PSB : announces December 2016 quarterly earnings of $1.51 per share on net income of $2.3 million

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PSB announces December 2016 quarterly earnings of $1.51 per share on net income of $2.3 million

Wausau, WI. - January 24, 2017 - PSB Holdings, Inc. (OTCPK: PSBQ) reported December 2016 quarterly earnings of $1.51 per share on net income of $2,310,000, compared to earnings of $1.16 per share on net income of $1,836,000 during the December 2015 quarter. Increased earnings were due primarily to the recapture of loan loss reserves associated with full collection of two problem loans. The December 2016 quarterly provision for loan losses was $610,000 less than the December 2015 quarter, making up 78% of the increased quarterly net income after tax impacts. The remaining increase to quarterly net income was driven by greater net interest income and fee income on loan growth and higher net interest margin which offset increased operating expenses.

During the year ended December 31, 2016, earnings were $5.48 per share on net income of $8,436,000, compared to earnings of $4.83 per share on net income of $7,749,000 during 2015. Both years included special non-recurring income items. 2016 earnings increased $242,000, or $.16 per share, from life insurance proceeds, net of related benefit payments. 2015 earnings increased $552,000, or $.34 per share on a large loan loss recovery. Excluding the 2016 life insurance proceeds and the 2015 loan recovery, proforma 2016 earnings were $5.32 per share compared to $4.49 per share in 2015, up 18.5%. The year- to-date proforma income increase before the special items was due primarily to increased net interest income on commercial related loan growth and lower provision for loan losses.

Peter W. Knitt, President and CEO of PSB Holdings, Inc. noted, "Strong December 2016 quarterly earnings on continued growth in net interest income and improved loan quality completed an extraordinary year of loan growth and related income. Net loans receivable grew $50.8 million during calendar 2016, up 9.5% since the beginning of the year. Disregarding our purchase of Marathon State Bank in June 2012, this was the largest calendar year over year dollar increase in the bank's history and the largest percentage increase seen since December 2008."

Knitt added, "We expect 2017 to be a year of transition for many reasons. A consistently improving economy combined with a pro-growth Donald Trump administration point to increased short-term interest rates and a potential decline in net interest margin." Knitt continued, "Higher rates could also slow residential mortgage banking income growth. Therefore, continued commercial loan growth will likely be important to maintaining net income growth during 2017."

Financial Highlights:

• Calendar 2016 earnings per share of $5.48 compared to $4.83 in 2015, up 13.5%. Return on average shareholders' equity was 12.39% in 2016 compared to 12.04% during 2015.

• December 31, 2016 total assets of $827.5 million, a new milestone, up 5.5% during the year. Net loans receivable grew $50.8 million since December 31, 2015, up 9.5%, reaching $586.1 million.

• Tangible net book value of $45.14 per share at December 31, 2016, up 9.7% from December 31, 2015. PSB repurchased 56,350 shares of its common stock (3.6% of the amount outstanding at the beginning of the year) during calendar 2016 at an average cost of $45.32 per share.

• PSB declared a semi-annual cash dividend of $.45 per common share payable January 31, 2017, up 7% from the dividend declared in December 2015.

Balance Sheet Highlights

Total assets were $827.5 million at December 31, 2016 compared to $784.4 million at December 31, 2015, an increase of $43.1 million, or 5.5%. Net loans receivable increased $50.8 million, or 9.5%, since December 31, 2015. The increase in loans was funded in part by a $13.1 million decrease in cash and cash equivalents, a $29.4 million increase in local deposits, and a $6.9 million increase in wholesale funding since the beginning of the year. Wholesale funding (including brokered certificates of deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements) was $101.9 million (12.3% of total assets) at December 31, 2016 compared to $95.0 million (12.1% of total assets) at December 31, 2015, up 7.2%.

Asset Quality, Credit Costs, and Allowance for Loan Loss Highlights

Total nonperforming assets declined $3,082,000, or 26.4%, during the year ended December 31, 2016 to

$8,585,000. The majority of the decline was related to full repayment of several long-time problem loans and internal credit upgrades to other borrowers recognizing improved operational performance. Net charge-offs of loan principal were $322,000 and $759,000 (excluding a large $1,230,000 loan recovery) during the year ended December 31, 2016 and 2015, respectively. These net charge-offs (excluding the large loan recovery), were .06% and .14% of average loans during the years ended December 31, 2016 and 2015, respectively.

Nonperforming assets are shown in the following table:

Nonperforming Assets as of

December 31,

(dollars in thousands) 2016 2015

Nonaccrual loans (excluding restructured loans)

$ 2,369 $

3,161

Nonaccrual restructured loans 1,242 2,137

Restructured loans not on nonaccrual 4,601 4,991 Accruing loans past due 90 days or more - -

Total nonperforming loans 8,212 10,289

Foreclosed assets 373 1,378

Total nonperforming assets

$ 8,585 $

11,667

Nonperforming loans as a % of gross loans 1.39% 1.90%

Total nonperforming assets as a % of total assets 1.04% 1.49% Allowance for loan losses as a % of nonperforming loans 74.07% 61.72%

PSB recorded a total credit for loan losses of ($400,000) during the December 2016 quarter recognizing full repayment of two impaired loans which had maintained $381,000 in estimated loss reserves. Recapture of these unneeded reserves resulted in the credit to the provision. Despite significant loan growth during calendar 2016, consistently improving credit metrics and lower net charge-offs reduced the required amount of allowance for loan losses, resulting in a provision for loan losses of $55,000 for the entire year. During the December 2015 quarter, the provision for loan losses was $210,000 while a credit to the provision for loan losses of ($530,000) was recorded for the year ended December 31, 2015. Excluding the $1,230,000 recovery received during 2015 on a previously charged-off loan, total provision for loan losses during calendar 2015 would have been $700,000, compared to $55,000 during calendar 2016.

Therefore, the decline in credit costs when excluding the large 2015 recovery was an important driver of higher net income during 2016. Future commercial related loan growth could increase required provisions for loan loss, negatively impacting net income growth. At December 31, 2016, the allowance for loan losses was $6,083,000, or 1.03% of total loans (74% of nonperforming loans), compared to $6,350,000, or 1.17% of total loans (62% of nonperforming loans) at December 31, 2015.

Nonperforming assets aggregating to $500,000 or more, measured by gross principal outstanding per credit relationship, included three relationships at December 31, 2016 and four relationships at December 31, 2015 totaling $4,321,000 and $4,715,000, respectively. Specific reserves maintained on these large problem loans were $147,000 at December 31, 2016 and $286,000 at December 31, 2015.

Capital and Liquidity Highlights

During the year ended December 31, 2016, stockholders' equity increased $3,967,000, from $8,436,000 of net income, and capital from vesting of restricted stock grants and other share issue adjustments of

$301,000, reduced by $2,554,000 paid in connection with stock buybacks, $1,379,000 in shareholder dividends, and other comprehensive net loss of $837,000 from a decline in fair value of securities available for sale. Changes in unrealized gains and losses on securities available for sale are not reflected in net income, but recorded as changes to stockholders' equity, net of tax impacts, and categorized as other comprehensive income (loss).

During the year ended December 31, 2016, PSB repurchased 56,350 shares of its common stock (3.6% of shares outstanding at the beginning of 2016) at an average cost of $45.32 per share, compared to repurchases during the year ended December 31, 2015 of 59,627 shares at an average cost of $41.77 per share. PSB intends for the foreseeable future to continue its stock buyback plan with shares purchased directly from shareholders or on the open market at prevailing prices as opportunities arise.

Tangible net book value increased to $45.14 per share at December 31, 2016, compared to $41.16 per share at December 31, 2015, an increase of 9.7%. PSB's stockholders' equity increased slightly to 8.34% of total assets at December 31, 2016 compared to 8.30% of assets at December 31, 2015. For regulatory purposes, the $7.73 million junior subordinated debentures maturing September 2035 reflected as debt on the Consolidated Balance Sheet are reclassified as Tier 1 regulatory equity capital. PSB's subsidiary, Peoples State Bank, was considered "well capitalized" at December 31, 2016, the strongest capital designation under applicable banking regulations.

Net Interest Income and Margin Highlights

Tax adjusted net interest income totaled $6,724,000 (on net margin of 3.49%) during the December 2016 quarter compared to $6,571,000 (on net margin of 3.43%) during the September 2016 quarter and

$6,270,000 (on net margin of 3.40%) in the December 2015 quarter. During the year ended December 31, 2016, tax adjusted net interest income totaled $25,908,000 (on net margin of 3.46%) compared to

$24,624,000 (on net margin of 3.45%) in 2015, up 5.2%.

Net interest income growth was due to average loan growth of 5.0% during the year ended December 31, 2016 compared to 2015. Commercial related loans led the growth, increasing $45.2 million (up 11.8%) during the year ended December 31, 2016, with approximately 70% of this loan growth in the commercial real estate category. The growth also includes a $3.2 million increase in purchased commercial loan participations, up 14.8%, which was also a contributor to loan growth during 2016.

Net interest income increased over prior year comparable periods due to loan growth, rather than increased net interest margin, as market short-term interest rates were largely unchanged. A continuing economic recovery, a Donald Trump pro-growth administration, and a tighter employment market could result in regular short-term rate increases during 2017. Rising market based short-term rates could pressure net interest margin lower during 2017. Therefore, increased net interest income in 2017 is likely to depend on continued commercial related loan growth.

Noninterest and Fee Income Highlights

Total noninterest income for the quarter ended December 31, 2016 was $1,813,000 compared to

$1,526,000 during the December 2015 quarter, an increase of $287,000, or 18.8%. Mortgage banking revenue from the sale and servicing of residential first mortgage loans to the secondary market provided most of the increase, up $199,000, or 42.0% compared to the prior year quarter, including a $119,000 benefit from a change in the mortgage servicing right valuation allowance. Investment and insurance sales commissions also increased $42,000, or 18.9%. All other items increased $46,000, or 5.5%.

Total noninterest income for the year ended December 31, 2016 was $6,969,000 compared to $6,148,000 in 2015. During 2016, noninterest income increased $380,000 from receipt of life insurance death benefits. Excluding this non-recurring item, noninterest income would have been $6,589,000 in 2016 compared to

$6,148,000 in 2015, up $441,000, or 7.2%. Most of the increase was from higher mortgage banking revenue, which increased $315,000, or 18.3%, during 2016 compared to 2015, including a $164,000 benefit from a change in the mortgage servicing right valuation allowance. All other items increased $126,000, or 2.8% during 2016 compared to 2015.

During the year ended December 31, 2016, the number of residential mortgage loans sold to the secondary market was similar to 2015. However, mortgage banking revenue increased in part from higher secondary market sale spreads (gains), approximating 1.51% of sold principal during 2016 before considering originated mortgage servicing rights. In addition, changes in the mortgage servicing valuation allowance represented 52% of the increase in mortgage banking revenue in 2016 compared to 2015. Higher mortgage interest rates in 2017 could reduce customer demand and units sold to the secondary market, and competition among lenders could lower the average gain on principal sold. These factors could reduce mortgage banking revenue during 2017 compared to 2016. Due to the normal seasonal slowdown in local housing activity, mortgage banking revenue is expected to decline during the January 2017 quarter compared to the December 2016 quarter.

Operating Expense Highlights

Noninterest expense totaled $5,215,000 during the December 2016 quarter compared to $4,651,000 during the December 2015 quarter, up $564,000, or 12.1%. Most of the increase was in salaries and employee benefits, up $495,000, or 18.6%. Included in this wage and benefit increase is $67,000 of wages and benefits related to the new Milwaukee loan production office, $186,000 of increased wages for all other bank employees (up 11.0%), $156,000 of increased health plan expense (up 75.7%) on a large stop-loss claim, and $60,000 in increased year-end incentives (up 13.3%) due to increased net income. Other noninterest expenses in the December 2016 quarter include a non-recurring vendor contract termination payment totaling $105,000. All other December 2016 quarterly operating costs decreased $36,000, or 1.8%, compared to the December 2015 quarter.

Noninterest expense totaled $19,505,000 during the year ended December 31, 2016 compared to

$18,881,000 during the comparable 2015 period, up $624,000, or 3.3%. Salaries and employee benefits expense during 2016 includes a non-recurring benefit payment of $227,000, and 2015 includes $318,000 of additional employee incentives benefits related to the large loan recovery in 2015. Operating expenses associated with the Milwaukee, Wisconsin loan production office opened April 2016 increased 2016 expenses by $238,000. Excluding these special items, total noninterest expense increased $477,000, or 2.6%, during the year ended December 31, 2016 compared to 2015.