Executive Summary

Q3 2014 delivered record diluted EPS of $1.08 and net income of $1.78M, with tax-adjusted net interest margin expanding sequentially to 3.43% from 3.34% and net interest income rising to $5.73M, as high-cost FHLB advances matured and were refinanced at lower rates .
Pro-forma comparisons show Q3 2014 EPS of $1.08 was in line with Q3 2013 pro-forma EPS of $1.07, reflecting stable core profitability once special items are adjusted out .
Asset quality improved quarter-over-quarter (nonperforming assets down 4.3% to $11.65M), though NPA remained higher than year-end on two credits added in 2014; credit costs stayed contained and are expected to remain similar in Q4 .
Outlook: management guided to similar net interest income in Q4 with stable loans and seasonal deposit inflows; another $18.3M of high-cost wholesale funding will mature and be repaid/refinanced, supporting margins. Mortgage banking remains structurally lower in 2014 vs 2013, and new regulatory capital rules from Jan 1, 2015 will modestly pressure ratios but not strategic flexibility .
Stock reaction catalysts: record EPS ex-specials, sequential NIM improvement on funding repricing, contained credit costs, and active buybacks; headwinds include subdued loan demand and persistently weaker mortgage banking revenue .

What Went Well and What Went Wrong

What Went Well

Record EPS per share when non-recurring items are excluded historically; CEO: “September 2014 quarterly earnings of $1.08 per share were record earnings per share compared to prior quarterly results when non-recurring income or expense items in those periods are excluded.” .
Net interest margin expanded to 3.43% and net interest income increased, driven primarily by maturities/refinance of high-cost FHLB advances; reduced FHLB interest expense contributed to 69% of quarterly net interest income increase YoY .
Asset quality improved sequentially: nonperforming assets fell $523K QoQ; allowance coverage remained adequate and credit costs were a key sustainer of income in 2014 .

What Went Wrong

Noninterest expenses rose YoY, with increases tied to the Northwoods branch integration, higher data processing fees, FDIC premiums, and audit/exam charges; efficiency ratio remained elevated vs prior year .
Mortgage banking revenue remained subdued due to lower refinance activity; 2014 mortgage banking expected to be 25–30% below 2013, weighing on noninterest income .
Nonperforming assets were higher vs year-end on newly identified problem credits; potential future uptick from a municipal tax financing district loan upon restructuring was noted .

Financial Results

Metric	Q3 2013	Q1 2014	Q2 2014	Q3 2014
Net Income ($USD Millions)	$0.013	$1.450	$1.403	$1.782
Diluted EPS (Reported)	$0.01	$0.87	$0.85	$1.08
EPS (Pro-forma)	$1.07	$0.92	$0.93	$1.08
Net Interest Income ($USD Millions)	$5.422	$5.174	$5.450	$5.734
Interest & Dividend Income ($USD Millions)	$6.772	$6.405	$6.618	$6.833
Noninterest Income ($USD Millions)	$1.411	$1.320	$1.369	$1.481

Margins & Returns	Q3 2013	Q1 2014	Q2 2014	Q3 2014
Net Interest Margin %	3.40%	3.31%	3.34%	3.43%
Rate Spread %	3.23%	3.15%	3.19%	3.28%
Efficiency Ratio %	53.94%	63.75%	66.19%	59.61%
ROA %	0.01%	0.84%	0.79%	0.97%
ROE %	0.09%	10.19%	9.47%	11.77%

Asset Quality & KPIs	Q3 2013	Q1 2014	Q2 2014	Q3 2014
Total Nonperforming Assets ($USD Millions)	$10.285	$10.323	$12.172	$11.649
Nonperforming Loans / Gross Loans %	1.66%	1.75%	2.06%	1.84%
Net Loan Charge-offs to Avg Loans (Annualized) %	2.97%	0.03%	0.07%	0.48%
Allowance for Loan Losses / Gross Loans %	1.36%	1.39%	1.31%	1.19%
Average Loans ($USD Millions)	$510.937	$498.957	$513.163	$528.420
Average Deposits ($USD Millions)	$537.836	$567.500	$592.377	$598.845
Average Total Assets ($USD Millions)	$695.344	$698.127	$716.152	$727.738

Guidance Changes

Metric	Period	Previous Guidance (as of Q2 2014)	Current Guidance (as of Q3 2014)	Change
Loans Receivable	Q4 2014	Expected to increase modestly (residential retained + commercial growth in Q3 outlook)	Expected to remain stable due to low borrower demand	Lowered
Deposits	Q4 2014	Mixed funding: new wholesale, CDs, and cash to fund loan growth (Q3 outlook)	Seasonal government tax deposits expected to significantly increase total deposits	Raised
Net Interest Income	Q4 2014	NII expected to increase next quarter on stable margin and average loan growth	December Q4 NII expected to remain similar to Q3 given lack of significant loan growth	Lowered
Net Interest Margin	2H 2014	Margin likely under pressure; CD/FHLB costs to decline; margin similar to 1H 2014	Sustained higher margin aided by $18.3M of high-cost wholesale funding maturing and refinanced at lower rates	Slightly Improved
Mortgage Banking Revenue	FY 2014	Expected to decline 25–30% vs 2013	Continued lower activity; FY 2014 down 25–30% vs 2013 remains the outlook	Maintained
Credit Costs	Q4 2014	Reduced credit costs sustaining income YTD	Credit costs expected to remain similar to Q3	Maintained
Regulatory Capital Ratios	FY 2015	New rules effective 1/1/2015; negative impact expected but no equity issuance planned	Negative impact reiterated; no new equity solely to meet requirements; operations/growth not significantly impacted	Maintained
Share Repurchases	2H 2014	Announced quarterly buyback up to 10,000 shares in Q3	Repurchased 10,000 shares at $33.23; plan continues into Q4	Executed/Maintained

Earnings Call Themes & Trends

Note: No Q3 2014 earnings call transcript or other conference transcript was located for PSBQ in the period searched.

Topic	Previous Mentions (Q1 & Q2)	Current Period (Q3 2014)	Trend
Interest Rate/Funding Costs	Margin pressure from falling loan yields; CD/FHLB costs to decline; margin similar to 1H 2014	Margin expanded to 3.43% as high-cost FHLB advances matured and were refinanced at lower rates	Improving
Loan Growth/Demand	Q2: Loans expected to increase modestly next quarter (residential + commercial)	Q4 outlook: loans expected to remain stable given low borrower demand	Softer
Mortgage Banking	Q1/Q2: 2014 mortgage banking down 25–30% vs 2013 on lower refi activity	Q3: Mortgage banking remains subdued; 2014 decline reiterated	Weaker structurally
Credit Costs/Asset Quality	Q1/Q2: Credit costs down sharply YoY; allowance adequate	Q3: NPA down QoQ but up vs year-end; credit costs expected similar in Q4	Stable/Cautious
Capital/Regulatory	New capital rules from 1/1/2015; expect negative ratio impact; no equity issuance	Reiterated; no expected impact on recurring operations or growth	Maintained
Shareholder Returns	Q2: declared $0.40 dividend; announced buyback up to 10,000 shares	Q3: repurchased 10,000 shares at $33.23; plan continues	Active

Management Commentary

“The September 2014 quarter was a return to strong income levels as loan growth from the Northwoods branch purchase and increased commercial lines of credit usage increased net interest income. In addition, net interest margin increased as high cost FHLB advances matured and operating expenses returned to normal levels after completing the Northwoods branch purchase conversion.” — Peter W. Knitt, President & CEO .
“September 2014 quarterly earnings of $1.08 per share were record earnings per share compared to prior quarterly results when non-recurring income or expense items in those periods are excluded.” — Peter W. Knitt .

Q&A Highlights

No Q3 2014 earnings call transcript found; therefore, Q&A themes, guidance clarifications, and tone shifts cannot be assessed from call content for this period.

Estimates Context

S&P Global consensus estimates for Q3 2014 were unavailable via our data connector for PSBQ (CIQ mapping missing). As a result, comparisons to Street EPS/Revenue estimates cannot be made at this time. Values retrieved from S&P Global would normally appear here; consensus was unavailable.

Metric	Q3 2014 Consensus	Actual Q3 2014	Surprise
EPS ($)	N/A (S&P Global consensus unavailable)	$1.08	N/A
Revenue ($USD Millions; Interest & Dividend Income)	N/A (S&P Global consensus unavailable)	$6.833	N/A

Key Takeaways for Investors

Core earnings power is intact: pro-forma EPS aligns with prior-year levels, and Q3 shows sequential improvement in margin and net interest income; watch for continued funding cost tailwinds as $18.3M of high-cost wholesale funding rolls in Q4 .
Credit costs are contained and expected to remain similar in Q4; sequential NPA improvement is constructive, though 2014 additions keep NPA above year-end—monitor the municipal TIF development loan restructuring risk .
Mortgage banking headwinds are structural in 2014; noninterest income resilience will depend on fees and interchange, not secondary market gains .
Near-term setup: guidance implies flat loans and similar NII in Q4; sequential margin support from funding repricing could offset muted asset growth—trade the “funding tailwind vs loan demand” narrative .
Capital and shareholder returns: buybacks executed and continuing, tangible book up 6.5% YTD; new Basel-related ratios will pressure reported capital metrics but not strategy—supportive for capital return continuity .
Medium-term thesis: community banking fundamentals with disciplined credit, improving margin from liability management, and integration of Northwoods assets/deposits; key swing factor remains organic loan demand recovery in footprint .
Data gap: Street consensus was unavailable; focus comparisons on sequential and YoY pro-forma performance until consensus visibility improves.

Sources

Q3 2014 8-K 2.02 and Exhibit 99.1 press release (October 24, 2014) .
Q2 2014 earnings 8-K and Exhibit 99.1 (July 25, 2014) .
Q1 2014 earnings 8-K and Exhibit 99.1 (April 28, 2014) .

PSB HOLDINGS INC /WI/ (PSBQ)·Q3 2014 Earnings Summary