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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, 2003
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):
Yes X No
--------- ---------
(2) has been subject to such filing requirements for past 90 days:
Yes X No
--------- ---------
(3) is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).:
Yes No X
--------- ---------
The Registrant had 3,148,191 shares of Common Stock outstanding as of
September 30, 2003.
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 OPERATION................................................12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........16
ITEM 4: CONTROLS AND PROCEDURES.............................................16
PART II. - OTHER INFORMATION........................................................17
Item 1. Legal Proceedings...................................................17
Item 2. Changes in Securities and Use of Proceeds...........................17
Item 3. Defaults Upon Senior Securities.....................................17
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 5. Other Information...................................................17
Item 6. Exhibits and Reports on Form 8-K....................................17
SIGNATURES..................................................................18
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 change 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
PSB GROUP. INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
ASSETS
Cash and cash equivalents $ 13,903 $ 14,158
Securities available for sale 65,401 87,498
Loans 312,958 285,602
Less allowance for possible loan loss (4,073) (4,632)
--------- ---------
Net loans 308,885 280,970
Loans held for sale 3,621 3,626
Bank premises and equipment 9,254 9,427
Accrued interest receivable 1,917 2,061
Other assets 5,719 4,849
--------- ---------
Total assets $ 408,700 $ 402,589
========= =========
LIABILITIES
Deposits:
Non-interest bearing $ 54,936 $ 47,550
Interest bearing 294,561 293,230
--------- ---------
Total deposits 349,497 340,780
Federal funds purchased 5,275 9,210
FHLB borrowings 5,000 5,000
Accrued taxes, interest and other liabilities 2,207 2,126
--------- ---------
Total liabilities 361,979 357,116
STOCKHOLDERS' EQUITY
Common stock - no par value - 5,000,000
authorized - 3,148,191 shares issued and
outstanding at September 30, 2003 and December 31, 2002 23,694 23,694
Retained earnings 22,436 20,861
Accumulated other comprehensive income 591 918
--------- ---------
Total stockholders' equity 46,721 45,473
--------- ---------
Total liabilities and stockholders' equity $ 408,700 $ 402,589
========= =========
3
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
INTEREST INCOME:
Interest and fees on loans $ 4,918 $ 5,135 $ 14,832 $ 15,599
SECURITIES:
Taxable 302 598 1,166 1,884
Tax-exempt 211 258 700 868
Federal funds sold 8 61 27 206
-------- -------- -------- --------
TOTAL INTEREST INCOME 5,439 6,052 16,725 18,557
INTEREST EXPENSE:
Deposits 1,280 1,563 3,913 5,201
FHLB & Short-term borrowings 60 57 181 168
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 1,340 1,620 4,094 5,369
-------- -------- -------- --------
NET INTEREST INCOME 4,099 4,432 12,631 13,188
Provision for loan loss -- (300) -- (800)
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 4,099 4,732 12,631 13,988
OTHER OPERATING INCOME:
Service charges on deposit accounts 602 333 1,751 985
Other income 1,067 807 2,781 2,205
-------- -------- -------- --------
TOTAL OTHER INCOME 1,669 1,140 4,532 3,190
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,436 2,231 7,357 6,806
Occupancy costs 699 598 2,074 1,796
Legal and professional 339 391 1,023 926
Other operating expense 848 666 2,494 2,132
-------- -------- -------- --------
TOTAL OTHER OPERATING EXPENSES 4,322 3,886 12,948 11,660
-------- -------- -------- --------
INCOME - BEFORE FEDERAL INCOME TAXES 1,446 1,986 4,215 5,518
Federal income taxes 407 569 1,161 1,530
-------- -------- -------- --------
NET INCOME $ 1,039 $ 1,417 $ 3,054 $ 3,988
======== ======== ======== ========
BASIC EARNINGS PER WEIGHTED AVERAGE OUTSTANDING
SHARE OF COMMON STOCK $ .33 $ .45 $ .97 $ 1.27
======== ======== ======== ========
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ .33 $ .45 $ .97 $ 1.27
======== ======== ======== ========
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income $ 1,039 $ 1,417 $ 3,054 $ 3,988
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax (210) 173 (327) 238
------- ------- ------- -------
Comprehensive income $ 829 $ 1,590 $ 2,727 $ 4,226
======= ======= ======= =======
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2003
(in thousands, except share data)
Total
Common Retained Accumulated Stockholders'
Stock Earnings OCI Equity
-------- -------- ----------- ------------
Balance - December 31, 2002 $ 23,694 $ 20,861 $ 918 $ 45,473
Net income -- 3,054 -- 3,054
Change in unrealized gain on -- -- (327) (327)
securities available for sale, net
of tax
Cash dividends -- (1,479) -- (1,479)
-------- -------- -------- --------
Balance - September 30, 2003 $ 23,694 $ 22,436 $ 591 $ 46,721
======== ======== ======== ========
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2003 2002
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 2,702 $ 5,148
CASH FLOW FROM INVESTING ACTIVITIES:
Net decrease (increase) in securities 22,097 (11,511)
Net increase in loans (27,915) (11,298)
Capital expenditures (442) (1,227)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,260) (24,036)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 8,717 (4,873)
Net (decrease) increase in federal funds purchased (3,935) 950
Cash dividends (1,479) (1,378)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 3,303 (5,301)
-------- --------
NET DECREASE IN CASH (255) (24,189)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD PERIOD 14,158 37,976
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 13,903 $ 13,787
======== ========
7
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, 2002 and notes thereto included in Peoples State
Bank's Form 10-K filed with the Federal Deposit Insurance Corporation on March
31, 2003. 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, 2003 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, 2003 are not
necessarily indicative of the results to be expected for the full year.
PSB Group, Inc. was formed as a holding company for Peoples State Bank on
February 28, 2003 pursuant to a plan of reorganization adopted by Peoples State
Bank and its shareholders. Pursuant to the reorganization, each share of the
Bank's stock was exchanged for three shares of stock in the holding company. The
reorganization had no material financial impact and is reflected for all prior
periods presented. Per share amounts have been retroactively restated to reflect
the three-for-one exchange of stock.
NOTE 2 - SECURITIES
The amortized cost and estimated market value of securities are as follows (000s
omitted):
September 30, 2003
----------------------------------------------------
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 $35,172 $ 329 $ 26 $35,475
Obligations of state and
political subdivisions 24,729 591 17 25,303
Corporate debt securities 3,000 19 -- 3,019
Other 1,604 -- -- 1,604
------- ------- ------- -------
Total available-for-sale securities $64,505 $ 939 $ 43 $65,401
======= ======= ======= =======
8
NOTE 2 - SECURITIES (CONTINUED)
December 31, 2002
---------------------------------------------------------------------
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 $45,148 $ 581 $ 2 $45,727
Obligations of state and political
subdivisions 28,603 681 17 29,267
Corporate debt securities 10,793 148 -- 10,941
Other 1,563 -- -- 1,563
------- ------- ------- -------
Total available-for-sale securities $86,107 $ 1,410 $ 19 $87,498
======= ======= ======= =======
The amortized cost and estimated market value of securities at September 30,
2003, 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,
2003, all securities are available for sale (000s omitted).
Available for Sale
-----------------------
Amortized Market
Cost Value
--------- -------
Due in one year or less $29,916 $30,103
Due in one year through five years 22,378 22,846
Due after five years through ten years 1,906 2,027
Due after ten years 1,445 1,476
------- -------
55,645 56,452
Federal agency pools 7,256 7,345
Other 1,604 1,604
------- -------
Total $64,505 $65,401
======= =======
Securities having a carrying value of $2,020,485 (market value of $2,050,625)
were pledged at September 30, 2003 to secure public deposits, repurchase
agreements, and for other purposes required by law.
9
NOTE 3 - LOANS
Major categories of loans included in the portfolio at September 30, 2003 and
December 31, 2002 are as follows (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ---------------
Mortgages on Real Estate $ 231,068 $ 197,540
Commercial 54,919 63,331
Consumer 26,971 24,731
--------------- ---------------
Total $ 312,958 $ 285,602
=============== ===============
The Company places loans in non-accrual status when, in the opinion of
management, uncertainty exists as to the ultimate collection of principal and
interest. Management knows of no loans (other than those that are immaterial in
amount) which have not been disclosed below which cause it to have doubts as to
the ability of the borrowers to comply with the contractual loan terms, or which
may have a material effect on the Company's balance sheet or results from
operations. Non-performing assets consists of non-accrual loans, loans past due
90 or more days, restructured loans and real estate that has been acquired in
full or partial satisfaction of loan obligations or upon foreclosure. As of
September 30, 2003, other real estate owned consists of two properties.
Management does not anticipate any material losses as the result of the disposal
of these properties. The following table summarizes non-performing assets
(dollars in thousands):
September 30, December 31,
2003 2002
--------------- ---------------
Non-accrual loans $ 1,599 $ 2,746
Loans past due 90 or more days 1,959 306
Renegotiated loans 835 907
--------------- ---------------
Total non-performing loans 4,393 3,959
Other real estate owned 969 224
--------------- ---------------
Total non-performing assets $ 5,362 $ 4,183
=============== ===============
Total non-performing loans to total loans 1.40% 1.39%
Total non-performing assets to total assets 1.31% 1.03%
10
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is as follows (dollars in
thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ---------------
Loan loss balance - Beginning of period $ 4,632 $ 5,585
Provision (reduction) -- (800)
Loan losses (1,247) (2,162)
Loan recoveries 688 2,009
--------------- ---------------
Loan loss balance - End of period $ 4,073 $ 4,632
=============== ===============
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 - WORKFORCE REDUCTION
Effective July 18, 2003, PSB Group, Inc. announced a reduction in the workforce
of Peoples State Bank, its subsidiary, of 16 employees, or approximately 10% of
the total work force. The reduction included three vice presidents and three
vacant positions that will not be filled. The Company expects to realize
annualized pre-tax savings of approximately $850,000 from the reduction in force
and related operating expenses. Third quarter operating results were negatively
impacted by a one-time pre-tax charge of approximately $132,000 for severance
and other related costs.
NOTE 6 - SUBSEQUENT EVENTS - STOCK REDEMPTION
Effective October 31, 2003, PSB Group, Inc. announced the resignation of Nels
Olson II as a director of both PSB Group, Inc. and its subsidiary Peoples State
Bank. Concomitant with his resignation, PSB Group, Inc. agreed to purchase all
of his 263,118 shares of PSB Group, Inc. common stock for $23.3125 per share.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
PSB Group, Inc. (the "Company"), a bank holding company, was formed on February
28, 2003 for the purpose of owning all of the issued and outstanding common
stock of Peoples State Bank (the "Bank"). Shareholders of the Bank exchanged
each of their shares of stock in the Bank for three shares of stock in the
holding company. 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").
Today we operate nine branches.
We provide customary retail and commercial banking services to our customers,
including checking and savings accounts, time deposits, safe deposit facilities,
commercial loans, real estate mortgage loans, installment loans, IRAs and night
depository facilities. Our deposits are insured by the FDIC to applicable legal
limits and we are supervised and regulated by the FDIC and Michigan Office of
Financial and Insurance Services.
We provide a full range of retail and commercial banking services designed to
meet the borrowing and depository needs of small and medium-sized businesses and
consumers in local areas. Substantially all of our loans are to customers
located within our service area. We have no foreign loans or highly leveraged
transaction loans, as defined by the Federal Reserve Board ("FRB"). We conduct
our lending activities pursuant to the loan policies adopted by our Board of
Directors. These loan policies grant individual loan officers authority to make
secured and unsecured loans in specific dollar amounts; senior officers or
various loan committees must approve larger loans. Our management information
systems and loan review policies are designed to monitor lending sufficiently to
ensure adherence to our loan policies.
We also offer a full range of deposit and personal banking services insured by
the Federal Deposit Insurance Corporation ("FDIC"), including (i) commercial
checking and small business checking products, (ii) retirement accounts such as
Individual Retirement Accounts ("IRA"), (iii) retail deposit services such as
certificates of deposits, money market accounts, savings accounts, checking
account products and Automated Teller Machines ("ATMs"), Point of Sale and other
electronic services, and (iv) other personal miscellaneous services such as safe
deposit boxes, foreign draft, foreign currency exchanges, night depository
services, travelers checks, merchant credit cards, direct deposit of payroll,
U.S. savings bonds, official bank checks and money orders. We also offer credit
cards and internet banking. Full estate and trust services, insurance and
investment advice are offered through a partnership with Bank of Bloomfield
Hills, Bloomfield Hills, Michigan. Substantially all of our deposits are from
local market areas surrounding each of our offices.
Our net income is derived primarily from net interest income, which is the
difference between interest earned on our loan and investment portfolios and our
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 and borrowings determine net interest income.
12
FINANCIAL CONDITION
Company assets consist of customer loans, investment securities, bank premises
and equipment, cash and other operating assets. Total assets increased
approximately $6 million, or 1.5% to $409 million at September 30, 2003 from
$403 million at December 31, 2002. The balance of our investment securities
decreased by approximately $22 million to $65.4 million at September 30, 2003 as
compared to $87.5 million at December 31, 2002. The proceeds from this run-off,
along with a $9 million increase in deposits, were used to increase our loan
portfolio by $27 million to $313 million at September 30, 2003 and reduce our
federal funds borrowings by $4 million.
The allowance for loan losses decreased $559 thousand during the first nine
months of 2003. As a percentage of total loans, the allowance was reduced to
1.30% at September 30, 2003 from 1.62% at December 31, 2002. Management believes
this reserve is sufficient to meet anticipated future loan losses.
Total liabilities increased by $5 million to $362 million at September 30, 2003
from $357 million at December 31, 2002. As mentioned above, this was mainly due
to a $9 million, or 2.6% increase in total deposits to $349.5 million at
September 30, 2003 from $340.8 million at December 31, 2002. Approximately $7
million of this increase was in non-interest bearing demand deposits. The
increase in deposits was partially offset by a $3.9 million reduction in our
Federal Funds borrowings.
FINANCIAL RESULTS
Three Months Ended September 30, 2003
Net income for the three months ended September 30, 2003 was $1.039 million
compared to $1.417 million for the same period in 2002. Total interest income
decreased $613 thousand in the third quarter 2003 compared to the third quarter
2002. Interest and fees on loans accounted for $217 thousand of the decrease,
primarily due to the lower interest rate environment. Average loan balances in
the third quarter 2003 were approximately $31 million higher than the third
quarter 2002. However, the positive impact of the higher balances was more than
offset by the negative impact of the lower interest rates, as higher yielding
loans matured and were replaced by lower yielding loans and variable rate loans
re-priced downward.
Interest income on investment securities and federal funds sold decreased $396
thousand in the third quarter 2003 compared to the third quarter 2002. This
decrease is due in part to the lower interest rate environment, but also because
the average investment in securities and federal funds was about $24 million
lower in the third quarter 2003 than the third quarter 2002.
The decrease in interest income was partially offset by a $280 thousand decrease
in interest expense in the third quarter 2003 compared to the third quarter
2002. This decrease was primarily due to the lower interest rate environment as
average interest bearing deposits were relatively unchanged from the third
quarter 2002
During the third quarter 2003 there was no provision for loan losses recorded.
This compares to a $300 thousand negative provision that was recorded in the
third quarter 2002. This was a major contributing factor in the difference
between the net income recorded in the third quarter 2003 and the third quarter
2002.
13
Total other income was about $529 thousand higher in the third quarter 2003 than
the third quarter 2002. Service charges related to a new overdraft protection
product accounted for about $274 thousand of this increase. In addition, gains
on the sale of mortgages and mortgage servicing rights increased $140 thousand
in the third quarter 2003 compared to the same period in 2002. The increased
gains were primarily the result of increased refinancing activity due to the low
interest rate environment. Other loan related fees also increased $96 thousand
in the third quarter 2003 over the same period in 2002. The increases in other
income were partially offset by a $62 thousand decrease in the gain on the sale
of securities in the third quarter 2003 as compared to the third quarter 2002.
Total other operating expenses increased $436 thousand during the third quarter
2003 over the same period in 2002. Salaries and benefits accounted for about
$205 thousand of this increase which included higher commissions related to
increased mortgage closings, $41 thousand in increased health benefit expenses
and $45 thousand in accelerated severance expenses related to the July workforce
reduction. Occupancy expenses increased $101 thousand, including increased
depreciation on equipment upgrades and expenses related to the two loan
production offices that were opened this year. Other expenses increased $182
thousand including increased charge-offs related to the overdraft protection
product, increased marketing expenses and increased single business tax
accruals.
Nine Months Ended September 30, 2003
Net income for the nine months ended September 30, 2003 was $3.054 million
compared to $3.988 million for the same period in 2002. Total interest income
decreased $1.832 million in first nine months of 2003 compared to the first nine
months of 2002. Interest and fees on loans accounted for $767 thousand of the
decrease, primarily due to the lower interest rate environment. Year-to date
average loan balances in 2003 were approximately $22 million higher than 2002.
Again, the positive impact of the higher balances for the year-to date was more
than offset by the negative impact of the lower interest rates, as higher
yielding loans matured and were replaced by lower yielding loans and variable
rate loans re-priced downward.
Interest income on investment securities and federal funds sold decreased $1.065
million in the first nine months of 2003 compared to the same period in 2002.
This decrease is due in part to the lower interest rate environment, but also
because the average investment in securities and federal funds was about $19
million lower in the first nine months of 2003 than the first nine months of
2002. Most of this decrease, $13 million, was in the form of lower federal funds
balances.
The decrease in interest income was partially offset by a $1.275 million
decrease in interest expense in the first nine months of 2003 compared to the
same period in 2002. This decrease was primarily due to the lower interest rate
environment, but a $6 million decrease in average interest bearing deposits in
the first nine months of 2003 as compared to the same period in 2002 was also a
contributing factor.
Although non-performing loans increased to $4.393 million at September 30, 2003
from $3.959 million at December 31, 2002, management believes the loan loss
allowance is sufficient to meet anticipated future losses. Therefore, there was
no provision for loan losses recorded in 2003. This compares to the $800
thousand negative provision that was recorded in June 2002. This was a major
contributing factor in the difference between the net income recorded in the
first nine months of 2003 and the first nine months of 2002.
14
Total other income was about $1.342 million higher in the first nine months of
2003 than the same period in 2002. Service charges related to the new overdraft
protection product accounted for about $770 thousand of this increase. In
addition, year-to-date gains on the sale of mortgages and mortgage servicing
rights increased $473 thousand in the first nine months of 2003 compared to the
same period in 2002. The increased gains were primarily the result of increased
refinancing activity due to the low interest rate environment.
Total other operating expenses increased $1.288 million during the first nine
months of 2003 over the same period in 2002. Salaries and benefits accounted for
about $551 thousand of this increase, including $133 thousand in higher
commissions related to increased mortgage closings, $168 thousand in increased
cost of employee benefits and employment taxes and $45 thousand in accelerated
severance expenses related to the July workforce reduction. Occupancy expenses
increased $278 thousand, including increased depreciation on equipment upgrades,
and expenses related to the two loan production offices that were opened this
year. Legal and professional expenses were $97 thousand higher in the first nine
months of 2003 than the first nine months of 2002, including a $96 thousand
increase in consulting fees. Other expenses increased $362 thousand including an
increase in legal settlements ($50 thousand), increased charge-offs related to
the overdraft protection product ($71 thousand) and increased accruals for
Michigan Single Business Taxes ($80 thousand).
LIQUIDITY
The Company manages its liquidity position with the objective of maintaining
sufficient funds to respond to the needs of depositors and borrowers and to take
advantage of earnings enhancement opportunities. In addition to the normal
inflow of funds from core-deposit growth, together with repayments and
maturities of loans and investments, the Company utilizes other short-term
funding sources such as Federal Home Loan Bank advances and overnight federal
funds purchases from correspondent banks.
During the nine months ended September 30, 2003, $22.1 million in cash was
provided by run-off of investment securities. This, plus $8.7 million in cash
provided through increased deposits was used to pay off $3.9 million in federal
funds borrowings and increase our loan portfolio by $27.9 million. In addition,
we had a net outflow of $442 thousand for capital expenditures and paid $1.479
million in cash dividends during the period. During the nine months ended
September 30, 2003, we experienced a net decrease of $255 thousand in cash and
cash equivalents.
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. On August
25, 2003, the Bank paid a $9 million cash dividend to PSB Group, Inc. The
following table shows the capital totals and ratios for the Bank as of September
30, 2003:
Tier 1 capital $ 33,524
Total capital $ 37,249
Tier 1 capital to risk-weighted assets 11.26%
Total capital to risk-weighted assets 12.51%
15
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest rate and market risk profile has not materially
changed from the year ended December 31, 2002. Please refer to the Bank's Form
10-K filed on March 31, 2003 for further discussion of our market and interest
rate risk.
ITEM 4: CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. We evaluated the effectiveness
of the design and operation of our disclosure controls and procedures as of
September 30, 2003. 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. Robert L. Cole, 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. Cole 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, 2003.
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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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 31.1 Certification of Robert L. Cole 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 Robert L. Cole 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
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K on
July 22, 2003, to announce its earnings for the
quarter ended June 30, 2003 and to announce a
reduction in its workforce.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSB GROUP, INC.
Date: November 12, 2003 /s/Robert L. Cole
--------------------------------------------
ROBERT L. COLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 12, 2003 /s/David A. Wilson
--------------------------------------------
DAVID A. WILSON
CHIEF FINANCIAL OFFICER
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EXHIBIT INDEX
Exhibit 31.1 Certification of Robert L. Cole 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 Robert L. Cole 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
19