FORM 10-Q



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2010



OR



£TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the transition period from __________ to __________





Commission file number:  0-26480



PSB Holdings, Inc.

(Exact name of registrant as specified in charter)



Wisconsin 39-1804877

(State of incorporation) (I.R.S. Employer Identification Number)



1905 West Stewart Avenue

Wausau, Wisconsin 54401

(Address of principal executive office)



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



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.  Yes  T  No  £



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  £  No  £



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

Large accelerated filer

£

Accelerated filer

£

Non-accelerated filer

£

Smaller reporting company

T

(Do not check if a smaller reporting company)



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  £  No  T



The number of common shares outstanding at May 13, 2010 was 1,564,297.







---











PSB HOLDINGS, INC.



FORM 10-Q



Quarter Ended March 31, 2010



|         |                       |                                                             |   
|-------- | --------------------- | ----------------------------------------------------------- | --
|         |                       | Page No.                                                   
|PART I.  | FINANCIAL INFORMATION |                                                            
|         |                       |                                                             |   
|         | Item 1.               | Financial Statements                                        |   
|         |                       |                                                             |   
|         |                       | Consolidated Balance Sheets                                 |   
|         |                       | March 31, 2010 (unaudited) and December 31, 2009            |   
|         |                       | (derived from audited financial statements)                 | 1 
|         |                       |                                                             |   
|         |                       | Consolidated Statements of Income                           |   
|         |                       | Three Months Ended March 31, 2010 and 2009 (unaudited)      | 2 
|         |                       |                                                             |   
|         |                       | Consolidated Statement of Changes in Stockholders Equity   |   
|         |                       | Three Months Ended March 31, 2010 (unaudited)               | 3 
|         |                       |                                                             |   
|         |                       | Consolidated Statements of Cash Flows                       |   
|         |                       | Three Months Ended March 31, 2010 and 2009 (unaudited)      | 4 
|         |                       |                                                             |   
|         |                       | Notes to Consolidated Financial Statements                  | 6 
|         |                       |                                                             |   
|         | Item 2.               | Managements Discussion and Analysis of Financial Condition |   
|         |                       | and Results of Operations                                   | 17
|         |                       |                                                             |   
|         | Item 3.               | Quantitative and Qualitative Disclosures About Market Risk  | 36
|         |                       |                                                             |   
|         | Item 4.               | Controls and Procedures                                     | 36
|         |                       |                                                             |   
|         |                       |                                                             |   
|PART II. | OTHER INFORMATION     |                                                            
|         |                       |                                                             |   
|         | Item 1A.              | Risk Factors                                                | 37
|         |                       |                                                             |   
|         | Item 6.               | Exhibits                                                    | 37



i



---





PART I.  FINANCIAL INFORMATION



Item 1.  Financial Statements



PSB Holdings, Inc.

Consolidated Balance Sheets

March 31, 2010 unaudited, December 31, 2009 derived from audited financial statements



|                                                                   |             |              |            | 
|------------------------------------------------------------------ | ----------- | ------------ | ---------- | 
|                                                                   | March 31,   | December 31,
|(dollars in thousands, except per share data)                      | 2010        | 2009        
|                                                                   |             |             
|Assets                                                             |             |             
|Cash and due from banks                                            | $     6,768 |              | $   15,010 | 
|Interest-bearing deposits and money market funds                   | 1,241       |              | 731        | 
|Federal funds sold                                                 | 12,552      |              | 10,596     | 
|                                                                   |             |              |            | 
|Cash and cash equivalents                                          | 20,561      |              | 26,337     | 
|                                                                   |             |              |            | 
|Securities available for sale (at fair value)                      | 108,288     |              | 106,185    | 
|Loans receivable, net                                              | 434,332     |              | 437,633    | 
|Accrued interest receivable                                        | 2,428       |              | 2,142      | 
|Foreclosed assets                                                  | 4,986       |              | 3,776      | 
|Premises and equipment, net                                        | 10,418      |              | 10,283     | 
|Mortgage servicing rights, net                                     | 1,143       |              | 1,147      | 
|Federal Home Loan Bank stock (at cost)                             | 3,250       |              | 3,250      | 
|Cash surrender value of bank-owned life insurance                  | 10,590      |              | 10,489     | 
|Other assets                                                       | 5,069       |              | 5,612      | 
|                                                                   |             |              |            | 
|TOTAL ASSETS                                                       | $ 601,065   |              | $ 606,854  | 
|                                                                   |             |              |            | 
|Liabilities                                                        |             |              |            | 
|Non-interest-bearing deposits                                      | $   52,850  |              | $   60,003 | 
|Interest-bearing deposits                                          | 406,233     |              | 398,728    | 
|                                                                   |             |              |            | 
|Total deposits                                                     | 459,083     |              | 458,731    | 
|                                                                   |             |              |            | 
|Federal Home Loan Bank advances                                    | 57,434      |              | 58,159     | 
|Other borrowings                                                   | 23,126      |              | 28,410     | 
|Senior subordinated notes                                          | 7,000       |              | 7,000      | 
|Junior subordinated debentures                                     | 7,732       |              | 7,732      | 
|Accrued expenses and other liabilities                             | 3,408       |              | 4,552      | 
|                                                                   |             |              |            | 
|Total liabilities                                                  | 557,783     |              | 564,584    | 
|                                                                   |             |              |            | 
|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  3,000,000 shares; Issued  1,751,431 shares           |             |              |            | 
|Outstanding  1,564,297 and 1,559,314 shares, respectively         | 1,751       |              | 1,751      | 
|Additional paid-in capital                                         | 5,474       |              | 5,599      | 
|Retained earnings                                                  | 39,228      |              | 38,348     | 
|Accumulated other comprehensive income                             | 1,898       |              | 1,776      | 
|Treasury stock, at cost  187,134 and 192,117 shares, respectively | (5,069)     |              | (5,204)    | 
|                                                                   |             |              |            | 
|Total stockholders equity                                         | 43,282      |              | 42,270     | 
|                                                                   |             |              |            | 
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                         | $ 601,065   |              | $ 606,854  | 



1



---





PSB Holdings, Inc.

Consolidated Statements of Income



|                                                    |                    |      |          | 
|--------------------------------------------------- | ------------------ | ---- | -------- | 
|                                                    | Three Months Ended
|(dollars in thousands,                              | March 31,         
|except per share data  unaudited)                  | 2010               | 2009
|                                                    |                    |     
|Interest and dividend income:                       |                    |     
|Loans, including fees                               | $ 6,129            |      | $ 6,163  | 
|Securities:                                         |                    |      |          | 
|Taxable                                             | 755                |      | 811      | 
|Tax-exempt                                          | 328                |      | 355      | 
|Other interest and dividends                        | 2                  |      | 2        | 
|                                                    |                    |      |          | 
|Total interest and dividend income                  | 7,214              |      | 7,331    | 
|                                                    |                    |      |          | 
|Interest expense:                                   |                    |      |          | 
|Deposits                                            | 1,883              |      | 2,344    | 
|FHLB advances                                       | 460                |      | 589      | 
|Other borrowings                                    | 231                |      | 185      | 
|Senior subordinated notes                           | 142                |      |         | 
|Junior subordinated debentures                      | 113                |      | 113      | 
|                                                    |                    |      |          | 
|Total interest expense                              | 2,829              |      | 3,231    | 
|                                                    |                    |      |          | 
|Net interest income                                 | 4,385              |      | 4,100    | 
|Provision for loan losses                           | 460                |      | 700      | 
|                                                    |                    |      |          | 
|Net interest income after provision for loan losses | 3,925              |      | 3,400    | 
|                                                    |                    |      |          | 
|Noninterest income:                                 |                    |      |          | 
|Service fees                                        | 348                |      | 336      | 
|Mortgage banking                                    | 263                |      | 757      | 
|Investment and insurance sales commissions          | 139                |      | 93       | 
|Loss on disposal of premises and equipment          |                   |      | (98)     | 
|Increase in cash surrender value of life insurance  | 101                |      | 101      | 
|Other noninterest income                            | 240                |      | 179      | 
|                                                    |                    |      |          | 
|Total noninterest income                            | 1,091              |      | 1,368    | 
|                                                    |                    |      |          | 
|Noninterest expense:                                |                    |      |          | 
|Salaries and employee benefits                      | 2,052              |      | 1,763    | 
|Occupancy and facilities                            | 534                |      | 542      | 
|Loss on foreclosed assets                           | 111                |      | 14       | 
|Data processing and other office operations         | 234                |      | 255      | 
|Advertising and promotion                           | 74                 |      | 73       | 
|FDIC insurance premiums                             | 232                |      | 166      | 
|Other noninterest expenses                          | 603                |      | 576      | 
|                                                    |                    |      |          | 
|Total noninterest expense                           | 3,840              |      | 3,389    | 
|                                                    |                    |      |          | 
|Income before provision for income taxes            | 1,176              |      | 1,379    | 
|Provision for income taxes                          | 295                |      | 373      | 
|                                                    |                    |      |          | 
|Net income                                          | $    881           |      | $ 1,006  | 
|Basic earnings per share                            | $   0.56           |      | $   0.65 | 
|Diluted earnings per share                          | $   0.56           |      | $   0.65 | 



2



---





PSB Holdings, Inc.

Consolidated Statement of Changes in Stockholders Equity

Three months ended March 31, 2010  unaudited



|                                            |         |            |          |               |          |        |          |        
|------------------------------------------- | ------- | ---------- | -------- | ------------- | -------- | ------ | -------- | -------
|                                            |         |            |          | Accumulated   |          |       
|                                            |         |            |          | Other         |          |       
|                                            |         | Additional |          | Comprehensive |          |       
|                                            | Common  | Paid-in    | Retained | Income        | Treasury |       
|(dollars in thousands)                      | Stock   | Capital    | Earnings | (Loss)        | Stock    | Totals
|                                            |         |            |          |               |          |       
|Balance January 1, 2010                     | $ 1,751 | $ 5,599    |          | $ 38,348      | $ 1,776  |        | $(5,204) | $42,270
|                                            |         |            |          |               |          |        |          |        
|Comprehensive income:                       |         |            |          |               |          |        |          |        
|Net income                                  |         |            |          | 881           |          |        |          | 881    
|Unrealized gain on securities               |         |            |          |               |          |        |          |        
|available for sale, net of tax              |         |            |          |               | 122      |        |          | 122    
|                                            |         |            |          |               |          |        |          |        
|Total comprehensive income                  |         |            |          |               |          |        |          | 1,003  
|                                            |         |            |          |               |          |        |          |        
|Issuance of new restricted stock grants     |         | (135)      |          |               |          |        | 135      |       
|Vesting of existing restricted stock grants |         | 10         |          |               |          |        |          | 10     
|Cash dividends declared on unvested         |         |            |          |               |          |        |          |        
|restricted stock grants                     |         |            |          | (1)           |          |        |          | (1)    
|                                            |         |            |          |               |          |        |          |        
|Balance March 31, 2010                      | $ 1,751 | $ 5,474    |          | $ 39,228      | $ 1,898  |        | $(5,069) | $43,282



3



---





PSB Holdings, Inc.

Consolidated Statements of Cash Flows

Three months ended March 31, 2010 and 2009  unaudited



|                                                                                  |           |      |          | 
|--------------------------------------------------------------------------------- | --------- | ---- | -------- | 
|(dollars in thousands)                                                            | 2010      | 2009
|                                                                                  |           |     
|Cash flows from operating activities:                                             |           |     
|                                                                                  |           |     
|Net income                                                                        | $     881 |      | $  1,006 | 
|Adjustments to reconcile net income to net cash provided by operating activities: |           |      |          | 
|Provision for depreciation and net amortization                                   | 491       |      | 498      | 
|Provision for loan losses                                                         | 460       |      | 700      | 
|Deferred net loan origination costs                                               | (76)      |      | (117)    | 
|Gain on sale of loans                                                             | (188)     |      | (747)    | 
|Provision for servicing right valuation allowance                                 | 9         |      | 6        | 
|Loss on sale of premises and equipment                                            |          |      | 98       | 
|(Gain) loss on sale of foreclosed assets                                          | 5         |      | (8)      | 
|Increase in cash surrender value of life insurance                                | (101)     |      | (101)    | 
|Changes in operating assets and liabilities:                                      |           |      |          | 
|Accrued interest receivable                                                       | (286)     |      | (183)    | 
|Other assets                                                                      | 482       |      | (310)    | 
|Other liabilities                                                                 | (1,144)   |      | (24)     | 
|                                                                                  |           |      |          | 
|Net cash provided by operating activities                                         | 533       |      | 818      | 
|                                                                                  |           |      |          | 
|Cash flows from investing activities:                                             |           |      |          | 
|                                                                                  |           |      |          | 
|Proceeds from sale and maturities of securities available for sale                | 5,905     |      | 5,109    | 
|Payment for purchase of securities available for sale                             | (7,862)   |      | (3,883)  | 
|Net decrease in loans                                                             | 1,667     |      | 1,418    | 
|Capital expenditures                                                              | (371)     |      | (10)     | 
|Proceeds from sale of foreclosed assets                                           | 10        |      | 40       | 
|                                                                                  |           |      |          | 
|Net cash provided by (used in) investing activities                               | (651)     |      | 2,674    | 



4



---





Consolidated Statements of Cash Flows, continued



|                       |                                                            |           |  |           | 
|---------------------- | ---------------------------------------------------------- | --------- |  | --------- | 
|(dollars in thousands) | 2010                                                       | 2009     
|                       |                                                            |           | 
|                       | Cash flows from financing activities:                      |           | 
|                       |                                                            |           | 
|                       | Net increase (decrease) in non-interest-bearing deposits   | (7,153)   |  | 1,281     | 
|                       | Net increase in interest-bearing deposits                  | 7,505     |  | 2,089     | 
|                       | Net decrease in FHLB advances                              | (725)     |  | (2,500)   | 
|                       | Net decrease in other borrowings                           | (5,284)   |  | (2,149)   | 
|                       | Dividends declared                                         | (1)       |  | (4)       | 
|                       |                                                            |           |  |           | 
|                       | Net cash used in financing activities                      | (5,658)   |  | (1,283)   | 
|                       |                                                            |           |  |           | 
|                       | Net increase (decrease) in cash and cash equivalents       | (5,776)   |  | 2,209     | 
|                       | Cash and cash equivalents at beginning                     | 26,337    |  | 13,172    | 
|                       |                                                            |           |  |           | 
|                       | Cash and cash equivalents at end                           | $20,561   |  | $15,381   | 
|                       |                                                            |           |  |           | 
|                       | Supplemental cash flow information:                        |           |  |           | 
|                       |                                                            |           |  |           | 
|                       | Cash paid (refunded) during the period for:                |           |  |           | 
|                       | Interest                                                   | $  2,899  |  | $  3,260  | 
|                       | Income taxes                                               | (6)       |  | 50        | 
|                       |                                                            |           |  |           | 
|                       | Noncash investing and financing activities:                |           |  |           | 
|                       |                                                            |           |  |           | 
|                       | Loans charged off                                          | $     424 |  | $     157 | 
|                       | Loans transferred to foreclosed assets                     | 1,225     |  | 105       | 
|                       | Vesting of restricted stock grants                         | 10        |  | 6         | 
|                       | Issuance of unvested restricted stock grants at fair value | 75        |  | 150       | 





5



---





PSB Holdings, Inc.

Notes to Consolidated Financial Statements





NOTE 1  GENERAL



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



These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles have been omitted or abbreviated.  The information contained in the consolidated financial statements and footnotes in PSBs Annual Report on Form 10-K for the year ended December 31, 2009 should be referred to in connection with the reading of these unaudited interim financial statements.



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



NOTE 2  STOCK-BASED COMPENSATION



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.  These options expire 10 years after the grant date with the options scheduled to expire during 2011 and 2012.   No additional shares of common stock remain reserved for future grants under the option plan approved by the shareholders.  As of March 31, 2010 and December 31, 2009, 4,281 options were outstanding and eligible to be exercised at a weighted average exercise price of $15.96 per share.  As of March 31, 2009, 4,476 options were outstanding and eligible to be exercised at a weighted average exercise price of $15.96 per share.  During the three months ended March 31, 2010 and 2009, respectively, no options were exercised or lapsed.



PSB granted restricted stock to certain employees having an initial market value of $75 and $150 during the three months ended March 31, 2010, and 2009, respectively.  Restricted shares vest to employees based on continued PSB service over a six-year period and are recognized as compensation expense over the vesting period.  Cash dividends are paid on unvested shares at the same time and amount as paid to PSB common shareholders.  Cash dividends paid on unvested restricted stock shares are charged to retained earnings as significantly all restricted shares are expected to vest to employees.  Unvested shares are subject to forfeiture upon employee termination.  During the three months ended March 31, compensation expense recorded from amortization of restricted shares expected to vest to employees was $10 and $6 during 2010 and 2009, respectively.





6



---





The following table summarizes information regarding restricted stock outstanding at March 31, 2010 and 2009 including activity during the three months then ended.



|                                |        |             |          | 
|------------------------------- | ------ | ----------- | -------- | 
|                                |        | Weighted   
|                                |        | Average    
|                                | Shares | Grant Price
|                                |        |            
|January 1, 2009                 | 3,916  |             | $  25.53 | 
|Restricted stock granted        | 10,416 |             | 14.40    | 
|                                |        |             |          | 
|March 31, 2009                  | 14,332 |             | $  17.44 | 
|                                |        |             |          | 
|January 1, 2010                 | 14,332 |             | $  17.44 | 
|Restricted stock granted        | 4,983  |             | 15.05    | 
|Restricted stock legally vested | (785)  |             | (25.53)  | 
|                                |        |             |          | 
|March 31, 2010                  | 18,530 |             | $  16.45 | 





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



|           |     
|---------- | ----
|2010       | $ 42
|2011       | 58  
|2012       | 65  
|2013       | 65  
|2014       | 45  
|Thereafter | 15  
|           |     
|Totals     | $290





NOTE 3  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.



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



|                                                          |                    |      |               | 
|--------------------------------------------------------- | ------------------ | ---- | ------------- | 
|                                                          | Three months ended
|                                                          | March 31,         
|(dollars in thousands, except per share data  unaudited) | 2010               | 2009
|                                                          |                    |     
|Net income                                                | $         881      |      | $      1,006  | 
|                                                          |                    |      |               | 
|Weighted average shares outstanding                       | 1,564,131          |      | 1,559,198     | 
|Effect of dilutive stock options outstanding              | 627                |      | 259           | 
|                                                          |                    |      |               | 
|Diluted weighted average shares outstanding               | 1,564,758          |      | 1,559,457     | 
|                                                          |                    |      |               | 
|Basic earnings per share                                  | $        0.56      |      | $        0.65 | 
|Diluted earnings per share                                | $        0.56      |      | $        0.65 | 



7



---







| |  |  |  | 
| |  |  |  | 



NOTE 4  COMPREHENSIVE INCOME



Comprehensive income as defined by current accounting standards for the three months ended March 31, 2010 and 2009 is as follows:



|                                                             |                    |      |        | 
|------------------------------------------------------------ | ------------------ | ---- | ------ | 
|                                                             | Three months ended
|                                                             | March 31,         
|(dollars in thousands  unaudited)                           | 2010               | 2009
|                                                             |                    |     
|Net income                                                   | $   881            |      | $1,006 | 
|Unrealized gain on securities available for sale, net of tax | 122                |      | 468    | 
|                                                             |                    |      |        | 
|Comprehensive income                                         | $1,003             |      | $1,474 | 



NOTE 5  LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES



Loans receivable are stated at unpaid principal balances plus net deferred loan origination costs less loans in process and the allowance for loan losses.



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 or the collection of principal becomes reasonably assured.  Interest income recognition on loans considered to be impaired under current accounting standards is consistent with the recognition on all other loans.



Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual life of the underlying loan.



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 that the collectibility of the principal is unlikely.  Management believes the allowance for loan losses is adequate 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 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 as defined by current accounting standards.  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 commercial, financial, agricultural, and commercial real estate loans that have a nonaccrual status or have had their terms restructured meet this definition.  Large groups of homogenous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment.  Specific allowances are based on discounted cash flows of expected future payments using the loans initial effective interest rate or the fair value of 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 based on information available to them at the time of their examination.





8



---





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 and are carried as Loans held for sale on the balance sheet.  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.



NOTE 6  FORECLOSED ASSETS



Real estate and other property acquired through, or in lieu of, loan foreclosure are to be sold and 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.



NOTE 7  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.



NOTE 8  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 9  HOLDING COMPANY LINE OF CREDIT



PSB maintains an unsecured line of credit at the parent holding company level with U.S. Bank for advances up to $1 million, which expires February 28, 2011.  The line carries a variable rate of interest based on changes in the 30-day London Interbank Offered Rate (LIBOR) plus 2.50%.  PSB was in compliance with all financial covenants associated with the line as of March 31, 2010.  As of March 31, 2010 and December 31, 2009, no advances were outstanding on the line.



NOTE 10  FAIR VALUE MEASUREMENTS



Certain assets and liabilities are recorded and 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.





9



---





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 and loans held for sale, are measured at fair value on a recurring basis under accounting principles generally accepted in the United States.  Other assets and liabilities, such as impaired loans, foreclosed assets, mortgage servicing rights, mortgage rate lock commitments, and guarantee liabilities 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.  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.



Level 3 securities include trust preferred securities and senior subordinated notes issued by Wisconsin headquartered banks that are not traded in an active market.  The fair value measurement of a Level 3 security is based on a discounted cash flow model that incorporates assumptions market participants would use to measure the fair value of the security and based on discounted cash flows represents an income approach to fair value.  At March 31, 2010, approximately 80% of Level 3 securities were trust preferred capital issues with current coupons ranging from 6.50% to 7.00% and 20% of Level 3 securities were senior subordinated notes with a current coupon of 8.00%.  At March 31, 2010, these securities assumed a discount rate for estimated future cash flows based on credit spreads ranging from 5% to 8% for discount periods ranging from approximately three to eight years.



Loans held for sale  Loans held for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value.  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.



Loans  Loans are not measured at fair value on a recurring basis.  However, loans considered to be impaired (see Note 5) 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.  All other impaired loan fair value measurements are based on the present value of expected future cash flows discounted at the applicable effective interest rate.  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 estimated assumptions market participants would use to measure fair value, such as discounted cash flow measurements, are considered Level 3 measurements and represent an income approach to fair value.





10



---





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.  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 are considered Level 3 measurements and represent an income approach to fair value.



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.  Significant unobservable inputs at March 31, 2010 used to measure fair value included:



·

Servicing cost of $100 per loan annually

·

Cash flow discount rate ranging from 10% to 12%, depending on year of origination

·

Short-term reinvestment rate on the float of payments to investors equal to .50%

·

Estimated future delinquent loans as a percentage of the serviced loan pool equal to 0.5%



Mortgage rate lock commitments  The fair value of mortgage rate lock commitments is not measured on a recurring basis.  Fair value is based on current secondary market pricing for delivery of similar loans and the value of originated mortgage servicing rights on loans expected to be delivered.  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 rate lock commitments is considered a Level 3 measurement and represent an income approach to fair value.  Significant unobservable inputs at March 31, 2010 used to measure fair value included:



·

Estimated failure to close on 10% of period-end rate lock commitments

·

Estimated combined cash gain on sale of principal and originated mortgage servicing rate equal to 1% of mortgage rate lock loan principal



Guarantee liability  Guarantees by PSB of customer payment obligations to a third party are measured at fair value using Level 3 inputs on a nonrecurring basis.  Fair value measurements include fair value of interest rate swaps covered by the guarantee, transaction fees received for offering the guarantee, and the credit risk and performance of the customer for which the guarantee is given.  Because recognition of initial transaction fees adjusted by amortization of such fees over the period of the guarantee is used to estimate fair value, these measurements represent a cost approach to fair value.





11



---





Assets measured at fair value on a recurring basis at period-end:



|                                                 |                |                                         |                   |              |  |       
|------------------------------------------------ | -------------- | --------------------------------------- | ----------------- | ------------ |  | ------
|                                                 |                | Recurring Fair Value Measurements Using
|                                                 |                | Quoted Prices in                        |                   |             
|                                                 |                | Active Markets                          | Significant Other | Significant 
|                                                 |                | for Identical                           | Observable        | Unobservable
|                                                 |                | Assets                                  | Inputs            | Inputs      
|                                                 | ($000s)        | (Level 1)                               | (Level 2)         | (Level 3)   
|                                                 |                |                                         |                   |             
|Assets:                                          | March 31, 2010 |                                         |                   |             
|                                                 |                |                                         |                   |             
|Securities available for sale:                   |                |                                         |                   |             
|                                                 |                |                                         |                   |             
|U.S. Treasury and agency debentures              | $   7,905      |                                         | $                | $   7,905    |  | $    
|Obligations of states and political subdivisions | 51,166         |                                         |                  | 51,166       |  |      
|U.S. agency issued residential MBS and CMO       | 46,454         |                                         | ­                 | 46,454       |  |      
|Privately issued residential MBS and CMO         | 855            |                                         |                  | 855          |  |      
|Nonrated trust preferred and subordinated debt   | 1,836          |                                         |                  |             |  | 1,836 
|Other equity securities                          | 72             |                                         |                  | 25           |  | 47    
|                                                 |                |                                         |                   |              |  |       
|Total securities available for sale              | $108,288       |                                         | $                | $106,405     |  | $1,883



|                                                 |                   |  |      |          |  |       
|------------------------------------------------ | ----------------- |  | ---- | -------- |  | ------
|Assets:                                          | December 31, 2009 |  |      |         
|                                                 |                   |  |      |         
|Securities available for sale:                   |                   |  |      |         
|                                                 |                   |  |      |         
|U.S. Treasury and agency debentures              | $ 10,227          |  | $   | $ 10,227 |  | $    
|Obligations of states and political subdivisions | 47,178            |  |     | 47,178   |  |      
|U.S. agency issued residential MBS and CMO       | 46,214            |  | ­    | 46,214   |  |      
|Privately issued residential MBS and CMO         | 936               |  |     | 936      |  |      
|Nonrated trust preferred and subordinated debt   | 1,562             |  |     |         |  | 1,562 
|Other equity securities                          | 68                |  |     | 21       |  | 47    
|                                                 |                   |  |      |          |  |       
|Total securities available for sale              | $106,185          |  | $   | $104,576 |  | $1,609





12



---





Reconciliation of fair value measurements using significant unobservable inputs:



|                                                                                     |            | 
|------------------------------------------------------------------------------------ | ---------- | 
|                                                                                     | Securities
|                                                                                     | Available 
|(dollars in thousands)                                                               | For Sale  
|                                                                                     |           
|Balance at January 1, 2009:                                                          | $ 1,670    | 
|Total realized/unrealized gains and (losses):                                        |            | 
|Included in earnings                                                                 |           | 
|Included in other comprehensive income                                               | (20)       | 
|Purchases, maturities, and sales                                                     |           | 
|                                                                                     |            | 
|Balance at March 31, 2009                                                            | $ 1,650    | 
|                                                                                     |            | 
|Total gains or (losses) for the period included in earnings attributable to the      |            | 
|change in unrealized gains or losses relating to assets still held at March 31, 2009 | $         | 
|                                                                                     |            | 
|Balance at January 1, 2010                                                           | $ 1,609    | 
|Total realized/unrealized gains and (losses):                                        |            | 
|Included in earnings                                                                 |           | 
|Included in other comprehensive income                                               | (126)      | 
|Purchases                                                                            | 400        | 
|                                                                                     |            | 
|Balance at March 31, 2010                                                            | $ 1,883    | 
|                                                                                     |            | 
|Total gains or (losses) for the period included in earnings attributable to the      |            | 
|change in unrealized gains or losses relating to assets still held at March 31, 2010 | $         | 





13



---





Assets measured at fair value on a non-recurring basis at period-end:



|                                  |                   |                                            |                   |              |              | 
|--------------------------------- | ----------------- | ------------------------------------------ | ----------------- | ------------ | ------------ | 
|                                  |                   | Nonrecurring Fair Value Measurements Using
|                                  |                   | Quoted Prices in                           |                   |             
|                                  |                   | Active Markets                             | Significant Other | Significant 
|                                  |                   | for Identical                              | Observable        | Unobservable
|                                  |                   | Assets                                     | Inputs            | Inputs      
|                                  | ($000s)           | (Level 1)                                  | (Level 2)         | (Level 3)   
|                                  |                   |                                            |                   |             
|Assets:                           | March 31, 2010    |                                            |                   |             
|                                  |                   |                                            |                   |             
|Impaired loans                    | $   3,075         |                                            | $                | $           | $    3,075   | 
|Foreclosed assets                 | 4,986             |                                            |                  |             | 4,986        | 
|Mortgage servicing rights         | 1,143             |                                            |                  |             | 1,143        | 
|Mortgage rate lock commitments    | 36                |                                            |                  |             | 36           | 
|                                  |                   |                                            |                   |              |              | 
|Total assets                      | $    9,240        |                                            | $                | $           | $    9,240   | 
|                                  |                   |                                            |                   |              |              | 
|Liabilities - Guarantee liability | $         82      |                                            | $                | $           | $         82 | 
|                                  |                   |                                            |                   |              |             
|Assets:                           | December 31, 2009 |                                            |                   |              |             
|                                  |                   |                                            |                   |              |             
|Impaired loans                    | $    7,464        |                                            | $                | $           | $    7,464   | 
|Foreclosed assets                 | 3,776             |                                            |                  |             | 3,776        | 
|Mortgage servicing rights         | 1,147             |                                            |                  |             | 1,147        | 
|Mortgage rate lock commitments    | 7                 |                                            |                  |             | 7            | 
|                                  |                   |                                            |                   |              |              | 
|Total assets                      | $  12,394         |                                            | $                | $           | $  12,394    | 
|                                  |                   |                                            |                   |              |              | 
|Liabilities - Guarantee liability | $         93      |                                            | $                | $           | $         93 | 



At March 31, 2010, loans with a carrying amount of $4,784 were considered impaired and were written down to their estimated fair value of $3,075 net of a valuation allowance of $1,709.  At December 31, 2009, loans with a carrying amount of $9,452 were considered impaired and were written down to their estimated fair value of $7,464, net of a valuation allowance of $1,988.  Changes in the valuation allowances are reflected through earnings as a component of the provision for loan losses.



At March 31, 2010, mortgage servicing rights with a carrying amount of $1,234 were considered impaired and were written down to their estimated fair value of $1,143, resulting in an impairment allowance of $91.  At December 31, 2009, mortgage servicing rights with a carrying amount of $1,229 were considered impaired and were written down to their estimated fair value of $1,147, resulting in an impairment charge of $82.  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 approximates the carrying value.



Loans  Fair value of variable rate loans that reprice frequently are based on carrying values.  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 are estimated using discounted expected future cash flows or the fair value of underlying collateral, if applicable.



Federal Home Loan Bank stock  Fair value is the redeemable (carrying) value based on the redemption provisions of the Federal Home Loan Bank.



14



---







Accrued interest receivable and payable  Fair value approximates the carrying value.



Cash value of life insurance  Fair value is based on reported values of the assets by the issuer which are redeemable to the insured.



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 being offered on similar time deposits.



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.  Fair value of borrowings with variable rates or maturing within 90 days approximates the carrying value of these borrowings.



Senior subordinated notes and junior subordinated debentures  Fair value of fixed rate, fixed term notes and debentures are estimated by discounting future cash flows using the current rates at which similar borrowings would be made.



The carrying amounts and fair values of PSBs financial instruments consisted of the following:



|                                             |                |                   |           |            |           |  |           | 
|-------------------------------------------- | -------------- | ----------------- | --------- | ---------- | --------- |  | --------- | 
|                                             | March 31, 2010 | December 31, 2009
|                                             | Carrying       | Estimated         | Carrying  | Estimated 
|                                             | Amount         | Fair Value        | Amount    | Fair Value
|Financial assets:                            |                |                   |           |           
|                                             |                |                   |           |           
|Cash and cash equivalents                    | $  20,561      |                   | $  20,561 |            | $  26,337 |  | $  26,337 | 
|Securities                                   | 108,288        |                   | 108,288   |            | 106,185   |  | 106,185   | 
|Net loans receivable and loans held for sale | 434,332        |                   | 436,637   |            | 437,633   |  | 440,162   | 
|Accrued interest receivable                  | 2,428          |                   | 2,428     |            | 2,142     |  | 2,142     | 
|Mortgage servicing rights                    | 1,143          |                   | 1,143     |            | 1,147     |  | 1,147     | 
|Mortgage rate lock commitments               | 36             |                   | 36        |            | 7         |  | 7         | 
|FHLB stock                                   | 3,250          |                   | 3,250     |            | 3,250     |  | 3,250     | 
|Cash surrender value of life insurance       | 10,590         |                   | 10,590    |            | 10,489    |  | 10,489    | 
|                                             |                |                   |           |            |           |  |           | 
|Financial liabilities:                       |                |                   |           |            |           |  |           | 
|                                             |                |                   |           |            |           |  |           | 
|Deposits                                     | $459,083       |                   | $463,131  |            | $458,731  |  | $462,040  | 
|FHLB advances                                | 57,434         |                   | 59,041    |            | 58,159    |  | 59,865    | 
|Other borrowings                             | 23,126         |                   | 24,375    |            | 28,410    |  | 29,717    | 
|Senior subordinated notes                    | 7,000          |                   | 6,856     |            | 7,000     |  | 6,698     | 
|Junior subordinated debentures               | 7,732          |                   | 7,557     |            | 7,732     |  | 7,498     | 
|Accrued interest payable                     | 905            |                   | 905       |            | 975       |  | 975       | 
|Guarantee liability                          | 82             |                   | 82        |            | 93        |  | 93        | 





15



---





NOTE 11  CURRENT YEAR ACCOUNTING CHANGES

FASB ASC Topic 810, Consolidation. New authoritative accounting guidance under ASC Topic 810 amended prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entitys involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entitys financial statements. The new authoritative accounting guidance under ASC Topic 810 was effective January 1, 2010 but had no significant impact on our financial statements.



FASB ASC Topic 820, Fair Value Measurements and Disclosures.  New authoritative disclosure guidance under Topic 820 was designed to increase transparency of fair value disclosures.  Under the new guidance, transfers between fair value Levels 1 and 2 must be described and disclosed separately.  In addition, the reconciliation of Level 3 fair value measurements should present activity separately rather than as one net number.  Also, fair value measurement disclosures should include disclosures for each class of assets and liabilities, which class may be a subset of a line item in the Consolidated Balance Sheet.  Lastly, disclosures about valuation techniques and inputs used to measure fair value for both recurring and nonrecurring items are required for measurements that fall in either Level 2 or Level 3.  The new disclosures were effective for interim periods beginning January 1, 2010 except for disclosures related to items in the reconciliation of Level 3 fair value measurements, which are effective for interim periods beginning January 1, 2011.  The new disclosure did not a have a significant impact on the presentation of our financial statements.



FASB ASC Topic 860, Transfers and Servicing.New authoritative accounting guidance under ASC Topic 860, Transfers and Servicing, amended prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a qualifying special-purpose entity and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC Topic 860 was effective for transactions occurring after December 31, 2009 and did not have a significant impact on our financial statements.



NOTE 12  SUBSEQUENT EVENTS



Management has reviewed PSBs operations for potential disclosure of information or financial statement impacts related to events occurring after March 31, 2010 but prior to the release of these financial statements.  Based on the results of this review, no subsequent event disclosures are required as of the release date.





16



---





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



Managements discussion and analysis (MD&A) reviews significant factors with respect to our financial condition as of March 31, 2010 compared to December 31, 2009 and results of our operations for the three months ended March 31, 2010 compared to the results of operations for the three months ended March 31, 2009.  The following MD&A concerning our operations is intended to satisfy three principal objectives:



·

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



·

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



·

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



Managements discussion and analysis, like other portions of this Quarterly Report on Form 10-Q, includes forward-looking statements that are provided to assist in the understanding of anticipated future financial performance.  However, our anticipated future financial performance involves risks and uncertainties that may cause actual results to differ materially from those described in our forward-looking statements.  A cautionary statement regarding forward-looking statements is set forth under the caption Forward-Looking Statements in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009, and, from time to time, in our other filings with the Securities Exchange Commission.  We do not intend to update forward-looking statements.  This discussion and analysis should be considered in light of that cautionary statement.  Additional risk factors relating to an investment in our common stock are also described under Item 1A of the 2009 Annual Report on Form 10-K.



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



EXECUTIVE OVERVIEW



Results of Operations



March 2010 quarterly net income was $881, or $.56 earnings per diluted share compared to quarterly net income of $1,006, or $.65 earnings per diluted share during the March 2009 quarter.  Current quarterly net income declined $125 (12.4%) from March 2009 due to a decline in mortgage banking income of $494 (before income tax effects) compared to the 2009 refinancing wave prompted by historically low mortgage rates.  Some of the decline in 2010 mortgage banking income was offset by greater net interest income from increased earning assets and net margin as well as lower provision for loan loss reserve.  March 2010 net income was also negatively impacted by additional interest expense on senior subordinated notes first issued during July 2009 to bolster our regulatory capital position.



Our provision for loan losses was $460 in the March 2010 quarter compared to $1,600 in the most recent December 2009 quarter and $700 in the prior year March 2009 quarter.  The provision for loan losses decreased during the March 2010 quarter compared to the prior December 2009 quarter due primarily to stabilization of the average internal credit quality grades assigned to loans, a decline in outstanding loan principal, and identification of fewer credits requiring large specific reserves.  Loss on foreclosed assets was $111 during the March 2010 quarter compared to $956 during the December 2009 quarter and $14 during March 2009  quarter.  The December 2009 quarter included an individual loss on foreclosed assets totaling $879 realized upon auction of foreclosed properties.  There were no significant sales of foreclosed properties during the March 2010 quarter.





17



---





Nonperforming loans decreased $2.1 million to $11.2 million at March 31, 2010 compared to $13.3 million at December 31, 2009 due to final foreclosure on a $1.1 million loan and application of collateral sale proceeds totaling $1.3 million on an unrelated nonaccrual loan.  Foreclosed assets increased $1.2 million to $5.0 million at March 31, 2010 compared to $3.8 million at December 31, 2009.  Total nonperforming assets declined $896, or 5.2% to $16.2 million from $17.1 million at December 31, 2009 primarily from the $1.3 million pay down to nonaccrual loans from sale of problem borrower collateral.



Liquidity



Total assets were $601.1 million at March 31, 2010 compared to $606.9 million at December 31, 2009 and $570.7 million at March 31, 2009.  The $5.8 million decline in assets since the beginning of 2010 was due primarily to a pay down of $2.4 million in commercial related loans (net of loans transferred to foreclosed properties) and a reduction in cash and investments totaling $3.7 million.



At March 31, 2010, unused (but available) wholesale funding was approximately $185 million, or 31% of total assets, compared to $188 million, or 31% of total assets at December 31, 2009.  Certain municipal securities held in PSBs investment portfolio may also be available for pledging as collateral against repurchase agreements and FHLB advances under conditions dictated by the lender.  However, due to the difficulty and uncertainty of the amount ultimately available as collateral, unpledged municipal securities are not considered available for funding in our internal analysis of liquidity flexibility or in the figures reported as unused but available wholesale funding.



Our ability to borrow funds on a short-term basis from the Federal Reserve Discount Window is an important part of our liquidity analysis.  Although we had no Discount Window amounts outstanding during the past several quarters, approximately 45% of unused but available liquidity at March 31, 2010 was represented by available Discount Window advances compared to 40% of available liquidity at December 31, 2009.  In addition, Discount Window availability is expected to decline by approximately 7% during June 2010 due to a change by the Federal Reserve in determining the fair value of collateral used to support potential advances.



Capital Resources



We are considered well-capitalized under regulatory capital rules with total risk adjusted capital of 12.72% at March 31, 2010, up from 12.49% at December 31, 2009 due to retained quarterly net income and a 0.4% reduction in total regulatory risk-weighted assets compared to the end of 2009.  Average tangible common equity (excluding the unrealized gain on sale of securities available for sale) to average assets was 6.82% during the March 2010 quarter compared to 6.94% during all of 2009.



Approximately 23% of our total regulatory capital is comprised of debt instruments including junior and senior debentures and notes which, unlike common stock, require quarterly payments of interest.  Therefore, although no current plans exist, future capital needs during the next several years would likely be met by issuance of our authorized common or preferred stock as needed.  Due to relatively high cost of capital options, we do not expect to buyback significant treasury stock shares during 2010, although we do expect to continue to pay our traditional semi-annual cash dividend assuming continued profitable operations and projections of adequate future capital levels for growth.   Due to the expected declaration of dividends to shareholders during June 2010, capital ratios could experience a slight decline at June 30, 2010 when compared to March 31, 2010.





18



---





Off Balance Sheet Arrangements and Contractual Obligations



Our largest volume off-balance sheet activity involves our servicing of payments and related collection activities on approximately $240 million of residential 1 to 4 family mortgages sold to FHLB and FNMA, up from $238 million at December 31, 2009.  We have provided a credit enhancement against FHLB loss on approximately 40% of the serviced principal, up to a maximum guarantee of $2.3 million in the aggregate.  However, we would incur such loss only if the FHLB first lost $4.2 million on this loan pool of approximately $97 million.  No sold loans have received our credit enhancement guarantee of principal since October 2008 and we have no intention of originating future loans with the guarantee.



We provide various commitments to extend credit for both commercial and consumer purposes totaling approximately $87 million at March 31, 2010 compared to $88 million at December 31, 2009.  These lending commitments are a traditional and customary part of lending operations and many of the commitments are expected to expire without being drawn upon.



RESULTS OF OPERATIONS



Earnings



March 2010 quarterly earnings were $.56 per share on net income of $881, a decline of $125, or 12.4%, from March 2009 quarterly earnings which were $.65 per share on net income of $1,006.  Return on average assets was .59% and .72% during the quarter ended March 31, 2010 and 2009, respectively.  Return on average stockholders equity was 8.33% and 9.93% during the quarter ended March 31, 2010 and 2009, respectively.



Compared to the prior year quarter, mortgage banking income from sale and servicing of fixed rate residential mortages declined $494 due to a loan refinancing wave seen during the prior year March 2009 quarter from historically low mortgage interest rates.  As customers refinanced their home loans during 2009, current mortgage banking income during March 2010 of $263 returned to more traditional quarterly levels.



Other reductions to net income during the March 2010 quarter compared to March 2009 included increased salaries and benefits expense and interest expense on senior subordinated notes issued July 2009.  Offsetting these additional expenses was increased net interest income and lower provision for loan losses during the current quarter.



The following Table 1 presents PSBs consolidated quarterly summary financial data.



19



---





Table 1:  Financial Summary



|                                              |               |              |               |          |               |  |               |  |               | 
|--------------------------------------------- | ------------- | ------------ | ------------- | -------- | ------------- |  | ------------- |  | ------------- | 
|(dollars in thousands, except per share data) | Quarter ended
|                                              | March 31,     | December 31, | September 30, | June 30, | March 31,    
|Earnings and dividends:                       | 2010          | 2009         | 2009          | 2009     | 2009         
|                                              |               |              |               |          |              
|Net interest income                           | $      4,385  |              | $      4,557  |          | $      4,126  |  | $      4,168  |  | $      4,100  | 
|Provision for loan losses                     | $         460 |              | $      1,600  |          | $         800 |  | $         600 |  | $         700 | 
|Other noninterest income                      | $      1,091  |              | $      1,563  |          | $      1,203  |  | $      1,442  |  | $      1,368  | 
|Other noninterest expense                     | $      3,840  |              | $      4,070  |          | $      3,553  |  | $      3,817  |  | $      3,389  | 
|Net income                                    | $         881 |              | $         489 |          | $         738 |  | $         883 |  | $      1,006  | 
|                                              |               |              |               |          |               |  |               |  |               | 
|Basic earnings per share(3)                   | $        0.56 |              | $        0.31 |          | $        0.47 |  | $        0.57 |  | $        0.65 | 
|Diluted earnings per share(3)                 | $        0.56 |              | $        0.31 |          | $        0.47 |  | $        0.57 |  | $        0.65 | 
|Dividends declared per share(3)               | $            |              | $        0.35 |          | $            |  | $        0.35 |  | $            | 
|Net book value per share                      | $      27.67  |              | $      27.11  |          | $      27.60  |  | $      26.47  |  | $      26.53  | 
|                                              |               |              |               |          |               |  |               |  |               | 
|Semi-annual dividend payout ratio             | n/a           |              | 44.47%        |          | n/a           |  | 28.90%        |  | n/a           | 
|Average common shares outstanding             | 1,564,131     |              | 1,559,314     |          | 1,559,314     |  | 1,559,314     |  | 1,559,198     | 
|                                              |               |              |               |          |               |  |               |  |               | 
|Balance sheet - average balances:             |               |              |               |          |               |  |               |  |               | 
|                                              |               |              |               |          |               |  |               |  |               | 
|Loans receivable, net of allowances for loss  | $   436,989   |              | $   433,212   |          | $   432,237   |  | $   429,104   |  | $   421,029   | 
|Assets                                        | $   603,988   |              | $   589,356   |          | $   588,180   |  | $   575,743   |  | $   569,372   | 
|Deposits                                      | $   457,055   |              | $   440,508   |          | $   441,741   |  | $   429,849   |  | $   427,490   | 
|Stockholders equity                          | $     42,902  |              | $     43,233  |          | $     42,184  |  | $     42,118  |  | $     41,072  | 
|                                              |               |              |               |          |               |  |               |  |               | 
|Performance ratios:                           |               |              |               |          |               |  |               |  |               | 
|                                              |               |              |               |          |               |  |               |  |               | 
|Return on average assets(1)                   | 0.59%         |              | 0.33%         |          | 0.50%         |  | 0.62%         |  | 0.72%         | 
|Return on average stockholders equity(1)     | 8.33%         |              | 4.49%         |          | 6.94%         |  | 8.41%         |  | 9.93%         | 
|Average tangible stockholders equity to      |               |              |               |          |               |  |               |  |               | 
|average assets(4)                             | 6.82%         |              | 7.01%         |          | 6.89%         |  | 6.97%         |  | 6.88%         | 
|Net loan charge-offs to average loans(1)      | 0.38%         |              | 0.72%         |          | 0.45%         |  | 0.16%         |  | 0.15%         | 
|Nonperforming loans to gross loans            | 2.53%         |              | 2.99%         |          | 2.21%         |  | 3.11%         |  | 2.82%         | 
|Allowance for loan losses to gross loans      | 1.73%         |              | 1.71%         |          | 1.54%         |  | 1.47%         |  | 1.41%         | 
|Nonperforming assets to tangible equity       |               |              |               |          |               |  |               |  |               | 
|plus the allowance for loan losses(4)         | 32.99%        |              | 35.49%        |          | 34.91%        |  | 31.80%        |  | 27.86%        | 
|Net interest rate margin(1)(2)                | 3.28%         |              | 3.43%         |          | 3.09%         |  | 3.23%         |  | 3.26%         | 
|Net interest rate spread(1)(2)                | 3.02%         |              | 3.12%         |          | 2.76%         |  | 2.90%         |  | 2.94%         | 
|Service fee revenue as a percent of           |               |              |               |          |               |  |               |  |               | 
|average demand deposits(1)                    | 2.65%         |              | 2.51%         |          | 2.76%         |  | 2.64%         |  | 2.68%         | 
|Noninterest income as a percent               |               |              |               |          |               |  |               |  |               | 
|of gross revenue                              | 13.14%        |              | 17.30%        |          | 14.18%        |  | 16.45%        |  | 15.80%        | 
|Efficiency ratio(2)                           | 67.55%        |              | 64.17%        |          | 64.13%        |  | 65.62%        |  | 59.66%        | 
|Noninterest expenses to average assets(1)     | 2.58%         |              | 2.74%         |          | 2.40%         |  | 2.66%         |  | 2.42%         | 
|                                              |               |              |               |          |               |  |               |  |               | 
|Stock price information:                      |               |              |               |          |               |  |               |  |               | 
|                                              |               |              |               |          |               |  |               |  |               | 
|High                                          | $      22.50  |              | $      19.00  |          | $      23.00  |  | $      23.75  |  | $      18.75  | 
|Low                                           | $      15.05  |              | $      15.05  |          | $      18.00  |  | $      17.00  |  | $      14.40  | 
|Last trade value at quarter-end               | $      20.00  |              | $      15.05  |          | $      19.50  |  | $      23.50  |  | $      18.75  | 



(1)Annualized

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

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

(4)Tangible stockholders equity excludes the impact of cumulative other comprehensive income (loss).





20



---





Balance Sheet Changes and Analysis



At March 31, 2010, total assets were $601,065, a decrease of $5,789, or 1.0%, over December 31, 2009 total assets of $606,854.  Changes in assets since December 31, 2009 consisted of:



Table 2:  Change in Balance Sheet Assets Composition



|                                                       |                    |   |        | 
|------------------------------------------------------ | ------------------ | - | ------ | 
|                                                       | Three months ended
|Increase (decrease) in assets ($000s)                  | March 31, 2010    
|                                                       | $                  | %
|Investment securities                                  | $ 2,103            |   | 2.0%   | 
|Foreclosed assets                                      | 1,210              |   | 32.0%  | 
|Residential real estate mortgage and home equity loans | 528                |   | 0.5%   | 
|Bank-owned life insurance                              | 101                |   | 1.0%   | 
|Other assets (various categories)                      | (391)              |   | -2.0%  | 
|Commercial real estate mortgage loans                  | (587)              |   | -0.3%  | 
|Commercial, industrial and agricultural loans          | (2,977)            |   | -2.2%  | 
|Cash and cash equivalents                              | (5,776)            |   | -21.9% | 
|                                                       |                    |   |        | 
|Total decrease in assets                               | $(5,789)           |   | -1.0%  | 



Investment securities increased during the quarter due to deployment of cash and cash equivalents held at December 31, 2009 primarily into municipality issued general obligation securities.  Commercial related loan principal declined during the March 2010 quarter due in part to traditional seasonal factors representing the third consecutive year in which March period-end loan principal declined compared to the prior calendar year ended December 31.  In addition, a growing portion of recent local potential new loan originations have not met our normal underwriting standards, negatively impacting new loan originations.



The change in net assets impacted funding sources since December 31, 2009, as follows:



Table 3:  Change in Balance Sheet Liabilities and Equity Composition



|                                                                  |                    |   |        | 
|----------------------------------------------------------------- | ------------------ | - | ------ | 
|                                                                  | Three months ended
|Increase (decrease) in liabilities and equity ($000s)             | March 31, 2010    
|                                                                  | $                  | %
|                                                                  |                    |  
|Retail certificates of deposit > $100                             | $ 11,889           |   | 23.0%  | 
|Wholesale deposits                                                | 8,235              |   | 10.7%  | 
|Stockholders equity                                              | 1,012              |   | 2.4%   | 
|FHLB advances                                                     | (725)              |   | -1.2%  | 
|Other liabilities and debt (various categories)                   | (1,144)            |   | -5.9%  | 
|Other borrowings                                                  | (5,284)            |   | -18.6% | 
|Core deposits (including MMDA)                                    | (19,772)           |   | -6.0%  | 
|                                                                  |                    |   |        | 
|Total increase (decrease) in liabilities and stockholders equity | $ (5,789)          |   | -1.0%  | 



During the March 2010 quarter, total deposits remained stable, although there were significant changes within various deposit types.  Core local deposits declined $19.8 million, or 6%, as local government units withdrew seasonal tax revenue held at December 31, 2009.  However, many of these government transactional deposits were retained in short-term certificates of deposit greater than $100,000, contributing to an increase in local jumbo certificates of deposit of $11.9 million.  Also during the quarter, wholesale brokered deposits increased $8.2 million in part from repayment of an existing $7.0 million repurchase agreement, which decreased other borrowings.  All wholesale funding, including brokered deposits, FHLB advances, and other borrowings was $166.0 million (27.6% of total assets) at March 31, 2010 compared to $163.8 million (27.0%) at December 31, 2009 and $163.4 million (28.6%) at March 31, 2009.





21



---





Loans Receivable and Credit Quality



Table 4:  Period-End Loan Composition



|                                        |           |           |           |                     |                   |        |            |          |           |        | 
|--------------------------------------- | --------- | --------- | --------- | ------------------- | ----------------- | ------ | ---------- | -------- | --------- | ------ | 
|                                        | March 31, |           | March 31, |                     | December 31, 2009
|                                        | Dollars   | Dollars   |           | Percentage of total |                   |        | Percentage
|(dollars in thousands)                  | 2010      | 2009      |           | 2010                | 2009              |        | Dollars    | of total
|                                        |           |           |           |                     |                   |        |            |         
|Commercial, industrial and agricultural | $ 129,565 | $ 131,031 |           | 29.3%               |                   | 30.5%  |            |          | $ 132,542 | 29.8%  | 
|Commercial real estate mortgage         | 204,772   | 196,178   |           | 46.4%               |                   | 45.8%  |            |          | 205,359   | 46.1%  | 
|Residential real estate mortgage        | 80,195    | 76,483    |           | 18.1%               |                   | 17.8%  |            |          | 79,220    | 17.8%  | 
|Consumer home equity                    | 23,322    | 21,073    |           | 5.3%                |                   | 4.9%   |            |          | 23,769    | 5.3%   | 
|Consumer and installment                | 4,127     | 4,371     |           | 0.9%                |                   | 1.0%   |            |          | 4,354     | 1.0%   | 
|                                        |           |           |           |                     |                   |        |            |          |           |        | 
|Totals                                  | $ 441,981 | $ 429,136 |           | 100.0%              |                   | 100.0% |            |          | $ 445,244 | 100.0% | 



The loan portfolio is our primary asset subject to credit risk.  Our process for monitoring credit risks includes quarterly analysis of loan quality, delinquencies, nonperforming assets, and potential problem loans.  Loans are placed on a nonaccrual status when they become contractually past due 90 days or more as to interest or principal payments.  All interest accrued but not collected for loans (including applicable impaired loans) that are placed on nonaccrual status or charged off is reversed against interest income.  We apply all payments received on nonaccrual loans to principal until the loan is returned to accrual status.  Loans are returned to accrual status when all the principal and interest amounts contractually due have been collected and there is reasonable assurance that repayment according to the contractual terms will continue.  Because restructured and nonaccrual loans remain classified as nonperforming loans until the uncertainty surrounding the credit is eliminated, some borrowers continue to make loan payments while maintained on non-accrual status.



Although we believe commercial loan portfolio credit quality will stabilize as the local economy improves later in 2010, nonaccrual loans may continue to increase.  In addition, foreclosed property is expected to increase during 2010 as PSB works through ongoing collection and foreclosure actions.  A continued slow local economy impacts the value of collateral and foreclosed assets, potentially increasing losses on foreclosed borrowers and properties during 2010.



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), and (2) foreclosed assets.



Table 5:  Nonperforming Assets



|                                                     |           |      |              |      |  |          | 
|---------------------------------------------------- | --------- | ---- | ------------ | ---- |  | -------- | 
|                                                     | March 31, |      | December 31,
|(dollars in thousands)                               | 2010      | 2009 |              | 2009
|                                                     |           |      |              |     
|Nonaccrual loans                                     | $ 11,192  |      | $ 11,339     |      |  | $ 13,298 | 
|Accruing loans past due 90 days or more              |          |      |             |      |  |         | 
|Restructured loans not on nonaccrual                 |          |      | 748          |      |  |         | 
|                                                     |           |      |              |      |  |          | 
|Total nonperforming loans                            | 11,192    |      | 12,087       |      |  | 13,298   | 
|Foreclosed assets                                    | 4,986     |      | 594          |      |  | 3,776    | 
|                                                     |           |      |              |      |  |          | 
|Total nonperforming assets                           | $ 16,178  |      | $ 12,681     |      |  | $ 17,074 | 
|                                                     |           |      |              |      |  |          | 
|Nonperforming loans as a % of gross loans receivable | 2.53%     |      | 2.82%        |      |  | 2.99%    | 
|                                                     |           |      |              |      |  |          | 
|Total nonperforming assets as a % of total assets    | 2.69%     |      | 2.22%        |      |  | 2.81%    | 





22



---





Nonperforming loans decreased $2.1 million to $11.2 million at March 31, 2010 compared to $13.3 million at December 31, 2009 due to final foreclosure on a $1.1 million loan and application of collateral sale proceeds totaling $1.3 million on an unrelated nonaccrual loan.  Foreclosed assets increased $1.2 million to $5.0 million at March 31, 2010 compared to $3.8 million at December 31, 2009.  Total nonperforming assets declined $896, or 5.2% to $16.2 million from $17.1 million at December 31, 2009 primarily from the $1.3 million pay down to nonaccrual loans from sale of collateral noted above.



Total nonperforming assets as a percentage of total assets was 2.69% at March 31, 2010 compared to 2.81% at December 31, 2009 and 2.22% at March 31, 2009.  Total nonperforming assets as a percentage of total tangible common equity including the allowance for loan losses (commonly referred to as the Texas Ratio) was 32.99%, 35.49%, and 27.86% at March 31, 2010, December 31, 2009, and March 31, 2009, respectively.  At March 31, 2010, our seven largest nonperforming assets measured by gross principal outstanding represent 52% of all nonperforming assets as summarized in the following table.



|                                                                 |            |           |          |          | 
|---------------------------------------------------------------- | ---------- | --------- | -------- | -------- | 
|Table 6:  Largest Nonperforming Assets at March 31, 2010 ($000s) |            |          
|                                                                 |            | Gross     | Specific
|Collateral Description                                           | Asset Type | Principal | Reserves
|                                                                 |            |           |         
|Nonowner occupied multi use, multi-tenant retail RE              | Nonaccrual | $   2,148 |          | $    400 | 
|Vacation home/recreational properties (four)                     | Foreclosed | 2,050     |          | n/a      | 
|Trucking equipment & business assets - participation             | Nonaccrual | 940       |          | 94       | 
|Commercial service real estate and lakefront home                | Foreclosed | 850       |          | n/a      | 
|Business supply inventory and accounts receivable                | Nonaccrual | 842       |          | 700      | 
|Out of area condo land development - participation               | Foreclosed | 792       |          | n/a      | 
|Owner occupied restaurant and business assets                    | Nonaccrual | 710       |          | 100      | 
|                                                                 |            |           |          |          | 
|Total listed assets                                              |            | $   8,332 |          | $ 1,294  | 
|Total bank wide nonperforming assets                             |            | $ 16,178  |          |         
|Listed assets as a % of total nonperforming assets               |            | 52%       |          |         



Annualized net loan charge-offs were .38% during the March 2010 quarter compared to .72% during the December 2009 quarter and .15% during the March 2009 quarter.  At March 31, 2010, the allowance for loan losses was $7,649 or 1.73% of total loans compared to $7,611, or 1.71% of total loans at December 31, 2009, and $6,065, or 1.41% of total loans at March 31, 2009.



Including the loans in the previous table, at March 31, 2010, our internal credit grading system identified 17 separate loan relationships totaling $5.6 million against which $2.0 million in specific loan loss reserves were recorded.  At December 31, 2009, our internal credit grading system identified 22 separate loan relationships totaling $10.8 million against which $2.5 million in loan loss reserves were recorded.  During the March 2010 quarter, the total amount of loan principal with specific reserve allocations declined approximately $2.4 million from foreclosure and collateral sale proceeds on two unrelated loans as discussed previously.  In addition, principal with specific reserve allocations declined an additional $2.8 million from reclassification of one performing borrower previously carrying specific reserves of $400 (at December 31, 2009) to a performing borrower with reserves determined by internal inherent loss estimates, resulting in approximate reserves totaling $270 at March 31, 2010.  This loan was considered performing at both December 31, 2009 and March 31, 2010 but had carried a collateral value shortfall under certain collateral value assumptions during 2009 necessitating the specific loss reserve.



Local loan demand has traditionally met requirements for loan growth and out of area participation loans we have purchased represent a very small portion of the total loan portfolio, currently $15,052, or 3.4% of the gross loan portfolio compared to $16,004 at December 31, 2009.  Many Wisconsin community banks work together on an informal basis to allow customers with credit needs above an institutions legal lending limit to be served by their local community bank as the lead bank after selling portions of the loan to other banks.  From time to time, we will purchase an out of area loan originated by another Wisconsin community bank for this purpose.  In addition, we may sell a portion of a large loan credit for one of our customers to these same community banks to accommodate large loan requests.  These informal relationships with Wisconsin



23



---





community banks make up the majority of our participation purchased loan portfolio.  However, at March 31, 2010, this portfolio also included a $1.7 million loan participation purchased from Bankers Bank of Wisconsin secured by development commercial real estate and $453 of purchased loans from Bankers Healthcare Group secured by medical equipment to medical practices operating outside of our local market area.  Both of these loan types were performing according to their terms at March 31, 2010.



We have guaranteed repayment of a customers interest rate swaps and letter of credit to a correspondent bank in exchange for an underwriting fee and a first mortgage lien on real estate.  The total principal amount we have guaranteed totaled $5,972 and $5,924 at March 31, 2010, and December 31, 2009, respectively.  The letter of credit guarantee expires during 2010, while the swap guarantees expire in 2018 and 2022.  The guarantee liability is carried at cost (equal to the amount of deferred income received), which approximates fair value and totaled $82 and $93 at March 31, 2010, and December 31, 2009, respectively.  The liability is recognized as income on a pro-rata basis over the life of the letter of credit guarantee as loan interest income, while swap guarantee income is recognized as other noninterest income.  Income recognized on the guarantees totaled $11 during the three months ended March 31, 2010, and 2009.



Provision for Loan Losses



We determine the adequacy of the provision for loan losses based on past loan loss experience, current economic conditions, and composition of the loan portfolio.  Accordingly, the amount charged to expense is based on managements evaluation of the loan portfolio.  It is our policy that when available information confirms that specific loans, or portions thereof, including impaired loans, are uncollectible, these amounts are promptly charged off against the allowance.  Our provision for loan losses was $460 in the March 2010 quarter compared to $1,600 in the most recent December 2009 quarter and $700 in the prior year March 2009 quarter.  The provision for loan losses decreased during the March 2010 quarter compared to the prior December 2009 quarter due primarily to stabilization of the average internal credit quality grades assigned to loans, a decline in outstanding loan principal, and identification of fewer credits requiring large specific reserves.



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.  The quarterly level of loan loss provision during the remainder of 2010 is expected to be similar to that seen during the March 2010 quarter.  Annualized net loan charge-offs were .38% during the March 2010 quarter compared to .15% during the March 2009 quarter.



Table 7:  Allowance for Loan Losses



|                                           |                    |      |         | 
|------------------------------------------ | ------------------ | ---- | ------- | 
|                                           | Three months ended
|                                           | March 31,         
|(dollars in thousands)                     | 2010               | 2009
|                                           |                    |     
|Allowance for loan losses at beginning     | $ 7,611            |      | $ 5,521 | 
|                                           |                    |      |         | 
|Provision for loan losses                  | 460                |      | 700     | 
|Recoveries on loans previously charged-off | 2                  |      | 1       | 
|Loans charged off                          | (424)              |      | (157)   | 
|                                           |                    |      |         | 
|Allowance for loan losses at end           | $7,649             |      | $ 6,065 | 





24



---





Loss on foreclosed assets was $111 during the March 2010 quarter compared to $956 during the December 2009 quarter and $14 during March 2009  quarter.  The December 2009 quarter included an individual loss on foreclosed assets totaling $879 realized upon auction of  foreclosed properties.  There were no significant sales of foreclosed properties during the March 2010 quarter.



Net Interest Income



Net interest income is the most significant component of earnings.  Tax adjusted net interest income totaled $4,594 during the March 2010 quarter compared to $4,318 in the March 2009, an increase of 6.4%.  Average earning assets increased 6.0% during the March 2010 quarter compared to March 2009.  Approximately $140 of the increase in net interest income was from growth in earning assets over the prior year and approximately $136 was from an increase in net interest margin from 3.26% during March 2009 to 3.28% during March 2010.  The new issue of $7 million of senior subordinated notes during 2009 added $142 of additional interest expense during the quarter ended March 31, 2010 not seen during the prior year March 2009 quarter.



Both loan yields and deposit costs saw declines during March 2010 compared to the most recent quarter ended December 31, 2009.  During the quarter ended March 31, 2010, loan yields declined 17 basis points to 5.63% while total average deposit costs declined 13 basis points to 1.89%.  During the upcoming quarter, loan yields are expected to stabilize while securities yields and certificate of deposit funding costs continue to decline, resulting in net interest margin similar to that seen during the March 2010 quarter.



We have increased net interest margin since 2009 by inserting interest rate floors in commercial-related loans and retail residential home equity lines of credit to avoid the negative impacts to net interest margin from a sustained low interest rate environment and to appropriately price for credit risk in the current market.  At March 31, 2010, approximately 87% of our $121 million in adjustable rate loans carried a contractual interest rate floor and, of those loans with floors, approximately 98% carried current loan yields in excess of the normal adjustable rate coupon due to the interest rate floor.  The weighted average amount in which actual loan yields were supported by the in the money loan rate floor was approximately 150 basis points on $103 million of adjustable rate loans at March 31, 2010.  The annualized increase to net interest income and net interest margin would be approximately $1,548 and .27%, respectively, based on those existing loan floors and total earning assets at March 31, 2010 if interest rates were assumed to remain the same.  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 more quickly, impacting net interest income less adversely than if short-term rates rose slowly or deliberately.





25



---





Table 8:  Net Interest Income Analysis (Quarter)



|                                     |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|------------------------------------ | ---------------------------- | -------- | ---------------------------- |  | ------- | -------- | ------ | --------- |  | -------- |  | ----- | 
|(dollars in thousands)               | Quarter ended March 31, 2010 |          | Quarter ended March 31, 2009
|                                     | Average                      |          | Yield/                       |  | Average |          | Yield/
|                                     | Balance                      | Interest | Rate                         |  | Balance | Interest | Rate  
|Assets                               |                              |          |                              |  |         |          |       
|Interest-earning assets:             |                              |          |                              |  |         |          |       
|Loans(1)(2)                          | $444,718                     |          | $ 6,169                      |  | 5.63%   |          |        | $ 426,646 |  | $ 6,198  |  | 5.89% | 
|Taxable securities                   | 68,284                       |          | 755                          |  | 4.48%   |          |        | 65,183    |  | 811      |  | 5.05% | 
|Tax-exempt securities(2)             | 37,482                       |          | 497                          |  | 5.38%   |          |        | 38,104    |  | 538      |  | 5.73% | 
|FHLB stock                           | 3,250                        |          |                             |  | 0.00%   |          |        | 3,250     |  |         |  | 0.00% | 
|Other                                | 14,589                       |          | 2                            |  | 0.06%   |          |        | 3,215     |  | 2        |  | 0.25% | 
|                                     |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Total(2)                             | 568,323                      |          | 7,423                        |  | 5.30%   |          |        | 536,398   |  | 7,549    |  | 5.71% | 
|                                     |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Non-interest-earning assets:         |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Cash and due from banks              | 9,717                        |          |                              |  |         |          |        | 12,581    |  |          |  |       | 
|Premises and equipment, net          | 10,319                       |          |                              |  |         |          |        | 10,829    |  |          |  |       | 
|Cash surrender value insurance       | 10,527                       |          |                              |  |         |          |        | 10,008    |  |          |  |       | 
|Other assets                         | 12,831                       |          |                              |  |         |          |        | 5,173     |  |          |  |       | 
|Allowance for loan losses            | (7,729)                      |          |                              |  |         |          |        | (5,617)   |  |          |  |       | 
|                                     |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Total                                | $603,988                     |          |                              |  |         |          |        | $ 569,372 |  |          |  |       | 
|                                     |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Liabilities & stockholders equity   |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Interest-bearing liabilities:        |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Savings and demand deposits          | $124,667                     |          | $    329                     |  | 1.07%   |          |        | $ 106,231 |  | $    367 |  | 1.40% | 
|Money market deposits                | 95,344                       |          | 314                          |  | 1.34%   |          |        | 69,349    |  | 222      |  | 1.30% | 
|Time deposits                        | 183,874                      |          | 1,240                        |  | 2.73%   |          |        | 201,131   |  | 1,755    |  | 3.54% | 
|FHLB borrowings                      | 58,614                       |          | 460                          |  | 3.18%   |          |        | 62,911    |  | 589      |  | 3.80% | 
|Other borrowings                     | 27,070                       |          | 231                          |  | 3.46%   |          |        | 25,721    |  | 185      |  | 2.92% | 
|Senior subordinated notes            | 7,000                        |          | 142                          |  | 8.23%   |          |        |          |  |         |  | 0.00% | 
|Junior subordinated debentures       | 7,732                        |          | 113                          |  | 5.93%   |          |        | 7,732     |  | 113      |  | 5.93% | 
|                                     |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Total                                | 504,301                      |          | 2,829                        |  | 2.28%   |          |        | 473,075   |  | 3,231    |  | 2.77% | 
|                                     |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Non-interest-bearing liabilities:    |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Demand deposits                      | 53,170                       |          |                              |  |         |          |        | 50,779    |  |          |  |       | 
|Other liabilities                    | 3,615                        |          |                              |  |         |          |        | 4,446     |  |          |  |       | 
|Stockholders equity                 | 42,902                       |          |                              |  |         |          |        | 41,072    |  |          |  |       | 
|                                     |                              |          |                              |  |         |          |        |           |  |          |  |       | 
|Total                                | $603,988                     |          |                              |  |         |          |        | $ 569,372 |  |          |  |       | 
|                                     |                              |          |                              |  |         |          |        |           |  |          | 
|Net interest income                  |                              | $ 4,594  |                              |  |         |          |        | $ 4,318   |  |          | 
|Rate spread                          |                              |          | 3.02%                        |  |         |          |        | 2.94%     | 
|Net yield on interest-earning assets |                              |          | 3.28%                        |  |         |          |        | 3.26%     | 



(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%.



26



---





Table 9:  Interest Expense and Expense Volume and Rate Analysis (Year to Date)



|                            |                                |      |        |  |         | 
|--------------------------- | ------------------------------ | ---- | ------ |  | ------- | 
|                            | 2010 compared to 2009         
|                            | increase (decrease) due to (1)
|(dollars in thousands)      | Volume                         | Rate | Net   
|                            |                                |      |       
|Interest earned on:         |                                |      |       
|Loans(2)                    | $ 251                          |      | $(280) |  | $  (29) | 
|Taxable securities          | 34                             |      | (90)   |  | (56)    | 
|Tax-exempt securities(2)    | (8)                            |      | (33)   |  | (41)    | 
|Other interest income       | 2                              |      | (2)    |  |        | 
|                            |                                |      |        |  |         | 
|Total                       | 279                            |      | (405)  |  | (126)   | 
|                            |                                |      |        |  |         | 
|Interest paid on:           |                                |      |        |  |         | 
|Savings and demand deposits | 49                             |      | (87)   |  | (38)    | 
|Money market deposits       | 86                             |      | 6      |  | 92      | 
|Time deposits               | (116)                          |      | (399)  |  | (515)   | 
|FHLB borrowings             | (34)                           |      | (95)   |  | (129)   | 
|Other borrowings            | 12                             |      | 34     |  | 46      | 
|Senior subordinated notes   | 142                            |      |       |  | 142     | 
|                            |                                |      |        |  |         | 
|Total                       | 139                            |      | (541)  |  | (402)   | 
|                            |                                |      |        |  |         | 
|Net interest earnings       | $ 140                          |      | $  136 |  | $ 276   | 



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

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



Interest Rate Sensitivity



We incur market risk primarily from interest-rate risk inherent in our lending and deposit taking activities.  Market risk is the risk of loss from adverse changes in market prices and rates.  We actively monitor and manage our interest-rate risk exposure.  The measurement of the market risk associated with financial instruments (such as loans and deposits) is meaningful only when all related and offsetting on- and off-balance sheet transactions are aggregated, and the resulting net positions are identified.  Disclosures about the fair value of financial instruments that reflect changes in market prices and rates can be found in Note 10 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.





27



---





Our overall strategy is to coordinate the volume of rate sensitive assets and liabilities to minimize the impact of interest rate movement on the net interest margin.  The following table (Table 10) represents our earnings sensitivity to changes in interest rates at March 31, 2010.  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.

Money market deposit accounts are considered fully repriced within 90 days.  Rewards Checking NOW 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 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.



Table 10 reflects a liability sensitive (negative) gap position during the next year, with a cumulative one-year gap ratio as of March 31, 2010 of 90.4% compared to a negative gap of 87.6% at December 31, 2009.  In general, a current negative gap would be favorable in a falling interest rate environment but unfavorable in a rising rate environment.  However, net interest income is impacted not only by the timing of product repricing, but the extent of the change in pricing which could be severely limited from local competitive pressures.  This factor can result in change to net interest income from changing interest rates different than expected from review of the gap table.





28



---





Table 10:  Interest Rate Sensitivity Gap Analysis



|                                  |                |             |              |           |          |               |       |           |  |           |  |         
|--------------------------------- | -------------- | ----------- | ------------ | --------- | -------- | ------------- | ----- | --------- |  | --------- |  | --------
|                                  | March 31, 2010
|(dollars in thousands)            | 0-90 Days      | 91-180 days | 181-365 days | 1-2 yrs.  | 2-5 yrs. | Beyond 5 yrs. | Total
|                                  |                |             |              |           |          |               |      
|Earning assets:                   |                |             |              |           |          |               |      
|Loans                             | $164,087       | $  27,641   |              | $  50,691 |          | $  79,637     |       | $  94,658 |  | $  25,267 |  | $441,981
|Securities                        | 7,127          | 5,176       |              | 10,828    |          | 12,429        |       | 27,830    |  | 44,898    |  | 108,288 
|FHLB stock                        |                |             |              |           |          |               |       |           |  | 3,250     |  | 3,250   
|CSV bank-owned life insurance     |                |             |              |           |          |               |       |           |  | 10,590    |  | 10,590  
|Other earning assets              | 13,793         |             |              |           |          |               |       |           |  |           |  | 13,793  
|                                  |                |             |              |           |          |               |       |           |  |           |  |         
|Total                             | $185,007       | $  32,817   |              | $  61,519 |          | $  92,066     |       | $122,488  |  | $  84,005 |  | $577,902
|Cumulative rate                   |                |             |              |           |          |               |       |           |  |           |  |         
|sensitive assets                  | $185,007       | $217,824    |              | $279,343  |          | $371,409      |       | $493,897  |  | $577,902  |  |         
|                                  |                |             |              |           |          |               |       |           |  |           |  |         
|Interest-bearing liabilities      |                |             |              |           |          |               |       |           |  |           |  |         
|Interest-bearing deposits         | $187,077       | $  24,003   |              | $  79,190 |          | $  29,371     |       | $  55,028 |  | $  31,564 |  | $406,233
|FHLB advances                     |                |             |              | 1,333     |          | 7,977         |       | 47,124    |  | 1,000     |  | 57,434  
|Other borrowings                  | 9,626          |             |              |           |          |               |       | 8,000     |  | 5,500     |  | 23,126  
|Senior subordinated notes         |                |             |              |           |          |               |       |           |  | 7,000     |  | 7,000   
|Junior subordinated debentures    |                | 7,732       |              |           |          |               |       |           |  |           |  | 7,732   
|                                  |                |             |              |           |          |               |       |           |  |           |  |         
|Total                             | $196,703       | $  31,735   |              | $  80,523 |          | $  37,348     |       | $110,152  |  | $  45,064 |  | $501,525
|Cumulative interest               |                |             |              |           |          |               |       |           |  |           |  |         
|sensitive liabilities             | $196,703       | $228,438    |              | $308,961  |          | $346,309      |       | $456,461  |  | $501,525  |  |         
|                                  |                |             |              |           |          |               |       |           |  |           |  |         
|Interest sensitivity gap for      |                |             |              |           |          |               |       |           |  |           |  |         
|the individual period             | $(11,696)      | $    1,082  |              | $(19,004) |          | $  54,718     |       | $  12,336 |  | $  38,941 |  |         
|Ratio of rate sensitive assets to |                |             |              |           |          |               |       |           |  |           |  |         
|rate sensitive liabilities for    |                |             |              |           |          |               |       |           |  |           |  |         
|the individual period             | 94.1%          | 103.4%      |              | 76.4%     |          | 246.5%        |       | 111.2%    |  | 186.4%    |  |         
|                                  |                |             |              |           |          |               |       |           |  |           |  |         
|Cumulative interest               |                |             |              |           |          |               |       |           |  |           |  |         
|sensitivity gap                   | $(11,696)      | $(10,614)   |              | $(29,618) |          | $25,100       |       | $37,436   |  | $76,377   |  |         
|Cumulative ratio of rate          |                |             |              |           |          |               |       |           |  |           |  |         
|sensitive assets to rate          |                |             |              |           |          |               |       |           |  |           |  |         
|sensitive liabilities             | 94.1%          | 95.4%       |              | 90.4%     |          | 107.2%        |       | 108.2%    |  | 115.2%    |  |         



We use financial modeling techniques that measure the 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.  We also use various policy measures to assess interest rate risk as described below.



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





29



---





Table 11:  Net Interest Margin Rate Simulation Impacts



|                                       |            |            |               |  |       | 
|-------------------------------------- | ---------- | ---------- | ------------- |  | ----- | 
|Period Ended:                          | March 2010 | March 2009 | December 2009
|                                       |            |            |              
|Cumulative 1 year gap ratio            |            |            |              
|Base                                   | 90%        |            | 91%           |  | 88%   | 
|Up 200                                 | 86%        |            | 86%           |  | 84%   | 
|Down 100                               | 93%        |            | 96%           |  | 92%   | 
|                                       |            |            |               |  |       | 
|Change in Net Interest Income  Year 1 |            |            |               |  |       | 
|Up 200 during the year                 | -3.3%      |            | -3.0%         |  | -3.3% | 
|Down 100 during the year               | -0.6%      |            | -0.8%         |  | -1.1% | 
|                                       |            |            |               |  |       | 
|Change in Net Interest Income  Year 2 |            |            |               |  |       | 
|No rate change (base case)             | -0.5%      |            | 3.6%          |  | 0.1%  | 
|Following up 200 in year 1             | -3.0%      |            | -0.9%         |  | -2.0% | 
|Following down 100 in year 1           | -5.3%      |            | -0.1%         |  | -5.9% | 



To assess whether interest rate sensitivity beyond one year helps mitigate or exacerbate the short-term rate sensitive position, a quarterly measure of core funding utilization is made.  Core funding is defined as liabilities with a maturity in excess of 60 months and stockholders equity capital.  Core deposits including DDA, 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 86.3% at March 31, 2010 compared to 81.6% at December 31, 2009.



As at December 31, 2009, the elevated core funding utilization ratio at March 31, 2010 is due to extension in principal payments on residential mortgage loans held in the loan portfolio as well as residential mortgage related securities held in the investment securities portfolio.  In the up 200 basis point scenario, securities and loan principal to reprice in 5 years or longer increases approximately $14,105, accounting for approximately 84% of the increase in assets repricing over 5 years.  Although this level is considered manageable, we are taking actions to protect net interest income during a rising interest rate environment by extending the average fixed term of wholesale funding and reinvesting securities cash flow in shorter duration investments.



At March 31, 2010, 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 small projected changes 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.  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 the 12 months following March 31, 2010, net interest income would decline during the first three years of the simulation in amounts ranging from 4.8% to 6.3% of the base simulations net interest income ($553 to $721 after tax impacts per year).  When the yield curve flattens, repriced short-term funding cost, such as for terms of 1 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 lower than that seen at December 31, 2009 when similar flat up 500 basis point projections indicated net interest income would decline during the first three years of the simulation in amounts ranging from 5.9% to 8.7% of the base simulations net interest income ($682 to $1,009 after tax impacts).  The decline in sensitivity is due in part to continued extension of the fixed rate wholesale funding sources, whose average fixed rate period is projected to be approximately 34 months at June 30, 2010 up from an average of approximately 22 months during the year ended December 31, 2009.  Wholesale funding makes up approximately 28% of total assets at March 31, 2010.





30



---





Noninterest Income



Total noninterest income for the quarter ended March 31, 2010 was $1,091 compared to $1,368 earned during the March 2009 quarter, a decline of $277, or 20%.  The decline was due to significantly lower mortgage banking income during 2010 compared to 2009, which prior year period saw historically low mortgage rates and a wave of customer loan refinancing.  Therefore, mortgage banking income declined $494, or 65%, during 2010 compared to 2009.  The decline in mortgage banking income was offset by absence of the loss on disposal of premise and equipment of $98 seen during 2009 and an increase in investment sales commissions of $46 and increased debit and credit card interchange income of $38 during March 2010 compared to the prior year.



Noninterest Expense



Noninterest expenses totaled $3,840 during the March 2010 quarter compared to $3,389 during the prior year, an increase of $451, or 13%.  The 2010 increase was due to an increase in total salaries and benefits of $289 (up 16%), increased loss on foreclosed assets of $97 (up 693%) and increased FDIC insurance of $66 (up 40%).



Base salaries and wages increased $61, or 4.3%, during March 2010 compared to the prior year from an average annual employee base wage increase of 1.7% effective January 1, 2010 and a small increase in the number of employees.  In addition, health and dental plan expense increased $97, or 54% during 2010 compared to the prior year.  Health insurance plan expense is expected to moderate during the June 2010 quarter as a new high deductible health plan managed by employees within a health reimbursement account (HRA) is expected to reduce plan costs.  Discretionary profit sharing and incentive plan accrued costs increased $36 during 2010 compared to 2009 but are subject to full year results and represented estimates at March 31, 2010.  The remaining increase in wages and benefits expense during the March 2010 quarter is due to lower deferral of direct loan origination costs under current accounting standards (which are subsequently amortized over the life of the loan as a yield adjustment) due to approximately 30% lower level of new loan originations during March 2010 compared to March 2009.



LIQUIDITY



Liquidity refers to the ability to generate adequate amounts of cash to meet our need for cash at a reasonable cost.  We manage our liquidity to provide adequate funds to support borrowing needs and deposit flow of our customers.  We also view liquidity as the ability to raise cash at a reasonable cost or with a minimum of loss and as a measure of balance sheet flexibility to react to marketplace, regulatory, and competitive changes.  Retail and local deposits are the primary source of funding.  Retail and local deposits were 62.2% of total assets at March 31, 2010, compared to 62.9% of total assets at December 31, 2009.



Table 12:  Period-end Deposit Composition

|                                               |           |        |              |           |        |  |           |       
|---------------------------------------------- | --------- | ------ | ------------ | --------- | ------ |  | --------- | ------
|                                               | March 31, |        | December 31,
|(dollars in thousands)                         | 2010      |        |              | 2009      |        |  | 2009      |       
|                                               | $         | %      |              | $         | %      |  | $         | %     
|                                               |           |        |              |           |        |  |           |       
|Non-interest bearing demand                    | $  52,850 | 11.5%  |              | $  55,514 | 12.9%  |  | $  60,003 | 13.1% 
|Interest-bearing demand and savings            | 108,226   | 23.6%  |              | 98,261    | 22.8%  |  | 115,961   | 25.3% 
|Money market deposits                          | 92,476    | 20.1%  |              | 71,416    | 16.6%  |  | 94,356    | 20.6% 
|Retail time deposits less than $100            | 56,512    | 12.3%  |              | 67,073    | 15.6%  |  | 59,516    | 13.0% 
|                                               |           |        |              |           |        |  |           |       
|Total core deposits                            | 310,064   | 67.5%  |              | 292,264   | 67.9%  |  | 329,836   | 72.0% 
|Wholesale interest-bearing demand              | 9,501     | 2.1%   |              | 0         | 0.0%   |  | 9,501     | 2.1%  
|Retail time deposits $100 and over             | 63,589    | 13.9%  |              | 61,469    | 14.2%  |  | 51,700    | 11.3% 
|Broker & national time deposits less than $100 | 1,051     | 0.2%   |              | 750       | 0.2%   |  | 1,050     | 0.2%  
|Broker & national time deposits $100 and over  | 74,878    | 16.3%  |              | 76,688    | 17.7%  |  | 66,644    | 14.4% 
|                                               |           |        |              |           |        |  |           |       
|Totals                                         | $459,083  | 100.0% |              | $431,171  | 100.0% |  | $458,731  | 100.0%



31



---







| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 



Interest-bearing demand and savings deposits declined $7,735, or 6.7%, during the quarter ended March 31, 2010 as seasonal governmental tax deposits held at December 31, 2010 were submitted to the State of Wisconsin or used by municipalities for other short-term purposes.  However, a significant portion of these short-term governmental deposits were retained during the quarter via placement into the CDARS program.   We originate retail certificates of deposit with local depositors under the program known as the Certificate of Deposit Account Registry System (CDARS) in which our customer deposits (with participation of other banks in the CDARS network) are able to obtain levels of FDIC deposit insurance coverage in amounts greater than traditional limits.  For purposes of the Period-end Deposit Composition Table above, these certificates are included in retail time deposits $100 and over and totaled $25,337 at March 31, 2010 compared to $12,113 at December 31, 2009.  Although classified as retail time deposits $100 and over in the table above, we are required to report these balances as broker deposits on our quarterly regulatory call reports.



Our high yield retail interest bearing demand account, Rewards Checking, continues to grow in balances and held $40,744, in deposits at March 31, 2010 compared to $40,198 at December 31, 2009.  Peoples Rewards Checking pays a premium interest rate and reimbursement of ATM fees to depositors who meet account usage requirements including minimum debit card purchases, acceptance of electronic account statements, and direct deposit activity.  The average interest cost of Reward Checking balances (excluding debit card interchange fee income, savings from delivery of electronic periodic statements, customer reimbursement of ATM fees,  and vendor software costs of maintaining the program) was 2.28% and 3.03% during the quarters ended March 31, 2010 and 2009, respectively.



Wholesale funding generally carries higher interest rates than local core deposit funding, so loan growth supported by wholesale funds often generates lower net interest spreads than loan growth supported by local funds.  However, wholesale funds provide us the ability to quickly raise large funding blocks and to match loan terms to minimize interest rate risk and avoid the higher incremental cost to existing deposits from simply increasing retail rates to raise local deposits.  Rates paid on local deposits are significantly impacted by competitor interest rates and the local economys ability to grow in a way that supports the deposit needs of all local financial institutions.



Current brokered certificate of deposit rates available to us are less costly than equivalent local deposits as national wholesale funds place a premium on FDIC insurance available on their large deposit when placed with brokers in amounts less than current FDIC insurance limits.  Due to large demand through brokers for these types of deposits, brokered deposit rates for well performing banks are historically low.  In addition, declines in profitability and capital at some banks have reduced their individual availability of wholesale funding or increased its cost.  In many cases, these institutions with reduced wholesale funding access have increased their retail interest rates to gather funds through local depositors.  Consequently, local certificate of deposit rates in many markets are priced higher than equivalent wholesale brokered deposits due to a limited supply of retail deposits.  We expect this difference in pricing between wholesale and local certificates of deposit to be removed by the wholesale funding market as the banking industry becomes well capitalized and regains consistent profits.  The impact of an improving national economy will likely be an increase in wholesale rates relative to local core deposit rates that could increase the volatility of our interest expense due to a significant portion of our funding coming from wholesale sources.



Our internal policy is to limit broker and national time (not including CDARS) deposits to 20% of total assets.  Broker and national deposits as a percentage of total assets were 14.2%, 12.7%, and 13.6% at March 31, 2010, December 31, 2009, and March 31, 2009, respectively.  Brokered deposits increased $7 million during the March 2010 quarter to refinance a maturing repurchase agreement.  Brokered deposits to total assets would have been 13.0% at March 31, 2010 excluding the repurchase agreement impacts.  Due to borrowing capacity at the FHLB from pay down of prior advances, we expect a mix of brokered deposits and new FHLB advances to provide wholesale funding as needed during the coming quarters.  Beyond these traditional sources of wholesale funding, secondary wholesale sources include Federal Reserve Discount Window advances and pledging of investments securities against repurchase agreements.





32



---





Table 13:  Summary of Balance by Significant Deposit Source



|                                               |           |      |              |      |  |           | 
|---------------------------------------------- | --------- | ---- | ------------ | ---- |  | --------- | 
|                                               | March 31, |      | December 31,
|(dollars in thousands)                         | 2010      | 2009 |              | 2009
|                                               |           |      |              |     
|Total time deposits $100 and over              | $ 138,467 |      | $ 138,157    |      |  | $ 118,344 | 
|Total broker and wholesale deposits            | 85,430    |      | 77,438       |      |  | 77,195    | 
|Total retail time deposits                     | 120,101   |      | 128,542      |      |  | 111,216   | 
|Core deposits, including money market deposits | 310,064   |      | 292,264      |      |  | 329,836   | 



Table 8:  Change in Deposit Balance since Prior Period Ended



|                                               |                |   |                   |   |   |          |  |       | 
|---------------------------------------------- | -------------- | - | ----------------- | - | - | -------- |  | ----- | 
|                                               | March 31, 2009 |   | December 31, 2009
|(dollars in thousands)                         | $              | % |                   | $ | %
|                                               |                |   |                   |   |  
|Total time deposits $100 and over              | $    310       |   | 0.2%              |   |   | $ 20,123 |  | 17.0% | 
|Total broker wholesale deposits                | 7,992          |   | 10.3%             |   |   | 8,235    |  | 10.7% | 
|Total retail time deposits                     | (8,441)        |   | -6.6%             |   |   | 8,885    |  | 8.0%  | 
|Core deposits, including money market deposits | 17,800         |   | 6.1%              |   |   | (19,772) |  | -6.0% | 



Table 14:  Available but Unused Funding Sources other than Retail Deposits



|                                              |                |        |                   |             |        |           |  |           | 
|--------------------------------------------- | -------------- | ------ | ----------------- | ----------- | ------ | --------- |  | --------- | 
|                                              | March 31, 2010 |        | December 31, 2009
|                                              | Unused, but    | Amount |                   | Unused, but | Amount
|(dollars in thousands)                        | Available      | Used   |                   | Available   | Used  
|                                              |                |        |                   |             |       
|Overnight federal funds purchased             | $  25,500      |        | $                |             |        | $  24,500 |  | $        | 
|Federal Reserve discount window advances      | 83,132         |        |                  |             |        | 74,261    |  |          | 
|FHLB advances under blanket mortgage lien     | 12,738         |        | 57,434            |             |        | 20,929    |  | 58,159    | 
|Repurchase agreements and other FHLB advances | 27,557         |        | 23,126            |             |        | 22,878    |  | 28,410    | 
|Wholesale market time deposits                | 34,783         |        | 85,430            |             |        | 44,176    |  | 77,195    | 
|Holding company unsecured line of credit      | 1,000          |        |                  |             |        | 1,000     |  |          | 
|                                              |                |        |                   |             |        |           |  |           | 
|Totals                                        | $184,710       |        | $165,990          |             |        | $187,744  |  | $163,764  | 
|                                              |                |        |                   |             |       
|Funding as a percent of total assets          | 30.7%          | 27.6%  |                   | 30.9%       | 27.0% 



We regularly maintain access to wholesale markets to fund loan originations and manage local depositor needs.  At March 31, 2010, unused (but available) wholesale funding was approximately $185 million, or 31% of total assets, compared to $188 million, or 31% of total assets at December 31, 2009.  Certain municipal securities held in our investment portfolio may also be available for pledging as collateral against repurchase agreements and FHLB advances under conditions dictated by the lender.  However, due to the difficulty and uncertainty of the amount ultimately available as collateral, unpledged municipal securities are not considered available for funding in our internal analysis of liquidity flexibility or in the figures reported as unused but available wholesale funding above.



Our ability to borrow funds on a short-term basis from the Federal Reserve Discount Window is an important part of our liquidity analysis.  Although we had no Discount Window amounts outstanding during the past several quarters, approximately 45% of unused but available liquidity at March 31, 2010 was represented by available Discount Window advances compared to 40% of available liquidity at December 31, 2009.  During June 2010, we were informed by the Federal Reserve that a Program-wide change in the calculation of fair value of commercial related loans that we submit for Discount Window collateral would reduce the borrowing base of our collateral pool by approximately 7%.





33



---





Total FHLB advances in excess of $65,000 require us to purchase additional FHLB stock equal to 5% of the advance amount.  At March 31, 2010, we could have drawn an FHLB advance up to $7,566 of the $12,738 available without the purchase of FHLB stock.  Further advances of the remaining $5,172 available would have required us to purchase additional FHLB stock totaling $259.  The FHLB currently pays no dividends on its stock and has informed its shareholders that no dividends should be expected during 2010.  Therefore, additional FHLB advances carry additional cost relative to other wholesale borrowing alternatives due to the requirement to hold non-earning FHLB stock.



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 6.9% and 5.6% at March 31, 2010, and December 31, 2009, respectively.



CAPITAL RESOURCES



Stockholders equity increased $1,012 to $43,282 during the three months ended March 31, 2010.  The increase was driven by quarterly net income of $881 and an increase in unrealized gain on securities available for sale of $122.  Net book value of $27.67 per share at March 31, 2010 increased 4.3% from net book value per share of $26.53 at March 31, 2009 and 2.1% from net book value of $27.11 per share at December 31, 2009.  Unrealized gains in securities available for sale reflected as accumulated other comprehensive income represented approximately $1.21, or 4.4% of total net book value at March 31, 2010.  The decline in market interest rates since September 30, 2008 has increased the fair value of the fixed rate debt securities held in our investment portfolio.  If market rates were to increase in the future, existing unrealized gains would decline, negatively influencing net book value per share.



During the March 2010 quarter, we issued 4,983 shares of restricted stock having a grant date value of $75 to certain key employees as a retention tool and to align employee performance with shareholder interests.  The shares vest over the service period using a straight-line method and unvested shares are forfeited if, prior to vesting, the employee is no longer employed with the Bank.  Refer to Footnote 2 of the Notes to Consolidated Financial Statements for more information on the restricted shares.



No shares were repurchased by us during the three months ended March 31, 2010 or 2009 as we sought to conserve capital for growth and increased regulatory capital ratios.  Industry wide, the cost of capital has increased significantly compared to prior years and many sources of previously low cost capital such as pooled trust preferred offerings have been closed.  The banking industry continues to place a premium on capital and we expect to refrain from significant treasury stock repurchases during the remainder of 2010.



The adequacy of our capital is regularly reviewed to ensure sufficient capital is available for current and future needs and is in compliance with regulatory guidelines.  As of March 31, 2010, and December 31, 2009, the Banks Tier 1 risk-weighted capital ratio, total risk-weighted capital, and Tier 1 leverage ratio were in excess of regulatory minimums and were classified as well-capitalized.  Failure to remain well-capitalized could prevent us from obtaining future wholesale brokered time deposits which are an important source of funding.  Average book tangible stockholders equity to average assets was 6.82% during the March 2010 quarter, 7.01% during the December 2009 quarter, and 6.88% during the March 2009 quarter.





34



---





Table 15:  Capital Ratios



PSB Holdings, Inc.  Consolidated



|                                                           |           |      |              |      |  |           | 
|---------------------------------------------------------- | --------- | ---- | ------------ | ---- |  | --------- | 
|                                                           | March 31, |      | December 31,
|(dollars in thousands)                                     | 2010      | 2009 |              | 2009
|                                                           |           |      |              |     
|Stockholders equity                                       | $  43,282 |      | $  41,375    |      |  | $  42,270 | 
|Junior subordinated debentures, net                        | 7,500     |      | 7,500        |      |  | 7,500     | 
|Disallowed mortgage servicing right assets                 | (114)     |      | (87)         |      |  | (115)     | 
|Unrealized gain on securities available for sale           | (1,898)   |      | (1,940)      |      |  | (1,781)   | 
|                                                           |           |      |              |      |  |           | 
|Tier 1 regulatory capital                                  | 48,770    |      | 46,848       |      |  | 47,874    | 
|Senior subordinated notes                                  | 7,000     |      | 0            |      |  | 7,000     | 
|Allowance for loan losses                                  | 6,097     |      | 6,030        |      |  | 6,121     | 
|                                                           |           |      |              |      |  |           | 
|Total regulatory capital                                   | $  61,867 |      | $  52,878    |      |  | $  60,995 | 
|                                                           |           |      |              |      |  |           | 
|Tier 1 capital to average tangible assets (leverage ratio) | 8.08%     |      | 8.23%        |      |  | 8.12%     | 
|Tier 1 capital to risk-weighted assets                     | 10.03%    |      | 9.71%        |      |  | 9.81%     | 
|Total capital to risk-weighted assets                      | 12.72%    |      | 10.96%       |      |  | 12.49%    | 



Peoples State Bank  Subsidiary



|                                                        |        |  |        |  |       
|------------------------------------------------------- | ------ |  | ------ |  | ------
|Tier 1 capital average tangible assets (leverage ratio) | 9.10%  |  | 8.15%  |  | 9.16% 
|Tier 1 capital to risk-weighted assets                  | 11.32% |  | 9.61%  |  | 11.05%
|Total capital to risk-weighted assets                   | 12.57% |  | 10.86% |  | 12.30%



OFF BALANCE-SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS



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 on an aggregate pool basis.  The following tables summarize loan principal serviced for the FHLB under various MPF programs and for FNMA as of March 31, 2010 and December 31, 2009.



Table 16:  Residential Mortgage Loans Serviced for Others as of March 31, 2010 ($000s)



|             |           |       |             |              |             |              |                      |   |         |  |          |  |      
|------------ | --------- | ----- | ----------- | ------------ | ----------- | ------------ | -------------------- | - | ------- |  | -------- |  | -----
|             |           |       | 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 | $  37,330 | 566   |             | 5.42%        | 84          |              | $    499             |   | $ 2,494 |  | $    130 |  | 0.35%
|FHLB MPF 125 | 59,441    | 570   |             | 5.77%        | 46          |              | 1,851                |   | 1,753   |  | 255      |  | 0.43%
|FHLB XTRA    | 137,082   | 951   |             | 4.83%        | 10          |              | n/a                  |   | n/a     |  | 725      |  | 0.53%
|FNMA         | 6,209     | 47    |             | 5.21%        | 11          |              | n/a                  |   | n/a     |  | 33       |  | 0.53%
|             |           |       |             |              |             |              |                      |   |         |  |          |  |      
|Totals       | $240,062  | 2,134 |             | 5.16%        | 30          |              | $ 2,350              |   | $ 4,247 |  | $ 1,143  |  | 0.48%





35



---





Table 17:  Residential Mortgage Loans Serviced for Others as of December 31, 2009 ($000s)



|             |           |       |             |              |             |              |                      |   |         |  |          |  |      
|------------ | --------- | ----- | ----------- | ------------ | ----------- | ------------ | -------------------- | - | ------- |  | -------- |  | -----
|             |           |       | 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 | $  39,908 | 587   |             | 5.41%        | 81          |              | $    499             |   | $ 2,494 |  | $    144 |  | 0.36%
|FHLB MPF 125 | 62,751    | 591   |             | 5.78%        | 44          |              | 1,851                |   | 1,753   |  | 280      |  | 0.45%
|FHLB XTRA    | 130,541   | 902   |             | 4.83%        | 7           |              | n/a                  |   | n/a     |  | 699      |  | 0.54%
|FNMA         | 4,564     | 34    |             | 5.37%        | 14          |              | n/a                  |   | n/a     |  | 24       |  | 0.53%
|             |           |       |             |              |             |              |                      |   |         |  |          |  |      
|Totals       | $237,764  | 2,114 |             | 5.19%        | 29          |              | $ 2,350              |   | $ 4,247 |  | $ 1,147  |  | 0.49%



We have ceased originating loans under the MPF 100 and MPF 125 programs.  All FHLB originations are now through the FHLB XTRA closed loan program which do not include our credit enhancement.  Due to historical strength of mortgage borrowers in our markets, the original 1% of principal loss pool provided by the FHLB, and current economic conditions in our markets, management believes the possibility of losses under guarantees to the FHLB to be remote.  Accordingly, we have made no provision for a recourse liability related to this recourse obligation on loans we currently service.  Under the MPF 100 and MPF 125 credit enhancement programs, the FHLB is reimbursed for any incurred principal losses by withholding the monthly credit enhancement fee normally paid to us until their principal loss is recovered.  We recognize credit enhancement income on a cash basis when received monthly from the FHLB.



Under the XTRA program, loan principal is sold to the FHLB in exchange for a fee while we retain servicing rights to the loan.  We are paid an annualized fee of 25 basis points for servicing future payments on the loan.  We provide no credit enhancement on the loan to the FHLB and are paid no credit enhancement fees.  The FHLB has no recourse to us for their realized future principal losses under the XTRA program.  As loan principal is repaid by customers on loans in these discontinued MPF 100 and MPF 125 programs, credit enhancement fees (approximately 7 to 10 basis points of principal per year on a loan level basis) will decline, reducing our mortgage banking income in future periods. Credit enhancement fee income was $12 and $39 during the three months ended March 31, 2010 and 2009, respectively.



Item 3.  Quantitative and Qualitative Disclosures About Market Risk



There has been no material change in the information provided in response to Item 7A of PSBs Form 10-K for the year ended December 31, 2009.



Item 4.  Controls and Procedures



As of the end of the period covered by this report, management, under the supervision, and with the participation, of PSBs President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of PSBs disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) pursuant to Exchange Act Rule 13a-15.  Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that PSBs disclosure controls and procedures were effective.  There were no changes in PSBs internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, PSBs internal control over financial reporting.





36



---





PART II  OTHER INFORMATION



Item 1A.  Risk Factors



In addition to the other information set forth in this report, this report should be considered in light of the risk factors referenced in Part I of PSBs Annual Report on Form 10-K for the year ended December 31, 2009, under the caption Forward-Looking Statements.  These and other risk factors could materially affect PSBs business, financial condition, or future results of operations.  The risks referenced in PSBs Annual Report on Form 10-K are not the only risks facing PSB.  Additional risks and uncertainties not currently known to PSB or that it currently deems to be immaterial also may materially adversely affect PSBs business, financial condition, and/or operating results.



Item 6.  Exhibits



Exhibits required by Item 601 of Regulation S-K.



|        |                                                                     
|------- | --------------------------------------------------------------------
|Exhibit |                                                                     
|Number  | Description                                                         
|        |                                                                     
|31.1    | Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
|31.2    | Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
|32.1    | Certifications under Section 906 of Sarbanes-Oxley Act of 2002      





37



---





SIGNATURES





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







PSB HOLDINGS, INC.







May 14, 2010

SCOTT M. CATTANACH

Scott M. Cattanach

Treasurer



(On behalf of the Registrant and as

Principal Financial Officer)



38



---





EXHIBIT INDEX

to

FORM 10-Q

of

PSB HOLDINGS, INC.

for the quarterly period ended March 31, 2010

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

(17 C.F.R. §232.102(d))





The following exhibits are filed as part this report:



31.1

Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002

31.2

Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002

32.1

Certifications under Section 906 of Sarbanes-Oxley Act of 2002





39