value declines
were $406 in 2013, compared to $485 in 2012 and $992 during 2011. Foreclosed property holding costs are expected to remain similar
in 2014 compared to 2013.
After incurring a $110 net loss during 2010 related to a coordinated
external fraud targeting us and our debit card customers, we improved our debit card fraud monitoring tools to include real-time
anomaly identification and real-time text alerts to customers prior to processing certain transactions. Our debit card losses since
implementing these tools have declined significantly, and we have not yet seen significant impacts or losses related to the December
2013 announcement by Target, Inc. of their massive customer card information theft. To mitigate our risk to this fraud, we did
re-issue some customer debit cards and take other actions at a total cost of less than $10,000 during December 2013. In addition,
we did set aside a reserve for potential future direct card losses at December 31, 2013 related to the Target, Inc. fraud totaling
$10,000. While we do not anticipate significant losses related to the Target, Inc. fraud or other similar frauds, such attacks
can be difficult to predict and generate potential losses that are difficult to reasonably estimate. Future losses could exceed
our existing reserve for such losses, decreasing future net income.
During early 2014, we announced our agreement to purchase the Rhinelander,
Wisconsin branch of The Baraboo National Bank along with its approximately $44 million in deposits and $22 million performing loans.
Integration of this branch and its customer accounts into our data processing and existing branch delivery system will cause us
to incur significant nonrecurring branch closing costs, including data conversion costs, new signage and marketing costs, legal
fees, and employee severance costs. We estimate closing and branch integration costs to be $500 to $525 during 2014, which will
increase total noninterest expense and may not be fully offset by increased income on the purchased branch customer accounts during
this year of purchase and integration.
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.
2011 compared to 2010
During 2011, total noninterest expenses were $15,778 compared to
$15,925 during 2010, a decrease of $147, or 0.9%. However, operating expenses before foreclosure costs would have declined $495,
or 3.3%, during 2011 compared to 2010 with $277 of the decline coming from lower FDIC insurance premiums and $220 of the decline
coming from lower debit card and deposit losses. Dodd-Frank legislation effective during 2011 changed the method in which deposit
insurance premiums are calculated. Premium levels are now assessed based on net assets after deducting Tier 1 regulatory capital
rather than being assessed based on the level of deposits held. The effect of this change was to transfer a greater portion of
total industry deposit insurance premiums to the nation’s largest banks as they typically maintain a lower percentage of
deposits to assets compared to smaller banks like us. Debit card losses were higher in 2010 due to sustaining a net $110 loss from
a concentrated fraud involving certain of our customer accounts. Salaries and employee benefits declined $130, or 1.5%, from $8,467
in 2010 to $8,337 in 2011 due primarily to an $89 decrease (9.5%) in health and dental insurance expense.
During 2011, data processing expenses increased $208, or 17.7%,
compared to 2010 due to outsourced data processing costs associated with the new computer system placed in service during June
2010. However, occupancy and facilities expense declined $161 during 2011 in part from lower computer equipment depreciation expense
previously incurred with the prior in-house computer system and categorized as occupancy expenses. During 2012, data processing
expense is expected to increase at a rate similar to that seen during 2011 as we experience a full year of regular contract charges.
Following the June 2010 conversion, we had enjoyed discounted monthly vendor charges to help offset conversion related costs incurred
during the first year of using the new system.
Income Taxes
The effective tax rate was 26.0% during 2013 compared to 30.0% during
2012 and 31.3% during 2011. The 2013 effective rate declined compared to prior years as the percentage of tax-exempt income from
securities and bank owned life insurance increased while total pre-tax income declined. 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 2014 effective tax rate to approximate the 31.3% seen during 2012 before the Marathon purchase gain and related income
tax expense.
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,
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
Dollar
|
|
principal
|
|
Dollar
|
|
principal
|
|
Dollar
|
|
principal
|
|
Dollar
|
|
principal
|
|
Dollar
|
|
principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
municipal, and agricultural
|
|
$
|
1,661
|
|
|
|
1.36
|
%
|
|
$
|
1,687
|
|
|
|
1.32
|
%
|
|
$
|
1,743
|
|
|
|
1.44
|
%
|
|
$
|
2,736
|
|
|
|
2.14
|
%
|
|
$
|
2,602
|
|
|
|
1.98
|
%
|
Commercial real estate mortgage
|
|
|
1,958
|
|
|
|
0.89
|
%
|
|
|
2,129
|
|
|
|
1.02
|
%
|
|
|
2,290
|
|
|
|
1.17
|
%
|
|
|
3,304
|
|
|
|
1.72
|
%
|
|
|
2,641
|
|
|
|
1.36
|
%
|
Residential real estate mortgage
|
|
|
995
|
|
|
|
0.62
|
%
|
|
|
1,104
|
|
|
|
0.79
|
%
|
|
|
627
|
|
|
|
0.56
|
%
|
|
|
211
|
|
|
|
0.19
|
%
|
|
|
191
|
|
|
|
0.19
|
%
|
Consumer and individual
|
|
|
61
|
|
|
|
1.72
|
%
|
|
|
77
|
|
|
|
1.64
|
%
|
|
|
103
|
|
|
|
2.81
|
%
|
|
|
213
|
|
|
|
5.42
|
%
|
|
|
189
|
|
|
|
4.34
|
%
|
Impaired loans
|
|
|
2,108
|
|
|
|
13.36
|
%
|
|
|
2,434
|
|
|
|
19.57
|
%
|
|
|
3,178
|
|
|
|
18.46
|
%
|
|
|
1,496
|
|
|
|
13.10
|
%
|
|
|
1,988
|
|
|
|
15.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,783
|
|
|
|
1.31
|
%
|
|
$
|
7,431
|
|
|
|
1.53
|
%
|
|
$
|
7,941
|
|
|
|
1.78
|
%
|
|
$
|
7,960
|
|
|
|
1.81
|
%
|
|
$
|
7,611
|
|
|
|
1.71
|
%
|
The following table presents our allowance for loan loss activity
by loan category during the five years ended December 31, 2013.
Table 14: Loan Loss Experience
Years ended December 31
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of loans for period
|
|
$
|
508,454
|
|
|
$
|
462,237
|
|
|
$
|
443,709
|
|
|
$
|
443,293
|
|
|
$
|
435,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at beginning of year
|
|
$
|
7,431
|
|
|
$
|
7,941
|
|
|
$
|
7,960
|
|
|
$
|
7,611
|
|
|
$
|
5,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial, municipal, and agricultural
|
|
|
3,650
|
|
|
|
128
|
|
|
|
867
|
|
|
|
454
|
|
|
|
479
|
|
Commercial real estate mortgage
|
|
|
174
|
|
|
|
518
|
|
|
|
236
|
|
|
|
448
|
|
|
|
951
|
|
Residential real estate mortgage
|
|
|
850
|
|
|
|
629
|
|
|
|
367
|
|
|
|
462
|
|
|
|
123
|
|
Consumer and individual
|
|
|
69
|
|
|
|
57
|
|
|
|
117
|
|
|
|
101
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
4,743
|
|
|
|
1,332
|
|
|
|
1,587
|
|
|
|
1,465
|
|
|
|
1,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries on loans previously charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial, municipal, and agricultural
|
|
|
29
|
|
|
|
6
|
|
|
|
166
|
|
|
|
7
|
|
|
|
19
|
|
Commercial real estate mortgage
|
|
|
33
|
|
|
|
4
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate mortgage
|
|
|
6
|
|
|
|
21
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
Consumer and individual
|
|
|
12
|
|
|
|
6
|
|
|
|
6
|
|
|
|
4
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
80
|
|
|
|
37
|
|
|
|
178
|
|
|
|
19
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
4,663
|
|
|
|
1,295
|
|
|
|
1,409
|
|
|
|
1,446
|
|
|
|
1,610
|
|
Provision for loan losses
|
|
|
4,015
|
|
|
|
785
|
|
|
|
1,390
|
|
|
|
1,795
|
|
|
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year
|
|
$
|
6,783
|
|
|
$
|
7,431
|
|
|
$
|
7,941
|
|
|
$
|
7,960
|
|
|
$
|
7,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs during the year to average loans
|
|
|
0.92
|
%
|
|
|
0.28
|
%
|
|
|
0.32
|
%
|
|
|
0.33
|
%
|
|
|
0.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to loans receivable at end of year
|
|
|
1.31
|
%
|
|
|
1.53
|
%
|
|
|
1.78
|
%
|
|
|
1.81
|
%
|
|
|
1.71
|
%
|
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%. Refer to Note 6 of the Notes to Consolidated
Financial Statements for a summary of activity in foreclosed assets.
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 were .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 significant new problem loans were not
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 loan loss provision during 2014 is expected to increase slightly from the $675
recorded during 2013 before recognition of the large grain loss and be similar to the level seen during 2012. However, future provisions
could be impacted by changes in the local unemployment rate and the actual amount of impaired and other problem loans identified
by internal procedures or regulatory agencies.
The $3,340 commercial line of credit loss recorded in 2013 resulted
from an apparent 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 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.)
|
|
·
|
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 require follow-up
to increase the level of financial statement attestation or conduct a current audit of collateral. Although the detailed credit
reviews of all 59 loans noted above having similar risk characteristics to the large 2013 grain loss is ongoing, the initial review
of each borrower did not identify any significant unknown elevated risk factors that would require the credit to be newly classified
as an impaired loan at December 31, 2013. 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 a 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 could result in
increased income from a reduction to the regular provision for loan losses expense.
While the general credit quality of our loan portfolio and identified
problem loans continues to improve, the local economic conditions are fragile and slow growing in central and northern Wisconsin,
and 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 resurces 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.
We expect these conditions to restrain economic growth as some borrowers
continue to manage fragile cash flows and debt servicing ability. In addition, the loss of the significant employers mentioned
previously may have a significant negative impact on small local municipalities that depended on these closed manufacturing plants
for tax assessment base and utility revenue. At December 31, 2013, $3,090 of tax exempt general obligation and tax incremental
financing district development loans receivable with a local municipality expected to be significantly negatively impacted due
to a plant closure were classified as performing, but impaired loans with no specific reserve. During the June 2014 quarter, we
may restructure this loan to extend the life of the tax incremental financing district so that existing property tax collections
from real estate located within the district continue for a period long enough to fully pay the original district development costs.
This debt restructuring is expected to be classified as a troubled debt restructuring, which would increase non performing loans
beginning June 30, 2014.
Nonperforming loans are reviewed to determine exposure for potential
loss within each loan category. The adequacy of the allowance for loan losses is assessed based on credit quality and other pertinent
loan portfolio information. The adequacy of the allowance and the provision for loan losses is consistent with the composition
of the loan portfolio and recent internal credit quality assessments. We maintain our headquarters and one branch location in the
City of Wausau, Wisconsin, and maintain the majority of our deposits (including five of our eight locations), and loan customers
in Marathon County, Wisconsin. The significant majority of our customers and borrowers live and work in Marathon, Oneida, and Vilas
Counties, Wisconsin, in which we have branch locations. The unemployment rate (not seasonally adjusted) in the Wausau-Marathon
County, Wisconsin MSA was 5.7% at December 2013 compared to 6.6% at December 2012. The unemployment rate in Oneida County, Wisconsin
was 8.6% at December 2013 compared to 9.6% at December 2012. The unemployment rate in Vilas County, Wisconsin was 10.7% at December
2013 compared to 10.9% at December 2012. The unemployment rate for all of Wisconsin (not seasonally adjusted) was 5.8% at December
2013 compared to 6.6% at December 2012. A recently published local economic outlook survey of business owners for our market area
points to expectations of an improving local economy with some businesses considering a local capital expansion, although an overall
economic rebound is considered further out in the future towards the end of 2014.
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.
2011 compared to 2010
Provision for estimated loan losses declined to $1,390 in 2011 from
$1,795 in 2010. The provision for loan losses decreased during 2011 compared to 2010 due to a reduction in seriously delinquent
nonaccrual loans of $1,065, or 11.8%, during 2011 and identification of fewer new problem loans as the local economy and borrower
credit stabilized. However, loss on foreclosed assets increased $348, or 41.0% to $1,197 during 2011 compared to $849 during 2010
from a larger amount of partial write-downs to foreclosed properties. Partial write-downs were $992 during 2011 and $405 during
2010. Total credit costs as represented by the provision for loan losses and loss on foreclosed property was largely unchanged
and was $2,587 during 2011 and $2,644 during 2010.
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. The majority of gross loan charge-offs during 2010 were related to five borrowers totaling $1,064, or
73% of all charge-offs, with the largest charge-off of $448 related to a non-owner multi-use, multi-tenant commercial real estate
development, the majority of which was sold during 2011.
During the March 2011 quarter, we underwent a comprehensive update
of our process to categorize impaired loans, estimate the related allowance for loan losses on impaired loans, and estimate inherent
losses on other portfolio loans not considered to be impaired. This review did not significantly increase or decrease the amount
of allowance for loan losses required on the bank wide portfolio compared to our previous method of estimating loss allowances.
However, our new method did allocate a greater amount of the reserve to impaired loans. During 2011, we streamlined internal criteria
to classify a loan as impaired which now includes all nonaccrual loans, all restructured loans (whether performing or not), and
other loans with the potential to become nonaccrual or restructured in the next year. Prior to 2011, impaired loans were generally
defined to include larger commercial purpose loans only and did not include all nonaccrual or restructured loans. Refer to Note
5 of the Notes to Consolidated Financial Statements for the loan loss activity by loan category during 2011, including the net
changes to the provision for loan losses by category. In general, the change resulted in a reallocation of allowance previously
assigned to commercial real estate to the residential real estate category.
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,
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans (excluding restructured loans)
|
|
$
|
3,704
|
|
|
$
|
6,491
|
|
|
$
|
5,893
|
|
|
$
|
7,127
|
|
|
$
|
11,829
|
|
Nonaccrual restructured loans
|
|
|
3,636
|
|
|
|
1,224
|
|
|
|
2,081
|
|
|
|
1,912
|
|
|
|
1,469
|
|
Restructured loans not on nonaccrual
|
|
|
1,299
|
|
|
|
2,965
|
|
|
|
6,220
|
|
|
|
2,383
|
|
|
|
—
|
|
Accruing loans past due 90 days or more
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
8,639
|
|
|
|
10,680
|
|
|
|
14,194
|
|
|
|
11,422
|
|
|
|
13,298
|
|
Nonaccrual trust preferred investment security
|
|
|
—
|
|
|
|
—
|
|
|
|
750
|
|
|
|
—
|
|
|
|
—
|
|
Foreclosed assets
|
|
|
1,750
|
|
|
|
1,774
|
|
|
|
2,939
|
|
|
|
4,967
|
|
|
|
3,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
10,389
|
|
|
$
|
12,454
|
|
|
$
|
17,883
|
|
|
$
|
16,389
|
|
|
$
|
17,074
|
|
Impaired loans considered to be performing
|
|
$
|
7,136
|
|
|
$
|
1,969
|
|
|
$
|
3,026
|
|
|
$
|
6,398
|
|
|
$
|
3,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans as a percent of gross loans
|
|
|
1.67
|
%
|
|
|
2.20
|
%
|
|
|
3.19
|
%
|
|
|
2.60
|
%
|
|
|
2.99
|
%
|
Total nonperforming assets as a percent of total assets
|
|
|
1.46
|
%
|
|
|
1.75
|
%
|
|
|
2.87
|
%
|
|
|
2.64
|
%
|
|
|
2.81
|
%
|
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 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. The
interest that would have been reported in 2011 if all such loans had been current throughout the year in accordance with their
original terms was approximately $647 in comparison to $124 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 on non-accrual status.
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, 2013, approximately $760 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
rd
mortgage position or lower, compared to $1,554 at December
31, 2012, and $2,300 at December 31, 2011. 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 with the borrower customized to their need.
We do not maintain a formal residential mortgage modification program for delinquent residential mortgage borrowers.
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. 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 16.80% at December 31, 2013 compared to 20.54% at December
31, 2012 and 31.32% at December 31, 2011. For the purpose of this measurement, tangible common equity is equal to total common
stockholders’ equity less mortgage servicing right assets.
During 2014, restructured loans could increase as we work with problem
borrowers to minimize the level of potential future charge-offs and maximize our cumulative total principal repayment if the local
and national economies fail to experience a meaningful economic recovery. As described previously, we may reclassify a $3,090 municipal
development tax incremental financing district loan as restructured debt during 2014, which would increase nonperforming assets.
Although some new restructured loans may continue on accrual status following modification as is expected for this municipal loan,
the restructured designation would still increase total nonperforming loans and could increase the provision for loan losses.
Approximately 20% of total nonperforming assets were represented
by the following aggregate credits or foreclosed properties greater than $500 at December 31, 2013:
Table 16: 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 17 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 16 above.
Table 17: 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 following section summarizes activity associated with the large
nonperforming loans shown in Table 18 as of December 31, 2012 and their activity during 2013 as well as one new nonaccrual large
problem loan was added to Table 16 during 2013.
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 and gave a purchase option within three years to the new business owner. At
December 31, 2011 and 2012, this loan was classified as a performing restructured loan with outstanding principal of $764 (Table
20) and $752 (Table 18), respectively. During 2013, the new business owner ceased to use the production facility which now sits
idle. In response, the remaining principal balance was reclassified as a nonaccrual loan. Customer payments received while in nonaccrual
status reduced the remaining nonaccrual balance shown in Table 16 to $731 at December 31, 2013. 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, an updated
appraisal value, and the likelihood of bank foreclosure and liquidation of the collateral.
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 $688 was maintained on accrual status as reflected in Table 20 at December
31, 2011 with a specific allowance of $195, and was reflected in Table 18 with restructured principal of $664 and a specific allowance
of $182 at December 31, 2012. Customer financial performance deteriorated during 2013 and we reclassified the $642 loan to nonaccrual
status as shown in Table 16 due to the increased likelihood of bank foreclosure and liquidation. The specific allowance associated
with the loan decreased from $182 at December 31, 2012 to $107 at December 31, 2013 from an updated favorable property appraisal
obtained during 2013.
During 2013, we downgraded one borrower’s various non-owner
occupied commercial real estate loans to nonaccrual status having $642 of principal outstanding as shown in Table 16. 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. A specific
loss of $51 is maintained against this loan based on property liquidation values in the potential event of bank foreclosure and
liquidation. The customer continues to make some payments on the debt but we cannot predict the final timing or resolution of this
problem loan.
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 18: 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
|
%
|
Table 19: 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 following section summarizes activity associated with the large
nonperforming loans shown in Table 20 as of December 31, 2011 and their activity during 2012 not already discussed as properties
continuing on Table 16 at December 31, 2013. No new large non-performing loans were added to Table 18 during 2012.
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. This
loan relationship was included in Table 20 at December 31, 2011 as $1,767 of gross principal. 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. This loan relationship was included in Table 20 at December 31, 2011
as $1,578 of gross principal. 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. The remaining three properties were shown in Table 20 with a cost basis 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 as reflected in Table 20 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 is maintained.
The loan was considered as an accruing troubled debt restructuring at December 31, 2013 and 2012.
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, 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 2010, the borrower’s residential
mortgage loan was also classified as a nonperforming loan which increased net nonperforming principal by $93 to $706 at December
31, 2010. During 2011, $31 of payments were received reducing the balance to $675 as shown in Table 20 for December 31, 2011 with
a specific reserve of $150. 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 which was written down to $225 at December 31, 2013 reflecting
a declining fair market value. We reaffirmed the borrower’s $91 residential mortgage loan during 2012 but maintain the loan
on nonaccrual status at December 31, 2013. Although we are adequately collateralized on the remaining mortgage loan, we cannot
predict the final timing or resolution of this problem loan.
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, a new appraisal identified a further decline in value and the foreclosed property was written down an additional $205 to
its new cost basis of $587 as reflected in Table 17 at December 31, 2011. During 2012, a new appraisal identified a further decline
in value and the foreclosed asset was written down an additional $137 to its new cost basis of $450. The property was written down
an additional $213 during 2013 to its new basis of $237 at December 31, 2013. At this time, we are unable to determine the final
resolution of this property and further write-downs of value could be required during 2014 when updated appraisals are obtained
or the property is sold.
2011 compared to 2010
Nonperforming assets increased $1,494, or 9.1%, to $17,883 (2.87%
of total assets) at December 31, 2011, from $16,389 (2.64% of total assets) at December 31, 2010 as restructured loans to troubled
borrowers that performed according to restructured terms increased by $3,837, or 161.0%. Although these restructured loans are
accruing interest, they are still classified as nonperforming loans. Non-performing loans relative to total loans increased significantly
from 2.60% at December 31, 2010 to 3.19% at December 31, 2011 due to addition of $3,837 of restructured loans which continued to
perform on their restructured terms. However, foreclosed assets decreased from $4,967 at December 31, 2010 to $2,939 at December
31, 2011. Including the trust preferred investment security issued by Johnson Financial Group, total nonperforming assets increased
$1,494, or 9.1% to $17,883 at December 31, 2011. After 2010, when the decline in local economic conditions stabilized, the local
economy remained slow to recover, which impacted borrower ability to repay according to the loan terms. At December 31, 2011, the
unemployment rate was 6.6% in Wisconsin and 6.5% in Marathon County (the home of the majority of our borrowers and down from 7.1%
at December 31, 2010) compared to a rate of 8.5% for the United States.
Approximately 52% of total nonperforming assets were represented
by the following aggregate credits or foreclosed properties greater than $500 at December 31, 2011:
Table 20: Largest Nonperforming Assets at December 31, 2011
($000s)
Collateral Description
|
|
Asset Type
|
|
Gross Principal
|
|
Specific Reserves
|
|
|
|
|
|
|
|
|
|
|
|
Northern Wisconsin hotel
|
|
Accrual TDR
|
|
$
|
1,767
|
|
|
$
|
—
|
|
Cranberry producing agricultural real estate
|
|
Accrual TDR
|
|
|
1,578
|
|
|
|
—
|
|
Vacation home/recreational properties (three)
|
|
Foreclosed
|
|
|
1,280
|
|
|
|
n/a
|
|
Multi-family rental apartment units and vacant land
|
|
Accrual TDR
|
|
|
1,240
|
|
|
|
302
|
|
Owner occupied cabinetry contractor real estate and equipment
|
|
Accrual TDR
|
|
|
764
|
|
|
|
47
|
|
Johnson Financial Group (WI) Capital Trust III debentures
|
|
Nonaccrual
|
|
|
750
|
|
|
|
—
|
|
Owner occupied multi use, multi-tenant real estate
|
|
Accrual TDR
|
|
|
688
|
|
|
|
195
|
|
Owner occupied restaurant real estate and business assets
|
|
Nonaccrual
|
|
|
675
|
|
|
|
150
|
|
Out of area condo land development - loan participation
|
|
Foreclosed
|
|
|
587
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
Total listed nonperforming assets
|
|
|
|
$
|
9,329
|
|
|
$
|
694
|
|
Total bank wide nonperforming assets
|
|
|
|
$
|
17,883
|
|
|
$
|
2,659
|
|
Listed assets as a percent of total nonperforming assets
|
|
|
|
|
52
|
%
|
|
|
26
|
%
|
Table 21: Largest Performing, but Impaired Loans at December
31, 2011 ($000s)
Collateral Description
|
|
Asset Type
|
|
Gross Principal
|
|
Specific Reserves
|
|
|
|
|
|
|
|
Owner occupied cabinetry contractor real estate and equipment
|
|
Impaired
|
|
$
|
790
|
|
|
$
|
98
|
|
Owner occupied manufacturer real estate & equipment
|
|
Impaired
|
|
|
615
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total listed performing, but impaired loans
|
|
|
|
$
|
1,405
|
|
|
$
|
98
|
|
Total performing, but impaired loans
|
|
|
|
$
|
3,026
|
|
|
$
|
519
|
|
Listed assets as a % of total performing, but impaired loans
|
|
|
|
|
46
|
%
|
|
|
19
|
%
|
The trend and resolution of each large non performing asset reflected
in Table 20 at December 31, 2011 was previously addressed under the subheadings of
2013 compared to 2012
, and
2012
compared to 2011
above.
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, 2013 are presented in Table 1 of Item 6 to this Annual Report on Form 10-K. 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. Total assets increased $89,099, or 14.3%, during 2012 due to the acquisition of Marathon during 2012. A breakdown
of the assets acquired in the purchase of 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, 2013 as a percentage of total assets.
Table 22: Summary Balance Sheet as a Percent of Total Assets
As of December 31,
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
4.4
|
%
|
|
|
6.9
|
%
|
|
|
6.1
|
%
|
|
|
6.5
|
%
|
|
|
4.3
|
%
|
Securities
|
|
|
18.7
|
%
|
|
|
20.4
|
%
|
|
|
17.5
|
%
|
|
|
17.4
|
%
|
|
|
17.5
|
%
|
Total loans receivable, net of allowance
|
|
|
71.7
|
%
|
|
|
67.1
|
%
|
|
|
70.3
|
%
|
|
|
69.5
|
%
|
|
|
72.1
|
%
|
Premises and equipment, net
|
|
|
1.4
|
%
|
|
|
1.4
|
%
|
|
|
1.6
|
%
|
|
|
1.7
|
%
|
|
|
1.7
|
%
|
Bank owned life insurance
|
|
|
1.8
|
%
|
|
|
1.7
|
%
|
|
|
1.8
|
%
|
|
|
1.8
|
%
|
|
|
1.7
|
%
|
Other assets
|
|
|
2.0
|
%
|
|
|
2.5
|
%
|
|
|
2.7
|
%
|
|
|
3.1
|
%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
81.1
|
%
|
|
|
79.5
|
%
|
|
|
77.4
|
%
|
|
|
75.0
|
%
|
|
|
75.5
|
%
|
FHLB advances
|
|
|
5.3
|
%
|
|
|
7.0
|
%
|
|
|
8.0
|
%
|
|
|
9.2
|
%
|
|
|
9.6
|
%
|
Other borrowings
|
|
|
2.9
|
%
|
|
|
2.9
|
%
|
|
|
3.2
|
%
|
|
|
5.1
|
%
|
|
|
4.6
|
%
|
Senior subordinated notes
|
|
|
0.6
|
%
|
|
|
1.0
|
%
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
|
1.2
|
%
|
Junior subordinated debentures
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
|
1.2
|
%
|
|
|
1.2
|
%
|
|
|
1.3
|
%
|
Other liabilities
|
|
|
1.0
|
%
|
|
|
0.9
|
%
|
|
|
1.0
|
%
|
|
|
0.9
|
%
|
|
|
0.8
|
%
|
Stockholders’ equity
|
|
|
8.0
|
%
|
|
|
7.6
|
%
|
|
|
8.1
|
%
|
|
|
7.5
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2013 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,
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
$
|
13,034
|
|
|
$
|
7,556
|
|
|
$
|
9,657
|
|
Payment of dividends to shareholders and purchase of treasury stock
|
|
|
(1,558
|
)
|
|
|
(1,509
|
)
|
|
|
(1,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow retained by PSB
|
|
|
11,476
|
|
|
|
6,047
|
|
|
|
8,489
|
|
Net funds received from retail and local depositors
|
|
|
9,229
|
|
|
|
3,375
|
|
|
|
8,517
|
|
Net funds received from wholesale depositors
|
|
|
2,902
|
|
|
|
—
|
|
|
|
7,735
|
|
Net proceeds from other borrowings
|
|
|
—
|
|
|
|
1,037
|
|
|
|
—
|
|
Proceeds from additional capital received from shareholders
|
|
|
—
|
|
|
|
9
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow retained from operations and financing before debt repayment
|
|
|
23,607
|
|
|
|
10,468
|
|
|
|
24,786
|
|
Net funds repaid to wholesale depositors
|
|
|
—
|
|
|
|
(20,109
|
)
|
|
|
—
|
|
Net repayment of FHLB advances
|
|
|
(12,075
|
)
|
|
|
—
|
|
|
|
(7,310
|
)
|
Net repayment of other borrowings, net
|
|
|
(287
|
)
|
|
|
—
|
|
|
|
(11,820
|
)
|
Repayment of senior subordinated notes
|
|
|
(3,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow retained from operations and financing after debt repayment
|
|
|
8,245
|
|
|
|
(9,641
|
)
|
|
|
5,656
|
|
Funds received from sale and maturities of investment securities, net
|
|
|
49,312
|
|
|
|
60,068
|
|
|
|
21,347
|
|
Net redemption of bank certificates of deposit
|
|
|
2,229
|
|
|
|
—
|
|
|
|
—
|
|
Cash acquired on purchase of Marathon State Bank
|
|
|
—
|
|
|
|
14,910
|
|
|
|
—
|
|
Redemption of FHLB capital stock
|
|
|
—
|
|
|
|
744
|
|
|
|
—
|
|
Proceeds from sale of nonmonetary assets
|
|
|
831
|
|
|
|
1,527
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow available for investing activities
|
|
|
60,617
|
|
|
|
67,608
|
|
|
|
28,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net funds loaned to customers
|
|
|
(36,746
|
)
|
|
|
(10,349
|
)
|
|
|
(7,130
|
)
|
Net funds invested in securities
|
|
|
(40,201
|
)
|
|
|
(44,064
|
)
|
|
|
(22,718
|
)
|
Purchase of bank certificates of deposit
|
|
|
—
|
|
|
|
(1,981
|
)
|
|
|
—
|
|
Payments for purchase of FHLB capital stock
|
|
|
(50
|
)
|
|
|
—
|
|
|
|
—
|
|
Funds used to purchase bank-owned life insurance
|
|
|
(611
|
)
|
|
|
—
|
|
|
|
(92
|
)
|
Premises and equipment capital expenditures
|
|
|
(334
|
)
|
|
|
(572
|
)
|
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow used in investing activities
|
|
|
(77,942
|
)
|
|
|
(56,966
|
)
|
|
|
(30,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents held at beginning of year
|
|
$
|
(17,325
|
)
|
|
$
|
10,642
|
|
|
$
|
(2,126
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
48,847
|
|
|
|
38,205
|
|
|
|
40,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
31,522
|
|
|
$
|
48,847
|
|
|
$
|
38,205
|
|
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.
During 2014, we expect to use local deposit growth and wholesale
funding as needed to fund net commercial related loan growth of $10 million to $20 million year over year compared to 2013. To
the extent that funds are not needed for loan growth, we expect to continue to pay down wholesale funding during 2014. Assuming
our announced acquisition of The Baraboo National Bank’s Rhinelander, Wisconsin branch is completed during 2014, we expect
to end 2014 with total assets in excess of $760 million, a growth rate of approximately 7% over December 31, 2013.
2012 compared to 2011
Total assets were $711,966 at December 31, 2012, up $89,099 (14.3%)
compared to December 31, 2011. During the year ended December 31, 2012, a $101,385 increase in core deposits, primarily from the
acquisition of Marathon, funded a $20,109 pay down of maturing brokered certificates of deposit and the majority of the $89,099
net growth in total assets. 2012 asset growth consisted primarily of $10,642 in cash and overnight investments, $26,833 in residential
first and junior lien mortgage loans (up 23.8%), $12,953 in commercial related loans (up 3.9%), and $36,532 in investment securities
(up 33.6%).
Marathon’s total assets were $107,364 on the June 1, 2012
acquisition date, including $62,260 of securities and short-term investments. Following the purchase date, maturity proceeds from
the acquired Marathon investment securities and Marathon’s existing cash holdings were used to pay down wholesale funding.
Wholesale borrowings, including brokered and national deposits, FHLB advances, and wholesale repurchase agreements decreased $20,109
during 2012 and were $118,081 at December 31, 2012 compared to $138,190 at December 31, 2011. Wholesale funding to total assets
was 16.6% at December 31, 2012 and 22.2% at 2011.
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 $1,030 (40%) of the original gain remains unamortized at December 31, 2013.
Table 24 presents the fair value of securities held by us at December 31,
2013, 2012, and 2011.
Table 24: Investment Securities Distribution – At Fair
Value
|
|
As of December 31
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
Fair
|
|
% of
|
|
Fair
|
|
% of
|
|
Fair
|
|
% of
|
Securities available for sale:
|
|
Value
|
|
Portfolio
|
|
Value
|
|
Portfolio
|
|
Value
|
|
Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government agencies
|
|
$
|
999
|
|
|
|
0.75
|
%
|
|
$
|
10,027
|
|
|
|
6.79
|
%
|
|
$
|
518
|
|
|
|
0.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency residential mortgage backed securities
|
|
|
21,486
|
|
|
|
16.12
|
%
|
|
|
14,397
|
|
|
|
9.75
|
%
|
|
|
19,816
|
|
|
|
18.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency residential collateralized mortgage obligations
|
|
|
37,904
|
|
|
|
28.43
|
%
|
|
|
45,243
|
|
|
|
30.62
|
%
|
|
|
38,573
|
|
|
|
35.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately issued residential collateralized mortgage obligations
|
|
|
105
|
|
|
|
0.08
|
%
|
|
|
173
|
|
|
|
0.12
|
%
|
|
|
429
|
|
|
|
0.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
159
|
|
|
|
0.12
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrated commercial paper
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
5,500
|
|
|
|
3.72
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrated SBA loan fund
|
|
|
950
|
|
|
|
0.71
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
|
47
|
|
|
|
0.04
|
%
|
|
|
47
|
|
|
|
0.03
|
%
|
|
|
47
|
|
|
|
0.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
61,650
|
|
|
|
46.25
|
%
|
|
|
75,387
|
|
|
|
51.03
|
%
|
|
|
59,383
|
|
|
|
53.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
69,876
|
|
|
|
52.40
|
%
|
|
|
70,455
|
|
|
|
47.68
|
%
|
|
|
49,010
|
|
|
|
44.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrated trust preferred securities
|
|
|
1,389
|
|
|
|
1.04
|
%
|
|
|
1,499
|
|
|
|
1.01
|
%
|
|
|
1,332
|
|
|
|
1.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrated senior subordinated notes
|
|
|
407
|
|
|
|
0.31
|
%
|
|
|
410
|
|
|
|
0.28
|
%
|
|
|
409
|
|
|
|
0.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity
|
|
|
71,672
|
|
|
|
53.75
|
%
|
|
|
72,364
|
|
|
|
48.97
|
%
|
|
|
50,751
|
|
|
|
46.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
133,322
|
|
|
|
100.00
|
%
|
|
$
|
147,751
|
|
|
|
100.00
|
%
|
|
$
|
110,134
|
|
|
|
100.00
|
%
|
At December 31, 2013, 2012, and 2011, 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 $47,593, and $44,914,
at December 31, 2013 and 2012, 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 36% and 32% of securities
eligible for pledging at December 31, 2013 and 2011, 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, 2013 and $2,506 of stock at December 31, 2012. The
current capital stock level supports FHLB total advances of $51,120. An annualized dividend rate of .45% was paid on FHLB stock
during 2013 compared to .32% paid during 2012. Until 2012, the FHLB of Chicago operated under a capital management plan required
by their regulatory oversight body, the Federal Housing Finance Agency. 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, 2013.
Table 25 categorizes securities by scheduled maturity date as of
December 31, 2013 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, 2013
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Treasury securities and obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of U.S. government agencies
|
|
|
|
|
|
|
|
|
|
$
|
999
|
|
|
|
0.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency residential mortgage backed securities
|
|
|
170
|
|
|
|
4.79
|
%
|
|
|
13,097
|
|
|
|
3.26
|
%
|
|
|
8,219
|
|
|
|
2.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency residential collateralized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage obligations
|
|
|
943
|
|
|
|
3.87
|
%
|
|
|
36,720
|
|
|
|
2.18
|
%
|
|
|
241
|
|
|
|
2.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately issued residential collateralized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage obligations
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
4.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
5.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrated SBA loan fund
|
|
|
950
|
|
|
|
1.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
|
47
|
|
|
|
15.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,110
|
|
|
|
3.25
|
%
|
|
$
|
50,921
|
|
|
|
2.44
|
%
|
|
$
|
8,460
|
|
|
|
2.02
|
%
|
|
$
|
159
|
|
|
|
5.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
(1)
|
|
$
|
3,312
|
|
|
|
3.65
|
%
|
|
$
|
22,177
|
|
|
|
3.26
|
%
|
|
$
|
39,277
|
|
|
|
3.83
|
%
|
|
$
|
4,938
|
|
|
|
3.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-rated trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,524
|
|
|
|
4.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-rated senior subordinated notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401
|
|
|
|
7.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,312
|
|
|
|
3.65
|
%
|
|
$
|
22,177
|
|
|
|
3.26
|
%
|
|
$
|
39,678
|
|
|
|
3.87
|
%
|
|
$
|
6,462
|
|
|
|
3.97
|
%
|
(1)
Weighted average yields on tax-exempt securities
have been calculated on a tax-equivalent basis using a rate of 34%.
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. During 2014, we expect to continue to increase the investment
allocation to U.S. Agency mortgage backed securities and to lower the allocation to obligations of state and political subdivisions
to more evenly diversify the securities portfolio to historical levels prior to the 2012 Marathon purchase.
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.
We maintain a conservative municipal investment portfolio with concentrations
as of December 31, 2013 outlined below.
Municipal Geographical Concentration by Issuer at December 31,
2013:
Wisconsin – 73%
Minnesota – 9%
Illinois – 5%
Iowa – 3%
All other states – 10%
Municipal Type of Issue at December 31, 2013:
Unlimited General Obligation - 92%
Limited General Obligation – 2%
Revenue Bond – 6%
Municipal Bond Principal Quality by Credit Rating at December
31, 2013:
AAA or pre-refunded – 7%
AA – 55%
A – 20%
BBB – 1%
Nonrated – 17%
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, 2013.
At December 31, 2013, securities fair value was 100.1% of amortized
cost compared to 102.9% of amortized cost at December 31, 2012. Unrealized fair value gains over historical amortized cost declined
during 2013 due to an increase in market interest rates and continued amortization of the unrealized gain on securities that existed
on the transfer to held to maturity status during 2010. 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 $614, net of taxes of $398 at December 31, 2013. The net unrealized gain
on securities available for sale, recorded as a component of stockholders’ equity, was $3, net of deferred taxes of $2 at
December 31, 2013. 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.
2012 compared to 2011
During 2012, our investment in U.S. agency debentures and obligations
of states and political subdivisions increased as reflected in Table 24 above due to the purchase of Marathon’s security
portfolio. The nonrated commercial paper reflected in the Table 24 above were 30 to 60 day maturity paper purchased through a regional
correspondent bank who also served as the issuer’s lead bank. All of the paper was issued by publicly traded companies on
which we performed individual credit analysis with a maximum investment of $2 million per issuer. While unrated, these short-term
investments are considered to carry very low credit risk. Total investment in collateralized mortgage obligations (“CMOs”)
increased while mortgage backed securities (“MBS”) declined because cash flow repayment of CMOs is expected to display
less volatility in a rising rate environment than MBS. Although the average yield on CMO is generally less than with MBS, lower
volatility reduces interest risk in the balance sheet as a whole in a rising rate environment.
Included with obligations of states and political subdivisions in
Table 24 are Qualified School Construction bonds with book value of $4,610 at December 31, 2012 and $4,803 at December 31, 2011.
At December 31, 2012, this portfolio carried a tax adjusted yield of 4.96% and an average stated maturity of approximately 5.1
years and were considered a general obligation of the issuing local government authority.
Our non-rated trust preferred securities were issued by three banks
headquartered in Wisconsin 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. None of the securities were
considered other than temporarily impaired at December 31, 2012.
At December 31, 2012, securities fair value was 102.9% of amortized
cost compared to 103.1% of amortized cost at December 31, 2011. As noted previously, during 2010, municipal securities were reclassified
from securities available for sale to securities held to maturity. Fair value of municipal securities at the transfer date is reflected
in stockholders’ equity as comprehensive income and is being amortized against the new cost basis over the remaining life
of the securities. The net unrealized gain on securities transferred to securities held to maturity and recorded as a component
of stockholders’ equity was $850, net of taxes of $582 at December 31, 2012. The net unrealized gain on securities available
for sale, recorded as a component of stockholders’ equity, was $970, net of deferred taxes of $608 at December 31, 2012.
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
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
As of December 31,
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
industrial, municipal,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and agricultural
|
|
$
|
130,220
|
|
|
|
24.88
|
%
|
|
$
|
132,633
|
|
|
|
26.90
|
%
|
|
$
|
127,192
|
|
|
|
28.26
|
%
|
|
$
|
129,063
|
|
|
|
29.00
|
%
|
|
$
|
132,542
|
|
|
|
29.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate mortgage
|
|
|
212,850
|
|
|
|
40.67
|
%
|
|
|
183,818
|
|
|
|
37.27
|
%
|
|
|
184,360
|
|
|
|
40.96
|
%
|
|
|
180,937
|
|
|
|
40.65
|
%
|
|
|
178,071
|
|
|
|
39.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(commercial and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential)
|
|
|
31,949
|
|
|
|
6.10
|
%
|
|
|
43,729
|
|
|
|
8.87
|
%
|
|
|
33,497
|
|
|
|
7.44
|
%
|
|
|
35,310
|
|
|
|
7.93
|
%
|
|
|
43,246
|
|
|
|
9.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate mortgage
|
|
|
123,980
|
|
|
|
23.69
|
%
|
|
|
105,579
|
|
|
|
21.41
|
%
|
|
|
78,114
|
|
|
|
17.35
|
%
|
|
|
71,675
|
|
|
|
16.10
|
%
|
|
|
66,879
|
|
|
|
14.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held for sale
|
|
|
150
|
|
|
|
0.03
|
%
|
|
|
884
|
|
|
|
0.18
|
%
|
|
|
39
|
|
|
|
0.01
|
%
|
|
|
436
|
|
|
|
0.10
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate home equity
|
|
|
20,677
|
|
|
|
3.95
|
%
|
|
|
21,756
|
|
|
|
4.41
|
%
|
|
|
23,193
|
|
|
|
5.15
|
%
|
|
|
23,774
|
|
|
|
5.34
|
%
|
|
|
23,769
|
|
|
|
5.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
individual
|
|
|
3,567
|
|
|
|
0.68
|
%
|
|
|
4,715
|
|
|
|
0.96
|
%
|
|
|
3,732
|
|
|
|
0.83
|
%
|
|
|
3,929
|
|
|
|
0.88
|
%
|
|
|
4,355
|
|
|
|
0.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
523,393
|
|
|
|
100.00
|
%
|
|
$
|
493,114
|
|
|
|
100.00
|
%
|
|
$
|
450,127
|
|
|
|
100.00
|
%
|
|
$
|
445,124
|
|
|
|
100.00
|
%
|
|
$
|
448,862
|
|
|
|
100.00
|
%
|
Commercial real estate loans are originated for a broad range of
business purposes including non-owner occupied office rental 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 $31,949 at December 31, 2013, and $43,729 at December 31,
2012 (including loan principal not yet disbursed) and represented 6.1% of total gross loans at December 31, 2013 compared to 8.9%
at December 31, 2012. Commercial real estate loans, including disbursed commercial construction and land development loans, were
equal to 395% of total common stockholders’ equity at December 31, 2013 compared to 385% of total common stockholders’
equity at December 31, 2012. However, our commercial real estate concentration has declined steadily during the past several years
and averaged 406%, 441%, and 477% of common stockholder equity during 2011, 2010, and 2009, respectively. We consider commercial
real estate lending to be a core product and expect to maintain a high concentration during 2014. Our experience in such lending
allows us to minimize credit risk with annual net charge-offs on commercial real estate lending ranging from 0.06% to 0.48% of
the average commercial real estate portfolio during the five years ended December 31, 2013. 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. During 2014,
regulatory changes defining “qualifying” residential mortgages will cause us to convert existing balloon residential
mortgages to adjustable rate mortgages upon maturity and to originate new mortgages held within our portfolio as adjustable rate
mortgages rather than as balloon mortgages. Similar to the existing balloon mortgages, we expect the fixed rate period on the new
adjustable rate mortgages to be 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 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 more profitable lending categories such as residential mortgages and commercial related lending.
2013 compared to 2012
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 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. 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 $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. 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, 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.
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 2014 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 2014.
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, 2013, $38.6 million of total principal under this 2012 and 2013 program
remained on the balance sheet at a 2.82% 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.
2012 compared to 2011
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 70% of total loans at December 31, 2012 compared to 74% of total loans at December 31, 2011.
All construction and land development loans, including commercial and 1-4 family residential construction loan commitments were
approximately 8.9% of total loans receivable at December 31, 2012 compared to 7.4% at December 31, 2011. Total construction and
development loans increased $10,232 during 2012 from a new $7,197 loan with a developer of multi-family housing in our market area.
We have worked successfully with this developer on many prior projects and this property can service debt amortization with existing
cash flow and was refinanced into permanent financing early in 2013. This loan was a significant source of our commercial related
loan growth during 2012.
Loan participations purchased were $20,601 and $12,196 at December
31, 2012 and December 31, 2011, respectively, representing 4.2% and 2.7% of total loans as shown in Table 26. During 2012, purchased
loan participations increased $8,108 from a loan participation purchased from BMO Harris Bank with a customer operating in our
market collateralized by local owner occupied commercial real estate. This purchased loan was a significant source of our commercial
related loan growth during 2012. At December 31, 2012, $529 of loan participations were purchased from sources other than traditional
banks with substantial operations in Wisconsin compared to $541 at December 31, 2011.
To support loan growth and invest deposits previously held in low
yielding overnight funds, we maintained a temporary 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 as described previously. The program originated approximately $26.1 million in residential mortgage loans at a 2.92% weighted
average interest rate during 2012 of which $25.1 million of principal at a 2.91% weighted average interest rate was outstanding
at December 31, 2012.
Loans Receivable Maturities
Table 27 categorizes loan principal by scheduled maturity at December
31, 2013, 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, 2013, 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, 2013:
|
|
or less
|
|
to five years
|
|
five years
|
|
|
|
|
|
|
|
Commercial, industrial, municipal, and agricultural
|
|
$
|
71,610
|
|
|
$
|
48,888
|
|
|
$
|
9,722
|
|
Commercial real estate mortgage
|
|
|
44,504
|
|
|
|
148,066
|
|
|
|
20,280
|
|
Real estate construction
|
|
|
24,024
|
|
|
|
7,496
|
|
|
|
429
|
|
Residential real estate mortgage
|
|
|
11,891
|
|
|
|
38,661
|
|
|
|
73,428
|
|
Residential real estate mortgage held for sale
|
|
|
150
|
|
|
|
|
|
|
|
|
|
Residential real estate home equity
|
|
|
—
|
|
|
|
20,677
|
|
|
|
—
|
|
Consumer and individual
|
|
|
1,006
|
|
|
|
2,494
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
153,185
|
|
|
$
|
266,282
|
|
|
$
|
103,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
|
|
|
$
|
230,632
|
|
|
$
|
91,080
|
|
Variable rate
|
|
|
|
|
|
|
35,650
|
|
|
|
12,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
266,282
|
|
|
$
|
103,926
|
|
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 66.6% and 64.9% of total assets as of
December 31, 2013 and 2012, respectively. In addition to core certificates of deposit, funding from local certificates with balances
greater than $100 made up 6.5% and 6.8% of total assets at December 31, 2013, and 2012, 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, 2013.
Table 28: Average Deposits Distribution
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
Interest
|
|
|
|
Interest
|
|
|
|
Interest
|
Year Ended December 31,
|
|
Amount
|
|
Rate paid
|
|
Amount
|
|
Rate paid
|
|
Amount
|
|
Rate paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
82,506
|
|
|
|
n/a
|
|
|
$
|
73,135
|
|
|
|
n/a
|
|
|
$
|
57,942
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand and savings deposits
|
|
|
172,249
|
|
|
|
0.22
|
%
|
|
|
154,428
|
|
|
|
0.51
|
%
|
|
|
126,944
|
|
|
|
0.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market demand deposits
|
|
|
121,351
|
|
|
|
0.33
|
%
|
|
|
110,587
|
|
|
|
0.53
|
%
|
|
|
100,089
|
|
|
|
0.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and local time deposits
|
|
|
105,462
|
|
|
|
1.01
|
%
|
|
|
110,488
|
|
|
|
1.10
|
%
|
|
|
97,042
|
|
|
|
1.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale and national time deposits
|
|
|
58,930
|
|
|
|
2.02
|
%
|
|
|
65,699
|
|
|
|
2.40
|
%
|
|
|
74,158
|
|
|
|
2.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
540,498
|
|
|
|
0.56
|
%
|
|
$
|
514,337
|
|
|
|
0.81
|
%
|
|
$
|
456,175
|
|
|
|
1.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average retail and local deposit growth
|
|
|
7.34
|
%
|
|
|
|
|
|
|
17.44
|
%
|
|
|
|
|
|
|
1.24
|
%
|
|
|
|
|
Average total deposit growth
|
|
|
5.09
|
%
|
|
|
|
|
|
|
12.75
|
%
|
|
|
|
|
|
|
-0.01
|
%
|
|
|
|
|
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 $6,906 during 2013, $11,681 during 2012, and $16,384 during 2011. Average CDARS balances have declined
in recent years as local municipalities that fueled 2010 CDARS growth seeking 100% FDIC protection withdrew 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 $4,292 and $8,825 at December 31,
2013 and 2012, respectively.
Table 29 provides a breakdown of deposit categories as of December
31, 2013 and 2012.
Table 29: Period-End Deposit Composition
As of December 31,
|
|
2013
|
|
2012
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
102,644
|
|
|
|
17.8
|
%
|
|
$
|
89,819
|
|
|
|
15.9
|
%
|
Interest-bearing demand and savings
|
|
|
176,427
|
|
|
|
30.5
|
%
|
|
|
185,203
|
|
|
|
32.8
|
%
|
Money market deposits
|
|
|
136,797
|
|
|
|
23.7
|
%
|
|
|
124,501
|
|
|
|
22.0
|
%
|
Retail time deposits less than $100
|
|
|
57,897
|
|
|
|
10.0
|
%
|
|
|
62,756
|
|
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits
|
|
|
473,765
|
|
|
|
82.0
|
%
|
|
|
462,279
|
|
|
|
81.7
|
%
|
Retail time deposits $100 and over
|
|
|
46,390
|
|
|
|
8.0
|
%
|
|
|
48,706
|
|
|
|
8.6
|
%
|
Broker & national time deposits less than $100
|
|
|
542
|
|
|
|
0.1
|
%
|
|
|
739
|
|
|
|
0.1
|
%
|
Broker and national time deposits $100 and over
|
|
|
56,817
|
|
|
|
9.9
|
%
|
|
|
53,718
|
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
577,514
|
|
|
|
100.0
|
%
|
|
$
|
565,442
|
|
|
|
100.0
|
%
|
Table 30 provides a summary of changes in key deposit categories
during 2013 and 2012.
Table 30: Change in Deposit Composition
|
|
|
|
|
|
% Change from prior year
|
At December 31,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
Total time deposits $100 and over
|
|
$
|
103,207
|
|
|
$
|
102,424
|
|
|
|
0.8
|
%
|
|
|
-14.5
|
%
|
Total broker and wholesale deposits
|
|
|
57,359
|
|
|
|
54,457
|
|
|
|
5.3
|
%
|
|
|
-27.0
|
%
|
Total retail time deposits
|
|
|
104,287
|
|
|
|
111,462
|
|
|
|
-6.4
|
%
|
|
|
21.5
|
%
|
Core deposits, including money market deposits
|
|
|
473,765
|
|
|
|
462,279
|
|
|
|
2.5
|
%
|
|
|
28.1
|
%
|
Table 31 outlines maturities of time deposits of $100 or more, including
broker and retail time deposits as of December 31, 2013 and 2012.
Table 31: Maturity Distribution of Certificates of Deposit
of $100 or More
|
|
2013
|
|
2012
|
As of December 31,
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
|
|
|
|
|
|
|
|
3 months or less
|
|
$
|
13,940
|
|
|
|
1.11
|
%
|
|
$
|
15,930
|
|
|
|
1.10
|
%
|
Over 3 months through 6 months
|
|
|
8,510
|
|
|
|
1.04
|
%
|
|
|
17,745
|
|
|
|
2.04
|
%
|
Over 6 months through 12 months
|
|
|
21,944
|
|
|
|
1.28
|
%
|
|
|
23,470
|
|
|
|
1.25
|
%
|
Over 1 year through 5 years
|
|
|
55,907
|
|
|
|
1.84
|
%
|
|
|
45,279
|
|
|
|
2.18
|
%
|
Over 5 years
|
|
|
2,906
|
|
|
|
2.69
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
103,207
|
|
|
|
1.58
|
%
|
|
$
|
102,424
|
|
|
|
1.77
|
%
|
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. We expect Reward Checking customer balances to continue to
decline during 2014, but less than the $7,290 decline seen during 2013. 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 expected to be withdrawn during the first several months of 2014 but contributed to the large
cash and cash equivalents balance at December 31, 2013.
2012 compared to 2011
Total deposits increased $83,933, or 17.4% at December 31, 2012
compared to December 31, 2011. Local core deposits increased $104,042, up 25.6%, at December 31, 2012 compared December 31, 2011
due to the acquisition of Marathon and its $100,866 total deposits as of the acquisition date. An increase of $48,253 in interest
bearing demand and savings deposits (up 35.2%) represented 46.4% of the local deposit increase because Marathon had promoted a
high yield passbook savings account in which most of their customers maintained a balance. Offsetting the increase in local deposits
was a $20,109, or 27.0%, decrease in brokered and national time deposits during 2012.
Although we acquired $37,973 of Marathon certificates on the acquisition
date, bank wide retail and local certificates of deposit increased only $19,760 during 2012, pointing to a net $18,213 run off
in certificates of deposit. As during 2011, rates paid on certificates of deposit in the current market approached those paid on
money market and NOW accounts. Therefore, customers appeared to move funds out of time deposits into nonmaturity accounts that
allowed them to access the funds without penalty compared to a time deposit. Nonmaturity money market, NOW, and savings accounts
increased $69,761 during 2012 compared to 2011, including a $39,639 increase from Marathon nonmaturity money market, NOW, and savings
account deposits.
Rewards Checking was the primary driver of increased deposit growth
from its introduction in June 2007 through December 2010 but sales of the product were discontinued during October 2011. Rewards
Checking operated as a traditional interest bearing checking account but paid a premium interest rate and reimbursement of foreign
ATM fees if the customer meet certain account usage requirements. In general, the account required customers to use their debit
card at least 10 times per month, deposit their employer paycheck via ACH, and receive their periodic checking account statement
via email from our home banking website. At December 31, 2012, the premium rate paid on Rewards Checking was .40% on the first
$15 of deposit balances. The Rewards Checking interest rate is adjustable at our discretion, but was intended to provide the highest
potential retail deposit rate product available to customers. Rewards Checking balances were $43,742 and $47,578 at December 31,
2012, and 2011, respectively. The average interest cost of Rewards Checking balances (excluding debit card interchange fees, savings
from delivery of electronic periodic statements and vendor software costs of maintaining the program) was .95% in 2012 compared
to 1.59% in 2011.
Deposits held for municipalities were $35,637 at December 31, 2012,
up $3,492, or 10.9%, from $32,145 at December 31, 2011 primarily from addition of Marathon’s municipal deposit customers.
Many of our municipalities had higher December 31 balances from seasonal property tax collection activity. At December 31, 2012
we held $40.6 million of total nonmaturity deposits and overnight repurchase agreement amounts from our ten largest deposit customers,
making up approximately 8% of our total local deposits and overnight repurchase agreements. Many of the balances at year-end were
seasonal deposits withdrawn during the first several months of 2013 but contributed to the large cash and cash equivalents balance
at December 31, 2012.
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, 2013 and 2012. Currently unused but available funding sources along with a
significant amount of overnight liquid funds at December 31, 2013 are considered sufficient to fund anticipated 2014 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, 2013 and 2012.
Table 33: Available but Unused Funding Sources other than
Retail Deposits:
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
Unused, but
|
|
Amount
|
|
Unused, but
|
|
Amount
|
|
|
Available
|
|
Used
|
|
Available
|
|
Used
|
|
|
|
|
|
|
|
|
|
Overnight federal funds purchased
|
|
$
|
28,000
|
|
|
$
|
—
|
|
|
$
|
28,000
|
|
|
$
|
—
|
|
Federal Reserve discount window advances
|
|
|
89,875
|
|
|
|
—
|
|
|
|
70,141
|
|
|
|
—
|
|
FHLB advances under blanket mortgage lien
|
|
|
54,944
|
|
|
|
38,049
|
|
|
|
38,797
|
|
|
|
50,124
|
|
Repurchase agreements and other FHLB advances
|
|
|
35,822
|
|
|
|
20,441
|
|
|
|
44,634
|
|
|
|
20,728
|
|
Wholesale and national deposits
|
|
|
84,949
|
|
|
|
57,359
|
|
|
|
87,936
|
|
|
|
54,457
|
|
Holding company secured line of credit
|
|
|
3,000
|
|
|
|
—
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
296,590
|
|
|
$
|
115,849
|
|
|
$
|
272,508
|
|
|
$
|
125,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding as a percent of total assets
|
|
|
41.7%
|
|
|
|
16.3%
|
|
|
|
38.3%
|
|
|
|
17.6%
|
|
Percentage of gross available funding used at period-end
|
|
|
|
|
|
|
28.1%
|
|
|
|
|
|
|
|
31.5%
|
|
The following discussion examines each of the available but unused
funding sources listed in Table 31 above and the factors that may directly or indirectly influence the timing or the amount ultimately
available to us.
2013 compared to 2012
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. Our subsidiary bank’s composite ratio was approximately 13% at December 31, 2013 and December 31, 2012, 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 2012 and 2013, and as of December 31, 2013, the annualized interest rate applicable
to Discount Window advances was .75%. Under the BIC program, we provide a monthly listing of detailed loan information on the loans
provided as collateral. We are subject to annual review and certification by the Federal Reserve to retain participation in the
program. The Discount Window represents the primary source of liquidity on a daily basis following our federal funds purchased
lines of credit discussed above. We were limited to a maximum advance of $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 2013 or 2012.
Only performing loans are permitted as collateral under the BIC
and each individual loan is subject to a haircut to collateral value based on the Federal Reserve’s review of the listing
each month. In general, approximately 75% of the loan principal offered as collateral is able to support Discount Window advances.
Similar to the federal funds purchased lines of credit, an increase in nonperforming loans would decrease the amount of collateral
available for Discount Window advances.
Federal Home Loan Bank (FHLB) advances under blanket mortgage
lien and other FHLB advances
We maintain an available line of credit with the FHLB of Chicago
based on a pledge of 1 to 4 family mortgage loan collateral, both first and secondary lien positions. We may borrow on the line
to the lesser of the blanket mortgage lien collateral provided, or 20 times our existing FHLB capital stock investment. Based on
our existing $2,556 capital stock investment, total FHLB advances in excess of $51,124 require us to purchase additional FHLB stock
equal to 5% of the advance amount. At 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. At December 31, 2012, no advances were available without the purchase of additional
FHLB stock. FHLB stock currently pays an annualized dividend of .45% 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, 2013 and December 31, 2012. 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, 2013 or December 31, 2012.
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, 2013, $13,500 of our repurchase agreements are wholesale agreements with correspondent banks and
$5,441 are 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.
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, 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
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 $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.
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, 2013 and December 31, 2012. No amounts were drawn on the line
at December 31, 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. 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, 2013 and December 31, 2012, we were not in violation
of any of the line of credit covenants. A violation of any covenant could prevent us from utilizing the unused balance of the line
of credit. The line of credit expires during December 2014.
If liquidity needs persist after exhausting all available funds
from the sources described above, we would consider more drastic methods to raise funds including, but not limited to, sale of
investment securities at a loss, cessation of lending to new or existing customers, sale of branch real estate in a sale-leaseback
transaction, surrender of bank owned life insurance to obtain the cash surrender value net of taxes due, packaging and sale of
residential mortgage loan pools held in our portfolio, sale of foreclosed assets at a loss, and sale of mortgage servicing rights.
Such actions could generate undesirable sale losses or income tax impacts. While sale of additional common stock or issuance of
other types of capital could provide additional liquidity, the ability to find significant buyers of such capital issues during
a liquidity crisis would be difficult making such a source of funding unlikely or unreliable if the liquidity crisis was caused
by our deteriorating financial condition.
2012 compared to 2011
Overnight federal funds purchased
Our aggregate federal funds purchased availability totaled $28,000
from three correspondent banks at December 31, 2012 and 2011, 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, 2012 and 16% at December 31, 2011, respectively,
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 2012, the annualized interest rate applicable to Discount Window advances was .75%.
We were limited to a maximum advance of $70,141 and $100,000 at December 31, 2012 and December 31, 2011, respectively, based on
the BIC loan collateral pledged. No Discount Window advances were used during 2012 or 2011. Since we did not actively use the line,
we pledged fewer commercial related loans under the Discount Window program during 2012, which reduced our availability under the
line compared to 2011.
Federal Home Loan Bank (FHLB) advances under blanket mortgage
lien and other FHLB advances
Based on our existing $2,506 capital stock investment, total FHLB
advances in excess of $50,124 require us to purchase additional FHLB stock equal to 5% of the advance amount. At December 31, 2012,
no amounts were available from the FHLB without the purchase of additional FHLB stock. At December 31, 2011, we could have
drawn an FHLB advance up to $14,876 of the $22,559 available without the purchase of FHLB stock. Further advances of the $38,797
available at December 31, 2012, would have required us to purchase additional FHLB stock totaling $1,940. 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, 2012 or December 31, 2011.
In connection with the lifting of their regulatory consent order, the FHLB of Chicago announced a capital stock conversion plan
and repurchased $744 of our stock during 2012.
Repurchase agreements and FHLB advances collateralized by investment
securities
At December 31, 2012, $13,500 of our repurchase agreements are wholesale
agreements with correspondent banks and $7,228 are overnight repurchase agreements with local customers using our treasury management
services. At December 31, 2011, $13,500 of our repurchase agreements were wholesale agreements with correspondent banks and $6,191
were overnight repurchase agreements with local customers. 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. At December 31, 2011, $34,416 of
additional FHLB advances were available based on pledging of securities if an additional $1,721 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 $87,936 at December 31, 2012 and $50,007 at December 31, 2011. Brokered and national certificates
were 7.6% and 12.0% of assets at December 31, 2012 and December 31, 2011, respectively. Increased brokered deposit availability
came with increased asset size following the Marathon purchase. 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, 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, 2012 and December 31, 2011. No amounts were drawn on the line
at December 31, 2012 or 2011. 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, 2012 and December 31, 2011, 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, 2013 or December
31, 2012 and no liquidity stress levels were considered to exist at those dates. During 2011, we increased our “Risk Level
1” trigger points related to commercial and industrial loans and commercial real estate loans relative to capital. The Risk
Level 1 trigger for commercial and industrial loans was increased from 200% of capital at December 31, 2010 to 250% of capital
as of December 31, 2011. Likewise, the Risk Level 1 trigger for commercial real estate loans was increased from 300% at December
31, 2010 to 350% at December 31, 2011. These increases were considered appropriate due to our concentration on commercial related
lending to local borrowers and relatively low levels of capital, and therefore we consistently exceeded these triggers at the prior
year levels. However, we have historically experienced net loan charge-offs on commercial related lending less than similar sized
banks and do not consider this mix of loans to signify an undercapitalized position.
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
11.6%, 14.4%, and 7.9% at December 31, 2013, 2012, and 2011, respectively. The basic surplus increased significantly at December
31, 2012 compared to 2013 and 2011 due to the purchase of Marathon and its large cash and unencumbered investment security position
in addition to our growth in residential mortgage loans added to the balance sheet which were available for pledging under the
FHLB blanket lien.
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, 2013, total stockholders’
equity increased $10,063, or 26.5%. During this period, retained net income after payment of shareholder dividends represented
$12,364 of this growth in equity which was primarily offset by a decline in unrealized gains on securities available for sale,
which declined $2,179. 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 $125,788 ($10,063 equity growth divided by 8% assumed capital ratio). A detailed listing
of stockholders’ equity activity during the three years ended December 31, 2013 may be found in Item 8, Consolidated Statements
of Changes in Stockholders’ Equity. Average tangible common stockholders’ equity to total assets was 8.16% during 2013,
8.04% during 2012, and 8.11% during 2011. Projected 2014 earnings combined with expected asset growth, including the planned purchase
of The Baraboo National Bank Rhinelander branch office is expected to result in average common stockholder’s equity to total
assets of approximately 8.00% during 2014.
Unrealized gains on securities available for sale, net of tax, reflected
as accumulated other comprehensive income, represented approximately $0.37, or 1.1% of total net book value per share at December
31, 2013 compared to $1.10, or 3.3% of total net book value per share at December 31, 2012. As market interest rates increased
during the second half of calendar 2013, unrealized gains on fixed rate investment securities declined, which reduced equity since
changes in unrealized gains on securities available for sale are recorded through equity. If market rates continue to increase
in the future, existing unrealized gains on our fixed rate investment portfolio would further decline, negatively impacting total
stockholders’ equity and net book value per share.
During 2013, we issued 8,076 shares of restricted stock having a
grant date value of $210 to certain key employees as a retention tool and to align employee performance with shareholder interests,
compared to 8,895 shares of restricted stock having a grant date value of $200 issued during 2012. 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 $145, $105, and $78, during 2013, 2012, and 2011, respectively.
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. No shares were repurchased during 2011 or 2010 as we sought to conserve capital for growth,
merger and acquisition activity, repayment of our 8% senior subordinated notes, and expected increases to regulatory capital ratio
minimums. 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.
The banking industry continues to place a premium on capital and we expect to refrain from significant treasury stock repurchases
during 2014 and to reserve capital primarily for 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, 2013 to regulatory capital. We were considered
“well capitalized” under applicable capital regulations at December 31, 2013, 2012, and 2011. 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, 2013, 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 and
2011, 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,” 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.
|
If the new capital rules were applied to our existing consolidated
December 31, 2013 regulatory capital position and made effective immediately, the proforma new capital ratios are projected to
change as follows:
|
Actual as of:
|
Proforma as of:
|
Targeted minimum
|
|
Dec 31, 2013
|
Dec 31, 2013
|
with capital buffer
|
|
|
|
|
Tier 1 leverage ratio to average assets
|
9.06%
|
9.06%
|
6.50%
|
Common equity Tier 1 ratio (new)
|
n/a
|
10.62%
|
7.00%
|
Tier 1 risk adjusted capital ratio
|
12.63%
|
12.04%
|
8.50%
|
Tier 2 total risk adjusted capital ratio
|
13.88%
|
13.29%
|
10.50%
|
We continue to internally review the timing and extent of the proposed
changes on our regulatory capital position and the final capital ratios at January 1, 2015, may be different than the proforma
capital ratios shown above. Increased regulatory capital requirements could impact our ability to pay shareholder cash dividends,
repurchase shares of treasury stock, or the pace of which we could grow in assets, both organically and via merger and acquisition
activities. While we do not expect to be required to raise common stock capital solely to meet these new requirements, the new
rules would increase the likelihood we would need capital through the issuance of new common stock if we continued merger and acquisition
activity for growth. Because the market price of our stock currently trades at less than our book value, issuance of new common
stock shares, such as for an acquisition, could dilute the book value per share of existing shareholders.
Table 34: Capital Ratios
At December 31,
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
$
|
56,753
|
|
|
$
|
54,447
|
|
|
$
|
50,362
|
|
Junior subordinated debentures, net
|
|
|
7,500
|
|
|
|
7,500
|
|
|
|
7,500
|
|
Disallowed mortgage servicing right assets
|
|
|
(170
|
)
|
|
|
(123
|
)
|
|
|
(121
|
)
|
Accumulated other comprehensive (income) loss
|
|
|
(349
|
)
|
|
|
(1,394
|
)
|
|
|
(1,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 regulatory capital
|
|
|
63,734
|
|
|
|
60,430
|
|
|
|
55,807
|
|
Senior subordinated notes
|
|
|
—
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Add: allowance for loan losses
|
|
|
6,314
|
|
|
|
6,206
|
|
|
|
5,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total regulatory capital
|
|
$
|
70,048
|
|
|
$
|
73,636
|
|
|
$
|
68,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average tangible assets
|
|
$
|
703,261
|
|
|
$
|
689,974
|
|
|
$
|
602,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets (as defined by current regulations)
|
|
$
|
504,561
|
|
|
$
|
495,287
|
|
|
$
|
457,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average tangible assets (leverage ratio)
|
|
|
9.06%
|
|
|
|
8.76%
|
|
|
|
9.27%
|
|
Tier 1 capital to risk-weighted assets
|
|
|
12.63%
|
|
|
|
12.20%
|
|
|
|
12.20%
|
|
Total capital to risk-weighted assets
|
|
|
13.88%
|
|
|
|
14.87%
|
|
|
|
14.99%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios – Peoples State Bank – Subsidiary Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average tangible assets (leverage ratio)
|
|
|
9.39%
|
|
|
|
9.35%
|
|
|
|
9.99%
|
|
Tier 1 capital to risk-weighted assets
|
|
|
13.10%
|
|
|
|
13.11%
|
|
|
|
13.13%
|
|
Total capital to risk-weighted assets
|
|
|
14.35%
|
|
|
|
14.36%
|
|
|
|
14.39%
|
|
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)
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
10,389
|
|
|
$
|
12,454
|
|
|
$
|
17,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$
|
56,753
|
|
|
$
|
54,447
|
|
|
$
|
50,362
|
|
Less: Mortgage servicing rights, net (intangible assets)
|
|
|
(1,696
|
)
|
|
|
(1,233
|
)
|
|
|
(1,205
|
)
|
Less: Preferred stock capital elements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Add: Allowance for loan losses
|
|
|
6,783
|
|
|
|
7,431
|
|
|
|
7,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tangible common stockholders’ equity and reserves
|
|
$
|
61,840
|
|
|
$
|
60,645
|
|
|
$
|
57,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets as a percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
total tangible common stockholders’ equity and reserves
|
|
|
16.80%
|
|
|
|
20.54%
|
|
|
|
31.32%
|
|
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, 2013, our credit guarantee covered $23,709 of loan principal on which we would incur credit losses up to
$949 if the FHLB first loss exceeds $1,593 on foreclosure of loans within this pool. 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, 2013,
the average remaining first mortgage principal balance for loans on which we provided the credit enhancement was $66.
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
to the FHLB is risk-weighted for the purposes of the total capital to risk-weighted assets capital calculation. Total risk-based
capital required to be held for the recourse obligations under the FHLB MPF programs for capital adequacy purposes was $864 at
December 31, 2013 and $1,859 at December 31, 2012 and 2011. 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
During 2011, we began sale of a new product that allowed certain
adjustable rate commercial loan customers 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 $14,323 and $14,979 of interest rate swaps associated
with customer floating rate commercial loan principal at December 31, 2013 and 2012, respectively, under the program.
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 $272,280 and $269,554 of residential real estate loans
which have been sold to the FHLB and FNMA at December 31, 2013 and 2012, 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
$294, $28, and $38 during 2013, 2012, and 2011, respectively. We have provided a liability of $108 at December 31, 2013 for potential
future representation and warranty losses.
Table 36 summarizes the various programs and investors for which
we serviced loans as of December 31, 2013 and 2012.
Table 36: Residential Mortgage Loan Servicing for Others
At December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Avg. Monthly
|
|
PSB Credit
|
|
Agency
|
|
Mortgage
|
Agency
|
|
Principal
|
|
Loan
|
|
Average
|
|
Payment
|
|
Enhancement
|
|
Funded First
|
|
Servicing Right, net
|
Program
|
|
Serviced
|
|
Count
|
|
Coupon Rate
|
|
Seasoning
|
|
Guarantee
|
|
Loss Account
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB MPF 100
|
|
$
|
8,493
|
|
|
|
184
|
|
|
|
5.38%
|
|
|
|
128
|
|
|
$
|
94
|
|
|
$
|
291
|
|
|
$
|
19
|
|
|
|
0.22%
|
|
FHLB MPF 125
|
|
|
18,748
|
|
|
|
226
|
|
|
|
5.75%
|
|
|
|
81
|
|
|
|
855
|
|
|
|
1,302
|
|
|
|
77
|
|
|
|
0.41%
|
|
FHLB XTRA
|
|
|
185,283
|
|
|
|
1,472
|
|
|
|
3.75%
|
|
|
|
27
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
1,133
|
|
|
|
0.61%
|
|
FNMA
|
|
|
59,756
|
|
|
|
409
|
|
|
|
3.50%
|
|
|
|
15
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
467
|
|
|
|
0.78%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
272,280
|
|
|
|
2,291
|
|
|
|
3.88%
|
|
|
|
31
|
|
|
$
|
949
|
|
|
$
|
1,593
|
|
|
$
|
1,696
|
|
|
|
0.62%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Avg. Monthly
|
|
PSB Credit
|
|
Agency
|
|
Mortgage
|
Agency
|
|
Principal
|
|
Loan
|
|
Average
|
|
Payment
|
|
Enhancement
|
|
Funded First
|
|
Servicing Right, net
|
Program
|
|
Serviced
|
|
Count
|
|
Coupon Rate
|
|
Seasoning
|
|
Guarantee
|
|
Loss Account
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB MPF 100
|
|
$
|
12,328
|
|
|
|
247
|
|
|
|
5.38%
|
|
|
|
116
|
|
|
$
|
94
|
|
|
$
|
291
|
|
|
$
|
21
|
|
|
|
0.17%
|
|
FHLB MPF 125
|
|
|
23,695
|
|
|
|
272
|
|
|
|
5.75%
|
|
|
|
74
|
|
|
|
1,851
|
|
|
|
1,474
|
|
|
|
66
|
|
|
|
0.28%
|
|
FHLB XTRA
|
|
|
194,710
|
|
|
|
1,507
|
|
|
|
3.88%
|
|
|
|
21
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
909
|
|
|
|
0.47%
|
|
FNMA
|
|
|
38,821
|
|
|
|
274
|
|
|
|
3.44%
|
|
|
|
13
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
237
|
|
|
|
0.61%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
269,554
|
|
|
|
2,300
|
|
|
|
4.05%
|
|
|
|
29
|
|
|
$
|
1,945
|
|
|
$
|
1,765
|
|
|
$
|
1,233
|
|
|
|
0.46%
|
|
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 increased during
2013, secondary market mortgage origination activity could decline and customer repayments on existing serviced loans could cause
serviced loan principal could decline during 2014 compared to 2013.
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,
2013
|
|
Principal payments due by period
|
|
|
Total
|
|
< 1 year
|
|
1-3 years
|
|
3-5 years
|
|
> 5 years
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances
|
|
$
|
38,049
|
|
|
$
|
36,049
|
|
|
$
|
—
|
|
|
$
|
2,000
|
|
|
$
|
—
|
|
Long-term other borrowings
|
|
|
15,000
|
|
|
|
9,000
|
|
|
|
500
|
|
|
|
5,500
|
|
|
|
—
|
|
Junior subordinated debentures
|
|
|
7,732
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,732
|
|
Senior subordinated notes
|
|
|
4,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,000
|
|
|
|
—
|
|
Deferred compensation agreements
|
|
|
3,155
|
|
|
|
223
|
|
|
|
200
|
|
|
|
256
|
|
|
|
2,476
|
|
Post-retirement health insurance benefits plan
|
|
|
32
|
|
|
|
5
|
|
|
|
10
|
|
|
|
6
|
|
|
|
11
|
|
Long-term charitable contribution commitments
|
|
|
16
|
|
|
|
5
|
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
Branch bank operating lease commitments
|
|
|
24
|
|
|
|
24
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term contractual obligations before time deposits
|
|
|
68,008
|
|
|
|
45,306
|
|
|
|
721
|
|
|
|
11,762
|
|
|
|
10,219
|
|
Time deposits
|
|
|
161,646
|
|
|
|
82,077
|
|
|
|
41,761
|
|
|
|
34,902
|
|
|
|
2,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term contractual obligations including time deposits
|
|
$
|
229,654
|
|
|
$
|
127,383
|
|
|
$
|
42,482
|
|
|
$
|
46,664
|
|
|
$
|
13,125
|
|
Critical Accounting Policies
Allowance for Loan Losses
As noted previously, during the quarter ended March 31, 2011, we
changed our methodology to determine the adequacy of our allowance for loan losses. The changes were made in response to several
regulatory and industry factors including greater transparency in allowance and loss activity by loan segment and class, greater
reliance on various external and internal factors to determine contingency reserves on loans not considered to be impaired, and
greater reliance on estimates of future cash flows on impaired loans to estimate required allowances with lesser reliance on impaired
loan collateral fair value to determine required allowances.
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):
|
•
|
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 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, 2013 and 2012, 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, 2013 allowance for loan
losses would have increased $844 (12.4%) and have decreased 2013 net income by approximately $512 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, 2013, 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, 2013 would have increased $658 (9.7%) and decreased 2013 net income by approximately $399 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 2013 secondary market sales were 25% less than that recorded, gain on sale of loans (a component
of mortgage banking income) during 2013 would have declined approximately $156 before income taxes (reducing 2013 net income by
$95). In addition, if the actual value of the entire December 31, 2013 MSR were 25% less than recorded, net servicing revenue (a
component of mortgage banking income) would have declined approximately $424 before income taxes and 2013 net income would have
been reduced $257.
We make the following estimates and perform the following procedures
when accounting for MSRs:
|
1.
|
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.
|
|
2.
|
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.
|
3.
|
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.
|
|
4.
|
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 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, 2013 and 2012, 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, 2013. 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,
2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2013, in conformity with accounting principles generally accepted in the United States.
Wipfli LLP
March 17, 2014
Wausau, Wisconsin
Consolidated Balance Sheets
December 31, 2013 and 2012
(dollars in thousands except per share data)
Assets
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
13,800
|
|
|
$
|
20,332
|
|
Interest-bearing deposits and money market funds
|
|
|
977
|
|
|
|
1,431
|
|
Federal funds sold
|
|
|
16,745
|
|
|
|
27,084
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
31,522
|
|
|
|
48,847
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale (at fair value)
|
|
|
61,650
|
|
|
|
75,387
|
|
Securities held to maturity (fair value of $71,672 and $72,364, respectively)
|
|
|
71,629
|
|
|
|
69,822
|
|
Bank certificates of deposit
|
|
|
2,236
|
|
|
|
4,465
|
|
Loans held for sale
|
|
|
150
|
|
|
|
884
|
|
Loans receivable, net of allowance for loan losses
|
|
|
509,880
|
|
|
|
477,991
|
|
Accrued interest receivable
|
|
|
2,076
|
|
|
|
2,157
|
|
Foreclosed assets
|
|
|
1,750
|
|
|
|
1,774
|
|
Premises and equipment, net
|
|
|
9,669
|
|
|
|
10,240
|
|
Mortgage servicing rights, net
|
|
|
1,696
|
|
|
|
1,233
|
|
Federal Home Loan Bank stock (at cost)
|
|
|
2,556
|
|
|
|
2,506
|
|
Cash surrender value of bank-owned life insurance
|
|
|
12,826
|
|
|
|
11,813
|
|
Other assets
|
|
|
3,901
|
|
|
|
4,847
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
711,541
|
|
|
$
|
711,966
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest-bearing
|
|
$
|
102,644
|
|
|
$
|
89,819
|
|
Interest-bearing
|
|
|
474,870
|
|
|
|
475,623
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
577,514
|
|
|
|
565,442
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances
|
|
|
38,049
|
|
|
|
50,124
|
|
Other borrowings
|
|
|
20,441
|
|
|
|
20,728
|
|
Senior subordinated notes
|
|
|
4,000
|
|
|
|
7,000
|
|
Junior subordinated debentures
|
|
|
7,732
|
|
|
|
7,732
|
|
Accrued expenses and other liabilities
|
|
|
7,052
|
|
|
|
6,493
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
654,788
|
|
|
|
657,519
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,830
|
|
|
|
1,830
|
|
Outstanding - 1,651,518 and 1,653,472 shares, respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
6,967
|
|
|
|
7,020
|
|
Retained earnings
|
|
|
52,432
|
|
|
|
48,977
|
|
Accumulated other comprehensive income, net of tax
|
|
|
349
|
|
|
|
1,394
|
|
Treasury stock, at cost - 178,748 and 176,794 shares, respectively
|
|
|
(4,825
|
)
|
|
|
(4,774
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
56,753
|
|
|
|
54,447
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
711,541
|
|
|
$
|
711,966
|
|
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
Years Ended December 31, 2013, 2012, and 2011
(dollars in thousands except per share data)
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
23,126
|
|
|
$
|
23,458
|
|
|
$
|
24,480
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
2,098
|
|
|
|
2,402
|
|
|
|
2,637
|
|
Tax-exempt
|
|
|
1,511
|
|
|
|
1,293
|
|
|
|
1,125
|
|
Other interest and dividends
|
|
|
81
|
|
|
|
91
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
26,816
|
|
|
|
27,244
|
|
|
|
28,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,051
|
|
|
|
4,161
|
|
|
|
5,428
|
|
Federal Home Loan Bank advances
|
|
|
1,285
|
|
|
|
1,414
|
|
|
|
1,776
|
|
Other borrowings
|
|
|
650
|
|
|
|
596
|
|
|
|
645
|
|
Senior subordinated notes
|
|
|
184
|
|
|
|
578
|
|
|
|
567
|
|
Junior subordinated debentures
|
|
|
341
|
|
|
|
342
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
5,511
|
|
|
|
7,091
|
|
|
|
8,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
21,305
|
|
|
|
20,153
|
|
|
|
19,557
|
|
Provision for loan losses
|
|
|
4,015
|
|
|
|
785
|
|
|
|
1,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
17,290
|
|
|
|
19,368
|
|
|
|
18,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees
|
|
|
1,580
|
|
|
|
1,648
|
|
|
|
1,632
|
|
Mortgage banking, net
|
|
|
1,591
|
|
|
|
1,795
|
|
|
|
1,373
|
|
Investment and insurance sales commissions
|
|
|
944
|
|
|
|
736
|
|
|
|
631
|
|
Net gain on sale of securities
|
|
|
12
|
|
|
|
0
|
|
|
|
32
|
|
Increase in cash surrender value of bank-owned life insurance
|
|
|
402
|
|
|
|
407
|
|
|
|
415
|
|
Gain on bargain purchase
|
|
|
0
|
|
|
|
851
|
|
|
|
0
|
|
Other operating income
|
|
|
1,094
|
|
|
|
1,131
|
|
|
|
1,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
5,623
|
|
|
|
6,568
|
|
|
|
5,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
9,069
|
|
|
|
9,169
|
|
|
|
8,337
|
|
Occupancy and facilities
|
|
|
1,762
|
|
|
|
1,622
|
|
|
|
1,702
|
|
Loss on foreclosed assets
|
|
|
428
|
|
|
|
573
|
|
|
|
1,197
|
|
Data processing and other office operations
|
|
|
1,862
|
|
|
|
2,296
|
|
|
|
1,382
|
|
Advertising and promotion
|
|
|
335
|
|
|
|
327
|
|
|
|
291
|
|
FDIC insurance premiums
|
|
|
452
|
|
|
|
464
|
|
|
|
505
|
|
Other operating expense
|
|
|
2,598
|
|
|
|
2,941
|
|
|
|
2,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
16,506
|
|
|
|
17,392
|
|
|
|
15,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,407
|
|
|
|
8,544
|
|
|
|
7,726
|
|
Provision for income taxes
|
|
|
1,663
|
|
|
|
2,535
|
|
|
|
2,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,744
|
|
|
$
|
6,009
|
|
|
$
|
5,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.87
|
|
|
$
|
3.61
|
|
|
$
|
3.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
2.87
|
|
|
$
|
3.61
|
|
|
$
|
3.21
|
|
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2013, 2012, and 2011
(dollars in thousands except per share data)
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,744
|
|
|
$
|
6,009
|
|
|
$
|
5,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for sale
|
|
|
(961
|
)
|
|
|
(191
|
)
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for net gain, included in net income
|
|
|
(7
|
)
|
|
|
0
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrealized gain on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
transferred to securities held to maturity included in net income
|
|
|
(236
|
)
|
|
|
(274
|
)
|
|
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on interest rate swap
|
|
|
46
|
|
|
|
(179
|
)
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment of interest rate swap settlements included in earnings
|
|
|
113
|
|
|
|
104
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,699
|
|
|
$
|
5,469
|
|
|
$
|
4,711
|
|
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2013, 2012, and 2011
(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, 2011
|
|
$
|
1,830
|
|
|
$
|
7,323
|
|
|
$
|
40,078
|
|
|
$
|
2,528
|
|
|
($
|
5,069
|
)
|
|
$
|
46,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
5,305
|
|
|
|
|
|
|
|
|
|
|
|
5,305
|
|
Unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale, net of tax of $71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
109
|
|
Reclassification adjustment for net security gain,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net income, net of tax of $13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
(19
|
)
|
Amortization of unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale transferred to securities held
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to maturity included in net income, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax of $168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(348
|
)
|
|
|
|
|
|
|
(348
|
)
|
Unrealized loss on interest rate swap,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax of $287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
(447
|
)
|
Reclassification of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
settlements included in earnings,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax of $72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options issued out of treasury
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
45
|
|
Grants of restricted stock
|
|
|
|
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
236
|
|
|
|
0
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
Cash dividends declared $.705 per share
|
|
|
|
|
|
|
|
|
|
|
(1,147
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,147
|
)
|
Cash dividends declared on unvested restricted stock
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
1,830
|
|
|
$
|
7,140
|
|
|
$
|
44,215
|
|
|
$
|
1,934
|
|
|
($
|
4,757
|
)
|
|
$
|
50,362
|
|
Consolidated Statements of Changes in Stockholders’ Equity
(Continued)
Years Ended December 31, 2013, 2012, and 2011
(dollars in thousands except per share data)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
Paid-In
|
|
Retained
|
|
Comprehensive
|
|
Treasury
|
|
|
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Income (Loss)
|
|
Stock
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
1,830
|
|
|
$
|
7,140
|
|
|
$
|
44,215
|
|
|
$
|
1,934
|
|
|
($
|
4,757
|
)
|
|
$
|
50,362
|
|
(Brought Forward)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
6,009
|
|
|
|
|
|
|
|
|
|
|
|
6,009
|
|
Unrealized loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale, net of tax of $119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(191
|
)
|
|
|
|
|
|
|
(191
|
)
|
Amortization of unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale transferred to securities held to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturity included in net income, net of tax of $178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(274
|
)
|
|
|
|
|
|
|
(274
|
)
|
Unrealized loss on interest rate swap,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax of $116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(179
|
)
|
|
|
|
|
|
|
(179
|
)
|
Reclassification of interest rate swap settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in earnings, net of tax of $68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
44,977
|
|
|
$
|
1,394
|
|
|
($
|
4,774
|
)
|
|
$
|
54,447
|
|
Consolidated Statements of Changes in Stockholders’ Equity
(Continued)
Years Ended December 31, 2013, 2012, and 2011
(dollars in thousands except per share data)
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
4,744
|
|
|
|
|
|
|
|
|
|
|
|
4,744
|
|
Unrealized loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale, net of tax of $613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(961
|
)
|
|
|
|
|
|
|
(961
|
)
|
Reclassification adjustment for security gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income, net of tax of $5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
Amortization of unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale transferred to securities held to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturity included in net income, net of tax of $184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(236
|
)
|
|
|
|
|
|
|
(236
|
)
|
Unrealized gain on interest rate swap,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax of $29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
Reclassification of interest rate swap settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in earnings, net of tax of $73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Years Ended December 31, 2013, 2012, and 2011
(dollars in thousands except per share data)
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,744
|
|
|
$
|
6,009
|
|
|
$
|
5,305
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for depreciation and net amortization
|
|
|
2,516
|
|
|
|
2,604
|
|
|
|
2,329
|
|
Provision (benefit) for deferred income taxes
|
|
|
(33
|
)
|
|
|
400
|
|
|
|
(100
|
)
|
Provision for loan losses
|
|
|
4,015
|
|
|
|
785
|
|
|
|
1,390
|
|
Deferred net loan origination costs
|
|
|
(514
|
)
|
|
|
(443
|
)
|
|
|
(292
|
)
|
Proceeds from sales of loans held for sale
|
|
|
63,510
|
|
|
|
102,080
|
|
|
|
63,305
|
|
Originations of loans held for sale
|
|
|
(61,950
|
)
|
|
|
(101,812
|
)
|
|
|
(62,267
|
)
|
Gain on sale of loans
|
|
|
(1,373
|
)
|
|
|
(1,918
|
)
|
|
|
(1,064
|
)
|
Provision for (recapture of) mortgage servicing rights valuation allowance
|
|
|
(259
|
)
|
|
|
199
|
|
|
|
(122
|
)
|
Net (gain) loss on sale of premises and equipment
|
|
|
0
|
|
|
|
3
|
|
|
|
(15
|
)
|
Realized gain on sale of securities available for sale
|
|
|
(12
|
)
|
|
|
0
|
|
|
|
(32
|
)
|
Net loss on sale and provision for write-down of foreclosed assets
|
|
|
301
|
|
|
|
443
|
|
|
|
972
|
|
Increase in cash surrender value of bank-owned life insurance
|
|
|
(402
|
)
|
|
|
(407
|
)
|
|
|
(415
|
)
|
Gain on bargain purchase
|
|
|
0
|
|
|
|
(851
|
)
|
|
|
0
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
81
|
|
|
|
313
|
|
|
|
170
|
|
Other assets
|
|
|
1,590
|
|
|
|
386
|
|
|
|
64
|
|
Accrued expenses and other liabilities
|
|
|
820
|
|
|
|
(235
|
)
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,034
|
|
|
|
7,556
|
|
|
|
9,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of securities available for sale
|
|
|
41,824
|
|
|
|
49,290
|
|
|
|
17,046
|
|
Proceeds from sale of securities available for sale
|
|
|
986
|
|
|
|
0
|
|
|
|
37
|
|
Proceeds from maturities of securities held to maturity
|
|
|
6,502
|
|
|
|
10,778
|
|
|
|
4,264
|
|
Payment for purchase of securities available for sale
|
|
|
(31,241
|
)
|
|
|
(32,368
|
)
|
|
|
(21,697
|
)
|
Payment for purchase of securities held to maturity
|
|
|
(8,960
|
)
|
|
|
(11,696
|
)
|
|
|
(1,021
|
)
|
Cash acquired on purchase of Marathon State Bank
|
|
|
0
|
|
|
|
14,910
|
|
|
|
0
|
|
Net redemption (net purchase) of bank certificates of deposit
|
|
|
2,229
|
|
|
|
(1,981
|
)
|
|
|
0
|
|
Net redemption (purchase) of FHLB stock
|
|
|
(50
|
)
|
|
|
744
|
|
|
|
0
|
|
Net increase in loans
|
|
|
(36,746
|
)
|
|
|
(10,349
|
)
|
|
|
(7,130
|
)
|
Capital expenditures
|
|
|
(334
|
)
|
|
|
(572
|
)
|
|
|
(191
|
)
|
Proceeds from sale of premises and equipment
|
|
|
0
|
|
|
|
0
|
|
|
|
15
|
|
Proceeds from sale of foreclosed assets
|
|
|
831
|
|
|
|
1,527
|
|
|
|
987
|
|
Purchase of bank-owned life insurance
|
|
|
(611
|
)
|
|
|
0
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(25,570
|
)
|
|
|
20,283
|
|
|
|
(7,782
|
)
|
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2013, 2012, and 2011
(dollars in thousands except per share data)
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in non-interest-bearing deposits
|
|
$
|
12,825
|
|
|
($
|
9,902
|
)
|
|
$
|
17,366
|
|
Net decrease in interest-bearing deposits
|
|
|
(694
|
)
|
|
|
(6,832
|
)
|
|
|
(1,114
|
)
|
Net decrease in Federal Home Loan Bank advances
|
|
|
(12,075
|
)
|
|
|
0
|
|
|
|
(7,310
|
)
|
Net increase (decrease) in other borrowings
|
|
|
(287
|
)
|
|
|
1,037
|
|
|
|
(11,820
|
)
|
Repayment of senior subordinated notes
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
(1,289
|
)
|
|
|
(1,247
|
)
|
|
|
(1,168
|
)
|
Proceeds from exercise of stock options
|
|
|
0
|
|
|
|
9
|
|
|
|
45
|
|
Purchase of treasury stock
|
|
|
(269
|
)
|
|
|
(262
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(4,789
|
)
|
|
|
(17,197
|
)
|
|
|
(4,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(17,325
|
)
|
|
|
10,642
|
|
|
|
(2,126
|
)
|
Cash and cash equivalents at beginning
|
|
|
48,847
|
|
|
|
38,205
|
|
|
|
40,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
|
|
$
|
31,522
|
|
|
$
|
48,847
|
|
|
$
|
38,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,645
|
|
|
$
|
7,177
|
|
|
$
|
8,982
|
|
Income taxes
|
|
|
759
|
|
|
|
2,146
|
|
|
|
2,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
$
|
4,743
|
|
|
$
|
1,332
|
|
|
$
|
1,587
|
|
Loans transferred to foreclosed assets
|
|
|
1,342
|
|
|
|
1,295
|
|
|
|
1,006
|
|
Loans originated on sale of foreclosed properties
|
|
|
234
|
|
|
|
490
|
|
|
|
1,075
|
|
Grants of unvested restricted stock at fair value
|
|
|
210
|
|
|
|
200
|
|
|
|
200
|
|
Vesting of restricted stock grants
|
|
|
165
|
|
|
|
116
|
|
|
|
84
|
|
Amortization of unrealized gain on securities held to maturity transferred
|
|
|
|
|
|
|
|
|
|
|
|
|
from securities available for sale
|
|
|
420
|
|
|
|
452
|
|
|
|
516
|
|
See accompanying notes to consolidated financial statements.
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 eight 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. Amortization of premiums and accretion of discounts on purchased
securities held to maturity is recognized in interest 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.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
In 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 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 collectibility
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 collectibility 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.
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.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
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 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 other 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.
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.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
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.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
Current Accounting Changes
Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 210,
Balance Sheet
.
In January 2013, clarifications were issued of new authoritative accounting
guidance first issued in December 2011 concerning disclosure of information about offsetting and related arrangements associated
with derivative instruments. The clarifications and originally issued guidance require additional disclosures associated with offsetting
and collateral arrangements with derivative instruments to enable users of PSB's financial statements to understand the effect
of those arrangements on its financial position beginning March 31, 2013. These new disclosures were added as necessary during
the quarter ended March 31, 2013, and did not have a significant impact to the reporting of PSB's financial results upon adoption.
FASB ASC Topic 220,
Comprehensive Income.
In February
2013, new authoritative accounting guidance was issued which required PSB to report the effect of significant reclassifications
out of accumulated other comprehensive income in a footnote to the financial statements. The disclosure was effective beginning
March 31, 2013 on a prospective basis. The change did not have a significant impact on PSB's financial reporting or results of
operations upon adoption.
FASB ASC Topic 220,
Comprehensive Income.
In June
2011, new authoritative accounting guidance was approved that required changes to the presentation of comprehensive net income.
Effective during the quarter ended March 31, 2012, PSB began to present comprehensive income as a separate financial statement
directly after the basic income statement. Adoption of the new presentation standards for comprehensive income did not have any
financial impact to PSB's financial results or operations.
FASB ASC Topic 310,
Receivables
.
New authoritative
accounting guidance issued in July 2010 under ASC Topic 310,
Receivables
, required extensive new disclosures surrounding
the allowance for loan losses, although it did not change any credit loss recognition or measurement rules. The new rules require
disclosures to include a breakdown of allowance for loan loss activity by portfolio segment as well as problem loan disclosures
by detailed class of loan. In addition, disclosures on internal credit grading metrics and information on impaired, nonaccrual,
and restructured loans are also required. The period-end disclosures were effective for financial periods ended December 31,
2010, but deferred presentation of loan loss allowance by loan portfolio segment until the quarter ended March 31, 2011. PSB adopted
the rules for loan loss allowance disclosures by loan segment effective March 31, 2011.
In April 2011, new authoritative accounting guidance concerning
a creditor’s determination of whether a loan restructuring is a troubled debt restructuring was issued under ASC Topic 310,
Receivables
. The amendments clarified existing guidance concerning the creditor’s evaluation of whether it has granted
a concession and whether the concession was to a borrower experiencing financial difficulties. The guidance clarified that a troubled
debt restructuring includes modifications to a borrower experiencing financial difficulties that did not otherwise have access
to funds at a market rate for debt with similar risk characteristics as the restructured debt. In addition, a creditor may conclude
that a debtor is experiencing financial difficulties even though the debtor is not currently in payment default if the debtor would
be in default on any of its debt in the foreseeable future without loan modification. The clarifying guidance is expected to result
in more consistent application of required accounting and disclosure for troubled debt restructurings. These amendments were adopted
by PSB during the quarter ended September 30, 2011, and applied retrospectively to loans restructured since January 1, 2011. PSB
did not incur a change to measurement of impairment from retrospective application of these amendments to loans restructured since
January 1, 2011.
FASB ASC Topic 805,
Business Combinations.
In October
2012, new authoritative accounting guidance was issued that addressed accounting for an indemnification asset acquired as a result
of a government-assisted acquisition of a financial institution when a subsequent change in cash flows expected to be collected
is identified. After identification of the new cash flows, the reporting entity should subsequently account for the change in the
measurement of the indemnification asset on the same basis as accounting for the change in the assets subject to the indemnification.
Amortization of these changes in value is limited to the remaining contractual term of the indemnification agreement. These new
rules became effective for changes in cash flows identified beginning January 1, 2013. Adoption of this new guidance did not
have an impact on PSB's financial statements.
FASB ASC Topic 805,
Business Combinations
.
In December
2010, new authoritative guidance was approved that clarified the disclosure of revenue and earnings of an acquired entity with
the combined entity as if the combination occurred as of the beginning of the year. Specifically, if comparative financial statements
are presented, the combined entity should disclose revenue and earnings of the combined entity as though the business combination
that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The
guidance was effective for combinations occurring after January 1, 2011. Adoption of this standard did not have a significant impact
on PSB’s financial reporting.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
FASB ASC Topic 820,
Fair Value Measurements.
In May
2011, new authoritative accounting guidance concerning fair value measurements was issued. Significant provisions of the new guidance
now require both domestic and international companies to follow existing United States guidance in measuring fair value. In addition,
certain Level 3 unobservable inputs and impacts to fair value from sensitivity of these inputs to changes must be disclosed.
Lastly, the level of fair value hierarchy used to estimate fair value of financial instruments not accounted for at fair value
on the balance sheet (such as loans receivable and deposits) must be disclosed. These new disclosures were adopted during the quarter
ended March 31, 2012, and did not have a significant impact to PSB financial reporting or operations.
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, 2013, but prior to the release of
these financial statements. A description of an agreement to purchase branch net assets made January 22, 2014, is described in
Note 2.
NOTE 2
|
Merger and Acquisition Activity
|
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 and liabilities acquired, 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
|
|
Table of Contents
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
|
|
Agreement to Purchase Rhinelander, Wisconsin, Branch
On January 22, 2014, the Bank entered into a definitive purchase
agreement with The Baraboo National Bank ("Baraboo") to purchase Baraboo's branch location located in Rhinelander, Wisconsin,
along with the related deposits and performing loans. The Bank also agreed to purchase the customer loans held at Baraboo's Elcho,
Wisconsin, branch location. Under the terms of the agreement, the Bank will pay a deposit premium equal to 1.65% of purchased core
deposits as defined in the agreement. At December 31, 2013, the branch to be purchased held approximately $22 million in loans
receivable and $44 million in customer deposits. The transaction is expected to close during the quarter ended June 30, 2014.
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, 2013, PSB had a
required reserve of $905, which was satisfied by cash balances of $1,694.
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 $570 at December 31, 2013, and $1,060 at December 31, 2012.
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 $12,045 and $515 at December 31, 2013 and 2012, respectively. At
December 31, 2012, some of the correspondent banks were participating in the Federal Deposit Insurance Corporation’s
(FDIC) Transaction Account Guarantee (TAG) program. Consequently, the majority of account balances with correspondent banks, except
the FHLB, were guaranteed at December 31, 2012. If the TAG program had not been in effect, uninsured cash and cash equivalent balances
would have been $18,112 at December 31, 2012. The TAG program expired on January 1, 2013.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
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, 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 subdivisions
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government corporations and agencies
|
|
$
|
9,998
|
|
|
$
|
29
|
|
|
$
|
0
|
|
|
$
|
10,027
|
|
U.S. agency issued residential mortgage-backed securities
|
|
|
13,550
|
|
|
|
847
|
|
|
|
0
|
|
|
|
14,397
|
|
U.S. agency issued residential collateralized mortgage obligations
|
|
|
44,544
|
|
|
|
749
|
|
|
|
50
|
|
|
|
45,243
|
|
Privately issued residential collateralized mortgage obligations
|
|
|
168
|
|
|
|
5
|
|
|
|
0
|
|
|
|
173
|
|
Nonrated commercial paper
|
|
|
5,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5,500
|
|
Other equity securities
|
|
|
47
|
|
|
|
0
|
|
|
|
0
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
73,807
|
|
|
$
|
1,630
|
|
|
$
|
50
|
|
|
$
|
75,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
67,915
|
|
|
$
|
2,581
|
|
|
$
|
41
|
|
|
$
|
70,455
|
|
Nonrated trust preferred securities
|
|
|
1,505
|
|
|
|
60
|
|
|
|
66
|
|
|
|
1,499
|
|
Nonrated senior subordinated notes
|
|
|
402
|
|
|
|
8
|
|
|
|
0
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
69,822
|
|
|
$
|
2,649
|
|
|
$
|
107
|
|
|
$
|
72,364
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
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.
Nonrated trust preferred securities at December 31, 2013 and 2012,
consist of separate obligations issued by three holding companies headquartered in Wisconsin. Nonrated senior subordinated notes
at December 31, 2013 and 2012, 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, 2013 and
2012.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency issued residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collateralized mortgage obligations
|
|
$
|
8,130
|
|
|
$
|
50
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
8,130
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
5,639
|
|
|
$
|
41
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,639
|
|
|
$
|
41
|
|
Nonrated trust preferred securities
|
|
|
316
|
|
|
|
66
|
|
|
|
0
|
|
|
|
0
|
|
|
|
316
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,955
|
|
|
$
|
107
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,955
|
|
|
$
|
107
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
At December 31, 2013, 167 debt securities had unrealized losses
with aggregate depreciation of 3.36% from the amortized cost basis, compared to 35 debt securities which had unrealized losses
with aggregate depreciation of 1.10% from the amortized cost basis at December 31, 2012. 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, 2013, 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
|
|
|
$
|
3,312
|
|
|
$
|
3,322
|
|
Due after one year through five years
|
|
|
1,001
|
|
|
|
999
|
|
|
|
22,177
|
|
|
|
22,564
|
|
Due after five years through ten years
|
|
|
0
|
|
|
|
0
|
|
|
|
39,678
|
|
|
|
39,728
|
|
Due after ten years
|
|
|
159
|
|
|
|
159
|
|
|
|
6,462
|
|
|
|
6,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotals
|
|
|
1,160
|
|
|
|
1,158
|
|
|
|
71,629
|
|
|
|
71,672
|
|
Mortgage-backed securities and collateralized mortgage obligations
|
|
|
59,488
|
|
|
|
59,495
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
60,648
|
|
|
$
|
60,653
|
|
|
$
|
71,629
|
|
|
$
|
71,672
|
|
Securities with a fair value of $47,593 and $44,914 at December 31,
2013 and 2012, respectively, were pledged to secure public deposits, other borrowings, and for other purposes required by law.
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 2011,
PSB realized a gain of $32 ($19 after tax expense) from the sale of its remaining investment in FNMA preferred stock generating
proceeds of $37.
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 unrealized gain
will be amortized against the new cost basis (equal to transfer date fair value) over the remaining life of the securities.
Scheduled amortization at December 31, 2013, of the remaining unrealized
gain is as follows:
2014
|
|
$
|
335
|
|
2015
|
|
|
274
|
|
2016
|
|
|
194
|
|
2017
|
|
|
115
|
|
2018
|
|
|
68
|
|
Thereafter
|
|
|
44
|
|
|
|
|
|
|
Total
|
|
$
|
1,030
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
The composition of loans at December 31 categorized by the type
of the loan is as follows:
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Commercial, industrial, and municipal
|
|
$
|
130,220
|
|
|
$
|
132,633
|
|
Commercial real estate mortgage
|
|
|
212,850
|
|
|
|
183,818
|
|
Commercial construction and development
|
|
|
13,672
|
|
|
|
28,482
|
|
Residential real estate mortgage
|
|
|
123,980
|
|
|
|
105,579
|
|
Residential construction and development
|
|
|
18,277
|
|
|
|
15,247
|
|
Residential real estate home equity
|
|
|
20,677
|
|
|
|
21,756
|
|
Consumer and individual
|
|
|
3,567
|
|
|
|
4,715
|
|
|
|
|
|
|
|
|
|
|
Subtotals – Gross loans
|
|
|
523,243
|
|
|
|
492,230
|
|
Loans in process of disbursement
|
|
|
(6,895
|
)
|
|
|
(7,039
|
)
|
|
|
|
|
|
|
|
|
|
Subtotals – Disbursed loans
|
|
|
516,348
|
|
|
|
485,191
|
|
Net deferred loan costs
|
|
|
315
|
|
|
|
231
|
|
Allowance for loan losses
|
|
|
(6,783
|
)
|
|
|
(7,431
|
)
|
|
|
|
|
|
|
|
|
|
Net loans receivable
|
|
$
|
509,880
|
|
|
$
|
477,991
|
|
PSB originates and holds adjustable rate residential mortgage loans
and commercial purpose loans with variable rates of interest. The rate of interest on some of these loans is capped over the life
of the loan. At December 31, 2013 and 2012, PSB held $4,553 and $5,954, respectively, of variable rate loans with interest
rate caps. At December 31, 2013 and 2012, none of the loans had reached the interest rate cap.
PSB, in the ordinary course of business, grants loans to its executive
officers and directors, including their families and firms in which they are principal owners. All loans to executive officers
and directors are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others and, in the opinion of management, did not involve more than the normal risk of collectibility
or present other unfavorable features. Activity in such loans is summarized below:
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Loans outstanding at beginning
|
|
$
|
7,371
|
|
|
$
|
9,958
|
|
New loans
|
|
|
3,519
|
|
|
|
4,485
|
|
Repayments
|
|
|
(4,227
|
)
|
|
|
(7,072
|
)
|
|
|
|
|
|
|
|
|
|
Loans outstanding at end
|
|
$
|
6,663
|
|
|
$
|
7,371
|
|
At December 31, 2013 and 2012, PSB had total loans receivable of
approximately $4,595 and $4,875, respectively, from one related party
Table of Contents
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,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Impaired loans without a valuation allowance
|
|
$
|
9,303
|
|
|
$
|
3,410
|
|
|
$
|
5,474
|
|
Impaired loans with a valuation allowance
|
|
|
6,472
|
|
|
|
9,029
|
|
|
|
11,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans before valuation allowances
|
|
|
15,775
|
|
|
|
12,439
|
|
|
|
17,219
|
|
Valuation allowance related to impaired loans
|
|
|
2,108
|
|
|
|
2,434
|
|
|
|
3,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impaired loans
|
|
$
|
13,667
|
|
|
$
|
10,005
|
|
|
$
|
14,041
|
|
|
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Average recorded investment, net of allowance for loan losses
|
|
$
|
14,109
|
|
|
$
|
12,026
|
|
|
$
|
12,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized
|
|
$
|
534
|
|
|
$
|
569
|
|
|
$
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on a cash basis on impaired loans
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
At December 31, 2013, $201 of funds were committed to be advanced
on remaining available lines of credit in connection with impaired loans, while $214 of funds were committed to be advanced on
remaining available lines of credit in connection with impaired loans at December 31, 2012.
Total loans receivable (including nonaccrual impaired loans) maintained
on nonaccrual status as of December 31, 2013 and 2012 were $7,340 and $7,715, respectively. There were no loans past due 90 days
or more but still accruing income at December 31, 2013 and 2012.
A summary analysis of the allowance for loan losses for the three
years ended December 31 follows:
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Balance, January 1
|
|
$
|
7,431
|
|
|
$
|
7,941
|
|
|
$
|
7,960
|
|
Provision charged to operating expense
|
|
|
4,015
|
|
|
|
785
|
|
|
|
1,390
|
|
Recoveries on loans
|
|
|
80
|
|
|
|
37
|
|
|
|
178
|
|
Loans charged off
|
|
|
(4,743
|
)
|
|
|
(1,332
|
)
|
|
|
(1,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
6,783
|
|
|
$
|
7,431
|
|
|
$
|
7,941
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
Detailed allowance for loan losses activity for the years ended
December 31, 2013, 2012, and 2011, follows:
|
|
2013
|
|
|
|
|
Commercial
|
|
Residential
|
|
|
|
|
|
|
|
|
Commercial
|
|
Real Estate
|
|
Real Estate
|
|
Consumer
|
|
Unallocated
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,014
|
|
|
$
|
2,803
|
|
|
$
|
1,511
|
|
|
$
|
103
|
|
|
$
|
0
|
|
|
$
|
7,431
|
|
Provision
|
|
|
3,435
|
|
|
|
(9
|
)
|
|
|
556
|
|
|
|
33
|
|
|
|
0
|
|
|
|
4,015
|
|
Recoveries
|
|
|
29
|
|
|
|
33
|
|
|
|
6
|
|
|
|
12
|
|
|
|
0
|
|
|
|
80
|
|
Charge-offs
|
|
|
(3,650
|
)
|
|
|
(174
|
)
|
|
|
(850
|
)
|
|
|
(69
|
)
|
|
|
0
|
|
|
|
(4,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,828
|
|
|
$
|
2,653
|
|
|
$
|
1,223
|
|
|
$
|
79
|
|
|
$
|
0
|
|
|
$
|
6,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,167
|
|
|
$
|
695
|
|
|
$
|
228
|
|
|
$
|
18
|
|
|
$
|
0
|
|
|
$
|
2,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
1,661
|
|
|
$
|
1,958
|
|
|
$
|
995
|
|
|
$
|
61
|
|
|
$
|
0
|
|
|
$
|
4,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable (gross):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
8,102
|
|
|
$
|
5,527
|
|
|
$
|
2,129
|
|
|
$
|
17
|
|
|
$
|
0
|
|
|
$
|
15,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
122,118
|
|
|
$
|
220,995
|
|
|
$
|
160,805
|
|
|
$
|
3,550
|
|
|
$
|
0
|
|
|
$
|
507,468
|
|
|
|
2012
|
|
|
|
|
Commercial
|
|
Residential
|
|
|
|
|
|
|
|
|
Commercial
|
|
Real Estate
|
|
Real Estate
|
|
Consumer
|
|
Unallocated
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,406
|
|
|
$
|
3,175
|
|
|
$
|
1,242
|
|
|
$
|
118
|
|
|
$
|
0
|
|
|
$
|
7,941
|
|
Provision
|
|
|
(270
|
)
|
|
|
142
|
|
|
|
877
|
|
|
|
36
|
|
|
|
0
|
|
|
|
785
|
|
Recoveries
|
|
|
6
|
|
|
|
4
|
|
|
|
21
|
|
|
|
6
|
|
|
|
0
|
|
|
|
37
|
|
Charge-offs
|
|
|
(128
|
)
|
|
|
(518
|
)
|
|
|
(629
|
)
|
|
|
(57
|
)
|
|
|
0
|
|
|
|
(1,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,014
|
|
|
$
|
2,803
|
|
|
$
|
1,511
|
|
|
$
|
103
|
|
|
$
|
0
|
|
|
$
|
7,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,327
|
|
|
$
|
674
|
|
|
$
|
407
|
|
|
$
|
26
|
|
|
$
|
0
|
|
|
$
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
1,687
|
|
|
$
|
2,129
|
|
|
$
|
1,104
|
|
|
$
|
77
|
|
|
$
|
0
|
|
|
$
|
4,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable (gross):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
5,263
|
|
|
$
|
4,204
|
|
|
$
|
2,946
|
|
|
$
|
26
|
|
|
$
|
0
|
|
|
$
|
12,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
127,370
|
|
|
$
|
208,096
|
|
|
$
|
139,636
|
|
|
$
|
4,689
|
|
|
$
|
0
|
|
|
$
|
479,791
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
|
|
2011
|
|
|
|
|
Commercial
|
|
Residential
|
|
|
|
|
|
|
|
|
Commercial
|
|
Real Estate
|
|
Real Estate
|
|
Consumer
|
|
Unallocated
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,862
|
|
|
$
|
3,674
|
|
|
$
|
211
|
|
|
$
|
213
|
|
|
$
|
0
|
|
|
$
|
7,960
|
|
Provision
|
|
|
245
|
|
|
|
(269
|
)
|
|
|
1,398
|
|
|
|
16
|
|
|
|
0
|
|
|
|
1,390
|
|
Recoveries
|
|
|
166
|
|
|
|
6
|
|
|
|
0
|
|
|
|
6
|
|
|
|
0
|
|
|
|
178
|
|
Charge-offs
|
|
|
(867
|
)
|
|
|
(236
|
)
|
|
|
(367
|
)
|
|
|
(117
|
)
|
|
|
0
|
|
|
|
(1,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,406
|
|
|
$
|
3,175
|
|
|
$
|
1,242
|
|
|
$
|
118
|
|
|
$
|
0
|
|
|
$
|
7,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,663
|
|
|
$
|
885
|
|
|
$
|
615
|
|
|
$
|
15
|
|
|
$
|
0
|
|
|
$
|
3,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
1,743
|
|
|
$
|
2,290
|
|
|
$
|
627
|
|
|
$
|
103
|
|
|
$
|
0
|
|
|
$
|
4,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable (gross):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
6,484
|
|
|
$
|
8,063
|
|
|
$
|
2,603
|
|
|
$
|
69
|
|
|
$
|
0
|
|
|
$
|
17,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
120,708
|
|
|
$
|
196,375
|
|
|
$
|
112,123
|
|
|
$
|
3,663
|
|
|
$
|
0
|
|
|
$
|
432,869
|
|
PSB maintains an independent credit administration staff that continually
monitors aggregate commercial loan portfolio and individual borrower credit quality trends. All commercial purpose loans are assigned
a credit grade upon origination, and credit grades for nonproblem borrowers with aggregate credit in excess of $500 are reviewed
annually. In addition, all past due, restructured, or identified problem loans, both commercial and consumer purpose, are reviewed
and assigned an up-to-date credit grade quarterly.
PSB uses a seven point grading scale to estimate credit risk with
risk rating 1, representing the high credit quality, and risk rating 7, representing the lowest credit quality. The assigned credit
grade takes into account several credit quality components which are assigned a weight and blended into the composite grade. The
factors considered and their assigned weight for the final composite grade is as follows:
Cash flow
(30% weight) – Considers earnings trends
and debt service coverage levels.
Collateral
(25% weight) – Considers loan-to-value and
other measures of collateral coverage.
Leverage
(15% weight) – Considers balance sheet debt
and capital ratios compared to Robert Morris & Associates (RMA) industry medians.
Liquidity
(10% weight) – Considers balance sheet current,
quick, and other working capital ratios compared to RMA industry medians.
Management
(5% weight) – Considers the past performance,
character, and depth of borrower management.
Guarantor
(5% weight) – Considers the existence of
a guarantor along with a bank’s past experience with the guarantor and his related liquidity and credit score.
Financial reporting
(5% weight) – Considers the relative
level of independent financial review obtained by the borrower on its financial statements, from audited financial statements down
to existence of only tax returns or potentially unreliable financial information.
Industry
(5% weight) – Considers the borrower’s
industry and whether it is stable or subject to cyclical or seasonal factors.
Nonclassified loans are assigned a risk rating of 1 to 4 and have
credit quality that ranges from well above average to some inherent industry weaknesses that may present higher than average risk
due to conditions affecting the borrower, the borrower’s industry, or economic development.
Table of Contents
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, 2013 and 2012, follows:
|
|
2013
|
|
|
|
|
Commercial
|
|
Construction
|
|
|
|
|
|
|
|
|
Commercial
|
|
Real Estate
|
|
& Development
|
|
Agricultural
|
|
Government
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High quality (risk rating 1)
|
|
$
|
44
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
44
|
|
Minimal risk (2)
|
|
|
24,085
|
|
|
|
19,249
|
|
|
|
120
|
|
|
|
1,115
|
|
|
|
78
|
|
|
|
44,647
|
|
Average risk (3)
|
|
|
51,745
|
|
|
|
145,673
|
|
|
|
8,863
|
|
|
|
2,563
|
|
|
|
6,512
|
|
|
|
215,356
|
|
Acceptable risk (4)
|
|
|
26,395
|
|
|
|
34,154
|
|
|
|
2,917
|
|
|
|
424
|
|
|
|
357
|
|
|
|
64,247
|
|
Watch risk (5)
|
|
|
8,146
|
|
|
|
7,572
|
|
|
|
1,632
|
|
|
|
0
|
|
|
|
0
|
|
|
|
17,350
|
|
Substandard risk (6)
|
|
|
654
|
|
|
|
815
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,469
|
|
Impaired loans (7)
|
|
|
4,860
|
|
|
|
5,387
|
|
|
|
140
|
|
|
|
152
|
|
|
|
3,090
|
|
|
|
13,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
115,929
|
|
|
$
|
212,850
|
|
|
$
|
13,672
|
|
|
$
|
4,254
|
|
|
$
|
10,037
|
|
|
$
|
356,742
|
|
|
|
2012
|
|
|
|
|
Commercial
|
|
Construction
|
|
|
|
|
|
|
|
|
Commercial
|
|
Real Estate
|
|
& Development
|
|
Agricultural
|
|
Government
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High quality (risk rating 1)
|
|
$
|
38
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
38
|
|
Minimal risk (2)
|
|
|
16,360
|
|
|
|
20,193
|
|
|
|
305
|
|
|
|
559
|
|
|
|
1,575
|
|
|
|
38,992
|
|
Average risk (3)
|
|
|
51,846
|
|
|
|
103,454
|
|
|
|
22,573
|
|
|
|
3,336
|
|
|
|
12,550
|
|
|
|
193,759
|
|
Acceptable risk (4)
|
|
|
32,002
|
|
|
|
45,699
|
|
|
|
3,318
|
|
|
|
216
|
|
|
|
0
|
|
|
|
81,235
|
|
Watch risk (5)
|
|
|
8,271
|
|
|
|
8,291
|
|
|
|
1,757
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18,319
|
|
Substandard risk (6)
|
|
|
617
|
|
|
|
2,179
|
|
|
|
327
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,123
|
|
Impaired loans (7)
|
|
|
5,109
|
|
|
|
4,002
|
|
|
|
202
|
|
|
|
154
|
|
|
|
0
|
|
|
|
9,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
114,243
|
|
|
$
|
183,818
|
|
|
$
|
28,482
|
|
|
$
|
4,265
|
|
|
$
|
14,125
|
|
|
$
|
344,933
|
|
The consumer credit exposure based on payment activity at December
31, 2013 and 2012, follows:
|
|
2013
|
|
|
Residential-
|
|
Residential-
|
|
Construction and
|
|
|
|
|
|
|
Prime
|
|
HELOC
|
|
Development
|
|
Consumer
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
122,408
|
|
|
$
|
20,167
|
|
|
$
|
18,230
|
|
|
$
|
3,550
|
|
|
$
|
164,355
|
|
Impaired loans
|
|
|
1,572
|
|
|
|
510
|
|
|
|
47
|
|
|
|
17
|
|
|
|
2,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
123,980
|
|
|
$
|
20,677
|
|
|
$
|
18,277
|
|
|
$
|
3,567
|
|
|
$
|
166,501
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
|
|
2012
|
|
|
Residential-
|
|
Residential-
|
|
Construction and
|
|
|
|
|
|
|
Prime
|
|
HELOC
|
|
Development
|
|
Consumer
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
103,292
|
|
|
$
|
21,250
|
|
|
$
|
15,094
|
|
|
$
|
4,689
|
|
|
$
|
144,325
|
|
Impaired loans
|
|
|
2,287
|
|
|
|
506
|
|
|
|
153
|
|
|
|
26
|
|
|
|
2,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
105,579
|
|
|
$
|
21,756
|
|
|
$
|
15,247
|
|
|
$
|
4,715
|
|
|
$
|
147,297
|
|
The payment age analysis of loans receivable disbursed at December
31, 2013 and 2012, follows:
|
|
2013
|
|
|
30-59
|
|
60-89
|
|
90+
|
|
Total
|
|
|
|
Total
|
|
90+ and
|
Loan Class
|
|
Days
|
|
Days
|
|
Days
|
|
Past Due
|
|
Current
|
|
Loans
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
284
|
|
|
$
|
57
|
|
|
$
|
610
|
|
|
$
|
951
|
|
|
$
|
114,978
|
|
|
$
|
115,929
|
|
|
$
|
0
|
|
Agricultural
|
|
|
0
|
|
|
|
0
|
|
|
|
152
|
|
|
|
152
|
|
|
|
4,102
|
|
|
|
4,254
|
|
|
|
0
|
|
Government
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
10,037
|
|
|
|
10,037
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
376
|
|
|
|
547
|
|
|
|
1,276
|
|
|
|
2,199
|
|
|
|
210,651
|
|
|
|
212,850
|
|
|
|
0
|
|
Construction and development
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
11,434
|
|
|
|
11,434
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential – Prime
|
|
|
369
|
|
|
|
87
|
|
|
|
335
|
|
|
|
791
|
|
|
|
123,189
|
|
|
|
123,980
|
|
|
|
0
|
|
Residential – HELOC
|
|
|
45
|
|
|
|
14
|
|
|
|
314
|
|
|
|
373
|
|
|
|
20,304
|
|
|
|
20,677
|
|
|
|
0
|
|
Construction and development
|
|
|
37
|
|
|
|
0
|
|
|
|
0
|
|
|
|
37
|
|
|
|
13,583
|
|
|
|
13,620
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
15
|
|
|
|
10
|
|
|
|
9
|
|
|
|
34
|
|
|
|
3,533
|
|
|
|
3,567
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,126
|
|
|
$
|
715
|
|
|
$
|
2,696
|
|
|
$
|
4,537
|
|
|
$
|
511,811
|
|
|
$
|
516,348
|
|
|
$
|
0
|
|
|
|
2012
|
|
|
30-59
|
|
60-89
|
|
90+
|
|
Total
|
|
|
|
Total
|
|
90+ and
|
Loan Class
|
|
Days
|
|
Days
|
|
Days
|
|
Past Due
|
|
Current
|
|
Loans
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
375
|
|
|
$
|
83
|
|
|
$
|
1,795
|
|
|
$
|
2,253
|
|
|
$
|
111,990
|
|
|
$
|
114,243
|
|
|
$
|
0
|
|
Agricultural
|
|
|
0
|
|
|
|
154
|
|
|
|
0
|
|
|
|
154
|
|
|
|
4,111
|
|
|
|
4,265
|
|
|
|
0
|
|
Government
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14,125
|
|
|
|
14,125
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
936
|
|
|
|
76
|
|
|
|
1,028
|
|
|
|
2,040
|
|
|
|
181,778
|
|
|
|
183,818
|
|
|
|
0
|
|
Construction and development
|
|
|
0
|
|
|
|
20
|
|
|
|
0
|
|
|
|
20
|
|
|
|
25,340
|
|
|
|
25,360
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential – Prime
|
|
|
950
|
|
|
|
274
|
|
|
|
1,344
|
|
|
|
2,568
|
|
|
|
103,011
|
|
|
|
105,579
|
|
|
|
0
|
|
Residential – HELOC
|
|
|
64
|
|
|
|
0
|
|
|
|
335
|
|
|
|
399
|
|
|
|
21,357
|
|
|
|
21,756
|
|
|
|
0
|
|
Construction and development
|
|
|
0
|
|
|
|
0
|
|
|
|
133
|
|
|
|
133
|
|
|
|
11,197
|
|
|
|
11,330
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
21
|
|
|
|
3
|
|
|
|
15
|
|
|
|
39
|
|
|
|
4,676
|
|
|
|
4,715
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,346
|
|
|
$
|
610
|
|
|
$
|
4,650
|
|
|
$
|
7,606
|
|
|
$
|
477,585
|
|
|
$
|
485,191
|
|
|
$
|
0
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
The impaired loans at December 31, 2013 and 2012, and during the
years then ended, by loan class, follows:
|
|
2013
|
|
|
Unpaid
|
|
|
|
|
|
Average
|
|
Interest
|
|
|
Principal
|
|
Related
|
|
Recorded
|
|
Recorded
|
|
Income
|
|
|
Balance
|
|
Allowance
|
|
Investment
|
|
Investment
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,906
|
|
|
$
|
0
|
|
|
$
|
2,861
|
|
|
$
|
2,172
|
|
|
$
|
135
|
|
Commercial real estate
|
|
|
2,555
|
|
|
|
0
|
|
|
|
2,376
|
|
|
|
1,740
|
|
|
|
85
|
|
Commercial construction and development
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Agricultural
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Government
|
|
|
3,090
|
|
|
|
0
|
|
|
|
3,090
|
|
|
|
1,545
|
|
|
|
150
|
|
Residential – Prime
|
|
|
979
|
|
|
|
0
|
|
|
|
866
|
|
|
|
845
|
|
|
|
14
|
|
Residential – HELOC
|
|
|
110
|
|
|
|
0
|
|
|
|
110
|
|
|
|
55
|
|
|
|
3
|
|
Residential construction and development
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,231
|
|
|
$
|
1,112
|
|
|
$
|
1,999
|
|
|
$
|
2,813
|
|
|
$
|
43
|
|
Commercial real estate
|
|
|
3,143
|
|
|
|
621
|
|
|
|
3,011
|
|
|
|
2,955
|
|
|
|
81
|
|
Commercial construction and development
|
|
|
142
|
|
|
|
74
|
|
|
|
140
|
|
|
|
171
|
|
|
|
8
|
|
Agricultural
|
|
|
152
|
|
|
|
55
|
|
|
|
152
|
|
|
|
153
|
|
|
|
0
|
|
Residential – Prime
|
|
|
749
|
|
|
|
101
|
|
|
|
706
|
|
|
|
1,085
|
|
|
|
9
|
|
Residential – HELOC
|
|
|
412
|
|
|
|
119
|
|
|
|
400
|
|
|
|
453
|
|
|
|
5
|
|
Residential construction and development
|
|
|
49
|
|
|
|
8
|
|
|
|
47
|
|
|
|
106
|
|
|
|
1
|
|
Consumer
|
|
|
19
|
|
|
|
18
|
|
|
|
17
|
|
|
|
22
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
5,137
|
|
|
$
|
1,112
|
|
|
$
|
4,860
|
|
|
$
|
4,985
|
|
|
$
|
178
|
|
Commercial real estate
|
|
|
5,698
|
|
|
|
621
|
|
|
|
5,387
|
|
|
|
4,695
|
|
|
|
166
|
|
Commercial construction and development
|
|
|
143
|
|
|
|
74
|
|
|
|
140
|
|
|
|
171
|
|
|
|
8
|
|
Agricultural
|
|
|
152
|
|
|
|
55
|
|
|
|
152
|
|
|
|
153
|
|
|
|
0
|
|
Government
|
|
|
3,090
|
|
|
|
0
|
|
|
|
3,090
|
|
|
|
1,545
|
|
|
|
150
|
|
Residential – Prime
|
|
|
1,728
|
|
|
|
101
|
|
|
|
1,572
|
|
|
|
1,930
|
|
|
|
23
|
|
Residential – HELOC
|
|
|
522
|
|
|
|
119
|
|
|
|
510
|
|
|
|
508
|
|
|
|
8
|
|
Residential construction and development
|
|
|
49
|
|
|
|
8
|
|
|
|
47
|
|
|
|
106
|
|
|
|
1
|
|
Consumer
|
|
|
19
|
|
|
|
18
|
|
|
|
17
|
|
|
|
22
|
|
|
|
0
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
|
|
2012
|
|
|
Unpaid
|
|
|
|
|
|
Average
|
|
Interest
|
|
|
Principal
|
|
Related
|
|
Recorded
|
|
Recorded
|
|
Income
|
|
|
Balance
|
|
Allowance
|
|
Investment
|
|
Investment
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,483
|
|
|
$
|
0
|
|
|
$
|
1,483
|
|
|
$
|
1,545
|
|
|
$
|
88
|
|
Commercial real estate
|
|
|
1,103
|
|
|
|
0
|
|
|
|
1,103
|
|
|
|
2,405
|
|
|
|
194
|
|
Commercial construction and development
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33
|
|
Residential – Prime
|
|
|
824
|
|
|
|
0
|
|
|
|
824
|
|
|
|
493
|
|
|
|
9
|
|
Residential – HELOC
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
3,626
|
|
|
$
|
1,287
|
|
|
$
|
2,339
|
|
|
$
|
2,777
|
|
|
$
|
62
|
|
Commercial real estate
|
|
|
2,899
|
|
|
|
643
|
|
|
|
2,256
|
|
|
|
2,634
|
|
|
|
105
|
|
Commercial construction and development
|
|
|
202
|
|
|
|
31
|
|
|
|
171
|
|
|
|
316
|
|
|
|
21
|
|
Agricultural
|
|
|
154
|
|
|
|
40
|
|
|
|
114
|
|
|
|
57
|
|
|
|
10
|
|
Residential – Prime
|
|
|
1,463
|
|
|
|
277
|
|
|
|
1,186
|
|
|
|
1,384
|
|
|
|
22
|
|
Residential – HELOC
|
|
|
506
|
|
|
|
126
|
|
|
|
380
|
|
|
|
259
|
|
|
|
15
|
|
Residential construction and development
|
|
|
153
|
|
|
|
4
|
|
|
|
149
|
|
|
|
129
|
|
|
|
5
|
|
Consumer
|
|
|
26
|
|
|
|
26
|
|
|
|
0
|
|
|
|
27
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
5,109
|
|
|
$
|
1,287
|
|
|
$
|
3,822
|
|
|
$
|
4,322
|
|
|
$
|
150
|
|
Commercial real estate
|
|
|
4,002
|
|
|
|
643
|
|
|
|
3,359
|
|
|
|
5,039
|
|
|
|
299
|
|
Commercial construction and development
|
|
|
202
|
|
|
|
31
|
|
|
|
171
|
|
|
|
316
|
|
|
|
54
|
|
Agricultural
|
|
|
154
|
|
|
|
40
|
|
|
|
114
|
|
|
|
57
|
|
|
|
10
|
|
Residential – Prime
|
|
|
2,287
|
|
|
|
277
|
|
|
|
2,010
|
|
|
|
1,877
|
|
|
|
31
|
|
Residential – HELOC
|
|
|
506
|
|
|
|
126
|
|
|
|
380
|
|
|
|
259
|
|
|
|
18
|
|
Residential construction and development
|
|
|
153
|
|
|
|
4
|
|
|
|
149
|
|
|
|
129
|
|
|
|
5
|
|
Consumer
|
|
|
26
|
|
|
|
26
|
|
|
|
0
|
|
|
|
27
|
|
|
|
2
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
The loans on nonaccrual status at December 31, follows:
|
|
2013
|
|
2012
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,575
|
|
|
$
|
3,023
|
|
Agricultural
|
|
|
152
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
4,103
|
|
|
|
2,001
|
|
Construction and development
|
|
|
17
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Residential – Prime
|
|
|
1,059
|
|
|
|
2,021
|
|
Residential – HELOC
|
|
|
387
|
|
|
|
365
|
|
Construction and development
|
|
|
30
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
17
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
7,340
|
|
|
$
|
7,715
|
|
The following table presents information concerning modifications
of troubled debt made during 2013 and 20112:
|
|
|
|
|
|
Postmodification
|
|
|
|
|
Premodification
|
|
Outstanding
|
|
|
|
|
Outstanding
|
|
Recorded
|
|
|
Number of
|
|
Recorded
|
|
Investment
|
As of December 31, 2013
|
|
contracts
|
|
Investment
|
|
at Period-End
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
7
|
|
|
|
$1,012
|
|
|
|
$642
|
|
Commercial and real estate
|
|
|
5
|
|
|
|
587
|
|
|
|
564
|
|
Residential real estate - Prime
|
|
|
5
|
|
|
|
867
|
|
|
|
852
|
|
During the year ended December 31, 2013, approximately $1,272, or
52%, of the modified loan principal was restructured to capitalize unpaid property taxes, and $1,194, or 48%, was modified to extend
amortization periods or to lower the existing interest rate. No loan principal was charged off or forgiven in connection with the
modifications. At December 31, 2013, specific loan loss reserves maintained on loans modified or restructured during 2013 totaled
$258.
The following table outlines past troubled debt restructurings that
subsequently defaulted during 2013 when the default occurred within 12 months of the last restructuring date. For purposes of this
table, default is defined as 90 days or more past due on restructured payments.
|
|
Number of
|
|
Recorded
|
|
|
Contracts
|
|
Investment
|
Commercial and industrial
|
|
|
1
|
|
|
|
$ 0
|
|
Commercial real estate
|
|
|
1
|
|
|
|
80
|
|
Residential real estate - Prime
|
|
|
1
|
|
|
|
87
|
|
The contracts noted above were originally restructured primarily
to lower the interest rate and convert payments to interest only. Collateral supporting the modified loans was in the process of
foreclosure at period-end. No specific loan loss reserves were maintained on these impaired loans at December 31, 2013.
Table of Contents
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, 2012
|
|
Contracts
|
|
Investment
|
|
at Period-End
|
Commercial and industrial
|
|
|
6
|
|
|
|
$661
|
|
|
|
$614
|
|
Commercial and real estate
|
|
|
3
|
|
|
|
603
|
|
|
|
570
|
|
Residential real estate - Prime
|
|
|
1
|
|
|
|
121
|
|
|
|
89
|
|
During the year ended December 31, 2012, approximately $328, or
24%, of the modified loan principal was restructured to convert the payments from amortizing principal payments to interest only
payments, $379, or 27%, was restructured to capitalize unpaid property taxes, and $678, or 49%, was modified to extend amortization
periods or to lower the existing interest rate. No loan principal was charged off or forgiven in connection with the modifications.
At December 31, 2012, specific loan loss reserves maintained on loans modified or restructured during 2012 totaled $254.
The following table outlines past troubled debt restructurings that
subsequently defaulted during 2012 when the default occurred within 12 months of the last restructuring date. For purposes of this
table, default is defined as 90 days or more past due on restructured payments.
|
|
Number of
|
|
Recorded
|
|
|
Contracts
|
|
Investment
|
Commercial and industrial
|
|
|
2
|
|
|
|
$ 0
|
|
Commercial real estate
|
|
|
1
|
|
|
|
45
|
|
The contracts noted above were originally restructured primarily
to lower the interest rate and convert payments to interest only. Collateral supporting the modified loans was in the process of
foreclosure at period-end. No specific loan loss reserves were maintained on these impaired loans at December 31, 2012.
Under a secondary market loan servicing program with the FHLB, in
exchange for a monthly fee, PSB provides a credit enhancement guarantee to reimburse the FHLB for foreclosure losses in excess
of 1% of original loan principal sold to the FHLB. At December 31, 2013, PSB serviced payments on $23,709 of first lien residential
loan principal under these terms for the FHLB. At December 31, 2013, the maximum PSB obligation for such guarantees would be approximately
$949 if total foreclosure losses on the entire pool of loans exceed approximately $1,593. Management believes the likelihood of
reimbursement for credit loss payable to the FHLB on loans underwritten according to program requirements beyond the monthly credit
enhancement fee is remote. PSB recognizes the credit enhancement fee as mortgage banking income when received in cash and does
not maintain any recourse liability for possible credit enhancement losses.
PSB had originated and sold $5,202 and $5,438 of commercial and
commercial real estate loans to other participating financial institutions at December 31, 2013 and 2012, respectively, to accommodate
customer credit needs and maintain compliance with internal and external large borrower limits. Likewise, PSB had purchased $27,404
and $20,601 of commercial and commercial real estate loans originated by other Wisconsin-based financial institutions at December
31, 2013 and 2012, respectively, as part of informal reciprocal relationships that allow the originating bank to meet the needs
of their large credit customers. PSB does not charge servicing fees to the participating institutions on these traditional loan
participations sold by PSB, and no servicing right asset or liability has been recognized on these relationships. Any credit losses
incurred on purchased or sold participation loans upon liquidation are shared pro-rata among the participants based on principal
owned.
A summary of activity in foreclosed assets for the period ended
December 31 is as follows:
|
|
2013
|
|
2012
|
|
2011
|
Balance at beginning of year
|
|
$
|
1,774
|
|
|
$
|
2,939
|
|
|
$
|
4,967
|
|
Transfer of loans at net realizable value to foreclosed assets
|
|
|
1,342
|
|
|
|
1,295
|
|
|
|
1,006
|
|
Sale proceeds
|
|
|
(831
|
)
|
|
|
(1,527
|
)
|
|
|
(987
|
)
|
Loans made on sale of foreclosed assets
|
|
|
(234
|
)
|
|
|
(490
|
)
|
|
|
(1,075
|
)
|
Net gain from sale of foreclosed assets
|
|
|
105
|
|
|
|
42
|
|
|
|
20
|
|
Provision for write-down charged to operations
|
|
|
(406
|
)
|
|
|
(485
|
)
|
|
|
(992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,750
|
|
|
$
|
1,774
|
|
|
$
|
2,939
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
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 $428, $573, and $1,197 during the years ended 2013, 2012, and 2011, 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 $272,280
and $269,554 at December 31, 2013 and 2012, respectively. The following is a summary of changes in the balance of MSRs:
|
|
Originated
|
|
Valuation
|
|
|
|
|
MSR
|
|
Allowance
|
|
Total
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
$
|
1,303
|
|
|
($
|
203
|
)
|
|
$
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions from originated servicing
|
|
|
419
|
|
|
|
0
|
|
|
|
419
|
|
Amortization charged to earnings
|
|
|
(436
|
)
|
|
|
0
|
|
|
|
(436
|
)
|
Change in valuation allowance credited to earnings
|
|
|
0
|
|
|
|
122
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
1,286
|
|
|
|
(81
|
)
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions from originated servicing
|
|
|
774
|
|
|
|
0
|
|
|
|
774
|
|
Amortization charged to earnings
|
|
|
(547
|
)
|
|
|
0
|
|
|
|
(547
|
)
|
Change in valuation allowance charged 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 credited to earnings
|
|
|
0
|
|
|
|
259
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
1,717
|
|
|
($
|
21
|
)
|
|
$
|
1,696
|
|
The table below summarizes the components of PSB’s mortgage
banking income for the three years ended December 31.
|
|
Years Ending December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Cash gain on sale of mortgage loans
|
|
$
|
826
|
|
|
$
|
1,113
|
|
|
$
|
642
|
|
Originated mortgage servicing rights
|
|
|
625
|
|
|
|
774
|
|
|
|
419
|
|
Increase (decrease) in accrued mortgage rate lock commitments
|
|
|
(78
|
)
|
|
|
31
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
1,373
|
|
|
|
1,918
|
|
|
|
1,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing fee income
|
|
|
674
|
|
|
|
649
|
|
|
|
645
|
|
Provision for representation and warranty losses on serviced loans
|
|
|
(294
|
)
|
|
|
(28
|
)
|
|
|
(38
|
)
|
FHLB credit enhancement fee income
|
|
|
0
|
|
|
|
2
|
|
|
|
16
|
|
Amortization of mortgage servicing rights
|
|
|
(421
|
)
|
|
|
(547
|
)
|
|
|
(436
|
)
|
Decrease (increase) in servicing right valuation allowance
|
|
|
259
|
|
|
|
(199
|
)
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fee income, net
|
|
|
218
|
|
|
|
(123
|
)
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income, net
|
|
$
|
1,591
|
|
|
$
|
1,795
|
|
|
$
|
1,373
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
NOTE 8
|
Premises and Equipment
|
The composition of premises and equipment at December 31 follows:
|
|
2013
|
|
2012
|
|
|
|
|
|
Land
|
|
$
|
2,261
|
|
|
$
|
2,306
|
|
Buildings and improvements
|
|
|
9,379
|
|
|
|
9,596
|
|
Furniture and equipment
|
|
|
3,084
|
|
|
|
3,099
|
|
Computer hardware and software
|
|
|
1,690
|
|
|
|
1,591
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
16,414
|
|
|
|
16,592
|
|
Less – Accumulated depreciation and amortization
|
|
|
6,745
|
|
|
|
6,352
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
9,669
|
|
|
$
|
10,240
|
|
Depreciation and amortization charged to operating expenses amounted
to $723 in 2013, $659 in 2012, and $673 in 2011.
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 2014.
The lease is classified as operating. Future minimum payments under the noncancelable lease total $24 during 2014.
Rental expense for all operating leases was $76, $72, and $69, for
the years ended December 31, 2013, 2012, and 2011, respectively.
The distribution of deposits at December 31 is as follows:
|
|
2013
|
|
2012
|
|
|
|
|
|
Non-interest-bearing demand
|
|
$
|
102,644
|
|
|
$
|
89,819
|
|
Interest-bearing demand (NOWs)
|
|
|
118,769
|
|
|
|
131,404
|
|
Savings
|
|
|
57,658
|
|
|
|
53,799
|
|
Money market
|
|
|
136,797
|
|
|
|
124,501
|
|
Retail and local time
|
|
|
104,287
|
|
|
|
111,462
|
|
Wholesale market and national time
|
|
|
57,359
|
|
|
|
54,457
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
577,514
|
|
|
$
|
565,442
|
|
The scheduled maturities of time deposits at December 31, 2013,
are summarized as follows:
2014
|
|
$
|
82,077
|
|
2015
|
|
|
26,952
|
|
2016
|
|
|
14,809
|
|
2017
|
|
|
18,165
|
|
2018
|
|
|
16,737
|
|
Thereafter
|
|
|
2,906
|
|
|
|
|
|
|
Total
|
|
$
|
161,646
|
|
Time deposits with individual balances of $100 and over totaled
$103,207 and $102,424 at December 31, 2013 and 2012, respectively.
Deposits from PSB directors, executive officers, and related parties
at December 31, 2013 and 2012 totaled $9,304 and $9,311, respectively.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
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
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate, interest only
|
|
2013
|
|
2.58%-3.75%
|
|
3.09%
|
|
$
|
8,075
|
|
Variable rate, interest only
|
|
2013
|
|
1.13%
|
|
1.13%
|
|
|
6,000
|
|
Fixed rate, interest only
|
|
2014
|
|
2.69%-3.45%
|
|
3.18%
|
|
|
31,049
|
|
Variable rate, interest only
|
|
2014
|
|
1.40%
|
|
1.40%
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
2.74%
|
|
$
|
50,124
|
|
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 $6,920 of FHLB public unit
deposit letters of credit outstanding at December 31, 2013, which mature during 2014. No FHLB letters of credit were outstanding
at December 31, 2012.
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, 2013.
PSB may draw both short-term and long-term advances on a maximum line of credit totaling approximately $100,862 based on pledged
performing residential real estate mortgage collateral totaling $167,882 as of December 31, 2013. At December 31, 2013,
PSB’s available and unused portion of this line of credit totaled approximately $54,944. PSB also has, under a current agreement
with the FHLB, an ability to borrow up to $35,822 by pledging securities.
At December 31, 2013, FHLB advances drawn by PSB totaling greater
than $51,124 would require PSB to purchase additional shares of FHLB capital stock. Transfer of FHLB stock is substantially restricted.
Other borrowings consist of the following obligations at December
31 as follows:
|
|
2013
|
|
2012
|
|
|
|
|
|
Short-term repurchase agreements
|
|
$
|
5,441
|
|
|
$
|
7,228
|
|
Bank stock term loan
|
|
|
1,500
|
|
|
|
0
|
|
Wholesale structured repurchase agreements
|
|
|
13,500
|
|
|
|
13,500
|
|
|
|
|
|
|
|
|
|
|
Total other borrowings
|
|
$
|
20,441
|
|
|
$
|
20,728
|
|
PSB pledges various securities available for sale as collateral
for repurchase agreements. The fair value of securities pledged for repurchase agreements totaled $22,699 and $21,931 at December 31,
2013 and 2012, respectively.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
The following information relates to securities sold under repurchase
agreements for the years ended December 31:
|
|
2013
|
|
2012
|
|
|
|
|
|
As of end of year:
|
|
|
|
|
|
|
|
|
Weighted average rate
|
|
|
3.08%
|
|
|
|
2.81%
|
|
For the year:
|
|
|
|
|
|
|
|
|
Highest month-end balance
|
|
$
|
24,100
|
|
|
$
|
20,728
|
|
Daily average balance
|
|
$
|
21,862
|
|
|
$
|
19,190
|
|
Weighted average rate
|
|
|
2.97%
|
|
|
|
3.11%
|
|
The wholesale structured repurchase agreements are with JP Morgan
Chase Bank N.A. and carry fixed rates. The repurchase agreements may be put back by the issuer to PSB for repayment on a quarterly
basis. The following information relates to the terms of wholesale structured repurchase agreements issued at December 31, 2013:
Maturity Date
|
|
Current Rate
|
|
Amount
|
|
|
|
|
|
November 1, 2014
|
|
4.335%
|
|
$
|
8,000
|
|
November 1, 2017
|
|
4.090%
|
|
|
5,500
|
|
|
|
|
|
|
|
|
Totals
|
|
4.235%
|
|
$
|
13,500
|
|
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, 2013, 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, 2013, PSB had pledged $120,269 of commercial purpose loans in the program, which permitted Discount
Window advances up to $89,875 against this collateral. No investment securities were pledged against the line at December 31, 2013
or 2012. There were no Discount Window advances outstanding at December 31, 2013 or 2012.
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, 2014, 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, 2013 and 2012, 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, 2013 or 2012.
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
are $1,000 in 2014 and $500 in 2015. Total interest expense on the term note totaled $54 during 2013.
NOTE 12
|
Senior Subordinated Notes
|
During 2009, PSB issued $7,000 of Senior Subordinated Notes (the
“Notes”) on a private placement basis. The Notes carried a fixed interest rate of 8.00% paid quarterly and scheduled
to mature on July 1, 2019. Under current banking regulatory capital rules, the Notes qualified as Tier 2 regulatory equity
capital at December 31, 2012.
During 2013, PSB elected to prepay the Notes in full with $1,000
of cash and $6,000 in proceeds from an issue of new subordinated debt. The new debt includes $4,000 of privately placed notes carrying
a 3.75% fixed interest rate with interest only payments, due in 2018, and $2,000 in a fully amortizing term note with Bankers’
Bank, Madison, Wisconsin, carrying a floating rate of interest and maturing in 2015. The $4,000 of new debt is held by related
parties, including directors and a significant shareholder. The $6,000 in new subordinated debt did not qualify as Tier 2
regulatory capital at December 31, 2013. Total interest expense on senior subordinated notes was $184 during 2013, $578 during
2012, and $567 during 2011. Notes held by related parties including directors, their families, or significant shareholders totaled
$4,000 at December 31, 2013 and $3,250 at December 31, 2012.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
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. The subordinated
debentures mature in 2035 and carried a fixed rate of interest of 5.82% during the five-year period ended September 2010. 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 $341 in 2013, $342
in 2012, and $341 in 2011. 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.
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:
|
|
2013
|
|
2012
|
|
|
|
|
|
Notional amount
|
|
$7,500
|
|
$7,500
|
Pay fixed rate
|
|
2.72%
|
|
2.72%
|
Receive variable rate
|
|
0.24%
|
|
0.31%
|
Maturity
|
|
9/15/2017
|
|
9/15/2017
|
Unrealized loss (fair value)
|
|
$438
|
|
$699
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
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 2013 or 2012. Risk management results for the year ended December 31, 2013, 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, 2013, the fair value of the interest rate swap of $438 was recorded
in other liabilities. Net unrealized gain on the derivative instrument recognized in other comprehensive income during the year
ended December 31, 2013, totaled $46, net of tax. The net amount of other comprehensive loss reclassified into interest expense
during the year ended December 31, 2013 was $113, net of tax. As of December 31, 2013, approximately $184 of losses reported in
other comprehensive income related to the interest rate swap ($111 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, 2014. The interest rate swap
agreement was secured by cash and cash equivalents of $570 and $850 at December 31, 2013 and 2012, respectively.
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, 2013 and 2012, 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.
At December 31, the following floating interest rate swaps were
outstanding with customers:
|
|
2013
|
|
2012
|
|
|
|
|
|
Notional amount
|
|
$14,323
|
|
$
|
14,979
|
|
Receive fixed rate (average)
|
|
2.00%
|
|
|
1.99%
|
|
Pay variable rate (average)
|
|
0.17%
|
|
|
0.21%
|
|
Maturity
|
|
3/2015-10/2021
|
|
|
3/2015-10/2021
|
|
Weighted average remaining term
|
|
2.9 years
|
|
|
3.9 years
|
|
Unrealized gain fair value
|
|
$276
|
|
$
|
673
|
|
At December 31, the following offsetting fixed interest rate swaps
were outstanding with correspondent banks:
|
|
2013
|
|
2012
|
|
|
|
|
|
Notional amount
|
|
$14,323
|
|
$14,979
|
Pay fixed rate (average)
|
|
2.00%
|
|
1.99%
|
Receive variable rate (average)
|
|
0.17%
|
|
0.21%
|
Maturity
|
|
3/2015-10/2021
|
|
3/2015-10/2021
|
Weighted average remaining term
|
|
2.9 years
|
|
3.9 years
|
Unrealized loss fair value
|
|
($276)
|
|
($673)
|
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, 2013, 2012, and 2011 was $446, $509, and
$470, 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 the participant’s remaining periods
of service. The liability outstanding under the agreements was $3,155 and $2,855 at December 31, 2013 and 2012, respectively. The
amount charged to operations was $270, $301, and $232 for 2013, 2012, and 2011, respectively.
Table of Contents
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 $65 per year 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 and $84 as of December 31, 2013 and 2012, respectively.
Health and dental insurance expense recorded in 2013, 2012, and 2011, was $1,130, $1,078, and $852, respectively.
The components of the provision for income taxes are as follows:
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Current income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,246
|
|
|
$
|
1,600
|
|
|
$
|
1,915
|
|
State
|
|
|
450
|
|
|
|
535
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
1,696
|
|
|
|
2,135
|
|
|
|
2,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(132
|
)
|
|
|
330
|
|
|
|
(60
|
)
|
State
|
|
|
99
|
|
|
|
70
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(33
|
)
|
|
|
400
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
1,663
|
|
|
$
|
2,535
|
|
|
$
|
2,421
|
|
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:
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
|
of
|
|
|
|
of
|
|
|
|
of
|
|
|
|
|
Pretax
|
|
|
|
Pretax
|
|
|
|
Pretax
|
|
|
Amount
|
|
Income
|
|
Amount
|
|
Income
|
|
Amount
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense at statutory rate
|
|
$
|
2,178
|
|
|
|
34.0
|
|
|
$
|
2,905
|
|
|
|
34.0
|
|
|
$
|
2,627
|
|
|
|
34.0
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest
|
|
|
(703
|
)
|
|
|
(11.0
|
)
|
|
|
(778
|
)
|
|
|
(9.1
|
)
|
|
|
(480
|
)
|
|
|
(6.2
|
)
|
Bank-owned life insurance
|
|
|
(137
|
)
|
|
|
(2.1
|
)
|
|
|
(138
|
)
|
|
|
(1.6
|
)
|
|
|
(141
|
)
|
|
|
(1.8
|
)
|
State income tax
|
|
|
362
|
|
|
|
5.7
|
|
|
|
399
|
|
|
|
4.7
|
|
|
|
374
|
|
|
|
4.8
|
|
Merger-related expenses
|
|
|
0
|
|
|
|
0.0
|
|
|
|
73
|
|
|
|
1.0
|
|
|
|
0
|
|
|
|
0.0
|
|
Other
|
|
|
(37
|
)
|
|
|
(0.6
|
)
|
|
|
74
|
|
|
|
1.0
|
|
|
|
41
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
1,663
|
|
|
|
26.0
|
|
|
$
|
2,535
|
|
|
|
30.0
|
|
|
$
|
2,421
|
|
|
|
31.3
|
|
Table of Contents
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:
|
|
2013
|
|
2012
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
2,579
|
|
|
$
|
2,821
|
|
Deferred compensation and directors’ fees
|
|
|
1,308
|
|
|
|
1,189
|
|
Accrued interest receivable
|
|
|
0
|
|
|
|
125
|
|
Foreclosed assets
|
|
|
352
|
|
|
|
228
|
|
Interest rate swaps
|
|
|
171
|
|
|
|
273
|
|
Other
|
|
|
223
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
4,633
|
|
|
|
4,777
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
769
|
|
|
|
864
|
|
Mortgage servicing rights
|
|
|
673
|
|
|
|
521
|
|
FHLB stock
|
|
|
120
|
|
|
|
240
|
|
Unrealized gain on securities available for sale
|
|
|
400
|
|
|
|
1,190
|
|
Deferred net loan origination costs
|
|
|
128
|
|
|
|
98
|
|
Prepaid expenses
|
|
|
139
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
2,229
|
|
|
|
3,094
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
2,404
|
|
|
$
|
1,683
|
|
At December 31, 2013, federal tax returns remained open for Internal
Revenue Service (IRS) review for tax years after 2009, while state tax returns remain open for review by state taxing authorities
for tax years after 2008. There were no federal or state income tax audits being conducted at December 31, 2013.
The following table presents income tax effects on items of comprehensive
income (loss) for the years ended December 31:
|
|
2013
|
|
2012
|
|
2011
|
|
|
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
|
|
($
|
1,574
|
)
|
|
($
|
613
|
)
|
|
($
|
310
|
)
|
|
($
|
119
|
)
|
|
$
|
180
|
|
|
$
|
71
|
|
Reclassification adjustment for net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
security gain included in net income
|
|
|
(12
|
)
|
|
|
(5
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(32
|
)
|
|
|
(13
|
)
|
Amortization of unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale transferred to securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held to maturity included in net income
|
|
|
(420
|
)
|
|
|
(184
|
)
|
|
|
(452
|
)
|
|
|
(178
|
)
|
|
|
(516
|
)
|
|
|
(168
|
)
|
Unrealized gain (loss) on interest rate swap
|
|
|
75
|
|
|
|
29
|
|
|
|
(295
|
)
|
|
|
(116
|
)
|
|
|
(734
|
)
|
|
|
(287
|
)
|
Reclassification adjustment of interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swap settlements included in earnings
|
|
|
186
|
|
|
|
73
|
|
|
|
172
|
|
|
|
68
|
|
|
|
183
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
($
|
1,745
|
)
|
|
($
|
700
|
)
|
|
($
|
885
|
)
|
|
($
|
345
|
)
|
|
($
|
919
|
)
|
|
($
|
325
|
)
|
Table of Contents
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:
|
|
2013
|
|
2012
|
|
|
|
|
|
Commitments to extend credit – Fixed and variable rates
|
|
$
|
89,645
|
|
|
$
|
74,121
|
|
Commercial standby letters of credit – Variable rate
|
|
|
4,533
|
|
|
|
4,951
|
|
Unused home equity lines of credit – Variable rate
|
|
|
24,082
|
|
|
|
22,999
|
|
Unused credit card commitments – Variable rate
|
|
|
234
|
|
|
|
3,217
|
|
Credit enhancement under the FHLB of Chicago
|
|
|
|
|
|
|
|
|
Mortgage Partnership Finance program
|
|
|
949
|
|
|
|
1,945
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
119,443
|
|
|
$
|
107,233
|
|
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. At
December 31, 2013, certain card balances for which PSB provides full recourse against losses were still retained. Aggregate exposure
on the full recourse balances was $328 at December 31, 2013, including $234 of unused commitments.
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 $1,507 and $10,123 in firm commitments outstanding
to deliver loans to these providers at December 31, 2013 and 2012, respectively, from rate lock commitments made with customers.
Until November 2008, loans delivered by PSB to the Program carried a contractually agreed-upon credit enhancement from PSB with
the commitment to perform servicing of the loan.
Table of Contents
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 $210, $200, and $200, during 2013, 2012, and 2011, 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, 2013, 32,602 shares of restricted stock 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, 2013, 2012, and 2011.
|
|
Unvested
|
|
Weighted Average
|
|
|
Shares
|
|
Grant Value
|
|
|
|
|
|
January 1, 2011
|
|
|
19,452
|
|
|
$
|
15.68
|
|
Restricted shares granted
|
|
|
9,130
|
|
|
|
21.90
|
|
Restricted shares vested
|
|
|
(3,010
|
)
|
|
|
(16.62
|
)
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
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
|
|
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. During 2011, total compensation expense
of $78 (before tax benefits of $31) 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:
2014
|
|
$
|
146
|
|
2015
|
|
|
137
|
|
2016
|
|
|
122
|
|
2017
|
|
|
82
|
|
2018
|
|
|
42
|
|
|
|
|
|
|
Total
|
|
$
|
529
|
|
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. No additional shares of common stock remain reserved for future grants under
the option plan approved by the shareholders, and the last outstanding option shares were exercised during 2012. No stock option
plan expense was recorded in 2012 or 2011. The following table summarizes information regarding stock option activity during the
two years ended December 31, 2012.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Shares
|
|
Price
|
|
|
|
|
|
January 1, 2011
|
|
|
3,827
|
|
|
$
|
15.23
|
|
Options granted
|
|
|
0
|
|
|
|
0.00
|
|
Options exercised
|
|
|
(2,952
|
)
|
|
|
15.09
|
|
Option forfeited
|
|
|
(287
|
)
|
|
|
15.08
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
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, 2013, PSB and the Bank meet all capital adequacy requirements.
As of December 31, 2013, 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.
Table of Contents
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, 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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
73,636
|
|
|
|
14.87%
|
|
|
$
|
39,615
|
|
|
|
8.00%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Peoples State Bank
|
|
$
|
71,032
|
|
|
|
14.36%
|
|
|
$
|
39,572
|
|
|
|
8.00%
|
|
|
$
|
49,465
|
|
|
|
10.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
60,430
|
|
|
|
12.20%
|
|
|
$
|
19,813
|
|
|
|
4.00%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Peoples State Bank
|
|
$
|
64,834
|
|
|
|
13.11%
|
|
|
$
|
19,782
|
|
|
|
4.00%
|
|
|
$
|
29,672
|
|
|
|
6.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
60,430
|
|
|
|
8.76%
|
|
|
$
|
27,594
|
|
|
|
4.00%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Peoples State Bank
|
|
$
|
64,834
|
|
|
|
9.35%
|
|
|
$
|
27,736
|
|
|
|
4.00%
|
|
|
$
|
34,671
|
|
|
|
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:
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
1,652,700
|
|
|
|
1,663,147
|
|
|
|
1,652,861
|
|
Effect of dilutive stock options outstanding
|
|
|
0
|
|
|
|
58
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
1,652,700
|
|
|
|
1,663,205
|
|
|
|
1,653,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.87
|
|
|
$
|
3.61
|
|
|
$
|
3.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
2.87
|
|
|
$
|
3.61
|
|
|
$
|
3.21
|
|
Table of Contents
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, 2013, 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 $21,931. 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. Because 2012 Bank dividends paid to PSB exceeded 2012 Bank net income, the Bank may not pay
dividends to PSB in excess of net income during 2013 or 2014, without prior approval.
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, 2013 and 2012, 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.
Table of Contents
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, 2013, used to measure fair value included:
Direct annual servicing cost per loan
|
$57
|
Direct annual servicing cost per loan in process of foreclosure
|
$500
|
Weighted average prepayment speed: CPR
|
26.17%
|
Weighted average prepayment speed: PSA
|
476.53%
|
Weighted average cash flow discount rate
|
7.92%
|
Asset reinvestment rate
|
4.00%
|
Short-term cost of funds
|
0.25%
|
Escrow inflation adjustment
|
1.00%
|
Servicing cost inflation adjustment
|
1.00%
|
Mortgage rate lock commitments
– The fair value of
mortgage rate lock commitments is measured on a recurring basis. Fair value is based on current secondary market pricing for delivery
of similar loans and the value of OMSR on loans expected to be delivered, which is considered a Level 2 fair value measurement.
Interest rate swap agreements
– Fair values for interest
rate swap agreements are based on the amounts required to settle the contracts based on valuations provided by third-party dealers
in the contracts, which is considered a Level 2 fair value measurement, and are measured on a recurring basis.
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
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)
|
|
|
|
|
|
|
|
|
|
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 commitment
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency debentures
|
|
$
|
10,027
|
|
|
$
|
0
|
|
|
$
|
10,027
|
|
|
$
|
0
|
|
U.S. agency issued residential MBS and CMO
|
|
|
59,640
|
|
|
|
0
|
|
|
|
59,640
|
|
|
|
0
|
|
Privately issued residential MBS and CMO
|
|
|
173
|
|
|
|
0
|
|
|
|
173
|
|
|
|
0
|
|
Nonrated commercial paper
|
|
|
5,500
|
|
|
|
0
|
|
|
|
5,500
|
|
|
|
0
|
|
Other equity securities
|
|
|
47
|
|
|
|
0
|
|
|
|
0
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
75,387
|
|
|
|
0
|
|
|
|
75,340
|
|
|
|
47
|
|
Loans held for sale
|
|
|
884
|
|
|
|
0
|
|
|
|
884
|
|
|
|
0
|
|
Mortgage rate lock commitments
|
|
|
91
|
|
|
|
0
|
|
|
|
91
|
|
|
|
0
|
|
Interest rate swap agreements
|
|
|
673
|
|
|
|
0
|
|
|
|
673
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
77,035
|
|
|
$
|
0
|
|
|
$
|
76,988
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities – Interest rate swap agreements
|
|
$
|
1,372
|
|
|
$
|
0
|
|
|
$
|
1,372
|
|
|
$
|
0
|
|
Table of Contents
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, 2012:
|
|
$
|
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, 2012
|
|
$
|
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, 2012
|
|
$
|
0
|
|
|
|
|
|
|
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
|
|
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)
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
2,973
|
|
|
$
|
0
|
|
|
$
|
328
|
|
|
$
|
2,645
|
|
Foreclosed assets
|
|
|
1,774
|
|
|
|
0
|
|
|
|
752
|
|
|
|
1,022
|
|
Mortgage servicing rights
|
|
|
1,233
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,980
|
|
|
$
|
0
|
|
|
$
|
1,080
|
|
|
$
|
4,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
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. At December
31, 2012, loans with a carrying amount of $3,955 were considered impaired and were written down to their estimated fair value of
$2,973 net of a valuation allowance of $982. 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 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. In 2012, foreclosed assets with a fair value of $1,295 were
acquired through or in lieu of foreclosure, which is the fair value net of estimated costs to sell. During 2012, foreclosed assets
with a carrying amount of $2,259 were written down to a fair value of $1,774, less costs to sell. As a result, an impairment charge
of $485 was included in earnings for the year ended December 31, 2012.
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. At December 31, 2012, mortgage servicing rights with a carrying amount of $1,513 were considered impaired
and were written down to their estimated fair value of $1,233, resulting in an impairment allowance of $280. 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.
Table of Contents
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, 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
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
|
|
December 31, 2012
|
|
|
Carrying
|
|
Estimated
|
|
Fair Value Hierarchy Level
|
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
48,847
|
|
|
$
|
48,847
|
|
|
$
|
48,847
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Securities
|
|
|
145,209
|
|
|
|
147,751
|
|
|
|
0
|
|
|
|
145,795
|
|
|
|
1,956
|
|
Bank certificates of deposit
|
|
|
4,465
|
|
|
|
4,538
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4,538
|
|
Net loans receivable and loans held for sale
|
|
|
478,875
|
|
|
|
484,925
|
|
|
|
0
|
|
|
|
1,212
|
|
|
|
483,713
|
|
Accrued interest receivable
|
|
|
2,157
|
|
|
|
2,157
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,157
|
|
Mortgage servicing rights
|
|
|
1,233
|
|
|
|
1,233
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,233
|
|
Mortgage rate lock commitments
|
|
|
91
|
|
|
|
91
|
|
|
|
0
|
|
|
|
91
|
|
|
|
0
|
|
FHLB stock
|
|
|
2,506
|
|
|
|
2,506
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,506
|
|
Cash surrender value of life insurance
|
|
|
11,813
|
|
|
|
11,813
|
|
|
|
0
|
|
|
|
11,813
|
|
|
|
0
|
|
Interest rate swap agreements
|
|
|
673
|
|
|
|
673
|
|
|
|
0
|
|
|
|
673
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
565,442
|
|
|
$
|
568,014
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
568,014
|
|
FHLB advances
|
|
|
50,124
|
|
|
|
51,590
|
|
|
|
0
|
|
|
|
51,590
|
|
|
|
0
|
|
Other borrowings
|
|
|
20,728
|
|
|
|
22,118
|
|
|
|
0
|
|
|
|
14,890
|
|
|
|
7,228
|
|
Senior subordinated notes
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
7,000
|
|
Junior subordinated debentures
|
|
|
7,732
|
|
|
|
4,911
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4,911
|
|
Interest rate swap agreements
|
|
|
1,372
|
|
|
|
1,372
|
|
|
|
0
|
|
|
|
1,372
|
|
|
|
0
|
|
Accrued interest payable
|
|
|
697
|
|
|
|
697
|
|
|
|
0
|
|
|
|
0
|
|
|
|
697
|
|
NOTE 24
|
Condensed Parent Company Only Financial Statements
|
The following are condensed balance sheets as of December 31, 2013
and 2012, and condensed statements of income and cash flows for the years ended December 31, 2013, 2012, and 2011, for PSB Holdings,
Inc.
Balance Sheets
December 31, 2013 and 2012
Assets
|
|
2013
|
|
2012
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
3,502
|
|
|
$
|
2,325
|
|
Investment in Peoples State Bank
|
|
|
66,801
|
|
|
|
66,777
|
|
Other assets
|
|
|
840
|
|
|
|
952
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
71,143
|
|
|
$
|
70,054
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends payable
|
|
$
|
644
|
|
|
$
|
0
|
|
Other borrowings
|
|
|
1,500
|
|
|
|
0
|
|
Senior subordinated notes
|
|
|
4,000
|
|
|
|
7,000
|
|
Junior subordinated debentures
|
|
|
7,732
|
|
|
|
7,732
|
|
Other liabilities
|
|
|
514
|
|
|
|
875
|
|
Total stockholders’ equity
|
|
|
56,753
|
|
|
|
54,447
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
71,143
|
|
|
$
|
70,054
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
Statements of Income
Years Ended December 31, 2013, 2012, and 2011
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from Peoples State Bank
|
|
$
|
4,000
|
|
|
$
|
7,700
|
|
|
$
|
2,875
|
|
Dividends from other investments
|
|
|
6
|
|
|
|
5
|
|
|
|
6
|
|
Interest
|
|
|
5
|
|
|
|
10
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
4,011
|
|
|
|
7,715
|
|
|
|
2,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on other borrowings
|
|
|
54
|
|
|
|
0
|
|
|
|
0
|
|
Interest expense on senior subordinated notes
|
|
|
184
|
|
|
|
578
|
|
|
|
567
|
|
Interest expense on junior subordinated debentures
|
|
|
341
|
|
|
|
342
|
|
|
|
341
|
|
Transfer agent and shareholder communication
|
|
|
47
|
|
|
|
68
|
|
|
|
38
|
|
Other
|
|
|
136
|
|
|
|
348
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
762
|
|
|
|
1,336
|
|
|
|
1,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in undistributed net income of Peoples State Bank
|
|
|
3,249
|
|
|
|
6,379
|
|
|
|
1,846
|
|
Recognition of income tax benefit
|
|
|
293
|
|
|
|
431
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before equity in undistributed net income of Peoples State Bank
|
|
|
3,542
|
|
|
|
6,810
|
|
|
|
2,248
|
|
Equity in undistributed net income of Peoples State Bank
|
|
|
1,202
|
|
|
|
(801
|
)
|
|
|
3,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,744
|
|
|
$
|
6,009
|
|
|
$
|
5,305
|
|
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands except per share data)
|
Statements of Cash Flows
Years Ended December 31, 2013, 2012, and 2011
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Increase (decrease) in cash and due from banks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,744
|
|
|
$
|
6,009
|
|
|
$
|
5,305
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of Peoples State Bank
|
|
|
(1,202
|
)
|
|
|
801
|
|
|
|
(3,057
|
)
|
(Increase) decrease in other assets
|
|
|
147
|
|
|
|
(21
|
)
|
|
|
5
|
|
Increase (decrease) in other liabilities
|
|
|
(79
|
)
|
|
|
(2
|
)
|
|
|
28
|
|
Increase (decrease) in dividends payable
|
|
|
644
|
|
|
|
(583
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
4,254
|
|
|
|
6,204
|
|
|
|
2,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Marathon State Bank common stock
|
|
|
(19
|
)
|
|
|
(5,482
|
)
|
|
|
0
|
|
Investment in Peoples State Bank
|
|
|
0
|
|
|
|
(5
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19
|
)
|
|
|
(5,487
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of senior subordinated notes
|
|
|
(3,000
|
)
|
|
|
0
|
|
|
|
0
|
|
Proceeds from other borrowings
|
|
|
2,000
|
|
|
|
0
|
|
|
|
0
|
|
Repayment of other borrowings
|
|
|
(500
|
)
|
|
|
0
|
|
|
|
0
|
|
Proceeds from exercise of stock options
|
|
|
0
|
|
|
|
9
|
|
|
|
45
|
|
Dividends declared
|
|
|
(1,289
|
)
|
|
|
(1,247
|
)
|
|
|
(1,168
|
)
|
Purchase of treasury stock
|
|
|
(269
|
)
|
|
|
(262
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,058
|
)
|
|
|
(1,500
|
)
|
|
|
(1,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and due from banks
|
|
|
1,177
|
|
|
|
(783
|
)
|
|
|
1,178
|
|
Cash and due from banks at beginning
|
|
|
2,325
|
|
|
|
3,108
|
|
|
|
1,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end
|
|
$
|
3,502
|
|
|
$
|
2,325
|
|
|
$
|
3,108
|
|
Table of Contents
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
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
7,043
|
|
|
$
|
7,113
|
|
|
$
|
7,095
|
|
|
$
|
7,063
|
|
Interest expense
|
|
|
2,279
|
|
|
|
2,247
|
|
|
|
2,228
|
|
|
|
2,003
|
|
Net interest income
|
|
|
4,764
|
|
|
|
4,866
|
|
|
|
4,867
|
|
|
|
5,060
|
|
Provision for loan losses
|
|
|
360
|
|
|
|
430
|
|
|
|
360
|
|
|
|
240
|
|
Noninterest income
|
|
|
1,397
|
|
|
|
1,197
|
|
|
|
1,367
|
|
|
|
1,376
|
|
Net income
|
|
|
1,285
|
|
|
|
1,226
|
|
|
|
1,394
|
|
|
|
1,400
|
|
Basic earnings per share*
|
|
|
0.78
|
|
|
|
0.74
|
|
|
|
0.85
|
|
|
|
0.85
|
|
Diluted earnings per share*
|
|
|
0.78
|
|
|
|
0.74
|
|
|
|
0.84
|
|
|
|
0.85
|
|
* Basic and diluted earnings per share
may not foot to the total for the year ended December 31 due to rounding.