SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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) and, (2) has been subject to such filing
requirements for past 90 days:
Yes X No
------------- -------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes No X
------------- -------------
Indicate by check mark whether the registrant is a shell company (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 September 30, 2005.
TABLE OF CONTENTS
<Table>
<Caption>
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 ............................................................................. 19
Item 6. Exhibits ...................................................................................... 19
SIGNATURES ............................................................................................ 20
</Table>
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 ESTIMATES
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. No impairment loss was recorded upon the adoption of SFAS
142 in 2002, nor was any impairment loss was recorded in 2003, 2004 or to date
in 2005.
3
PSB GROUP. INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands, except share data)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2005 2004
--------------- ---------------
ASSETS
Cash and cash equivalents $ 13,181 $ 14,253
Securities available for sale 104,176 91,125
Loans 350,763 338,674
Less allowance for possible loan loss (3,611) (3,394)
--------------- ---------------
Net loans 347,152 335,280
Loans held for sale 12,163 2,388
Bank premises and equipment 12,718 10,618
Accrued interest receivable 2,102 2,144
Other assets 5,921 5,534
--------------- ---------------
Total assets $ 497,413 $ 461,342
=============== ===============
LIABILITIES
Deposits:
Non-interest bearing $ 61,327 $ 57,479
Interest bearing 364,969 353,653
--------------- ---------------
Total deposits 426,296 411,132
Federal funds purchased 20,710 --
FHLB borrowings 5,000 5,000
Accrued taxes, interest and other liabilities 1,360 2,229
--------------- ---------------
Total liabilities 453,366 418,361
SHAREHOLDERS' EQUITY
Common stock -- no par value -- 5,000,000
authorized - 3,029,152 shares issued and
outstanding at September 30, 2005 and December
31, 2004 20,406 17,560
Retained earnings 24,112 25,331
Accumulated other comprehensive (loss)/ income (471) 90
--------------- ---------------
Total shareholders' equity 44,047 42,981
--------------- ---------------
Total liabilities and stockholders' equity $ 497,413 $ 461,342
=============== ===============
</Table>
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
INTEREST INCOME:
Interest and fees on loans $ 6,187 $ 5,250 $ 17,418 $ 15,409
SECURITIES:
Taxable 710 292 2,053 719
Tax-exempt 209 179 580 436
Federal funds sold -- 14 27 16
------------- ------------- ------------- -------------
TOTAL INTEREST INCOME 7,106 5,735 20,078 16,580
INTEREST EXPENSE:
Deposits 2,303 1,351 6,237 3,914
FHLB & Short-term borrowings 185 74 337 227
------------- ------------- ------------- -------------
TOTAL INTEREST EXPENSE 2,488 1,425 6,574 4,141
------------- ------------- ------------- -------------
NET INTEREST INCOME 4,618 4,310 13,504 12,439
Provision for loan loss 644 350 1,193 820
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 3,974 3,960 12,311 11,619
OTHER OPERATING INCOME:
Service charges on deposit accounts 628 689 1,787 1,841
Other income 1,064 803 2,966 2,401
------------- ------------- ------------- -------------
TOTAL OTHER INCOME 1,692 1,492 4,753 4,242
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,246 1,898 6,634 6,018
Occupancy costs 855 781 2,520 2,305
Legal and professional 197 274 773 859
Other operating expense 902 774 2,579 2,387
------------- ------------- ------------- -------------
TOTAL OTHER OPERATING EXPENSES 4,200 3,727 12,506 11,569
------------- ------------- ------------- -------------
INCOME - BEFORE FEDERAL INCOME TAXES 1,466 1,725 4,558 4,292
Federal income taxes 420 509 1,343 1,259
------------- ------------- ------------- -------------
NET INCOME $ 1,046 $ 1,216 $ 3,215 $ 3,033
============= ============= ============= =============
BASIC EARNINGS PER WEIGHTED AVERAGE OUTSTANDING
SHARE OF COMMON STOCK $ .35 $ .40 $ 1.06 $ 1.00
============= ============= ============= =============
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ .35 $ .40 $ 1.06 $ 1.00
============= ============= ============= =============
CASH DIVIDENDS PER SHARE $ .18 $ .16 $ .52 $ .49
============= ============= ============= =============
</Table>
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2005 2004
------------- -------------
Net income $ 3,215 $ 3,033
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax (561) (3)
------------- -------------
Comprehensive income $ 2,654 $ 3,030
============= =============
</Table>
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2005
(in thousands, except share data)
<Table>
<Caption>
Total
Common Retained Accumulated Shareholders'
Stock Earnings OCI Equity
------------- ------------- ------------- -------------
Balance -- December 31, 2004 $ 17,560 $ 25,331 $ 90 $ 42,981
Net income -- 3,215 -- 3,215
Change in unrealized gain on -- -- (561) (561)
securities available for sale, net
of tax
Cash dividends -- (1,588) -- (1,588)
Stock dividends 2,846 (2,846) -- --
------------- ------------- ------------- -------------
Balance -- September 30, 2005 $ 20,406 $ 24,112 $ (471) $ 44,047
============= ============= ============= =============
</Table>
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2005 2004
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 4,727 $ 5,228
CASH FLOW FROM INVESTING ACTIVITIES:
Net increase in securities (14,193) (12,963)
Net increase in loans (13,065) (14,477)
Net increase in loans held for sale (9,775) (2,957)
Capital expenditures (3,052) (1,242)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (40,085) (31,639)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 15,164 42,394
Net increase in federal funds purchased 20,710 (2,420)
Cash dividends (1,588) (1,472)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 34,286 38,502
------------- -------------
NET DECREASE IN CASH (1,072) 12,091
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 14,253 14,308
------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 13,181 $ 26,399
============= =============
</Table>
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 September 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 nine-month period ended September 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):
<Table>
<Caption>
September 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 $ 78,790 $ 8 $ 757 $ 78,041
Obligations of state and
political subdivisions 23,365 115 72 23,408
Corporate debt securities 1,000 -- 8 992
Other 1,735 -- -- 1,735
------------- ------------- ------------- -------------
Total available-for-sale securities $ 104,890 $ 123 $ 837 $ 104,176
============= ============= ============= =============
</Table>
9
NOTE 2 -- SECURITIES (CONTINUED)
<Table>
<Caption>
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
============= ============= ============== ============
</Table>
The amortized cost and estimated market value of securities at September 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 September 30,
2005, all securities are available for sale (000s omitted).
<Table>
<Caption>
Available for Sale
---------------------------------
Amortized Market
Cost Value
--------------- ---------------
Due in one year or less $ 32,413 $ 32,368
Due in one year through five years 37,982 37,567
Due after five years through ten years 9,893 9,872
Due after ten years 4,775 4,766
--------------- ---------------
85,063 84,573
Federal agency pools 18,092 17,868
Other 1,735 1,735
--------------- ---------------
Total $ 104,890 $ 104,176
=============== ===============
</Table>
Securities having a carrying value of $2,014,625 (market value of $2,010,000)
were pledged at September 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 September 30, 2005 and
December 31, 2004 are as follows (dollars in thousands):
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2005 2004
--------------- ---------------
Mortgages on Real Estate $ 294,478 $ 272,756
Commercial 42,652 47,608
Consumer 13,633 18,310
--------------- ---------------
Total $ 350,763 $ 338,674
=============== ===============
</Table>
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, 2005, other real estate owned consisted of two properties.
Management does not anticipate any material loss as the result of the disposal
of these properties. Non-performing loans have decreased $1,349 thousand, or 37%
since December 31, 2004. The following table summarizes non-performing assets
(dollars in thousands):
11
<Table>
<Caption>
September 30, December 31,
2005 2004
------------- -------------
Non-accrual loans $ 1,628 $ 2,297
Loans past due 90 or more days 92 717
Renegotiated loans 533 586
------------- -------------
Total non-performing loans 2,253 3,600
Other real estate owned 234 411
------------- -------------
Total non-performing assets $ 2,487 $ 4,011
============= =============
Total non-performing loans to total loans 0.64% 1.06%
Total non-performing assets to total assets 0.50% 0.87%
</Table>
NOTE 4 -- ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is as follows (dollars in
thousands):
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2005 2004
-------------- --------------
Loan loss balance -- Beginning of period $ 3,394 $ 3,887
Provision 1,193 1,200
Loan losses (1,479) (2,318)
Loan recoveries 503 625
-------------- --------------
Loan loss balance -- End of period $ 3,611 $ 3,394
============== ==============
</Table>
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 12
banking offices, including our newest branch opened in August 2005 in Fenton,
Michigan and 8 mortgage offices.
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 September 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 $36 million, or 8% to $497 million at September 30, 2005 from $461
million at December 31, 2004. The balance of our investment securities increased
by approximately $13 million to $104.2 million at September 30, 2005 as compared
to $91.1 million at December 31, 2004. Our loan portfolio increased
approximately $12 million to $350.8 million at September 30, 2005. This was the
result of a $24 million increase in commercial loans, partially offset by a $7.7
million decrease in residential mortgages and a $4.2 million decrease in other
consumer loans. Loans held for sale increased by $9.8 million to $12.2 million
at September 30, 2005. Other assets increased approximately $2.4 million at
September 30, 2005. This was primarily the result of a $2.1 million increase in
fixed assets, mostly related to our new branches.
The allowance for loan losses increased $217 thousand during the first nine
months of 2005. As a percentage of total loans, the allowance increased to 1.03%
at September 30, 2005 from 1.00% at December 31, 2004. Management believes this
reserve is sufficient to meet anticipated future loan losses.
Total liabilities increased $35 million to $453 million at September 30, 2005
from $418 million at December 31, 2004. This was mainly due to a $15.2 million,
or 3.7% increase in total deposits to $426.3 million at September 30, 2005 from
$411.1 million at December 31, 2004. Approximately $3.8 million of this increase
was in non-interest bearing demand deposits. The bulk of the increase, $22.8
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 $11.2 million from December 31, 2004
to September 30, 2005. The increases were partially offset by an $18.6 million
drop in Money Market balances, a $1.7 million drop in NOW balances and a $2.3
million drop in other savings balances. The increase in deposits was
supplemented with a $20.7 million increase in our Federal Funds borrowings in
funding our $36 million increase in total assets.
14
FINANCIAL RESULTS
Three Months Ended September 30, 2005
Net income for the three months ended September 30, 2005 was $1.0 million
compared to $1.2 million for the same period in 2004. Total interest income
increased $1.4 million in the third quarter 2005 compared to the third quarter
2004. Interest and fees on loans increased $937 thousand in the third quarter
2005 over the third quarter 2004. Interest on securities and federal funds sold
increased $434 thousand for the same period. The increase in interest and fees
on loans in the third quarter 2005 compared to the third quarter 2004 was
primarily due to higher interest rates in 2005. Average loan balances increased
about $6.7 million in the third quarter 2005 over the third quarter 2004, but we
earned approximately 74 basis points more in 2005 than 2004. The increase in
interest on securities and fed funds sold was primarily the result of a $44.1
million increase in average securities and fed funds balances in the third
quarter 2005 compared to the third quarter 2004, as well as a 30 basis point
increase in yield.
Interest expense increased $1.1 million in the third quarter 2005 as compared to
the same period in 2004. Approximately $837 thousand of this increase is due to
our Prime Savings Plus product. This product was introduced in the third quarter
2004. In the third quarter 2005, we held an average of over $89 million in Prime
Savings Plus balances. Interest expense on CD's was about $245 thousand higher
in the third quarter 2005 than the third quarter 2004. This was partly due to
the fact that average CD balances were about $9.4 million higher in the third
quarter 2005 than the same quarter 2004, but also because of higher interest
rates in 2005. Interest expense on FHLB and short-term borrowings was about $111
thousand higher in the third quarter 2005 than 2004. We averaged about $9.2
million more in borrowings in the third quarter 2005 than the third quarter 2004
and, again, interest rates were higher in 2005. These increases were partially
offset by an $84 thousand decrease in interest on interest-bearing demand
balances.
During the third quarter 2005, there was a $644 thousand provision for loan
losses recorded. This compares to a $350 thousand provision in the third quarter
2004.
Total other income was about $200 thousand higher in the third quarter 2005 than
the third quarter 2004. Increased commercial loan fees, mainly broker fees,
accounted for $42 thousand of this increase. Gains on the sale of mortgages and
mortgage servicing rights increased approximately $203 thousand over the same
period. Both commercial loan fees and mortgage loan fees are included in Other
Income. This was partially offset by a $32 thousand decrease in Overdraft
Privilege fee income.
Total other operating expenses increased $473 thousand in the third quarter 2005
over the same period in 2004. Higher salaries and employee benefits accounted
for $348 thousand of this increase. Higher FTE related to the opening of two new
branch offices in 2005, as well as the acquisition of two new mortgage loan
production offices accounted for much of this increase. Occupancy expenses were
$74 thousand higher in the third quarter 2005 than the third quarter 2004. This
increase is due in a large part to the opening of two new branches in 2005.
Other operating expenses increased $128 thousand in the third quarter 2005 over
the third quarter 2004. This includes increased lender-paid closing costs
related to a mortgage loan promotion and higher state tax accruals.
15
Nine Months Ended September 30, 2005
Net income for the nine months ended September 30, 2005 was $3.215 million
compared to $3.033 million for the same period in 2004. Total interest income
increased $3.5 million in the first nine months of 2005 compared to the first
nine months of 2004. Interest and fees on loans increased $2.0 million. 2005
year to date average loan balances increased $6.1 million over the 2004
averages, however, the 64 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 complimented by a $1.5 million increase in interest on investment
securities. This increase was primarily the result of a $55 million increase in
average investment securities and fed funds sold.
Total interest expense increased $2.4 million in the first nine months of 2005
compared to the same period in 2004. Approximately $2.2 million of this increase
was due to our Prime Savings Plus product. During the first nine months of 2005,
we held an average of $85.4 million in Prime Savings Plus balances. Again, this
product was not introduced until the third quarter of 2004. Interest on Money
Market accounts is down $238 thousand due to the fact that average Money Market
balances are down $26 million. Interest expense on CDs is up $399 thousand due
mainly to the higher rates being paid in 2005.
During the first nine months of 2005, we recorded a $1.193 million provision for
loan losses compared to an $820 thousand provision in the first nine months of
2004. Even though we have experienced lower loan losses in 2005 than 2004, the
higher provision was recorded in order to keep the loan loss reserve at an
adequate level on a growing loan portfolio.
Total other income was about $511 thousand higher in the first nine months of
2005 than the first nine months of 2004. Deposit service charges remained
relatively consistent between the two periods. Other non-interest income
increased $565 thousand, comparing the first nine months of 2005 to the first
nine months of 2004. This included a $283 thousand increase in commercial loan
fees and a $186 thousand increase in mortgage loan fees. We also realized a $25
thousand increase in the gains on the sale of securities in 2005.
Total other operating expenses increased $937 thousand in the first nine months
of 2005 compared to the first nine months of 2004. Total salary and benefits
expense increased $616 thousand. This is mainly due to increased FTE with the
opening of our two new branches and the acquisition of our new mortgage loan
production offices. Occupancy costs increased $215 thousand over the 2004 level,
much of which is related to our new branches. Other operating expenses increased
$192 thousand from period to period including increased state tax accruals and
increased lender paid closing costs related to an on-going mortgage loan
promotion.
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.
16
During the nine months ended September 30, 2005, $4.7 million in cash was
provided by operations. This, plus $15.2 million in cash provided through
increased deposits and $20.7 million from increased fed funds borrowings, was
used to increase our investment portfolio by $14 million and our loan portfolio
and loans held for sale by $22.8 million. In addition, we had a net outflow of
$3.1 million for capital expenditures and paid $1.6 million in cash dividends
during the period. During the nine months ended September 30, 2005, we
experienced a net decrease of approximately $1.1 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 September 30, 2005, the Company had commitments to extend credit of $63.6
million and stand-by letters of credit of $3.1 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 September
30, 2005:
<Table>
Tier 1 capital $39,406
Total capital $43,017
Tier 1 capital to risk-weighted assets 10.96%
Total capital to risk-weighted assets 11.96%
</Table>
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.
17
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, 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.
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, 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 September 30, 2005.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may from time-to-time be involved in legal proceedings
occurring in the ordinary course of business which, in the aggregate, involve
amounts which are believed by management to be immaterial to the financial
condition of the Company. The Company is not currently involved in any legal
proceedings which management believes are of a material nature.
ITEM 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
19
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 14, 2005 /s/Robert L. Cole
--------------------------------------------
ROBERT L. COLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 14, 2005 /s/David A. Wilson
--------------------------------------------
DAVID A. WILSON
CHIEF FINANCIAL OFFICER
20
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
21