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, 2007
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 [ ]]
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.
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 29, 2007, 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 ($18.45 per share),
was approximately $53,857,898 (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).
As of March 1, 2008, there were issued and outstanding 3,101,367 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, 2007 (the "Annual Report") (Parts I and II).
2. Portions of Proxy Statement for the 2008 Annual Meeting of Shareholders (the
"Proxy Statement") (Part III).
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INDEX
PAGE
----
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... 26
Item 8. Financial Statements and Supplementary Data................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 26
Item 9A(T). Controls and Procedures................................... 26
Item 9B. Other Information............................................ 27
PART III................................................................. 27
Item 10. Directors, Executive Officers and Corporate Governance....... 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, and Director
Independence....................................................... 28
Item 14. Principal Accountant Fees and Services....................... 28
PART IV.................................................................. 28
Item 15. Exhibits and Financial Statement Schedules................... 28
SIGNATURES............................................................ 31
3
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, 2007, 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.
In 1998, the Bank acquired Madison National Bank, Madison Heights, Michigan
("Madison"). In 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 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 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 - 1994; (2) 14801 Twelve
Mile Road, Warren, Michigan - 1995; and, (3) 31130 Ryan Road, Warren, Michigan -
1995. Subsequently, the Sterling Heights office was closed in 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. In 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. In 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
2001, the Bank closed one of the Farmington Hills, Michigan branches. The cash,
furniture, fixtures, equipment and deposits were transferred to another branch.
In 2002, the Bank opened a branch in Grosse Pointe Woods, Michigan. In 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. In 2007, the Bank opened two new
branches, one in Troy, Michigan and one in Grosse Pointe Woods, Michigan. With
the opening of the new state-of-the-art branch in Grosse Pointe Woods, two
nearby branches, one in St. Clair Shores, Michigan and one in Grosse Pointe
Woods, Michigan were closed with most of the deposits transferred to the new
branch. Also in 2007, the Bank closed an underperforming branch in Madison
Heights, Michigan and one mortgage loan production office in Fenton, Michigan.
As of December 31, 2007, the Bank operated 11 branch offices and three mortgage
loan production offices.
As of December 31, 2007, the Company had approximately $492 million in
total assets, $389.3 million in total loans, $439 million in total deposits and
$40 million in total shareholders 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.
4
Lending Activities
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 32% 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.
Adjustable rate loans are amortized for 30 years and have fixed rate periods of
one to seven years, after which the rates adjust annually. 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 contractors to construct
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 90% of cost of
construction.
Consumer loans offered by the Company include (i) personal unsecured lines
of credit, (ii) personal installment loans, (iii) credit cards, 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 $2,500,000. The Directors
Loan Committee of the Board of Directors has the authority to approve loans up
to $5,000,000. These loans come to the Committee with a review, analysis and
recommendation by the lender and the Officers Loan Committee. Loans exceeding
$5,000,000 come to the full Board of Directors after review by the Directors
Loan
5
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.
The Company generally requires that loans secured by first mortgages on
real estate have loan to value ratios within specified limits, up to 80% for
improved property, or up to 90% if secured by private mortgage insurance. The
Company also makes loans secured by second mortgages on real estate.
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.
Investment advice, products and services are offered through Primevest Financial
Services, a non-affiliated Registered Broker/Dealer, Member FINRA, SIPC.
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 advance is a loan with separate terms including an interest
rate and maturity date. The Company can vary these terms depending on 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.
6
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 Primevest Financial Services.
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 Oakland County,
southern Macomb County, those portions of Wayne County that include the city of
Detroit and its eastern 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 fund 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.
7
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 subsidiaries 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 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
8
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 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 February 4, 2008, the Bank entered into a Memorandum of Understanding
with the Federal Deposit Insurance Corporation and the Michigan Office of
Financial and Insurance Services, which sets forth certain actions required to
be taken by management of the Bank. A Memorandum of Understanding is
characterized by regulatory authorities as an informal action that is neither
published nor made publicly available by agencies and is used when circumstances
warrant a milder form of action than a formal cease and desist order. Under the
terms of the Memorandum of Understanding, the Bank must achieve and maintain an
8% minimum capital minus goodwill to total assets ratio while the Memorandum is
in force.
As of December 31, 2007, 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 8.99%, a ratio of total capital to risk-weighted assets
of 10.24%, and a leverage ratio of 7.13%.
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
9
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 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.
Another stipulation of the Memorandum of Understanding that the Bank
entered into with the FDIC and the Michigan Office of Financial and Insurance
Services states that the Bank may not declare or pay dividends without prior
written approval of the FDIC and the Office of Financial and Insurance Services
of Michigan. The Company may be restricted in its ability to pay dividends to
shareholders since its sole source of income is dividends from the Bank.
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;
10
- "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
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
11
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.
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.
As previously mentioned, as of February 4, 2008, the Bank entered into a
Memorandum of Understanding with the Federal Deposit Insurance Corporation and
the Michigan Office of Financial and Insurance Services, whereby the Bank is
12
required to achieve and maintain an 8% minimum capital minus goodwill to total
assets ratio while the Memorandum is in force.
The following table shows the capital totals and ratios for the Bank as of
December 31, 2007 (000s omitted in dollar amounts):
Tier 1 capital $36,709
Total capital $41,658
Tier 1 capital to risk weighted assets 9.28%
Total capital to risk weighted assets 10.53%
Leverage ratio 7.36%
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. The Bank's deposits are insured up to applicable limits
by an insurance fund administered by the FDIC.
Following the adoption of the Federal Deposit Insurance Reform Act of 2005,
the FDIC has the opportunity, through its rulemaking authority, to better price
deposit insurance for risk than was previously authorized. The FDIC adopted
regulations effective January 1, 2007 that create a new system of risk-based
assessments. Under the regulations there are four risk categories, and each
insured institution will be assigned to a risk category based on capital levels
and supervisory ratings. well-capitalized institutions with CAMELS composite
ratings of 1 or 2 will be placed in Risk Category I while other institutions
will be placed in Risk Categories II, III, or IV depending on capital levels
and CAMELS composite ratings. The current assessment rates established by the
FDIC provide that the highest rated institutions, those in Risk Category I,
will pay premiums of between .05% and .07% of deposits and the lowest rated
institutions, those in Risk Category IV, will pay premiums of .43% of deposits.
The assessment rates may be changed by the FDIC as necessary to maintain the
insurance fund at the reserve ratio designated by the FDIC, which currently is
1.25% of insured deposits. The FDIC may establish the reserve ratio annually
between 1.15% and 1.50% of insured deposits. Deposit insurance assessments will
be collected for a quarter at the end of the next quarter. Assessments will be
13
based on deposit balances at the end of the quarter, except for institutions
with $1 billion or more in assets and any institution that becomes insured on or
after January 1, 2007 which will have their assessment base determined using
average daily balances of insured deposits.
FDIC-insured institutions also are subject to assessments to repay
obligations issued by a federally chartered corporation to provide financing for
resolving the thrift crisis in the 1980's. For the first quarter of 2008, the
rate established by the FDIC for this purpose is 1.14 basis points per dollar of
insured deposits.
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.
Under the terms of the Memorandum of Understanding, the Bank may not
declare or pay dividends without prior written approval of the FDIC and the
Office of Financial and Insurance Services of Michigan.
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.
14
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 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 the exception approval process outlined in the lending
policy is followed.
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 $9.3 million or less, a reserve of
0%; and
- for transaction accounts in excess of $9.3 million up to and including
$43.9 million, a reserve of 3%; and
- for transaction accounts totaling in excess of $43.9 million, a
reserve requirement of $1.038 million plus 10% against that portion of
the total transaction accounts greater than $43.9 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.
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, 2007, the Company had 149 full-time employees and 27
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 2007 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 2005-2007" 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 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
16
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, 2007, approximately 82% 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 loan losses.
17
Potential Problem Loans
The Bank uses a risk rating system to identify the credit risk of the
entire commercial loan portfolio. Each loan is individually reviewed at
origination and then periodically reviewed throughout its life. Loans with a 5
rating are considered "watch" loans and reflect borrowers who exhibit potential
credit weaknesses or downward trends in their business, deserving bank
management's close attention. While potentially weak, we anticipate no loss of
principal or interest. As of 12/31/07, the Bank had sixty-five credits, totaling
$12,657,000 of watch loans. The number of 5 rated loans has increased to
ninety-five with balances of $28,800,000 as of 2/29/08.
This increase in the 5 rated credits is due mostly to the continued impact
of the economic challenges faced by our borrowers. In addition, the Bank took
several steps in the fourth quarter of 2007 and the first quarter of 2008 to
more aggressively risk rate the portfolio. To bolster the range and depth of the
loan review process, an outside firm was contracted in February 2008 to review
$33,000,000 worth of loans. Finally, an additional full time loan review person
was hired in February 2008. Given these recent changes, it is anticipated that
the number of watch loans will grow in 2008 simply due to the increased
scrutiny.
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 35-36 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
18
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.
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.
19
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 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.
20
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" 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
21
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 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
--------------------- ------- ---------------
Warren Office 14801 12 Mile Road at Gloede Owned
Warren, MI 48088
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
Southfield/Evergreen 25250 Evergreen Road Owned
Southfield, MI 48075
Farmington Hills/Halsted 37386 12 Mile Road Owned
Farmington Hills, MI 48331
Sterling Heights/ 3801 Metropolitan Parkway Land - Leased
Metropolitan Parkway Sterling Heights, MI 48310 Building - Owned
Fenton 17197 Silver Parkway Owned
Fenton, MI 48430
Troy 30 East Long Lake Rd. Land - Leased
Troy, MI 48085 Building - Owned
Grosse Pointe Woods 20276 Mack Avenue Land - Leased
Grosse Pointe Woods, MI 48236 Building - Owned
Universal Mortgage Corporation operates the following offices:
Troy 50 West Big Beaver, Suite 100 Leased
Troy, MI 48084
Ann Arbor 3001 Plymouth Road, Suite 205 Leased
Ann Arbor, MI 48105
Howell 2020 East Grand River, Suite 103 Leased
Howell, MI 48843
23
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 2007.
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
------------ ------------------------- ----------------------
Michael J. Tierney, 52 President and Chief Executive Officer President and Chief Executive
Officer since January 2007.
President of Peoples State Bank
since July 2006. Managing director
for business banking in the midwest
region for JP Morgan Chase from
February 2006 to June 2006. Prior
to February 2006, Mr. Tierney spent
28 years at Comerica Inc. where he
held executive positions in retail
banking, corporate banking, private
banking and product management.
Michael J. Banks, 49 Senior Vice President - Chief Senior Vice President and Chief
Lending Officer Lending Officer since March 2007;
1st Vice President in Commercial
Lending at Comerica Bank from 2001 -
March 2007.
Gary Forhan, 50 Senior Vice President - Marketing Senior Vice President - Marketing
since December 2006; Director of
Product Management at Citizens Bank
in Flint from Sept. 2005 - Sept.
2006; President of Forhan & Assoc.,
LLC from Feb. 2003 - Sept. 2005;
Dir. of Product & Project Mgmt. at
Mich. National Bank from Aug. 1991 -
Feb. 2003.
Tami H. Janowicz, 50 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.
Jeffrey Moore, 51 Senior Vice President and Chief Senior Vice President and Chief
Credit Officer Credit Officer since May of 2007;
Senior Vice President - Business
24
Banking at Fifth Third Bank -
Eastern Michigan from Sept. 1997 -
Mar. 2007.
Gregory Quick, 53 Senior Vice President - Residential Senior Vice President - Residential
Mortgages Mortgages since Sept. 2007; Senior
Vice President of Mortgage
Operations at Citizens Bank in Flint
from Jan. 2002 - Sept. 2007.
Catherine M. Revord, 48 Senior Vice President - Human Senior Vice President - Human
Resources Resources since July, 2005; Vice
President - Human Resources from
October 2001 to July 2005.
Vincent J. Szymborski, 48 Senior Vice President - Retail Senior Vice President - Retail
Banking Banking since Mar. 2007; 1st Vice
President and National Group Mgr. of
Deposit, Credit and Service Related
Products at Comerica for over 5
years.
David A. Wilson, 47 Senior Vice President and Chief Senior Vice President and Chief
Financial Officer Financial Officer since 1991.
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 35 and 50 of the
registrant's 2007 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, 2007.
ISSUER PURCHASES OF EQUITY SECURITIES
MAXIMUM NUMBER (OR
TOTAL NUMBER OF APPROXIMATE DOLLAR
SHARES PURCHASED AS VALUE) OF SHARES
PART OF PUBLICLY THAT MAY YET BE
TOTAL NUMBER OF AVERAGE PRICE PAID ANNOUNCED PLANS OR PURCHASED UNDER THE
PERIOD SHARES PURCHASED PER SHARE PROGRAMS PLANS OR PROGRAMS
- ---------- ---------------- ------------------ ------------------- -------------------
10/01/07 - 0 0 0 0
10/31/07
11/01/07 - 0 0 0 0
11/30/07
12/01/07 - 0 0 0 0
12/31/07
------- ------- ------- -------
Total 0 0 0 0
======= ======= ======= =======
25
The Company does not currently have a stock repurchase plan in place.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference from the
table captioned "Selected Financial Information" on page 36 of the 2007 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 from the
section captioned "Management's Discussion and Analysis" on pages 37 through 49
of the 2007 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference from the
section captioned "Quantitative and Qualitative Disclosures about Market Risk"
on pages 47 - 49 of the 2007 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Audited Consolidated Financial Report contained on pages 1 through 33
of the 2007 Annual Report to Shareholders, together with the related notes and
independent auditor's report and the Quarterly Results of Operation on page 35
of the 2007 Annual Report to Shareholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure controls and procedures. We evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of December
31, 2007. Our disclosure controls and procedures are the controls and other
procedures that we designed to ensure that we record, process, summarize and
report in a timely manner, the information we must disclose in reports that we
file with, or submit to the SEC. Michael J. Tierney, our President and Chief
Executive Officer, and David A. Wilson, our Senior Vice President and Chief
Financial Officer, reviewed and participated in this evaluation. Based on this
evaluation, Messrs. Tierney and Wilson concluded that, as of the date of their
evaluation, our disclosure controls were effective.
Management's Annual Report on Internal Control over Financial Reporting.
The management of PSB Group, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting. PSB Group,
Inc.'s internal control over financial reporting is a process designed under the
supervision of the Company's Chief Executive Officer and Chief Financial Officer
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company's financial statements for external reporting
purposes in accordance with United States generally accepted accounting
principles.
PSB Group, Inc.'s management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2007 based on
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission
26
(COSO) in "Internal Control-Integrated Framework." Based on that assessment,
management determined that, as of December 31, 2007, the Company's internal
control over financial reporting is effective, based on those criteria.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management's
report in this annual report.
Changes in Internal controls. During the quarter ended December 31, 2007,
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
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this item is incorporated by reference from
the registrant's 2008 Proxy Statement furnished to its shareholders in
connection with an Annual Meeting of Shareholders to be held on April 22, 2008
(the "2008 Proxy Statement"), under the captions "Election of Directors", "Role
and Composition of the Board 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 by reference from the registrant's 2008 Proxy Statement for the
Annual Meeting of Shareholders to be held on April 22, 2008 under the caption
"Directors' Compensation" on pages 8 and 9, "Compensation Committee Interlocks
and Insider Participation" on page 22, "Compensation Committee Report" on page
23 and in the "Compensation Discussion and Analysis" section on pages 14 - 22.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated by reference from
pages 10 - 12 of the registrant's 2008 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 as of December 31, 2007:
27
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 plans
outstanding options, outstanding options, (excluding securities in
Plan category warrants and rights warrants and rights column (a))
- ---------------------------- -------------------------- -------------------- --------------------------
Equity compensation plans
approved by security
holders 100,893 $19.72 306,257
Equity compensation plans
not approved by
security holders None None None
----------- ------------ -------------
Total 100,893 $19.72 306,257
=========== ============ =============
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information relating to certain relationships and related transactions
is incorporated by reference from the registrant's 2008 Proxy Statement at page
22 under the caption "Transactions with Certain Related Persons" and page 3
under the caption "Role and Composition of the Board of Directors."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information on pages 9 and 10 of the 2008 Proxy Statement, under the
caption "Item 2. Approval of Auditors" is incorporated by reference.
PART IV
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, 2007. 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, 2007 and 2006
3. Consolidated Statements of Income for each of the years in the
Three-Year Period Ended December 31, 2007
4. Consolidated Statements of Stockholders' Equity for each of the years
in the Three-Year Period Ended December 31, 2007
5. Consolidated Statements of Cash Flows for each of the years in the
Three-Year Period Ended December 31, 2007
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:
28
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 Employment Agreement with Michael J. Tierney (incorporated by reference from Current Report on Form
8-K filed on June 26, 2006).
10.2 Restricted Stock Agreement with Michael J. Tierney (incorporated by reference from Current Report on
Form 8-K filed on June 26, 2006).
10.3 Management Continuity Agreement with David A. Wilson.*
10.4 Management Continuity Agreement with Tami Janowicz (incorporated by reference from Annual Report on
Form 10-K for the year ended December 31, 2006).
10.5 Management Continuity Agreement with Catherine M. Revord (incorporated by reference from Annual
Report on Form 10-K for the year ended December 31, 2006).
10.6 2004 Stock Compensation Plan.**
10.7 Form of Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement (incorporated by
reference from Annual Report on Form 10-K for the year ended December 31, 2005).
10.8 Deferred Compensation Plan, as amended (incorporated by reference from Annual Report on Form 10-K
for the year ended December 31, 2005).
10.9 Form of Restricted Stock Agreement (incorporated by reference from Quarterly Report on Form 10-Q for
the quarter ended March 31, 2007).
10.10 Management Continuity Agreement with Gary D. Forhan (incorporated by reference from Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007).
10.11 Management Continuity Agreement with Vincent J. Szymborski (incorporated by reference from Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007).
10.12 Management Continuity Agreement with Michael J. Banks (filed herewith).
10.13 Management Continuity Agreement with Jeffrey Moore (filed herewith).
11 Computation of Earnings Per Share (filed herewith on page 3 of the 2007 Annual Report to
Shareholders including Note 1 thereto).
13 Portions of 2007 Annual Report to Shareholders (filed herewith).
14 Code of Ethics (incorporated by reference from Annual Report on Form 10-K for the year ended
December 31, 2006).
21.1 Subsidiaries of Registrant (filed herewith).
- ----------
* Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.
** Incorporated by reference from Registrant's Proxy Statement for the 2004
annual meeting of shareholders.
29
23. Consent of Plante & Moran, PLLC.
31.1 Certification of Michael J. Tierney required by Rule 13a - 14(a).
31.2 Certification of David A. Wilson required by Rule 13a - 14(a).
32.1 Certification of Michael J. Tierney required by Rule 13a - 14(b) and Section 906 of the Sarbanes -
Oxley Act of 2002, 18 U.S.C. Section 1350.
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.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 24, 2008 By: /s/ Michael J. Tierney
------------------------------------
Michael J. Tierney
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/ Michael J. Tierney Date: March 24, 2008
---------------------------------
Michael J. Tierney
President and Chief Executive
Officer
(Principal Executive Officer and
Director)
By: /s/ David A. Wilson Date: March 24, 2008
---------------------------------
David A. Wilson
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
By: /s/ Robert L. Cole Date: March 24, 2008
---------------------------------
Robert L. Cole
(Director)
By: /s/ Dr. James Jacobs Date: March 24, 2008
---------------------------------
Dr. James Jacobs
(Director)
By: /a/ Michael J. Kowalski Date: March 24, 2008
---------------------------------
Michael J. Kowalski
(Director)
By: /s/ Longine V. Morawski Date: March 24, 2008
---------------------------------
Longine V. Morawski
(Director)
By: /s/ Sydney L. Ross Date: March 24, 2008
---------------------------------
Sydney L. Ross
(Director)
By: /s/ Edward H. Turner Date: March 24, 2008
---------------------------------
Edward H. Turner
(Director)
By: /s/ David L. Wood Date: March 24, 2008
---------------------------------
David L. Wood
(Director)
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