PSB Holdings, Inc. (“PSB”) (OTCQX: PSBQ), the holding company for Peoples State Bank serving North Central and Southeastern Wisconsin, reported second quarter earnings ending June 30, 2020 of $0.72 per share on net income of $3.19 million, compared to earnings of $0.36 per share on net income of $1.61 million during the March 31, 2020 quarter, and $0.57 per share on earnings of $2.57 million during the second quarter a year ago.  Second quarter earnings benefitted from record mortgage refinance income and lower compensation and benefit expenses related to expense deferrals on the origination of Paycheck Protection Program (“PPP”) loans offset in part by higher loan loss provisions and a lower net interest margin.

“We are pleased with the success of our operations during the first full quarter of the COVID-19 pandemic.  During the quarter, we were able to generate record 1st mortgage originations of $84.2 million, originate over $116.4 million in PPP loans and provide loan accommodations on $143 million of loans despite many staff members working remotely.  Meanwhile, we continued our outreach to borrowers to determine their financial health and adjust our risk-weighting accordingly. Though the balance of our “Watch Risk” loans increased during the quarter, we are currently seeing a large portion of these borrowers making payments or agreeing to return to payments in the third quarter.  We maintained the same loan loss provision during the quarter as in the previous quarter and continued strong core operating income that supported an increase in our reserve ratio to 1.32% of gross loans less our PPP loans,” stated Scott Cattanach, President and CEO.

Loan Accommodations: As of June 30, 2020, PSB has provided 114 loan accommodations totaling $143 million to defer payments or make interest only payments for 90 days in response to challenges for borrowers resulting from COVID-19.  As the initial 90-day accommodation period now ends, we expect approximately 90 of the loans totaling $97.3 million to return to making regularly scheduled payments in the third quarter.  The remaining 24 loans totaling $45.7 million have, or are expected to, request an extended deferral of an additional 90 days, including $19.9 million of loans requesting a full payment deferral.  “For each relationship, we assign a risk weighting to identify and quantify the risk of loss prior to origination of the loan and periodically afterwards.  As requests for payment deferrals 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 the resulting 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 $38.6 million of loans to the “Watch Risk” category in 2020, which are largely related to businesses materially affected by the mandatory closing of their operation by executive order.  Thirteen of the loans where we anticipate extended deferrals totaling $28.6 million are weighted as average or acceptable risk, ten loans totaling $16.9 million are weighted as watch, and one loan totaling less than $200,000 is considered impaired,” continued Cattanach.

As of June 30, 2020, the bank had granted a 90-day payment deferral on 88 residential related loans totaling $10.3 million. As with the commercial loan deferrals, the majority of customers are expected to return to regular principal and interest payments during the third quarter 2020.

Disclaimer: The table has been omitted (The document can be viewed at http://www.psbholdingsinc.com/file/Index?KeyFile=404749950)

Includes undisbursed Construction & Development lines of credit. PPP loan balances are assigned a risk-weighting of "3".

Industry Exposure: PSB has identified the following fifteen industries with the highest portfolio concentrations, and identified Hotels, Restaurants, Retail Stores and Services as concentrations that may be adversely impacted by the Safer-At-Home Order and the on-going pandemic.  Though these industries may change, management believes these industries are where PSB may have exposure or where credit weightings are elevated. Percentages and weightings are of the total commercial related portfolio credit extensions including PPP loans.

The following table indicates PSB’s Top Industry Risk Exposure sorted by weighted average risk rating as of June 30, 2020:

Disclaimer: The table has been omitted (The document can be viewed at http://www.psbholdingsinc.com/file/Index?KeyFile=404749950)

Loan portfolio includes unused loan commitments. Balances do not include any consumer loans.

Weighted average loan to collateral values at June 30, 2020 were 64%, 64% and 72% in the Hotels, Restaurant and Retail industry categories, respectively.

Loan Loss Reserve:  For the quarter ended June 30, 2020, PSB added provisions for loan losses totaling $1.8 million, the same level provided during the prior quarter.  The provision replaced existing specific reserves related to a charge-off of approximately $500,000 on a Shopko store loan moved into foreclosed property in addition to provisions taken due to changes in risk ratings associated with loan classifications as a result of the ongoing pandemic. Loan loss provisions are expected to remain elevated in the third quarter as better clarity on the impact of the economic slowdown from the COVID-19 pandemic materializes.  Allowance for loan losses totaled $9.17 million at June 30, 2020 which includes $3.18 million of allowances for loans with risk weightings at 5 and above (“Watch and Impaired”) and $5.99 million for loans with risk weightings at 4 and below (“Acceptable and Average”).  At June 30, 2020, allowance for loan losses totaled 1.12% of gross loans and 1.32% of gross loans less PPP loans guaranteed through the SBA.

Net Interest Margin Impact:  PSB’s net interest margin declined to 3.09% for the quarter ended June 30, 2020 from 3.45% the prior quarter due to the swift reduction in short term interest rates in March, and the resulting effect of loans and investments repricing at lower rates, and the addition of PPP loans with 1% coupon yields.  “The addition of PPP loans combined with a large liquid position fueled in part by strong deposit growth in a low interest rate market influenced the net interest margin.  Excluding the impact of our PPP lending, the net interest margin would have been 3.25% for the most recent quarter,” said Mark C. Oldenberg, Chief Financial Officer.

Paycheck Protection Program Participation and Deposit Growth:  During the second quarter of 2020, PSB originated 718 loans, 152 to new customers, for a total of $116.4 million in PPP loans and generated total loan fees receivable of $3.9 million.  These fees are currently deferred and will be realized over the life of the loan or will be recognized in proportion to the amount of loan when forgiven by the SBA.  We expect customers to begin the process of requesting loan forgiveness during the third quarter and receipt of the loan funds from the SBA to begin taking place during the fourth quarter. Additionally, during the June 2020 quarter, PSB deferred direct salary and compensation expenses associated with the origination of the loans totaling $861,000 and will recognize this expense during the period in which the origination fee is recognized in income.  These factors combined during the quarter resulting in total net deferred loan fees at June 30, 2020 of $2.6 million compared to net deferred costs of $388,000 at March 31, 2020.

Main Street Lending Program:  We have reviewed the requirements for the program and stand ready to participate on behalf of our customers who need and qualify for the program. As of June 30, 2020, we have not received any borrower requests that could benefit from the program.

Capital Management:  At June 30, 2020, the holding company’s tangible equity to asset ratio was 8.95% and the bank’s capital was well in-excess of all regulatory requirements.  As the PPP loans paydown or are forgiven resulting in a declining asset base, management expects capital ratios to return to historical levels exceeding 9.00%.

June 2020 Quarterly Financial Highlights (at or for the periods ended June 30, 2020, compared to March 31, 2020 and / or June 30, 2019, as applicable):

* Return on shareholders’ equity was 13.38% for the quarter compared to 6.84% one quarter earlier and 11.90% for the second quarter one year earlier.  Return on average assets was 1.20% for the second quarter of 2020, compared to 0.67% the previous quarter and 1.15% for the second quarter one year earlier.

* Gains on the sale of mortgage loans increased to $1.75 million for the quarter ended June 30, 2020 from $987,000 the previous quarter and $432,000 for the same quarter ended one year earlier.  The gains were slightly offset by a decline in net mortgage loan servicing rights to a loss of $165,000 compared to a loss of $23,000 the prior quarter and a gain of $84,000 for the same quarter ended one year earlier.  Through the beginning of the third quarter of fiscal 2020, mortgage banking activity remains robust.

* PSB realized a sizable increase in the value of investments held for sale as the market value improved for four collateralized loan obligations.  During the quarter ended June 30, 2020, the net unrealized gain on securities available for sale increased $2.61 million from a loss of $342,000 during the March 2020 quarter, mostly due to the recovery in value related to $20 million of Collateralized Loan Obligations Peoples State Bank holds with ratings of A or better.  These obligations had been impacted by unusual volatility in the bond market and temporary illiquidity during the prior quarter.

* Tangible net book value was $21.97 per share at June 30, 2020, compared to $20.89 per share as of March 31, 2020, and $19.41 per share at June 30, 2019.  Over the past year, tangible book value per share has grown 13.19%.

Balance Sheet and Asset Quality Review

Total assets were $1.093 billion as of June 30, 2020, compared to $970 million as of March 31, 2020, an increase of $123 million, or 12.7%.  Total loans receivable increased by $101.0 million, or 14.3% due primarily to the addition of PPP loans.  With the addition of PPP loans to the commercial/agricultural non-real estate loan portfolio, commercial/agricultural non-real estate loans became the largest loan concentration.  The commercial/agricultural non-real estate loan portfolio increased to $252.0 million at June 30, 2020 from $139.2 million three months earlier.  Commercial/agricultural non-real estate loans represented 30.8% of gross loans at June 30, 2020, followed by non-owner occupied commercial real estate loans at 26.5%, owner occupied commercial/agricultural real estate loans at 22.1%, residential real estate loans at 20.1%, and consumer loans at 0.5%.  Total agricultural related loans represent 0.9% of the total loan portfolio.*

The allowance for loan losses increased to 1.12% of gross loans at June 30, 2020 and 1.32% of gross loans less the PPP guaranteed loans.  The annualized net charge-offs to average loans was 0.25% for the quarter ended June 30, 2020, compared to 0.49% the previous quarter and 0.00% one year earlier.  The charge-offs in the most recent quarter related to the previously disclosed bankruptcy of the retailer Shopko, where approximately $500,000 was charged-off, and a $50,000 write-down was taken on a former branch office held for sale that is in foreclosed assets.  Non-performing assets decreased to 0.49% of total assets at June 30, 2020, compared to 0.54% at March 31, 2020, and 0.42% at June 30, 2019.  At June 30, 2020, non-performing assets consisted of $3.0 million in non-accrual loans, $244,000 in non-accrual restructured loans, $650,000 in restructured loans not on non-accrual, and $1.53 million in other real estate owned.

Accrued interest receivable increased during the quarter to $3.6 million from $2.8 million in the first quarter of 2020, due to the loan payment deferrals and interest-only payments related to COVID-19 accommodations.  We expect the accrued interest receivable levels to decline in the third quarter as borrowers return to regular payments.

At June 30, 2020, cash and cash equivalents totaled $60.3 million compared to $48.1 million at March 31, 2020 and $18.7 million one year earlier.  Current cash levels are elevated due to the depositing of PPP funds and to accommodate potential cash needs related to the pandemic.  Investment securities totaled $178.6 million at June 30, 2020 compared to $171.1 million at March 31, 2020 and $165.7 million one year earlier.  All investment securities during the prior three quarters were considered available for sale and carried at market value.

Foreclosed assets increased to $1.53 million at June 30, 2020 from $425,000 at March 31, 2020 and $172,000 one year earlier.  The increase primarily reflects our foreclosure on the Shopko property which is currently listed for sale and carried at an appraised value obtained in May 2020.

Total deposits increased 15.3% to $882.2 million at June 30, 2020 compared to $765.3 million at March 31, 2020, led by an $83.4 million increase in non-interest demand deposits.  A large portion of the increase was related to PPP funds deposited at the Bank.  At June 30, 2020, interest-bearing demand and savings deposits accounted for 30.4% of total deposits, followed by noninterest-bearing demand deposits at 27.4%, money market deposits at 23.0%, and retail and local time deposits at 14.6%.  Broker and national time deposits accounted for 4.6% of total deposits at June 30, 2020 versus 3.9% the prior quarter and 5.9% one year earlier. As a result of the Safer-At-Home Order and ongoing pandemic, we have seen customer increase mobile banking enrollment by 12% and active mobile deposit product usage of 24%.

FHLB advances decreased to $87.0 million at June 30, 2020 compared to $88.7 million at March 31, 2020 and other borrowings increased to $3.9 million from $3.5 million over the same time period.

For the quarter ended June 30, 2020, stockholders’ equity increased $4.8 million to $98.0 million, compared to $93.2 million at March 31, 2020.  Stockholders’ equity was impacted by earnings, our recently declared $0.21 per share dividend payment 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 $21.97 per share, at June 30, 2020, compared to $20.89 per share at March 31, 2020.  PSB’s tangible equity to total assets was 8.95% at June 30, 2020 compared to 9.59% at March 31, 2020.  Adjusted for $116.4 million of PPP loans, tangible equity would have been 10.03% at June 30, 2020. As previously disclosed, we have suspended our share repurchase program and will consider reinstatement of the program at a future date.

Operations Review

Net interest income totaled $7.8 million (on a net margin of 3.09%) for the second quarter of 2020, compared to $7.8 million (on net margin of 3.45%) for the first quarter of 2020 and $7.8 million (on a net margin of 3.72%) for the second quarter of 2019.  For the six months ended June 30, 2020, net interest income was $15.6 million compared to $15.4 million for the same six-month period one year earlier.  Compared to the preceding quarter, loans and investment yields decreased 61 basis points to 3.69% during the second quarter of 2020 from 4.30% one quarter earlier while deposit and borrowing costs declined 26 basis points to 0.84% from 1.10% over the same period.  The decline in loan and investment yields was partially due to a larger average balance of cash and cash equivalents held during the quarter, a decrease in the prime lending rate due to actions by the Federal Reserve and the addition of PPP loans with coupon yields of 1.00%.  Loan yields decreased to 4.14% during the quarter, 4.45% adjusted to exclude the PPP loan volume, from 4.78% during the first quarter of 2020, as many floating rate loans repriced lower as the prime rate declined towards the end of the first quarter.  “We expect the net-interest margin adjusted for low yielding PPP loans to stabilize in the third quarter near the 3.25% level as we intend to reduce the elevated level of liquidity during the quarter,” stated Oldenberg.

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 $1.08 million for the second quarter of 2020 from $1.48 million the previous quarter.  Interest costs on borrowings declined $5,000 for the second quarter of 2020 to $448,000 from $453,000 the previous quarter.

The provision for loan losses totaled $1.8 million during the second quarter of 2020 compared to $1.8 million for the prior linked quarter.  The provision primarily relates to our charge-off on a Shopko related loan and an increased need for reserves related to anticipated losses related to a more difficult economic climate.  For the six months ended June 30, 2020, provision for loan losses totaled $3.6 million compared to $550,000 for the same period one year earlier.

For the six months ended June 30, 2020, total noninterest income was $5.5 million compared to $4.0 million for the six-months ended June 30, 2019.  The six-month increase was largely due to gains on the sale of mortgage loans.  Total noninterest income for the second quarter of 2020 increased to $3.1 million from $2.4 million for the first quarter of 2020.  Gains on sale of mortgage loans increased to $1.7 million for the second quarter from $987,000 in the first quarter of 2020 and remained strong as lower long-term U.S.Treasury rates have spurred mortgage refinance activity by borrowers.  We expect active mortgage originations during the third quarter though the wave of refinancing activity appears to have peaked.  The gains on sale of mortgage loans were partially offset by a loss on mortgage loan servicing of $165,000 for the second quarter of 2020 compared to a loss of $23,000 the previous quarter.

Deposit and service fee income in the second quarter were down to $278,000 compared to $391,000 during the preceding quarter of 2020.  The service fee income was down as Peoples State Bank provided waivers on service fees through June 30, 2020 and recorded less overdraft income as depositors had higher average balances from stimulus money received.  Net gains on sale of securities was $194,000 for the second quarter of 2020 compared to $123,000 for the first quarter of 2020 and $121,000 for the quarter one year earlier.  Commissions on customer investment and insurance sales decreased to $259,000 from $349,000 the prior quarter as sales activity slowed during the pandemic and advisory fees tied to market values declined.  At June 30, 2020, Peoples State Bank had wealth assets under management totaling $234.4 million compared to $217.5 million at March 31, 2020 and $236.6 million at June 30, 2019.  The volatility over the past year in assets under management was has been primarily related to stock market value declines.  Other non-interest income for the second quarter was higher year over year due to $332,000 of fee income earned on loans originated with swap like features originated during the quarter.

Noninterest expense was $4.9 million for the second quarter of 2020, compared to $6.3 million for the first quarter of 2020.  For the second quarter of 2020, noninterest expense decreased due to lower salaries and employee benefits costs related to the deferral of $861,000 in loan origination costs associated with the PPP loans.  The deferred expenses will be recognized over the life of the loan or, in the case of PPP loans, when forgiven by the SBA.  Salary and employee benefit expenses were $2.6 million for the second quarter compared to $3.8 million in the first quarter of 2020, from the deferred costs and a separate $375,000 reduction related to lower benefits expenses.  Second quarter expenses were also $115,000 less than first quarter on lower donations expense.  The second quarter 2020 results reflect renewed FDIC insurance premiums compared to zero during the prior three quarters as the FDIC insurance fund had reached its targeted level.  It is expected FDIC insurance premiums will continue to be incurred throughout the pandemic.  For the six-months ended June 30, 2020, total noninterest expense was $11.2 million compared to $11.9 million for the same period one year earlier.

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 and southeastern 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.

Source: PSB Holdings, Inc.

• PSB Holdings Inc (Wisconsin)