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 March 31, 2005 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):
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
March 31, 2005.
1
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................................................. 13
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
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 GOODWILL - Effective January 1, 2002, the Corporation
adopted Statement of Financial Standard No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142), which changes the Corporation's accounting for goodwill and
other intangible assets. Generally, intangible assets that meet certain criteria
are recognized and subsequently amortized over their estimated useful lives.
Goodwill and intangible assets with indefinite lives are not amortized. However,
such assets are tested for impairment at adoption of SFAS 142 and at least
annually thereafter. The adoption of SFAS 142 resulted in an increase in net
income for 2002 of approximately $164,000 due to a decrease in amortization
expense. No impairment loss was recorded upon the adoption of SFAS 142 in 2002,
nor was any impairment loss was recorded in 2003 or 2004.
3
PSB GROUP. INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands, except share data)
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
ASSETS
Cash and cash equivalents $ 11,110 $ 14,253
Securities available for sale 106,068 91,125
Loans 341,497 338,674
Less allowance for possible loan loss (3,430) (3,394)
------------ ------------
Net loans 338,067 335,280
Loans held for sale 3,147 2,388
Bank premises and equipment 11,208 10,618
Accrued interest receivable 2,228 2,144
Other assets 6,080 5,534
------------ ------------
Total assets $ 477,908 $ 461,342
============ ============
LIABILITIES
Deposits:
Non-interest bearing $ 57,751 $ 57,479
Interest bearing 361,676 353,653
------------ ------------
Total deposits 419,427 411,132
Federal funds purchased 8,725 -
FHLB borrowings 5,000 5,000
Accrued taxes, interest and other liabilities 2,092 2,229
------------ ------------
Total liabilities 435,244 418,361
SHAREHOLDERS' EQUITY
Common stock - no par value - 5,000,000
authorized - 2,885,073 shares issued and
outstanding at March 31, 2005 and December
31, 2004 17,560 17,560
Retained earnings 25,698 25,331
Accumulated other comprehensive (loss)/ income (594) 90
------------ ------------
Total shareholders' equity 42,664 42,981
------------ ------------
Total liabilities and stockholders' equity $ 477,908 $ 461,342
============ ============
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2005 2004
---------- ----------
INTEREST INCOME:
Interest and fees on loans $ 5,461 $ 5,016
SECURITIES:
Taxable 631 204
Tax-exempt 176 120
Federal funds sold 24 2
---------- ----------
TOTAL INTEREST INCOME 6,292 5,342
INTEREST EXPENSE:
Deposits 1,837 1,293
FHLB & Short-term borrowings 64 62
---------- ----------
TOTAL INTEREST EXPENSE 1,901 1,355
---------- ----------
NET INTEREST INCOME 4,391 3,987
Provision for loan loss 404 90
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 3,987 3,897
OTHER OPERATING INCOME:
Service charges on deposit accounts 568 551
Other income 881 873
---------- ----------
TOTAL OTHER INCOME 1,449 1,424
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,248 2,254
Occupancy costs 860 774
Legal and professional 272 326
Other operating expense 806 758
---------- ----------
TOTAL OTHER OPERATING EXPENSES 4,186 4,112
---------- ----------
INCOME - BEFORE FEDERAL INCOME TAXES 1,250 1,209
Federal income taxes 363 351
---------- ----------
NET INCOME $ 887 $ 858
========== ==========
BASIC EARNINGS PER AVERAGE OUTSTANDING SHARE
OF COMMON STOCK $ 0.31 $ 0.30
========== ==========
CASH DIVIDEND PER SHARE $ 0.18 $ 0.17
========== ==========
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
-------- --------
Net income $ 887 $ 858
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax (684) (2)
-------- --------
Comprehensive income $ 203 $ 856
======== ========
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005
(in thousands, except share data)
Total
Retained Accumulated Shareholders'
Common Stock Earnings OCI Equity
------------ ----------- ----------- -------------
Balance - December 31, 2004 $ 17,560 $ 25,331 $ 90 $ 42,981
Net income - 887 - 887
Change in unrealized gain on
securities available for sale, net
of tax - - (684) (684)
Cash dividends - (520) - (520)
------------ ----------- ----------- -------------
Balance -March 31, 2005 $ 17,560 $ 25,698 $ (594) $ 42,664
============ =========== =========== =============
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2005 2004
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 1,279 $ 1,853
CASH FLOW FROM INVESTING ACTIVITIES:
Net (increase) decrease in securities (16,068) 10,162
Net increase in loans (3,191) (14,839)
Net increase in loans held for sale (759) (3,171)
Capital expenditures (904) (127)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (20,922) (7,975)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 8,295 8,426
Net increase (decrease) in federal funds purchased 8,725 (2,420)
Cash dividends (520) (491)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,500 5,515
---------- ----------
NET DECREASE IN CASH (3,143) (607)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 14,253 14,308
---------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 11,110 $ 13,701
========== ==========
8
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, 2004 and notes thereto included in PSB Group, Inc.'s
Form 10-K filed with the Securities and Exchange Commission on March 31, 2005.
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 March 31, 2005 and for the periods then ended have been made. Those
adjustments consist only of normal and recurring adjustments. The results of
operations for the three-month period ended March 31, 2005 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):
March 31, 2005
-----------------------------------------------
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 $ 82,581 $ 15 $ 1,001 $ 81,595
Obligations of state and political
subdivisions 21,670 111 31 21,750
Corporate debt securities 1,000 6 - 1,006
Other 1,717 - - 1,717
--------- ---------- ---------- ---------
Total available-for-sale securities $ 106,968 $ 132 $ 1,032 $ 106,068
========= ========== ========== =========
9
NOTE 2 - SECURITIES (CONTINUED)
December 31, 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 $ 68,619 $ 54 $ 185 $ 68,488
Obligations of state and political
subdivisions 19,670 261 1 19,930
Corporate debt securities 1,000 8 - 1,008
Other 1,699 - - 1,699
----------- ---------- ---------- ---------
Total available-for-sale securities $ 90,988 $ 323 $ 186 $ 91,125
=========== ========== ========== =========
The amortized cost and estimated market value of securities at March 31, 2005,
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 March 31, 2005,
all securities are available for sale (000s omitted).
Available for Sale
----------------------------
Amortized Market
Cost Value
------------ ------------
Due in one year or less $ 35,392 $ 35,197
Due in one year through five years 48,458 47,873
Due after five years through ten years 4,179 4,179
Due after ten years 5,268 5,262
------------ ------------
93,297 92,511
Federal agency pools 11,954 11,840
Other 1,717 1,717
------------ ------------
Total $ 106,968 $ 106,068
============ ============
Securities having a carrying value of $2,050,228 (market value of $2,033,750)
were pledged at March 31, 2005 to secure public deposits, repurchase agreements,
and for other purposes required by law.
10
NOTE 3 - LOANS
Major categories of loans included in the portfolio at March 31, 2005 and
December 31, 2004 are as follows (dollars in thousands):
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
Mortgages on Real Estate $ 281,788 $ 272,756
Commercial 43,575 47,608
Consumer 16,134 18,310
------------ ------------
Total $ 341,497 $ 338,674
============ ============
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 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
March 31, 2005, other real estate owned consisted of four properties. Management
does not anticipate any material loss as the result of the disposal of these
properties. Non-performing loans have decreased $1.5 million, or 41% since
December 31, 2004. The following table summarizes non-performing assets (dollars
in thousands):
11
March 31, December 31,
2005 2004
---------- ------------
Non-accrual loans $ 2,026 $ 2,297
Loans past due 90 or more days 86 117
Renegotiated loans - 586
---------- ----------
Total non-performing loans 2,112 3,600
Other real estate owned 563 411
---------- ----------
Total non-performing assets $ 2,675 $ 4,011
========== ==========
Total non-performing loans to total loans 0.62% 1.06%
Total non-performing assets to total assets 0.56% 0.87%
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is as follows (dollars in
thousands):
MARCH 31, DECEMBER 31,
2005 2004
---------- ------------
Loan loss balance - Beginning of period $ 3,394 $ 3,887
Provision 404 1,200
Loan losses (461) (2,318)
Loan recoveries 93 625
---------- ------------
Loan loss balance - End of period $ 3,430 $ 3,394
========== ============
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.
12
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 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 11 banking offices, 4 mortgage offices and two shared loan production
offices, with an additional banking office 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.
13
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. and Universal Mortgage Company are wholly owned
subsidiaries of Peoples State Bank. PSB Capital, Inc. was formed in October,
2004. Through March 31, 2005, 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.
FINANCIAL CONDITION
Company assets consist of customer loans, investment securities, bank premises
and equipment, cash and other operating assets. Total assets increased
approximately $16.6 million, or 4% to $478 million at March 31, 2005 from $461
million at December 31, 2004. The balance of our investment securities increased
by approximately $15 million to $106.1 million at March 31, 2005 as compared to
$91.1 million at December 31, 2004. Our loan portfolio increased approximately
$2.8 million to $341.5 million at March 31, 2005. This was the result of a $9
million increase in loans secured by real estate, which includes a $5.2 million
purchase of residential mortgages. This increase was partially offset by a $4
million decrease in other commercial loans and a $2.2 million decrease in other
consumer loans. Loans held for sale increased by $759 thousand to $3.1 million
at March 31, 2005. Other assets increased approximately $1.2 million at March
31, 2005. This was primarily the result of a $590 thousand increase in bank
premises and equipment related to our new branch opened in January.
The allowance for loan losses as a percentage of total loans remained at 1.0% at
March 31, 2005, the same as December 31, 2004. 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 $17 million to $435 million at March 31, 2005 from
$418 million at December 31, 2004. This was mainly due to an $8.3 million
increase in total deposits to $419 million at March 31, 2005 from $411 million
at December 31, 2004. During the first quarter of 2005, we increased the balance
of our very successful Prime Savings Plus account by $16.9 million. The Prime
Savings Plus product is a savings account that offers tiered interest rates that
are tied to the Wall Street Journal prime rate. This product has generated $80.9
million in deposits since it was introduced in August 2004. This was partially
offset by an $8.1 decrease in interest bearing demand deposits. In addition, to
help fund the increase in assets, we increased our federal funds borrowings by
$8.7 million.
FINANCIAL RESULTS
Three Months Ended March 31, 2005
Net income for the three months ended March 31, 2005 was $887 thousand compared
to $858 thousand for the same period in 2004. Total interest income increased
$950 thousand in the first
14
quarter 2005 compared to the first quarter 2004. Interest and fees on loans
increased $445 thousand in the first quarter 2005 over the same period in 2004.
The increase in interest and fees on loans was due mainly to increased interest
rates over the 2004 levels, but also to a $6.5 million increase in average loan
balances. Interest income on securities and federal funds sold was $505 thousand
higher in the first quarter of 2005 than the same period in 2004. This was
mainly due to a $58.2 million increase in average investments securities and
federal funds sold over the 2004 levels.
Interest expense increased $546 thousand in the first quarter 2005 as compared
to the same period in 2004. Average interest bearing deposits increased over
$60.9 million in the first quarter of 2005 over the first quarter of 2004. Our
Prime Savings Plus product, a savings account with rates tied to the prime rate,
accounted for a $75.5 million increase in average interest bearing balances.
This product was introduced in the third quarter of 2004. This increase was
partially offset by a $3.6 million decrease in average certificates of deposit
and a $14 million decrease in average money market and NOW balances. Higher
interest rates in 2005 also contributed to the higher interest expense in the
first quarter of 2005.
During the first quarter 2005, there was a $404 thousand provision for loan
losses recorded in order to maintain the allowance for possible loan losses at a
level that management believes is appropriate in light first quarter net
charge-offs and the growth in the loan portfolio . This compares to a $90
thousand provision recorded in the first quarter 2004.
Total other operating income remained relatively stable when comparing the first
quarter of 2005 to the first quarter of 2004, increasing $25 thousand.
Total other operating expenses also remained relatively flat between the two
periods, increasing only $74 thousand. Occupancy costs increased $86 thousand,
most of which was related to the opening of our new branch in January 2005. In
addition, we experienced a $28 thousand increased lender paid closing costs
related to a new mortgage loan marketing program.
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 three months ended March 31, 2005, $1.3 million in cash was provided
by operations. This, plus $17 million in cash provided through increased
deposits and federal funds borrowings, was used to increase our loan portfolio
and loans held for sale by $4 million and our securities portfolio by $16
million. In addition, we had a net cash outflow of $904 thousand for capital
expenditures and paid $520 thousand in cash dividends during the period. During
the three months ended March 31, 2005, we experienced a net decrease of $3.1
million in cash and cash equivalents.
15
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 March 31, 2005, the Company had commitments to extend credit of $58.4 million
and stand-by letters of credit of $4.8 million compared with $43.8 million and
$4.8 million, respectively, at December 31, 2004.
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 March 31,
2005:
Tier 1 capital $ 38,433
Total capital $ 41,863
Tier 1 capital to risk-weighted assets 11.20%
Total capital to risk-weighted assets 12.20%
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 March 31, 2005 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
16
assumptions concerning core deposit sensitivity and other assumptions, net
interest income is forecasted to increase as interest rates rise. Please refer
to the corresponding discussion in the Company's Annual Report on Form 10-K for
the year ended December 31, 2004 for more detailed information.
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 March
31, 2005. 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 March 31, 2005.
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: May 16, 2005 /s/ Robert L. Cole
-----------------------------------------
ROBERT L. COLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 16, 2005 /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