PSB Reports First Quarter 2020 Earnings of $1.6 Million or $0.36 Per Share; COVID-19 Preparations Begin

WAUSAU, Wis., April 27, 2020 (GLOBE NEWSWIRE) -- PSB Holdings, Inc. ("PSB") PSBQ, the holding company for Peoples State Bank serving North Central Wisconsin, reported first quarter earnings ending March 31, 2020 of $0.36 per PSB share on net income of $1.61 million, compared to earnings of $0.63 per share on net income of $2.81 million during the December 31, 2019 quarter, and $0.61 per share  on earnings of $2.73 million during the first quarter a year ago.  First quarter earnings reflect the initial impact of COVID-19 preparations and the Safer-At-Home Order by Governor Evers effective March 25, 2020, resulting in the closing of businesses or a substantial reduction in business activity.  Our first quarter operating results reflected: (1) significantly higher loan loss provisions related to the COVID-19 pandemic and its expected credit impact from a slowing economy, (2) a lower net interest margin due in part to a higher level of liquidity amidst a declining interest rate environment, (3) higher non-interest expenses related to higher health insurance claims, significant donations and prepayment penalties on FHLB advances, offset by (4) higher fee income from the sale of mortgage loans.

"The health and well-being of our workforce and customers is critical to the success of our daily banking operations.  As such, PSB began preparations for the COVID-19 pandemic during mid-February, which led to closing branch lobbies as of March 19^th, sending selected personnel to work from home and providing appropriate IT equipment and services to accommodate the Safer-At Home Order.  Our lending teams have reached out to borrowers that have been affected by the declining economic activity and offered assistance in various forms including deferred payments, interest-only payments and fee waivers.  We are particularly focused on customers that may have difficulty re-opening their businesses in sufficient time to re-generate the cash-flow needed to sustain their operation.  We have worked with our customers to file applications for the Paycheck Protection Program ("PPP") offered through the Small Business Administration and expect the Program to provide some short-term relief in their efforts to sustain operations. Meanwhile, we are closely monitoring loan payments and requests for modifications daily.  In anticipation of future credit losses, we increased our loan loss provision during the quarter, and we elevated our liquidity levels in anticipation of higher cash needs by our customers. Our actions are intended to be proactive and I believe early identification of potential problem credits allows us to minimize future loan charge-offs," stated Scott Cattanach, President and CEO.

COVID-19 Preparations:

Industry Exposure: PSB has identified various industries that may be adversely impacted by the Safer-At-Home Order.  Though these industries may change, management believes the following industries are where PSB has exposure that will experience the most immediate impacts; Percentages are of the total commercial related portfolio credit extensions: Non-Owner Occupied Commercial Real Estate (15.35%), Hotel and Restaurants (9.53%), Medical (6.78%), Retail Stores (2.81%), and Recreation (0.95%).

The following table indicates PSB's Top Industry Concentrations by total credit extension (both used and unused lines) and as a percentage of total commercial related credit extension as of March 31, 2020:

Loan Accommodations: During the quarter-ended March 31, 2020, PSB recorded loan accommodations to defer payments or make interest only payments for 90 days in response to challenges for borrowers resulting from COVID-19. The loan accommodations were only made to borrowers that were current and in good standing at the time of the request.  "For each relationship, we assign a risk weighting to identify and quantify the risk of loss prior to origination of the loan.  As requests for 90 days deferral of payments or modifications for interest only payments are made, we review the credit risk rating and adjust as forward-looking circumstances warrant.  We believe this system helps us monitor the risks inherent in our loan portfolio and appropriately track the impact caused by the pandemic and slowing economy.  As shown in the table below, our "impaired loans" and "substandard risk" loans did not change materially from the prior quarter. However, we did move approximately $18.1 million of loans to the "watch" list which are largely related to businesses materially affected by the mandatory closing of their operation by executive order," added Cattanach. Cattanach continued, "PSB was already an approved lender under the Paycheck Protection Program through the Small Business Administration in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  These PPP loans provide further temporary cash flow to support small business payroll expense."

Loan Loss Reserve:  Though PSB's asset quality has not changed materially over the quarter as measured by delinquent loan payments, management determined it prudent to increase its loan loss reserves through the addition of $1.8 million in loan loss provisions for the quarter-ended March 31, 2020 compared to $150,000 the previous quarter and $400,000 one year earlier.  The increased provision replaced existing specific reserves related to write-offs of approximately $870,000 on two customer relationships and provisions taken in anticipation of changes in risks associated with loan classification assignments and a slowing economy. Loan loss provisions are expected to remain elevated in the second quarter as better clarity on the impact of the economic slowdown from the COVID-19 pandemic materializes. "While there is significant uncertainty regarding the eventual impacts on the national and local economies from the pandemic and Safer-At-Home order, our local markets are expected to perform in line with the national market as a whole. However, to the extent the Wisconsin Safer-At Home order is extended beyond May 26, 2020, customers in our northern Wisconsin market, to whom we have approximately $158.5 million in loans outstanding, could experience outsized impacts due to greater dependency on recreation and tourism activities," said Cattanach.

Liquidity Changes: "In anticipation of market volatility and customer demands related to the COVID-19 pandemic, PSB borrowed $10 million from the Federal Home Loan Bank and increased its liquidity levels during the quarter," said Mark C. Oldenberg, Chief Financial Officer. At March 31, 2020, cash and cash equivalents totaled $48.1 million compared to $22.2 million one year earlier. PSB's liquidity levels remain well in excess of regulatory requirements.

Operational Changes and Non-Typical Expenses:  To protect the well-being of its staff and customers, PSB allowed personnel to work from home.  To facilitate the move, we allocated existing and excess laptop computers to staff and enhanced our ability to network offsite with upgrades of various software licensing, which has resulted in approximately 30% of our team working from home.  Use of bank issued laptops and network connection security protocol and tools allows customer and bank information to remain private even as some employees work from home.  Except at our new West Allis branch in metro Milwaukee, our branch drive-throughs are currently open to customers on our normal schedule.

Net Interest Margin Impact:  PSB's net interest margin declined to 3.45% for the quarter ended March 31, 2020 from 3.53% the prior quarter due to the swift reduction in short term interest rates and the resulting effect on yields in the loan and investment portfolios.  "Since the sharp decline in interest rates did not occur until late in the quarter, the full effect of the lower interest rate environment had not yet been realized at quarter end.  We expect to see further margin compression during the second quarter," continued Oldenberg.

Growth and Paycheck Protection Program Participation:  PSB's total assets decreased $5.0 million during the quarter ended March 31, 2020 due primarily to a reduction in cash and securities and lower deposit balances.  During the second quarter of 2020, PSB expects loan balances will sharply increase due to originations for PPP before being paid down in the third quarter through forgiveness grants from the Small Business Administration. Loans pledged to the Federal Reserve Payment Protection Plan Liquidity Fund (PPPLF) will not require the Bank to carry additional equity capital. "Outside of the loan activity related to the PPP, the Bank expects organic loan origination activity to slow due to a weakened economy brought on by the COVID-19 pandemic which may result in a shrinking asset base," added Oldenberg.  Through April 20, 2020, PSB processed approximately $96 million of approved PPP loans. 

Capital Management:  At March 31, 2020, the holding company's tangible equity to asset ratio was 9.59% and the bank's capital was well in excess of all regulatory requirements.  With the likelihood of limited near term loan growth, outside of PPP, management expects to maintain capital ratios within regulatory compliance.  "At the present time, we have temporarily ceased all stock repurchasing activity and the bank has sufficiently funded the holding company with cash to continue paying debt obligations and dividends for more than a year without the need to pursue additional cash from the bank or external sources," said Oldenberg.

March 2020 Quarterly Financial Highlights (at or for the periods ended March 31, 2020, compared to December 31, 2019 and / or March 31, 2019, as applicable):

• Return on shareholders' equity was 6.84% for the quarter compared to 11.98% one quarter earlier and 13.42% for the first quarter one year earlier. Without provision expense, return on equity would have been 12.48% for the current quarter compared to 12.61% last quarter and 15.39% in the quarter-ended one year earlier.  Return on average assets was 0.67% for the first quarter of 2020, compared to 1.17% the previous quarter and 1.23% for the first quarter one year earlier.  The decline in returns primarily relate to loan loss provisions taken in the current quarter related to two loans and in anticipation of a slowing economy from COVID-19 impacts.
   
• Gains on the sale of mortgage loans more than doubled for the quarter ended March 31, 2020 to $987,000 from $452,000 the previous quarter due to a robust refinancing market fueled by lower interest rates.  This increase was slightly offset by a decline in net mortgage loan servicing rights to a loss of $23,000 compared to a gain of $57,000 the prior quarter.  Through the beginning of the second quarter of fiscal 2020, mortgage banking activity remains robust.
   
• The net unrealized loss on securities available for sale declined $342,000 during the March 2020 quarter compared to an increase of $179,000 one quarter earlier due primarily to a decline in market value of four collateralized loan obligations with a book value of approximately $20 million.  These obligations have been impacted by unusual volatility in the bond market and temporary illiquidity.
   
• Tangible net book value was $20.89 per share at March 31, 2020, compared to $20.72 per share as of December 31, 2019 and $18.89 per share at March 31, 2019.  Over the past year, tangible book value per share has grown 10.59%.

Balance Sheet and Asset Quality Review

Total assets were $969.9 million as of March 31, 2020, compared to $974.9 million as of December 31, 2019, a decrease of $5.0 million, or 0.5%.  Total loans receivable decreased slightly by $1.1 million, or 0.2%. The commercial/agricultural real estate loan portfolio decreased to $399.4 million at March 31, 2020 from $401.4 million three months earlier. Non-owner occupied commercial real estate loans represented the largest component of the loan portfolio at 30.8% of gross loans at March 31, 2020, followed by owner occupied commercial real estate loans at 25.4%, residential real estate at 23.8%, commercial/agricultural non-real estate loans at 19.5% and consumer loans at 0.5%.  Total agricultural related loans represent 1.0% of the total loan portfolio.  The non-owner occupied commercial real estate portfolio represents the largest portion of loan growth over the past year as the balance grew 10.3% from $199.2 million at March 31, 2019 to $219.7 million at March 31, 2020. 

The allowance for loan losses increased to 1.10% of gross loans at March 31, 2020.  The annualized net charge-offs to average loans was 0.49% for the quarter ended March 31, 2020, compared to the previous quarter 0.01% and 0.08% one year earlier. The charge-offs in the most recent quarter relate to the previously disclosed bankruptcy of the retailer Shopko where approximately $600,000 was charged-off and a $255,000 charge-off related to a non-profit. Both charge-offs were supported by specific reserves in place at December 31, 2019.  Non-performing assets decreased to 0.54% of total assets at March 31, 2020, compared to 0.55% at December 31, 2019, and 0.84% at March 31, 2019.  At March 31, 2020, non-performing assets consisted of $3.9 million in non-accrual loans, $232,000 in non-accrual restructured loans, $672,000 in restructured loans not on non-accrual, and $425,000 in other real estate owned. 

At March 31, 2020, cash and cash equivalents totaled $48.1 million compared to $49.0 million at December 31, 2019 and $22.3 million one year earlier.  As previously mentioned, current cash levels are elevated to accommodate cash needs related to the pandemic.  Investment securities totaled $171.1 million at March 31, 2020 compared to $174.4 million at December 31, 2019 and $170.4 million one year earlier.  All investment securities during the prior two quarters were considered available for sale and carried at market value.   

Total deposits decreased 2.1% to $765.3 million at March 31, 2020 compared to $781.8 million at December 31, 2019, led by an $18.5 million decline in non-interest demand deposits.  At March 31, 2020, interest-bearing demand and savings deposits accounted for 33.3% of total deposits, followed by money market deposits at 25.2%, noninterest-bearing demand deposits at 20.7% and retail and local time deposits at 16.9%.  Broker and national time deposits accounted for 4.6% of total deposits at March 31, 2020 versus 4.3% the prior quarter and 6.8% one year earlier.

FHLB advances increased to $88.7 million at March 31, 2020 compared to $73.5 million at December 31, 2019 and other borrowings decreased to $3.5 million from $6.1 million over the same time period.  The increase in FHLB advances was to fund anticipated pandemic related liquidity needs.      

For the quarter ended March 31, 2020, stockholders' equity increased $460,000 to $93.2 million, compared to $92.7 million at December 31, 2019.  Stockholders' equity was impacted by earnings, stock repurchases and other comprehensive income adjustments, including the change in unrealized gains and losses on securities available for sale.  Tangible net book value per share increased to $20.89 per share, at March 31, 2020, compared to $20.72 per share at December 31, 2019.  PSB's tangible equity to total assets was 9.59% at March 31, 2020, compared to 9.50% at December 31, 2019. 

To support stock liquidity for shareholders as needed, PSB regularly repurchases its shares directly from shareholders holding shares in certificate form and on the open market at prevailing prices as opportunities arise. During the quarter ended March 31, 2020, PSB repurchased 18,434 shares of its common stock at an average cost of $25.95 per share.

Operations Review

Net interest income totaled $7.8 million (on a net margin of 3.45%) for the first quarter of 2020, compared to $8.0 million (on net margin of 3.53%) for the fourth quarter of 2019 and $7.6 million (on a net margin of 3.63%) for the first quarter of 2019.  Compared to the preceding quarter, loans and investment yields decreased 11 basis points to 4.30% during the first quarter of 2020 from 4.41% one quarter earlier while deposit and borrowing costs declined 7 basis points to 1.10% from 1.17% over the same time period.  The decline in loan and investment yields were partially due to a larger average balance of cash and cash equivalents held during the quarter and a decrease in the prime lending rate due to actions by the Federal Reserve.  Loan yields decreased to 4.78% from 4.88% during the first quarter of 2020, as many floating rate loans repriced lower as the prime rate declined. 

The cost of interest-bearing liabilities decreased during the quarter, reflecting lower rates associated with money market accounts and time deposits. Deposit costs decreased to $1.48 million for the first quarter of 2020 from $1.54 million the previous quarter. Interest costs on borrowings declined $22,000 for the first quarter of 2020 to $453,000 from $475,000 the previous quarter.

The provision for loan losses totaled $1.8 million during the first quarter of 2020 compared to $150,000 for the prior linked quarter.  The larger provision primarily relates to our March 31, 2020 increased need for reserves related to an anticipated deteriorating economic climate.

Total noninterest income for the first quarter of 2020 increased to $2.4 million from $1.8 million for the fourth quarter of 2019.  Service fees in the first quarter were $391,000 compared to $411,000 during the fourth quarter of 2019.  Gains on sale of mortgage loans increased to $987,000 for the first quarter from $452,000 in the fourth quarter of 2019 and remained strong as falling long-term U.S. Treasury rates have spurred mortgage refinance activity.  We expect continued elevated gains on sale of mortgage loans in the second quarter.  Commissions on investment and insurance sales increased to $349,000 from $301,000 the prior quarter.  At March 31, 2020, PSB had wealth assets under management totaling $217.5 million compared to $248.5 million at December 31, 2019 and $229.8 million at March 31, 2019.  The year over year reduction in assets under management was 5.35% and primarily related to stock market value declines.  Net gains on sale of securities was $123,000 for the first quarter of 2020 compared to $71,000 for the fourth quarter of 2019.

Noninterest expense was $6.3 million for the first quarter of 2020, compared to $5.9 million for the fourth quarter.  For the first quarter of 2020, noninterest expense increased due to an increase in salaries and employee benefits costs that totaled $296,000, donations to non-profits of $115,000 and prepayment penalties associated with FHLB advances of $25,000.  Additionally, the Bank opened a new branch office in Milwaukee during the quarter which added new operational expenses of approximately $68,000.  Similar to the prior quarter, the first quarter 2020 results reflect the elimination of FDIC insurance premiums as the FDIC insurance fund reached its targeted level.  However, in the current deteriorating economic climate, it is expected future FDIC insurance premiums will be incurred.

"In the first quarter of 2020, we experienced higher personnel expenses, office expenses, depreciation and advertising costs associated with the opening of our new branch in Milwaukee," said Oldenberg.

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 north central Wisconsin from nine full-service banking locations in Marathon, Oneida, Vilas and Milwaukee 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, 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, 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.