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 Commission File No.: 000-50301
September 30, 2004
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):
Yes X No
-------------- -------------
(2) has been subject to such filing requirements for past 90 days:
Yes X No
------------- -------------
(3) is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
Yes No X
------------- -------------
The Registrant had 2,885,073 shares of Common Stock outstanding as
of September 30, 2004.
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 OPERATION...........................................................................................12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................................16
ITEM 4: CONTROLS AND PROCEDURES........................................................................................17
PART II. -- OTHER INFORMATION............................................................................................18
Item 1. Legal Proceedings..............................................................................................18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....................................................18
Item 3. Defaults Upon Senior Securities................................................................................18
Item 4. Submission of Matters to a Vote of Security Holders............................................................18
Item 5. Other Information..............................................................................................18
Item 6. Exhibits.......................................................................................................18
SIGNATURES.............................................................................................................19
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Statements contained in this Form 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.
2
PART I --FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSB GROUP. INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2004 2003
----------------- ----------------------
ASSETS
Cash and cash equivalents $ 26,399 $ 14,308
Securities available for sale 60,579 47,619
Loans 339,354 326,262
Less allowance for possible loan loss (3,322) (3,887)
---------------- --------------------
Net loans 336,032 322,375
Loans held for sale 3,584 627
Bank premises and equipment 9,746 9,213
Accrued interest receivable 1,741 1,525
Other assets 5,187 5,844
---------------- --------------------
Total assets $ 443,268 $ 401,511
================ ====================
LIABILITIES
Deposits:
Non-interest bearing $ 61,422 $ 53,412
Interest bearing 331,960 297,576
---------------- --------------------
Total deposits 393,382 350,988
Federal funds purchased - 2,420
FHLB borrowings 5,000 5,000
Accrued taxes, interest and other liabilities 2,317 2,092
---------------- --------------------
Total liabilities 400,699 360,500
SHAREHOLDERS' EQUITY
Common stock -- no par value -- 5,000,000
authorized - 2,885,073 shares issued and
outstanding at September 30, 2004 and
December 31, 2003 17,560 17,560
Retained earnings 24,665 23,104
Accumulated other comprehensive (loss)/ income 344 347
---------------- --------------------
Total shareholders' equity 42,569 41,011
---------------- --------------------
Total liabilities and stockholders' equity $ 443,268 $ 401,511
================ ====================
3
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- ------------ -------------
INTEREST INCOME:
Interest and fees on loans $ 5,250 $ 4,918 $ 15,409 $ 14,832
SECURITIES:
Taxable 292 302 719 1,166
Tax-exempt 179 211 436 700
Federal funds sold 14 8 16 27
-------------- ------------- ------------ -------------
TOTAL INTEREST INCOME 5,735 5,439 16,580 16,725
INTEREST EXPENSE:
Deposits 1,351 1,280 3,914 3,913
FHLB & Short-term borrowings 74 60 227 181
-------------- ------------- ------------ -------------
TOTAL INTEREST EXPENSE 1,425 1,340 4,141 4,094
-------------- ------------- ------------ -------------
NET INTEREST INCOME 4,310 4,099 12,439 12,631
Provision for loan loss 350 - 820 -
-------------- ------------- ------------ -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 3,960 4,099 11,619 12,631
OTHER OPERATING INCOME:
Service charges on deposit accounts 689 602 1,841 1,751
Other income 803 1,067 2,401 2,781
-------------- ------------- ------------ -------------
TOTAL OTHER INCOME 1,492 1,669 4,242 4,532
OTHER OPERATING EXPENSE:
Salaries and employee benefits 1,898 2,436 6,018 7,357
Occupancy costs 781 699 2,305 2,074
Legal and professional 274 339 859 1,023
Other operating expense 774 848 2,387 2,494
-------------- ------------- ------------ -------------
TOTAL OTHER OPERATING EXPENSES 3,727 4,322 11,569 12,948
-------------- ------------- ------------ -------------
INCOME - BEFORE FEDERAL INCOME TAXES 1,725 1,446 4,292 4,215
Federal income taxes 509 407 1,259 1,161
-------------- ------------- ------------ -------------
NET INCOME $ 1,216 $ 1,039 $ 3,033 $ 3,054
============== ============= ============ =============
BASIC EARNINGS PER WEIGHTED AVERAGE OUTSTANDING
SHARE OF COMMON STOCK $ .42 $ .33 $ 1.05 $ .97
============== ============= ============ =============
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ .42 $ .33 $ 1.05 $ .97
============== ============= ============ =============
CASH DIVIDENDS PER SHARE $ .17 $ .17 $ .51 $ .47
============== ============= ============ =============
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
2004 2003
-------------- ----------------
Net income $ 3,033 $ 3,054
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax (3) (327)
-------------- ----------------
Comprehensive income $ 3,030 $ 2,727
============== ================
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2004
(in thousands, except share data)
Total
Common Retained Accumulated Shareholders'
Stock Earnings OCI Equity
----------- ------------- -------------- ---------------
Balance -- December 31, 2003 $ 17,560 $ 23,104 $ 347 $ 41,011
Net income - 3,033 - 3,033
Change in unrealized gain on - - (3) (3)
securities available for sale, net
of tax
Cash dividends - (1,472) - (1,472)
----------- ------------- -------------- ---------------
Balance -- September 30, 2004 $ 17,560 $ 24,665 $ 344 $ 42,569
=========== ============= ============== ===============
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2004 2003
------------------ ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 5,228 $ 2,702
CASH FLOW FROM INVESTING ACTIVITIES:
Net (increase) decrease in securities (12,963) 22,097
Net increase in loans (14,477) (27,920)
Net (increase) decrease in loans held for sale
(2,957) 5
Capital expenditures (1,242) (442)
------------------ ----------------
NET CASH USED IN INVESTING ACTIVITIES (31,639) (6,260)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 42,394 8,717
Net decrease in federal funds purchased (2,420) (3,935)
Cash dividends (1,472) (1,479)
------------------ ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 38,502 3,303
------------------ ----------------
NET INCREASE (DECREASE) IN CASH 12,091 (255)
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 14,308 14,158
------------------ ----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 26,399 $ 13,903
================== ================
7
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, 2003 and notes thereto included in PSB Group, Inc.'s
Form 10-K filed with the Securities and Exchange Commission on March 30, 2004.
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, 2004 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, 2004 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.
NOTE 2 -- SECURITIES
The amortized cost and estimated market value of securities are as follows (000s
omitted):
September 30, 2004
---------------------------------------------------------------------
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 $ 36,901 $ 167 $ 32 $ 37,036
Obligations of state and political
subdivisions 20,476 379 - 20,855
Corporate debt securities 1,000 7 - 1,007
Other 1,681 - - 1,681
-------------- -------------- --------------- -------------
Total available-for-sale securities $ 60,058 $ 553 $ 32 $ 60,579
============== ============== =============== =============
8
NOTE 2 -- SECURITIES (CONTINUED)
December 31, 2003
---------------------------------------------------------------------
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 $ 27,195 $ 178 $ 14 $ 27,359
Obligations of state and political
subdivisions 17,274 362 9 17,627
Corporate debt securities 1,000 9 - 1,009
Other 1,624 - - 1,624
-------------- -------------- --------------- -------------
Total available-for-sale securities $ 47,093 $ 549 $ 23 $ 47,619
============== ============== =============== =============
The amortized cost and estimated market value of securities at September 30,
2004, 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,
2004, all securities are available for sale (000s omitted).
Available for Sale
-------------------------------------------------
Amortized Market
Cost Value
---------------------- -----------------------
Due in one year or less $ 16,424 $ 16,465
Due in one year through five years 26,064 26,371
Due after five years through ten years 3,182 3,250
Due after ten years 4,137 4,204
---------------------- -----------------------
49,807 50,290
Federal agency pools 8,570 8,608
Other 1,681 1,681
---------------------- -----------------------
Total $ 60,058 $ 60,579
====================== =======================
Securities having a carrying value of $2,085,378 (market value of $2,089,375)
were pledged at September 30, 2004 to secure public deposits, repurchase
agreements, and for other purposes required by law.
9
NOTE 3 -- LOANS
Major categories of loans included in the portfolio at September 30, 2004 and
December 31, 2003 are as follows (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
-------------------- ---------------------
Mortgages on Real Estate $ 270,967 $ 245,520
Commercial 47,745 53,725
Consumer 20,642 27,017
-------------------- ---------------------
Total $ 339,354 $ 326,262
==================== =====================
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. 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 consists 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, 2004, other real estate owned consisted of four properties.
Management does not anticipate any material loss as the result of the disposal
of these properties. The following table summarizes non-performing assets
(dollars in thousands):
September 30, December 31,
2004 2003
-------------------- -------------------
Non-accrual loans $ 2,133 $ 1,496
Loans past due 90 or more days 998 1,189
Renegotiated loans 606 808
-------------------- -------------------
Total non-performing loans 3,737 3,493
Other real estate owned 155 969
-------------------- -------------------
Total non-performing assets $ 3,892 $ 4,462
==================== ===================
Total non-performing loans to total loans 1.10% 1.07%
Total non-performing assets to total assets 0.88% 1.11%
10
NOTE 4 -- ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is as follows (dollars in
thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------------ ------------------
Loan loss balance -- Beginning of period $ 3,887 $ $ 4,632
Provision 820 -
Loan losses (1,830) (1,553)
Loan recoveries 445 808
------------------ ------------------
Loan loss balance -- End of period $ 3,322 $ 3,887
================== ==================
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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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, Inc. (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 10
banking offices, 4 mortgage offices and two shared loan production offices, with
two additional banking offices under construction.
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 FDIC to applicable legal
limits and we are supervised and regulated by the FDIC and Michigan Office of
Financial and Insurance Services.
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 Federal Deposit Insurance Corporation ("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 draft, 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 credit
cards and internet banking. Full estate and trust services, insurance and
investment advice are offered through a partnership with The Private Bank,
Bloomfield Hills, Michigan. Substantially all of our deposits are from local
market areas surrounding each of our offices.
12
The consolidated financial statements include the accounts of PSB Group, Inc.
and its wholly owned subsidiary, Peoples State Bank. PSB Insurance Agency, Inc.
and Universal Mortgage Company are wholly owned subsidiaries of Peoples State
Bank. 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.
FINANCIAL CONDITION
Company assets consist of customer loans, investment securities, bank premises
and equipment, cash and other operating assets. Total assets increased
approximately $41 million, or 10% to $443 million at September 30, 2004 from
$402 million at December 31, 2003. The balance of our investment securities
increased by approximately $13 million to $60.6 million at September 30, 2004 as
compared to $47.6 million at December 31, 2003. Our loan portfolio increased
approximately $13.1 million to $339.4 million at September 30, 2004. This was
the result of a $25.4 million increase in loans secured by real estate,
partially offset by a $6 million decrease in other commercial loans and a $6.4
million decrease in other consumer loans. Loans held for sale increased by $3
million to $3.6 million at September 30, 2004. Other assets decreased
approximately $657 thousand at September 30, 2004. This was primarily the result
of an $814 thousand decrease in other real estate. The discussion contained in
"Note 3 -- Loans" to the Financial Statements contained in this report is hereby
incorporated by this reference.
The allowance for loan losses decreased $565 thousand during the first nine
months of 2004. As a percentage of total loans, the allowance decreased to 0.98%
at September 30, 2004 from 1.19% at December 31, 2003. Management believes this
reserve is sufficient to meet anticipated future loan losses. The discussion set
forth in "Note 4 -- Allowance for Possible Loan Losses" to the Financial
Statements contained in this report is hereby incorporated by this reference.
Total liabilities increased $40.2 million to $401 million at September 30, 2004
from $361 million at December 31, 2003. This was mainly due to a $42.4 million,
or 12% increase in total deposits to $393.4 million at September 30, 2004 from
$351 million at December 31, 2003. Approximately $8 million of this increase was
in non-interest bearing demand deposits.
FINANCIAL RESULTS
Three Months Ended September 30, 2004
Net income for the three months ended September 30, 2004 was $1.2 million
compared to $1.0 million for the same period in 2003. Total interest income
increased $296 thousand in the third quarter 2004 compared to the third quarter
2003. Interest and fees on loans increased $332 thousand in the third quarter
2004 over the same period in 2003. The increase in interest and fees on loans
was partially offset by a $36 thousand decrease in interest on securities and
federal funds sold. Average loan balances in the third quarter 2004 were
approximately $35 million higher than the third
13
quarter 2003. However, the positive impact of the higher balances was partially
offset by the negative impact of lower interest rates, as higher yielding loans
matured and were replaced by lower yielding loans.
Interest expense increased $85 thousand in the third quarter 2004 as compared to
the same period in 2003. Average interest bearing deposits increased over $16
million, accounting for $71 thousand of the increased interest expense. A $3.6
million increase in average federal funds borrowings accounted for the remainder
of the increase.
During the third quarter 2004 there was a $350 thousand provision for loan
losses recorded. This compares to no provision recorded in the first quarter
2003.
Total other income was about $177 thousand lower in the third quarter 2004 than
the third quarter 2003. Gains on the sale of mortgages and mortgage servicing
rights, included in other income, decreased $182 thousand in the third quarter
2004 as compared to the third quarter 2003. Also, there was a $68 thousand
recovery of prior period interest income included in Other Income in 2003 but no
similar recovery in 2004. The decreases were partially offset by an $87 thousand
increase in service charges on deposit accounts.
Total other operating expenses decreased $595 thousand in the third quarter 2004
over the same period in 2003. Salaries and benefits decreased about $538
thousand. Approximately $122 thousand of this decrease was due to reduced bonus
accruals and $295 thousand was due to lower salaries and benefits expenses, much
of which is attributable to our workforce reduction in the third quarter of
2003. Occupancy expenses increased $82 thousand in the third quarter of 2004
over the same period in 2003. This included increased depreciation on equipment
upgrades and expenses related to the two new loan production offices that were
opened in 2003. Legal and professional fees were $65 thousand lower in the third
quarter 2004 than the third quarter 2003, including a $52 thousand drop in
consulting fees and a $20 thousand drop in legal fees. Other operating expenses
in the third quarter 2004 were $74 thousand less than the third quarter 2003.
Nine Months Ended September 30, 2004
Net income for the nine months ended September 30, 2004 was $3.033 million
compared to $3.054 million for the same period in 2003. Total interest income
decreased $145 thousand in the first nine months of 2004 compared to the first
nine months of 2003. Interest and fees on loans increased $577 thousand. Year to
date average loan balances increased $40 million over the 2003 averages,
however, the positive impact of the higher average loan balances was largely
offset by lower loan yields, as higher yielding loans matured and were replaced
by lower yielding loans. The increased interest income on loans was more than
offset by a $722 thousand decrease in interest income on investment securities.
This decrease was primarily due to the fact that our average investment in
securities and fed funds was $26 million lower in the first nine months of 2004
than the first nine months of 2003, as funds were re-deployed to the higher
yielding loan portfolio.
Total interest expense increased $47 thousand in the first nine months of 2004
compared to the first nine months of 2003. Average interest bearing deposits
increased approximately $10 million over the 2003 average balances, but the
impact of higher average balances was offset by lower interest
rates, as total interest on deposits was flat from period to period. Interest
expense on FHLB and
14
short-term borrowings increased $46 thousand over the 2003 level due to a $4
million increase in average fed funds borrowings.
During the first nine months of 2004 we recorded an $820 thousand provision for
loan losses compared to no provision in the first nine months of 2003.
Total other income was about $290 thousand lower in the first nine months of
2004 than the first nine months of 2003. Deposit service charges were $90
thousand higher in the first nine months of 2004 due to certain new service
charges that were implemented this year. Other non-interest income however, was
$380 thousand lower. This included a $289 thousand drop in the gain on the sale
of mortgages and mortgage servicing rights that resulted from a drop in
refinance activity from the refinance boom period in 2003. Also included in the
drop in other non-interest income is an $83 thousand decrease in earnings from
PSB Insurance Agency.
Total other operating expenses decreased $1.4 million in the first nine months
of 2004 compared to the first nine months of 2003. Total salary and benefits
expense dropped $1.3 million. This includes a $504 thousand reduction in accrued
bonuses and a $730 thousand reduction salaries and benefits, much of which is
the result of our workforce reduction in the third quarter of 2003. Overtime
expense was also reduced by $39 thousand. Occupancy costs increased $231
thousand over the 2003 level. This includes additional depreciation and
amortization expenses related to equipment and software upgrades, as well as
additional rent and other expenses related to the two new loan production
offices that were opened in 2003. Year-to-date legal and professional fees
expense is $164 thousand below the 2003 level, including a $174 thousand drop in
professional consulting fees and a $57 thousand drop in contract labor expense,
partially offset by a $62 thousand increase in legal fees. Other operation
expenses were reduced $107 thousand from period to period.
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 overnight federal
funds purchases from correspondent banks.
During the nine months ended September 30, 2004, $5.2 million in cash was
provided by operations. This, plus $42.4 million in cash provided through
increased deposits, was used to increase our loan portfolio and loans held for
sale by $17.4 million and our securities portfolio by $13 million. In addition,
we had a net cash outflow of $1.2 million for capital expenditures and paid $1.5
million in cash dividends during the period. During the nine months ended
September 30, 2004, we experienced a net increase of $12.1 million in cash and
cash equivalents. These funds will be used to take advantage of loan and
investment opportunities in the future.
OFF BALANCE SHEET 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, 2004, the
15
Company had commitments to extend credit of $30.2 million and stand-by letters
of credit of $2.2 million compared with $34.7 million and $2.1 million,
respectively, at December 31, 2003.
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, 2004:
Tier 1 capital $37,398
Total capital $40,720
Tier 1 capital to risk-weighted assets 11.47%
Total capital to risk-weighted assets 12.48%
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 the September 30, 2004 simulation, the Company is in a position to
benefit from the rising interest rates that are anticipated. Based on the
position of the balance sheet and management's assumptions concerning core
deposit sensitivity and other assumptions, net interest income is forecasted to
increase as interest rates rise.
16
ITEM 4: 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, 2004. 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. Robert L. Cole, 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. Cole 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, 2004.
17
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 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 Robert L. Cole 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 Robert L. Cole 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
18
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 12, 2004 /s/Robert L. Cole
--------------------------------------------
ROBERT L. COLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 12, 2004 /s/David A. Wilson
--------------------------------------------
DAVID A. WILSON
CHIEF FINANCIAL OFFICER
19
EXHIBIT INDEX
Exhibit 31.1 Certification of Robert L. Cole 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 Robert L. Cole 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