SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission File No.: 000-50301
PSB GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 42-1591104
(State of Organization) (IRS Employer Identification No.)
1800 EAST TWELVE MILE ROAD, MADISON HEIGHTS,
MICHIGAN 48071
(Address of Principal Executive Offices) (Zip Code)
(248) 548-2900
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. YES [ ] NO [X]
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 the past 90 days. [YES X NO ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of June 30, 2005, the last business day of the registrant's most
recently completed second quarter, the aggregate market value of the voting
stock held by non-affiliates of the registrant, computed by reference to the
last per share sales price of which the registrant is aware ($18.60 per share),
was approximately $54,504,250 (for purposes of this calculation, directors,
executive officers and beneficial owners of more than 10% of the registrant's
outstanding voting stock are treated as affiliates).
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As of March 1, 2006, there were issued and outstanding 3,029,152 shares of
the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Shareholders for the Fiscal Year Ended
December 31, 2005 (the "Annual Report") (Parts I and II).
2. Portions of Proxy Statement for the 2006 Annual Meeting of Shareholders
(the "Proxy Statement") (Part III).
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INDEX
PAGE
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PART I................................................................... 4
Item 1. Business..................................................... 4
Item 1A. Risk Factors................................................. 16
Item 1B. Unresolved Staff Comments.................................... 22
Item 2. Properties................................................... 23
Item 3. Legal Proceedings............................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.......... 24
SUPPLEMENTAL INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT....... 24
PART II.................................................................. 25
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securiites................................................... 25
Item 6. Selected Financial Data...................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 25
Item 8. Financial Statements and Supplementary Data.................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 26
Item 9A. Controls and Procedures...................................... 26
Item 9B. Other Information............................................ 26
PART III................................................................. 26
Item 10. Directors and Executive Officers of the Registrant........... 27
Item 11. Executive Compensation....................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................... 27
Item 13. Certain Relationships and Related Transactions............... 27
Item 14. Principal Accountant Fees and Services....................... 27
Item 15. Exhibits and Financial Statement Schedules................... 28
SIGNATURES............................................................ 30
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PART I
ITEM 1. BUSINESS
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 stockholders.
Pursuant to the reorganization, each share of Peoples State Bank stock held by
existing stockholders of the Bank was exchanged for three shares of common stock
of PSB Group, Inc. The reorganization had no consolidated financial statement
impact. Share amounts for all prior periods presented have been restated to
reflect the reorganization. In October, 2004, the Company formed a new
subsidiary, PSB Capital, Inc. Through December 31, 2005, there had been no
business conducted by PSB Capital, Inc.
The Bank was incorporated and chartered as Peoples State Bank under the
laws of the state of Michigan in 1909. In 1916, the Bank moved to the southeast
corner of Jos. Campau and Holbrook in Hamtramck, where the main office at 9252
Jos. Campau remains today. Following several name changes and a merger with four
small local banks in 1930, a plan of reorganization was accepted by the
shareholders, and the name was changed to "Peoples State Bank" in November 1934.
Effective May 15, 1998, the Bank acquired Madison National Bank, Madison
Heights, Michigan ("Madison"). Effective May 1, 2000, the Bank acquired 100% of
the common stock of Universal Mortgage Corporation, a southeast Michigan based
mortgage lender with 2 offices, one in Southfield, Michigan and one in Warren,
Michigan. In June, 2005, Universal Mortgage Corporation acquired the assets of
Nations One, a southeast Michigan based mortgage originator with two offices,
one in Ann Arbor, Michigan and one in Howell, Michigan.
The Bank operated as a unit bank until July 20, 1992, when it opened its
first branch office at 3747 Fifteen Mile Road, Sterling Heights, Michigan. It
then continued its Macomb County expansion by opening the following branch
offices: (1) 25901 Harper Avenue, St. Clair Shores, Michigan - December 5, 1994;
(2) 14801 Twelve Mile Road, Warren, Michigan - March 13, 1995; and, (3) 31130
Ryan Road, Warren, Michigan - April 10, 1995. Subsequently, the Sterling Heights
office was closed on June 30, 1995 and consolidated into the new facility on
Ryan Road in Warren. During 1997, the Bank opened a supermarket branch at 40832
Ryan Road in Sterling Heights. On May 15, 1998, the Bank acquired Madison
pursuant to a Merger Agreement in which Madison was merged with and into the
Bank (the "Merger"). In connection with the Merger, the Bank acquired the former
offices of Madison which include Madison's former main office at 1800 E. Twelve
Mile Road in Madison Heights, Michigan, a branch office in Madison Heights, two
branches in Farmington Hills and one branch in each of Southfield and Fraser.
Effective March 15, 2001, the Bank closed on a branch sale and assumption
agreement with a newly formed bank holding company. Pursuant to that agreement,
the Bank sold certain assets and transferred certain liabilities to the newly
formed holding company, effectively closing the Plymouth, Michigan branch. In
June 2001, the Bank closed one of the Farmington Hills, Michigan branches. The
cash, furniture, fixtures, equipment and deposits were transferred to another
branch. On March 4, 2002 the Bank opened a branch in Grosse Pointe Woods,
Michigan. In September, 2003, the Fraser branch was closed with the deposit
relationships transferred to another branch. During 2005, the Bank opened two
new branches, one in Sterling Heights, Michigan and the other in Fenton,
Michigan.
As of December 31, 2005, the Company had approximately $495 million in
total assets, $365.1 million in total loans, $424.7 million in total deposits
and $43 million in total shareholder equity.
PRODUCTS AND SERVICES
The Company provides customary retail and commercial banking services to
its customers, including checking and savings accounts, time deposits, safe
deposit facilities, commercial loans, real estate mortgage loans, installment
loans, IRAs and night depository facilities. The Bank's deposits are insured by
the FDIC to applicable legal limits and the Bank is supervised and regulated by
the FDIC and Michigan Office of Financial and Insurance Services, Division of
Financial Institutions.
Lending Activities
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The Company provides 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 the Company's
loans are to customers located within its service area. The Company has no
foreign loans or highly leveraged transaction loans, as defined by the Federal
Reserve Board ("FRB"). The Company conducts its lending activities pursuant to
the loan policies adopted by its Board of Directors. These loan policies grant
individual loan officer's authority to make secured and unsecured loans in
specific dollar amounts; senior officers or various loan committees must approve
larger loans. The Company's management information systems and loan review
policies are designed to monitor lending sufficiently to ensure adherence to the
Company's loan policies.
The commercial loans offered by the Company include (i) commercial real
estate loans, (ii) operating lines of credit and other commercial term loans,
(iii) construction loans, and (iv) SBA-guaranteed loans. The Company's
commercial real estate loans are used to provide permanent financing for
owner-occupied, retail and office buildings, multiple-family buildings and
churches. Commercial real estate secured loans are generally written on a three
to five year term, with amortizing periods ranging up to 25 years. Personal
guarantees are obtained on nearly all commercial loans. Credit analyses, loan
review and an effective collections process are also used to minimize any
potential losses. The interest rates charged on loans vary with the degree of
risk and loan amount and are further subject to competitive pressures, money
market rates, the availability of funds and government regulations.
Approximately 55% of the Company's portfolio has interest rates that float with
a reference rate.
Real estate loans include residential mortgages for which the Company holds
first and second collateral positions in real property. Real estate loans
include adjustable and fixed-rate loans secured by first priority liens on
one-to four-family residential properties. Residential mortgage products include
fixed rate loans, fixed rate balloon loans and adjustable rate mortgages. Terms
vary from a seven-year ARM to a one year adjustable with a 30 year amortization.
The longest term allowed on a fixed rate loan is 30 years. The Company does not
purchase loans but is active in secondary market lending and is also a member of
the Federal Home Loan Bank of Indianapolis.
Construction loans are typically made to individuals and contractors to
construct single-family residences and commercial buildings. These loans
generally have maturities of three to 18 months. These loans are variable rate
and it is typical for "take out" commitments to be in place as a part of the
transaction. All construction loans are funded at the lower of 80% of appraised
value or cost of construction.
Consumer loans offered by the Company include (i) personal unsecured lines
of credit, (ii) personal installment loans, (iii) credit card, and (iv) home
equity loans (fixed-rate term and open ended revolving lines of credits).
Consumer loans are primarily automobile, home equity or unsecured loans.
Consumer loans generally have maturities of five years or less and have fixed
interest rates. Other loans consist of personal lines of credit and bank card
advances. Personal lines of credit and home equity lines generally have
maturities from one to ten years and variable interest rates. Bank card payments
are generally due monthly and bear interest rates that vary from time-to-time.
Personal unsecured loans are available to creditworthy bank customers with
limits determined on a loan by loan basis. Credit reports and industry standard
debt-to-income ratios of 40% or less are used to qualify borrowers. Home equity
products include both a fixed-rate term product and an open-end revolving line
of credit.
Loan Approval
Individual loan authorities are established by the Company's Board of
Directors upon recommendation by the Company's senior lender. In establishing
individual authority the experience of the lender is taken into consideration,
as well as the type of lending in which the officer is involved. The Officers
Loan Committee consists of the President of the Company, the senior lender,
other lending officers and credit officers as recommended by the senior lender
and approved by the Directors Loan Committee. The Officers Loan Committee has
the authority to approve and consummate loans up to $1,000,000. The Directors
Loan Committee of the Board of Directors has the authority to approve loans up
to $3,000,000. These loans come to the Committee with a review, analysis and
recommendation by the lender and the Officers Loan Committee. Loans exceeding
$3,000,000 come to the full Board of Directors after review by the Directors
Loan Committee with their recommendation and that of the lender. The full Board
of Directors reviews, on a monthly basis, all loans approved by the Officers
Loan Committee.
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The Company generally requires that loans secured by first mortgages on
real estate have loan to value ratios within specified limits, up to 90% for
improved property, with the exception of secondary market programs and loans
secured by private mortgage insurance which allow loan to value ratios as high
as 100%. The Company also makes loans secured by second mortgages on real
estate. The Company also offers non-conforming loans with certain restrictions
for those customers having a lack of credit history. This product has a maximum
portfolio balance of $70,000,000 and is targeted at the market of relocated
persons from abroad.
Under applicable federal and state law, the Bank's permissible loans to one
borrower are also limited. The Company utilizes internal limits that may be less
than or equal to the prevailing legal limits.
NON-PERFORMING ASSETS
ASSET QUALITY. Asset quality is an important factor in the successful
operation of a financial institution. The loss of interest income and principal
that may result from non-performing assets has an adverse affect on earnings,
while the resolution of those assets requires the use of capital and managerial
resources. The Company maintains a conservative philosophy regarding its
underwriting guidelines. It also maintains loan monitoring policies and systems
that require detailed monthly and quarterly analysis of delinquencies,
non-performing loans, non-accrual loans, repossessed and other assets. Reports
of such categories are reviewed by management and the Board of Directors.
Deposit Activities
The Company also offers 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 drafts, 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. The Company also offers credit cards and internet banking. Full
estate and trust services, insurance and investment advice are offered through a
partnership with The Private Bank, Bloomfield Hills, Michigan.
The principal sources of funds for the Company are core deposits (demand
deposits, interest-bearing transaction accounts, money market accounts, savings
deposits, and certificates of deposit). The Company solicits these deposits from
individuals, businesses, foundations and governmental authorities. Substantially
all of the Company's deposits are from local market areas surrounding each of
its offices. The Company has a small amount of brokered deposits (less than 1%
of total deposits).
Investment Portfolio and Activities
The Company's investment portfolio has several objectives. A key objective
is to provide a balance in the Company's asset mix of loans and investments
consistent with its liability structure, and to assist in management of interest
rate risk. The investments augment the Company's capital position in the risk
based capital formula, providing necessary liquidity to meet fluctuations in
credit demands of the community and fluctuations in deposit levels. In addition,
the portfolio provides collateral for pledging against public funds, and a
reasonable allowance for control of tax liabilities. Finally, the investment
portfolio is designed to provide income for the Company. In view of the above
objectives, the portfolio is treated conservatively by management, and only
securities that pass conservative investment criteria are purchased. The Company
does not engage in any derivatives trading. The portfolio will commonly
fluctuate between 10% and 30% of the Company's assets. All of the Company's
investment securities are classified as available for sale.
Borrowings
From time to time, the Company obtains advances from the FHLB of
Indianapolis. Each borrowing is at separate terms including interest rate and
month until repayment. The Company can vary these terms depending on
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the specific liquidity and rate mix objective that management is trying to meet
at the time of the borrowing. Objectives can change at various points in time
depending on market conditions and loan funding needs.
The Company also purchases federal funds from various other financial
institutions in order to satisfy overnight liquidity needs. Federal funds
purchases are renewable on a daily basis and are generally subject to interest
rates established by the Federal Reserve Bank.
Additional Activities
The Company provides its commercial and public fund accounts with money
market sweep accounts through Federated Investments, a third party vendor. The
Company provides investment services through Vision Investment Services, Inc.
Full-time sales representatives work at various branch offices and offer a full
range of investment products.
MARKET AREA AND COMPETITION
The primary service area of the Company consists of southern Oakland
County, southern Macomb County, those portions of Wayne County that include the
city of Detroit and its northern suburbs and a portion of Genesee County, in
particular, the cities of Fenton and Linden.
The Company operates in a highly competitive industry. The Company's main
competition comes from other commercial banks, savings and loan associations,
credit unions, brokerage firms, insurance companies, finance companies, mortgage
companies and a host of other financial service providers.
The Company generally competes with other financial institutions through
the banking products and services offered, the pricing of services, the level of
service provided, the convenience and availability of services, and the degree
of expertise and personal manner in which these services are delivered. The
Company encounters strong competition from most of the financial institutions in
the Company's extended market area.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions and
general economic conditions, but also by the requirements of applicable state
and federal statutes and regulations and the policies of various governmental
regulatory authorities, including the Michigan Office of Financial and Insurance
Services (the "OFIS"), the Board of Governors of the Federal Reserve System (the
"Federal Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"), the
Internal Revenue Service and state taxing authorities and the Securities and
Exchange Commission (the "SEC"). The effect of applicable statutes, regulations
and regulatory policies can be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and the Bank, regulate, among other things,
the scope of business, investments, reserves against deposits, capital levels
relative to operations, the nature and amount of collateral for loans, the
establishment of branches, mergers, consolidations and dividends. The system of
supervision and regulation applicable to the Company and the Bank establishes a
comprehensive framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors, rather than the shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and the Bank. It does not describe all of
the statutes, regulations and regulatory policies that apply to the Company and
the Bank, nor does it restate all of the requirements of the statutes,
regulations and regulatory policies that are described. As such, the following
is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and the Bank.
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The Company participates in various community development programs in an
effort to meet its responsibilities under the Community Reinvestment Act
("CRA"). The Bank has most recently been rated "Outstanding" in meeting its
obligations under the CRA.
THE COMPANY
GENERAL. The Company, as the sole stockholder of the Bank is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the Federal Reserve under the Bank Holding Company
Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company is expected to act as a source of financial strength to its bank
subsidiaries and to commit resources to support its bank subsidiary in
circumstances where the Company might not do so absent such policy. Under the
BHCA, the Company is subject to periodic examination by the Federal Reserve and
is required to file with the Federal Reserve periodic reports of its operations
and such additional information as the Federal Reserve may require.
A bank holding company is a legal entity separate and distinct from its
subsidiary banks. Normally, the major source of a holding company's revenue is
dividends it receives from its subsidiary banks. The right of a bank holding
company to participate as a stockholder in any distribution of assets of its
subsidiary banks upon their liquidation or reorganization or otherwise is
subject to the prior claims of creditors of such subsidiary banks. The
subsidiary banks are subject to claims by creditors for long-term and short-term
debt obligations, including obligations for Federal funds purchased and
securities sold under repurchase agreements, as well as deposit liabilities.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989,
in the event of a loss suffered by the FDIC in connection with a banking
subsidiary of a bank holding company (whether due to a default or the provision
of FDIC assistance), other banking subsidiaries of the holding company could be
assessed for such loss.
INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must
obtain Federal Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the
shares of the other bank or bank holding company (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating with another
bank holding company. Subject to certain conditions (including certain deposit
concentration limits established by the BHCA), the Federal Reserve may allow a
bank holding company to acquire banks located in any state of the United States
without regard to whether the acquisition is prohibited by the law of the state
in which the target bank is located. In approving interstate acquisitions,
however, the Federal Reserve is required to give effect to applicable state law
limitations on the aggregate amount of deposits that may be held by the
acquiring bank holding company and its insured depository institution affiliates
in the state in which the target bank is located (provided that those limits do
not discriminate against out-of-state depository institutions or their holding
companies) and state laws which require that the target bank has been in
existence for a minimum period of time (not to exceed five years) before being
acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company which is not a bank and from engaging in any business other than that of
banking, managing and controlling banks or furnishing services to banks and
their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in,
and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be "so closely related to banking ... as to be a proper
incident thereto." Under current regulations of the Federal Reserve, the Company
and its non-bank subsidiaries are permitted to engage in a variety of
banking-related businesses, including the operation of a thrift, consumer
finance, equipment leasing, the operation of a computer service bureau
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
In 1999, the Gramm-Leach-Bliley Act ("GLB Act") was signed into law. Under
the GLB Act, bank holding companies that meet certain standards and elect to
become "financial holding companies" are permitted to engage in a wider range of
activities than those permitted to bank holding companies, including securities
and insurance activities. Specifically, a bank holding company that elects to
become a financial holding company may
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engage in any activity that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines is (i) financial in nature or incidental
thereto, or (ii) complementary to any such financial-in-nature activity,
provided that such complementary activity does not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. A bank holding company may elect to become a financial holding
company only if each of its depository institution subsidiaries is
well-capitalized, well-managed, and has a Community Reinvestment Act rating of
"satisfactory" or better at their most recent examination.
The GLB Act specifies many activities that are financial in nature,
including lending, exchanging, transferring, investing for others, or
safeguarding money or securities; underwriting and selling insurance; providing
financial, investment or economic advisory services; underwriting, dealing in,
or making a market in securities; and those activities currently permitted for
bank holding companies that are so closely related to banking or managing or
controlling banks, as to be a proper incident thereto.
The GLB Act changed federal laws to facilitate affiliation between banks
and entities engaged in securities and insurance activities. The law also
established a system of functional regulation under which banking activities,
securities activities, and insurance activities conducted by financial holding
companies and their subsidiaries and affiliates will be separately regulated by
banking, securities, and insurance regulators, respectively.
Federal law also prohibits any person or company from acquiring "control"
of a bank or bank holding company without prior notice to the appropriate
federal bank regulator. "Control" is defined in certain cases as the acquisition
of 10% of the outstanding shares of a bank or bank holding company.
REGULATORY CAPITAL REQUIREMENTS. Bank holding companies are required to
maintain minimum levels of capital in accordance with Federal Reserve capital
adequacy guidelines, which are substantially similar to those of the FDIC for
the Bank. See "Supervision and Regulation - The Bank - Regulatory Capital
Requirements" for a discussion of the risk-based framework for the assessment of
capital adequacy and components of Tier 1 and Tier 2 capital. If capital falls
below minimum guideline levels, a bank holding company, among other things, may
be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, at least one-half of which must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all
others.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve's capital guidelines contemplate that
additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios well above the minimum levels.
As of December 31, 2005, the Company had regulatory capital in excess of
the Federal Reserve's minimum requirements with a ratio of Tier 1 capital to
risk-weighted assets of 10.73%, a ratio of total capital to risk-weighted assets
of 11.74%, and a leverage ratio of 8.07%.
DIVIDENDS. The Michigan Business Corporation Act prohibits the Company from
paying dividends or making other distributions to shareholders, if after giving
effect to the dividend or other distribution, the Company would not be able to
pay its debts as they become due in the usual course of business or if the
Company's assets would be less than the sum of its total liabilities plus the
amount that would be needed upon dissolution of the Company to satisfy
preferential rights of shareholders whose preferential rights are superior to
those receiving the dividend or other distribution.
Additionally, the Federal Reserve has issued a policy statement with regard
to the payment of cash dividends by bank holding companies. The policy statement
provides that a bank holding company should not pay
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cash dividends which exceed its net income or which can only be funded in ways
that weaken the bank holding company's financial health, such as by borrowing.
The Federal Reserve also possesses enforcement powers over bank holding
companies and their non-bank subsidiaries to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
FEDERAL SECURITIES REGULATION. The Company's common stock is registered
with the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company
is subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
Common stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration unless sold in accordance with certain resale restrictions. If the
Company meets specified current public information requirements, each affiliate
of the Company is able to sell in the public market, without registration, a
limited number of shares in any three-month period.
SARBANES-OXLEY ACT. In 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). The stated goals of
Sarbanes-Oxley are to increase corporate responsibility, to provide for enhanced
penalties for accounting and auditing improprieties at publicly traded companies
and to protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.
Sarbanes-Oxley is arguably the most significant U.S. securities legislation
enacted since the adoption of the Exchange Act and the Securities Act of 1933.
Sarbanes-Oxley generally applies to all companies, both U.S. and non-U.S., that
file or are required to file periodic reports with the Securities and Exchange
Commission under the Exchange Act.
Sarbanes-Oxley includes very specific additional disclosure requirements
and corporate governance rules, required the Securities and Exchange Commission
and securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandated further studies of certain
issues by the Securities and Exchange Commission. Sarbanes-Oxley represents
significant federal involvement in matters traditionally left to state
regulatory systems, such as the regulation of the accounting profession, and to
state corporate law, such as the relationship between a board of directors and
management and between a board of directors and its committees.
Sarbanes-Oxley addresses, among other matters:
- internal controls over financial reporting;
- audit committees;
- certification of financial statements by the chief executive
officer and the chief financial officer;
- the forfeiture of bonuses or other incentive-based compensation
and profits from the sale of an issuer's securities by directors
and senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement;
- a prohibition on insider trading during pension plan black out
periods;
- disclosure of off-balance sheet transactions;
- expedited filing requirements for Form 4s;
- disclosure of a code of ethics and filing a Form 8-K for a change
or waiver of such code;
- "real time" filing of periodic reports;
- the formation of a public accounting oversight board;
- auditor independence; and
- various increased criminal penalties for violations of securities
laws.
THE BANK
10
GENERAL. Peoples State Bank, as a state chartered banking institution, is
subject to primary supervision, examination, and regulation by the OFIS, and the
FDIC. The Bank's activities are governed primarily by Michigan's Banking Code of
1999 (the "Banking Code") and the Federal Deposit Insurance Act ("FDI Act"). The
FDI Act, among other things, requires that federal banking regulators intervene
promptly when a depository institution experiences financial difficulties;
mandates the establishment of a risk-based deposit insurance assessment system;
and requires imposition of numerous additional safety and soundness operational
standards and restrictions. The FDI Act and other federal laws contain
provisions affecting numerous aspects of the operation and regulation of
federally insured banks and empower the FDIC, among other agencies, to
promulgate regulations implementing their provisions.
BRANCHING. State chartered banks have the authority under Michigan law to
establish branches throughout Michigan and in any state, the District of
Columbia, any U.S. territory or protectorate, and foreign countries, unless the
OFIS objects in writing within 30 days after it receives notice of a bank's
intent to establish a branch.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
allows the FDIC and other federal bank regulators to approve applications for
mergers of banks across state lines without regard to whether such activity is
contrary to state law. However, each state can determine if it will permit out
of state banks to acquire only branches of a bank in that state or to establish
de novo branches.
LOANS TO ONE BORROWER. Under Michigan law, the Bank's total loans and
extensions of credit and leases to one person is limited to 15% of the Bank's
capital and surplus, subject to several exceptions. This limit may be increased
to 25% of the Bank's capital and surplus upon approval by a 2/3 vote of its
board of directors. Certain loans, including loans secured by bonds or other
instruments of the United States and fully guaranteed by the United States as to
principal and interest, are not subject to the limit just referenced. In
addition, certain loans, including loans arising from the discount of consumer
paper which carries a full recourse endorsement or unconditional guaranty of the
person transferring the paper, are subject to a higher limit of 30% of capital
and surplus.
BROKERED DEPOSITS. Under Michigan law, the Bank may advertise, broker, and
conduct other activities to procure and retain deposits. The FDI Act, however,
provides for certain restrictions on brokered deposits. In general,
well-capitalized banks are not subject to restrictions on accepting, renewing,
or rolling over brokered deposits. Adequately-capitalized banks are able to
accept, renew or roll over brokered deposits but only (i) if granted a waiver
from the FDIC, and (ii) subject to the limitation that they do not pay an
effective yield on any such deposit that exceeds by more than 75 basis points
(a) the effective yield paid on deposits of comparable size and maturity in such
bank's normal market area for deposits accepted in its normal market area, or
(b) the national rate paid on deposits of comparable size and maturity for
deposits accepted outside the bank's normal market area. Undercapitalized banks
are not permitted to accept brokered deposits and may not solicit deposits by
offering an effective yield that exceeds by more than 75 basis points the
prevailing effective yields on insured deposits of comparable maturity in the
bank's normal market area or in the market area in which such deposits are being
solicited.
ENFORCEMENT. The OFIS and FDIC each have enforcement authority with respect
to the Bank. The OFIS has the authority to issue cease and desist orders to
address unsafe and unsound practices and actual or immanent violations of law
and to remove from office bank directors and officers who engage in unsafe and
unsound banking practices and who violate applicable laws, orders, or rules. The
OFIS also has authority in certain cases to take steps for the appointment of a
receiver or conservator of a bank.
The FDIC has similar broad authority, including authority to bring
enforcement actions against all "institution-affiliated parties" (including
stockholders, directors, officers, employees, attorneys, consultants, appraisers
and accountants) who knowingly or recklessly participate in any violation of law
or regulation or any breach of fiduciary duty, or other unsafe or unsound
practice likely to cause financial loss to, or otherwise have an adverse effect
on, an insured institution. Civil penalties under federal law cover a wide range
of violations and actions. Criminal penalties for most financial institution
crimes include monetary fines and imprisonment. In addition, the FDIC has
substantial discretion to impose enforcement action on banks that fail to comply
with its regulatory requirements, particularly with respect to capital levels.
Possible enforcement actions range from requiring the preparation of a capital
plan or imposition of a capital directive, to receivership, conservatorship, or
the termination of deposit insurance.
11
ASSESSMENTS AND FEES. The Bank pays a supervisory fee to the OFIS of not
less than $3,000 and not more than 25 cents for each $1,000 of total assets.
This fee is invoiced prior to July 1 each year and is due no later than August
15. The OFIS imposes additional fees, in addition to those charged for normal
supervision, for applications, special evaluations and analyses, and
examinations.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank System, which consists of 12 regional FHLBs. The FHLBs provide a
credit reserve for their member institutions. The Bank, as a member of the
FHLB-Indianapolis, holds shares of capital stock in that FHLB in an amount at
least equal to 1% of the aggregate unpaid principal of its home mortgage loans,
home-purchase contracts, and similar obligations, based on the Bank's calendar
year-end financial data.
REGULATORY CAPITAL REQUIREMENTS. The Bank is required to comply with
capital adequacy standards set by the FDIC. The FDIC may establish higher
minimum requirements if, for example, a bank has previously received special
attention or has a high susceptibility to interest rate risk. Banks with capital
ratios below the required minimum are subject to certain administrative actions.
More than one capital adequacy standard applies, and all applicable standards
must be satisfied for an institution to be considered to be in compliance. There
are three basic measures of capital adequacy: a total risk-based capital ratio,
a Tier 1 risk-based capital ratio; and a leverage ratio.
The risk-based framework was adopted to assist in the assessment of capital
adequacy of financial institutions by, (i) making regulatory capital
requirements more sensitive to differences in risk profiles among organizations;
(ii) introducing off-balance-sheet items into the assessment of capital
adequacy; (iii) reducing the disincentive to holding liquid, low-risk assets;
and (iv) achieving greater consistency in evaluation of capital adequacy of
major banking organizations throughout the world. The risk-based guidelines
include both a definition of capital and a framework for calculating
risk-weighted assets by assigning assets and off-balance sheet items to
different risk categories. An institution's risk-based capital ratios are
calculated by dividing its qualifying capital by its risk-weighted assets.
Qualifying capital consists of two types of capital components: "core
capital elements" (or Tier 1 capital) and "supplementary capital elements" (or
Tier 2 capital). Tier 1 capital is generally defined as the sum of core capital
elements less goodwill and other intangibles. Core capital elements consist of
(i) common shareholders' equity, (ii) noncumulative perpetual preferred stock
(subject to certain limitations), and (iii) minority interests in the equity
capital accounts of consolidated subsidiaries. Tier 2 capital consists of (i)
allowance for loan and lease losses (subject to certain limitations); (ii)
perpetual preferred stock which does not qualify as Tier 1 capital (subject to
certain conditions); (iii) hybrid capital instruments and mandatory convertible
debt securities; (iv) term subordinated debt and intermediate term preferred
stock (subject to limitations); and (v) net unrealized holding gains on equity
securities.
Under current capital adequacy standards, the Bank must meet a minimum
ratio of qualifying total capital to risk-weighted assets of 8%. Of that ratio,
at least half, or 4%, must be in the form of Tier 1 capital.
The Bank must also meet a leverage capital requirement. In general, the
minimum leverage capital requirement is not less than 3% Tier 1 capital to total
assets if the bank has the highest regulatory rating and is not anticipating or
experiencing any significant growth. All other banks should have a minimum of
100 to 200 basis points higher resulting in a minimum leverage capital ratio of
not less than 4% for most banks.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
FDIC provide that additional capital may be required to take adequate account
of, among other things, interest rate risk or the risks posed by concentrations
of credit, nontraditional activities or securities trading activities.
The following table shows the capital totals and ratios for the Bank as of
December 31, 2005 (000s omitted in dollar amounts):
12
Tier 1 capital $39,563
Total capital $43,259
Tier 1 capital to risk weighted assets 10.80%
Total capital to risk weighted assets 11.81%
Leverage ratio 8.13%
PROMPT CORRECTIVE REGULATORY ACTION. The FDIC is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a bank
is considered "well capitalized" if its risk-based capital ratio is at least
10%, its Tier 1 risk-based capital ratio is at least 6%, its leverage ratio is
at least 5%, and the bank is not subject to any written agreement, order, or
directive by the FDIC.
A bank generally is considered "adequately capitalized" if it does not meet
each of the standards for well-capitalized institutions, and its risk-based
capital ratio is at least 8%, its Tier 1 risk-based capital ratio is at least
4%, and its leverage ratio is at least 4% (or 3% if the institution receives the
highest rating under the Uniform Financial Institution Rating System). A bank
that has a risk-based capital ratio less than 8%, or a Tier 1 risk-based capital
ratio less than 4%, or a leverage ratio less than 4% (3% or less for
institutions with the highest rating under the Uniform Financial Institution
Rating System) is considered to be "undercapitalized." A bank that has a
risk-based capital ratio less than 6%, or a Tier 1 capital ratio less than 3%,
or a leverage ratio less than 3% is considered to be "significantly
undercapitalized," and a bank is considered "critically undercapitalized" if its
ratio of tangible equity to total assets is equal to or less than 2%.
Subject to a narrow exception, the FDIC is required to appoint a receiver
or conservator for a bank that is "critically undercapitalized." The regulation
also provides that a capital restoration plan must be filed with the FDIC within
45 days of the date a bank receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by each company that controls a bank that
submits such a plan, up to an amount equal to 5% of the bank's assets at the
time it was notified regarding its deficient capital status. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions, and
expansion. The FDIC could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
DEPOSIT INSURANCE. Currently, the Bank's deposits are insured by the FDIC
through the Bank Insurance Fund ("BIF") but under the recently adopted Federal
Deposit Insurance Reform Act of 2005 (the "FDIRA"), the BIF will be merged with
the Savings Association Insurance Fund during 2006. As an insured institution,
the Bank pays deposit insurance premiums to the FDIC, which are determined in
accordance with a risk-based assessment system. Under the current system, all
insured depository institutions are placed into one of nine categories, and
insurance premiums are based upon their capital level and supervisory
evaluation. BIF-insured institutions classified as well-capitalized and
considered healthy pay the lowest premium (currently 0% of deposits), while
BIF-insured institutions that are undercapitalized and of substantial
supervisory concern pay the highest premium (currently 0.27% of deposits).
Pursuant to the FDIRA, a new system for assessing insurance premiums based on
risk will be adopted.
Assessments for subsequent periods will depend on the timetable for
implementation of the FDIRA and the regulations adopted by the FDIC to implement
the FDIRA. In addition to a new system for assessing insurance premiums based on
risk, a number of other provisions of the FDIRA and the implementing regulations
will impact future assessments. The FDIC will have flexibility to determine the
level of reserves it will hold. Currently, the FDIC must hold reserves equal to
1.25 percent of insured deposits, but under the FDIRA, the FDIC will be able to
set the reserve ratio annually between 1.15 percent and 1.50 percent. In
addition, the FDIC will be required to pay dividends awarded on an historical
basis to insured depository institutions whenever the reserve ratio exceeds 1.35
percent, although dividends may be suspended or limited if the FDIC determines
there is a significant risk to the
13
deposit insurance fund. Insured depository institutions also will receive a
one-time credit which can be applied against the payment of future premiums.
Until FDIRA is fully implemented, it is not possible for the Bank to
determine how these changes will impact the amount of deposit premiums it will
pay in the future.
PAYMENT OF DIVIDENDS BY THE BANK. There are state and federal requirements
limiting the amount of dividends which the Bank may pay. Generally, a bank's
payment of cash dividends must be consistent with its capital needs, asset
quality, and overall financial condition. The FDIC has the authority to prohibit
the Bank from engaging in any business practice (including the payment of
dividends) which it considers to be unsafe or unsound.
Under Michigan law, the payment of dividends is subject to several
restrictions. The Bank cannot declare or pay a cash dividend or dividend in kind
unless the Bank will have a surplus amounting to not less than 20% of its
capital after payment of the dividend. The Bank is required to transfer 10% of
net income to surplus until its surplus is equal to its capital before the
declaration of any cash dividend or dividend in kind. In addition, the Bank may
pay dividends only out of net income then on hand, after deducting its losses
and bad debts. These limitations can affect the Bank's ability to pay dividends.
INSIDER TRANSACTIONS. Federal laws limit certain transactions between the
Bank and its affiliates, including the Company and any non-bank subsidiaries of
the Company. Such transactions include loans or extensions of credit by the Bank
to the Company, the purchase of assets or securities of the Company, the
acceptance of the Company's securities as collateral for loans, and the issuance
of a guaranty, acceptance or letter of credit on behalf of the Company.
Transactions of this kind are limited to 10% of the Bank's capital and surplus
for transactions with one affiliate, and 20% of the Bank's capital and surplus
for transactions with all affiliates. Such transactions are also subject to
certain collateral requirements. These transactions, as well as other
transactions between the Bank and the Company, must also be on terms
substantially the same as, or at least as favorable as, those prevailing at the
time for comparable transactions with nonaffiliated companies or, in the absence
of comparable transactions, on terms, or under circumstances, including credit
standards, that would be offered to, or would apply to, nonaffiliated companies.
Under FDIC regulations, the Bank's authority to extend credit to executive
officers, directors, and principal shareholders of the Bank and the Company is
subject to the same restrictions set forth in Federal Reserve Regulation O.
Among other things, Regulation O (i) requires that any such loans be made on
terms substantially similar to those offered to nonaffiliated individuals, (ii)
places limits on the amount of loans the Bank may make to such persons based, in
part, on the Bank's capital position, and (iii) requires that certain approval
procedures be followed in connection with such loans.
Under Michigan law, the Bank may purchase securities or other property from
a director, or from an entity of which the director is an officer, manager,
director, owner, employee, or agent, only if such purchase (i) is made in the
ordinary course of business, (ii) is on terms not less favorable to the Bank
than terms offered by others, and (iii) the purchase is authorized by a majority
of the board of directors not interested in the sale. The Bank may also sell
securities or other property to its directors, subject to the same restrictions
(except in the case of a sale by the Bank, the terms may not be more favorable
to the director than those offered to others).
STANDARDS FOR SAFETY AND SOUNDNESS. The FDIC has established safety and
soundness standards applicable to the Bank regarding such matters as internal
controls, loan documentation, credit underwriting, interest-rate risk exposure,
asset growth, compensation and other benefits, and asset quality and earnings.
If the Bank were to fail to meet these standards, the FDIC could require it to
submit a written compliance plan describing the steps the Bank will take to
correct the situation and the time within which such steps will be taken. The
FDIC has authority to issue orders to secure adherence to the safety and
soundness standards.
REAL ESTATE LENDING STANDARDS. The FDIC and the other federal banking
agencies have issued uniform regulations prescribing real estate lending
standards. The FDIC regulations require the Bank to establish and maintain
written internal real estate lending standards consistent with safe and sound
banking practices, appropriate to the Bank's size and the nature and scope of
its real estate lending activities. The internal real estate lending standards
must also be
14
consistent with FDIC guidelines, which include maximum loan-to-value ratios for
the following types of real estate loans: raw land (65 percent), land
development (75 percent), commercial, multi-family, and nonresidential
construction (80 percent), improved property (85 percent) and one to four-family
residential construction (85 percent). Maximum loan-to-value ratio limits have
not been established for owner-occupied one- to-four-family mortgage loans and
home equity loans, but such loans with a loan-to-value ratio at origination of
90 percent or greater are to be backed by private mortgage insurance or readily
marketable collateral. The Bank is permitted to make a limited amount of loans
that do not conform to the proposed loan-to-value limitations as long as such
exceptions are appropriately reviewed and justified. The guidelines also list a
number of lending situations in which exceptions to the loan-to-value standard
are justified.
FINANCIAL MANAGEMENT REQUIREMENTS. FDIC regulations require banks with $500
million or more in total assets to undergo an annual independent audit and to
establish an audit committee comprised solely of outside directors. Banks with
$1 billion or more in total assets must also hire outside auditors to evaluate
the institution's internal control structure and procedures for compliance with
laws and regulations relating to safety and soundness. For banks that are
subsidiaries of holding companies, the independent audit requirement may be
satisfied by an independent audit of the consolidated holding company. The FDIC
guidelines and interpretations regarding financial management reiterate the
FDIC's belief that every depository institution, regardless of size, should have
an annual independent audit and an independent audit committee.
RESERVE REQUIREMENT. Under a regulation promulgated by the Federal Reserve
Board, depository institutions, including the Bank, currently are required to
maintain non-interest earning reserves against a stated percentage of their
transaction accounts, as follows:
- for transaction accounts totaling $7.8 million or less, a reserve of
0%; and
- for transaction accounts in excess of $7.8 million up to and including
$48.3 million, a reserve of 3%; and
- for transaction accounts totaling in excess of $48.3 million, a
reserve requirement of $1.215 million plus 10% against that portion of
the total transaction accounts greater than $48.3 million.
The dollar amounts and percentages stated above are all subject to
adjustment by the Federal Reserve. The effect of maintaining the required
non-interest earning reserve is to reduce the Bank's interest-earning assets.
STATE BANK ACTIVITIES. Under federal law and FDIC regulations, FDIC insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank or its subsidiary, respectively, unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member.
The GLB Act also authorizes insured state banks to engage in financial
activities, through subsidiaries, similar to the activities permitted for
financial holding companies. If a state bank wants to establish a subsidiary
engaged in financial activities, it must meet certain criteria, including that
it and all of its affiliated insured depository institutions are
well-capitalized and have a Community Reinvestment Act rating of at least
"satisfactory" and that it is well-managed. There are capital deduction and
financial statement requirements and financial and operational safeguards that
apply to subsidiaries engaged in financial activities. Such a subsidiary is
considered to be an affiliate of the bank and there are limitations on certain
transactions between a bank and a subsidiary engaged in financial activities of
the same type that apply to transactions with a bank's holding company and its
subsidiaries.
EMPLOYEES
As of December 31, 2005, the Company had 178 full-time employees and 43
part-time employees. The Company provides a number of benefits for its full-time
employees, including health and life insurance, workers' compensation, social
security, paid vacations, numerous bank services and a retirement plan.
15
INCORPORATION OF ADDITIONAL INFORMATION BY REFERENCE
The following information appearing in the 2005 Annual Report to Shareholders is
also incorporated into this Item 1:
"Loan Portfolio Composition" table - discloses distribution of loans of the
Bank.
"Loan Maturity" table - discloses maturities of loans.
"Non-Performing Assets" table - discloses the breakdown of non-performing assets
by category.
"Allowance for Loan Loss" and "Charge-off/Recovery" tables disclose the
allocation of loan loss allowance by category and the breakdown of charge-offs
and recoveries.
"Securities Portfolio" table - discloses the distribution of the securities
portfolio including book versus fair value comparison.
"Securities Maturity" table - discloses maturities of securities.
"Deposits" and "Time Deposits over $100,000" tables - disclose the distribution
of deposits of the Bank and maturities of time deposits over $100,000.
"Borrowings" table - discloses the distribution and maturities of borrowings.
"Consolidated Average Balances/Interest Earned-Paid/Rates 2003-2005" table -
presents average balance sheet amounts, interest earned or paid and related
average yields earned and rates paid.
"Rate/Volume Analysis" table - presents changes in the interest income and
expense for each major category of interest earning assets and interest bearing
liabilities.
Note 1, "Summary of Significant Accounting Policies" of the "Notes to
Consolidated Financial Statements" - discloses information on non-accrual and
past-due loans, the Bank's policy on placing loans on non-accrual, and other
important accounting policies.
ITEM 1A. RISK FACTORS
An investment in the Company's common stock is subject to risks
inherent to the Company's business. The material risks and uncertainties
that management believes affect the Company are described below. Before
making an investment decision, you should carefully consider the risks and
uncertainties described below, together with all of the other information
included or incorporated by reference in this report. The risks and
uncertainties described below are not the only ones facing the Company.
Additional risks and uncertainties that management is not aware of or
focused on, or that management currently deems immaterial, may also impair
the Company's business operations. This report is qualified in its entirety
by these risk factors.
If any of the following risks actually occur, the Company's financial
condition and results of operations could be materially and adversely
affected. If this were to happen, the value of the Company's common stock
could decline significantly, and you could lose all or part of your
investment.
References to "we," "us," and "our" in this section refer to the
Company and its subsidiaries, unless otherwise specified or unless the
context otherwise requires.
RISKS RELATED TO THE COMPANY'S BUSINESS
We Are Subject To Interest Rate Risk
The Company's earnings and cash flows are largely dependent upon its
net interest income. Interest
16
rates are highly sensitive to many factors that are beyond the Company's
control, including general economic conditions and policies of various
governmental and regulatory agencies and, in particular, the Federal
Reserve. Changes in monetary policy, including changes in interest rates,
could influence not only the interest the Company receives on loans and
securities and the amount of interest it pays on deposits and borrowings,
but such changes could also affect (i) the Company's ability to originate
loans and obtain deposits, (ii) the fair value of the Company's financial
assets and liabilities, and (iii) the average duration of the Company's
interest earning assets and interest bearing liabilities. If the interest
rates paid on deposits and other borrowings increase at a faster rate than
the interest rates received on loans and other investments, the Company's
net interest income, and therefore earnings, could be adversely affected.
Earnings could also be adversely affected if the interest rates received on
loans and other investments fall more quickly than the interest rates paid
on deposits and other borrowings.
Although management believes it has implemented effective asset and
liability management strategies to reduce the potential effects of changes
in interest rates on the Company's results of operations, any substantial,
unexpected, prolonged change in market interest rates could have a material
adverse effect on the Company's financial condition and results of
operations. Also, the Company's interest rate risk modeling techniques and
assumptions may not fully predict or capture the impact of actual interest
rate changes on the Company's balance sheet. See "Quantitative and
Qualitative Disclosures about Market Risk" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," for further
discussion related to the Company's management of interest rate risk.
We Are Subject To Credit Risk
As of December 31, 2005, approximately 71% of the Company's loan
portfolio consisted of commercial, financial, real estate construction, and
commercial real estate loans (collectively, "commercial loans"). Commercial
loans are generally viewed as having more inherent risk of default than
residential mortgage loans or retail loans. Also, the commercial loan
balance per borrower is typically larger than that for residential mortgage
loans and retail loans, inferring higher potential losses on an individual
loan basis. The deterioration of one or a few of these loans could cause a
significant increase in nonperforming loans. An increase in nonperforming
loans could result in a net loss of earnings from these loans, an increase
in the provision for loan losses, and an increase in loan charge offs, all
of which could have a material adverse effect on the Company's financial
condition and results of operations. See Part II section "Loans" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," for further discussion of credit risks related to different
loan types.
Our Allowance for Loan Losses May Be Insufficient
The Company maintains an allowance for loan losses, which is a reserve
established through a provision for loan losses charged to expense, which
represents management's best estimate of probable losses that have been
incurred within the existing portfolio of loans. The allowance, in the
judgment of management, is necessary to reserve for estimated loan losses
and risks inherent in the loan portfolio. The level of the allowance
reflects management's continuing evaluation of industry concentrations;
specific credit risks; loan loss experience; current loan portfolio
quality; present economic, political, and regulatory conditions; and
unidentified losses inherent in the current loan portfolio. The
determination of the appropriate level of the allowance for loan losses
inherently involves a high degree of subjectivity and requires the Company
to make significant estimates of current credit risks using existing
qualitative and quantitative information, all of which may undergo material
changes. Changes in economic conditions affecting borrowers, new
information regarding existing loans, identification of additional problem
loans, and other factors, both within and outside of the Company's control,
may require an increase in the allowance for loan losses. In addition, bank
regulatory agencies periodically review the Company's allowance for loan
losses and may require an increase in the provision for loan losses or the
recognition of additional loan charge offs, based on judgments different
than those of management. An increase in the allowance for loan losses
results in a decrease in net income, and possibly capital, and may have a
material adverse effect on the Company's financial condition and results of
operations. See "Allowance for Loan Losses" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion related to the Company's process for determining the appropriate
level of the allowance for
17
loan losses.
Our Profitability Depends Significantly On Economic Conditions in the Areas
within Which We Do Business
The Company's success depends on the general economic conditions of
the specific local markets in which the Company operates. Local economic
conditions have a significant impact on the demand for the Company's
products and services as well as the ability of the Company's customers to
repay loans, the value of the collateral securing loans, and the stability
of the Company's deposit funding sources. A significant decline in general
economic conditions, caused by inflation, recession, acts of terrorism,
outbreak of hostilities, or other international or domestic occurrences,
unemployment, changes in securities markets or other factors could impact
local economic conditions and, in turn, have a material adverse effect on
the Company's financial condition and results of operations.
We Are Subject To Extensive Government Regulation and Supervision
The Company is subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect
depositors' funds, federal deposit insurance funds, and the banking system
as a whole, not shareholders. These regulations affect the Company's
lending practices, capital structure, investment practices, dividend
policy, and growth, among other things. Congress and federal regulatory
agencies continually review banking laws, regulations, and policies for
possible changes. Changes to statutes, regulations, or regulatory policies,
including changes in interpretation or implementation of statutes,
regulations, or policies, could affect the Company in substantial and
unpredictable ways. Such changes could subject the Company to additional
costs and limit the types of financial services and products the Company
may offer. Failure to comply with laws, regulations, or policies could
result in sanctions by regulatory agencies, civil money penalties, and/or
reputation damage, which could have a material adverse effect on the
Company's business, financial condition, and results of operations. While
the Company has policies and procedures designed to prevent any such
violations, there can be no assurance that such violations will not occur.
See Note 17, "Regulatory Matters," of the notes to consolidated financial
statements on pages 30-31 in our Annual Report to Shareholders.
Our Internal Controls May Be Ineffective
Management regularly reviews and updates the Company's internal
controls, disclosure controls and procedures, and corporate governance
policies and procedures. Any system of controls, however well designed and
operated, is based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the system are
met. Any failure or circumvention of the Company's controls and procedures
or failure to comply with regulations related to controls and procedures
could have a material adverse effect on the Company's business, results of
operations, and financial condition.
New Lines of Business or New Products and Services May Subject Us to
Additional Risks
From time to time, we may implement new lines of business or offer new
products and services within existing lines of business. There are
substantial risks and uncertainties associated with these efforts,
particularly in instances where the markets are not fully developed. In
developing and marketing new lines of business and/or new products and
services, the Company may invest significant time and resources. Initial
timetables for the introduction and development of new lines of business
and/or new products or services may not be achieved and price and
profitability targets may not prove feasible. External factors, such as
compliance with regulations, competitive alternatives, and shifting market
preferences, may also impact the successful implementation of a new line of
business or a new product or service. Furthermore, any new line of business
and/or new product or service could have a significant impact on the
effectiveness of the Company's system of internal controls. Failure to
successfully manage these risks in the development and implementation of
new lines of business or new products or services could have a material
adverse effect on the Company's business, results of operations and
financial condition.
18
We May Not Be Able To Attract and Retain Skilled People
The Company's success depends, in large part, on its ability to
attract and retain skilled people. Competition for the best people in most
activities engaged in by the Company can be intense and the Company may not
be able to hire sufficiently skilled people or to retain them. The
unexpected loss of services of one or more of the Company's key personnel
could have a material adverse impact on the Company's business because of
their skills, knowledge of the Company's market, years of industry
experience, and the difficulty of promptly finding qualified replacement
personnel.
Our Information Systems May Experience an Interruption or Breach in
Security
The Company relies heavily on communications and information systems
to conduct its business. Any failure, interruption, or breach in security
of these systems could result in failures or disruptions in the Company's
customer relationship management, general ledger, deposit, loan, and other
systems. While the Company has policies and procedures designed to prevent
or limit the effect of the failure, interruption, or security breach of its
information systems, we cannot assure you that any such failures,
interruptions, or security breaches will not occur or, if they do occur,
that they will be adequately addressed. The occurrence of any failures,
interruptions, or security breaches of the Company's information systems
could damage the Company's reputation, result in a loss of customer
business, subject the Company to additional regulatory scrutiny, or expose
the Company to civil litigation and possible financial liability, any of
which could have a material adverse effect on the Company's financial
condition and results of operations.
We Continually Encounter Technological Change
The financial services industry is continually undergoing rapid
technological change with frequent introductions of new technology-driven
products and services. The effective use of technology increases efficiency
and enables financial institutions to better serve customers and to reduce
costs. The Company's future success depends, in part, upon its ability to
address the needs of its customers by using technology to provide products
and services that will satisfy customer demands, as well as to create
additional efficiencies in the Company's operations. Many of the Company's
competitors have substantially greater resources to invest in technological
improvements. The Company may not be able to effectively implement new
technology-driven products and services or be successful in marketing these
products and services to its customers. Failure to successfully keep pace
with technological change affecting the financial services industry could
have a material adverse impact on the Company's business and, in turn, the
Company's financial condition and results of operations.
We Are Subject To Claims and Litigation Pertaining To Fiduciary
Responsibility
From time to time, customers make claims and take legal action
pertaining to the Company's performance of its fiduciary responsibilities.
Whether customer claims and legal action related to the Company's
performance of its fiduciary responsibilities are founded or unfounded, if
such claims and legal actions are not resolved in a manner favorable to the
Company, they may result in significant financial liability and/or
adversely affect the market perception of the Company and its products and
services, as well as impact customer demand for those products and
services. Any financial liability or reputation damage could have a
material adverse effect on the Company's business, which, in turn, could
have a material adverse effect on the Company's financial condition and
results of operations.
Severe Weather, Natural Disasters, Acts of War or Terrorism, and Other
External Events Could Significantly Impact Our Business
Severe weather, natural disasters, acts of war or terrorism, and other
adverse external events could have a significant impact on the Company's
ability to conduct business. Such events could affect the stability of the
Company's deposit base; impair the ability of borrowers to repay
outstanding loans, impair the value of collateral securing loans, cause
significant property damage, result in loss of revenue and/or cause the
Company to incur additional expenses. For example, during 2005, numerous
hurricanes made landfall and subsequently caused extensive flooding and
19
destruction in various parts of the country. While the impact of these
hurricanes did not significantly affect the Company, other severe weather
or natural disasters, acts of war or terrorism, or other adverse external
events may occur in the future. Although management has established
disaster recovery policies and procedures, the occurrence of any such event
could have a material adverse effect on the Company's business, which, in
turn, could have a material adverse effect on the Company's financial
condition and results of operations.
We Are Subject To Environmental Liability Risk Associated With Lending
Activities
A significant portion of the Company's loan portfolio is secured by
real property. During the ordinary course of business, the Company may
foreclose on and take title to properties securing certain loans. In doing
so, there is a risk that hazardous or toxic substances could be found on
these properties. If hazardous or toxic substances are found, the Company
may be liable for remediation costs, as well as for personal injury and
property damage. Environmental laws may require the Company to incur
substantial expenses and may materially reduce the affected property's
value or limit the Company's ability to use or sell the affected property.
In addition, future laws or more stringent interpretations or enforcement
policies with respect to existing laws may increase the Company's exposure
to environmental liability. Although the Company has policies and
procedures to perform an environmental review before initiating any
foreclosure action on real property, these reviews may not be sufficient to
detect all potential environmental hazards. The remediation costs and any
other financial liabilities associated with an environmental hazard could
have a material adverse effect on the Company's financial condition and
results of operations.
RISKS ASSOCIATED WITH THE COMPANY'S COMMON STOCK
Our Stock Price Can Be Volatile
Stock price volatility may make it more difficult for you to resell
your common stock when you want and at prices you find attractive. The
Company's stock price can fluctuate significantly in response to a variety
of factors including, among other things:
- Actual or anticipated variations in quarterly results of
operations.
- Lack of liquidity in our common stock.
- Recommendations by securities analysts.
- Operating and stock price performance of other companies that
investors deem comparable to the Company.
- News reports relating to trends, concerns, and other issues in
the financial services industry.
- Perceptions in the marketplace regarding the Company and/or its
competitors.
- New technology used or services offered by competitors.
- Significant acquisitions or business combinations, strategic
partnerships, joint ventures, or capital commitments by or
involving the Company or its competitors.
- Failure to integrate acquisitions or realize anticipated benefits
from acquisitions.
- Changes in government regulations.
- Geopolitical conditions such as acts or threats of terrorism or
military conflicts.
General market fluctuations, industry factors, and general economic
and political conditions and events, such as economic slowdowns or
recessions, interest rate changes, or credit loss trends, could also cause
the Company's stock price to decrease regardless of operating results.
An Investment in Our Common Stock Is Not an Insured Deposit
The Company's common stock is not a bank deposit and, therefore, is
not insured against loss by the FDIC, any other deposit insurance fund, or
by any other public or private entity. Investment in the Company's common
stock is inherently risky for the reasons described in this "Risk Factors"
20
section and elsewhere in this report and is subject to the same market
forces that affect the price of common stock in any company. As a result,
if you acquire the Company's common stock, you may lose some or all of your
investment.
Our Articles of Incorporation, Bylaws, and Certain Banking Laws May Have an
Anti-Takeover Effect
Provisions of the Company's articles of incorporation, bylaws, and
federal banking laws, including regulatory approval requirements, could
make it more difficult for a third party to acquire the Company, even if
doing so would be perceived to be beneficial to the Company's shareholders.
The combination of these provisions may prohibit a non-negotiated merger or
other business combination, which, in turn, could adversely affect the
market price of the Company's common stock.
RISKS ASSOCIATED WITH THE COMPANY'S INDUSTRY
We Operate In a Highly Competitive Industry and Market Area
The Company faces substantial competition in all areas of its
operations from a variety of different competitors, many of which are
larger and may have more financial resources. Such competitors primarily
include national, regional, and internet banks within the various markets
in which the Company operates. The Company also faces competition from many
other types of financial institutions, including, without limitation,
savings and loans, credit unions, finance companies, brokerage firms,
insurance companies, and other financial intermediaries. The financial
services industry could become even more competitive as a result of
legislative, regulatory, and technological changes and continued
consolidation. Banks, securities firms, and insurance companies can merge
under the umbrella of a financial holding company, which can offer
virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting), and merchant
banking. Also, technology has lowered barriers to entry and made it
possible for non-banks to offer products and services traditionally
provided by banks, such as automatic transfer and automatic payment
systems. Many of the Company's competitors have fewer regulatory
constraints and may have lower cost structures. Additionally, due to their
size, many competitors may be able to achieve economies of scale and, as a
result, may offer a broader range of products and services as well as
better pricing for those products and services than the Company can.
The Company's ability to compete successfully depends on a number of
factors, including, among other things:
- The ability to develop, maintain, and build upon long-term
customer relationships based on top quality service, high ethical
standards, and safe, sound assets.
- The ability to expand the Company's market position.
- The scope, relevance, and pricing of products and services
offered to meet customer needs and demands.
- The rate at which the Company introduces new products and
services relative to its competitors.
- Customer satisfaction with the Company's level of service.
- Industry and general economic trends.
Failure to perform in any of these areas could significantly weaken
the Company's competitive position, which could adversely affect the
Company's growth and profitability, which, in turn, could have a material
adverse effect on the Company's financial condition and results of
operations.
Financial Services Companies Depend On the Accuracy and Completeness of
Information about Customers and Counterparties
In deciding whether to extend credit or enter into other transactions,
the Company may rely on information furnished by or on behalf of customers
and counterparties, including financial statements, credit reports, and
other financial information. The Company may also rely on representations
of those customers, counterparties, or other third parties, such as
independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial statements,
credit
21
reports, or other financial information could cause us to enter into
unfavorable transactions, which would have a material adverse effect on the
Company's financial condition and results of operations.
Consumers May Decide Not To Use Banks to Complete Their Financial
Transactions
Technology and other changes are allowing parties to complete
financial transactions, which historically have involved banks, through
alternative methods. For example, consumers can now maintain funds that
would have historically been held as bank deposits in brokerage accounts or
mutual funds. Consumers can also complete transactions such as paying bills
and/or transferring funds directly without the assistance of banks. The
process of eliminating banks as intermediaries, known as
"disintermediation," could result in the loss of fee income, as well as the
loss of customer deposits and the related income generated from those
deposits. The loss of these revenue streams and the lower cost of deposits
as a source of funds could have a material adverse effect on the Company's
financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
22
ITEM 2. PROPERTIES
The Company owns and operates its main office at 9252 Jos. Campau Avenue,
Hamtramck, Michigan 48212-3794. In addition the Company operates the following
branches, listed in the order in which they were purchased or opened. Whether
the branch is owned or leased is also noted.
COMMON NAME OF OFFICE ADDRESS OWNED OR LEASED
--------------------- ------- ---------------
St. Clair Shores Office 25901 Harper Ave. Leased
St. Clair Shores, MI 48081
Warren Office 14801 12 Mile Road at Gloede Owned
Warren, MI 48093
Warren Office & Loan Center 31130 Ryan Road at 13 Mile Road Owned
Warren, MI 48092
Sterling Heights/Ryan Road 40832 Ryan Road Leased
Sterling Heights, MI 48310
Madison Hgts/12 Dequindre 1800 E. 12 Mile Road Owned
Madison Heights, MI 48071-0485
Madison Hgts/14 John R. 600 E. 14 Mile Road Owned
Madison Heights, MI 48071
Southfield/Evergreen 25250 Evergreen Road Owned
Southfield, MI 48075
Farmington Hills/Halsted 37386 12 Mile Road Owned
Farmington Hills, MI 48331
Grosse Pointe Woods 21110 Mack Avenue Leased
Grosse Pointe Woods, MI 48236
Sterling Heights/ 3801 Metropolitan Parkway Land - Leased
Metropolitan Parkway Sterling Heights, MI 48310 Building - Owned
Fenton 17197 Silver Parkway Owned
Fenton, MI 48430
Universal Mortgage Corporation operates the following offices:
Southfield 24901 Northwestern Hwy. Leased
Suite 214
Southfield, MI 48075
Warren 12434 12 Mile Road Leased
Suite 101
Warren, MI 48093
Clinton Township 16950 19 Mile Road Leased
Suite 5B
Clinton Township, MI 48038
23
Fenton 2801 Silver Lake Road Leased
Fenton, MI 48430
Macomb Township 51170 Romeo Plank Road Leased
Macomb Twp., MI 48042
Ann Arbor 3001 Plymouth Road, Suite 205 Leased
Ann Arbor, MI 48105
Howell 2020 East Grand River, Suite 103 Leased
Howell, MI 48843
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is a party to routine litigation incidental
to its business. The Company is not currently a party to any material
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2005.
SUPPLEMENTAL INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all executive officers of the Company are
listed below:
PRINCIPAL OCCUPATION
NAME AND AGE POSITION WITH THE COMPANY DURING PAST FIVE YEARS
------------ ------------------------- ----------------------
Robert L. Cole, 64 President and Chief President and Chief
Executive Officer Executive Officer since
1996.
David A. Wilson, 45 Senior Vice President and Senior Vice President and
Chief Financial Officer Chief Financial Officer
since 1991.
Theodore G. Bangert, 51 Senior Vice President and Senior Vice President and
Senior Lending Officer Senior Lending Officer
since 2001; SVP and Chief
Lending Officer at
Commercial and Savings
Bank, Millersburg, Ohio
from 2000 to 2001; SVP
and Chief Lending Officer
at Cortland Savings and
Banking Company,
Cortland, Ohio from 1989
to 1999.
Tami H. Janowicz, 48 Senior Vice President Senior Vice President -
Retail Banking since
February 2005; Vice
President - Compliance
and CRA since Dec. 2001;
Asst. Vice Pres. - Human
Resources since 1998.
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Information relating to the market for registrant's common equity,
dividends paid and related shareholder matters appears on pages 37 and 51 of the
registrant's 2005 Annual Report to Shareholders and is incorporated herein by
reference.
The following table provides information about purchases of the Company's common
stock by the Company, including any affiliated purchasers, during the quarter
ended December 31, 2005.
ISSUER PURCHASES OF EQUITY SECURITIES
TOTAL NUMBER OF MAXIMUM NUMBER (OR
SHARES PURCHASED APPROXIMATE DOLLAR VALUE)
AS PART OF PUBLICLY OF SHARES THAT MAY
TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS YET BE PURCHASED UNDER
PERIOD SHARES PURCHASED PAID PER SHARE OR PROGRAMS THE PLANS OR PROGRAMS
- ---------- ---------------- -------------- ------------------- -------------------------
10/01/05 - 0 0 0 0
10/31/05
11/01/05 - 0 0 0 0
11/30/05
12/01/05 - 50,000 $20 0 0
12/31/05
------ --- --- ---
Total 50,000 $20 0 0
====== === === ===
On December 5, 2005, the Peoples State Bank 401(k), Profit Sharing and
Employee Stock Ownership Plan ("ESOP") purchased 38,501 shares of PSB Group,
Inc. common stock at an aggregate cost of $770,020 to be used in connection with
the ESOP portion of the 401(k) Plan. As part of its employee compensation
system, the Bank makes regular contributions at the discretion of the board to
the ESOP portion of the 401(k) Plan. These contributions are allocated to
employees' accounts in proportion to the percentage that each employee's
compensation bears to the compensation of all eligible employees.
In November 2005, the Company amended the PSB Group, Inc. Deferred
Compensation Plan (the "Plan") to permit participants to elect to have the
investment performance of their deferred benefit account be measured as if it
were invested in shares of PSB Group, Inc. common stock. Payment of Plan
benefits to these participants when they become eligible for a distribution
under the Plan is to be in the form of PSB Group, Inc. common stock rather than
cash. In November 2005, two participant directors elected to have the investment
performance of their deferred benefit account measured as if it were invested in
shares of PSB Group, Inc. common stock. As a result, in December 2005, the Plan,
through a rabbi trust formed under the Plan, purchased 11,499 shares of PSB
Group, Inc. common stock at a price of $20 per share, for an aggregate of
$229,980 in order to satisfy the Plan's future obligation to these participants
under the Plan. Although the rabbi trust is established to provide a source to
pay
25
Plan benefits, the assets of the trust are considered assets of PSB Group, Inc.
and are subject to the claims of PSB Group, Inc.'s general creditors.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to the
table captioned "Selected Financial Information" on page 38 of the 2005 Annual
Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference to the
section captioned "Management's Discussion and Analysis" on pages 39 through 50
of the 2005 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference to the
section captioned "Quantitative and Qualitative Disclosures about Market Risk"
on pages 48 through 50 of the 2005 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Audited Consolidated Financial Report contained on pages 1 through 34
of the 2005 Annual Report to Shareholders, together with the related notes and
independent auditor's report and the Quarterly Results of Operation on page 37
of the 2005 Annual Report to Shareholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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
December 31, 2005. 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. During the quarter ended December 31, 2005, there
have not been any significant changes in our internal accounting controls or in
other factors that could significantly affect those controls.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
26
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated by reference to
the registrant's 2006 Proxy Statement furnished to its shareholders in
connection with an Annual Meeting of Shareholders to be held April 25, 2006 (the
"2006 Proxy Statement"), under the captions "Election of Directors", "Audit
Committee Financial Expert", "Code of Ethics", and "Compliance with Section 16",
which Proxy Statement has been filed with the SEC. The information required
under this item relating to the executive officers is set forth in Part I,
"Supplemental Information - Executive Officers of the Registrant" of this Annual
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to directors' and executive compensation is
incorporated herein by reference to the registrant's 2006 Proxy Statement for
the Annual Meeting of Shareholders to be held on April 25, 2006 on page 12 under
the caption "Executive Compensation," page 16 under the captions "Director
Compensation" and "401(k) Plan and ESOP," page 17 under the captions "2004 Stock
Option Plan" and " Compensation Committee Interlocks and Insider Participation,"
and page 14 under the caption "Employment Agreements."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated by reference to
pages 10 and 11 of the registrant's 2006 Proxy Statement under the captions
"Security Ownership of Directors, Nominees for Director, Most Highly Compensated
Executive Officers and All Directors and Executive Officers as a Group" and
"Security Ownership of Shareholders Holding 5% or more."
The following table shows the Company's shareholder approved and
non-shareholder approved equity compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
Number of securities to be Weighted-average future issuance under
issued upon exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding
Plan category warrants and rights warrants and rights securities in column (a))
- ------------------- -------------------------- -------------------- -------------------------
Equity compensation
plans approved by
security holders 31,100 $24.42 418,900
Equity compensation
plans not approved
by security holders None None None
------ ------ -------
Total 31,100 $24.42 418,900
====== ====== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the registrant's 2006 Proxy Statement at
page 17 under the caption "Transactions with Certain Related Persons."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
27
The information on pages 8 and 9 of the 2006 Proxy Statement, under the
caption "Item 2. Approval of Auditors" is incorporated by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS
(a)(1) The following financial statements are included in the Annual Report
to Shareholders for the fiscal year ended December 31, 2005. The remaining
information appearing in the Annual Report is not deemed to be filed as part of
this report, except as expressly provided herein.
1. Independent Auditor's Report
2. Consolidated Balance Sheets as of December 31, 2005 and 2004
3. Consolidated Statements of Income for each of the years in the
Three-Year Period Ended December 31, 2005
4. Consolidated Statements of Stockholders' Equity for each of the years
in the Three-Year Period Ended December 31, 2005
5. Consolidated Statements of Cash Flows for each of the years in the
Three-Year Period Ended December 31, 2005
6. Notes to Consolidated Financial Statements
(a)(2) All financial statement schedules have been omitted as the required
information is either inapplicable or included in the Consolidated Financial
Statements or related notes.
(a)(3) The following exhibits are either filed as part of this report or
are incorporated herein by reference:
NO. DESCRIPTION
- --- -----------
3.1 Articles of Incorporation of PSB Group, Inc.*
3.2 Bylaws of PSB Group, Inc.*
4.1 Specimen Certificate of Common Stock*
10.1 Management Continuity Agreement with Robert L. Cole*
10.2 Management Continuity Agreement with Theodore G. Bangert*
10.3 Management Continuity Agreement with David A. Wilson*
10.4 2004 Stock Compensation Plan**
10.5 Form of Incentive Stock Option Agreement and Non-Qualified Stock Option
Agreement (filed herewith)
10.6 Deferred Compensation Plan, as amended (filed herewith)
11 Computation of Earnings Per Share (filed herewith on page 3 of the 2005
Annual Report to Shareholders including Note 1 thereto)
13 Portions of 2005 Annual Report to Shareholders (filed herewith)
- ----------
* Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003.
** Incorporated by reference to Registrant's Proxy Statement for the 2004
annual meeting of shareholders.
28
14 Code of Ethics (filed herewith)
21.1 Subsidiaries of Registrant (filed herewith)
23. Consent of Plante & Moran, PLLC
31.1 Certification of Robert L. Cole required by Rule 13a - 14(a)
31.2 Certification of David A. Wilson required by Rule 13a - 14(a)
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
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
29
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
PEOPLES STATE BANK
Date: March 31, 2006 By: /s/ Robert L. Cole
------------------------------------
Robert L. Cole
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Robert L. Cole Date: March 31, 2006
---------------------------------
Robert L. Cole
President and Chief Executive
Officer
(Principal Executive Officer
and Director)
By: /s/ David A. Wilson Date: March 31, 2006
---------------------------------
David A. Wilson
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
By: /s/ Dr. James Jacobs Date: March 31, 2006
---------------------------------
Dr. James Jacobs
(Director)
By: /s/ Michael J. Kowalski Date March 31, 2006
---------------------------------
Michael J. Kowalski
(Director)
By: /s/ Longine V. Morawski Date: March 31, 2006
---------------------------------
Longine V. Morawski
(Director)
By: /s/ Sydney L Ross Date: March 31, 2006
---------------------------------
Sydney L. Ross
(Director)
By: /s/ Edward H. Turner Date March 31, 2006
---------------------------------
Edward H. Turner
(Director)
By: /s/ David L. Wood Date: March 31, 2006
---------------------------------
David L. Wood
(Director)
30
Exhibit Index
NO. DESCRIPTION
- --- -----------
10.5 Form of Incentive Stock Option Agreement and Non-Qualified Stock Option
Agreement
10.6 Deferred Compensation Plan, as amended
13 Portions of 2005 Annual Report to Shareholders
14 Code of Ethics
21.1 Subsidiaries of Registrant
23. Consent of Plante & Moran, PLLC
31.1 Certification of Robert L. Cole required by Rule 13a - 14(a)
31.2 Certification of David A. Wilson required by Rule 13a - 14(a)
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
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
31