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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, 2006 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 a large accelerated filer, an
accelerated filer or a non-accelerated filer (see definitions of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [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
March 31, 2006.
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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 ............................................... 12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .......... 17
ITEM 4: CONTROLS AND PROCEDURES ............................................. 17
PART II. -- OTHER INFORMATION ................................................. 18
Item 1. Legal Proceedings ................................................... 18
Item 1A. Risk Factors ....................................................... 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 .................................................................. 20
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 recorded in 2003, 2004, 2005 or 2006 to date.
3
PSB GROUP. INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands, except share data)
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
ASSETS
Cash and cash equivalents $ 11,920 $ 12,261
Securities available for sale 93,319 93,645
Loans 371,371 365,093
Less allowance for possible loan loss (3,753) (3,670)
--------- ---------
Net loans 367,618 361,423
Loans held for sale 1,637 6,235
Bank premises and equipment 12,420 12,663
Accrued interest receivable 2,423 2,406
Other assets 6,091 6,378
--------- ---------
Total assets $ 495,428 $ 495,011
========= =========
LIABILITIES
Deposits:
Non-interest bearing $ 57,250 $ 54,445
Interest bearing 379,571 370,213
--------- ---------
Total deposits 436,821 424,658
Short-term borrowings 8,455 20,440
Long-term debt 5,744 5,770
Accrued taxes, interest and other liabilities 1,037 963
--------- ---------
Total liabilities 452,057 451,831
SHAREHOLDERS' EQUITY
Common stock - no par value - 5,000,000 authorized - 3,029,152
shares issued and outstanding at March 31, 2006 and
December 31, 2005 20,406 20,406
Unearned ESOP benefits (744) (770)
Common stock held in trust (230) (230)
Deferred compensation obligation 230 230
Retained earnings 24,547 24,357
Accumulated other comprehensive (loss)/ income (838) (813)
--------- ---------
Total shareholders' equity 43,371 43,180
--------- ---------
Total liabilities and stockholders' equity $ 495,428 $ 495,011
========= =========
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------- ------
INTEREST INCOME:
Interest and fees on loans $ 6,657 $5,461
SECURITIES:
Taxable 592 631
Tax-exempt 326 176
Federal funds sold 28 24
------- ------
TOTAL INTEREST INCOME 7,603 6,292
INTEREST EXPENSE:
Deposits 2,869 1,837
Short-term borrowings 95 9
Long-term debt 55 55
------- ------
TOTAL INTEREST EXPENSE 3,019 1,901
------- ------
NET INTEREST INCOME 4,584 4,391
Provision for loan loss 188 404
------- ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,396 3,987
OTHER OPERATING INCOME:
Service charges on deposit accounts 548 568
Other income 774 881
------- ------
TOTAL OTHER INCOME 1,322 1,449
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,467 2,248
Occupancy costs 1,060 860
Legal and professional 307 272
Other operating expense 931 806
------- ------
TOTAL OTHER OPERATING EXPENSES 4,765 4,186
------- ------
INCOME - BEFORE FEDERAL INCOME TAXES 953 1,250
Federal income taxes 218 363
------- ------
NET INCOME $ 735 $ 887
======= ======
BASIC EARNINGS PER AVERAGE OUTSTANDING SHARE OF COMMON STOCK $ 0.24 $ 0.29
======= ======
CASH DIVIDEND PER SHARE $ 0.18 $ 0.18
======= ======
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------- -----
Net income $ 735 $ 887
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax (25) (684)
------- -----
Comprehensive income $ 710 $ 203
======= =====
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006
(IN THOUSANDS, EXCEPT SHARE DATA)
Unearned Common Deferred Total
Common ESOP Stock Comp. Retained Accumulated Shareholders'
Stock Benefits Held in Trust Obligation Earnings OCI Equity
------- -------- ------------- ---------- -------- ----------- -------------
Balance - Dec 31, 2005 $20,406 ($770) ($230) $230 $24,357 ($813) $ 43,180
Net Income $ 735 $ 735
Change in unrealized gain
on securities available
for sale, net of tax ($ 25) ($ 25)
Earned ESOP Benefit $ 26 $ 26
Cash Dividends ($ 545) ($ 545)
------- ----- ----- ---- ------- ----- --------
Balance - Mar 31, 2006 $20,406 ($744) ($230) $230 $24,547 ($838) $ 43,371
======= ===== ===== ==== ======= ===== ========
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 1,710 $ 1,279
CASH FLOW FROM INVESTING ACTIVITIES:
Net (increase) decrease in securities 219 (16,068)
Net increase in loans (6,383) (3,191)
Net (increase) decrease in loans held for sale 4,598 (759)
Capital expenditures (118) (904)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,684) (20,922)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 12,163 8,295
Net increase (decrease) in short-term borrowings (11,985) 8,725
Cash dividends (545) (520)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (367) 16,500
-------- --------
NET DECREASE IN CASH (341) (3,143)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 12,261 14,253
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 11,920 $ 11,110
======== ========
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, 2005 and notes thereto included in PSB Group, Inc.'s
Form 10-K filed with the Securities and Exchange Commission on March 31, 2006.
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, 2006 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, 2006 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, 2006
------------------------------------------
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 $58,278 $ 5 $ 1,234 $57,049
Obligations of state and political subdivisions 33,575 99 119 33,555
Corporate debt securities 1,000 - 20 980
Other 1,735 - - 1,735
------- ------- ------- -------
Total available-for-sale securities $94,588 $ 104 $ 1,373 $93,319
======= ======= ======= =======
9
NOTE 2 - SECURITIES (CONTINUED)
December 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 $ 60,428 $ 3 $ 1,186 $ 59,245
Obligations of state and political
subdivisions 31,714 96 130 31,680
Corporate debt securities 1,000 - 15 985
Other 1,735 - - 1,735
--------- --------- --------- ---------
Total available-for-sale securities $ 94,877 $ 99 $ 1,331 $ 93,645
========= ========= ========= =========
The amortized cost and estimated market value of securities at March 31, 2006,
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, 2006,
all securities are available for sale (000s omitted).
Available for Sale
--------------------------
Amortized Market
Cost Value
--------- ---------
Due in one year or less $ 24,825 $ 24,650
Due in one year through five years 22,340 21,814
Due after five years through ten years 18,847 18,840
Due after ten years 7,679 7,634
--------- ---------
73,691 72,938
Federal agency pools 19,162 18,646
Other 1,735 1,735
--------- ---------
Total $ 94,588 $ 93,319
========= =========
Securities having a carrying value of $2,500,000 (market value of $2,411,725)
were pledged at March 31, 2006 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, 2006 and
December 31, 2005 are as follows (dollars in thousands):
MARCH 31, DECEMBER 31,
2006 2005
---------- -----------
Mortgages on Real Estate $ 310,797 $ 307,010
Commercial 49,058 45,868
Consumer 11,516 12,215
---------- ----------
Total $ 371,371 $ 365,093
========== ==========
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, 2006, 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 increased $982 thousand, or 23%
since December 31, 2005. The following table summarizes non-performing assets
(dollars in thousands):
March 31, December 31,
2006 2005
--------- ------------
Non-accrual loans $3,726 $1,651
Loans past due 90 or more days 1,065 2,044
Renegotiated loans 401 515
------ ------
Total non-performing loans 5,192 4,210
Other real estate owned 306 306
------ ------
Total non-performing assets $5,498 $4,516
====== ======
Total non-performing loans to total loans 1.40% 1.15%
Total non-performing assets to total assets 1.11% 0.91%
11
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,
2006 2005
--------- ------------
Loan loss balance - Beginning of period $ 3,670 $ 3,394
Provision 188 1,554
Loan losses (182) (1,880)
Loan recoveries 77 602
------- -------
Loan loss balance - End of period $ 3,753 $ 3,670
======= =======
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PSB Group, Inc. (the "Company") was formed on February 28, 2003 as a bank
holding company for the purpose of owning Peoples State Bank (the "Bank")
pursuant to a plan of reorganization adopted by the Bank and its shareholders.
Pursuant to the reorganization, each share of Bank stock held by existing
shareholders was exchanged for three shares of common stock of PSB Group, Inc.
The reorganization had no consolidated financial statement impact. Share amounts
for all prior periods presented have been restated to reflect the
reorganization.
The Bank was incorporated and chartered under the laws of the state of Michigan
in 1909. We operated as a unit bank until July 20, 1992, when we opened our
first branch office in Sterling Heights, Michigan. In May 1998, the Bank
acquired Madison National Bank, Madison Heights, Michigan ("Madison"). On May 1,
2000, the Bank acquired 100% of the common stock of Universal Mortgage
Corporation, a southeast Michigan based mortgage lender. Today we operate 12
banking offices and 8 mortgage offices, with a new bank branch scheduled to open
in the third quarter of 2006.
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
12
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. We provide commercial and public fund accounts with
money market sweep accounts through Federated Investments, a third party vendor.
We also provide investment services through Vision Investment Services, Inc.
Full-time representatives work at various branch offices and offer a full range
of investment products. Substantially all of our deposits are from local market
areas surrounding each of our offices.
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, 2006, there has been no business transacted by PSB
Capital, Inc. All significant inter-company transactions are eliminated in
consolidation.
Net income is derived primarily from net interest income, which is the
difference between interest earned on the Bank's loan and investment portfolios
and its cost of funds, primarily interest paid on deposits and borrowings. The
volume of, and yields earned, on loans and investments and the volume of, and
rates paid, on deposits determine net interest income.
The Company adopted SFAS 123(R), Accounting for Share Based Payments in 2006. To
date, the effects of this change have been insignificant.
FINANCIAL CONDITION
Company assets consist of customer loans, investment securities, bank premises
and equipment, cash and other operating assets. Total assets increased
approximately $417 thousand to $495.4 million at March 31, 2006 from $495.0
million at December 31, 2005. The balance of our investment
13
securities decreased by approximately $326 thousand to $93.3 million at March
31, 2006 as compared to $93.6 million at December 31, 2005. Our loan portfolio
increased approximately $6.3 million to $371.4 million at March 31, 2006. This
was the result of a $3.8 million increase in loans secured by real estate and a
$3.2 million increase in other commercial loans. This increase was partially
offset by a $700 thousand decrease in other consumer loans. Loans held for sale
decreased $4.6 million to $1.6 million at March 31, 2006. Other assets decreased
approximately $270 thousand at March 31, 2006.
The allowance for loan losses as a percentage of total loans remained at 1.01%
at March 31, 2006, the same as December 31, 2005. Management believes this
reserve is sufficient to meet anticipated future loan losses. The discussions
set forth in "Note 3 - Loans" and "Note 4 - Allowance for Possible Loan Losses"
to the Financial Statements contained in this report are hereby incorporated by
this reference.
Total liabilities increased $226 thousand to $452.1 million at March 31, 2006
from $451.8 million at December 31, 2005. Total deposits increased $12.2 million
to $436.8 million at March 31, 2006 from $424.6 at December 31, 2005. This was
mainly due to a $13.3 million increase in certificates of deposit and a $488
thousand increase in savings deposits, partially offset by a $1.5 million
decrease in demand deposits. The increase in total deposits was used to fund our
increased assets and to reduce our short-term borrowings by almost $12 million.
FINANCIAL RESULTS
Three Months Ended March 31, 2006
Net income for the three months ended March 31, 2006 was $735 thousand compared
to $887 thousand for the same period in 2005. Total interest income increased
$1.3 million in the first quarter 2006 compared to the first quarter 2005.
Interest and fees on loans increased $1.2 million in the first quarter 2006 over
the same period in 2005. The increase in interest and fees on loans was due
mainly to increased interest rates over the 2005 levels, but also to a $25.6
million increase in average loan balances. We experienced a $39.8 million
increase in average commercial loans which was partially offset by a $10.4
million reduction in our average mortgage loan balances and a $3.8 million drop
in our average consumer loans. Interest income on securities and federal funds
sold was $115 thousand higher in the first quarter of 2006 than the same period
in 2005. This increase was also due to the overall higher interest rate
environment in 2006. Our average investment in securities and federal funds
actually dropped approximately $12 million from the first quarter 2005 levels
but this was more than offset by higher average yields earned in 2006.
Interest expense increased $1.1 million in the first quarter 2006 compared to
the first quarter 2005. Interest on deposits increased $1 million due mainly to
the higher interest rate environment in 2006. In addition to the higher interest
rate environment, average total deposits in the first quarter 2006 were about
$14 million higher than in 2005, contributing to the increase in interest
expense. Also, we experienced a change in our deposit mix between the two
periods. There was a drop in our relatively low cost interest bearing demand
deposits of about $21 million that we replaced with higher cost certificates of
deposit.
During the first quarter 2006, there was a $188 thousand provision for loan
losses recorded in order to maintain the allowance for possible loan losses at a
level that management believes is appropriate
14
in light first quarter net charge-offs and the growth in the loan portfolio.
This compares to a $404 thousand provision recorded in the first quarter 2005.
Total other operating income decreased $127 thousand in the first quarter 2006
compared to the first quarter 2005. Approximately $77 thousand of this decrease
is due to losses taken on the sale of certain investment securities. Low
yielding securities were sold at a loss and the funds were reinvested in higher
yielding securities that were available. The loss taken on the sale will be more
than recovered by the higher yielding replacement securities before the end of
the year. In addition, the Bank realized a $31 thousand gain on the sale of
other real estate in the first quarter 2005. There was no similar gain recorded
in 2006.
Total other operating expenses increased $579 thousand in the first quarter 2006
over the same period in 2005. Compensation and employee benefits increased $219
thousand. This is mainly due to increased staffing related to our new offices.
We have a new bank branch that was opened in August, 2005 in Fenton, Michigan.
In addition, our mortgage subsidiary, Universal Mortgage Corporation, acquired
two new offices, one in Ann Arbor, Michigan and one in Howell, Michigan, in June
2005. Occupancy costs increased $200 thousand in the first quarter 2006 over the
first quarter 2005. This increase is also mainly due to the new offices
mentioned above. Other operating expenses increased $125 thousand in the first
quarter 2006 over the first quarter 2005. Some of these increased expenses, such
as postage and telephone expenses, are also related to operating the new
offices. In addition, our marketing expense increased $137 thousand in the first
quarter 2006 over the first quarter 2005. This is mainly the result of an
acceleration in our marketing program as many of our campaigns were scheduled
for the first quarter this year. The increases in other operating expenses were
partially offset by the fact that a $54 thousand operating loss that we suffered
in the first quarter 2005 was not repeated in 2006.
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, 2006, $1.7 million in cash was provided
by operations. This, plus $17 million in cash provided through increased
deposits and the reduction in loans held for sale, was used to increase our loan
portfolio by $6 million and pay down our short-term borrowings by $12 million.
In addition, we had a net cash outflow of $118 thousand for capital expenditures
and paid $545 thousand in cash dividends during the period. During the three
months ended March 31, 2006, we experienced a net decrease of $341 thousand 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 March 31, 2006, the Company
15
had commitments to extend credit of $63.8 million and stand-by letters of credit
of $3 million compared to $58.4 million and $4.8 million, respectively, at
December 31, 2005.
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,
2006:
Tier 1 capital $ 39,654
Total capital $ 43,407
Tier 1 capital to risk-weighted assets 10.64%
Total capital to risk-weighted assets 11.65%
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, 2006 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, 2005 for
more detailed information
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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, 2006. 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, 2006.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may from time-to-time be involved in legal proceedings
occurring in the ordinary course of business which, in the aggregate, involve
amounts which are believed by management to be immaterial to the financial
condition of the Company. The Company is not currently involved in any legal
proceedings which management believes are of a material nature.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2005, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSB GROUP, INC.
Date: May 15, 2006 /s/ Robert L. Cole
----------------------------------------------
ROBERT L. COLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 15, 2006 /s/ David A. Wilson
----------------------------------------------
DAVID A. WILSON
CHIEF FINANCIAL OFFICER
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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
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