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 June 30, 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 3,029,152 shares of Common Stock outstanding as of June
30, 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 .................................................... 17
ITEM 4: CONTROLS AND PROCEDURES .................................... 18
PART II. -- OTHER INFORMATION ........................................... 19
Item 1. Legal Proceedings .......................................... 19
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds ......................................... 19
Item 3. Defaults Upon Senior Securities ............................ 19
Item 4. Submission of Matters to a Vote of Security Holders ........ 19
Item 5. Other Information .......................................... 20
Item 6. Exhibits ................................................... 20
SIGNATURES 21
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 Company 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)
JUNE 30, DECEMBER 31,
2005 2004
-------- -------------
ASSETS
Cash and cash equivalents $ 11,303 $ 14,253
Securities available for sale 107,085 91,125
Loans 347,151 338,674
Less allowance for possible loan loss (3,675) (3,394)
-------- --------
Net loans 343,476 335,280
Loans held for sale 3,751 2,388
Bank premises and equipment 11,949 10,618
Accrued interest receivable 2,409 2,144
Other assets 5,846 5,534
-------- --------
Total assets $485,819 $461,342
======== ========
LIABILITIES
Deposits:
Non-interest bearing $ 60,592 $ 57,479
Interest bearing 363,021 353,653
-------- --------
Total deposits 423,613 411,132
Federal funds purchased 11,680 --
FHLB borrowings 5,000 5,000
Accrued taxes, interest and other liabilities 1,798 2,229
-------- --------
Total liabilities 442,091 418,361
SHAREHOLDERS' EQUITY
Common stock - no par value - 5,000,000 authorized
- 3,029,152 shares issued and outstanding at
June 30, 2005 and December 31, 2004 20,406 20,406
Retained earnings 23,611 22,485
Accumulated other comprehensive (loss)/ income (289) 90
-------- --------
Total shareholders' equity 43,728 42,981
-------- --------
Total liabilities and stockholders' equity $485,819 $461,342
======== ========
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2005 2004 2005 2004
------ ------ ------- -------
INTEREST INCOME:
Interest and fees on loans $5,770 $5,143 $11,231 $10,159
SECURITIES:
Taxable 712 223 1,343 427
Tax-exempt 195 137 371 257
Federal funds sold 3 -- 27 2
------ ------ ------- -------
TOTAL INTEREST INCOME 6,680 5,503 12,972 10,845
INTEREST EXPENSE:
Deposits 2,097 1,270 3,934 2,563
FHLB & Short-term borrowings 88 91 152 153
------ ------ ------- -------
TOTAL INTEREST EXPENSE 2,185 1,361 4,086 2,716
------ ------ ------- -------
NET INTEREST INCOME 4,495 4,142 8,886 8,129
Provision for loan loss 145 380 549 470
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 4,350 3,762 8,337 7,659
OTHER OPERATING INCOME:
Service charges on deposit accounts 591 601 1,159 1,152
Other income 1,021 725 1,902 1,598
------ ------ ------- -------
TOTAL OTHER INCOME 1,612 1,326 3,061 2,750
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,140 1,866 4,388 4,120
Occupancy costs 805 750 1,665 1,524
Legal and professional 304 259 576 585
Other operating expense 871 855 1,677 1,613
------ ------ ------- -------
TOTAL OTHER OPERATING EXPENSES 4,120 3,730 8,306 7,842
------ ------ ------- -------
INCOME - BEFORE FEDERAL INCOME TAXES 1,842 1,358 3,092 2,567
Federal income taxes 560 399 923 750
------ ------ ------- -------
NET INCOME $1,282 $ 959 $ 2,169 $ 1,817
====== ====== ======= =======
BASIC EARNINGS PER WEIGHTED AVERAGE OUTSTANDING
SHARE OF COMMON STOCK $ .42 $ .32 $ .72 $ .60
====== ====== ======= =======
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ .42 $ .32 $ .72 $ .60
====== ====== ======= =======
CASH DIVIDENDS PER SHARE $ .17 $ .16 $ .34 $ .32
====== ====== ======= =======
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
SIX MONTHS ENDED
JUNE 30,
---------------
2005 2004
------ ------
Net income $2,169 $1,817
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax (379) (432)
------ ------
Comprehensive income $1,790 $1,385
====== ======
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2005
(in thousands, except share data)
Total
Common Retained Accumulated Shareholders'
Stock Earnings OCI Equity
------- -------- ----------- -------------
Balance - December 31, 2004 $17,560 $25,331 $ 90 $42,981
Net income -- 2,169 -- 2,169
Change in unrealized gain on
securities available for sale,
net of tax -- -- (379) (379)
Cash dividends -- (1,043) -- (1,043)
Stock dividends 2,846 (2,846) -- --
------- ------- ----- -------
Balance-June 30, 2005 $20,406 $23,611 $(289) $43,728
======= ======= ===== =======
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
SIX MONTHS ENDED
JUNE 30,
-------------------
2005 2004
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 2,637 $ 2,297
CASH FLOW FROM INVESTING ACTIVITIES:
Net increase in securities (16,736) (8,168)
Net increase in loans (8,745) (20,155)
Net increase in loans held for sale (1,363) (1,024)
Capital expenditures (1,861) (256)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (28,705) (29,603)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 12,481 15,503
Net increase in federal funds purchased 11,680 12,460
Cash dividends (1,043) (981)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,118 26,982
-------- --------
NET DECREASE IN CASH (2,950) (324)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 14,253 14,308
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 11,303 $ 13,984
======== ========
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 30, 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 June 30, 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 six-month period ended June 30, 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):
June 30, 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 $ 83,750 $ 12 $639 $ 83,123
Obligations of state and political
subdivisions 21,038 199 4 21,233
Corporate debt securities 1,000 -- 6 994
Other 1,735 -- -- 1,735
-------- ---- ---- --------
Total available-for-sale securities $107,523 $211 $649 $107,085
======== ==== ==== ========
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 June 30, 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 June 30, 2005,
all securities are available for sale (000s omitted).
Available for Sale
--------------------
Amortized Market
Cost Value
--------- --------
Due in one year or less $ 35,876 $ 35,765
Due in one year through five years 48,369 48,004
Due after five years through ten years 5,274 5,319
Due after ten years 5,164 5,234
-------- --------
94,683 94,322
Federal agency pools 11,105 11,028
Other 1,735 1,735
-------- --------
Total $107,523 $107,085
======== ========
Securities having a carrying value of $2,032,542 (market value of $2,021,875)
were pledged at June 30, 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 June 30, 2005 and
December 31, 2004 are as follows (dollars in thousands):
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
Mortgages on Real Estate $288,578 $272,756
Commercial 43,143 47,608
Consumer 15,430 18,310
-------- --------
Total $347,151 $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 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 June
30, 2005, other real estate owned consisted of three properties. Management does
not anticipate any material loss as the result of the disposal of these
properties. Non-performing loans have decreased $816 thousand, or 23% since
December 31, 2004. The following table summarizes non-performing assets (dollars
in thousands):
June 30, December 31,
2005 2004
-------- ------------
Non-accrual loans $1,728 $2,297
Loans past due 90 or more days 504 717
Renegotiated loans
552 586
------ ------
Total non-performing loans 2,784 3,600
Other real estate owned 460 411
------ ------
Total non-performing assets $3,244 $4,011
====== ======
Total non-performing loans to total loans 0.80% 1.06%
Total non-performing assets to total assets 0.67% 0.87%
11
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is as follows (dollars in
thousands):
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
Loan loss balance - Beginning of period $3,394 $ 3,887
Provision 549 1,200
Loan losses (694) (2,318)
Loan recoveries 426 625
------ -------
Loan loss balance - End of period $3,675 $ 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 (the "Bank")
pursuant to a plan of reorganization adopted by the Bank and its shareholders.
Pursuant to the reorganization, each share of Peoples State Bank stock held by
existing shareholders of the Bank 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, 6 mortgage offices and two shared loan production offices, with
an additional banking office under construction in Fenton, Michigan.
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 June 30, 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 $24 million, or 5% to $486 million at June 30, 2005 from $461
million at December 31, 2004. The balance of our investment securities increased
by approximately $16 million to $107.1 million at June 30, 2005 as compared to
$91.1 million at December 31, 2004. Our loan portfolio increased approximately
$8.5 million to $347.2 million at June 30, 2005. This was the result of a $13.2
million increase in commercial loans, partially offset by a $2.8 million
decrease in residential mortgages and a $1.9 million decrease in other consumer
loans. Loans held for sale increased by over $1 million to $3.8 million at June
30, 2005. Other assets increased approximately $1.9 million at June 30, 2005.
This was primarily the result of a $1.3 million increase in fixed assets, mostly
related to our new branches.
The allowance for loan losses increased $281 thousand during the first six
months of 2005. As a percentage of total loans, the allowance increased to 1.06%
at June 30, 2005 from 1.00% at December 31, 2004. Management believes this
reserve is sufficient to meet anticipated future loan losses.
Total liabilities increased $23.7 million to $442 million at June 30, 2005 from
$418 million at December 31, 2004. This was mainly due to a $12.5 million, or
3.0% increase in total deposits to $423.6 million at June 30, 2005 from $411
million at December 31, 2004. Approximately $3.1 million of this increase was in
non-interest bearing demand deposits. The bulk of the increase, $27.6 million,
was the result of our very successful Prime Savings Plus product, a savings
account with tiered interest rates tied to the Wall street Journal prime rate.
CD balances increased approximately $4.1 million from December 31, 2004 to June
30, 2005. The increases were partially offset by a $15.9 million drop in Money
Market balances, a $5.2 million drop in NOW balances and a $1.2 million drop in
other savings balances. The increase in deposits was supplemented with an $11.7
million increase in our Federal Funds borrowings in funding our $24 million
increase in total assets.
FINANCIAL RESULTS
Three Months Ended June 30, 2005
Net income for the three months ended June 30, 2005 was $1.3 million compared to
$959 thousand for the same period in 2004. Total interest income increased $1.2
million in the second quarter 2005 compared to the second quarter 2004. Interest
and fees on loans increased $627 thousand in the
14
second quarter 2005 over the second quarter 2004. Interest on securities and
federal funds sold increased $550 thousand for the same period. The increase in
interest and fees on loans in the second quarter 2005 compared to the second
quarter 2004 was due to higher interest rates in 2005. Average loan balances
actually fell slightly between the two periods but we earned approximately 76
basis points more in 2005 than 2004. The increase in interest on securities and
fed funds sold was primarily the result of a $61.8 million increase in average
securities and fed funds balances in the second quarter 2005 compared to the
second quarter 2004, as well as a 23 basis point increase in yield.
Interest expense increased $824 thousand in the second quarter 2005 as compared
to the same period in 2004. Approximately $776 thousand of this increase is due
to our Prime Savings Plus product. This product was not available until the
third quarter 2004. In the second quarter 2005, we held an average of over $91
million in Prime Savings Plus balances.
During the second quarter 2005, there was a $145 thousand provision for loan
losses recorded. This compares to a $380 thousand provision in the second
quarter 2004.
Total other income was about $286 thousand higher in the second quarter 2005
than the second quarter 2004. Increased commercial loan fees, mainly broker
fees, accounted for $203 thousand of this increase. Gains on the sale of
mortgages and mortgage servicing rights increased approximately $77 thousand
over the same period. Both commercial loan fees and mortgage loan fees are
included in Other Income.
Total other operating expenses increased $390 thousand in the second quarter
2005 over the same period in 2004. Salaries and benefits accounted for $274
thousand of this increase. Higher bonus and profit sharing accruals accounted
for $206 thousand of this, the result of a reduction in this expense that was
recorded in the second quarter 2004. Occupancy expenses were $55 thousand higher
in the second quarter 2005 than the second quarter 2004. This increase is due in
a large part to the opening of our new branch in January 2005. Legal and
professional fees are up $45 thousand in the second quarter 2005 over the second
quarter 2004 due in part to increased accounting expenses related to Sarbanes
Oxley work. Other operating expenses increased $16 thousand in the second
quarter 2005 over the second quarter 2004.
Six Months Ended June 30, 2005
Net income for the six months ended June 30, 2005 was $2.169 million compared to
$1.817 million for the same period in 2004. Total interest income increased
$2.127 million in the first six months of 2005 compared to the first six months
of 2004. Interest and fees on loans increased $1.072 million. 2005 year to date
average loan balances increased $2.4 million over the 2004 averages, however,
the 57 basis point increase in yield accounted for the bulk of the increase in
interest and fees on loans. The increased interest income on loans was almost
matched by a $1.055 million increase in interest on investment securities. This
increase was the result of a $60 million increase in average investment
securities and fed funds sold.
Total interest expense increased $1.370 million in the first six months of 2005
compared to the same period in 2004. Approximately $1.362 million of this
increase was due to our Prime Savings Plus product. During the first six months
of 2005, we held an average of $83.4 million in Prime Savings Plus balances.
Again, this product was not available until the third quarter of 2004. Interest
on Money Market accounts is down $141 thousand due to the fact that average
Money Market balances
15
are down $23 million. Interest expense on CDs is up $154 thousand due mainly to
the higher rates being paid in 2005.
During the first six months of 2005, we recorded a $549 thousand provision for
loan losses compared to a $470 thousand provision in the first six months of
2004.
Total other income was about $311 thousand higher in the first half of 2005 than
the first half of 2004. Deposit service charges remained relatively consistent
between the two periods. Other non-interest income increased $304 thousand,
comparing the first half of 2005 to the first half of 2004. This included a $225
thousand increase in commercial loan fees. We also realized an $18 thousand
increase in the gains on the sale of securities in 2005.
Total operating expenses increased $464 thousand in the first six months of 2005
compared to the first six months of 2004. Total salary and benefits expense
increased $268 thousand. This includes a $104 thousand increase in accrued
bonuses, a $57 thousand increase in the cost of insurance benefits and a $90
thousand increase in net mortgage commissions. Occupancy costs increased $141
thousand over the 2004 level, $128 thousand of which is related to our new
branch that opened in January 2005. Year-to-date legal and professional fees
remained relatively stable, decreasing $9 thousand. Accounting expenses, mainly
related to Sarbanes Oxley accruals, increased $60 thousand but this was offset
by a $31 thousand drop in legal fees, a $13 thousand drop in consulting fees and
a $13 thousand drop in Directors' fees. Other operating expenses increased $64
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 six months ended June 30, 2005, $2.7 million in cash was provided by
operations. This, plus $12.5 million in cash provided through increased deposits
and $11.7 million from increased fed funds borrowings, was used to increase our
investment portfolio by $16 million and our loan portfolio and loans held for
sale by $10.1 million. In addition, we had a net outflow of $1.9 million for
capital expenditures and paid $1 million in cash dividends during the period.
During the six months ended June 30, 2005, we experienced a net decrease of
approximately $3 million in cash and cash equivalents.
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 June 30, 2005, the Company had commitments to extend credit of $68.2 million
and stand-by letters of credit of $4.9 million compared with $43.8 million and
$4.8 million, respectively, at December 31, 2004.
16
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 June 30,
2005:
Tier 1 capital $38,923
Total capital $42,598
Tier 1 capital to risk-weighted assets 11.08%
Total capital to risk-weighted assets 12.12%
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 June 30, 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 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.
17
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 June
30, 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 June 30, 2005.
18
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
a. The Annual Meeting of Shareholders was held on April 26, 2005.
b. At that meeting, the shareholders approved the following matters:
PROPOSAL 1: ELECTION OF DIRECTORS
That Robert L. Cole be elected as Director of PSB Group, Inc. for a
term expiring at the annual meeting of shareholders in 2008.
For - 2,182,416
Withheld - 5,701
That Michael J. Kowalski be elected as Director of PSB Group, Inc. for
a term expiring at the annual meeting of shareholders in 2008.
For - 2,182,419
Withheld - 5,699
That Sydney L. Ross be elected as Director of PSB Group, Inc. for a
term expiring at the annual meeting of shareholders in 2008.
For - 2,176,047
Withheld - 12,071
19
PROPOSAL 2: RATIFY THE SELECTION OF INDEPENDENT AUDITORS
To ratify the selection of Plante & Moran, PLLC as the independent
auditors of PSB Group, Inc. for the year 2005.
For - 2,159,508
Against - 2,222
Abstain - 26,387
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
20
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: August 15, 2005 /s/ Robert L. Cole
----------------------------------------
ROBERT L. COLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: August 15, 2005 /s/ David A. Wilson
----------------------------------------
DAVID A. WILSON
CHIEF FINANCIAL OFFICER
21
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
22