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PSB HOLDINGS INC /WI/ (PSBQ)·Q1 2014 Earnings Summary

Executive Summary

  • Q1 2014 EPS was $0.87 on net income of $1.45M; pro-forma EPS excluding merger/conversion costs was $0.92 vs $0.93 a year ago, as lower credit costs were offset by softer mortgage banking and higher core opex .
  • Net interest margin compressed slightly to 3.31% (from 3.32% in Q4 and 3.37% YoY) as loan yields fell faster than funding costs amid seasonal loan paydowns and cash build; management expects slight NIM pressure in Q2 but a slight increase in net interest income helped by the acquired loan portfolio .
  • Northwoods Rhinelander branch acquisition closed April 11, adding ~$21M loans and ~$41M deposits; Q2 will include $380–$400k pre-tax conversion costs and 2014 net income will be reduced by ~$(0.33)M after tax, with accretion expected in 2015 .
  • Consensus estimates (S&P Global) unavailable for PSBQ; no earnings call transcript located for Q1. Near-term stock catalysts: integration progress, Q2 conversion costs hitting EPS, and loan growth rebound narrative post-acquisition .

What Went Well and What Went Wrong

  • What Went Well

    • Credit costs improved: provision dropped to $0.14M (vs $0.32M YoY) and net charge-offs were 0.03% of average loans (annualized), supporting earnings quality .
    • Core noninterest income mix resilient: debit/credit card interchange rose $41k (+20.7%) as PSB shifted from credit card loan principal ownership to interchange income, partially offsetting mortgage banking softness .
    • Management closed the Northwoods acquisition, adding performing loans and deposits with no NPLs acquired; “expected to be accretive to earnings during 2015” .
    • Quote: “Earnings growth was held back during the quarter due to a decline in net loans… However, other bank operations are performing as planned, and deposit retention has been better than expected.”

  • What Went Wrong

    • Loan balances fell $21.8M (-4.3%) QoQ from seasonal commercial line paydowns and a large multifamily payoff, dampening NII and pressuring NIM .
    • Mortgage banking slowed materially: gain on sale fell 50.6% YoY to $0.224M; management expects 2014 mortgage banking income to be just 20–30% of 2013, a significant headwind to fee income .
    • Operating expenses rose to $4.289M (vs $4.082M YoY), with $0.128M Q1 merger/conversion costs and higher data processing; Q2 will add $380–$400k pre-tax conversion costs .

Financial Results

MetricQ1 2013Q4 2013Q1 2014
Net Income ($USD Millions)$1.609 $1.561 $1.450
Diluted EPS ($)$0.97 $0.95 $0.87
Total Interest & Dividend Income ($USD Millions)$6.624 $6.728 $6.405
Net Interest Income ($USD Millions)$5.201 $5.365 $5.174
Noninterest Income ($USD Millions)$1.415 $1.274 $1.320
Noninterest Expense ($USD Millions)$4.082 $4.391 $4.289
Provision for Loan Losses ($USD Millions)$0.323 $0.000 $0.140
Net Interest Margin (%)3.37% 3.32% 3.31%
ROA (%)0.95% 0.88% 0.84%
ROE (%)11.83% 10.82% 10.19%
Efficiency Ratio (%)59.50% 63.87% 63.75%

KPIs and balance trends:

KPIQ1 2013Q4 2013Q1 2014
Avg Loans Receivable, net ($USD Millions)$485.495 $507.898 $498.957
Avg Total Assets ($USD Millions)$689.687 $704.559 $698.127
Avg Deposits ($USD Millions)$541.672 $557.639 $567.500
Nonperforming Loans / Gross Loans (%)2.02% 1.67% 1.75%
Total NPAs / Total Assets (%)1.74% 1.46% 1.49%
Allowance for Loan Losses / Gross Loans (%)1.49% 1.31% 1.39%
Net Charge-offs / Avg Loans (annualized, %)0.26% 0.27% 0.03%
Mortgage Banking Income ($USD Millions)$0.396 $0.253 $0.316

Notes:

  • Pro-forma Q1 2014 EPS $0.92 vs $0.93 in Q1 2013 excludes merger/tax items .
  • Tangible book rose to $35.15 per share (+2.3% QoQ) .
  • Wholesale funding reduced to $99.6M (14.4% of assets) from $108.9M (15.3%) at year-end 2013 .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Interest MarginQ2 2014“Could decline slightly during the March 2014 quarter” “Could decline slightly during the June 2014 quarter” Maintained slight downward bias
Net Interest IncomeQ2 2014“Could decline from December 2013 if loan growth does not continue” Expected to increase slightly vs Q1 on acquired loan portfolio Improved vs prior caution
Mortgage BankingQ2 2014Stabilize vs Q4; refinance down sharply Gain on sale expected at Q1 levels in Q2; full-year 2014 mortgage banking to 20–30% of 2013 Lowered full-year outlook
Merger/Conversion CostsQ2 2014Not specified$380–$400k pre-tax in Q2; full-year 2014 after-tax hit ~$(0.325)M New cost headwind
Nonperforming LoansQ2 2014Expected +$3.1M on municipal TID restructure (not yet in NPLs at 12/31/13) Expect increase +$3.1M in June quarter as restructuring occurs Timing reiterated
Equity RatioQ2 2014Not specifiedExpected to decline on asset increase from branch purchase New
Share RepurchaseQ2 2014Buy up to 10k shares at ≤$30.00 (Q1 plan) Can buy up to 10k shares at ≤$31.50 Expanded price ceiling
Dividends2014Target 10% ROE and “traditional increase in cash dividends per share” (framework) No Q1 dividend declared; semi-annual cadence unchanged in table Unchanged cadence

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2013 and Q4 2013)Current Period (Q1 2014)Trend
Loan growth/usageQ3’13 impacted by $3.34M grain fraud charge; Q4’13 warned of challenging loan growth near term Seasonal paydowns and an $8.3M payoff drove -$21.8M net loans QoQ; acquisition adds ~$21M loans to aid growth Near-term soft organically; M&A offsets
Net interest marginNIM drifted down (3.40%→3.32% in Q3→Q4) and could decline slightly in Q1 3.31% in Q1; slight decline possible in Q2, but NII to rise on acquired loans Mild compression; NII supported
Mortgage bankingBig deceleration as rates rose; recourse provision in Q4’13 Gain on sale -50.6% YoY; 2014 mortgage banking only 20–30% of 2013 Structural headwind in 2014
Credit costs/NPAsLarge one-off Q3’13 fraud loss; Q4’13 no provision, improved trends; expected NPL increase from TID loan Provision $0.14M; expecting +$3.1M NPLs in Q2 from municipal restructure Core credit benign; one idiosyncratic item ahead
Regulatory capitalBasel III implementation noted; not expecting to issue equity New rules effective 1/1/2015; ratios to be negatively impacted but no equity raise expected Stable outlook
M&A/Branch actionAnnounced Northwoods deal in Jan-2014 Closed April 11; $41M deposits, $21M loans; accretive in 2015 Integration underway

Management Commentary

  • “Earnings growth was held back during the quarter due to a decline in net loans outstanding… However, other bank operations are performing as planned, and deposit retention has been better than expected.” – Peter W. Knitt, President & CEO .
  • “Meeting calendar 2014 financial goals will depend on getting back to loan growth, which was helped with our recent acquisition of the Northwoods branch… approximately $21 million of performing loans along with $41 million of deposits.” .
  • “After recognition of acquisition and conversion costs… approximately $325,000 after tax benefits, we expect the [Northwoods] purchase to be accretive to earnings during 2015.” .
  • Q4 2013 context: Focused on “a 10% return on book equity and our traditional increase in cash dividends per share,” alongside M&A, debt paydown and buybacks .

Q&A Highlights

  • No Q1 2014 earnings call transcript was available in our document set; no Q&A to summarize [ListDocuments showed none].
  • Key clarifications from the release:
    • NIM could “decline slightly” in Q2, but NII expected to “increase slightly” due to acquired loans .
    • Mortgage banking gain on sale expected to remain around Q1 levels in Q2; full-year mortgage banking 20–30% of 2013 .
    • Q2 merger/conversion costs of $380–$400k pre-tax; 2014 after-tax reduction ~$325k .
    • Anticipated +$3.1M NPLs in Q2 from a municipal TID loan restructure .

Estimates Context

  • We attempted to retrieve S&P Global consensus for Q1 2014 EPS and revenue; no mapping/consensus was available for PSBQ at this time (SPGI mapping error on ticker) and no external estimates were found. As a result, we cannot assess beat/miss vs consensus for Q1 2014.
  • Implication: Modelers should anchor on internal expectations; near-term estimate risk is to Q2 EPS from conversion costs and sustained mortgage banking pressure (20–30% of 2013), partially offset by acquired loans supporting NII .

Key Takeaways for Investors

  • Core profitability steady on a pro-forma basis: excluding merger/tax items, Q1 EPS was $0.92 vs $0.93 YoY; efficiency ratio ~64% reflects expense discipline despite conversion spend .
  • Loan growth is the swing factor: organic balances fell $21.8M in Q1 from seasonal and refinancing dynamics; the Northwoods acquisition adds ~$21M loans and should stabilize growth into Q2 .
  • Expect Q2 EPS to absorb $380–$400k pre-tax conversion costs and a likely NPL uptick (+$3.1M) from a municipal restructure; these are timing/one-off effects rather than broad credit deterioration .
  • NIM drift continues amid competition and low-rate environment; management still sees slight NII uplift in Q2 given acquired assets despite slight NIM pressure .
  • Mortgage banking headwind is structural near term: full-year 2014 mortgage banking at just 20–30% of 2013 as refi volumes remain muted .
  • Capital remains solid (“well capitalized”); Basel III to modestly impact ratios but no equity issuance expected; buybacks up to 10k shares at ≤$31.50 offer capital return flexibility .
  • Watch integration KPIs: deposit retention (already better than expected), cost synergies, and cross-sell in Rhinelander/Oneida County as medium-term ROE drivers .

Additional Detail and Cross-References

  • Balance Sheet and Asset Quality: Total NPAs were $10.323M (1.49% of assets) vs $10.389M at YE13; ALLL was $6.882M (1.39% of loans; ~80% of NPLs) .
  • Funding: Wholesale funding reduced to $99.6M (14.4% assets) from $108.9M (15.3%) Q4, while access to unused wholesale capacity remained ample (~$309M) .
  • Tax-Equivalent NII: Tax-adjusted NII was $5.408M (NIM 3.31%) vs $5.601M (3.32%) in Q4 and $5.446M (3.37%) YoY, consistent with pressure from lower loan yields .

Sources: PSB Holdings, Inc. Q1 2014 earnings 8‑K and press release, financial statements, and related 8‑Ks ; Q4 2013 earnings press release and tables ; Northwoods acquisition announcement and completion releases .