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, 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 3,034,152 shares of Common Stock outstanding as of September
30, 2006.
TABLE OF CONTENTS
PAGE
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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.... 18
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............................................. 19
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)
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
ASSETS
Cash and cash equivalents $ 14,945 $ 12,261
Federal Funds Sold 3,426 --
Securities available for sale 71,685 93,645
Loans 386,711 365,093
Less allowance for possible loan loss (3,969) (3,670)
-------- --------
Net loans 382,742 361,423
Loans held for sale 2,538 6,235
Bank premises and equipment 12,204 12,663
Accrued interest receivable 2,546 2,406
Other assets 6,382 6,378
-------- --------
Total assets $496,468 $495,011
======== ========
LIABILITIES
Deposits:
Non-interest bearing $ 58,011 $ 54,445
Interest bearing 391,208 370,213
-------- --------
Total deposits 449,219 424,658
Short-term borrowings 1,000 20,440
Long-term debt 744 5,770
Accrued taxes, interest and other liabilities 1,559 963
-------- --------
Total liabilities 452,522 451,831
SHAREHOLDERS' EQUITY
Common stock - no par value - 5,000,000
authorized - 3,034,152 and 3,029,152
shares issued and outstanding at
September 30, 2006 and December 31, 2005 20,496 20,406
Unearned ESOP benefits (744) (770)
Additional paid in - Stock Options and Awards (23) --
Common stock held in trust (230) (230)
Deferred compensation obligation 230 230
Retained earnings 25,146 24,357
Accumulated other comprehensive (loss)/ income (929) (813)
-------- --------
Total shareholders' equity 43,946 43,180
-------- --------
Total liabilities and stockholders' equity $496,468 $495,011
======== ========
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------- -------
INTEREST INCOME:
Interest and fees on loans $7,388 $6,187 $21,053 $17,418
SECURITIES:
Taxable 548 710 1,714 2,053
Tax-exempt 308 209 963 580
Federal funds sold 9 -- 49 27
------ ------ ------- -------
TOTAL INTEREST INCOME 8,253 7,106 23,779 20,078
INTEREST EXPENSE:
Deposits 3,409 2,303 9,483 6,237
Short-term borrowings 60 130 202 170
Long-term debt -- 55 70 167
------ ------ ------- -------
TOTAL INTEREST EXPENSE 3,469 2,488 9,755 6,574
------ ------ ------- -------
NET INTEREST INCOME 4,784 4,618 14,024 13,504
Provision for loan loss 605 644 1,084 1,193
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 4,179 3,974 12,940 12,311
OTHER OPERATING INCOME:
Service charges on deposit accounts 572 628 1,705 1,787
Other income 724 1,064 2,264 2,966
------ ------ ------- -------
TOTAL OTHER INCOME 1,296 1,692 3,969 4,753
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,403 2,246 7,154 6,634
Occupancy costs 942 855 3,000 2,520
Legal and professional 222 197 801 773
Other operating expense 911 902 2,742 2,579
------ ------ ------- -------
TOTAL OTHER OPERATING EXPENSES 4,478 4,200 13,697 12,506
------ ------ ------- -------
INCOME - BEFORE FEDERAL INCOME TAXES 997 1,466 3,212 4,558
Federal income taxes 245 420 787 1,343
------ ------ ------- -------
NET INCOME $ 752 $1,046 $ 2,425 $ 3,215
====== ====== ======= =======
BASIC EARNINGS PER WEIGHTED AVERAGE
OUTSTANDING SHARE OF COMMON STOCK $ .25 $ .35 $ .80 $ 1.06
====== ====== ======= =======
CASH DIVIDENDS PER SHARE $ .18 $ .18 $ .54 $ .52
====== ====== ======= =======
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2006 2005
------ ------
Net income $2,425 $3,215
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax (116) (561)
------ ------
Comprehensive income $2,309 $2,654
====== ======
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2006
(IN THOUSANDS, EXCEPT SHARE DATA)
Add'l Paid
Unearned in Capital - Common Deferred Total
Common ESOP Stock Options Stock Comp. Retained Accumulated Shareholders'
Stock Benefits and Awards Held in Trust Obligation Earnings OCI Equity
------- -------- ------------- ------------- ---------- -------- ----------- -------------
Balance - December 31, 2005 $20,406 ($770) ($230) $230 $ 24,357 ($813) $ 43,180
Net Income $ 2,425 $ 2,425
Change in unrealized gain on
securities available for
sale, net of tax ($116) ($116)
Stock Issuance - Stock Awards $ 90 $ 90
Earned ESOP Benefit $ 26 $ 26
Add'l Paid in Capital-Stock
Options $ 19 $ 19
Unearned Stock Awards ($42) ($42)
Cash Dividends ($1,636) ($1,636)
------- ------ ----- ----- ---- -------- ----- --------
Balance - September 30, 2006 $20,496 ($744) ($23) ($230) $230 $ 25,146 ($929) $ 43,946
======= ====== ===== ===== ==== ======== ===== ========
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2006 2005
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 5,312 $ 4,727
CASH FLOW FROM INVESTING ACTIVITIES:
Net (increase)/decrease in securities 21,619 (14,193)
Net increase in loans (22,403) (13,065)
Net (increase)/decrease in loans held for sale 3,697 (9,775)
Capital expenditures (1,190) (3,052)
Proceeds on sale of fixed assets 590 --
-------- --------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 2,313 (40,085)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 24,561 15,164
Net increase/(decrease) in short-term borrowings (19,440) 20,710
Net decrease in long-term debt (5,000) --
Cash dividends (1,636) (1,588)
-------- --------
NET CASH (USED IN)/ PROVIDED BY FINANCING ACTIVITIES (1,515) 34,286
-------- --------
NET INCREASE/(DECREASE) IN CASH 6,110 (1,072)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 12,261 14,253
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 18,371 $ 13,181
======== ========
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 September 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 nine-month period ended September 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):
September 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 $42,552 $ 4 $ 966 $41,590
Obligations of state and political subdivisions 27,938 11 430 27,519
Corporate debt securities 1,000 -- 25 975
Other 1,601 -- -- 1,601
------- --- ------ -------
Total available-for-sale securities $73,091 $15 $1,421 $71,685
======= === ====== =======
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 September 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 September 30,
2006, all securities are available for sale (000s omitted).
Available for Sale
-------------------
Amortized Market
Cost Value
--------- -------
Due in one year or less $ 8,002 $ 7,878
Due in one year through five years 17,704 17,343
Due after five years through ten years 18,129 17,862
Due after ten years 7,585 7,435
------- -------
51,420 50,518
Federal agency pools 20,070 19,566
Other 1,601 1,601
------- -------
Total $73,091 $71,685
======= =======
Securities having a carrying value of $5,008,173 (market value of $4,846,100)
were pledged at September 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 September 30, 2006 and
December 31, 2005 are as follows (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
Commercial Real Estate $218,586 $197,431
Residential Mortgages 103,599 109,579
Commercial - Other 53,348 45,868
Consumer 11,178 12,215
-------- --------
Total $386,711 $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
September 30, 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 $2.9 million, or 68%
since December 31, 2005. The following table summarizes non-performing assets
(dollars in thousands):
September 30, December 31,
2006 2005
------------- ------------
Non-accrual loans $2,620 $1,651
Loans past due 90 or more days 3,962 2,044
Renegotiated loans 506 515
------ ------
Total non-performing loans 7,088 4,210
Other real estate owned 251 306
------ ------
Total non-performing assets $7,339 $4,516
====== ======
Total non-performing loans to total loans 1.83% 1.15%
Total non-performing assets to total assets 1.48% 0.91%
11
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is as follows (dollars in
thousands):
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
Loan loss balance - Beginning of period $ 3,670 $ 3,394
Provision 1,084 1,554
Loan losses (1,186) (1,880)
Loan recoveries 401 602
------- -------
Loan loss balance - End of period $ 3,969 $ 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 12
banking offices, 6 mortgage offices and two shared loan production offices, with
an additional banking office under construction in Troy, Michigan that is
expected to open around the end of the year.
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. As of September 30, 2006, we held
approximately $7 million in brokered deposits. The remainder of our deposits,
approximately 98.5% of total 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 September 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
$1.5 million to $496.5 million at September 30, 2006 from $495 million at
December 31, 2005. At September 30, 2006, we had about $3.4 million of excess
cash temporarily invested in federal funds. This compares to no federal funds at
December 31, 2005. Our investment in securities was reduced by approximately $22
million to $72 million at September 30, 2006 compared to $94 million at December
31, 2005. This was an intentional run-off of the portfolio. Proceeds were used
primarily to pay down our short-term borrowings and increase our loan portfolio.
Our loan portfolio increased approximately $21.6 million to $386.7 million at
September 30, 2006. This was the result of a $15.2 million increase in loans
secured by real estate and a $7.5 million increase in other commercial loans,
offset partially by a $1.1 million decrease in consumer loans. Loans held for
sale decreased by $3.7 million to $2.5 million at September 30, 2006. All other
assets decreased approximately $315 thousand at September 30, 2006.
The allowance for loan losses increased $299 thousand during the first nine
months of 2006. We increased the allowance, as a percentage of total loans, to
1.03% at September 30, 2006 compared to 1.01% at 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 $691 thousand to $452.5 million at September 30,
2006 from $451.8 million at December 31, 2005. We were able to increase total
deposits by $24 million, or 5.8%, to $449 million at September 30, 2006 from
$425 million at December 31, 2005. We realized a $36.5 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 $7.1 million
in brokered deposits that we acquired. Proceeds from the brokered deposits were
used, among other things, to pay off our $5
14
million long-term FHLB advance. The increases were partially offset by a $270
thousand drop in interest bearing demand balances and a $15.6 million decrease
in savings balances. Of the decrease in savings balances, $11.5 million was a
decrease in our higher paying Prime Savings Plus accounts as much of these funds
were moved into certificates of deposit. The net increase in total deposits,
along with the proceeds from the run-off of our investment portfolio, were used
to pay down our short-term borrowings by $19.4 million and increase our loan
portfolio.
FINANCIAL RESULTS
Three Months Ended September 30, 2006
Net income for the three months ended September 30, 2006 was $752 thousand
compared to $1.0 million for the same period in 2005. Total interest income
increased $1.1 million in the third quarter 2006 compared to the third quarter
2005. Interest and fees on loans increased $1.2 million in the third quarter
2006 over the third quarter 2005. Interest on securities and federal funds sold
dropped by $54 thousand during the same period. The increase in interest and
fees on loans in the third quarter 2006 compared to the third quarter 2005 was
due both to higher interest rates in 2006 and higher average balances. Average
loan balances increased $32.3 million between the two periods and we earned
approximately 65 basis points more in 2006 than 2005. While interest on
securities and federal funds did drop by $54 thousand when comparing the third
quarter 2006 to the third quarter 2005, we were able to mitigate this loss by
repositioning our portfolio. We increased our investment in tax exempt municipal
securities and the result was that on a tax equivalent basis, our interest on
securities and federal funds remained about the same for the two quarters.
Interest expense increased $981 thousand in the third 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 certificates of deposit. Average
certificate of deposit balances are approximately $46.8 million higher in the
third quarter 2006 than the third quarter 2005, and interest paid was 106 basis
points higher in the third quarter 2006 than 2005. The other large contributing
factor in our increased interest expense is our Prime Savings Plus accounts.
Average Prime Savings Plus balances are actually about $5.5 million lower in the
third quarter 2006 than they were in the third quarter 2005, but we paid about
106 basis points more on this product in the third quarter 2006 than the third
quarter 2005.
During the third quarter 2006, we recorded a $605 thousand provision for loan
losses compared to the $644 thousand provision in the third quarter 2005.
Total other income was about $396 thousand lower in the third quarter 2006 than
the third quarter 2005. Reduced commercial loan fees accounted for $118 thousand
of this decrease. Gains on the sale of mortgages and mortgage servicing rights
decreased $156 thousand during the same period as mortgage activity slowed.
Total other operating expenses increased $278 thousand in the third quarter 2006
over the same period in 2005. Salaries and benefits accounted for $157 thousand
of this increase. Higher bonus and profit sharing accruals accounted for $128
thousand of this, the result of bonus and profit sharing reversals that were
recorded in the third quarter 2005. Also, in 2006, we had a full quarter's
salary and benefits expense of a branch that was opened in August of 2005 and
only a partial quarter's expense in 2005. Occupancy expenses were $87 thousand
higher in the third quarter 2006 than the
15
third quarter 2005. This increase is due in a large part to the opening of the
new branch in August 2005 and to rent being paid on our Troy, Michigan branch
that is currently under construction. Legal and professional fees are up $25
thousand in the third quarter 2006 from the third quarter 2005. Other operating
expenses remained relatively flat between the two periods, increasing only $9
thousand.
Nine Months Ended September 30, 2006
Net income for the nine months ended September 30, 2006 was $2.4 million
compared to $3.2 million for the same period in 2005. Total interest income
increased $3.7 million in the first nine months of 2006 compared to the first
nine months of 2005. Interest and fees on loans increased $3.6 million. Year to
date average loan balances increased $30.4 million over the 2005 averages. This
increase, and the 75 basis point increase in yield, accounted for the increase
in interest and fees on loans. Interest income on investment securities
increased $66 thousand in the first nine months of 2006 over the first nine
months of 2005. Our average investment in securities and federal funds sold is
actually about $13.5 million lower so far in 2006 than it was in the first nine
months of 2005, but we increased our yield by shifting maturing U. S. Agency
investments into higher yielding municipal securities.
Total interest expense increased $3.2 million in the first nine months of 2006
compared to the same period in 2005. Approximately $2.3 million of this increase
is due to our certificates of deposit. Our average balance in certificates of
deposit in the first nine months of 2006 is $40.5 million higher than it was in
the first nine months of 2005. In addition, we paid on average, 99 basis points
more on these deposits so far in 2006 than we did in the first nine months of
2005. Another $870 thousand of the increase is due to our Prime Savings Plus
product. During the first nine months of 2006, we held an average of $90.4
million in Prime Savings Plus balances compared to $85.4 million in the first
nine months of 2005. Also, we paid 110 basis points more on these balances in
2006 than 2005. With interest rates continuing to rise over the past year,
average interest bearing demand balances dropped $15.6 million in the first nine
months of 2006 compared to the same period in 2005 as customers shifted balances
to higher yielding certificates of deposit and the Prime Savings Plus product.
During the first nine months of 2006, we recorded a $1.1 million provision for
loan losses compared to a $1.2 million provision in the first nine months of
2005.
Total other income was about $784 thousand lower in the first nine months of
2006 than the first nine months of 2005. Deposit service charges were $82
thousand lower in the first nine months of 2006 than the same period in 2005.
About half of this decrease was due to lower fee income on our Overdraft
Privilege product. Other non-interest income decreased $702 thousand, comparing
the first nine months of 2006 to the first nine months of 2005. This included a
$382 thousand decrease in commercial loan fees, $175 thousand of which was a
drop in broker fees. We also realized a $152 thousand drop in the gain on the
sale of mortgages which is the result of an overall decline in mortgage loan
volume. In addition, we realized a $139 thousand drop in the gain on the sale of
securities in 2006 as we took some losses while we repositioned our portfolio.
The decreases mentioned above were partially offset by a $60 thousand increase
in investment referral income.
Total operating expenses increased $1.2 million in the first nine months of 2006
compared to the first nine months of 2005. Total salary and benefits expense
increased $520 thousand. This includes a $254 thousand increase in accrued
bonuses and a $266 thousand increase in salaries and other
16
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 $480 thousand over the 2005 level. Again, this is mainly due to the
new branches and mortgage production offices acquired last year. Year-to-date
legal and professional fees remained relatively stable, increasing $28 thousand
over 2005. Other operating expenses increased $163 thousand in the first nine
months of 2006 over the first nine months of 2005. Telephone expense is up $57
thousand, a direct result of the additional offices. Advertising expense is $205
thousand over the 2005 level due to the fact that many of our 2006 advertising
programs were scheduled for the first part 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 and we realized a $60 thousand decrease in
lender paid mortgage closing costs associated with a mortgage marketing program.
LIQUIDITY
The Company manages its liquidity position with the objective of maintaining
sufficient funds to respond to the needs of depositors and borrowers and to take
advantage of earnings enhancement opportunities. In addition to the normal
inflow of funds from core-deposit growth, together with repayments and
maturities of loans and investments, the Company utilizes other short-term
funding sources such as Federal Home Loan Bank advances and overnight federal
funds purchases from correspondent banks.
During the nine months ended September 30, 2006, $5.3 million in cash was
provided by operations. This, plus $24.6 million in cash provided through
increased deposits and $25.3 million from the pay-down of loans held for sale
and investment securities was used to increase our loan portfolio by $22.4
million and pay-down our short-term and long-term borrowings by $24.4 million.
In addition, we paid $1.6 million in cash dividends during the period. During
the nine months ended September 30, 2006, we experienced a net increase of
approximately $6.1 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, 2006, the Company had commitments to extend credit of $63.5
million and stand-by letters of credit of $3.9 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 September
30, 2006:
Tier 1 capital $40,188
Total capital $44,157
Tier 1 capital to risk-weighted assets 10.48%
Total capital to risk-weighted assets 11.51%
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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 September 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 change by less than 2% 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
September 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 September 30, 2006.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may from time-to-time be involved in legal proceedings
occurring in the ordinary course of business which, in the aggregate, involve
amounts which are believed by management to be immaterial to the financial
condition of the Company. The Company is not currently involved in any legal
proceedings which management believes are of a material nature.
ITEM 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.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
Exhibit 31.1 Certification of Robert L. Cole required by Rule 13a - 14(a)
Exhibit 31.2 Certification of David A. Wilson required by Rule 13a - 14(a)
Exhibit 32.1 Certification of Robert L. Cole required by Rule 13a - 14(b) and
Section 906 of the Sarbanes - Oxley Act of 2002, 18 U.S.C. Section
1350
Exhibit 32.2 Certification of David A. Wilson required by Rule 13a - 14(b) and
Section 906 of the Sarbanes - Oxley Act of 2002, 18 U.S.C. Section
1350
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSB GROUP, INC.
Date: November 14, 2006 /s/ Robert L. Cole
----------------------------------------
ROBERT L. COLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 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