Psb (PSBGE) 10-Q 2009 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

Commission File No.: 000-50301                              

PSB GROUP, INC.

(Exact name of registrant as specified in its charter)

Michigan	42-1591104
(State or other jurisdiction of	(I.R.S. Employer I.D. No.)
incorporation or organization)

1800 East Twelve Mile Road, Madison Heights, Michigan 48071
(Address of principal executive offices)

Registrant’s telephone number:(248) 548-2900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and, (2) has been subject to such filing requirements for past 90 days: Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yeso Noþ

The Registrant had 3,476,310 shares of Common Stock outstanding as of November 13, 2009.

TABLE OF CONTENTS

	PAGE
PART I — FINANCIAL INFORMATION		3
ITEM 1. FINANCIAL STATEMENTS		3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		19
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		26
ITEM 4T: CONTROLS AND PROCEDURES		27
PART II. — OTHER INFORMATION		28
Item 1. Legal Proceedings		28
Item 1A. Risk Factors		28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3. Defaults Upon Senior Securities		28
Item 4. Submission of Matters to a Vote of Security Holders		28
Item 5. Other Information		28
Item 6. Exhibits		28
SIGNATURES		30
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Information Concerning Forward-Looking Statements

     Statements contained in thisForm 10-Q which are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve important known and unknown risks, uncertainties and other factors and can be identified by phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “should” and similar expressions or words. Such forward-looking statements are subject to risk and uncertainties which could cause actual results to differ materially from those projected. Such risks and uncertainties include potential changes in interest rates, competitive factors in the financial services industry, general economic conditions, the effect of new legislation and other risks detailed in documents filed by the Company with the Securities and Exchange Commission from time to time.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Application of Critical Accounting Policies

     Allowance for Loan Losses —The allowance for loan losses is calculated with the objective of maintaining a reserve sufficient to absorb estimated probable loan losses. Loan losses are charged against the allowance when management believes loan balances are uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. This evaluation is inherently subjective as it requires an estimate of the loss content for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows and an estimate of the value of collateral.

     A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting principal and interest payments when due. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

     Accounting for Deferred Taxes —Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effect of the various temporary differences between the book value and tax basis of the various balance sheet assets and liabilities, and gives the current recognition of changes in tax rates and laws. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

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PSB Group, Inc.
Consolidated Balance Sheet
(in thousands, except share data)

	September 30, 2009			December 31,
	(unaudited)			2008
Assets
Cash and cash equivalents	$	19,698		$	12,268
Securities available for sale		69,618			52,254
Loans		363,708			374,809
Less allowance for possible loan loss		(7,327	)		(7,116	)
Net loans		356,381			367,693
Loans held for sale		1,733			1,082
Bank premises and equipment		16,148			14,107
Accrued interest receivable		2,473			2,159
Other real estate owned		6,993			8,459
Other assets		1,255			2,494
Total assets	$	474,299		$	460,516
Liabilities
Deposits:
Non-interest bearing	$	54,330		$	49,661
Interest bearing		385,721			362,781
Total deposits		440,051			412,442
FHLB Advances		5,500			15,000
Long-term debt		282			436
Accrued taxes, interest and other liabilities		2,351			2,536
Total liabilities		448,184			430,414
Shareholders’ Equity
Common stock — no par value - 10,000,000 authorized - 3,476,310 shares issued and outstanding at Sept. 30, 2009 and 3,442,060 at December 31, 2008		23,693			23,607
Unearned ESOP benefits		(282	)		(436	)
Common stock held in trust		(410	)		(410	)
Deferred compensation obligation		410			410
Additional paid in capital — stock options/awards		1,015			707
Unearned compensation		(1,168	)		(976	)
Retained earnings		2,288			6,191
Accumulated other comprehensive income		569			1,009
Total shareholders’ equity		26,115			30,102
Total liabilities and stockholders’ equity	$	474,299		$	460,516

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PSB Group, Inc.
Consolidated Statement of Income (unaudited)
(in thousands, except share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Interest Income:
Interest and fees on loans	$	5,122		$	6,339		$	16,600		$	19,567
Securities:
Taxable		590			591			1,784			1,846
Tax-exempt		54			55			163			226
Federal funds sold		—			—			—			6
Total interest income		5,766			6,985			18,547			21,645
Interest expense:
Deposits		2,148			2,160			6,630			7,434
Federal funds purchased		—			14			—			81
Discount window borrowings		—			8			—			8
Federal Home Loan Bank advances		78			164			287			425
Total interest expense		2,226			2,346			6,917			7,948
Net interest income		3,540			4,639			11,630			13,697
Provision for loan losses		1,620			2,350			6,378			5,966
Net interest income after provision for loan losses		1,920			2,289			5,252			7,731
Other operating income:
Service charges on deposit accounts		670			618			1,843			1,757
Gain on the sale of investment securities		866			—			1,974			187
Other income		359			301			1,197			1,363
Total other income		1,895			919			5,014			3,307
Other operating expense:
Salaries and employee benefits		1,933			2,301			6,129			7,375
Occupancy costs		792			1,121			2,361			2,961
Legal and professional		340			335			1,085			1,053
Other real estate owned expense		231			1,779			1,103			3,655
Marketing expense		61			74			251			256
FDIC insurance		294			122			1,091			240
Other operating expense		837			574			2,126			1,919
Total other operating expenses		4,488			6,306			14,146			17,459
Loss — before federal income tax (benefit)		(673	)		(3,098	)		(3,880	)		(6,421	)
Federal income tax benefit		—			(1,068	)		23			(2,243	)
Net loss	$	(673	)	$	(2,030	)	$	(3,903	)	$	(4,178	)
Loss per average outstanding share of common stock — Basic	$	(.19	)	$	(.61	)	$	(1.12	)	$	(1.30	)
Fully diluted		(.19	)		(.61	)		(1.12	)		(1.30	)
Cash dividends per share	$	.00		$	.00		$	.00		$	.04

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PSB Group, Inc.
Consolidated Statement of Comprehensive Income (unaudited)
(in thousands, except share data)

	Nine Months Ended
	September 30,
	2009			2008
Net loss	$	(3,903	)	$	(4,178	)
Other comprehensive income (loss):
Change in unrealized loss on securities available for sale, net of tax		1,534			1
Less reclassification adjustment for gains included in net loss, net of tax		(1,974	)		(123	)
Other comprehensive loss		(440	)		(122	)
Comprehensive loss	$	(4,343	)	$	(4,300	)

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PSB Group, Inc.
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
Nine Months Ended September 30, 2009
(in thousands, except share data)

				Unearned			Common			Deferred		Add’l Paid in											Total
	Common			ESOP			Stock			Comp.		Capital - Stock		Unearned			Retained			Accumulated			Shareholders’
	Stock			Benefits			Held in Trust			Obligation		Options/Awards		Compensation			Earnings			OCI			Equity
Balance — December 31, 2008	$	23,607		$	(436	)	$	(410	)	$	410	$	707	$	(976	)	$	6,191		$	1,009		$	30,102
Net loss																		(3,903	)					(3,903	)
Change in Other Comprehensive Income																					(440	)		(440	)
Earned ESOP Benefit					154																			154
Restricted Stock Awards		138																						138
Repurchase of common stock		(52	)																					(52	)
Additional paid in capital stock options and awards													308		(192	)								116
Balance — Sept. 30, 2009	$	23,693		$	(282	)	$	(410	)	$	410	$	1,015	$	(1,168	)	$	2,288		$	569		$	26,115

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PSB Group, Inc.
Consolidated Statement of Cash Flows (Unaudited)
(in thousands, except share data)

	Nine Months Ended
	September 30
	2009			2008
Net cash provided by (used) in operating activities:	$	4,223		$	1,374
Cash flow from investing activities:
Purchase of securities available for sale		(94,200	)		(25,841	)
Proceeds from maturities of securities available for sale		8,418			12,904
Proceeds from sale of securities available for sale		69,582			25,017
Net decrease in loans		4,283			2,331
Capital expenditures		(2,933	)		(274	)
Net cash (used in) provided by investing activities		(14,850	)		14,137
Cash flow from financing activities:
Net increase (decrease) in deposits		27,609			(42,867	)
Net increase in short-term borrowings		5,500			8,850
Net (decrease) increase in FHLB advances		(15,000	)		15,000
Issuance of common stock		—			2,039
Cash dividends		—			(125	)
Repurchase of common stock		(52	)		—
Net cash provided by (used in ) financing activities		18,057			(17,103	)
Net increase (decrease) in cash		7,430			(1,592	)
Cash and Cash Equivalents — Beginning of period		12,268			12,762
Cash and Cash Equivalents — End of period	$	19,698		$	11,170
Supplemental Information— Cash paid (received) for:
Interest	$	7,027		$	8,087
Taxes	$	(1,218	)	$	(723	)

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PSB Group, Inc.
Notes to Consolidated Financial Statements (unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. You should read these condensed financial statements in conjunction with our audited financial statements for the year ended December 31, 2008 and notes thereto included in PSB Group, Inc.’s Form 10-K filed with the Securities and Exchange Commission on March 31, 2009. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations, and cash flows of PSB Group, Inc. as of September 30, 2009 and for the periods then ended have been made. Those adjustments consist only of normal and recurring adjustments. The results of operations for the nine-month period ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

PSB Group, Inc. was formed as a holding company for Peoples State Bank on February 28, 2003 pursuant to a plan of reorganization adopted by Peoples State Bank and its shareholders. Pursuant to the reorganization, each share of the Bank’s stock was exchanged for three shares of stock in the holding company. The reorganization had no material financial impact and is reflected for all prior periods presented. Per share amounts have been retroactively restated to reflect the three-for-one exchange of stock.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 805, Business Combinations, which established principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

On April 9, 2009, the FASB finalized three FASB Staff Positions (“FSPs”) regarding the accounting treatment for investments including mortgage-backed securities. These FSPs changed the method for determining if an other-than-temporary impairment (“OTTI”) exists and the amount of OTTI to be recorded through an entity’s income statement. The changes brought about by the FSPs provide greater clarity and reflect a more accurate representation of the credit and noncredit components of an OTTI event. The three FSPs are as follows:

• FASB ASC 820-10-65-4, Fair Value Measurements and Disclosures provides guidelines for making fair value measurements that determine fair value when the volume and level of activity for assets or liabilities have significantly decreased and identify transactions that are not orderly.

• FASB ASC 320-10-65, Investments — Debt and Equity Securities provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

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• FASB ASC 825-10-65, Financial Instruments enhances consistency in financial reporting by increasing the frequency of fair value disclosures.

The adoption of these did not have a material effect on the Company’s results of operations or financial position.

In May 2009, FASB issued FASB ASC 855, Subsequent Events with the objective to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB ASC 855 sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. FASB ASC 855 is effective for interim and annual financial periods ending after June 15, 2009. The adoption of FASB ASC 855 on June 30, 2009, did not have an impact on the Company’s consolidated financial statements.

In June 2009, FASB issued FASB ASC 860, Transfers and Servicing. The objective of FASB ASC 860 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. FASB ASC 860 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company is currently evaluating the impact of the adoption of this standard, but does not expect it have a material effect on the Company’s financial position or results of operation.

In June 2009, FASB issued FASB ASC 810, Consolidation. The objective of FASB ASC 810 is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. FASB ASC 810 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is currently evaluating the impact of the adoption of this standard, but does not expect it have a material effect on the Company’s financial position or results of operation.

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Note 2 — Securities

The amortized cost and estimated market value of securities are as follows (000s omitted):

	September 30, 2009
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. treasury securities and obligations of U.S. government corporations and agencies	$	46,695	$	455	$	(69	)	$	47,081
Obligations of state and political subdivisions		20,321		277		(43	)		20,555
Corporate debt securities		500		—		(50	)		450
Other		1,532		—		—			1,532
Total available-for-sale securities	$	69,048	$	732	$	(162	)	$	69,618

	December 31, 2008
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	43,833	$	1,318	$	(5	)	$	45,146
Obligations of state and political subdivisions		5,380		6		(260	)		5,126
Corporate debt securities		500		—		(50	)		450
Other		1,532		—		—			1,532
Total available-for-sale securities	$	51,245	$	1,324	$	(315	)	$	52,254

The amortized cost and estimated market value of securities at September 30, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. As of September 30, 2009, all securities are available for sale (000s omitted).

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	Available for Sale
	Amortized		Market
	Cost		Value
Due in one year or less	$	15,631	$	15,633
Due in one year through five years		15,577		15,700
Due after five years through ten years		2,424		2,483
Due after ten years		9,098		9,145
		42,730		42,961
Federal agency pools		24,786		25,125
Other		1,532		1,532
Total	$	69,048	$	69,618

Securities having a carrying value of $33,710,000 (market value of $34,021,000) were pledged at September 30, 2009 to secure public deposits, repurchase agreements, and for other purposes required by law.

Note 3 — Loans

Major categories of loans included in the portfolio at September 30, 2009 and December 31, 2008 are as follows (dollars in thousands):

	September 30,		December 31,
	2009		2008
Commercial Real Estate	$	233,217	$	249,133
Residential Mortgages		85,718		81,138
Commercial		38,405		37,243
Consumer		6,368		7,295
Total	$	363,708	$	374,809

The Company places loans in non-accrual status when, in the opinion of management, uncertainty exists as to the ultimate collection of principal and interest. This typically includes loans that have exceeded 90 days past-due. Management knows of no loans (other than those that are immaterial in amount) which have not been disclosed below which cause it to have doubts as to the ability of the borrowers to comply with the contractual loan terms, or which may have a material effect on the Company’s balance sheet or results from operations. Non-performing assets consist of non-accrual loans, loans past due 90 or more days, restructured loans and real estate that has been acquired in full or partial satisfaction of loan obligations or upon foreclosure. As of September 30, 2009, other real estate owned consisted of 35 properties, compared to 52 properties at December 31, 2008. Other real estate is carried on the books at the lower of fair value less the estimated cost to sell, or the carrying amount of the loan at the date of foreclosure. The following table summarizes non-performing assets (dollars in thousands):

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	September 30,			December 31,
	2009			2008
Non-accrual loans	$	28,488		$	8,738
Loans past due 90 or more days		1,241			543
Restructured debt		13,552			4,746
Total non-performing loans		43,281			14,027
Other real estate owned		6,993			8,459
Total non-performing assets	$	50,274		$	22,486
Total non-performing loans to total loans		11.90	%		3.74	%
Total non-performing assets to total assets		10.60	%		4.88	%

Note 4 — Allowance for Possible Loan Losses

Activity in the allowance for possible loan losses is as follows (dollars in thousands):

	Nine Months
	Ended			Year Ended
	September 30,			December 31,
	2009			2008
Loan loss balance — Beginning of period	$	7,116		$	5,184
Provision for loan losses		6,378			9,956
Charge-offs		(6,574	)		(8,387	)
Recoveries		407			363
Loan loss balance — End of period	$	7,327		$	7,116
Allowance as a % of total loans		2.01	%		1.90	%
Allowance as a % of total non-performing loans		16.93	%		50.73	%

The allowance for possible loan losses is maintained at a level believed adequate by management to absorb potential losses from impaired loans as well as the remainder of the loan portfolio. The allowance for loan losses is based upon periodic analysis of the portfolio, economic conditions and trends, historical credit loss experience, borrowers’ ability to repay and collateral values.

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Note 5 — Fair Value Measurements

The following tables contain information about the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2009, and the valuation techniques used by the Company to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

Disclosures concerning assets and liabilities at fair value are as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2009
(dollars in thousands)

			Significant
	Quoted Prices in		Other		Significant
	Active		Observable		Unobservable		Balance at
	Markets for Identical		Inputs		Inputs		September 30,
	Assets (Level 1)		(Level 2)		(Level 3)		2009
Assets
Investment securities available-for-sale	$	1,001	$	68,167	$	450	$	69,618

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Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
(dollars in thousands)

	Investment
	securities - available-
	for-sale
Balance at December 31, 2008	$	730
Total realized and unrealized gains (losses) included in income		—
Total unrealized gains (losses) included in other comprehensive income		—
Net purchases, sales, calls and maturities		—
Net transfers in/out of Level 3		(280	)
Balance at September 30, 2009	$	450

Investment Securities Available for Sale.Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices for similar assets, if available. If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curves, prepayment speeds, and default rates. Recurring Level 1 securities would include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Recurring Level 2 securities include U.S. government agency securities, U.S. government sponsored agency securities, mortgage-backed securities, collateralized mortgage obligations and municipal bonds. Where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Changes in fair market value are recorded in other comprehensive income as the securities are available for sale.

Of the Level 3 assets that were still held by the Company at September 30, 2009, there was $50 thousand in unrealized losses included in other comprehensive income in the consolidated balance sheet. There were no gains or losses realized through the income statement for these assets during the nine months ended September 30, 2009.

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in the fair value that were attributable to both observable and unobservable inputs.

Available-for-sale investment securities categorized as Level 3 assets consist of a trust preferred investment issued by a local area bank holding company. The Company estimates fair value of these investments on the present value of expected future cash flows using management’s best estimate of key assumptions.

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are impaired loans accounted for under FASB ASC Topic 310: Accounting by Creditors for Impairment of a Loan. The Company has estimated the fair value of these assets using Level 2 inputs, including discounted cash flow projections and estimated realizable value of the underlying collateral (typically based on outside appraisals).

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Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2009
(dollars in thousands)

									Total
									Losses
			Quoted Prices in		Significant				for the
			Active		Other		Significant		period
	Balance		Markets for		Observable		Unobservable		ended
	September		Identical		Inputs		Inputs		September
	30, 2009		Assets (Level 1)		(Level 2)		(Level 3)		30, 2009
Assets
Impaired loans accounted for under FAS 114	$	35,422	$	—	$	35,422	$	—	$	3,266
Other Real Estate Owned	$	6,993	$	—	$	6,993	$	—	$	518

Impaired Loans.The Company does not record loans at fair value on a recurring basis. However, on occasion, a loan is considered impaired and an allowance for loan loss is established. A loan is considered impaired when it is probable that all of the principal and interest due under the original terms of the loan may not be collected. Once a loan is identified as individually impaired, management measures impairment in accordance with FASB ASC Topic 310: Accounting by Creditors for Impairment of a Loan. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with FASB ASC Topic 825: The Fair Value Option for Financial Assets and Liabilities, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Other Real Estate. Other real estate is carried at the lower of (1) the fair value of the asset, determined by current appraisal, less the estimated costs to sell the asset or (2) the remaining balance of the related loan.

Other assets, including goodwill and other intangible assets, are also subject to periodic impairment assessments under other accounting principles generally accepted in the United States of America. These assets are not considered financial instruments. Accordingly, these assets have been omitted from the above disclosures.

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Note 6 — Earnings per Share

Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options.

Earnings per common share have been computed based on the following (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Net income (loss)	$	(673	)	$	(2,030	)	$	(3,903	)	$	(4,178	)
Average number of common shares outstanding used to calculate basic earnings per common share		3,476,310			3,333,625			3,476,149			3,212,025
Effect of dilutive securities		—			—			—			—
Average number of common shares outstanding used to calculate diluted earnings per common share		3,476,310			3,333,625			3,476,149			3,212,025
Number of anti-dilutive stock options excluded from		145,293			148,193			145,293			148,193

Note 7 — Fair Value of Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. FASB ASC 825-10-50: Financial Instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.

The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents— The carrying amounts of cash and short-term instruments approximate fair values.

Securities— Fair values for securities are based on quoted market prices.

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Loans Held for Sale— Fair values for loans held for sale are based on commitments on hand from investors or prevailing market prices.

Loans Receivable— For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one- to four-family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial, and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit Liabilities— The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Long-term Borrowings— The fair values of the Corporation’s long-term borrowings are estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rates for similar types of borrowing arrangements.

Short-term Borrowings— The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued Interest— The carrying amounts of accrued interest approximate fair value.

Other Instruments— The fair values of other financial instruments, including loan commitments and unfunded letters of credit, based on a discounted cash flow analysis, are not material.

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The estimated fair values and related carrying values or notional amounts of the Corporation’s financial instruments are as follows (000s omitted):

	September 30, 2009				December 31, 2008
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Cash and short-term investments	$	19,698	$	19,698	$	12,268	$	12,268
Securities		69,618		69,618		52,254		52,254
Loans		356,381		369,576		367,693		379,809
Loans held for sale		1,733		1,762		1,082		1,100
Accrued interest receivable		2,473		2,473		2,159		2,159
Liabilities:
Noninterest-bearing deposits		54,330		54,330		49,661		49,661
Interest-bearing deposits		385,721		388,352		362,781		366,465
FHLB advances		5,500		5,500		15,000		15,488
Long-term debt		282		282		436		436
Accrued interest payable		289		289		398		398

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

PSB Group, Inc. (the “Company”) was formed on February 28, 2003 as a bank holding company for the purpose of owning Peoples State Bank (the “Bank”) pursuant to a plan of reorganization adopted by the Bank and its shareholders. Pursuant to the reorganization, each share of Bank stock held by existing shareholders was exchanged for three shares of common stock of PSB Group, Inc. The reorganization had no consolidated financial statement impact. Share amounts for all prior periods presented have been restated to reflect the reorganization.

The Bank was incorporated and chartered under the laws of the state of Michigan in 1909. We operated as a unit bank until July 20, 1992, when we opened our first branch office in Sterling Heights, Michigan. In May 1998, the Bank acquired Madison National Bank, Madison Heights, Michigan (“Madison”). On May 1, 2000, the Bank acquired 100% of the common stock of Universal Mortgage Corporation, a southeast Michigan based mortgage lender. Today we operate 11 banking offices and 1 mortgage origination office.

We provide customary retail and commercial banking services to our customers, including checking and savings accounts, time deposits, safe deposit facilities, commercial loans, real estate mortgage loans, installment loans, IRAs and night depository facilities. Our deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to applicable legal limits and we are supervised and regulated by the FDIC and Michigan Office of Financial and Insurance Regulation.

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We provide a full range of retail and commercial banking services designed to meet the borrowing and depository needs of small and medium-sized businesses and consumers in local areas. Substantially all of our loans are to customers located within our service area. We have no foreign loans or highly leveraged transaction loans, as defined by the Federal Reserve Board (“FRB”). We conduct our lending activities pursuant to the loan policies adopted by our Board of Directors. These loan policies grant individual loan officers authority to make secured and unsecured loans in specific dollar amounts; senior officers or various loan committees must approve larger loans. Our management information systems and loan review policies are designed to monitor lending sufficiently to ensure adherence to our loan policies.

We also offer a full range of deposit and personal banking services insured by the FDIC, including (i) commercial checking and small business checking products, (ii) retirement accounts such as Individual Retirement Accounts (“IRA”), (iii) retail deposit services such as certificates of deposits, money market accounts, savings accounts, checking account products and Automated Teller Machines (“ATMs”), Point of Sale and other electronic services, and (iv) other personal miscellaneous services such as safe deposit boxes, foreign drafts, foreign currency exchanges, night depository services, travelers checks, merchant credit cards, direct deposit of payroll, U.S. savings bonds, official bank checks and money orders. We also offer third party credit cards and internet banking. We provide commercial and public fund accounts with money market sweep accounts through Federated Investments, a third party vendor. We also provide investment services through Primevest Financial Services, Inc. Full-time representatives work at various branch offices and offer a full range of investment products.

The consolidated financial statements include the accounts of PSB Group, Inc. and its wholly owned subsidiaries, Peoples State Bank and PSB Capital, Inc. PSB Insurance Agency, Inc. is a wholly owned subsidiary of Peoples State Bank. PSB Capital, Inc. was formed in October, 2004. Through September 30, 2009, there has been no business transacted by PSB Capital, Inc. All significant inter-company transactions are eliminated in consolidation.

Net income is derived primarily from net interest income, which is the difference between interest earned on the Bank’s loan and investment portfolios and its cost of funds, primarily interest paid on deposits and borrowings. The volume of, and yields earned, on loans and investments and the volume of, and rates paid, on deposits determine net interest income.

The Company adopted SFAS 123(R), Accounting for Share Based Payments in 2006. For the first nine months of 2009, the Company recorded $254 thousand in share based compensation expense. This compares to $239 thousand for the first nine months of 2008.

Recent Events

On September 28, 2009, the Bank entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist with the FDIC and the OFIR (the “Stipulation and Order.”)

Prior to the issuance of the Stipulation and Order, the Bank’s board and management had already commenced initiatives and strategies to address the issues noted in the Stipulation and Order. The Bank continues to work in cooperation with its regulators and expects to satisfy all of the points contained in the Stipulation and Order. The Bank continues to pursue plans to increase capitalization through a combination of capital raising efforts, which include conventional efforts in public and private markets.

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The Stipulation and Order requires the Bank to take action in the following areas:

§	The Bank shall have and retain qualified management.
§	The Board of directors shall assume full responsibility for the approval of sound policies and objectives and for the supervision of all of the Bank’s activities.
§	Increase the Bank’s level of Tier 1 capital as a percentage of total assets to at least 8 percent.
§	Charge off any loans classified as “loss”.
§	Prohibit the extension of credit to borrowers that have had loans with the Bank that were classified “substandard”, “doubtful” or “special mention” without prior board approval.
§	Prohibit the extension of credit to borrowers that have had loans charged off or classified as “loss” in exam reports.
§	The Bank may not declare or pay any cash dividend without prior written consent of the FDIC and OFIR.
§	Prior to submission or publication of all Reports of Condition, the Board shall review the adequacy of the Bank’s Allowance for Loan and Lease Losses.
§	Within 30 days of the effective date of the Stipulation and Order, the Bank shall eliminate and/or correct all violations of law, rule, and regulations.
§	Within 60 days from the effective date of the Stipulation and Order, the Bank shall correct all deficiencies in the loans listed for “Special Mention”.
§	Prepare and submit progress reports the FDIC and OFIR.

The Stipulation and Order will remain in effect until modified or terminated by the FDIC and OFIR. The Bank expects to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Failure of the Bank to comply with the terms of the Stipulation and Order may subject the Bank to further enforcement action by the FDIC and OFIR, which could have a material adverse effect on the Company. Please refer to the Current Report on Form 8-K filed on October 30, 2009 (which is incorporated herein by this reference) for additional information on the Stipulation and Order.

Financial Condition

Company assets consist of customer loans, investment securities, bank premises and equipment, cash and other operating assets. Total assets increased approximately $13.8 million to $474.3 million at September 30, 2009 from $460.5 million at December 31, 2008. We increased our investment portfolio by approximately $17.3 million to $69.6 million at September 30, 2009 as compared to $52.3 million at December 31, 2008. Our loan portfolio decreased approximately $11.1 million to $363.7 million at September 30, 2009. This was the result of a $15.9 million decrease in commercial real estate loans and a $927 thousand decrease in consumer loans, partially offset by a $4.6 million increase in residential mortgages and a $1.2 million increase in other commercial loans. Loans held for sale increased $651 thousand to $1.7 million at September 30, 2009. Bank premises and equipment increased $2.0 million as we recently purchased the land at two existing banking facilities that we had previously leased. Other real estate owned (repossessed properties) decreased approximately $1.5 million during the first nine months of the year, as we began a company-wide campaign focused on the liquidation of these properties. Other assets decreased $1.2 million during the first nine months of 2009 due mainly to the recovery of approximately $1.0 million in previously paid federal income taxes relating to net operating loss carry-backs.

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During the first nine months of 2009, we experienced net loan charge-offs of $6.2 million. This compares to net charge-offs of $8.2 million during the first nine months of 2008. In addition, at September 30, 2009, we were carrying $43.3 million in non-performing loans, including Troubled Debt Restructured, compared to $14.0 million at December 31, 2008. This high level of net charge-offs and non-performing loans is the direct result of the continuing unfavorable economic conditions in the state of Michigan, combined with the ongoing problems related to the residential real estate market in southeast Michigan. We have no exposure in the sub-prime mortgage lending market, but through our commercial loan portfolio, we have had a number of relationships with residential real estate developers who have encountered severe problems. During the first nine months of 2009, we recorded a loan loss provision of $6.4 million compared to a $6.0 million provision during the first nine months of 2008. Our loan loss reserve as a percentage of total loans has been increased to 2.01% as of September 30, 2009, compared to 1.90% at December 31, 2008 and 1.78% at September 30, 2008. Management believes the reserve is sufficient to meet anticipated future loan losses. The discussions set forth in “Note 3 — Loans” and “Note 4 — Allowance for Possible Loan Losses” in the Financial Statements contained in this report are hereby incorporated by this reference.

Total liabilities increased $17.8 million to $448.2 million at September 30, 2009 from $430.4 million at December 31, 2008. We continue to experience favorable deposit growth without paying above market rates and without soliciting brokered deposits. Total deposits increased $27.6 million to $440.1 million at September 30, 2009 from $412.5 at December 31, 2008. This was mainly due to a $20.5 million increase in savings deposits, a $5.7 million increase in certificates of deposit and a $4.7 million increase in non-interest bearing deposits, partially offset by a $3.3 million decrease in interest bearing demand balances. We used this increase in deposits primarily to pay down our FHLB advances by $9.5 million and build our investment portfolio.

Financial Results

Three Months Ended September 30, 2009

For the three months ended September 30, 2009, we realized a net loss of $673 thousand compared to a net loss of $2.030 million for the same period in 2008, a net loss of $1.778 million in the first quarter of 2009 and a net loss of $1.452 million in the second quarter of 2009. Total interest income decreased $1.2 million in the third quarter 2009 compared to the third quarter 2008. Interest and fees on loans decreased $1.2 million in the third quarter 2009 compared to the same period in 2008. The decrease in interest and fees on loans was due to the overall decrease in our loan portfolio and to a decrease in the yield. We realized an $18.2 million decrease in our average loans in the third quarter 2009 compared to the third quarter 2008. This was the result of a $24.3 million decrease in our average commercial loans and a $1.4 million decrease in average consumer loans, partially offset by a $7.5 million increase in our average residential real estate portfolio. In addition to the decrease in average loan balances, we have seen our yield on loans decrease 100 basis points in the third quarter of 2009 compared to the third quarter of 2008. This drop in yield is due to the lower overall interest rate environment experienced in 2009 and also to an increase in non-performing loans over the September 30, 2008 level. Interest on investment securities remained relatively flat when comparing the two periods. Our average investment in securities increased $21.4 million over the third quarter of 2008, but the effect of the increase in the average investment was offset by a 147 basis points decrease in yield on those securities. The net result was a $2 thousand decrease in interest income from securities.

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Partially offsetting the decrease in interest income was a $120 thousand decrease in interest expense in the third quarter of 2009 compared to the third quarter of 2008. The result was a $699 thousand decrease in net interest income comparing the two quarters. Interest on deposits decreased $12 thousand comparing the two quarters. Average interest bearing balances were $42.6 million higher in the third quarter of 2009 than the third quarter of 2008, but through disciplined pricing, we were able to lower the rates paid and reduce the interest expense on these deposits. Comparing the third quarter 2009 to the third quarter 2008 our average certificate of deposit balances increased $36.4 million, but we reduced the rate paid on these deposits by 19 basis points, resulting in an increase in the interest on certificates of deposit of $200 thousand. Our average savings balances increased $9.3 million between the two quarters but we paid 64 basis points less in the third quarter of 2009 than the third quarter of 2008, resulting in a $158 thousand decrease in interest expense on these balances. Our interest bearing demand balances decreased $3.1 million between the two quarters and we paid 44 basis points less on these balances resulting in a $54 thousand decrease in interest expense from the third quarter of 2008 to the third quarter of 2009. The decrease in interest expense on deposits was supplemented by a $107 thousand decrease in interest on borrowed funds as we decreased our average borrowings by approximately $18.1 million.

During the third quarter 2009, we recorded a $1.6 million provision for loan losses compared to a $2.4 million provision in the third quarter of 2008, a $2.2 million provision for the first quarter of 2009 and a $2.5 million provision recorded in the second quarter of 2009. This level of provision is necessary due to the high net charge-offs we have realized in 2009 and the increase in non-performing loans. Management believes this provision is necessary to maintain the loan loss reserve at an appropriate level.

Total other operating income increased $976 thousand in the third quarter 2009 compared to the third quarter 2008. This increase was mainly the result of an $866 thousand increase in the gains on the sale of investment securities. We also realized a $52 thousand increase in deposit service charges comparing the two periods.

Total other operating expenses were reduced by $1.818 million when comparing the third quarters of 2009 and 2008. Salary and benefits expense decreased $368 thousand. This is mainly due to staff cuts and a freeze on merit increases for all employees in 2009. Salaries and wages have been reduced by $234 thousand and fringe benefits have been reduced by $134 thousand when comparing the third quarter of 2009 to the third quarter of 2008. Occupancy costs have been reduced by $329 thousand including a $303 thousand reduction in rent expense as we closed two mortgage origination offices between the two periods and purchased the land at two existing branch facilities that had previously been leased. Legal and professional expenses remained relatively flat comparing the two quarters. Other real estate owned expenses decreased $1.5 million comparing the third quarter of 2009 to the third quarter of 2008, due mainly to lower write-downs in the value of the repossessed properties. We also realized a $13 thousand decrease in marketing expense. The decreases in non-interest expenses were partially offset by a $172 thousand increase in FDIC insurance expense. This included a 15 basis points increase in our basic assessment rate. Also, we experienced a $263 thousand increase in other operating expenses which included a $184 thousand pre-payment charge from the FHLB as we opted to pre-pay $15 million in FHLB advances and a $48 thousand increase in loan collection expenses.

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Nine Months Ended September 30, 2009

For the nine months ended September 30, 2009, we realized a net loss of $3.903 million compared to a net loss of $4.178 million for the same period in 2008. Total interest income decreased $3.1 million in the first nine months of 2009 compared to the first nine months of 2008. Interest and fees on loans decreased $3.0 million in the first nine months of 2009 over the same period in 2008. The decrease in interest and fees on loans was due to both the overall decrease in our loan portfolio and to a decrease in the yield. Average total loans decreased $15.9 million comparing the first nine months of 2009 to the first nine months of 2008. We realized a $17.2 million decrease in the average balance of our commercial loan portfolio. This decrease in commercial loan balances, combined with a 77 basis points drop in yield resulted in a $2.6 million decrease in interest income on our commercial loans. The drop in yield is due to the lower overall interest rate environment in 2009, as well as a $29.3 million increase in non-performing loans. The average balance of our consumer loan portfolio also contracted, decreasing by $2.0 million. The drop in consumer loan balances combined with a 131 basis points drop in yield resulted in a $311 thousand decrease in interest income on consumer loans. We were able to increase the average balance in our residential real estate portfolio by $3.3 million over the September 2008 level, but the positive effect of the increase in loan balances was more than offset by a 45 basis points drop in yield. The result was a $35 thousand decrease in interest income on our residential real estate loans.

During the first nine months of 2009, we were able to increase our average investment in securities by $14.9 million. However, the yield on the investment portfolio decreased 123 basis points, resulting in a $132 thousand decrease in interest income on the securities portfolio.

Total interest expense decreased $1.031 million in the first nine months of 2009 compared to the first nine months of 2008. Interest on deposits decreased $804 thousand. Our average balance of interest bearing deposits actually increased $25.2 million, but again, through disciplined pricing, we were able to reduce total interest expense. Comparing the first nine months of 2009 to the first nine months of 2008 our average certificate of deposit balances increased $30.6 million, but we reduced the rate paid on these deposits by 77 basis points, resulting in an increase in the interest on certificates of deposit of only $32 thousand. Our average savings balances decreased $1.5 million between the two periods and we paid 109 basis points less in the first nine months of 2009 than the first nine months of 2008, resulting in a $683 thousand decrease in interest expense on these balances. In addition, our interest bearing demand balances decreased $3.9 million between the two periods and we paid 60 basis points less on these balances resulting in a $154 thousand decrease in interest expense from the first nine months of 2008 to the first nine months of 2009. The year-to-date decrease in interest expense on deposits was supplemented by a $226 thousand decrease in interest on borrowed funds as we decreased our average borrowings by approximately $10.1 million.

During the first nine months of 2009, we recorded a $6.4 million provision for loan losses compared to a $6.0 million provision recorded in the first nine months of 2008. This increase in the provision is due to the increase in net charge-offs we have realized in 2009 and the increase in non-performing loans. Management believes this provision is necessary to maintain the reserve at an appropriate level.

Total other operating income increased $1.707 million in the first nine months 2009 compared to the first nine months 2008. Deposit service charges increased $86 thousand. We also realized a $1.787 million increase in the gain on the sale of securities comparing the first nine months of 2009 to the

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first nine months of 2008. The increases were partially offset by a $166 thousand decrease in other income. While we did realize a $77 thousand increase in the gain on the sale of mortgages (included in other income), we also experienced a $163 thousand increase in losses on the sale of other real estate owned (included in other income) and a $52 thousand decrease in investment referral fee income as activity slowed in 2009.

Total other operating expenses were reduced by $3.313 million in the first nine months of 2009 compared to the same period in 2008, even though our FDIC insurance expense increased $851 thousand. The FDIC increase included a 15 basis points increase in our basic assessment rate as well as a one-time special assessment levied by the FDIC against the banking industry, our portion of which was of $232 thousand. Salary and benefits expense was reduced by $1.246 million. This was mainly due to staff cuts, a freeze in merit increases in 2009 and the suspension of 401K Plan matching contributions for the period May — December 2009. In addition, there was a $200 thousand one-time expense for retiree medical benefits that was recorded in 2008. Occupancy costs have been reduced by $600 thousand, including a $184 thousand reduction in equipment maintenance and depreciation expenses and a $364 thousand reduction in rent expense as we closed two mortgage origination offices and purchased the land at two existing branch facilities that had previously been leased. Legal and professional expenses increased $32 thousand. Other real estate owned expenses decreased $2.552 million due mainly to lower write-downs in the value of the repossessed properties in 2009. Marketing expenses remained relatively flat. Other operating expenses increased $207 thousand due mainly to the $184 thousand pre-payment charge from the FHLB as we opted to pre-pay $15 million in FHLB advances.

Liquidity

The Company manages its liquidity position with the objective of maintaining sufficient funds to respond to the needs of depositors and borrowers and to take advantage of earnings enhancement opportunities. In addition to the normal inflow of funds from core-deposit growth, together with repayments and maturities of loans and investments, the Company utilizes other short-term funding sources such as Federal Home Loan Bank advances and the Federal Reserve Discount Window. During the nine months ended September 30, 2009, the Company increased deposits by $27.6 million. Proceeds from the maturity and sale of securities provided $78.0 million in cash during the first nine months of 2009 and proceeds from the pay-down of the loan portfolio provided $4.3 million. These sources of cash, along with the $4.2 million in cash provided by operating activities, were primarily used to fund the $94.2 million in securities that were purchased and $2.9 million in capital expenditures. In addition, they funded a $9.5 million pay-down of our borrowings and a $7.4 million increase in our cash position. As a result, as of September 30, 2009 we had $19.7 million in cash and cash equivalents, a figure that management considers sufficient to meet our future liquidity needs.

Off Balance Sheet Arrangements and Contractual Obligations

The only significant off-balance sheet obligations incurred routinely by the Company are its commitments to extend credit and its stand-by letters of credit. At September 30, 2009, the Company had commitments to extend credit of $34.0 million and stand-by letters of credit of $2.5 million compared to $35.7 million and $2.6 million, respectively, at December 31, 2008.

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Capital Resources

Banks are expected to meet a minimum risk-based capital to risk-weighted assets ratio of 8%, of which at least one-half (4%) must be in the form of Tier 1 (core) capital. The remaining one-half may be in the form of Tier 1 or Tier 2 (supplemental) capital. The amount of loan loss allowance that may be included in capital is limited to 1.25% of risk-weighted assets. The Bank is currently, and expects to continue to be, in compliance with these guidelines. The following table shows the capital totals and ratios for the Bank as of September 30, 2009:

Tier 1 capital	$	26,170
Total capital	$	30,772
Tier 1 capital to risk-weighted assets		7.16	%
Total capital to risk-weighted assets		8.42	%
Tier 1 capital to average assets		5.37	%

As described in the Company’s Form 8-K filed on October 30, 2009, under a stipulation and consent to the issuance of an order to cease and desist (the “Stipulation and Order”) entered into with the FDIC and Michigan’s Office of Financial and Insurance Regulation, the Bank is required to maintain its Tier 1 capital to assets ratio at not less than 8%. Failure of the Bank to comply with the terms of the Stipulation and Order may subject the Bank to further enforcement action by the FDIC and OFIR, which could have a material adverse effect on the Company.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     To a great extent, the Company’s operating strategies focus on asset/liability management. The purpose of its Asset Liability Management Policy is to provide stable net interest income growth while both maintaining adequate liquidity and protecting the Bank’s earnings from undue interest rate risk. The Bank follows its Asset/Liability Management Policy for controlling exposure to interest rate risk. The Policy is established by management and approved by the Board of Directors.

The Company’s balance sheet consists of investments in interest earning assets (investment securities and loans) that are funded by interest bearing liabilities (deposits and borrowings). These instruments have varying levels of sensitivity to changes in market interest rates which results in interest rate risk. Our policies place strong emphasis on stabilizing net interest margin, with the goal of providing a consistent level of satisfactory earnings.

An interest sensitivity model is the primary tool used in assessing interest rate risk, by estimating the effect that specific upward and downward changes in interest rates would have on pre-tax net interest income. Key assumptions used in this model include prepayment speeds on mortgage related assets; changes in market conditions, loan volumes and pricing; and management’s determination of core deposit sensitivity. These assumptions are inherently uncertain and, as a result, the model can not precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in other market conditions.

Based on our most recent simulation, the Company is in an almost neutral position. Based on the position of the balance sheet and management’s assumptions concerning core deposit sensitivity and

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other assumptions, net interest income will not be significantly impacted whether rates rise or fall. Please refer to the corresponding discussion in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 for more detailed information.

ITEM 4T: CONTROLS AND PROCEDURES

     (a) Disclosure controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner, the information we must disclose in reports that we file with, or submit to the SEC. Michael J. Tierney, our President and Chief Executive Officer, and David A. Wilson, our Senior Vice President and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Tierney and Wilson concluded that, as of the date of their evaluation, our disclosure controls were effective.

     (b) Internal controls. There have not been any significant changes in our internal accounting controls or in other factors that could significantly affect those controls during the quarter ended September 30, 2009.

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PART II. OTHER INFORMATION

     Item 1. Legal Proceedings

     The Company may from time-to-time be involved in legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition of the Company. The Company is not currently involved in any legal proceedings which management believes are of a material nature.

     Item 1A. Risk Factors

     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

     Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     Not Applicable.

     Item 3. Defaults Upon Senior Securities

     Not applicable.

     Item 4. Submission of Matters to a Vote of Security Holders

     Not applicable.

     Item 5. Other Information

     Not applicable.

     Item 6. Exhibits

     a. Exhibits

Exhibit 31.1	Certification of Michael J. Tierney required by Rule 13a — 14(a)
Exhibit 31.2	Certification of David A. Wilson required by Rule 13a — 14(a)
Exhibit 32.1	Certification of Michael J. Tierney required by Rule 13a — 14(b) and Section 906 of the Sarbanes — Oxley Act of 2002, 18 U.S.C. Section 1350
Exhibit 32.2	Certification of David A. Wilson required by Rule 13a — 14(b) and Section 906 of the Sarbanes — Oxley Act of 2002, 18 U.S.C. Section 1350

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PSB GROUP, INC.
Date: November 16, 2009	/s/ Michael J. Tierney
	Michael J. Tierney
	President and Chief Executive Officer
Date: November 16, 2009	/s/ David A. Wilson
	David A. Wilson
	Chief Financial Officer

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EXHIBIT INDEX

Exhibit 31.1	Certification of Michael J. Tierney required by Rule 13a — 14(a)
Exhibit 31.2	Certification of David A. Wilson required by Rule 13a — 14(a)
Exhibit 32.1	Certification of Michael J. Tierney required by Rule 13a — 14(b) and Section 906 of the Sarbanes — Oxley Act of 2002, 18 U.S.C. Section 1350
Exhibit 32.2	Certification of David A. Wilson required by Rule 13a — 14(b) and Section 906 of the Sarbanes — Oxley Act of 2002, 18 U.S.C. Section 1350

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