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, 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]
Indicated 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 June 30,
2006.
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 1A. Risk Factors .......................................................................... 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 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 has any impairment loss been recorded since the adoption of
this standard.
3
PSB GROUP. INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands, except share data)
JUNE 30, DECEMBER 31,
2006 2005
----------- ------------
ASSETS
Cash and cash equivalents $ 12,317 $ 12,261
Securities available for sale 89,237 93,645
Loans 380,838 365,093
Less allowance for possible loan loss (3,807) (3,670)
----------- ------------
Net loans 377,031 361,423
Loans held for sale 1,644 6,235
Bank premises and equipment 11,918 12,663
Accrued interest receivable 2,580 2,406
Other assets 6,068 6,378
----------- ------------
Total assets $ 500,795 $ 495,011
=========== ============
LIABILITIES
Deposits:
Non-interest bearing $ 58,093 $ 54,445
Interest bearing 388,914 370,213
----------- ------------
Total deposits 447,007 424,658
Short-term borrowings 8,225 20,440
Long-term debt 744 5,770
Accrued taxes, interest and other liabilities 1,602 963
----------- ------------
Total liabilities 457,578 451,831
SHAREHOLDERS' EQUITY
Common stock - no par value - 5,000,000
authorized - 3,029,152 shares issued and
outstanding at June 30, 2006 and December 31, 2005 20,406 20,406
Unearned ESOP benefits (744) (770)
Additional paid in - Stock Options 10 --
Common stock held in trust (230) (230)
Deferred compensation obligation 230 230
Retained earnings 24,940 24,357
Accumulated other comprehensive (loss)/ income (1,395) (813)
----------- ------------
Total shareholders' equity 43,217 43,180
----------- ------------
Total liabilities and stockholders' equity $ 500,795 $ 495,011
=========== ============
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- ---------
INTEREST INCOME:
Interest and fees on loans $ 7,008 $ 5,770 $ 13,665 $ 11,231
SECURITIES:
Taxable 574 712 1,166 1,343
Tax-exempt 329 195 655 371
Federal funds sold 12 3 40 27
--------- --------- --------- ---------
TOTAL INTEREST INCOME 7,923 6,680 15,526 12,972
INTEREST EXPENSE:
Deposits 3,205 2,097 6,074 3,934
Short-term borrowings 47 32 142 40
Long-term debt 15 56 70 112
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 3,267 2,185 6,286 4,086
--------- --------- --------- ---------
NET INTEREST INCOME 4,656 4,495 9,240 8,886
Provision for loan loss 291 145 479 549
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,365 4,350 8,761 8,337
OTHER OPERATING INCOME:
Service charges on deposit accounts 585 591 1,133 1,159
Other income 766 1,021 1,540 1,902
--------- --------- --------- ---------
TOTAL OTHER INCOME 1,351 1,612 2,673 3,061
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,284 2,140 4,751 4,388
Occupancy costs 998 805 2,058 1,665
Legal and professional 272 304 579 576
Other operating expense 900 871 1,831 1,677
--------- --------- --------- ---------
TOTAL OTHER OPERATING EXPENSES 4,454 4,120 9,219 8,306
--------- --------- --------- ---------
INCOME - BEFORE FEDERAL INCOME TAXES 1,262 1,842 2,215 3,092
Federal income taxes 324 560 542 923
--------- --------- --------- ---------
NET INCOME $ 938 $ 1,282 $ 1,673 $ 2,169
========= ========= ========= =========
BASIC EARNINGS PER WEIGHTED AVERAGE OUTSTANDING SHARE
OF COMMON STOCK $ .31 $ .42 $ .55 $ .72
========= ========= ========= =========
========= ========= ========= =========
CASH DIVIDENDS PER SHARE $ .18 $ .17 $ .36 $ .34
========= ========= ========= =========
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
SIX MONTHS ENDED
JUNE 30,
------------------
2006 2005
------- -------
Net income $ 1,673 $ 2,169
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax (582) (379)
------- -------
Comprehensive income $ 1,091 $ 1,790
======= =======
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2006
(IN THOUSANDS, EXCEPT SHARE DATA)
Unearned Add'l Paid Common
Common ESOP in Capital - Stock
Stock Benefits Stk Options Held in Trust
--------- -------- ------------- -------------
Balance - December 31, 2005 $ 20,406 ($ 770) ($ 230)
Net Income
Change in unrealized gain on
securities available for sale, net
of tax
Earned ESOP Benefit $ 26
Add'l Paid in Capital-Stk Options $ 10
Cash Dividends
--------- -------- ------------- -------------
Balance - June 30, 2006 $ 20,406 ($ 744) $ 10 ($ 230)
========= ======== ============= =============
Deferred Total
Comp. Retained Accumulated Shareholders'
Obligation Earnings OCI Equity
---------- -------- ----------- -------------
Balance - December 31, 2005 $ 230 $24,357 ($ 813) $ 43,180
Net Income $ 1,673 1,673
Change in unrealized gain on
securities available for sale, net
of tax ($ 582) ($ 582)
Earned ESOP Benefit $ 26
Add'l Paid in Capital-Stk Options $ 10
Cash Dividends ($ 1,090) ($ 1,090)
---------- -------- ----------- -------------
Balance - June 30, 2006 $ 230 $24,940 ($ 1,395) $ 43,217
========== ======== =========== =============
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
SIX MONTHS ENDED
JUNE 30,
----------------------
2006 2005
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 4,028 $ 2,637
CASH FLOW FROM INVESTING ACTIVITIES:
Net (increase)/decrease in securities 3,436 (16,736)
Net increase in loans (16,087) (8,745)
Net (increase)/decrease in loans held for sale 4,591 (1,363)
Capital expenditures (452) (1,861)
Proceeds on sale of fixed assets 496 --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (8,016) (28,705)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 22,349 12,481
Net increase/(decrease) in short-term borrowings (12,215) 11,680
Net decrease in long-term debt (5,000) --
Cash dividends (1,090) (1,043)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,044 23,118
--------- ---------
NET INCREASE/(DECREASE) IN CASH 56 (2,950)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 12,261 14,253
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 12,317 $ 11,303
========= =========
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 30, 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 June 30, 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 six-month period ended June 30, 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):
June 30, 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 $ 55,268 $ 3 $ 1,569 $ 53,702
Obligations of state and
political subdivisions 33,347 12 527 32,832
Corporate debt securities 1,000 -- 32 968
Other 1,735 -- -- 1,735
--------- ---------- ----------- ---------
Total available-for-sale securities $ 91,350 $ 15 $ 2,128 $ 89,237
========= ========== =========== =========
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 June 30, 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 June 30, 2006,
all securities are available for sale (000s omitted).
Available for Sale
---------------------
Amortized Market
Cost Value
--------- ---------
Due in one year or less $ 23,045 $ 22,911
Due in one year through five years 23,066 22,376
Due after five years through ten years 17,763 17,432
Due after ten years 7,582 7,390
--------- ---------
71,456 70,109
Federal agency pools 18,159 17,393
Other 1,735 1,735
--------- ---------
Total $ 91,350 $ 89,237
========= =========
Securities having a carrying value of $2,500,000 (market value of $2,379,700)
were pledged at June 30, 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 June 30, 2006 and
December 31, 2005 are as follows (dollars in thousands):
JUNE 30, DECEMBER 31,
2006 2005
--------- ------------
Commercial Real Estate $ 211,395 $ 197,431
Residential Mortgages 105,889 109,579
Commercial - Other 51,988 45,868
Consumer 11,566 12,215
--------- ------------
Total $ 380,838 $ 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 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, 2006, 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 increased $1.2 million, or 29% since
December 31, 2005. The following table summarizes non-performing assets (dollars
in thousands):
June 30, December 31,
2006 2005
-------- ------------
Non-accrual loans $ 3,995 $ 1,651
Loans past due 90 or more days 1,061 2,044
Renegotiated loans 386 515
-------- ------------
Total non-performing loans 5,442 4,210
Other real estate owned 114 306
-------- ------------
Total non-performing assets $ 5,556 $ 4,516
======== ============
Total non-performing loans to total loans 1.43% 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):
JUNE 30, DECEMBER 31,
2006 2005
--------- ------------
Loan loss balance - Beginning of period $ 3,670 $ $ 3,394
Provision 479 1,554
Loan losses (659) (1,880)
Loan recoveries 317 602
--------- ------------
Loan loss balance - End of period $ 3,807 $ 3,670
========= ============
The allowance for possible loan losses is maintained at a level believed
adequate by management to absorb probable 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 Troy, 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. 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
13
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 June 30, 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 loans, investment securities, bank premises and
equipment, cash and other operating assets. Total assets increased approximately
$6 million, or 1.2% to $501 million at June 30, 2006 from $495 million at
December 31, 2005. The balance of our investment securities decreased by
approximately $4.4 million to $89.2 million at June 30, 2006 as compared to
$93.6 million at December 31, 2005. Our loan portfolio increased approximately
$15.7 million to $380.8 million at June 30, 2006. This was the result of a $10.3
million increase in loans secured by real estate and a $6.1 million increase in
other commercial loans, offset partially by a $649 thousand decrease in consumer
loans. Loans held for sale decreased by $4.6 million to $1.6 million at June 30,
2006. All other assets decreased approximately $900 thousand at June 30, 2006.
This was primarily due to the sale of a previously closed branch facility.
The allowance for loan losses increased $137 thousand during the first six
months of 2006. As a percentage of total loans, the allowance remained at 1.00%.
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 $5.8 million to $457.6 million at June 30, 2006 from
$451.8 million at December 31, 2005. This was mainly due to a $22.3 million, or
5.3% increase in total deposits to $447 million at June 30, 2006 from $425
million at December 31, 2005. We realized a $32.1 million increase in
certificates of deposit and a $3.6 million increase in non-interest bearing
demand balances. The increase in certificates of deposit includes $9.2 million
in brokered deposits that we acquired. Proceeds from the brokered deposits were
used, among other things, to pay off our $5 million long-term FHLB advance. The
increases were partially offset by a $7.2 million drop in interest bearing
demand balances and a $6.2 million drop in savings balances. The increase in
deposits was offset by a $16.6 million decrease in our borrowings, in funding
our $6 million increase in total assets.
14
FINANCIAL RESULTS
Three Months Ended June 30, 2006
Net income for the three months ended June 30, 2006 was $938 thousand compared
to $1.3 million for the same period in 2005. Total interest income increased
$1.2 million in the second quarter 2006 compared to the second quarter 2005.
Interest and fees on loans increased $1.2 million in the second quarter 2006
over the second quarter 2005. Interest on securities and federal funds sold
remained relatively flat, increasing $5 thousand for the same period. The
increase in interest and fees on loans in the second quarter 2006 compared to
the second quarter 2005 was due both to higher interest rates in 2006 and also
higher average balances. Average loan balances increased $31.8 million between
the two periods and we earned approximately 75 basis points more in 2006 than
2005.
Interest expense increased $1.1 million in the second quarter 2006 as compared
to the same period in 2005. The increased interest expense is due mainly to
higher balances and higher rates paid on our Prime Savings Plus product and
Certificates of Deposit. Average Prime Savings Plus balances are about $1.4
million higher in the second quarter 2006 than they were in the second quarter
2005, and, we paid about 91 basis points higher on this product in the second
quarter 2006 than the second quarter 2005. Average certificate of deposit
balances are approximately $45.1 million higher in the second quarter 2006 than
the second quarter 2005, and we paid 84 basis points higher in the second
quarter 2006 than 2005.
During the second quarter 2006 we recorded a $291 thousand provision for loan
losses compared to the $145 thousand provision in the second quarter 2005. This
increase was mainly due to a large provision taken in anticipation of a loss
related to one large commercial loan.
Total other income was about $261 thousand lower in the second quarter 2006 than
the second quarter 2005. Reduced commercial loan fees, mainly broker fees,
accounted for $247 thousand of this decrease. Lower gains on the sale of
mortgages and mortgage servicing rights also contributed to the drop in Other
Income.
Total other operating expenses increased $334 thousand in the second quarter
2006 over the same period in 2005. Salaries and benefits accounted for $144
thousand of this increase. Higher bonus and profit sharing accruals accounted
for $90 thousand of this, the result of a reduction in this expense that was
recorded in the second quarter 2005. Occupancy expenses were $193 thousand
higher in the second quarter 2006 than the second quarter 2005. This increase is
due in a large part to the opening of a new branch in August 2005, the
acquisition of two new mortgage production offices in June 2005 and to rent
being paid on our Troy, Michigan branch that is currently under construction.
Legal and professional fees are down $32 thousand in the second quarter 2006
from the second quarter 2005. Other operating expenses increased $29 thousand in
the second quarter 2006 over the second quarter 2005.
Six Months Ended June 30, 2006
Net income for the six months ended June 30, 2006 was $1.7 million compared to
$2.2 million for the same period in 2005. Total interest income increased $2.6
million in the first six months of 2006 compared to the first six months of
2005. Interest and fees on loans increased $2.4 million. 2006 year to date
average loan balances increased $21.2 million over the 2005 averages. This
increase, and the 94 basis point increase in yield accounted for the increase in
interest and fees on loans.
15
Interest income on investment securities increased $120 thousand in the first
half of 2006 over the first half of 2005. Our average investment in securities
and federal funds sold is actually about $8.8 million lower so far in 2006 than
it was in the first half of 2005, but we increased our yield by shifting
maturing U. S. Agency investments into higher yielding municipal securities.
Total interest expense increased $2.2 million in the first six months of 2006
compared to the same period in 2005. Approximately $1.4 million of this increase
is due to our certificates of deposit. Our average balance in certificates of
deposit in the first half of 2006 is $37.3 million higher than it was in the
first half of 2005. In addition, we paid on average, 95 basis points higher on
these deposits so far in 2006 than we did in the first half of 2005. Another
$701 thousand of the increase is due to our Prime Savings Plus product. During
the first six months of 2006, we held an average of $93.7 million in Prime
Savings Plus balances compared to $86.1 million in the first six months of 2005.
Also, we paid 124 basis points more on these balances in 2006 than 2005.
During the first six months of 2006, we recorded a $479 thousand provision for
loan losses compared to a $549 thousand provision in the first six months of
2005.
Total other income was about $388 thousand lower in the first half of 2006 than
the first half of 2005. Deposit service charges remained relatively consistent
between the two periods, dropping $26 thousand in 2006. Other non-interest
income decreased $362 thousand, comparing the first half of 2006 to the first
half of 2005. This included a $267 thousand decrease in commercial loan fees,
$180,000 of which was a drop in broker fees, and an $88 thousand drop in the
gains on the sale of mortgages, which is mainly due to an overall drop in
mortgage loan volume. We also realized a $77 thousand drop in the gains on the
sale of securities in 2006. The decreases were partially offset by a $43
thousand increase in investment referral income.
Total operating expenses increased $913 thousand in the first six months of 2006
compared to the first six months of 2005. Total salary and benefits expense
increased $363 thousand. This includes a $126 thousand increase in accrued
bonuses and a $229 thousand increase in salaries and other benefits due mainly
to the increased staffing to accommodate the new branch and the mortgage
production offices that were acquired last year. Occupancy costs increased $393
thousand over the 2005 level. Again, this is mainly due to the new branch and
mortgage production offices acquired last year. Year-to-date legal and
professional fees remained relatively stable, increasing $3 thousand over 2005.
Other operating expenses increased $154 thousand in the first half of 2006 over
the first half of 2005. Telephone expense is up $45 thousand and stationery and
supplies expense is up $19 thousand, both a direct result of the additional
offices. Advertising expense is $188 thousand over the 2005 level due to the
fact that many of our 2006 advertising programs were scheduled for the first
half of the year. Partially offsetting these increases is the fact that a $54
thousand processing loss that we suffered in 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
16
sources such as Federal Home Loan Bank advances and overnight federal funds
purchases from correspondent banks.
During the six months ended June 30, 2006, $4 million in cash was provided by
operations. This, plus $22.3 million in cash provided through increased deposits
and $8 million from the pay-down of loans held for sale and investment
securities was used to increase our loan portfolio by $16 million and pay-down
our short-term and long-term borrowings by $17.2 million. In addition, we paid
$1 million in cash dividends during the period. During the six months ended June
30, 2006, we experienced a net increase of approximately $56 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 June 30, 2006, the Company had commitments to extend credit of $69.4 million
and stand-by letters of credit of $3.8 million compared with $66.6 million and
$3.1 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 June 30,
2006:
Tier 1 capital $ 40,010
Total capital $ 43,817
Tier 1 capital to risk-weighted assets 10.48%
Total capital to risk-weighted assets 11.48%
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To a great extent, the Company's operating strategies focus on
asset/liability management. The purpose of its Asset Liability Management Policy
is to provide stable net interest income growth while both maintaining adequate
liquidity and protecting the Bank's earnings from undue interest rate risk. The
Bank follows its Asset/Liability Management Policy for controlling exposure to
interest rate risk. The Policy is established by management and approved by the
Board of Directors.
The Company's balance sheet consists of investments in interest earning assets
(investment securities and loans) that are funded by interest bearing
liabilities (deposits and borrowings). These instruments have varying levels of
sensitivity to changes in market interest rates which results in interest rate
risk. Our policies place strong emphasis on stabilizing net interest margin,
with the goal of providing a consistent level of satisfactory earnings.
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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, 2006 simulation, the Company is in an almost neutral
position. 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 slightly whether rates rise or fall.
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.
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, 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 June 30, 2006.
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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 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
a. The Annual Meeting of Shareholders was held on April 25, 2006.
b. At that meeting, the shareholders approved the following matters:
PROPOSAL 1: ELECTION OF DIRECTORS
That James B. Jacobs be elected as Director of PSB Group, Inc. for a
term expiring at the annual meeting of shareholders in 2009.
For - 2,287,563
Withheld - 74,413
That Longine V. Morawski be elected as Director of PSB Group, Inc.
for a term expiring at the annual meeting of shareholders in 2009.
For - 2,288,613
Withheld - 73,363
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That Edward H. Turner be elected as Director of PSB Group, Inc. for
a term expiring at the annual meeting of shareholders in 2009.
For - 2,287,563
Withheld - 74,413
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 2006.
For - 2,281,581
Against - 59,772
Abstain - 20,623
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
Exhibit 10.1 Employment Agreement with Michael J. Tierney
(Incorporated by reference from Current Report on
Form 8-K filed on June 26, 2006).
Exhibit 10.2 Restricted Stock Agreement with Michael J.
Tierney (Incorporated by reference from Current
Report on Form 8-K filed on June 26, 2006).
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: August 14, 2006 /s/ Robert L. Cole
-------------------------------------
ROBERT L. COLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: August 14, 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
22