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, 2007 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 3,073,802 shares of Common Stock outstanding as of August 13,
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 ....................................... 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,
2007 2006
-------- ------------
ASSETS
Cash and cash equivalents $ 12,150 $ 13,950
Securities available for sale 60,994 63,748
Loans 417,296 398,344
Less allowance for possible loan loss (5,865) (4,257)
-------- --------
Net loans 411,431 394,087
Loans held for sale 864 3,693
Bank premises and equipment 12,681 12,731
Accrued interest receivable 2,753 2,776
Other assets 6,583 6,249
-------- --------
Total assets $507,456 $497,234
======== ========
LIABILITIES
Deposits:
Non-interest bearing $ 60,129 $ 59,320
Interest bearing 393,270 374,640
-------- --------
Total deposits 453,399 433,960
Short-term borrowings 8,980 16,875
Long-term debt 590 744
Accrued taxes, interest and other liabilities 1,008 1,409
-------- --------
Total liabilities 463,977 452,988
SHAREHOLDERS' EQUITY
Common stock - no par value - 5,000,000
authorized - 3,073,802 shares issued and
outstanding at June 30, 2007 and 3,034,152 at
December 31, 2006 21,210 20,496
Unearned ESOP benefits (590) (744)
Additional paid in Capital - Stock (617) (12)
Options/Awards
Common stock held in trust (230) (230)
Deferred compensation obligation 230 230
Retained earnings 24,523 25,062
Accumulated other comprehensive loss (1,047) (556)
-------- --------
Total shareholders' equity 43,479 44,246
-------- --------
Total liabilities and stockholders' equity $507,456 $497,234
======== ========
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------- -----------------
2007 2006 2007 2006
------ ------ ------- -------
INTEREST INCOME:
Interest and fees on loans $7,644 $7,008 $15,238 $13,665
SECURITIES:
Taxable 397 574 813 1,166
Tax-exempt 269 329 539 655
Federal funds sold 10 12 10 40
------ ------ ------- -------
TOTAL INTEREST INCOME 8,320 7,923 16,600 15,526
INTEREST EXPENSE:
Deposits 3,603 3,205 7,000 6,074
Short-term borrowings 91 47 225 142
Long-term debt -- 15 -- 70
------ ------ ------- -------
TOTAL INTEREST EXPENSE 3,694 3,267 7,225 6,286
------ ------ ------- -------
NET INTEREST INCOME 4,626 4,656 9,375 9,240
Provision for loan losses 1,840 291 1,960 479
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 2,786 4,365 7,415 8,761
OTHER OPERATING INCOME:
Service charges on deposit accounts 610 585 1,177 1,133
Other income 557 766 1,245 1,540
------ ------ ------- -------
TOTAL OTHER INCOME 1,167 1,351 2,422 2,673
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,499 2,284 4,894 4,751
Occupancy costs 908 998 1,957 2,058
Legal and professional 316 272 639 579
Other operating expense 873 900 1,763 1,831
------ ------ ------- -------
TOTAL OTHER OPERATING EXPENSES 4,596 4,454 9,253 9,219
------ ------ ------- -------
INCOME - BEFORE FEDERAL INCOME TAXES (643) 1,262 584 2,215
Federal income tax (benefit) (304) 324 21 542
------ ------ ------- -------
NET INCOME (LOSS) $ (339) $ 938 $ 563 $ 1,673
====== ====== ======= =======
BASIC EARNINGS (LOSS) PER WEIGHTED AVERAGE
OUTSTANDING SHARE OF COMMON STOCK $ (.11) $ .31 $ .18 $ .55
====== ====== ======= =======
CASH DIVIDENDS PER SHARE $ .18 $ .18 $ .36 $ .36
====== ====== ======= =======
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
SIX MONTHS
ENDED
JUNE 30,
--------------
2007 2006
----- ------
Net income $ 563 $1,673
Other comprehensive loss:
Change in unrealized loss on securities
available for sale, net of tax (491) (582)
----- ------
Comprehensive income $ 72 $1,091
===== ======
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2007
(IN THOUSANDS, EXCEPT SHARE DATA)
Common
Unearned Add'l Paid Stock Deferred Total
Common ESOP in Capital - Held in Comp. Retained Accumulated Shareholders'
Stock Benefits Stk Options Trust Obligation Earnings OCI Equity
------- -------- ------------ ------- ---------- -------- ----------- -------------
Balance - December 31, 2006 $20,496 ($744) ($12) ($230) $230 $ 25,062 ($556) $ 44,246
Net Income $ 563 $ 563
Change in unrealized loss on ($491) ($491)
securities available for sale, net
of tax
Earned ESOP Benefit $154 $ 154
Restricted Stock Awards $ 714 $ 714
Add'l Paid in Capital-Stock ($605) ($605)
Options/Awards
Cash Dividends ($1,102) ($1,102)
------- ----- ----- ----- ---- -------- ------- --------
Balance - June 30, 2007 $21,210 ($590) ($617) ($230) $230 $ 24,523 ($1,047) $ 43,479
======= ===== ===== ===== ==== ======== ======= ========
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
SIX MONTHS ENDED
JUNE 30,
-------------------
2007 2006
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 2,826 $ 4,028
CASH FLOW FROM INVESTING ACTIVITIES:
Net decrease in securities 1,999 3,436
Net increase in loans (19,304) (16,087)
Net decrease in loans held for sale
2,829 4,591
Capital expenditures (1,048) (452)
Proceeds on sale of fixed assets 456 496
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (15,068) (8,016)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 19,439 22,349
Net decrease in short-term borrowings (7,895) (12,215)
Net decrease in long-term debt -- (5,000)
Cash dividends (1,102) (1,090)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,442 4,044
-------- --------
NET INCREASE/(DECREASE) IN CASH (1,800) 56
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 13,950 12,261
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 12,150 $ 12,317
======== ========
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 June 30, 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 six-month period ended June 30, 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):
June 30, 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 $32,632 $ 3 $ (773) $31,862
Obligations of state and
political subdivisions 27,916 5 (811) 27,110
Corporate debt securities 500 -- (10) 490
Other 1,532 -- -- 1,532
------- --- ------- -------
Total available-for-sale securities $62,580 $ 8 $(1,594) $60,994
======= === ======= =======
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 June 30, 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 June 30, 2007,
all securities are available for sale (000s omitted).
Available for Sale
-------------------
Amortized Market
Cost Value
--------- -------
Due in one year or less $10,374 $10,263
Due in one year through five years 8,694 8,502
Due after five years through ten years 17,039 16,547
Due after ten years 7,303 7,040
------- -------
43,410 42,352
Federal agency pools 17,638 17,110
Other 1,532 1,532
------- -------
Total $62,580 $60,994
======= =======
Securities having a carrying value of $5,005,029 (market value of $4,875,525)
were pledged at June 30, 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 June 30, 2007 and
December 31, 2006 are as follows (dollars in thousands):
JUNE 30, DECEMBER 31,
2007 2006
-------- ------------
Commercial Real Estate $249,960 $232,466
Residential Mortgages 97,615 103,343
Commercial - Other 60,054 51,827
Consumer 9,667 10,708
-------- --------
Total $417,296 $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 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, 2007, other real estate owned consisted of four properties. Management does
not anticipate any material loss as the result of the disposal of these
properties. Non-performing loans have increased $6.6 million, or 86% since
December 31, 2006. The following table summarizes non-performing assets (dollars
in thousands):
June 30, December 31,
2007 2006
-------- ------------
Non-accrual loans $11,860 $3,069
Loans past due 90 or more days 2,076 4,148
Renegotiated loans 392 486
------- ------
Total non-performing loans 14,328 7,703
Other real estate owned 550 325
------- ------
Total non-performing assets $14,878 $8,028
======= ======
Total non-performing loans to total loans 3.43% 1.93%
Total non-performing assets to total assets 2.93% 1.61%
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,
2007 2006
-------- ------------
Loan loss balance - Beginning of period $4,257 $$ 3,670
Provision 1,960 1,839
Loan losses (534) (1,716)
Loan recoveries 182 464
------ --------
Loan loss balance - End of period $5,865 $ 4,257
====== ========
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, 3 mortgage offices with an additional banking office under
construction in Grosse Pointe Woods, 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, 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.
Through June 30, 2007, the Company has recorded $108 thousand in share based
compensation expense.
FINANCIAL CONDITION
Company assets consist of loans, investment securities, bank premises and
equipment, cash and other operating assets. Total assets increased approximately
$10 million, or 2% to $507 million at June 30, 2007 from $497 million at
December 31, 2006. The balance of our investment securities decreased by
approximately $2.7 million to $61.0 million at June 30, 2007 as compared to
$63.7 million at December 31, 2006. Our loan portfolio increased approximately
$19 million to $417.3 million at June 30, 2007. This was the result of an $11.8
million increase in loans secured by real estate and an $8.2 million increase in
other commercial loans, offset partially by a $1 million decrease in consumer
loans. Loans held for sale decreased $2.8 million to $864 thousand at June 30,
2007. All other assets increased approximately $261 thousand at June 30, 2007,
compared to December 31, 2006.
The allowance for loan losses was increased $1.6 million during the first six
months of 2007. As a percentage of total loans, the allowance increased to 1.41%
from 1.07%. The increase in the allowance for loan losses is a result of the
increase in non-performing loans that we have experienced since 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 $11 million to $464 million at June 30, 2007 from
$453 million at December 31, 2006. This was mainly due to a $19.4 million, or
4.5% increase in total deposits to $453.4 million at June 30, 2007 from $434
million at December 31, 2006. We realized a $24.3 million increase in
certificates of deposit, a $4.0 million increase in savings balances and an $800
thousand increase in non-interest bearing demand balances. The increases were
partially offset by a $9.7 million drop in interest bearing demand balances (NOW
and Money Markets). The increase in deposits was offset by an $8.1 million
decrease in our borrowings, in funding our $10 million increase in total assets.
14
FINANCIAL RESULTS
Three Months Ended June 30, 2007
For the three months ended June 30, 2007, we realized a net loss of $339
thousand compared to net income of $938 thousand for the same period in 2006.
Total interest income increased $397 thousand in the second quarter 2007
compared to the second quarter 2006. Interest and fees on loans increased $636
thousand in the second quarter 2007 over the second quarter 2006. Interest on
securities and federal funds sold decreased $239 thousand for the same period,
as the investment portfolio was allowed to run-off. Proceeds from maturing
securities were invested in higher yielding loans. The increase in interest and
fees on loans in the second quarter 2007 compared to the second quarter 2006 was
due mainly to higher average loan balances. Average loan balances increased
$34.3 million between the two periods.
Interest expense increased $427 thousand in the second quarter 2007 as compared
to the same period in 2006. The increased interest expense is due mainly to
higher balances and higher rates paid on our certificates of deposit. Average
certificates of deposit balances are about $21.6 million higher in the second
quarter 2007 than they were in the second quarter 2006, and, we paid about 53
basis points higher on this product in the second quarter 2007 than the second
quarter 2006. The increase in interest expense on certificates of deposit was
partially offset by the fact that average interest bearing demand balances and
average savings balances dropped a combined $22.5 million for the same period as
customers traded in the liquidity of the demand and savings accounts for the
higher yielding certificates of deposit.
During the second quarter 2007 we recorded a $1.8 million provision for loan
losses compared to the $291 thousand provision in the second quarter 2006. This
large increase in our loan loss provision was necessary because of the $6.6
million increase in non-performing loans that we have experienced since December
31, 2006.
Total other income was about $184 thousand lower in the second quarter 2007 than
the second quarter 2006. Lower gains on the sale of mortgages and mortgage
servicing rights accounted for $93 thousand of this decrease and lower
commercial loan broker fee income accounted for another $45 thousand of the
decrease.
Total other operating expenses increased $142 thousand in the second quarter
2007 over the same period in 2006. Salaries and benefits accounted for $215
thousand of this increase. Higher bonus and incentive accruals, including stock
awards and stock options, accounted for $143 thousand of this, as new incentive
programs were instituted. Occupancy expenses were $90 thousand lower in the
second quarter 2007 than the second quarter 2006. This decrease is due in a
large part to the closing of a bank branch and three mortgage origination
offices in an effort to improve efficiency. Legal and professional fees are up
$44 thousand in the second quarter 2007 from the second quarter 2006. Other
operating expenses decreased $27 thousand in the second quarter 2007 over the
second quarter 2006.
Six Months Ended June 30, 2007
Net income for the six months ended June 30, 2007 was $563 thousand compared to
$1.7 million for the same period in 2006. Total interest income increased $1.1
million in the first six months of 2007 compared to the first six months of
2006. Interest and fees on loans increased $1.6 million. 2007 year to date
average loan balances increased $34.5 million over the 2006 averages. This
increase,
15
and the 15 basis point increase in yield accounted for the increase in interest
and fees on loans. Interest income on investment securities decreased $499
thousand in the first half of 2007 over the first half of 2006. Our average
investment in securities and federal funds sold is about $30.5 million lower so
far in 2007 than it was in the first half of 2006, but we increased our yield by
approximately 34 basis points helping to mitigate the loss of income. Funds from
maturing securities were re-invested in higher yielding loans.
Total interest expense increased $939 thousand in the first six months of 2007
compared to the same period in 2006. Approximately $1.1 million of the increase
is due to our certificates of deposit. Our average balance in certificates of
deposit in the first half of 2007 is $24.3 million higher than it was in the
first half of 2006. In addition, we paid on average, 63 basis points higher on
these deposits so far in 2007 than we did in the first half of 2006. The
increase in interest expense on certificates of deposit was partially offset by
a combined $211 thousand decrease in interest expense on interest bearing demand
balances and savings balances. Again, customers were trading in the liquidity of
the demand and savings balances for the higher yielding certificates of deposit.
During the first half of 2007, we experienced a $6.6 million increase in our
non-performing loans. A detailed analysis of our loan portfolio determined that
we should record a $1.96 million 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 half net charge-offs, the growth in non-performing
loans and the overall growth in the loan portfolio. This compares to a $479
thousand provision recorded in the first half of 2006.
Total other income was about $251 thousand lower in the first half of 2007 than
the first half of 2006. Deposit service charges remained relatively consistent
between the two periods, increasing $44 thousand in 2007. Other non-interest
income decreased $295 thousand, comparing the first half of 2007 to the first
half of 2006. This included a $125 thousand decrease in commercial loan fees and
a $141 thousand drop in the gains on the sale of mortgages, which is mainly due
to an overall drop in mortgage loan volume. The decreases were partially offset
by a $54 thousand increase in the gain on the sale of securities.
Total operating expenses increased $34 thousand in the first six months of 2007
compared to the first six months of 2006. Total salary and benefits expense
increased $143 thousand. This includes a $322 thousand increase in accrued
bonuses and incentives, as new incentive programs were instituted. This increase
was partially offset by a $239 thousand decrease in net loan related
commissions. Occupancy costs decreased $101 thousand compared to the 2006 level.
Lower janitorial and maintenance costs accounted for $82 thousand of this
decrease, with $48 thousand of that due to lower snow removal costs resulting
from the milder winter. Another $40 thousand was due to a gain realized on the
sale of the branch that we closed. Year-to-date legal and professional fees
increased $60 thousand over 2006. Other operating expenses decreased $68
thousand in the first half of 2007 over the first half of 2006. Postage expense
decreased $21 thousand and stationery and supplies expense decreased $34
thousand. Advertising expense decreased $113 thousand from the 2006 level due to
the fact that many of our 2006 advertising programs were scheduled for the first
half of the year. Partially offsetting these decreases is a $50 thousand loss
that we suffered in a robbery.
16
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 six months ended June 30, 2007, $2.8 million in cash was provided by
operations. This, plus $19.4 million in cash provided through increased deposits
and $4.8 million from the pay-down of loans held for sale and investment
securities was used to increase our loan portfolio by $19.3 million and pay-down
our short-term borrowings by $7.9 million. In addition, we paid $1.1 million in
cash dividends during the period. During the six months ended June 30, 2007, we
experienced a net decrease of approximately $1.8 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 June 30, 2007, the Company had commitments to extend credit of $64.4 million
and stand-by letters of credit of $5.3 million compared with $78.9 million and
$5.4 million, respectively, at December 31, 2006.
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,
2007:
Tier 1 capital $40,303
Total capital $45,461
Tier 1 capital to risk-weighted assets 9.77%
Total capital to risk-weighted assets 11.02%
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
17
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 June
30, 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 June 30, 2007.
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, 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
a. The Annual Meeting of Shareholders was held on April 24, 2007.
b. At that meeting, the shareholders approved the following matters:
PROPOSAL 1: ELECTION OF DIRECTORS
That Michael J. Tierney be elected as Director of PSB Group, Inc. for
a term expiring at the annual meeting of shareholders in 2010.
For - 2,405,483
Withheld - 75,791
That David L. Wood be elected as Director of PSB Group, Inc. for a
term expiring at the annual meeting of shareholders in 2010.
For - 2,438,877
Withheld - 42,122
19
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 2007.
For - 2,439,727
Against - 17,294
Abstain - 24,252
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
a. Exhibits
Exhibit 10.1 Management Continuity Agreement with Gary D. Forhan
Exhibit 10.2 Management Continuity Agreement with Vincent J. Szymborski
Exhibit 10.3 PSB Executive Bonus Compensation Plan - 2007 (incorporated by
reference from current report on Form 8-K filed on May 30, 2007)
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
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.
/s/ MICHAEL J. TIERNEY
Date: August 14, 2007 -------------------------------------
MICHAEL J. TIERNEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ DAVID A. WILSON
Date: August 14, 2007 -------------------------------------
DAVID A. WILSON
CHIEF FINANCIAL OFFICER
21
EXHIBIT INDEX
Exhibit 10.1 Management Continuity Agreement with Gary D. Forhan
Exhibit 10.2 Management Continuity Agreement with Vincent J. Szymborski
Exhibit 10.3 PSB Executive Bonus Compensation Plan - 2007 (incorporated by
reference from current report on Form 8-K filed on May 30, 2007)
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
22