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, 2007 Commission File No.: 000-50301
PSB GROUP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN
(State or other jurisdiction of 42-1591104
incorporation or organization) (I.R.S. Employer I.D. No.)
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 3,068,552 shares of Common Stock outstanding as of March 31,
2007.
1
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION .......................................... 3
ITEM 1. FINANCIAL STATEMENTS ........................................ 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................... 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK ........................................................ 17
ITEM 4: CONTROLS AND PROCEDURES ..................................... 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. 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)
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
ASSETS
Cash and cash equivalents $ 13,788 $ 13,950
Securities available for sale 63,109 63,748
Loans 409,246 398,344
Less allowance for possible loan loss (4,232) (4,257)
-------- --------
Net loans 405,014 394,087
Loans held for sale 1,324 3,693
Bank premises and equipment 12,599 12,731
Accrued interest receivable 2,706 2,776
Other assets 6,268 6,249
-------- --------
Total assets $504,808 $497,234
======== ========
LIABILITIES
Deposits:
Non-interest bearing $ 59,327 $ 59,320
Interest bearing 390,437 374,640
-------- --------
Total deposits 449,764 433,960
Short-term borrowings 8,000 16,875
Long-term debt 590 744
Accrued taxes, interest and other liabilities 1,544 1,409
-------- --------
Total liabilities 459,898 452,988
SHAREHOLDERS' EQUITY
Common stock - no par value - 5,000,000
authorized - 3,068,552 shares issued and
outstanding at March 31, 2007 and 3,034,152
at December 31, 2006 20,753 20,496
Unearned ESOP benefits (590) (744)
Common stock held in trust (230) (230)
Deferred compensation obligation 230 230
Additional paid in capital - stock
options/awards (232) (12)
Retained earnings 25,415 25,062
Accumulated other comprehensive loss (436) (556)
-------- --------
Total shareholders' equity 44,910 44,246
-------- --------
Total liabilities and stockholders' equity $504,808 $497,234
======== ========
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS
ENDED
MARCH 31,
---------------
2007 2006
------ ------
INTEREST INCOME:
Interest and fees on loans $7,594 $6,657
SECURITIES:
Taxable 416 592
Tax-exempt 270 326
Federal funds sold -- 28
------ ------
TOTAL INTEREST INCOME 8,280 7,603
INTEREST EXPENSE:
Deposits 3,397 2,869
Interest on borrowings 134 150
------ ------
TOTAL INTEREST EXPENSE 3,531 3,019
------ ------
NET INTEREST INCOME 4,749 4,584
Provision for loan loss 120 188
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 4,629 4,396
OTHER OPERATING INCOME:
Service charges on deposit accounts 567 548
Other income 688 774
------ ------
TOTAL OTHER INCOME 1,255 1,322
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,395 2,467
Occupancy costs 1,049 1,060
Legal and professional 323 307
Other operating expense 890 931
------ ------
TOTAL OTHER OPERATING EXPENSES 4,657 4,765
------ ------
INCOME - BEFORE FEDERAL INCOME TAXES 1,227 953
Federal income taxes 325 218
------ ------
NET INCOME $ 902 $ 735
====== ======
BASIC EARNINGS PER AVERAGE OUTSTANDING SHARE
OF COMMON STOCK $ 0.30 $ 0.24
====== ======
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,
-------------
2007 2006
------ ----
Net income $ 902 $735
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax 120 (25)
------ ----
Comprehensive income $1,022 $710
====== ====
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2007
(IN THOUSANDS, EXCEPT SHARE DATA)
Common
Unearned Stock Deferred Add'l Paid in Total
Common ESOP Held in Comp. Capital - Stk Retained Accumulated Shareholders'
Stock Benefits Trust Obligation Options/Awards Earnings OCI Equity
------- -------- ------- ---------- -------------- -------- ----------- -------------
Balance - Dec 31, 2006 $20,496 ($744) ($230) $230 ($12) $25,062 ($556) $44,246
Net Income $ 902 $ 902
Change in unrealized gain
on securities available
for sale, net of tax $ 120 $ 120
Earned ESOP Benefit $ 154 $ 154
Restricted Stock Awards $ 257 $ 257
Additional paid in Capital
Stock Options/Awards ($220) ($220)
Cash Dividends ($549) ($549)
------- ------ ----- ---- ----- ------- ------ -------
Balance - Mar 31, 2007 $20,753 ($590) ($230) $230 ($232) $25,415 ($436) $44,910
======= ====== ===== ==== ===== ======= ====== =======
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 1,568 $ 1,710
CASH FLOW FROM INVESTING ACTIVITIES:
Net decrease in securities 813 219
Net increase in loans (11,047) (6,383)
Net decrease in loans held for sale 2,369 4,598
Capital expenditures (245) (118)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (8,110) (1,684)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 15,804 12,163
Net decrease in short-term borrowings (8,875) (11,985)
Cash dividends (549) (545)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 6,380 (367)
-------- --------
NET DECREASE IN CASH (162) (341)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 13,950 12,261
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 13,788 $ 11,920
======== ========
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, 2006 and notes thereto included in PSB Group, Inc.'s
Form 10-K filed with the Securities and Exchange Commission on April 2, 2007. 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, 2007 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, 2007 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, 2007
-----------------------------------------------
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 $33,411 $14 $541 $32,884
Obligations of state and political
subdivisions 27,827 81 190 27,718
Corporate debt securities 1,000 -- 25 975
Other 1,532 -- -- 1,532
------- --- ---- -------
Total available-for-sale securities $63,770 $95 $756 $63,109
======= === ==== =======
9
NOTE 2 - SECURITIES (CONTINUED)
December 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 $34,203 $13 $643 $33,573
Obligations of state and political
subdivisions 27,855 68 255 27,668
Corporate debt securities 1,000 -- 25 975
Other 1,532 -- -- 1,532
------- --- ---- -------
Total available-for-sale securities $64,590 $81 $923 $63,748
======= === ==== =======
The amortized cost and estimated market value of securities at March 31, 2007,
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, 2007,
all securities are available for sale (000s omitted).
Available for Sale
-------------------
Amortized Market
Cost Value
--------- -------
Due in one year or less $ 4,431 $ 4,375
Due in one year through five years 14,438 14,258
Due after five years through ten years 17,398 17,347
Due after ten years 7,552 7,488
------- -------
43,819 43,468
Federal agency pools 18,419 18,109
Other 1,532 1,532
------- -------
Total $63,770 $63,109
======= =======
Securities having a carrying value of $5,006,000 (market value of $4,897,000)
were pledged at March 31, 2007 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, 2007 and
December 31, 2006 are as follows (dollars in thousands):
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
Commercial Real Estate $239,354 $232,466
Residential Mortgages 102,099 103,343
Commercial 57,637 51,827
Consumer 10,156 10,708
-------- --------
Total $409,246 $398,344
======== ========
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, 2007, other real estate owned consisted of six properties. Management
does not anticipate any material loss as the result of the disposal of these
properties. Non-performing loans have increased $4.5 million, or 58% since
December 31, 2006. The following table summarizes non-performing assets (dollars
in thousands):
March 31, December 31,
2007 2006
--------- ------------
Non-accrual loans $ 7,262 $3,069
Loans past due 90 or more days 4,587 4,148
Renegotiated loans 344 486
------- ------
Total non-performing loans 12,193 7,703
Other real estate owned 581 325
------- ------
Total non-performing assets $12,774 $8,028
======= ======
Total non-performing loans to total loans 2.98% 1.93%
Total non-performing assets to total assets 2.53% 1.61%
11
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is as follows (dollars in
thousands):
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 2007 DECEMBER 31, 2006
-------------- -----------------
Loan loss balance - Beginning of period $4,257 $ $3,670
Provision 120 1,839
Loan losses (250) (1,716)
Loan recoveries 105 464
------ --------
Loan loss balance - End of period $4,232 $ 4,257
====== ========
The allowance for possible loan losses is maintained at a level believed
adequate by management to absorb potential losses from impaired loans as well as
the remainder of the loan portfolio. The allowance for loan losses is based upon
periodic analysis of the portfolio, economic conditions and trends, historical
credit loss experience, borrowers' ability to repay and collateral values.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PSB Group, Inc. (the "Company") was formed on February 28, 2003 as a bank
holding company for the purpose of owning Peoples State Bank (the "Bank")
pursuant to a plan of reorganization adopted by the Bank and its shareholders.
Pursuant to the reorganization, each share of 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 3 mortgage offices, with a new bank branch scheduled to open
in the third quarter of 2007.
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 Federal Deposit Insurance
Corporation ("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 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. As of
March 31, 2007, we held approximately $2.2 million in brokered
13
deposits. The remainder of the deposits, approximately 99.5% of total deposits,
are from local market areas surrounding our branches.
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, 2007, 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,
and accordingly began recognizing expense relating to outstanding stock options
at that time.
FINANCIAL CONDITION
Company assets consist of customer loans, investment securities, bank premises
and equipment, cash and other operating assets. Total assets increased
approximately $7.6 million to $504.8 million at March 31, 2007 from $497.2
million at December 31, 2006. The balance of our investment securities decreased
by approximately $639 thousand to $63.1 million at March 31, 2007 as compared to
$63.7 million at December 31, 2006. Our loan portfolio increased approximately
$10.9 million to $409.2 million at March 31, 2007. This was the result of a $6.9
million increase in commercial real estate loans and a $5.8 million increase in
other commercial loans. This increase was partially offset by a $1.2 million
drop in loans secured by residential real estate and a $552 thousand drop in
consumer loans. Loans held for sale decreased $2.4 million to $1.3 million at
March 31, 2007. Other assets remained relatively flat, decreasing by about $183
thousand at March 31, 2007.
The allowance for loan losses as a percentage of total loans dropped to 1.03% at
March 31, 2007 compared to 1.07% at December 31, 2006. 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 $6.9 million to $459.9 million at March 31, 2007
from $453 million at December 31, 2006. Total deposits increased $15.8 million
to $449.8 million at March 31, 2007 from $434 at December 31, 2006. This was
mainly due to a $15.3 million increase in certificates of deposit and a $5.5
million increase in savings deposits, partially offset by a $3.7 million
decrease in money market deposits and a $1.3 million drop in NOW balances.. The
increase in total deposits was used to fund our increased assets and to reduce
our short-term borrowings by over $8 million.
14
FINANCIAL RESULTS
Three Months Ended March 31, 2007
Net income for the three months ended March 31, 2007 was $902 thousand compared
to $735 thousand for the same period in 2006. Total interest income increased
$677 thousand in the first quarter 2007 compared to the first quarter 2006.
Interest and fees on loans increased $937 thousand in the first quarter 2007
over the same period in 2006. The increase in interest and fees on loans was due
mainly to the overall increase in our loan portfolio and to a lesser degree, a
slight increase in the yield. We generated a $41.6 million increase in our
average commercial loans in the first quarter 2007 compared to the first quarter
2006. This plus a 30 basis point increase in the yield on commercial loans
resulted in a $1 million increase in interest and fees on commercial loans. Our
average consumer loan balances were approximately $1.4 million higher in the
first quarter 2007 than the 2006 level. We realized a 19 basis point increase in
yield on consumer loans in the first quarter 2007 compared to 2006. The result
of the higher average balances and higher yield was a $38 thousand increase in
interest and fees on consumer loans. During the first quarter 2007, we continued
to allow our mortgage loan portfolio to run-off. Average mortgage loan balances
during the first quarter 2007 were $6.8 million lower than during the first
quarter 2006. This drop in average mortgage balances combined with a 13 basis
point drop in yield resulted in a $118 thousand drop in interest and fees on
mortgage loans compared to the first quarter 2006.
Our average investment in securities and federal funds decreased $32.6 million
comparing the first quarter 2007 to the same period in 2006, as funds were moved
to higher yielding loans. The result was a $260 thousand decrease in interest on
securities. This decrease would have been greater except that through some
restructuring of the portfolio we were able to increase our yield by
approximately 39 basis points from period to period.
Interest expense increased $512 thousand in the first quarter 2007 compared to
the first quarter 2006. Interest on deposits increased $528 thousand due mainly
to a shift in deposits. Comparing the first quarter 2007 to the first quarter
2006, we saw a shift from money market and savings deposits to higher paying
certificates of deposit as customers traded liquidity for higher rates. Our
average money market balances decreased $8.6 million and average savings
balances decreased $19.4 million. Average certificate of deposit balances
increased $27.2 million. This shift in balances along with upward pressure on
deposit rates resulted in the $528 thousand increase in interest expense on
deposits.
During the first quarter 2007, even though we experienced an increase in our
non-performing loans, a detailed analysis of our loan portfolio determined that
we should record a $120 thousand provision for loan losses in order to maintain
the allowance for possible loan losses at a level that management believes is
appropriate in light of first quarter net charge-offs and the growth in the loan
portfolio. This compares to a $188 thousand provision recorded in the first
quarter 2006.
Total other operating income decreased $67 thousand in the first quarter 2007
compared to the first quarter 2006. This decrease was mainly the result of a $46
thousand decrease in the gains on the sale of mortgage loans due to lower
mortgage origination volume and a $66 thousand decrease in loan related fee
income. The decreases were partially offset by the fact that we realized a $54
thousand loss on the sale of securities in the first quarter 2006 that was not
repeated this year.
Total other operating expenses decreased $108 thousand when comparing the first
quarters of 2007 and 2006. Salary and benefits expense decreased $72 thousand.
Bonus and incentive accruals
15
increased $179 thousand as new incentive programs were put in place in 2007, but
this was more than offset by a $109 thousand increase in deferred loan
origination costs, a $53 thousand decrease in mortgage commissions and a $53
thousand decrease in medical expense accruals. Other operating expense decreased
$41 thousand. This was primarily the result of an $82 thousand decrease in
marketing expense as a large number of the 2006 marketing campaigns were
scheduled for the first quarter of the year. This was partially offset by a $50
thousand loss realized in the first quarter 2007 resulting from a branch
robbery.
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, 2007, $1.6 million in cash was provided
by operations. This, plus $18.2 million in cash provided through increased
deposits and the reduction in loans held for sale, was used to increase our loan
portfolio by $11 million and pay down our short-term borrowings by $8.9 million.
In addition, we had a net cash outflow of $245 thousand for capital expenditures
and paid $549 thousand in cash dividends during the period. During the three
months ended March 31, 2007, we experienced a net decrease of $162 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, 2007, the Company had commitments to extend credit of $87 million
and stand-by letters of credit of $6 million compared to $78.9 million and $5.4
million, respectively, at December 31, 2006.
As of March 31, 2007, the Company also had a $1.7 million contractual obligation
related to the construction of our new branch office in Grosse Pointe, Michigan.
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,
2007:
Tier 1 capital $41,024
Total capital $45,256
Tier 1 capital to risk-weighted assets 10.13%
Total capital to risk-weighted assets 11.17%
16
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 our most recent 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 1% 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, 2006 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 March
31, 2007. 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. Michael J. Tierney, 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. Tierney 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, 2007.
17
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, 2006, 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.
ITEM 6. EXHIBITS
a. Exhibits
Exhibit 10.1 Form of Restricted Stock Agreement
Exhibit 31.1 Certification of Michael J. Tierney 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 Michael J. Tierney 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
18
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, 2007 /s/ Michael J. Tierney
----------------------------------------
Michael J. Tierney
President and Chief Executive Officer
Date: May 15, 2007 /s/ David A. Wilson
----------------------------------------
David A. Wilson
Chief Financial Officer
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EXHIBIT INDEX
Exhibit 10.1 Form of Restricted Stock Agreement
Exhibit 31.1 Certification of Michael J. Tierney 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 Michael J. Tierney 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