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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 June 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
------------- -------------
(2) 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 June 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............................................18
Item 6. Exhibits and Reports on Form 8-K.............................18
SIGNATURES...........................................................19
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)
JUNE 30, DECEMBER 31,
2003 2002
--------- ---------
ASSETS
Cash and cash equivalents $ 30,263 $ 14,158
Securities available for sale 63,536 87,498
Loans 303,918 285,602
Less allowance for possible loan loss (4,259) (4,632)
--------- ---------
Net loans 299,659 280,970
Loans held for sale 6,573 3,626
Bank premises and equipment 9,382 9,427
Accrued interest receivable 1,904 2,061
Other assets 5,383 4,849
--------- ---------
Total assets $ 416,700 $ 402,589
========= =========
LIABILITIES
Deposits:
Non-interest bearing $ 65,364 $ 47,550
Interest bearing 297,934 293,230
--------- ---------
Total deposits 363,298 340,780
Federal funds purchased - 9,210
FHLB borrowings 5,000 5,000
Accrued taxes, interest and other liabilities 1,975 2,126
--------- ---------
Total liabilities 370,273 357,116
STOCKHOLDERS' EQUITY
Common stock -- no par value -- 5,000,000
authorized - 3,148,191 shares issued and
outstanding at June 30, 2003 and December 31, 2002 23,694 23,694
Retained earnings 21,932 20,861
Accumulated other comprehensive income 801 918
--------- ---------
Total stockholders' equity 46,427 45,473
--------- ---------
Total liabilities and stockholders' equity $ 416,700 $ 402,589
========= =========
3
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands, except share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
INTEREST INCOME:
Interest and fees on loans $ 5,003 $ 5,212 $ 9,914 $ 10,464
SECURITIES:
Taxable 385 681 864 1,286
Tax-exempt 238 302 489 610
Federal funds sold 15 51 19 145
-------- -------- -------- --------
TOTAL INTEREST INCOME 5,641 6,246 11,286 12,505
INTEREST EXPENSE:
Deposits 1,312 1,810 2,633 3,638
FHLB & Short-term borrowings 56 56 121 111
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 1,368 1,866 2,754 3,749
-------- -------- -------- --------
NET INTEREST INCOME 4,273 4,380 8,532 8,756
Provision for loan loss - (500) - (500)
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 4,273 4,880 8,532 9,256
OTHER OPERATING INCOME:
Service charges on deposit accounts 577 316 1,149 652
Other income 942 754 1,714 1,398
-------- -------- -------- --------
TOTAL OTHER INCOME 1,519 1,070 2,863 2,050
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,492 2,221 4,921 4,575
Occupancy costs 652 564 1,375 1,198
Legal and professional 390 306 684 535
Other operating expense 937 752 1,646 1,466
-------- -------- -------- --------
TOTAL OTHER OPERATING EXPENSES 4,471 3,843 8,626 7,774
-------- -------- -------- --------
INCOME - BEFORE FEDERAL INCOME TAXES 1,321 2,107 2,769 3,532
Federal income taxes 358 597 754 961
-------- -------- -------- --------
NET INCOME $ 963 $ 1,510 $ 2,015 $ 2,571
======== ======== ======== ========
BASIC EARNINGS PER WEIGHTED AVERAGE OUTSTANDING
SHARE OF COMMON STOCK $ .31 $ .48 $ .64 $ .82
======== ======== ======== ========
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ .31 $ .48 $ .64 $ .82
======== ======== ======== ========
4
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income $ 963 $ 1,510 $ 2,015 $ 2,571
Other comprehensive income (loss):
Change in unrealized gain on securities
available for sale, net of tax 51 314 (117) 65
------- ------- ------- -------
Comprehensive income $ 1,014 $ 1,824 $ 1,898 $ 2,636
======= ======= ======= =======
5
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 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 - 2,015 - 2,015
Change in unrealized gain on - - (117) (117)
securities available for sale, net
of tax
Cash dividends - (944) - (944)
-------- -------- -------- --------
Balance -- June 30, 2003 $ 23,694 $ 21,932 $ 801 $ 46,427
======== ======== ======== ========
6
PSB GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
--------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ (520) $ 4,172
CASH FLOW FROM INVESTING ACTIVITIES:
Net decrease (increase) in securities 23,443 (15,985)
Net increase in loans (18,689) (6,421)
Capital expenditures (493) (1,091)
--------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING 4,261 (23,497)
ACTIVITIES
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 22,518 4,638
Net decrease in federal funds purchased (9,210) -
Cash dividends (944) (905)
--------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,364 3,733
--------------- -------------
NET INCREASE (DECREASE) IN CASH 16,105 (15,592)
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 14,158 37,976
PERIOD --------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 30,263 $ 22,384
=============== =============
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 the
Company as of June 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 six-month period ended June 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 financial impact and is reflected for all prior periods
presented. Per share amounts have been retroactively restated to reflect the
three-for-one exchange of stock.
NOTE 2 -- SECURITIES
The amortized cost and estimated market value of securities are as follows (000s
omitted):
June 30, 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 $ 31,488 $ 439 $ 3 $ 31,924
Obligations of state and political
subdivisions 24,244 728 - 24,972
Corporate debt securities 5,006 50 - 5,056
Other 1,584 - - 1,584
----------- ------------- ------------- ------------
Total available-for-sale securities $ 62,322 $ 1,217 $ 3 $ 63,536
=========== ============= ============= ============
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 June 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 June 30, 2003,
all securities are available for sale (000s omitted).
Available for Sale
-------------------------------------------
Amortized Market
Cost Value
--------------- ----------------
Due in one year or less $ 32,408 $ 32,739
Due in one year through five years 16,191 16,701
Due after five years through ten years 1,907 2,044
Due after ten years 1,445 1,482
--------------- ----------------
51,951 52,966
Federal agency pools 8,787 8,986
Other 1,584 1,584
--------------- ----------------
Total $ 62,322 $ 63,536
=============== ================
Securities having a carrying value of $2,031,126 (market value of $2,078,437)
were pledged at June 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 June 30, 2003 and
December 31, 2002 are as follows (dollars in thousands):
JUNE 30, DECEMBER 31,
2003 2002
------------------ --------------------
Mortgages on Real Estate $ 218,340 $ 197,540
Commercial 59,490 63,331
Consumer 26,088 24,731
------------------ --------------------
Total $ 303,918 $ 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 which have not been disclosed below which
cause it to have doubts as to the ability of the borrowers to comply with the
contractual loan terms, or which may have a material effect on the Company's
balance sheet or results from operations. Non-performing assets consists of
non-accrual loans, loans past due 90 or more days, restructured loans and real
estate that has been acquired in full or partial satisfaction of loan
obligations or upon foreclosure. As of June 30, 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):
June 30, December 31,
2003 2002
-------------------- -------------------
Non-accrual loans $ 1,898 $ 2,746
Loans past due 90 or more days 967 306
Renegotiated loans 882 907
-------------------- -------------------
Total non-performing loans 3,747 3,959
Other real estate owned 974 224
-------------------- -------------------
Total non-performing assets $ 4,721 $ 4,183
==================== ===================
Total non-performing loans to total loans 1.23% 1.39%
Total non-performing assets to total assets 1.13% 1.03%
10
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is as follows (dollars in
thousands):
JUNE 30, 2003 DECEMBER 31, 2002
------------------- -------------------
Loan loss balance - Beginning of period $ 4,632 $ $ 5,585
Reduction charged to operations - (800)
Loan losses (895) (2,162)
Loan recoveries 522 2,009
------------------- -------------------
Loan loss balance - End of period $ 4,259 $ 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 - SUBSEQUENT EVENTS - 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 will be
negatively impacted by a one-time pre-tax charge of approximately $125,000 for
severance and other related costs.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
OVERVIEW
PSB Group, Incorporated (the "Company"), a bank holding company, was formed on
February 28, 2003 for the purpose of owning 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 ten 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 $14 million, or 3.5% to $417 million at June 30, 2003 from $403
million at December 31, 2002. The balance of our investment securities decreased
by approximately $24 million to $63.5 million at June 30, 2003 as compared to
$87.5 million at December 31, 2002. The proceeds from this run-off, along with a
$23 million increase in deposits, were used to increase our loan portfolio by
$18 million to $304 million at June 30, 2003, reduce our federal funds
borrowings by $9 million and increase liquidity by adding $16 million to our
cash and cash equivalents. Because of strong mortgage re-financings, the balance
of our loans held for sale increased $2.9 million during the first six months of
the year to $6.6 million at June 30, 2003.
The allowance for loan losses decreased $373 thousand during the first six
months of 2003. As a percentage of total loans, the allowance was reduced to
1.40% at June 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 $13 million to $370 million at June 30, 2003 from
$357 million at December 31, 2002. As mentioned above, this was mainly due to a
$23 million, or 6.6% increase in total deposits to $363.3 million at June 30,
2003 from $340.8 million at December 31, 2002. Approximately $18 million of this
increase was in non-interest bearing demand deposits. The increase in deposits
was partially offset by a $9.2 million reduction in our Federal Funds
borrowings.
FINANCIAL RESULTS
Three Months Ended June 30, 2003
Net income for the three months ended June 30, 2003 was $963 thousand compared
to $1.51 million for the same period in 2002. Total interest income decreased
$605 thousand in the second quarter 2003 compared to the second quarter 2002.
Interest and fees on loans accounted for $209 thousand of the decrease,
primarily due to the lower interest rate environment. Average loan balances in
the second quarter 2003 were approximately $18 million higher than the second
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.
Interest income on investment securities and federal funds sold decreased $396
thousand in the second quarter 2003 compared to the second 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 $22 million
lower in the second quarter 2003 than the second quarter 2002.
The decrease in interest income was partially offset by a $498 thousand decrease
in interest expense in the second quarter 2003 compared to the second quarter
2002. This decrease was primarily due to the lower interest rate environment,
but an $8 million decrease in average interest bearing deposits in the second
quarter 2003 as compared to the same period in 2002 was also a contributing
factor.
During the second quarter 2003 there was no provision for loan losses recorded.
This compares to a $500 thousand negative provision that was recorded in June
2002. This was a major contributing
13
factor in the difference between the net income recorded in the second quarter
2003 and the second quarter 2002.
Total other income was about $449 thousand higher in the second quarter 2003
than the second quarter 2002. Service charges related to a new overdraft
protection product accounted for about $247 thousand of this increase. In
addition, gains on the sale of mortgages and mortgage servicing rights increased
$227 thousand in the second quarter 2003 compared to the same period in 2002.
Total other operating expenses increased $628 thousand during the second quarter
2003 over the same period in 2002. Salaries and benefits accounted for about
$271 thousand of this increase which included higher commissions related to
increased mortgage closings. Occupancy expenses increased $88 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 $84 thousand higher in the second quarter 2003 than
the second quarter 2002, including a $56 thousand increase in consulting fees.
Other expenses increased $185 thousand including an increase in legal
settlements and increased charge-offs related to the overdraft protection
product.
Six Months Ended June 30, 2003
Net income for the six months ended June 30, 2003 was $2.015 million compared to
$2.571 million for the same period in 2002. Total interest income decreased
$1.219 million in first six months of 2003 compared to the first six months of
2002. Interest and fees on loans accounted for $550 thousand of the decrease,
primarily due to the lower interest rate environment. Year-to date average loan
balances in 2003 were approximately $17 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.
Interest income on investment securities and federal funds sold decreased $669
thousand in the first six 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 $16
million lower in the first half of 2003 than the first half of 2002. Most of
this decrease, $14 million, was in the form of lower federal funds balances.
The decrease in interest income was partially offset by a $995 thousand decrease
in interest expense in the first half of 2003 compared to the same period in
2002. Again, this decrease was primarily due to the lower interest rate
environment, but an $8 million decrease in average interest bearing deposits in
the first six months of 2003 as compared to the same period in 2002 was also a
contributing factor.
There was no provision for loan losses recorded in 2003. This compares to the
$500 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 half of 2003 and the first half of 2002.
Total other income was about $813 thousand higher in the first half of 2003 than
the same period in 2002. Service charges related to the new overdraft protection
product accounted for about $478 thousand of this increase. In addition,
year-to-date gains on the sale of mortgages and mortgage servicing rights
increased $333 thousand in the first six months of 2003 compared to the same
period in 2002.
14
Total other operating expenses increased $852 thousand during the first half of
2003 over the same period in 2002. Salaries and benefits accounted for about
$346 thousand of this increase, including $115 thousand in higher commissions
related to increased mortgage closings and $105 thousand in increased cost of
employee benefits and employment taxes. Occupancy expenses increased $177
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 $149 thousand higher in the first half of 2003 than
the first half of 2002, including a $103 thousand increase in consulting fees.
Other expenses increased $180 thousand including an increase in legal
settlements, increased charge-offs related to the overdraft protection product
and increased accruals for Michigan Single Business Taxes.
LIQUIDITY
The Company manages its liquidity position with the objective of maintaining
sufficient funds to respond to the needs of depositors and borrowers and to take
advantage of earnings enhancement opportunities. In addition to the normal
inflow of funds from core-deposit growth, together with repayments and
maturities of loans and investments, the Company utilizes other short-term
funding sources such as Federal Home Loan Bank advances and overnight federal
funds purchases from correspondent banks.
During the six months ended June 30, 2003, $23.4 million in cash was provided by
run-off of investment securities. This, plus $22.5 million in cash provided
through increased deposits was used to pay off $9.2 million in federal funds
borrowings and increase our loan portfolio by $18.7 million. In addition, we had
a net outflow of $493 thousand for capital expenditures and paid $944 in cash
dividends during the period. During the six months ended June 30, 2003, we
experienced a net increase of $16.1 million in cash and cash equivalents to meet
the demands of our depositors and to take advantage of future investment
opportunities.
CAPITAL RESOURCES
Banks are expected to meet a minimum risk-based capital to risk-weighted assets
ratio of 8%, of which at least one-half (4%) must be in the form of Tier 1
(core) capital. The remaining one-half may be in the form of Tier 1 or Tier 2
(supplemental) capital. The amount of loan loss allowance that may be included
in capital is limited to 1.25% of risk-weighted assets. The Bank is currently,
and expects to continue to be, in compliance with these guidelines. The
following table shows the capital totals and ratios for the Bank as of June 30,
2003:
Tier 1 capital $41,453
Total capital $45,154
Tier 1 capital to risk-weighted assets 14.03%
Total capital to risk-weighted assets 15.28%
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 June
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 June 30, 2003.
16
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
a. The Bank's Annual Meeting of Shareholders was held on
April 22, 2003.
b. At that meeting, the shareholders approved the following
matters:
PROPOSAL 1: APPROVAL OF CONSOLIDATION AGREEMENT
Approval of the Consolidation Agreement among PSB
Interim Bank,
Peoples State Bank and PSB Group, Inc. dated
February 28, 2003.
For - 755,195
Against - 28,948
Abstain - 1,760
PROPOSAL 2: ELECTION OF DIRECTORS
Three directors were proposed for election to the Board with
three year terms expiring at the annual meeting in 2006. The
director nominees were elected with the results as follows:
FOR WITHHELD
------- ---------
James B. Jacobs 789,249 2,365
Longine V. Morawski 791,204 410
Edward Turner 774,949 16,695
In addition, the following directors terms of office continued
after the meeting:
David L. Wood
Robert L. Cole
Michael J. Kowalski
Craig J. Mancinotti
Nels L. Olsen II
17
Sydney L. Ross
Thomas F. Meeker, Director Emeritus
ITEM 5. OTHER INFORMATION
At the annual meeting on April 22, 2003, the shareholders approved the
formation of a holding company, PSB Group, Inc. The holding company was formed
on February 28, 2003. Each share of the Bank's stock was exchanged for three
shares of stock in the holding company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 3.1 Restated Articles of Incorporation
Exhibit 3.2 Bylaws
Exhibit 4.1 Form of Stock Certificate
Exhibit 10.1 Management Continuity Agreement -
Robert L. Cole
Exhibit 10.2 Management Continuity Agreement -
Don Phillippi
Exhibit 10.3 Management Continuity Agreement -
Theodore Bangert
Exhibit 10.4 Management Continuity Agreement -
David Wilson
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
June 2, 2003, related to the formation of PSB Group,
Inc. as the holding company for Peoples State Bank.
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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: August 11, 2003 /s/Robert L. Cole
----------------------------------------
ROBERT L. COLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: August 11, 2003 /s/David A. Wilson
----------------------------------------
DAVID A. WILSON
CHIEF FINANCIAL OFFICER
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EXHIBIT INDEX
Exhibit 3.1 Restated Articles of Incorporation
Exhibit 3.2 Bylaws
Exhibit 4.1 Form of Stock Certificate
Exhibit 10.1 Management Continuity Agreement - Robert L. Cole
Exhibit 10.2 Management Continuity Agreement - Don Phillippi
Exhibit 10.3 Management Continuity Agreement - Theodore Bangert
Exhibit 10.4 Management Continuity Agreement - David Wilson
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
20