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, 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 3,072,002 shares of Common Stock outstanding as of September
30, 2007.
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 ...................................... 19
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 changed 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,
2007 2006
------------- ------------
ASSETS
Cash and cash equivalents $ 11,043 $ 13,950
Securities available for sale 50,565 63,748
Loans 418,420 398,344
Less allowance for possible loan loss (4,076) (4,257)
-------- --------
Net loans 414,344 394,087
Loans held for sale 2,486 3,693
Bank premises and equipment 13,529 12,731
Accrued interest receivable 2,547 2,776
Other assets 8,834 6,249
-------- --------
Total assets $503,348 $497,234
======== ========
LIABILITIES
Deposits:
Non-interest bearing $ 56,720 $ 59,320
Interest bearing 379,157 374,640
-------- --------
Total deposits 435,877 433,960
Short-term borrowings 20,000 16,875
Long-term debt 590 744
Accrued taxes, interest and other liabilities 4,809 1,409
-------- --------
Total liabilities 461,276 452,988
SHAREHOLDERS' EQUITY
Common stock - no par value - 5,000,000
authorized - 3,072,002 shares issued and
outstanding at September 30, 2007 and
3,034,152 at December 31, 2006 21,177 20,496
Unearned ESOP benefits (590) (744)
Additional paid in - Stock Options and Awards (515) (12)
Common stock held in trust (230) (230)
Deferred compensation obligation 230 230
Retained earnings 22,496 25,062
Accumulated other comprehensive (loss)/ income (496) (556)
-------- --------
Total shareholders' equity 42,072 44,246
-------- --------
Total liabilities and stockholders' equity $503,348 $497,234
======== ========
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2007 2006 2007 2006
------- ------- ------- -------
INTEREST INCOME:
Interest and fees on loans $ 7,312 $7,388 $22,550 $21,053
SECURITIES:
Taxable 377 548 1,190 1,714
Tax-exempt 259 308 798 963
Federal funds sold -- 9 10 49
------- ------ ------- -------
TOTAL INTEREST INCOME 7,948 8,253 24,548 23,779
INTEREST EXPENSE:
Deposits 3,617 3,409 10,617 9,483
Short-term borrowings 204 60 429 202
Long-term debt -- -- -- 70
------- ------ ------- -------
TOTAL INTEREST EXPENSE 3,821 3,469 11,046 9,755
------- ------ ------- -------
NET INTEREST INCOME 4,127 4,784 13,502 14,024
Provision for loan loss 2,525 605 4,485 1,084
------- ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 1,602 4,179 9,017 12,940
OTHER OPERATING INCOME:
Service charges on deposit accounts 588 572 1,765 1,705
Other income 274 724 1,519 2,264
------- ------ ------- -------
TOTAL OTHER INCOME 862 1,296 3,284 3,969
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,551 2,403 7,445 7,154
Occupancy costs 1,015 942 2,972 3,000
Legal and professional 305 222 944 801
Other operating expense 941 911 2,704 2,742
------- ------ ------- -------
TOTAL OTHER OPERATING EXPENSES 4,812 4,478 14,065 13,697
------- ------ ------- -------
INCOME - BEFORE FEDERAL INCOME TAXES (2,348) 997 (1,764) 3,212
Federal income taxes (874) 245 (853) 787
------- ------ ------- -------
NET INCOME $(1,474) $ 752 $ (911) $ 2,425
======= ====== ======= =======
BASIC EARNINGS PER WEIGHTED AVERAGE OUTSTANDING
SHARE OF COMMON STOCK $ (.48) $ .25 $ (.30) $ .80
======= ====== ======= =======
CASH DIVIDENDS PER SHARE $ .18 $ .18 $ .54 $ .54
======= ====== ======= =======
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2007 2006
----- ------
Net income $(911) $2,425
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax 60 (116)
----- ------
Comprehensive income $(851) $2,309
===== ======
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2007
(IN THOUSANDS, EXCEPT SHARE DATA)
Add'l Paid Common
Unearned in Capital - Stock Deferred Total
Common ESOP Stock Options Held in Comp. Retained Accumulated Shareholders'
Stock Benefits and Awards Trust Obligation Earnings OCI Equity
------- -------- ------------- ------- ---------- -------- ----------- -------------
Balance - December 31, 2006 $20,496 ($744) ($12) ($230) $230 $25,062 ($556) $44,246
Net Income ($911) ($911)
Change in unrealized gain on $60 $ 60
securities available for sale, net
of tax
Earned ESOP Benefit $154 $ 154
Restricted Stock Awards $ 681 $ 681
Add'l Paid in Capital-Stock
Options/Awards ($503) ($503)
Cash Dividends ($1,655) ($1,655)
------- ----- ----- ----- ---- ------- ----- -------
Balance - September 30, 2007 $21,177 ($590) ($515) ($230) $230 $22,496 ($496) $42,072
======= ===== ===== ===== ==== ======= ===== =======
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2007 2006
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 5,809 $ 5,312
CASH FLOW FROM INVESTING ACTIVITIES:
Net decrease in securities 13,227 21,619
Net increase in loans (24,742) (22,403)
Net decrease in loans held for sale 1,207 3,697
Capital expenditures (2,251) (1,190)
Proceeds on sale of fixed assets 456 590
-------- --------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES (12,103) 2,313
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 1,917 24,561
Net increase/(decrease) in short-term borrowings 3,125 (19,440)
Net decrease in long-term debt -- (5,000)
Cash dividends (1,655) (1,636)
-------- --------
NET CASH (USED IN)/ PROVIDED BY FINANCING ACTIVITIES 3,387 (1,515)
-------- --------
NET INCREASE/(DECREASE) IN CASH (2,907) 6,110
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 13,950 12,261
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 11,043 $ 18,371
======== ========
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 September 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 nine-month period ended September 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):
September 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 $31,627 $ 7 $(431) $31,203
Obligations of state and political subdivisions 17,657 4 (316) 17,345
Corporate debt securities 500 -- (15) 485
Other 1,532 -- -- 1,532
------- --- ----- -------
Total available-for-sale securities $51,316 $11 $(762) $50,565
======= === ===== =======
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 September 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 September 30,
2007, all securities are available for sale (000s omitted).
Available for Sale
-------------------
Amortized Market
Cost Value
--------- -------
Due in one year or less $12,581 $12,507
Due in one year through five years 5,423 5,367
Due after five years through ten years 10,566 10,387
Due after ten years 4,583 4,457
------- -------
33,153 32,718
Federal agency pools 16,631 16,315
Other 1,532 1,532
------- -------
Total $51,316 $50,565
======= =======
Securities having a carrying value of $14,996,403 (market value of $14,888,010)
were pledged at September 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 September 30, 2007 and
December 31, 2006 are as follows (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
Commercial Real Estate $252,194 $232,466
Residential Mortgages 95,293 103,343
Commercial - Other 61,800 51,827
Consumer 9,133 10,708
-------- --------
Total $418,420 $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
September 30, 2007, other real estate owned consisted of nine properties.
Management does not anticipate any material loss as the result of the disposal
of these properties. Non-performing loans have increased $15.8 million, or 205%
since December 31, 2006. The following table summarizes non-performing assets
(dollars in thousands):
September 30, December 31,
2007 2006
------------- ------------
Non-accrual loans $21,239 $3,069
Loans past due 90 or more days 1,267 4,148
Renegotiated loans 1,008 486
------- ------
Total non-performing loans 23,514 7,703
Other real estate owned 919 325
------- ------
Total non-performing assets $24,433 $8,028
======= ======
Total non-performing loans to total loans 5.62% 1.93%
Total non-performing assets to total assets 4.85% 1.61%
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 SEPTEMBER YEAR ENDED
30, 2007 DECEMBER 31, 2006
--------------- -----------------
Loan loss balance - Beginning of period $ 4,257 $ 3,670
Provision 4,485 1,839
Loan losses (5,014) (1,716)
Loan recoveries 348 464
------- -------
Loan loss balance - End of period $ 4,076 $ 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 11
banking offices and 3 mortgage offices. Our newest banking office opened
September 17, 2007, 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
13
through Vision Investment Services, Inc. Full-time representatives work at
various branch offices and offer a full range of investment products.
Substantially all of our deposits are from local market areas surrounding each
of our offices.
The consolidated financial statements include the accounts of PSB Group, Inc.
and its wholly owned subsidiaries, Peoples State Bank and PSB Capital, Inc. PSB
Insurance Agency, Inc. and Universal Mortgage Company are wholly owned
subsidiaries of Peoples State Bank. PSB Capital, Inc. was formed in October,
2004. Through September 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 September 30, 2007, the Company has recorded $179 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
$6 million, or 1.2% to $503 million at September 30, 2007 from $497 million at
December 31, 2006. The balance of our investment securities decreased by
approximately $13.2 million to $50.6 million at September 30, 2007 as compared
to $63.7 million at December 31, 2006. Our loan portfolio increased
approximately $20 million to $418.4 million at September 30, 2007. This was the
result of a $19.7 million increase in loans secured by commercial real estate
and an $10 million increase in other commercial loans, offset partially by an
$8.1 million decrease in residential real estate loans and a $1.6 million
decrease in consumer loans. Loans held for sale decreased $1.2 million to $2.5
million at September 30, 2007. All other assets increased approximately $3.2
million at September 30, 2007, compared to December 31, 2006. This includes a
$798 thousand increase in premises and equipment, due mainly to the construction
of the new branch. Also, our federal income taxes receivable, included in Other
Assets, increased $1.2 million since December 31, 2006.
During the first nine months of 2007, we have experienced net loan charge-offs
of $4.7 million. This compares to net loan charge-offs of $811 thousand for the
same period in 2006. In addition, we have seen a $15.8 million increase in
non-performing loans since December 31, 2006. Poor economic conditions in
Michigan, combined with collapse of the residential real estate market in
southeast Michigan have caused us to provide $4.5 million for loan losses this
year, $2.5 million of that in the third quarter alone. We have no exposure to
the sub-prime mortgage lending market but, through our commercial loan
portfolio, we have a number of relationships with residential real estate
developers who have encountered severe problems. During the third quarter, we
conducted an extensive examination of our loan portfolio and recorded the $2.5
million loan loss provision based on our credit reviews. Management believes the
loan loss reserve is sufficient to meet anticipated future loan losses. The
discussions set forth in "Note 3 - Loans" and "Note 4 - Allowance for Possible
14
Loan Losses" to the financial statements contained in this report are hereby
incorporated by this reference.
Total liabilities increased $8.3 million to $461.3 million at September 30, 2007
from $453 million at December 31, 2006. This was due in part to a $1.9 million
increase in total deposits to $435.9 million at September 30, 2007 from $434
million at December 31, 2006. We realized a $10.2 million increase in
certificates of deposit and a $3.2 million increase in savings balances. The
increases were partially offset by an $8.9 million drop in interest bearing
demand balances (NOW and Money Markets) and a $2.6 million drop in non-interest
bearing deposits. The increase in deposits was supplemented with a $3.0 million
increase in our borrowings, in funding our increase in total assets.
FINANCIAL RESULTS
Three Months Ended September 30, 2007
For the three months ended September 30, 2007, we realized a net loss of $1.5
million compared to net income of $752 thousand for the same period in 2006.
Total interest income decreased $305 thousand in the third quarter 2007 compared
to the third quarter 2006. Interest and fees on loans decreased $76 thousand in
the third quarter 2007 from the third quarter 2006. Interest on securities and
federal funds sold decreased $229 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 decrease in interest and fees on
loans in the third quarter 2007 compared to the third quarter 2006 was due
mainly to the increase in loans on non-accrual status. Average loan balances
increased $35.8 million between the two periods, but the positive impact of the
increased loan balances was more than offset by the negative impact of the
increase in loans on non-accrual status.
Interest expense increased $352 thousand in the third 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 $7.1 million higher in the third
quarter 2007 than they were in the third quarter 2006, and, we paid about 30
basis points more on this product in the third quarter 2007 than the third
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 $10.5 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 third quarter 2007 we recorded a $2.5 million provision for loan
losses compared to the $605 thousand provision in the third quarter 2006. This
large increase in our loan loss provision was necessary because of the $16.4
million increase in non-performing assets that we have experienced since
December 31, 2006.
Total other income was about $434 thousand lower in the third quarter 2007 than
the third quarter 2006. Lower mortgage related fees, including gains on the sale
of mortgages and mortgage servicing rights accounted for $232 thousand of this
decrease, and lower commercial loan broker fee income accounted for another $94
thousand of the decrease.
Total other operating expenses increased $334 thousand in the third quarter 2007
over the same period in 2006. Salaries and benefits accounted for $148 thousand
of this increase. Increased
15
medical and dental costs accounted for $148 thousand of this increase with
higher salaries expense accounting for $94 thousand and higher bonus and
incentive accruals, including stock awards and stock options, accounting for
another $31 thousand. These compensation increases were partially offset by a
$122 thousand drop in mortgage related commissions, Occupancy expenses were $73
thousand higher in the third quarter 2007 than the third quarter 2006. This
increase is due in a large part to the opening of our two newest branches, and
was partially offset by savings realized from the closing of a bank branch and
three mortgage origination offices. Legal and professional fees are up $83
thousand in the third quarter 2007 from the third quarter 2006. Other operating
expenses increased $30 thousand in the third quarter 2007 over the third quarter
2006.
Nine Months Ended September 30, 2007
We realized a net loss of $911 thousand for the nine months ended September 30,
2007, compared to net income of $2.4 million for the same period in 2006. Total
interest income increased $769 thousand in the first nine months of 2007
compared to the first nine months of 2006. Interest and fees on loans increased
$1.5 million. 2007 year to date average loan balances increased $35.8 million
over the 2006 averages. Much of the positive impact of this increase in average
loan balances was lost due to our increased loan charge-offs and the increase in
loans placed on non-accrual status during the year. Interest income on
investment securities decreased $728 thousand in the first nine months of 2007
over the first nine months of 2006. Our average investment in securities and
federal funds sold is about $29 million lower so far in 2007 than it was in the
first nine months of 2006, but we increased our yield by approximately 31 basis
points helping to mitigate the loss of income. Funds from maturing securities
were re-invested in higher yielding loans.
Total interest expense increased $1.3 million in the first nine months of 2007
compared to the same period in 2006. Approximately $1.4 million of the increase
is due to our certificates of deposit. Our average balance in certificates of
deposit in the first nine months of 2007 is $18.6 million higher than it was in
the first nine months of 2006. In addition, we paid on average, 52 basis points
more on these deposits so far in 2007 than we did in the first nine months of
2006. The increase in interest expense on certificates of deposit was partially
offset by a combined $232 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. In addition, we paid about $157 thousand more in
interest on borrowings during the first nine months of 2007 than during the same
period in 2006, as we increased our average borrowings by $2.8 million in 2007.
During the first nine months of 2007, we experienced a $15.8 million increase in
our non-performing loans. A detailed analysis of our loan portfolio determined
that we should record a $4.5 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 current year net charge-offs, the growth in
non-performing loans and the overall growth in the loan portfolio. This compares
to a $1.1 million provision recorded in the first nine months of 2006.
Total other income was about $685 thousand lower in the first nine months of
2007 than the first nine months of 2006. Deposit service charges remained
relatively consistent between the two periods, increasing $60 thousand in 2007.
Other non-interest income decreased $745 thousand, comparing the first nine
months of 2007 to the first nine months of 2006. This included a $212 thousand
decrease in commercial loan fees, a $312 thousand drop in the gains on the sale
of mortgages and a
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$118 thousand decrease in other mortgage related fee income, which is mainly due
to an overall drop in mortgage loan volume.
Total operating expenses increased $368 thousand in the first nine months of
2007 compared to the first nine months of 2006. Total salary and benefits
expense increased $291 thousand. This includes a $353 thousand increase in
accrued bonuses and incentives, as new incentive programs were instituted, a
$136 thousand increase medical and dental costs and a $113 thousand increase in
salaries expense. This increase was partially offset by a $283 thousand decrease
in loan related commissions. Occupancy costs decreased $28 thousand compared to
the 2006 level. The additional occupancy costs associated with our two new
branch offices has been offset by the cost savings related to the branch and
mortgage offices that were closed, including a $67 thousand gain on the sale of
the closed branch. Year-to-date legal and professional fees increased $143
thousand over 2006 partly due to costs associated with our plan to go private.
This plan has been put on hold for the present time. Other operating expenses
decreased $38 thousand in the first nine months of 2007 over the first nine
months of 2006.
LIQUIDITY
The Company manages its liquidity position with the objective of maintaining
sufficient funds to respond to the needs of depositors and borrowers and to take
advantage of earnings enhancement opportunities. In addition to the normal
inflow of funds from core deposit growth, together with repayments and
maturities of loans and investments, the Company utilizes other short-term
funding sources such as Federal Home Loan Bank advances and overnight federal
funds purchases from correspondent banks.
During the nine months ended September 30, 2007, $5.8 million in cash was
provided by operations. This, plus $1.9 million in cash provided through
increased deposits, $14.4 million from the pay-down of loans held for sale and
investment securities, a $3.1 million increase in short-term borrowings and a
$456 thousand increase in cash resulting from the sale of the closed branch
facility, was used to increase our loan portfolio by $24.7 million and purchase
$2.5 million in capital assets. In addition, we paid $1.7 million in cash
dividends during the period. During the nine months ended September 30, 2007, we
experienced a net decrease of approximately $2.9 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, 2007, the Company had commitments to extend credit of $72.2
million and stand-by letters of credit of $5.4 million compared with $78.9
million and $5.4 million, respectively, at December 31, 2006.
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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, 2007:
Tier 1 capital $38,393
Total capital $42,469
Tier 1 capital to risk-weighted assets 9.25%
Total capital to risk-weighted assets 10.23%
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.
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ITEM 4: CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. We evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of
September 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 September 30, 2007.
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.
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ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
a. Exhibits
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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSB GROUP, INC.
Date: November 14, 2007 /s/ Michael J. Tierney
----------------------------------------
MICHAEL J. TIERNEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 14, 2007 /s/ David A. Wilson
----------------------------------------
DAVID A. WILSON
CHIEF FINANCIAL OFFICER
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EXHIBIT INDEX
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
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