PSB Reports Record 1st Quarter Earnings of $3.9 Million, or $0.87 Per Share; Income Supported by PPP Fee Recognition and Continued Mortgage Gains

WAUSAU, Wis., April 26, 2021 (GLOBE NEWSWIRE) -- PSB Holdings, Inc. (“PSB”) (OTCQX: PSBQ), the holding company for Peoples State Bank serving Northcentral and Southeastern Wisconsin, reported first quarter earnings ending March 31, 2021 of $0.87 per share on net income of $3.9 million, compared to earnings of $0.73 per share on net income of $3.3 million, during the December 31, 2020 quarter, and $0.36 per share on net income of $1.6 million, during the first quarter a year ago. Relative to the prior quarter, first quarter earnings benefitted from stronger net interest income supported by first round SBA Paycheck Protection Program (“PPP”) fee accretion, continued elevated mortgage banking fee income, and lower noninterest expense due to deferred loan origination costs on second round SBA PPP loan originations.  

“Our southeastern Wisconsin growth continued with the closing of our acquisition of Waukesha Bankshares, Inc. on April 16, 2021. The improved economic clarity, vaccine rollout and our further expansion in the Milwaukee market should serve to continue to enhance shareholder value in 2021. To support our expanded presence in Milwaukee, we recently secured a local 20-year commercial banking veteran with deep ties to the business community to lead our Waukesha location,” stated Scott Cattanach, President and CEO. “Before considering loan repayments from ongoing PPP loan forgiveness, we are optimistic annualized loan growth will normalize in the four to five percent range as we leverage our operations in and around Milwaukee and businesses activity returns to pre-pandemic levels.”

Net Interest Margin Impact: PSB’s net interest margin increased to 3.62% for the quarter ended March 31, 2021 from 3.22% the prior quarter due to the accretion of net PPP origination fees of $1.3 million as $45.1 million PPP loans were repaid by the SBA during the quarter. In addition, the cost of time deposits declined 22 basis points, to 1.06% in the March 31, 2021 quarter lowering our cost of interest-bearing funds by 7 bps. Loan yield and net interest margin excluding the PPP loans would have been 4.17% and 3.24%, respectively during the March 2021 quarter compared to 4.26% and 3.26% in the December 2020 quarter. Loan originations in the most recent quarter were below our current loan yield and are expected to trend similarly during the June 2021 quarter.

Capital Management:   At March 31, 2021, PSB’s tangible equity to tangible asset ratio was 9.32% and the bank’s capital was well in-excess of all regulatory requirements. Management expects capital ratios to decline slightly with the closing of the Waukesha Bancshares, Inc. acquisition. PSB did not repurchase any shares during the quarter ending March 31, 2021, although the company announced resumption of its repurchase plan beginning January 2021.

Loan Loss Reserves:   For the quarter ended March 31, 2021, the bank added provisions for loan losses totaling $1.0 million, an increase from $675,000 in the previous quarter and down from $1.8 million in the first quarter of 2020. Allowance for loan losses were $11.8 million at March 31, 2021 which includes $4.9 million of allowances for loans with risk weightings at 5 to 7 (“Watch, Substandard, and Impaired”) and $6.9 million for loans with risk weightings at 1 to 4 (“Acceptable and Average”). At March 31, 2021, allowance for loan losses totaled 1.40% of gross loans, and was 1.59% of proforma gross loans net of PPP loans totaling $87.4 million and purchased USDA guaranteed loans totaling $10.5 million.

Loan Accommodations: Loan modifications decreased from 48 loan accommodations with a balance of $22.3 million at December 31, 2020 to 27 loans with a balance of $21.9 million, or 2.6% of gross loans, at March 31, 2021. In the first quarter, the bank added a grocery store loan with a balance of $2.0 million to modified accommodation loans.

As shown in the table below during the March 2021 quarter, “impaired loans” increased $3.0 million and the “substandard risk” loans increased $10.5 million while “watch risk” loans decreased $5.5 million.   The increase in impaired loans consists of a commercial real estate loan for $3.4 million leased to an operator of a national restaurant chain that has remained closed throughout the pandemic. This loan was moved from watch risk to the impaired loan category during the March 2021 quarter. The increase in substandard risk loans was associated with two borrowers. The first is a group of collateral dependent commercial real estate loans totaling $2.4 million to one borrower that was moved from the watch list to the substandard risk category. These properties are in the process of being sold and are scheduled to close in the second quarter of 2021 with proceeds adequate to repay the debts. The second is a $8.4 million hotel construction loan moved from “acceptable risk” to “substandard risk” during the quarter. A junior lien loan under the SBA 504 program for this project has been approved by the SBA and $3.4 million will be sold to the SBA in the June 2021 quarter.

March 31, 2021 Quarterly Financial Highlights (at or for the periods ended March 31, 2021, compared to December 31, 2020 and / or March 31, 2020, as applicable):

• Record earnings of $3.9 million for the quarter ended March 31, 2021 resulted in strong annualized return on average assets of 1.39% and return on average shareholders’ equity of 14.92%. The record earnings for the quarter were despite continued elevated provision for loan losses related to one impaired loan.
  
  
• Tangible net book value increased to $23.69 per share, a 13.4% over the most recent twelve-month period. Dividends of $0.42 per share were paid to shareholders during 2020, continuing a 5-year, 8.0% cumulative annual growth rate.
  
  
• Total net loans increased $23.6 million, excluding PPP paydowns and originations, during a typically seasonally slow winter period, up 3.2% during the quarter. SBA PPP loans declined $14.6 million to $87.4 million, from $45.1 million in first round forgiveness paydowns but increased $30.5 million from PPP second round new originations.
  

Balance Sheet and Asset Quality Review

Total assets remained mostly unchanged at March 31, 2021 relative to the prior quarter ended December 31, 2020, though there were some minor changes in the composition of assets. At March 31, 2021, and the prior quarter ended December 31, 2020, total assets were $1.13 billion. Total loans receivable increased by $9.0 million, or 1.1%, to $830.0 million at March 31, 2021 from $821.0 million one quarter earlier. Offsetting this growth, net SBA PPP loans decreased $14.6 million to $87.4 million at March 31, 2021, as $45.1 million of borrower loans were forgiven and repaid by the SBA PPP guarantee program and $30.5 million of new second round PPP loans were originated. At March 31, 2021, the bank had net unrealized PPP origination fees totaling $2.1 million of which $1.1 million are related to first round PPP loans and $1.0 million are related to second round PPP loans. The first round deferred origination fees are expected to be recognized as income during the remainder of 2021 when these loans are forgiven or paid off.   Excluding the impact of PPP loan activity, loans grew $24.3 million, or 3.3%, and were driven by residential first mortgages, owner occupied commercial real estate, and non-owner occupied commercial real estate.  

The allowance for loan losses increased to 1.40% of gross loans at March 31, 2021 (1.59% of gross loans net of PPP guaranteed loans and USDA guaranteed loans) compared to 1.30% of gross loans (1.50% of gross loans net of PPP loans and USDA guaranteed loans) one quarter earlier. Annualized net charge-offs to average loans were 0.01% for the quarter ended March 31, 2021. Non-performing assets increased to 1.13% of total assets at March 31, 2021, compared to 0.90% at December 31, 2020, and 0.54% at March 31, 2020. The increase in non-performing assets at March 31, 2021, primarily relates to the addition of a $3.4 million loan on real estate leased to a restaurant that has been closed throughout the pandemic. Though the borrower continues to make regularly scheduled payments, the loan was put on non-accrual status until such time clarity is provided to the operations of the restaurant chain or other building use. At March 31, 2021, non-performing assets consisted of $5.4 million in non-accrual loans, $1.1 million in non-accrual restructured loans, $5.2 million in restructured loans not on non-accrual and $1.1 million in other real estate owned.

At March 31, 2021, cash and cash equivalents totaled $29.9 million compared to $38.5 million at December 31, 2020, and $48.1 million one year earlier. Cash levels were reduced in the current quarter with the funds reinvested into lending products. Investment securities totaled $227.8 million at March 31, 2021, compared to $228.3 million at December 31, 2020, and $171.1 million one year earlier. All investment securities are considered available for sale and carried at market value.  

Foreclosed assets decreased to $1.1 million at March 31, 2021, from $1.6 million at December 31, 2020, due to the sale of a former bank branch office in Rhinelander, WI, made vacant following consolidation into a nearby Peoples State Bank branch. Foreclosed assets were $425,000 one year earlier.   

Total deposits decreased slightly to $925.9 million at March 31, 2021, compared to $932.1 million at December 31, 2020. At March 31, 2021, interest-bearing demand and savings deposits accounted for 35.6% of total deposits, followed by noninterest-bearing demand deposits at 26.2%, money market deposits at 23.3%, and retail and local time deposits at 13.6%. Broker and national time deposits accounted for 1.3% of total deposits at March 31, 2021, versus 1.5% the prior quarter. As a result of the ongoing pandemic, the bank has experienced larger average deposits per account and increased mobile banking enrollment and active mobile deposit product usage.

FHLB advances remained at $62.0 million at March 31, 2021, and other borrowings increased to $18.6 million, from $12.2 million the prior period.

For the quarter ended March 31, 2021, stockholders’ equity increased $1.2 million to $105.6 million, compared to $104.4 million at December 31, 2020. Stockholders’ equity was impacted by earnings, and other comprehensive income adjustments, including a decrease in unrealized gains on securities available for sale of $2.8 million during the current quarter as market interest rates increased. Tangible net book value per share increased to $23.69 per share, at March 31, 2021, compared to $23.43 per share at December 31, 2020. The bank’s tangible equity to total tangible assets was 9.32% at March 31, 2021 compared to 9.22% at December 31, 2020.

Operations Review

Net interest income totaled $9.6 million (on a net margin of 3.62%) for the first quarter of 2021, compared to $8.4 million (on net margin of 3.22%) for the fourth quarter of 2020 and $7.8 million (on a net margin of 3.45%) for the first quarter of 2020. Compared to the preceding quarter, loans and investment yields increased 35 basis points from 3.60% to 3.95% during the first quarter of 2021, while deposit and borrowing costs declined 7 basis points to 0.46% from 0.53% over the same period.

The increase in loan and investment yields was largely due to net accretion of loan fees of $1.6 million related to PPP loans that have been repaid compared to net accretion of $492,000 during the December 2020 quarter. Loan yields increased to 4.57% during the quarter from 4.08% during the fourth quarter of 2020. Loan yields excluding the impacts of PPP loans, were 4.17 % and 4.26% during the March 2021 and December 2020 quarters respectively. Net interest margin excluding the impacts of PPP loans, was 3.24% and 3.26% in the March 2021and December 2020 quarters, respectively. Continued recognition of PPP loan fee income is expected to elevate reported net interest margin for the remainder of 2021 as the first round PPP program fees are recognized throughout 2021 and second round PPP program fees begin to be recognized later in 2021.

The cost of interest-bearing liabilities decreased during the quarter, largely reflecting lower rates associated with time deposits. Deposit costs decreased to $547,000 for the first quarter of 2021, from $657,000 the previous quarter. Interest costs on borrowings declined $15,000 to $339,000 for the first quarter of 2021, from $354,000 the previous quarter.   The prepayment of some FHLB advances, during the fourth quarter of 2020, contributed to lower borrowing cost in the March 2021 quarter. “By successfully lowering our cost of funds during the past year, we have been able to limit the negative impact of lower asset yields on our net interest margin,” said Mark Oldenberg, Chief Financial Officer.

The provision for loan losses totaled $1.0 million during the first quarter of 2021 compared to $675,000 for the prior linked quarter. The provision relates to reserves taken against the previously discussed real estate loan leased to a national chain restaurant loan. Currently, it is uncertain whether the borrower will continue making loan payments and whether an alternative restaurant tenant can be found to operate the building. Loan loss provisions in 2021 are expected to be lower than provisions recorded during 2020 due to an improved economic outlook and expected favorable resolution to several large problem loans.

Total noninterest income for the first quarter of 2021 decreased to $2.7 million from $3.0 million for the fourth quarter of 2020, due in part to lower gains on the sale of mortgage loans and lower security gains. Gains on sale of mortgage loans decreased to $1.2 million for the first quarter from $1.4 million in the fourth quarter of 2020, due in part to management actions to invest significant on balance sheet liquidity into first lien residential mortgage loans rather than purchasing lower yielding investment securities. Adding these mortgages to the balance sheet rather than selling them for a gain into the secondary market reduced March 2021 noninterest income. In addition, slightly higher long-term U.S. Treasury rates slowed mortgage refinance activity by borrowers. However, mortgage origination activity remains high relative to historical levels. Mortgage originations are anticipated to remain at elevated levels in the second quarter of 2021 as the 10-year Treasury Notes remain low and housing demand remains strong.   Mortgage loan servicing income was $79,000 for the first quarter compared to $104,000 the previous quarter.

Deposit and service fee income in the first quarter declined to $332,000 for the three months ended March 31, 2021, compared to $352,000 for the prior three-month period. Net gains on the sale of securities were $21,000 for the first quarter of 2021, compared to $149,000 for the fourth quarter of 2020, and $123,000 for the quarter one year earlier. Commissions on customer investment and insurance sales increased to $595,000, from $391,000 the prior quarter as sales activity increased by adding a sales advisor to the Milwaukee market and advisory fees tied to rising market values. At March 31, 2021, the bank had wealth assets under management totaling $283.6 million compared to $269.0 million at December 31, 2020, and $217.5 million at March 31, 2020. For the first quarter ended March 31, 2021, other noninterest income was $462,000 compared to $488,000 the prior quarter.

Noninterest expense was $6.2 million for the first quarter of 2021, compared to $6.5 million for the fourth quarter of 2020. For the first quarter of 2021, noninterest expense was lower due to lower salaries and employee benefits driven by deferral of $377,000 in second round PPP loan origination costs. Salary and employee benefit expenses were $3.3 million for the first quarter compared to $4.1 million in the fourth quarter of 2020. The fourth quarter of 2020 benefited from a net gain on foreclosed assets of $218,000 compared to a net loss of $130,000 in the first quarter of 2021.   Data processing and other office expenses increased to $694,000 for the quarter ended March 31, 2021 from $568,000 for the prior quarter. Included in other noninterest expense was approximately $73,000 of Waukesha Bankshares, Inc. merger related expenses. Due to closing of the purchase on April 16, 2021, it is expected there will be significant additional noninterest and nonrecurring expenses related to the acquisition of Waukesha Bankshares, Inc. incurred during the second quarter of 2021. Cost savings from efficiencies gained in the merger are expected to be fully realized by the end of 2021.

About PSB Holdings, Inc.

PSB Holdings, Inc. is the parent company of Peoples State Bank. Peoples is a community bank headquartered in Wausau, Wisconsin, serving northcentral and southeastern Wisconsin from ten full-service banking locations in Marathon, Oneida, Vilas, Milwaukee and Waukesha counties and a loan production office in Stevens Point, Wisconsin. Peoples also provides investment and insurance products, along with retirement planning services, through Peoples Wealth Management, a division of Peoples. PSB Holdings, Inc. is traded under the stock symbol PSBQ on the OTCQX Market. More information about PSB, its management, and its financial performance may be found at www.psbholdingsinc.com.

Forward-Looking Statements

Certain matters discussed in this news release, including without limitation those relating to potential loan and deposit growth, future profits, changes in noninterest income and expenses, pro-forma impacts to income from non-recurring or unusual income and expense items, merger and acquisition activity, and future interest rates, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties which may cause results to differ materially from those set forth in this release. Among other things, these risks and uncertainties include the strength of the economy, the effects of government policies, including, in particular, interest rate policies, the benefits and risks associated with acquisition activities, and other risks and assumptions. Risk and uncertainties also include the effect of the COVID-19 pandemic, including the bank’s credit quality and business operations, as well as its impact on general economic and financial market conditions. PSB Holdings, Inc. assumes no obligation to update or supplement forward-looking statements that become untrue because of events subsequent to this press release.