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, 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
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller 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 3,421,960 shares of Common Stock outstanding as of
November 14, 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 ......................................... 17
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .... 24
ITEM 4T: CONTROLS AND PROCEDURES ....................................... 24
PART II. -- OTHER INFORMATION ............................................. 25
Item 1. Legal Proceedings ............................................. 25
Item 1A. Risk Factors .................................................. 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ... 25
Item 3. Defaults Upon Senior Securities ............................... 25
Item 4. Submission of Matters to a Vote of Security Holders ........... 25
Item 5. Other Information ............................................. 25
Item 6. Exhibits ...................................................... 26
SIGNATURES ............................................................. 27
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.
As a result of the ongoing volatility in the financial industry and PSB
Group, Inc's market capitalization decreasing to a level below tangible book
value, management has determined it is necessary to perform an interim goodwill
impairment test. Management expected the analysis to be completed by the end of
the third quarter but due to market inefficiencies and volatility we have
requested a third party to perform a valuation of the Company and will include
that information in an analysis to be completed during the fourth quarter.
3
PSB GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2008 (unaudited) 2007
---------------- -----------
ASSETS
Cash and due from banks $ 11,170 $ 11,141
Federal funds sold -- 1,621
Securities available for sale 52,065 64,115
Loans 382,876 389,312
Less allowance for possible loan losses (6,807) (5,184)
-------- --------
Net loans 376,069 384,128
Loans held for sale 644 882
Bank premises and equipment 12,650 13,358
Accrued interest receivable 2,020 2,344
Other real estate owned 5,853 5,996
Goodwill 4,458 4,458
Other assets 5,621 4,228
-------- --------
Total assets $470,550 $492,271
======== ========
LIABILITIES
Deposits:
Non-interest bearing $ 51,806 $ 59,028
Interest bearing 343,837 379,482
-------- --------
Total deposits 395,643 438,510
Federal funds purchased 850 --
Discount window borrowings 8,000 --
Federal Home Loan Bank advances 25,000 10,000
Long-term debt 436 590
Accrued interest and other liabilities 2,305 2,980
-------- --------
Total liabilities 432,234 452,080
SHAREHOLDERS' EQUITY
Common stock - no par value - 5,000,000 authorized - 3,421,960 shares issued
and outstanding at September 30, 2008 and 3,072,002 at December 31, 2007 23,511 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 (379) (441)
Retained earnings 15,810 20,113
Accumulated other comprehensive loss (190) (68)
-------- --------
Total shareholders' equity 38,316 40,191
-------- --------
Total liabilities and stockholders' equity $470,550 $492,271
======== ========
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2008 2007 2008 2007
------- ------- ------- -------
INTEREST INCOME:
Interest and fees on loans $ 6,339 $ 7,312 $19,567 $22,550
SECURITIES:
Taxable 591 377 1,846 1,190
Tax-exempt 55 259 226 798
Federal funds sold -- -- 6 10
------- ------- ------- -------
TOTAL INTEREST INCOME 6,985 7,948 21,645 24,548
INTEREST EXPENSE:
Deposits 2,160 3,617 7,434 10,617
Federal funds purchased 14 191 81 416
Discount window borrowings 8 -- 8 --
Federal Home Loan Bank advances 164 13 425 13
------- ------- ------- -------
TOTAL INTEREST EXPENSE 2,346 3,821 7,948 11,046
------- ------- ------- -------
NET INTEREST INCOME 4,639 4,127 13,697 13,502
Provision for loan losses 2,350 2,525 5,966 4,485
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 2,289 1,602 7,731 9,017
OTHER OPERATING INCOME:
Service charges on deposit accounts 618 588 1,757 1,765
Gain (loss) on the sale of investment securities -- (32) 187 (32)
Other income 301 306 1,363 1,551
------- ------- ------- -------
TOTAL OTHER INCOME 919 862 3,307 3,284
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,301 2,551 7,375 7,445
Occupancy costs 1,121 1,015 2,961 2,972
Legal and professional 335 305 1,053 944
Other real estate owned expense 1,779 6 3,655 12
Marketing expense 74 119 256 362
Other operating expense 696 816 2,159 2,330
------- ------- ------- -------
TOTAL OTHER OPERATING EXPENSES 6,306 4,812 17,459 14,065
------- ------- ------- -------
LOSS - BEFORE FEDERAL INCOME TAX BENEFIT (3,098) (2,348) (6,421) (1,764)
Federal income tax benefit (1,068) (874) (2,243) (853)
------- ------- ------- -------
NET LOSS $(2,030) $(1,474) $(4,178) $ (911)
======= ======= ======= =======
LOSS PER AVERAGE OUTSTANDING SHARE OF COMMON
STOCK - BASIC $ (0.61) $ (0.48) $ (1.30) $ (0.30)
======= ======= ======= =======
FULLY DILUTED (0.61) (0.48) (1.30) (0.30)
======= ======= ======= =======
CASH DIVIDENDS PER SHARE $ 0.00 $ 0.18 $ 0.04 $ 0.54
======= ======= ======= =======
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2008 2007
------- -----
Net loss $(4,178) $(911)
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities
available for sale, net of tax (122) 60
------- -----
Comprehensive loss $(4,300) $(851)
======= =====
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 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 (4,178) (4,178)
Change in unrealized loss
on securities available (122) (122)
for sale, net of tax
Earned ESOP Benefit 154 154
Restricted Stock Awards 295 295
Sale of common stock,
320,893 shares. 2,039 2,039
Stock Options/Awards expense 62 62
Purchase of stock by Trust (180) (180)
Deferred compensation 180 180
Cash dividends (125) (125)
------- ----- ------ ---- ----- ------- ----- -------
Balance - September 30, 2008 $23,511 ($436) ($ 410) $410 ($379) $15,810 ($190) $38,316
======= ===== ====== ==== ===== ======= ===== =======
7
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER
-------------------
2008 2007
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 1,374 $ 5,809
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of securities available for sale (25,841) (248)
Proceeds from the sale of available for sale securities 25,017 --
Proceeds from the maturity of available for sale securities 12,904 13,475
Net (increase) decrease in loans 2,093 (24,742)
Net decrease in loans held for sale 238 1,207
Capital expenditures (274) (1,795)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 14,137 (12,103)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (42,867) 1,917
Net increase in federal funds purchased 850 3,125
Increase in Fed Discount Window borrowings 8,000 --
Increase in FHLB advances 15,000 --
Issuance of common stock 2,039 --
Cash dividends (125) (1,655)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (17,103) 3,387
-------- --------
NET DECREASE IN CASH (1,592) (2,907)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 12,762 13,950
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 11,170 $ 11,043
======== ========
SUPPLEMENTAL INFORMATION - Cash paid (received) for:
Interest $ 8,087 $ 11,026
Taxes $ (723) $ 500
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 September 30, 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 nine-month period ended September 30, 2008 are not
necessarily indicative of the results to be expected for the full year.
The consolidated financial statements include the accounts of PSB Group, Inc.
(the "Corporation") and its wholly owned subsidiaries, Peoples State Bank, Inc.
(the "Bank") and PSB Capital, Inc. ("Capital"). PSB Title Insurance Agency, Inc.
is a wholly owned subsidiary of Peoples State Bank. All significant intercompany
transactions are eliminated in consolidation.
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.
9
NOTE 2 - SECURITIES
The amortized cost and estimated market value of securities are as follows (000s
omitted):
September 30, 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 $44,941 $283 $315 $44,909
Obligations of state and political subdivisions 5,380 1 232 5,149
Corporate debt securities 500 -- 25 475
Other 1,532 -- -- 1,532
------- ---- ---- -------
Total available-for-sale securities $52,353 $284 $572 $52,065
======= ==== ==== =======
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
======= ======= ==== =======
10
The amortized cost and estimated market value of securities at September 30,
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 September 30,
2008, all securities are available for sale (000s omitted).
Available for Sale
-------------------
Amortized Market
Cost Value
--------- -------
Due in one year or less $ 85 $ 85
Due in one year through five years 1,663 1,654
Due after five years through ten years 3,001 2,929
Due after ten years 4,334 4,111
------- -------
9,083 8,779
Federal agency pools 41,738 41,754
Other 1,532 1,532
------- -------
Total $52,353 $52,065
======= =======
Securities having a carrying value of $46,746,000 (market value of $44,713,000)
were pledged at September 30, 2008 to secure public deposits, repurchase
agreements, and for other purposes required by law.
NOTE 3 - LOANS
Major categories of loans included in the portfolio at September 30, 2008 and
December 31, 2007 are as follows (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------- ------------
Commercial Real Estate $254,357 $242,762
Residential Mortgages 81,343 77,879
Commercial 39,617 59,945
Consumer 7,559 8,726
-------- --------
Total $382,876 $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
September 30, 2008, other real estate owned consisted of 47 properties. Other
real estate is carried on the books at the lower of fair value less the
estimated cost to sell, or the
11
carrying amount of the loan at the date of foreclosure. Non-performing loans
have increased $3.1 million, or 15% since December 31, 2007. This is mainly due
to an $8.3 million increase in restructured debt. Loans in non-accrual status
have decreased $4.9 million and loans past due 90 days or more have decreased
$308 thousand during the same period. The following table summarizes
non-performing assets (dollars in thousands):
September 30, December 31,
2008 2007
------------- ------------
Non-accrual loans $13,379 $ 18,245
Loans past due 90 or more days 972 1,280
Restructured debt 9,658 1,347
------- -------
Total non-performing loans 24,009 20,872
Other real estate owned 5,853 5,996
------- -------
Total non-performing assets $29,862 $26,868
======= =======
Total non-performing loans to total loans 6.27% 5.36%
Total non-performing assets to total assets 6.35% 5.46%
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is as follows (dollars in
thousands):
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2008 DECEMBER 31, 2007
------------------ -----------------
Loan loss balance - Beginning of period $ 5,184 $ 4,257
Provision for loan losses 5,966 7,663
Charge-offs (4,625) (7,185)
Recoveries 282 449
------- -------
Loan loss balance - End of period $ 6,807 $ 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.
12
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 September 30, 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.
Disclosures concerning assets and liabilities at fair value are as follows:
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS AT
SEPTEMBER 30, 2008
(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) SEPTEMBER 30, 2008
----------------------- ----------- ------------ ------------------
ASSETS
Investment securities available-for-sale $46,441 $4,868 $756 $52,065
13
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 (14)
Net purchases, sales, calls and maturities (25)
Net transfers in/out of Level 3 --
----
Balance at September 30, 2008 $756
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 September 30, 2008,
there were $14 thousand in unrealized losses recognized in other comprehensive
income in the consolidated balance sheet. There were no gains or losses realized
through the income statement for these assets during the nine months ended
September 30, 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).
14
ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS AT SEPTEMBER 30, 2008
(DOLLARS IN THOUSANDS)
SIGNIFICANT
OTHER SIGNIFICANT TOTAL LOSSES
QUOTED PRICES IN ACTIVE OBSERVABLE UNOBSERVABLE FOR THE
BALANCE MARKETS FOR IDENTICAL INPUTS INPUTS PERIOD ENDED
SEPTEMBER 30, 2008 ASSETS (LEVEL 1) (LEVEL 2) (LEVEL 3) SEPTEMBER 30, 2008
------------------ ----------------------- ------------ ------------ ------------------
ASSETS
Impaired loans accounted
for under FAS 114 $16,643 $-- $-- $16,643 $1,483
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 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.
15
NOTE 6 - EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share reflects additional common shares that would have been outstanding if
dilutive potential common shares had been issued. Potential common shares that
may be issued by the Company relate to outstanding stock options.
Earnings per common share have been computed based on the following (in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Net income (loss) $ (1,535) $ (1,474) $ (3,683) $ (911)
Average number of common shares outstanding used
to calculate basic earnings per common share 3,333,625 3,073,469 3,212,025 3,063,018
Effect of dilutive securities -- -- -- --
---------- ---------- ---------- ----------
Average number of common shares outstanding used
to calculate diluted earnings per common share 3,333,625 3,073,469 3,212,025 3,063,018
========== ========== ========== ==========
Number of anti-dilutive stock options excluded from
diluted earnings per share computation 148,293 94,875 148,293 94,875
16
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. For purposes of cost
savings and operational efficiency, effective with the close of business August
31, 2008, Universal Mortgage Corporation was merged into the Bank. Today we
operate 11 banking offices and 2 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 Regulation.
We provide a full range of retail and commercial banking services designed to
meet the borrowing and depository needs of small and medium-sized businesses and
consumers in local areas. Substantially all of our loans are to customers
located within our service area. We have no foreign loans or highly leveraged
transaction loans, as defined by the Federal Reserve Board ("FRB"). We conduct
our lending activities pursuant to the loan policies adopted by our Board of
Directors. These loan policies grant individual loan officers authority to make
secured and unsecured loans in specific dollar amounts; senior officers or
various loan committees must approve larger loans. Our management information
systems and loan review policies are designed to monitor lending sufficiently to
ensure adherence to our loan policies.
We also offer a full range of deposit and personal banking services insured by
the FDIC, including (i) commercial checking and small business checking
products, (ii) retirement accounts such as Individual Retirement Accounts
("IRA"), (iii) retail deposit services such as certificates of deposits, money
market accounts, savings accounts, checking account products and Automated
Teller Machines ("ATMs"), Point of Sale and other electronic services, and (iv)
other personal miscellaneous services such as safe deposit boxes, foreign draft,
foreign currency exchanges, night depository services, 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 September
30, 2008, we held approximately $232 thousand in brokered deposits. The
remainder of the deposits, approximately 99.9% of total deposits, are from local
market areas surrounding our branches.
17
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. is a wholly owned subsidiary of Peoples State Bank. PSB
Capital, Inc. was formed in October, 2004. Through September 30, 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 nine months of 2008, the Company recorded $239 thousand in share
based compensation expense. This compares to $179 thousand for the first nine
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 $21.7 million to $470.6 million at September 30, 2008 from $492.3
million at December 31, 2007. Our federal funds sold balance decreased $1.6
million during the first nine months of the year as we moved to a net borrowing
position. The balance of our investment securities decreased by approximately
$12.0 million to $52.1 million at September 30, 2008 as compared to $64.1
million at December 31, 2007. Our loan portfolio decreased approximately $6.4
million to $382.9 million at September 30, 2008. This was the result of a $20.3
million decrease in commercial loans and a $1.2 million decrease in consumer
loans, partially offset by an $11.6 million increase in commercial real estate
loans and a $3.5 million increase in residential mortgages. Approximately $733
thousand of the decrease in consumer loans was the result of the sale of our
credit card portfolio in the first quarter of 2008. Loans held for sale
decreased $238 thousand to $644 thousand at September 30, 2008. The total of all
other assets remained flat at approximately $30 million.
During the first nine months of 2008, we experienced net loan charge-offs of
$4.3 million. This compares to net charge-offs of $4.7 million during the first
nine months of 2007. In addition, at September 30, 2008, we were carrying $24
million in non-performing loans compared to $20.9 million at December 31, 2007.
This increase is due mainly to an $8.3 million increase in restructured debt.
That is, loans that have been restructured and are in compliance with their
modified terms. We are making every reasonable effort to approve loan
modifications that would allow customers to maintain their homes and small
businesses. This was partially offset by a $4.9 million decrease in loans on
non-accrual status. 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 ongoing problems related to 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. We have reduced our exposure to residential
construction and land development
18
loans to approximately 2% of total loans. During the first nine months of 2008,
we recorded a loan loss provision of $6.0 million compared to a $4.5 million
provision during the first nine months of 2007. Our loan loss reserve as a
percentage of total loans has been increased to 1.78% as of September 30, 2008,
compared to 1.33% at December 31, 2007 and 0.97% at September 30, 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 $19.8 million to $432.2 million at September 30,
2008 from $452.1 million at December 31, 2007. Total deposits decreased $42.9
million to $395.6 million at September 30, 2008 from $438.5 at December 31,
2007. This was mainly due to a $19.3 million decrease in large certificates of
deposit ($100,000 and over) and a $20.1 million decrease in our Prime Savings
balances. We allowed high rate certificates of deposit and Prime Savings
balances to run-off and replaced them with small certificates of deposit (an
$11.4 million increase) and more favorable funding options from the Federal Home
Loan Bank and Federal Reserve. We took $15 million in two year advances from the
Federal Home Loan Bank of Indianapolis, $8 million in low cost overnight funds
from the Federal Reserve discount window and increased our Federal Funds
borrowings by $850 thousand.
FINANCIAL RESULTS
Three Months Ended September 30, 2008
For the three months ended September 30, 2008, we realized a net loss of $2.0
million compared to a net loss of $1.5 million for the same period in 2007.
Total interest income decreased $963 thousand in the third quarter 2008 compared
to the third quarter 2007. Interest and fees on loans decreased $973 thousand in
the third quarter 2008 compared to 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 realized a $33.1 million decrease in our
average loans in the third quarter 2008 compared to the third quarter 2007.
Approximately $14 million of this decrease was the result of a one-time sale of
mortgage loans in December, 2007. In addition to the decrease in average loan
balances, we have seen our yield on loans decrease 41 basis points in the third
quarter of 2008 compared to the third quarter of 2007. This drop in yield is due
mainly to the lower overall interest rate environment that resulted from
continued interest rate cuts by the Federal Reserve. Interest on investment
securities and federal funds sold remained relatively flat between the two
periods. The average investment in securities and federal funds decreased by
about $7.6 million, but by shifting investments, we were able to increase the
yield on the portfolio by approximately 71 basis points and thereby maintain the
same level of income.
More than offsetting the contraction in interest income, interest expense
decreased $1.5 million in the third quarter 2008 compared to the third quarter
2007. The result was a $512 thousand increase in net interest income comparing
the two quarters. Interest on deposits decreased $1.5 million due to the lower
interest rate environment in 2008 but also to our lower level of deposits.
Comparing the third quarter 2008 to the third quarter 2007 our average
certificate of deposit balances decreased $16.9 million, and we reduced the rate
paid on these deposits by 151 basis points, resulting in a decrease in the
interest on certificates of deposit of $902 thousand. Our average savings
balances decreased $12.7 million between the two quarters and we paid 138 basis
points less in the third quarter of 2008 than the third quarter of 2007,
resulting in a $507 thousand decrease in interest expense on these balances. In
addition, our interest bearing demand balances decreased $7.8 million
19
between the two quarters and we paid 25 basis points less on these balances
resulting in a $48 thousand decrease in interest expense from the third quarter
of 2007 to the third quarter of 2008. The decrease in interest expense on
deposits was enhanced by an $18 thousand decrease in interest on borrowed funds
as we increased our average borrowings by approximately $13.3 million, but
reduced the average rate paid on these borrowings by 267 basis points.
During the third quarter 2008, we recorded a $2.4 million provision for loan
losses compared to a $2.5 million provision recorded in the third quarter of
2007. $750 thousand of this related to one customer. Management believes this
provision is necessary to maintain the reserve at an appropriate level.
Total other operating income increased $57 thousand in the third quarter 2008
compared to the third quarter 2007. This increase was mainly the result of a $30
thousand increase in service charges on deposit accounts as well as lower losses
on the sale of investment securities.
Total other operating expenses increased $1.5 million when comparing the third
quarters of 2008 and 2007. Salary and benefits expense decreased $250 thousand.
This is mainly due to a $110 thousand reduction in salaries and wages as we
reduced staff compared to the third quarter of 2007. Also, we realized a $35
thousand reduction in bonus and incentive accruals and $159 thousand in lower
medical and dental expenses. These decreases were partially offset by a $17
thousand increase in mortgage related commissions. Occupancy expense increased
approximately $106 thousand comparing the third quarter of 2008 to the third
quarter of 2007. This was mainly due to a one-time rent expense of $238,000 that
we had to record related to the closing of one of our mortgage offices. This was
partially offset by a $26 thousand decrease in depreciation expense, a $30
thousand reduction in property taxes and a $36 thousand decrease in security
expense. Other Real Estate (repossessed property) expense increased $1.8
million, mainly the result of negative valuation adjustments and maintenance
costs. Over $525 thousand of this related to 20 properties that have been sold.
We were able to reduce marketing expenses by $45 thousand comparing the third
quarter of 2008 to the third quarter of 2008. Other operating expenses decreased
$120 in the third quarter of 2008 versus the third quarter of 2007. This
included a $69 thousand decrease in travel and entertainment, a $65 thousand
decrease in employment expenses, a $38 thousand decrease in state taxes, a $30
thousand decrease loan related expenses and a $18 thousand decrease in
stationery and supplies. These decreases were partially offset by a $103
thousand increase in our FDIC insurance.
Nine Months Ended September 30, 2008
For the nine months ended September 30, 2008, we realized a net loss of $4.2
million compared to a net loss of $911 thousand for the same period in 2007.
Total interest income decreased $2.9 million in the first nine months of 2008
compared to the first nine months of 2007. Interest and fees on loans decreased
$3.0 million in the first nine months of 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 realized a $1.4 million
decrease in our average commercial loan balances in the first nine months of
2008 compared to the first nine months of 2007. The impact of this slight
decrease in loan balances was compounded by a drop in our commercial loan yield
of 66 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. The combined result was a $1.7 million decrease in interest and fees on
commercial loans. Our average investment in residential mortgage loans decreased
$20.4 million in the first nine months of 2008 compared to the first nine months
of 2007. Approximately $14 million of this decrease was due to a one-time sale
of mortgage loans in December 2007 which was
20
undertaken in order to lower our exposure to residential real estate. 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 $961
thousand decrease in interest and fees on mortgage loans. During the first nine
months of 2008, we also realized a $375 thousand drop in interest and fees on
consumer loans as average balances dropped $3.6 million and the consumer loan
yield was reduced by 97 basis points.
Our average investment in securities and federal funds decreased $4.3 million
comparing the first nine months of 2008 to the same period in 2007. However,
through some restructuring of the portfolio, we were able to increase the yield
on our investments by 51 basis points. The net result was an $80 thousand
increase in interest on securities.
Interest expense decreased $3.1 million in the first nine months of 2008
compared to the first nine months of 2007. Interest on deposits decreased $3.2
million due to both lower average deposit balances and to the lower interest
rate environment in 2008. Comparing the first nine months of 2008 to the first
nine months of 2007 our average certificate of deposit balances decreased $13.4
million, and we reduced the rate paid on these deposits by 144 basis points,
resulting in a decrease in the interest on certificates of deposit of $1.8
million. Our average savings deposit balances decreased $1.2 million between the
two periods. The rate paid on these balances was reduced by 177 basis points
resulting in a $1.2 million decrease in interest on savings balances. Average
interest bearing demand balances decreased $7.8 million comparing the first nine
months of 2008 to the first nine months of 2007. We also reduced the rate paid
on these balances by 33 basis points resulting in a $134 thousand decrease in
interest expense on interest bearing demand balances. The decrease in interest
expense on deposits was partially offset by an $85 thousand increase in interest
on borrowed funds as we increased our average borrowings by approximately $12.6
million. The net results of the changes in rates and balances was a $195
thousand increase in net interest income for the first nine months of 2008 as we
increased our net interest margin (net interest income over average earning
assets) to 4.11% in 2008 compared to 3.80% in 2007.
During the first nine months of 2008, we recorded a $6.0 million provision for
loan losses compared to a $4.5 million provision recorded in the first nine
months of 2007. This increase in the provision has served to increase our loan
loss reserve to 1.78% of total loans as of September 30, 2008 compared to 1.33%
at September 30, 2007. Management believes this provision is necessary to
maintain the reserve at an appropriate level.
Total other operating income increased $23 thousand in the first nine months of
2008 compared to the first nine months of 2007. Deposit service charges remained
constant at $1.8 million. We realized a $219 thousand increase in the gain on
the sale of securities comparing the first nine months of 2008 to the first nine
months of 2007. While we did realize a $54 thousand gain on the sale of our
credit card portfolio and a $159 thousand increase in investment referral fees
(in Other Income) in the first nine months of 2008 over the 2007 level, these
increases were almost offset by lower loan related fees. We realized a $169
thousand decrease in the gain on the sale of mortgage loans and a $93 thousand
drop on other mortgage related fees as the mortgage loan business in southeast
Michigan remains very slow. In addition, we realized a $100 thousand decrease in
commercial loan related fees and a $39 thousand decrease in gains on the sale of
other real estate.
Total other operating expenses increased $3.4 million when comparing the first
nine months of 2008 and 2007. Salary and benefits expense decreased $70
thousand. Salaries remained relatively flat,
21
increasing only $69 thousand comparing 2008 to 2007. We reduced staff in the
second quarter of 2008 and should continue to see the benefits of this move
throughout the rest of the year. Medical and retirement benefits increased
approximately $122 thousand. One-time adjustments for certain pension and
retiree medical benefits accounted for a $267 thousand increase. This was
largely offset by a $145 thousand decrease in the expense for other medical
benefits. Stock options and awards expense was approximately $60 thousand higher
in the first nine months of 2008 than the first nine months of 2007. These
compensation increases were partially offset by a $253 thousand decrease in
accrued bonuses and incentives and a $116 thousand decrease in mortgage related
commissions resulting from slower mortgage activity in 2008. Legal and
professional fees increased $109 thousand due mainly to increased legal fees
related to loan reviews and loan workouts. Other Real Estate Expense increased
$3.6 million due mainly negative valuation adjustments and maintenance on
property we have repossessed. We were able to reduce marketing expense by $106
thousand from the 2007 level. Other Operating Expense decreased $171 thousand
due primarily to a $180 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
stationery and supplies expense by $59 thousand in the first nine months of 2008
compared to the first nine months of 2007. The decreases were partially offset
by a $191 thousand increase in FDIC insurance related to higher rates and to the
fact that we exhausted our one-time assessment credit in April of 2008.
Occupancy expense remained flat at $3.0 million. We did have a one-time rent
expense increase of $238 thousand related to the closing of a mortgage office,
as we had to immediately record the expense for the remaining term of the lease.
This cost was offset by other savings related to the closing of one bank branch
and other 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, overnight federal funds
purchases from correspondent banks and advances from the Federal Reserve
discount window.
During the nine months ended September 30, 2008, the Company increased long-term
debt by $15 million through FHLB advances. In addition, we increased short-term
borrowings through Federal Reserve discount window advances of $8 million and
federal funds by $850 thousand. We realized a $12.1 million increase in cash
through securities transactions, as sales and maturities exceeded purchases and
we sold $2.0 million in new common stock. We also realized a $2.3 million
increase in cash as the result of a net pay-down of our loan portfolio. These
increases, along with $1.4 million generated through operating activities, were
used to offset most of the $42.9 million decrease in deposits and fund $274
thousand in capital improvements and the $125 thousand first quarter dividend.
The result was an overall decrease of $1.6 million in cash and cash equivalents
during the first nine months of 2008 to approximately $11.2 million, an amount
that, along with available lines of credit of approximately $26.7 million,
management considers sufficient to meet future liquidity needs.
22
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, 2008, the Company had commitments to extend credit of $44.0
million and stand-by letters of credit of $4.7 million compared to $52.6 million
and $2.0 million, respectively, at December 31, 2007.
CAPITAL RESOURCES
During the first nine months of 2008, in offerings exempt under Rule 506 of
Regulation D, the Company sold 320,893 shares of its common stock to accredited
investors. The selling price for the shares was $7.00 per share. Approximately
$1.4 million of the proceeds were invested in the Company's subsidiary bank,
with the remaining funds retained at the holding company for working capital
purposes.
On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of
2008 ("EESA"), which provides the U. S. Secretary of the Treasury with broad
authority to implement certain actions to help restore stability and liquidity
to U. S. markets. One of the provisions resulting from the Act is the Treasury
Capital Purchase Program ("CPP"), which provides direct equity investment of
perpetual preferred stock by the Treasury in qualified financial institutions.
The program is voluntary and requires an institution to comply with a number of
restrictions and provisions, including limits on executive compensation, stock
redemptions and declaration of dividends. Applications must be submitted by
November 14, 2008, and are subject to approval by the Treasury. The CPP provides
for a minimum investment of 1% of Risk-Weighted Assets, with a maximum
investment equal to the lesser of 3% of Total Risk-Weighted Assets or $25
billion. The perpetual preferred stock investment will have a dividend rate of
5% per year, until the fifth anniversary of the Treasury investment, and a
dividend of 9%, thereafter. The CPP also requires the Treasury to receive
warrants for common stock equal to 15% of the capital invested by the Treasury.
The Corporation is evaluating whether to apply for participation in the CPP.
Participation in the program is not automatic and subject to approval by the
Treasury.
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, 2008:
Tier 1 capital $34,429
Total capital $39,240
Tier 1 capital to risk-weighted assets 8.99%
Total capital to risk-weighted assets 10.25%
Tier 1 capital to average assets 7.31%
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 will not be significantly impacted 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, 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
September 30, 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 September 30, 2008.
24
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 August 8, 2008, the Company completed the sale in an offering
exempt under Rule 506 of Regulation D under the Securities Act of 1933 of
172,531 shares of the Company's common stock to accredited investors. The
selling price for the shares was $7.00 per share. $800 thousand of the proceeds
were invested in the Company's subsidiary 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.
25
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
26
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, 2008 /s/ Michael J. Tierney
----------------------------------------
MICHAEL J. TIERNEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 14, 2008 /s/ David A. Wilson
----------------------------------------
DAVID A. WILSON
CHIEF FINANCIAL OFFICER
27
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
28