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, 2008 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, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 or the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a small reporting company)
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 3,212,843 shares of Common Stock outstanding as of
May 15, 2008.
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 ......................................... 15
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ... 20
ITEM 4T: CONTROLS AND PROCEDURES ..................................... 21
PART II. - OTHER INFORMATION ............................................ 22
Item 1. Legal Proceedings ............................................ 22
Item 1A. Risk Factors ................................................ 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .. 22
Item 3. Defaults Upon Senior Securities .............................. 22
Item 4. Submission of Matters to a Vote of Security Holders .......... 22
Item 5. Other Information ............................................ 22
Item 6. Exhibits ..................................................... 22
SIGNATURES ........................................................... 23
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 Company adopted
Statement of Financial Standard No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142), which changes the Company'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
(in thousands, except share data)
MARCH 31,
2008 DECEMBER 31,
(unaudited) 2007
----------- ------------
ASSETS
Cash and cash equivalents $ 11,763 $ 11,141
Federal Funds Sold -- 1,621
Securities available for sale 61,764 64,115
Loans 383,074 389,312
Less allowance for possible loan loss (5,204) (5,184)
-------- --------
Net loans 377,870 384,128
Loans held for sale 2,390 882
Bank premises and equipment 13,160 13,358
Accrued interest receivable 2,277 2,344
Other real estate owned 8,953 5,996
Other assets 8,352 8,686
-------- --------
Total assets $486,529 $492,271
======== ========
LIABILITIES
Deposits:
Non-interest bearing $ 62,500 $ 59,028
Interest bearing 362,969 379,482
-------- --------
Total deposits 425,469 438,510
Short-term borrowings 3,595 10,000
Long-term debt 15,436 590
Accrued taxes, interest and other liabilities 1,963 2,980
-------- --------
Total liabilities 446,463 452,080
SHAREHOLDERS' EQUITY
Common stock - no par value - 5,000,000
authorized - 3,212,843 shares issued and
outstanding at March 31, 2008 and 3,072,002 at
December 31, 2007 22,424 21,177
Unearned ESOP benefits (436) (590)
Common stock held in trust (410) (230)
Deferred compensation obligation 410 230
Additional paid in capital - stock options/awards (531) (441)
Retained earnings 18,486 20,113
Accumulated other comprehensive income/(loss) 123 (68)
-------- --------
Total shareholders' equity 40,066 40,191
-------- --------
Total liabilities and stockholders' equity $486,529 $492,271
======== ========
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
------------------
2008 2007
------- ------
INTEREST INCOME:
Interest and fees on loans $ 6,714 $7,594
SECURITIES:
Taxable 646 416
Tax-exempt 102 270
Federal funds sold 5 --
------- ------
TOTAL INTEREST INCOME 7,467 8,280
INTEREST EXPENSE:
Deposits 2,969 3,397
Interest on borrowings 160 134
------- ------
TOTAL INTEREST EXPENSE 3,129 3,531
------- ------
NET INTEREST INCOME 4,338 4,749
Provision for loan loss 2,063 120
------- ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,275 4,629
OTHER OPERATING INCOME:
Service charges on deposit accounts 551 567
Gain on the sale of investment securities 187 --
Other income 577 688
------- ------
TOTAL OTHER INCOME 1,315 1,255
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,653 2,395
Occupancy costs 917 1,049
Legal and professional 397 323
Other operating expense 1,942 890
------- ------
TOTAL OTHER OPERATING EXPENSES 5,909 4,657
------- ------
INCOME (LOSS) - BEFORE FEDERAL INCOME TAX
(BENEFIT) EXPENSE (2,319) 1,227
Federal income tax (benefit) expense (816) 325
------- ------
NET (LOSS) INCOME $(1,503) $ 902
======= ======
EARNINGS (LOSS) PER AVERAGE OUTSTANDING SHARE OF
COMMON STOCK - BASIC $ (0.49) $ 0.30
======= ======
FULLY DILUTED (0.49) 0.30
======= ======
CASH DIVIDEND PER SHARE $ 0.04 $ 0.18
======= ======
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
------------------
2008 2007
------- ------
Net (loss) income $(1,503) $ 902
Other comprehensive income:
Change in unrealized gain on securities
available for sale, net of tax 191 120
------- ------
Comprehensive (loss) income $(1,312) $1,022
======= ======
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2008
(IN THOUSANDS, EXCEPT SHARE DATA)
Unearned Common Deferred Add'l Paid in Total
Common ESOP Stock Comp. Capital - Stock Retained Accumulated Shareholders'
Stock Benefits Held in Trust Obligation Options/Awards Earnings OCI Equity
------- -------- ------------- ---------- --------------- -------- ----------- -------------
Balance - December 31, 2007 $21,177 ($590) ($230) $230 ($441) $20,113 ($68) $40,191
Net loss (1,503) (1,503)
Change in unrealized gain 191 191
on securities available
for sale, net of tax
Earned ESOP Benefit 154 154
Restricted Stock Awards 285 285
Sale of common stock 962 962
Stock Options/Awards espense (90) (90)
Purchase of stock by Trust (180) (180)
Deferred compensation 180 180
Cash dividends (124) (124)
------- ----- ----- ---- ----- ------- ---- -------
Balance - March 31, 2008 $22,424 ($436) ($410) $410 ($531) $18,486 $123 $40,066
======= ===== ===== ==== ===== ======= ==== =======
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
-------------------
2008 2007
-------- --------
NET CASH PROVIDED BY (USED) IN OPERATING ACTIVITIES: $ (2,894) $ 1,568
CASH FLOW FROM INVESTING ACTIVITIES:
Net decrease in securities 2,839 813
Net (increase) decrease in loans 4,195 (11,047)
Net (increase) decrease in loans held for sale (1,508) 2,369
Capital expenditures (118) (245)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,408 (8,110)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (13,041) 15,804
Net decrease in short-term borrowings (6,405) (8,875)
Net increase in long-term debt 15,000 --
Issuance of common stock 1,057 --
Cash dividends (124) (549)
-------- --------
NET CASH (USED IN ) PROVIDED BY FINANCING ACTIVITIES (3,513) 6,380
-------- --------
NET DECREASE IN CASH (999) (162)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 12,762 13,950
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 11,763 $ 13,788
======== ========
SUPPLEMENTAL INFORMATION - Cash paid (received) for:
Interest 3,163 3,496
Taxes (716) --
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, 2007 and notes thereto included in PSB Group, Inc.'s
Form 10-K filed with the Securities and Exchange Commission on March 24, 2008.
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, 2008 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, 2008 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, 2008
-----------------------------------------------
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 $50,151 $491 $186 $50,456
Obligations of state and political subdivisions 9,394 14 132 9,276
Corporate debt securities 500 -- -- 500
Other 1,532 -- -- 1,532
------- ---- ---- -------
Total available-for-sale securities $61,577 $505 $318 $61,764
======= ==== ==== =======
9
NOTE 2 - SECURITIES (CONTINUED)
December 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 $48,147 $ 167 $161 $48,153
Obligations of state and political
subdivisions 14,039 12 111 13,940
Corporate debt securities 500 -- 10 490
Other 1,532 -- -- 1,532
------- ------- ---- -------
Total available-for-sale securities $64,218 $ 179 $282 $64,115
======= ======= ==== =======
The amortized cost and estimated market value of securities at March 31, 2008,
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, 2008,
all securities are available for sale (000s omitted).
Available for Sale
-------------------
Amortized Market
Cost Value
--------- -------
Due in one year or less $ 5,084 $ 5,093
Due in one year through five years 1,774 1,793
Due after five years through ten years 2,615 2,621
Due after ten years 8,624 8,498
------- -------
18,097 18,005
Federal agency pools 41,948 42,227
Other 1,532 1,532
------- -------
Total $61,577 $61,764
======= =======
Securities having a carrying value of $16,267,000 (market value of $16,403,000)
were pledged at March 31, 2008 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, 2008 and
December 31, 2007 are as follows (dollars in thousands):
MARCH 31, DECEMBER 31,
2008 2007
--------- ------------
Commercial Real Estate $239,070 $242,762
Residential Mortgages 76,883 77,879
Commercial 59,537 59,945
Consumer 7,584 8,726
-------- --------
Total $383,074 $389,312
======== ========
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, 2008, other real estate owned consisted of 54 properties. Other real
estate is carried on the books at the lower of fair value less the estimated
cost to sell, or the carrying amount of the loan at the date of foreclosure.
Non-performing loans have decreased $4.6 million, or 22% since December 31,
2007. The following table summarizes non-performing assets (dollars in
thousands):
March 31, December 31,
2008 2007
--------- ------------
Non-accrual loans $13,520 $18,245
Loans past due 90 or more days 507 1,280
Restructured debt 2,226 1,347
------- -------
Total non-performing loans 16,253 20,872
Other real estate owned 8,953 5,996
------- -------
Total non-performing assets $25,206 $26,868
======= =======
Total non-performing loans to total loans 4.24% 5.36%
Total non-performing assets to total assets 5.18% 5.46%
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, 2008 DECEMBER 31, 2007
------------------ -----------------
Loan loss balance - Beginning of period $ 5,184 $ 4,257
Provision 2,063 7,663
Charge-offs (2,075) (7,185)
Recoveries 32 449
------- -------
Loan loss balance - End of period $ 5,204 $ 5,184
======= =======
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.
NOTE 5 - FAIR VALUE MEASUREMENTS
The following tables contain information about the Company's assets and
liabilities measured at fair value on a recurring basis at March 31, 2008, and
the valuation techniques used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that the Company has the ability to
access.
Fair values determined by Level 2 inputs use other inputs that are observable,
either directly or indirectly. These Level 2 inputs include quoted prices for
similar assets and liabilities in active markets, and other inputs such as
interest rates and yield curves that are observable at commonly quoted
intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset
or liability.
In instances where inputs used to measure fair value fall into different levels
in the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company's assessment of the significance of particular inputs to
these fair value measurements requires judgment and considers factors specific
to each asset or liability.
12
Disclosures concerning assets and liabilities at fair value are as follows:
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A
RECURRING BASIS AT MARCH 31, 2007
(DOLLARS IN THOUSANDS)
SIGNIFICANT
OTHER SIGNIFICANT
QUOTED PRICES IN ACTIVE OBSERVABLE UNOBSERVABLE
MARKETS FOR IDENTICAL INPUTS INPUTS BALANCE AT
ASSETS (LEVEL 1) (LEVEL 2) (LEVEL 3) MARCH 31, 2008
----------------------- ----------- ------------ --------------
ASSETS
Investment securities
available-for-sale $-- $60,983 $781 $61,764
CHANGES IN LEVEL 3 ASSETS AND LIABILITIES MEASURED
AT FAIR VALUE ON A RECURRING BASIS
(DOLLARS IN THOUSANDS)
INVESTMENT
SECURITIES - AVAILABLE-
FOR-SALE
-----------------------
Balance at December 31, 2007 $795
Total realized and unrealized gains (losses) included in income --
Total unrealized gains (losses) included in other comprehensive income 11
Net purchases, sales, calls and maturities (25)
Net transfers in/out of Level 3 --
----
Balance at March 31, 2008 $781
INVESTMENT SECURITIES AVAILABLE FOR SALE. Investment securities available for
sale are recorded at fair value on a recurring basis. Fair value measurement is
based upon quoted prices for similar assets, if available. If quoted prices are
not available, fair values are measured using matrix pricing models, or other
model-based valuation techniques requiring observable inputs other than quoted
prices such as yield curves, prepayment speeds, and default rates. Recurring
Level 1 securities would include U.S. Treasury securities that are traded by
dealers or brokers in active over-the-counter markets. Recurring Level 2
securities include U.S. government agency securities, U.S. government sponsored
agency securities, mortgage-backed securities, collateralized mortgage
obligations and municipal bonds. Where level 1 or Level 2 inputs are not
available, securities are classified within Level 3 of the hierarchy. Changes in
fair market value are recorded in other comprehensive income as the securities
are available for sale.
Of the level 3 assets that were still held by the Company at March 31, 2008,
there was an unrealized gain of $11 thousand, which is recognized in other
comprehensive income in the consolidated
13
balance sheet. There were no gains or losses realized through the income
statement for these assets during the three months ended March 31, 2008.
Both observable and unobservable inputs may be used to determine the fair value
of positions classified as Level 3 assets and liabilities. As a result, the
unrealized gains and losses for these assets and liabilities presented in the
tables above may include changes in the fair value that were attributable to
both observable and unobservable inputs.
Available-for-sale investment securities categorized as Level 3 assets consist
of bonds issued by local municipalities and a trust preferred investment issued
by a local area bank holding company. The Company estimates fair value of these
investments on the present value of expected future cash flows using
management's best estimate of key assumptions.
The Company also has assets that under certain conditions are subject to
measurement at fair value on a non-recurring basis. These assets are impaired
loans accounted for under FAS 114. The Company has estimated the fair value of
these assets using Level 3 inputs, including discounted cash flow projections
and estimated realizable value of the underlying collateral (typically based on
outside appraisals).
ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS AT MARCH 31, 2007
(DOLLARS IN THOUSANDS)
SIGNIFICANT
OTHER SIGNIFICANT TOTAL LOSSES
QUOTED PRICES IN ACTIVE OBSERVABLE UNOBSERVABLE FOR THE
BALANCE MARKETS FOR IDENTICAL INPUTS INPUTS PERIOD ENDED
MARCH 31, 2008 ASSETS (LEVEL 1) (LEVEL 2) (LEVEL 3) MARCH 31, 2008
-------------- ----------------------- ----------- ------------ --------------
ASSETS
Impaired loans
accounted for
under FAS 114 $13,520 $-- $13,520 $-- $181
IMPAIRED LOANS. The Company does not record loans at fair value on a recurring
basis. However, on occasion, a loan is considered impaired and an allowance for
loan loss is established. A loan is considered impaired when it is probable that
all of the principal and interest due under the original terms of the loan may
not be collected. Once a loan is identified as individually impaired, management
measures impairment in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan (SFAS No. 114). The fair value of impaired loans is
estimated using one of several methods, including collateral value, market value
of similar debt, enterprise value, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the
fair value of the expected repayments or collateral exceed the recorded
investments in such loans. In accordance with SFAS 157, impaired loans where an
allowance is established based
14
on the fair value of collateral require classification in the fair value
hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the impaired loan
as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company records the
impaired loan as nonrecurring Level 3.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale are recorded at the
lower of carrying value or fair value. The fair value of mortgage loans held for
sale is determined through forward commitments which the Company enters to sell
these loans to secondary market counterparties. As such, the Company classifies
mortgage loans held for sale as nonrecurring Level 2.
Other assets, including goodwill and other intangible assets, are also subject
to periodic impairment assessments under other accounting principles generally
accepted in the United States of America. These assets are not considered
financial instruments. Effective February 12, 2008, the FASB issued a staff
position, FSP FAS 157-2, which delayed the applicability of FAS 157 to
non-financial instruments. Accordingly, these assets have been omitted from the
above disclosures.
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 11
banking offices and 3 mortgage offices.
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
15
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 Primevest Financial Services, Inc. Full-time representatives
work at various branch offices and offer a full range of investment products. As
of March 31, 2008, we held approximately $5.3 million in brokered deposits. The
remainder of the deposits, approximately 98.7% 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, 2008, 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.
For the first three months of 2008, the Company recorded $76 thousand in share
based compensation expense. This compares to $38 thousand for the first three
months of 2007.
FINANCIAL CONDITION
Company assets consist of customer loans, investment securities, bank premises
and equipment, cash and other operating assets. Total assets decreased
approximately $5.8 million to $486.5 million at March 31, 2008 from $492.3
million at December 31, 2007. Our federal funds sold balance decreased $1.6
million during the first quarter of the year as we moved to a net borrowing
position. The balance of our investment securities decreased by approximately
$2.3 million to $61.8 million at March 31, 2008 as compared to $64.1 million at
December 31, 2007. Our loan portfolio decreased approximately $6.2 million to
$383.1 million at March 31, 2008. This was the result of a $3.7 million decrease
in commercial real estate loans, a $408 thousand decrease in other commercial
loans, a $996 thousand decrease in residential real estate loans and a $1.1
million decrease in
16
consumer loans. Approximately $733 thousand of the decrease in consumer loans
was the result of the sale of our credit card portfolio. Loans held for sale
increased $1.5 million to $2.4 million at March 31, 2008. The total of all other
assets increased $2.6 million at March 31, 2008, due mainly to a $3.0 million
increase in other real estate (repossessed properties).
During the first three months of 2008, we experienced net loan charge-offs of
$2.0 million. This compares to net charge-offs of $145 thousand during the first
three months of 2007. In addition, at March 31, 2008, we were carrying $16.3
million in non-performing loans compared to $12.2 million at March 31, 2007.
This high level of net charge-offs and non-performing loans is the direct result
of the continuing poor economic environment in the state of Michigan, combined
with the collapse of the residential real estate market in southeast Michigan.
We have no exposure in the sub-prime mortgage lending market, but through our
commercial loan portfolio, we have had a number of relationships with
residential real estate developers who have encountered severe problems. During
the first quarter of 2008, we recorded a loan loss provision of $2.1 million
compared to a $120 thousand provision during the first quarter of 2007. Our loan
loss reserve as a percentage of total loans has been increased to 1.36% as of
March 31, 2008, compared to 1.33% at December 31, 2007 and 1.03% at March 31,
2007. Management believes the 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" in the Financial Statements contained in
this report are hereby incorporated by this reference.
Total liabilities decreased $5.6 million to $446.5 million at March 31, 2008
from $452.1 million at December 31, 2007. Total deposits decreased $13 million
to $425.5 million at March 31, 2008 from $438.5 at December 31, 2007. This was
mainly due to an $8.2 million decrease in savings deposits, a $5.1 million
decrease in interest bearing demand deposits and a $3.2 million decrease in
certificates of deposit, partially offset by a $3.5 million increase in
non-interest bearing deposits. We took $15 million in two year advances from the
Federal Home Loan Bank of Indianapolis (long-term debt) and used the proceeds to
pay down our short-term debt (federal funds) and offset the drop in deposit
balances.
17
FINANCIAL RESULTS
Three Months Ended March 31, 2008
For the three months ended March 31, 2008, we realized a net loss of $1.5
million compared to net income of $902 thousand for the same period in 2007.
Total interest income decreased $813 thousand in the first quarter 2008 compared
to the first quarter 2007. Interest and fees on loans decreased $880 thousand in
the first quarter 2008 over the same period in 2007. The decrease in interest
and fees on loans was due to the overall decrease in our loan portfolio and to a
decrease in the yield. We generated a $10.4 million increase in our average
commercial loans in the first quarter 2008 compared to the first quarter 2007.
However, the positive impact of this increase in loan balances was more than
offset by a drop in our commercial loan yield of 77 basis points. This drop in
yield is due to the lower overall interest rate environment that resulted from
continued interest rate cuts by the Federal Reserve and also to a $4 million
increase in non-performing loans over the March 31, 2007 level. The result was a
$398 thousand net decrease in interest and fees on commercial loans. Our average
investment in residential mortgage loans decreased $24.6 million in the first
quarter of 2008 compared to the first quarter of 2007. Approximately $14 million
of this decrease was due to a one-time sale of mortgage loans in December 2007.
In addition to the drop in average mortgage loan balances, we also realized a 26
basis point drop in yield resulting from the lower interest rate environment. As
a result of this combined drop in balances and yield, we realized a $386
thousand decrease in interest and fees on mortgage loans. During the first
quarter of 2008, we also realized a $96 thousand drop in interest and fees on
consumer loans as average balances dropped $3.3 million and the consumer loan
yield was reduced by 56 basis points.
Our average investment in securities and federal funds increased $1.8 million
comparing the first quarter 2008 to the same period in 2007. The result was a
$66 thousand increase in interest on securities. This increase was the result of
some restructuring of the portfolio that allowed us to increase our yield by
approximately 29 basis points from period to period.
Interest expense decreased $402 thousand in the first quarter 2008 compared to
the first quarter 2007. Interest on deposits decreased $428 thousand due mainly
to the lower interest rate environment in 2008. Comparing the first quarter 2008
to the first quarter 2007 our average savings balances increased $2.8 million,
but we reduced the rate paid on these deposits by 83 basis points, resulting in
a decrease in the interest on savings balances of $243 thousand. Our average
certificate of deposit balances remained relatively flat, dropping only $45
thousand between the two periods. The rate paid on these balances was reduced by
28 basis points resulting in a $140 thousand decrease in interest on
certificates of deposit. Average interest bearing demand balances decreased
$10.5 million comparing the first quarter of 2008 to the first quarter of 2007.
We also reduced the rate paid on these balances by 18 basis points resulting in
a $46 thousand decrease in interest expense on interest bearing demand balances.
The decrease in interest expense on deposits was partially offset by a $26
thousand increase in interest on borrowed funds as we had to increase our
average borrowings by approximately $7.3 million to make up for the lower
deposits.
During the first quarter 2008, we recorded a $2.1 million provision for loan
losses compared to a $120 thousand provision recorded in the first quarter of
2007. This increase in the provision is due to the increase in net charge-offs
we have realized in 2007 and the increase in non-performing loans. Management
believes this provision is necessary to maintain the reserve at an appropriate
level.
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Total other operating income increased $60 thousand in the first quarter 2008
compared to the first quarter 2007. This increase was mainly the result a $187
thousand increase in the gain on the sale of securities and a $77 thousand gain
on the sale of our credit card portfolio. In addition, we realized a $47
thousand increase in investment commissions in the first quarter of 2008 over
the 2007 level. These increases were partially offset by lower loan related
fees. We realized a $114 thousand decrease in the gain on the sale of mortgage
loans and a $70 thousand drop on other mortgage related fees as the mortgage
loan business in southeast Michigan remains very slow. In addition, we realized
a $61 thousand decrease in commercial loan related fees.
Total other operating expenses increased $1.3 million when comparing the first
quarters of 2008 and 2007. Salary and benefits expense increased $258 thousand.
Salaries increased approximately $182 thousand due primarily to the hiring of
new senior level officers. Medical and retirement benefits increased
approximately $194 thousand. Approximately $113 thousand of this represents
one-time adjustments for certain pension and retiree medical benefits. Slower
loan activity resulted in reduced deferrals, increasing salaries expense by
approximately $48 thousand. Employment taxes also increased $30 thousand. The
increases were partially offset by a $120 thousand decrease in accrued
incentives expense and an $87 thousand decrease in net mortgage commissions.
Legal and professional fees increased $74 thousand due mainly to increased legal
fees related to loan reviews and loan workouts. Other operating expenses
increased $1.1 million due mainly to a $1.3 million increase in other real
estate (repossessed property) expense. This is mainly the result of negative
valuation adjustments and maintenance on property we have repossessed. This was
partially offset by a $122 thousand decrease in our state taxes, partly the
result of a shift from the Michigan Single Business Tax to the lower Michigan
Financial Institutions Tax effective January 1, 2008. In addition, we have
reduced marketing expenses by $42 thousand and stationery and supplies by $40
thousand in the first quarter of 2008 compared to the first quarter of 2007. We
also realized a $132 decrease in occupancy costs resulting mainly from the
closing of one bank branch and certain mortgage loan offices in 2007.
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, 2008, the Company increased long-term
debt by $15 million through FHLB advances. In addition, loans and securities
paid down by a combined $8.6 million and we sold $1.0 million in new common
stock. This increased cash was used to offset the $19.4 million decrease in
deposits and short-term borrowings and fund the $1.5 million increase in loans
held for sale and the $2.9 million used in operations. In addition, we used $118
thousand in cash to make capital improvements and $124 thousand to pay the first
quarter dividend. The result was an overall decrease of approximately $1 million
in cash and cash equivalents during the first quarter of 2008 to approximately
$11.8 million, an amount that management considers sufficient to meet future
liquidity needs.
19
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, 2008, the Company had commitments to extend credit of $56.4 million
and stand-by letters of credit of $4.4 million compared to $52.6 million and
$2.0 million, respectively, at December 31, 2007.
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,
2008:
Tier 1 capital $36,038
Total capital $40,939
Tier 1 capital to risk-weighted assets 9.20%
Total capital to risk-weighted assets 10.44%
Tier 1 capital to average assets 7.45%
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 will not be significantly impacted whether rates rise or fall.
20
Please refer to the corresponding discussion in the Company's Annual Report on
Form 10-K for the year ended December 31, 2007 for more detailed information.
ITEM 4T: 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, 2008. 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, 2008.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may from time-to-time be involved in legal proceedings
occurring in the ordinary course of business which, in the aggregate, involve
amounts which are believed by management to be immaterial to the financial
condition of the Company. The Company is not currently involved in any legal
proceedings which management believes are of a material nature.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2007, 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
On March 31, 2008, the Company completed the sale in an offering
exempt under Rule 506 of Regulation D under the Securities Act of 1933 of
113,126 shares of the Company's common stock to certain of the Company's
directors and executive officers. The selling price for the shares was $8.50 per
share. Of the approximate $962,000 in proceeds of the offering, $583,000 will be
used to infuse additional capital into the Company's subsidiary bank, Peoples
State Bank, with the remaining funds retained at the holding company for working
capital purposes.
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 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)
22
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
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, 2008 /s/ Michael J. Tierney
----------------------------------------
Michael J. Tierney
President and Chief Executive Officer
Date: May 15, 2008 /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
24