e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For fiscal year ended December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
OF 1934 |
For the transition period from to
Commission file number 000-23550
FENTURA FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
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| Michigan
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38-2806518 |
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.) |
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| 175 North Leroy, Fenton, Michigan
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48430-0725 |
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| (Address of Principal Executive Offices)
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(Zip Code) |
Registrant’s telephone number, including area code (810) 750-8725
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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. þ Yes o No
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of 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 definitions of “large accelerated
filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one);
Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company þ
(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 o No þ
State the aggregate market value of the voting and nonvoting common equity held by nonaffiliates of
the registrant computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of the last business day of the registrant’s
most recently completed second quarter.
Aggregate Market Value as of June 30, 2007: $68,167,544
State the number of shares outstanding of each of issuer’s classes of common equity, as of the
latest practicable date. 2,168,007 shares of Common Stock as of March 1, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Fentura Financial, Inc. Proxy Statement for its annual meeting of shareholders to
be held April 22, 2008 and its Rule 14a-3 annual report are incorporated by reference into Parts II
and III.
Fentura Financial, Inc.
2007 Annual Report on Form 10-K
Table Of Contents
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company
Fentura Financial, Inc. (the “Company” or “Fentura”) is a bank holding company headquartered
in Fenton, Michigan that owns three subsidiary banks (see “The Banks” below). All information in
this Item 1 is as of December 31, 2007. The Company’s subsidiary banks operate 17 community
banking offices offering a full range of banking services principally to individuals, small
businesses, and government entities throughout mid-Michigan and western Michigan. At the close of
business on December 31, 2007, the Company had assets of $628 million, deposits of $545 million,
and shareholders’ equity of $49 million. Trust assets under management totaled $164 million.
Fentura was incorporated in 1987 to serve as the holding company of its sole subsidiary bank,
The State Bank (“TSB” or one of the “Banks”). TSB traces its origins to its predecessor, The
Commercial Savings Bank of Fenton, which was incorporated in 1898. See “The Banks” below. On
March 13, 2000 a second bank subsidiary, Davison State Bank (“DSB” or one of the “Banks”) commenced
operation. On March 15, 2004, Fentura acquired West Michigan Community Bank (“WMCB” or one of the
“Banks”).
The Company’s principal executive offices are located at 175 North Leroy, Fenton, Michigan
48430-0725, and its telephone number is (810) 750-8725.
The Banks
TSB’s original predecessor was incorporated as a state banking corporation under the laws of
Michigan on September 16, 1898 under the name “The Commercial Savings Bank of Fenton.” In 1931, it
changed its name to State Savings Bank of Fenton, and in 1988 became The State Bank. For over 100
years, TSB has been engaged in the general banking business in the Fenton, Michigan area. TSB is
headquarted in Fenton and considers its primary service area to be portions of Genesee, Oakland,
and Livingston counties in Michigan. As of December 31, 2007, TSB operated four offices and an
operations center in the City of Fenton, Michigan, one office in the City of Linden, Michigan, one
office in the Village of Holly, Michigan, three offices in the Township of Grand Blanc, Michigan,
and one office in Brighton, Michigan. Its main office is located in downtown Fenton.
DSB commenced operations on March 13, 2000, and is engaged in the general banking business in
the Davison, Michigan area. DSB is headquartered in Davison and considers its primary service area
to be portions of Genesee and Lapeer Counties. As of December 31, 2007, DSB operated two offices
in the City of Davison, Michigan.
Fentura acquired West Michigan Community Bank on March 15, 2004. WMCB is engaged in the
general banking business in Hudsonville, Michigan, and other portions of Ottawa County and western
Kent County, Michigan. WMCB is headquartered in Hudsonville and considers its primary service
areas to be portions of Kent and Ottawa counties. As of December 31, 2007, WMCB operated two
offices in the City of Hudsonville, Michigan, one office in the City of Jenison, Michigan, and two
offices in the City of Holland, Michigan.
All of the Banks are community-oriented providers of financial services engaged in the
business of general commercial banking. Their activities include investing in state and federal
securities, accepting demand deposits, savings and other time deposits, extending retail,
commercial, consumer and real estate loans to individuals and businesses, providing safe deposit
boxes and credit card services, transmitting funds and providing other services generally
associated with full service commercial banking. Lending is focused on individuals and small
businesses in the local markets served by the Banks. In addition, TSB and WMCB operate trust
departments offering a full range of fiduciary services.
3
All three banks are state banks, chartered under the Michigan Banking Code. None are members
of the Federal Reserve, but the deposits of each are insured by the Federal Deposit Insurance
Corporation (the “FDIC”). See “Supervision and Regulation” below.
As of December 31, 2007, TSB employed 116 full time personnel, including 49 officers, and an
additional 45 part time employees; DSB employed 12 full time personnel, including 4 officers, and
an additional 8 part time employees; WMCB employed 41 full time personnel, including 17 officers,
and an additional 14 part time employees. All Banks consider their employee relations to be
excellent.
Competition
The financial services industry is highly competitive. The Banks compete with other
commercial banks, many of which are subsidiaries of bank holding companies, for loans, deposits,
trust accounts, and other business on the basis of interest rates, fees, convenience and quality of
service. The Banks also compete with a variety of other financial services organizations including
savings and loan associations, finance companies, mortgage banking companies, brokerage firms,
credit unions and other financial organizations. Many of the Banks’ competitors have substantially
greater resources than the Banks.
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting the Company and the
Banks. This summary is qualified in its entirety by such statutes and regulations. A change in
applicable laws or regulations may have a material effect on the Company, the Banks and the
business of the Company and the Banks.
General
Financial institutions and their holding companies are extensively regulated under federal and
state law. Consequently, the growth and earnings performance of the Company and the Banks can be
affected not only by management decisions and general economic conditions, but also by the statutes
administered by, and the regulations and policies of, various governmental regulatory authorities.
Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve
System (the “Federal Reserve Board”), the FDIC, the Commissioner of the Michigan Office of
Financial and Insurance Services (“Commissioner”), the Internal Revenue Service, and state taxing
authorities. The effect of such statutes, regulations and 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 and
their holding companies regulate, among other things, the scope of business, investments, reserves
against deposits, capital levels relative to operations, lending activities and practices, 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 Banks
establishes a comprehensive framework for their respective operations and is intended primarily for
the protection of the FDIC’s deposit insurance funds, the depositors of the Banks, and the public,
rather than shareholders of the Banks or the Company.
Federal law and regulations establish supervisory standards applicable to the lending
activities of the Banks, including internal controls, credit underwriting, loan documentation and
loan-to-value ratios for loans secured by real property.
4
The Company’s common stock is registered under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). It is therefore subject to the information, proxy solicitation, insider
trading and other restrictions and requirements of the SEC under the Exchange Act. On July 30,
2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act
provided for numerous changes to the reporting, accounting, corporate governance and business
practices of companies as well as financial and other professionals who have involvement with the
U.S. public markets.
The Company
General. The Company, as the sole shareholder of the Banks, is a bank holding company and is
registered with, and subject to regulation by, the Federal Reserve Board under the Bank Holding
Company Act, as amended (the “BHCA”). Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board
periodic reports of its operations and such additional information as the Federal Reserve Board may
require.
In accordance with Federal Reserve Board policy, the Company is expected to act as a source of
financial strength to the Banks and to commit resources to support the Banks in circumstances where
the Company might not do so absent such policy. In addition, if the Commissioner deems a Bank’s
capital to be impaired, the Commissioner may require the Bank to restore its capital by a special
assessment upon the Company as the Bank’s sole shareholder. If the Company were to fail to pay any
such assessment, the directors of the Bank would be required, under Michigan law, to sell the
shares of the Bank’s stock owned by the Company to the highest bidder at either a public or private
auction and use the proceeds of the sale to restore the Bank’s capital.
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 such acquisition, it would own or control
more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding company; or (iii)
merging or consolidating with another bank holding company. The Federal Reserve may allow a bank
holding company to acquire banks located in any state of the United States without regard to
geographic restrictions or reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may be held by the
acquiring holding company and all of its insured depository institution affiliates.
The merger or consolidation of an existing bank subsidiary of the Company with another bank,
or the acquisition by such a subsidiary of assets of another bank, or the assumption of liability
by such a subsidiary to pay any deposits in another bank, will require the prior written approval
of the responsible Federal depository institution regulatory agency under the Bank Merger Act. In
addition, in certain such cases an application to, and the prior approval of, the Federal Reserve
Board under the BHCA and/or the Commissioner under the Michigan Banking Code, may be required.
With certain limited exceptions, the BHCA prohibits any bank holding company from engaging,
either directly or indirectly through a subsidiary, in any activity other than managing or
controlling banks unless the proposed non-banking activity is one that the Federal Reserve Board
has determined to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Under current Federal Reserve Board regulations, such permissible
non-banking activities include such things as mortgage banking, equipment leasing, securities
brokerage, and consumer and commercial finance company operations. Well-capitalized and
well-managed bank holding companies may engage de novo in certain types of non-banking activities
without prior notice to, or approval of, the Federal Reserve Board, provided that written notice of
the new activity is given to the Federal Reserve Board within 10 business days after the activity
is commenced. If a bank holding company wishes to engage in a non-banking activity by acquiring a
going concern, prior notice and/or prior approval will be required, depending upon the activities
in which the company to be acquired is engaged, the size of the company to be acquired and the
financial and managerial condition of the acquiring bank holding company.
5
A bank holding company whose subsidiary depository institutions all are well-capitalized and
well-managed and who have Community Reinvestment Act ratings of at least “satisfactory” may elect
to become a financial holding company. A financial holding company is permitted to engage in a
broader range of activities than are permitted to bank holding companies.
Those expanded activities include any activity which the Federal Reserve (in certain instances
in consultation with the Department of the Treasury) determines, by order or regulation, to be
financial in nature or incidental to such financial activity, or to be complementary to a financial
activity and not to pose a substantial risk to the safety or soundness of depository institutions
or the financial system generally. Such expanded activities include, among others: insuring,
guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or issuing
annuities, and acting as principal, agent, or broker for such purposes; providing financial,
investment, or economic advisory services, including advising a mutual fund; and underwriting,
dealing in, or making a market in securities.
The BHCA generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank or financial holding companies.
Federal legislation also prohibits the acquisition of control of a bank holding company, such
as the Company, by a person or a group of persons acting in concert, without prior notice to the
Federal Reserve. Control is defined in certain cases as the acquisition of 10% of the outstanding
shares of a bank holding company.
Year-end securities were as follows (in thousands):
Available for Sale
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Gross |
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Gross |
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Fair |
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Unrealized |
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Unrealized |
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Value |
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Gains |
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Losses |
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2007 |
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U.S. Government and federal agency |
|
$ |
21,152 |
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$ |
41 |
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$ |
(37 |
) |
Mortgage-backed |
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40,562 |
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|
140 |
|
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(662 |
) |
State and municipal |
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6,823 |
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|
25 |
|
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|
(61 |
) |
Equity securities |
|
|
3,255 |
|
|
|
47 |
|
|
|
(207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
71,792 |
|
|
$ |
253 |
|
|
$ |
(967 |
) |
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency |
|
$ |
20,985 |
|
|
$ |
0 |
|
|
$ |
(546 |
) |
Mortgage-backed |
|
|
58,499 |
|
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|
48 |
|
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|
(1,189 |
) |
State and municipal |
|
|
9,311 |
|
|
|
77 |
|
|
|
(27 |
) |
Equity securities |
|
|
2,309 |
|
|
|
191 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
91,104 |
|
|
$ |
316 |
|
|
$ |
(1,767 |
) |
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency |
|
$ |
22,886 |
|
|
$ |
0 |
|
|
$ |
(640 |
) |
Mortgage-backed |
|
|
68,057 |
|
|
|
4 |
|
|
|
(1,481 |
) |
State and municipal |
|
|
6,591 |
|
|
|
59 |
|
|
|
(47 |
) |
Equity securities |
|
|
2,008 |
|
|
|
100 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
99,542 |
|
|
$ |
163 |
|
|
$ |
(2,170 |
) |
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6
Held to Maturity
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Gross |
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Gross |
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Amortized |
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Unrecognized |
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Unrecognized |
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Fair |
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|
Cost |
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Gains |
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Losses |
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|
Value |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed |
|
$ |
6 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
6 |
|
State and municipal |
|
|
8,679 |
|
|
|
61 |
|
|
|
(32 |
) |
|
|
8,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,685 |
|
|
$ |
61 |
|
|
$ |
(32 |
) |
|
$ |
8,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Mortgage-backed |
|
$ |
9 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
9 |
|
State and municipal |
|
|
11,890 |
|
|
|
36 |
|
|
|
(114 |
) |
|
|
11,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
$ |
11,899 |
|
|
$ |
36 |
|
|
$ |
(114 |
) |
|
$ |
11,821 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed |
|
$ |
14 |
|
|
$ |
1 |
|
|
$ |
0 |
|
|
$ |
15 |
|
State and municipal |
|
|
14,837 |
|
|
|
46 |
|
|
|
(226 |
) |
|
|
14,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
$ |
14,851 |
|
|
$ |
47 |
|
|
$ |
(226 |
) |
|
$ |
14,672 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its
examination and regulation of bank holding companies. If capital falls below minimum guidelines, a
bank holding company may, among other things, be denied approval to acquire or establish additional
banks or non-bank businesses. These capital guidelines are comparable to those established by the
regulatory authorities for the Banks discussed below.
Dividends. The Company is a corporation separate and distinct from the Banks. Most of the
Company’s revenues are received by it in the form of dividends paid by the Banks. Thus, the
Company’s ability to pay dividends to its shareholders is indirectly limited by statutory
restrictions on the Banks’ ability to pay dividends described below. Further, in a policy
statement, the Federal Reserve Board has expressed its view that a bank holding company
experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which
can only be funded in ways that weaken the bank holding company’s financial health, such as by
borrowing. Additionally, the Federal Reserve Board 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. Similar
enforcement powers over the Banks are possessed by the FDIC. The “prompt corrective action”
provisions of federal law and regulation authorizes the Federal Reserve Board to restrict the
payment of dividends by the Company for an insured bank which fails to meet specified capital
levels.
In addition to the restrictions on dividends imposed by the Federal Reserve Board, the
Michigan Business Corporation Act provides that dividends may be legally declared or paid only if
after the distribution a corporation, such as the Company, can pay its debts as they come due in
the usual course of business and its total assets equal or exceed the sum of its liabilities plus
the amount that would be needed to satisfy the preferential rights upon dissolution of any holders
of preferred stock whose preferential rights are superior to those receiving the distribution.
The Banks
General. The Banks are Michigan banking corporations, and their deposit accounts are insured
by the deposit insurance fund of the FDIC. As FDIC-insured Michigan chartered banks, the Banks are
subject to the examination, supervision, reporting and enforcement requirements of the
Commissioner, as the chartering authority for Michigan banks, and the FDIC, as administrator of the
deposit insurance fund. These agencies and the federal and state laws applicable to the Banks and
their operations, extensively regulate various aspects of the banking business including, among
other things, permissible types and amounts of loans, investments and other activities, capital
adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the
safety and soundness of banking practices.
7
Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay deposit
insurance premium assessments to 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 new 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 their capital levels and CAMELS
composite ratings. 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 set the reserve ratio annually at between 1.15% and 1.50% of insured
deposits. 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.
Deposit insurance assessments will be collected for a quarter at the end of the next quarter.
Assessments will be based on deposit balances at the end of the quarter, except for institutions
with $1 billion or more in assets and any institutions that become insured on or after January 1,
2007 which will have their assessment base determined using average daily balances of insured
deposits.
FICO Assessments. The Banks are subject to assessments to cover the payments on outstanding
obligations of the Financing Corporation (“FICO”). FICO was created to finance the recapitalization
of the Federal Savings and Loan Insurance Corporation, during the thrift crisis in the 1980s. From
now until the maturity of the outstanding FICO obligations in 2019, insured institutions will share
the cost of the interest on the FICO bonds on a pro rata basis.
Commissioner Assessments. Michigan banks are required to pay supervisory fees to the
Commissioner to fund the operations of the Commissioner. The amount of supervisory fees paid by a
bank is based upon the bank’s total assets, as reported to the Commissioner.
Capital Requirements. The FDIC has established the following minimum capital standards for
state-chartered, FDIC insured non-member banks, such as the Banks: a leverage requirement
consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most
highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital
requirement consisting 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. Tier 1 capital consists principally of
shareholders’ equity. These capital requirements are minimum requirements. Higher capital levels
will be required if warranted by the particular circumstances or risk profiles of individual
institutions.
8
Prompt Corrective Regulatory Action. Federal law provides the federal banking regulators with
broad power to take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators’ powers depends on whether the institution in question
is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized,” or “critically undercapitalized.” Federal regulations define these capital
categories as follows:
| |
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Total |
|
Tier 1 |
|
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Risk-Based |
|
Risk-Based |
|
|
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|
Capital Ratio |
|
Capital Ratio |
|
Leverage Ratio |
Well capitalized
|
|
10% or above
|
|
6% or above
|
|
5% or above |
Adequately capitalized
|
|
8% or above
|
|
4% or above
|
|
4% or above |
Undercapitalized
|
|
Less than 8%
|
|
Less than 4%
|
|
Less than 4% |
Significantly undercapitalized
|
|
Less than 6%
|
|
Less than 3%
|
|
Less than 3% |
Critically undercapitalized
|
|
—
|
|
—
|
|
A ratio of tangible |
|
|
|
|
|
|
equity to total assets |
|
|
|
|
|
|
of 2% or less |
As of December 31, 2007, each of the Banks’ ratios exceeded minimum requirements for the well
capitalized category.
Depending upon the capital category to which an institution is assigned, the regulators’
corrective powers include: requiring the submission of a capital restoration plan; placing limits
on asset growth and restrictions on activities; requiring the institution to issue additional
capital stock (including additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits; ordering a new
election of directors of the institution; requiring that senior executive officers or directors be
dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring
the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower category than is indicated
by its capital levels if the appropriate federal depository institution regulatory agency
determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an
unsafe or unsound practice. This could include a failure by the institution, following receipt of
a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.
Dividends. Under Michigan law, the Banks are restricted as to the maximum amount of dividends
they may pay on their common stock. The Banks may not pay dividends except out of net income after
deducting their losses and bad debts. A Michigan state bank may not declare or pay a dividend
unless the bank will have surplus amounting to at least 20% of its capital after the payment of the
dividend.
Federal law generally prohibits a depository institution from making any capital distribution
(including payment of a dividend) or paying any management fee to its holding company if the
depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank
from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In
addition, the FDIC may prohibit the payment of dividends by an insured bank, if such payment is
determined, by reason of the financial condition of the bank, to be an unsafe and unsound banking
practice.
Insider Transactions. The Banks are subject to certain restrictions imposed by the Federal
Reserve Act on any extensions of credit to the Company or its subsidiaries, on investments in the
stock or other securities of the Company or its subsidiaries and the acceptance of the stock or
other securities of the Company or its subsidiaries as collateral for loans. Certain limitations
and reporting requirements are also placed on extensions of
credit by the Banks to their directors and officers, to directors and officers of the Company
and its subsidiaries, to principal shareholders of the Company, and to “related interests” of
9
such directors, officers and principal shareholders. In addition, federal law and regulations
may affect the terms upon which any person becoming a director or officer of the Company or one of
its subsidiaries or a principal shareholder of the Company may obtain credit from banks with which
the Banks maintain a correspondent relationship.
Safety and Soundness Standards. The FDIC has adopted guidelines to promote the safety and
soundness of federally insured depository institutions. These guidelines establish standards for
internal controls, information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality
and earnings.
Investments and Other 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, as implemented
by FDIC regulations, also prohibits 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. Impermissible investments and activities must be divested or
discontinued within certain time frames set by the FDIC in accordance with federal law. These
restrictions are not currently expected to have a material impact on the operations of the Banks.
Federal law 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.
Consumer Protection Laws. The Banks’ businesses include making a variety of types of loans to
individuals. In making these loans, the Banks are subject to State usury and regulatory laws and to
various federal statutes, including the privacy of consumer financial information provisions of the
Gramm-Leach-Bliley Act and regulations promulgated thereunder, the Equal Credit Opportunity Act,
the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act,
and the Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs,
and regulate the mortgage loan servicing activities of the Banks, including the maintenance and
operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits,
the Banks are subject to extensive regulation under State and federal law and regulations,
including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the
Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws
could result in the imposition of significant damages and fines upon the Bank and its directors and
officers.
Branching Authority. Michigan banks, such as the Banks, have the authority under Michigan law
to establish branches in any state, including Michigan, the District of Columbia, a territory or
protectorate of the United States or a foreign country, subject to receipt of all required
regulatory approvals. Under federal law banks may establish interstate branch networks through
merger or consolidation with other banks without regard to whether such activity is contrary to
state law. The establishment of de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather than the merger or consolidation with an out-of-state
bank) is allowed only if specifically authorized by the law of the state where the branch will be
established or acquired.
Michigan law permits both U.S. and non-U.S. banks to establish branch offices in Michigan.
The Michigan Banking Code permits, in appropriate circumstances and with the approval of the
11
Commissioner, (1) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or
savings and loan association located in a state in which a Michigan bank could purchase branches of
the purchasing entity, (2) consolidation of Michigan banks and FDIC-insured banks, savings banks or
savings and loan associations located in other states having laws which permit such a
consolidation, (3) establishment of branches in Michigan by FDIC-insured banks located in other
states, the District of Columbia or U.S. territories or protectorates having laws permitting a
Michigan bank to establish a branch in such jurisdiction, and (4) establishment by foreign banks of
branches located in Michigan.
You should carefully consider the following risk factors, together with the other information
provided in this Annual Report on Form 10-K.
The Company may need additional capital in the future and adequate financing may not be
available to it on acceptable terms, or at all.
On March 15, 2004, the Company completed its acquisition of West Michigan Community Bank. At
the time it was acquired, West Michigan Community Bank was operating under a Memorandum of
Understanding (MOU) with the FDIC and the Michigan Office of Financial and Insurance Services. The
MOU was lifted in July 2004, and the bank is no longer under special scrutiny by the FDIC or OFIS
and is considered well capitalized under federal banking regulations. However, projections for
West Michigan Community Bank indicate that it could require capital infusions in the near term to
remain a well capitalized bank. The Company raised some capital in 2005 through an offering of its
common stock to Michigan residents (resulting in approximately $758,000 of gross proceeds to the
Company) and the issuance of $2 million aggregate principal amount of floating rate preferred
securities through the Company’s newly-formed, wholly-owned trust, Fentura Financial Capital Trust
II. However, additional capital may be required in the future, which may not be available to the
Company on acceptable terms or at all. If the Company is unable to obtain the funding it needs, it
may be unable to develop its products and services, take advantage of future opportunities, or
respond to competitive pressures, which could have a material adverse effect on its financial
condition and profitability.
The Company has credit risk inherent in its asset portfolio, and its allowance for loan losses
may not be sufficient to cover actual loan losses.
The Banks’ loan customers may not repay their loans according to their respective terms, and
any collateral securing the payment of these loans may be insufficient to assure repayment. As a
result, the Banks may experience significant credit losses which could have a material adverse
effect on the Company’s operating results.
To offset this risk, the Company makes various assumptions and judgments about the
collectibility of the loan portfolios of the Banks, including the creditworthiness of borrowers and
the value of the real estate and other assets that may serve as collateral for the repayment of
loans. In determining the size of the allowance for loan losses, the Company relies on its
experience and its evaluation of current economic conditions. If its assumptions prove to be
incorrect, its current allowance for loan losses may not be sufficient to cover any loan losses
inherent in its loan portfolio and adjustments may be necessary to allow for different economic
conditions or adverse developments in its loan portfolio. Material additions to the allowance would
materially decrease net income.
In the near term, the Company’s strategy is to continue to expand commercial lending
activities in the markets in which its Banks are currently operating. The Company may also pursue
opportunities to expand into new markets outside its traditional markets by establishing offices
staffed by commercial loan officers who come from other commercial banks in these new markets. The
Company cannot be sure that its loan loss experience with any new borrowers in these newer markets
will be consistent with its loan loss experience in its traditional markets. Its actual loan loss experience in these
markets may cause the Company to increase its reserves.
12
The allowance for loan losses is based upon ranges of estimates and is not intended to imply
either limitations on the usage of the allowance or precision of the specific amounts. The Company
does not view the allowance for loan losses as being divisible among the various categories of
loans. The entire allowance is available to absorb any future losses without regard to the
category or categories in which the charged-off loans are classified. In addition, federal and
state regulators periodically review the Company’s allowance for loan losses and may require it to
increase the provision for loan losses or recognize additional loan charge-offs. Any increase in
the allowance for loan losses or loan charge-offs required by these regulatory agencies could have
a material adverse effect on the results of operations and financial condition of the Company.
The Company has credit risk inherent in its securities portfolio.
The Company maintains diversified securities portfolios, which include obligations of the U.S.
Treasury and government-sponsored agencies as well as securities issued by states and political
subdivisions, corporate securities, and mortgage-backed securities. The Company may also invest in
capital securities, which include preferred stocks and trust preferred securities. At December 31,
2007, the Company owned (stated at fair value) approximately $6 million of common stock in other
entities, which primarily represents its minority investments in five Michigan banks and a 24.99%
investment in an Arizona bank.
The Company seeks to limit credit losses in its securities portfolios by generally purchasing
only highly rated securities (rated “A” or higher by a major debt rating agency) or by conducting
significant due diligence on the issuer for unrated securities. However, the Company may, in the
future, experience losses in its securities portfolio which may be other than temporary in nature
and result in charges that could materially adversely affect its results of operations.
The Company’s mortgage-banking revenues are susceptible to substantial variations dependent
largely upon factors that the Company does not control, such as market interest rates.
The Company’s mortgage-banking revenues are earned in the form of gains on the sale of real
estate mortgage loans. The amount of gains realized by the Company primarily depends on the volume
of loans the Company sells, which depends on the Company’s ability to originate real estate
mortgage loans and the demand for fixed-rate obligations and other loans that are outside of its
established interest-rate risk parameters. Net gains on real estate mortgage loans are also
dependent upon economic and competitive factors, which are largely outside of the Company’s
control, as well as the Company’s ability to effectively manage exposure to changes in interest
rates and can often be a volatile part of its overall revenues.
Fluctuations in interest rates and economic conditions could reduce the Company’s
profitability and negatively affect its capital and liquidity.
The Company realizes income primarily from the difference between interest earned on loans and
investments and the interest paid on deposits and borrowings. The Company’s interest income and
interest expense are affected by general economic conditions and by the policies of regulatory
authorities. While the Company has taken measures intended to manage the risks of operating in a
changing interest rate environment, there can be no assurance that these measures will be effective
in avoiding undue interest rate risk. The Company expects that it will periodically experience
“gaps” in the interest rate sensitivities of its assets and liabilities, meaning that either its
interest-bearing liabilities will be more sensitive to changes in market interest rates than its
interest-earning assets, or vice versa. In either event, if market interest rates should move
contrary to its position, this “gap” will work against it, and its earnings may be negatively
affected.
13
The Company is unable to predict fluctuations of market interest rates, which are affected by,
among other factors, changes in the following:
| |
• |
|
inflation or deflation rates; |
| |
| |
• |
|
levels of business activity; |
| |
| |
• |
|
recession; |
| |
| |
• |
|
unemployment levels; |
| |
| |
• |
|
money supply; |
| |
| |
• |
|
domestic or foreign events; and |
| |
| |
• |
|
instability in domestic and foreign financial markets. |
In addition, substantially all of its loans are to businesses and individuals in mid-Michigan
and West Michigan, and any decline in the economy of either of these areas could adversely affect
it.
The Company’s operations may be adversely affected if the Company is unable to secure adequate
funding. The Company’s use of wholesale funding sources exposes it to liquidity risk and potential
earnings volatility.
The Company relies on wholesale funding to a modest extent, including its revolving credit
facility, Federal Home Loan Bank borrowings, and brokered deposits, to augment its core deposits to
fund its business. Because wholesale funding sources are affected by general market conditions,
the availability of funding from wholesale lenders may be dependent on the confidence these
investors have in the Company’s commercial and consumer finance operations. The continued
availability to the Company of these funding sources is uncertain, and it may be difficult to
retain or replace brokered deposits at attractive rates as they mature. The Company’s liquidity
will be constrained if it is unable to renew its wholesale funding sources or if adequate financing
is not available in the future at acceptable rates of interest or at all. The Company may not have
sufficient liquidity to continue to fund new loans, and the Company may need to liquidate loans or
other assets unexpectedly in order to repay obligations as they mature.
The Company relies heavily on its management team, and the unexpected loss of key managers may
adversely affect its operations.
The Company’s success to date has been influenced strongly by its ability to attract and to
retain senior management experienced in banking and financial services. The ability to retain
executive officers and the current management teams of each of its lines of business will continue
to be important to successful implementation of its strategies. The Company does not have
employment or non-compete agreements with any of these key employees, except that the Company
entered into non-compete agreements with each of the directors of West Michigan Financial Corp. in
connection with the Company’s acquisition of West Michigan Financial Corp. and its subsidiaries
(including West Michigan Community Bank). The unexpected loss of services of any key management
personnel, or the inability to recruit and retain qualified personnel in the future, could have an
adverse effect on the Company’s business and financial results.
Competition with other financial institutions could adversely affect the Company’s
profitability.
The Company faces vigorous competition from banks and other financial institutions, including
savings and loan associations, savings banks, finance companies, mortgage banking companies, credit
unions, and other financial organizations. A number of these banks and other financial
institutions have substantially greater resources and lending limits, larger branch systems, and a
wider array of banking services. To a limited extent, the Company also competes with other
providers of financial services, such as money market mutual funds, brokerage firms, consumer
finance companies, and insurance companies, which are not subject to the same degree of regulation
as that imposed on the Banks. As a result, these non-bank competitors may have an advantage over
the Company in providing certain
14
services, and this competition may reduce or limit the Company’s margins on banking services,
reduce its market share, and adversely affect its results of operations and financial condition.
Changes in economic conditions could adversely affect the Company’s loan portfolio.
The Company’s success depends to a great extent upon general economic conditions. The Company
has in general experienced a slowing economy in Michigan since 2001. Unlike larger banks that are
more geographically diversified, the Company provides banking services to customers primarily in
mid-Michigan and, with the March 2004 acquisition of West Michigan Community Bank, in West
Michigan. The Company’s loan portfolio, the ability of the borrowers to repay these loans, and the
value of the collateral securing these loans will be impacted by local economic conditions.
An economic slowdown could have many adverse consequences, including the following:
| |
• |
|
Loan delinquencies may increase; |
| |
| |
• |
|
Problem assets and foreclosures may increase; |
| |
| |
• |
|
Demand for the Company’s products and services may decline; and |
| |
| |
• |
|
Collateral for the Company’s loans may decline in value, in turn reducing customers’
borrowing power and reducing the value of assets and collateral associated with
existing loans. |
In addition to local economic conditions in Michigan, the Company’s success will also depend
in part upon the state of the national economy. A general downturn in the local or national
economy may impact the Company’s operations. In addition, the effect of possible future terrorist
attacks or war on the Company or the local or national economy cannot be known or predicted.
The Company may be unable to maintain its historical growth rate, which may adversely impact
its results of operations and financial condition.
To achieve its growth, the Company has opened additional branches and acquired other financial
institutions and branches. The Company may be unable to sustain its historical rate of growth or
may not even be able to grow at all, and the Company may encounter difficulties obtaining the
funding necessary to support its growth. Various factors, such as economic conditions,
competition, and regulatory considerations, may impede or prohibit the opening of new branch
offices. In addition, the Company may have difficulty identifying suitable financial institutions
and other non-banking entities that the Company desires to acquire that are available for sale.
Further, its inability to attract and retain experienced bankers may adversely affect its internal
growth. A significant decrease in its historical rate of growth may adversely impact its results
of operations and financial condition.
The Company operates in a highly regulated environment and may be adversely affected by
changes in federal and local laws and regulations.
The Company is subject to extensive regulation, supervision, and examination by federal and
state banking authorities. Any change in applicable regulations or federal or state legislation
could have a substantial impact on it and its Banks and their operations. Additional legislation
and regulations may be enacted or adopted in the future that could significantly affect its powers,
authority, and operations, which could increase its costs of doing business and, as a result, give
an advantage to its competitors who may not be subject to similar legislative and regulatory
requirements. Further, regulators have significant discretion and power to prevent or remedy
unsafe or unsound practices or violations of laws by banks and bank holding companies in the
performance of their supervisory and enforcement duties. The exercise of regulatory power may have
a negative impact on the Company’s results of operations and financial condition. The effect of
this regulation can be significant and cannot be predicted with a high degree of certainty.
15
The Company may face challenges in managing its operational risks as the Company grows.
Like other financial services companies, the Company faces a number of operational risks,
including the potential for processing errors, internal or external fraud, failure of computer
systems, and external events beyond its control such as natural disasters. Acts of fraud are
difficult to detect and deter, and the Company cannot assure investors that its risk management
procedures and controls will prevent losses from fraudulent activity. The Company’s growth may
strain its existing managerial resources and internal monitoring, accounting, and reporting
systems.
16
The Company’s ability to pay dividends on its common stock is limited not only by its
profitability, but also by bank regulation.
Most of the Company’s revenues are received in the form of dividends paid to it by its
subsidiary Banks. Thus, its ability to pay dividends to the holders of its common stock is
indirectly limited by statutory restrictions on the ability of its subsidiary Banks to pay
dividends to it. Further, in a policy statement, the Federal Reserve Board has expressed its view
that a bank holding company experiencing earnings weaknesses should not pay cash dividends
exceeding its net income or that can only be funded in ways that weaken the bank holding company’s
financial health, such as by borrowing. In addition, the Federal Reserve Board 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. The FDIC has similar enforcement powers over the Company’s subsidiary
Banks. Federal law has “prompt corrective action” provisions that authorize the Federal Reserve
Board to restrict its payment of dividends for an insured bank that fails to meet specified capital
levels.
In addition to the restrictions on dividends imposed by federal banking regulation, the
Michigan Business Corporation Act provides that dividends may be legally declared or paid only if,
after the distribution, the Company is able to pay its debts as they become due in the usual course
of business and its total assets equal or exceed the sum of its total liabilities plus the amount
that would be needed to satisfy the preferential rights upon dissolution of any holders of
preferred stock whose preferential rights are superior to those receiving the dividend.
In addition, under Michigan banking laws, the Company’s Banks may not pay dividends except out
of net income after deducting their losses and bad debts. Each Bank may not declare or pay a
dividend unless it will have surplus amounting to at least 20% of its capital after the payment of
the dividend.
There is only a limited trading market for the Company’s common stock.
The Company’s common stock is reported on the OTC Bulletin Board under the symbol “FETM.” The
development and maintenance of an active trading market depends, however, upon the existence of
willing buyers and sellers, the presence of which is beyond the Company’s control or the control of
any market maker. Although the Company is publicly traded and files reports with the SEC, the
volume of trading activity in its stock is relatively limited. Even if a more active market
develops, there can be no assurance that such a market will continue.
|
|
|
| ITEM 1B. |
|
Unresolved Staff Comments. |
Not applicable.
17
The Company’s executive offices are located at 175 North Leroy Street, Fenton, Michigan, which
is also the main office of The State Bank. The State Bank also has the following community offices
(all of which are in Michigan):
| |
• |
|
Branch — 15095 Silver Parkway, Fenton (owned) |
| |
| |
• |
|
Branch — 18005 Silver Parkway, Fenton (leased) |
| |
| |
• |
|
Loan Extension Office — 101 North Leroy Street, Fenton (owned) |
| |
| |
• |
|
Branch — 107 Main Street, Linden (owned) |
| |
| |
• |
|
Branch — 4043 Grange Hall Road, Holly (leased) |
| |
| |
• |
|
Branch — 7606 S Saginaw, Grand Blanc (owned) |
| |
| |
• |
|
Branch — 8185 Holly Road, Grand Blanc (leased) |
| |
| |
• |
|
Branch — 1401 E. Hill Road, Grand Blanc (owned) |
| |
| |
• |
|
Branch — 315 E. Grand River Ave, Brighton (leased) |
| |
| |
• |
|
Branch — 134 N. First St, Brighton (owned) |
| |
| |
• |
|
Operations Center — 3202 Owen Road, Fenton (owned) |
Davison State Bank is headquartered in Davison, Michigan, at 625 S. State Street. Davison
State Bank also has the following community office (which is in Michigan):
| |
• |
|
Branch — 8503 Davison Road, Davison (leased) |
West Michigan Community Bank is headquartered in Hudsonville, Michigan, at 5367 School Avenue.
West Michigan Community Bank also has the following community offices (all of which are in
Michigan):
| |
• |
|
Branch — 3467 Kelly Street, Hudsonville (owned) |
| |
| |
• |
|
Branch — 81 E. 8th Street, Holland (leased) |
| |
| |
• |
|
Branch — 3493 W. Shore Dr, Holland (owned) |
| |
| |
• |
|
Branch — 437 Baldwin Road, Jenison (owned) |
The Company owns the headquarters of each of its three Banks and many of the other bank
offices (as noted above). The balance of the bank offices are leased from third parties. All
properties have maintenance contracts and are maintained in good condition.
|
|
|
| ITEM 3. |
|
LEGAL PROCEEDINGS |
From time to time, the Company and its subsidiaries are parties to various legal proceedings
incident to their business. At December 31, 2007, there were no legal proceedings which management
anticipates would have a material adverse effect on the Company.
|
|
|
| ITEM 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted during the fourth quarter of 2007 to a vote of security holders
through the solicitation of proxies or otherwise.
18
ADDITIONAL ITEM — EXECUTIVE OFFICERS OF REGISTRANT
The following information concerning executive officers of the Company has been omitted from
the Registrant’s proxy statement pursuant to Instruction 3 to Regulation S-K, Item 401(b).
Officers of the Company are appointed annually by the Board of Directors of the Company and
serve at the pleasure of the Board of Directors. Certain of the officers named below are appointed
annually by the Board of Directors of one or the other of the Banks and serve at the pleasure of
the Board of the Bank that appointed them. The Bank officers are included in the listing of
executive officers of the Company because of the nature of the office they hold. Information
concerning these executive officers is given below:
Donald L. Grill (age 60) serves as President and Chief Executive Officer of the
Company and Chief Executive Officer of The State Bank since 1996. From 1983 to
1996, Mr. Grill was employed by First of America Bank Corporation and served as
President and Chief Executive Officer of First of America Bank — Frankenmuth.
Robert E. Sewick (age 58) was appointed President and CEO of West Michigan
Community Bank on March 15, 2004, and was appointed Senior Vice President of the
Company on December 1, 2004. Prior to the appointment, Mr. Sewick was Senior Vice
President and Senior Lender of The State Bank. Prior to joining The State Bank in
June of 1999, he was Senior Vice President and Regional Credit officer for
Huntington National Bank for Western Michigan. Mr, Sewick has over 30 years of
banking experience.
Ronald L. Justice (age 43) is the CEO and President of Davison State Bank and
the Secretary and Senior Vice President of the Company. Prior to holding these
positions, he served as the CFO of the Company and its subsidiary Banks. Prior to
that, Mr. Justice held other positions with The State Bank.
Dennis E. Leyder (age 54) was appointed Senior Vice President of the Company
on December 1, 2004 and was promoted to President and Chief Operating Officer of The
State Bank in December 2006. In his new capacity at The State Bank, he is
responsible for all retail banking, marketing, trust and investment management. Mr.
Leyder has over 24 years of banking experience, all in Genesee County.
Holly J Pingatore (age 50) was named Senior Vice President of the Company on
December 1, 2004. Her responsibilities include data processing, bank operations,
product support, and network services. Prior to such appointment, she was Senior
Vice President of The State Bank. Prior to joining The State Bank in 1999, Ms.
Pingatore served in various capacities at a large Michigan based regional bank.
Douglas J. Kelley (age 39) was appointed Chief Financial Officer of the
Company in 2003 and was appointed Senior Vice President of the Company on December
1, 2004. Prior to being named Chief Financial Officer, he served as Controller and
CFO of The State Bank and Davison State Bank since 2001. Prior to joining the
Banks, Mr. Kelley was an Assistant Vice President and Accounting Officer with
Citizens Bank. Mr. Kelley has over 17 years of banking experience.
19
PART II
|
|
|
| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The market, dividend, and holders of record information required by this item appears under
the caption “Fentura Financial, Inc. Common Stock” and Table 16 on page 58 under the title
“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”, of the
Company’s 2007 Rule 14a-3 annual report, and is incorporated herein by reference. The performance
graph is incorporated by reference from page 60 of the Company’s 2007 Rule 14a-3 annual report.
The following table summarizes the repurchase activity of the Corporation’s common stock
during the quarter ended December 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number of |
|
| |
|
|
|
|
|
Average |
|
|
Purchased as |
|
|
Shares that May Yet |
|
| |
|
Total Number of |
|
|
Price Paid |
|
|
Publicly Announced |
|
|
be Purchased Under |
|
| |
|
Share Purchased |
|
|
per Share |
|
|
Plans or Programs |
|
|
the Program |
|
October 1-October 31 |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
|
32,816 |
|
November 1-November 30 |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
|
32,816 |
|
December 1-December 31 |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
|
32,816 |
|
Total |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
|
32,816 |
|
The stock was repurchased pursuant to authorization granted by the Corporation’s Board of
Directors on March 28, 2007. The authorization allowed the purchase of up to 50,000 shares of the
Corporation’s stock until March 28, 2008.
|
|
|
| ITEM 6. |
|
SELECTED FINANCIAL DATA |
The information required by this item appears under the title “MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — SELECTED FINANCIAL DATA”, appearing in
Table 1 on page 37 of the Company’s 2007 Rule 14a-3 annual report, and is incorporated herein by
reference.
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
The information required by this item appears under the title “MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”, appearing on pages 37 through 59 of the
Company’s 2007 Rule 14a-3 annual report, and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item appears under the headings “Liquidity and Interest Rate
Risk Management” on pages 51 and 52, “Quantitative and Qualitative Disclosure About Market Risk” on
page 54 and 55 and “Interest Rate Sensitivity Management” on pages 55 and 56 under the title
“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of the
Company’s 2007 Rule 14a-3 annual report, and is incorporated herein by reference.
20
|
|
|
| ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements of the Company including the notes thereto and Report of
Crowe Chizek and Company LLC, Independent Registered Public Accounting Firm, appear on pages 1
through 36 of the Financial Statements portion of the Company’s 2007 Rule 14a-3 annual report, and
are incorporated herein by reference. The supplementary data required by this item is contained in
Note 15 thereto.
|
|
|
| ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
None
|
|
|
| ITEM 9A(T) |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures.
The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this Form 10-K Annual Report,
have concluded that the Company’s disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company would be made known to them by others
within the Company, particularly during the period in which this Form 10-K Annual Report was being
prepared.
Internal Control over Financial Reporting.
Management’s Annual Report on Internal Control over Financial Reporting.
The management of Fentura Financial Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting. Fentura Financial Inc.’s internal control over
financial reporting is a process designed under the supervision of the Corporation’s Chief
Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Corporation’s financial statements
for external reporting purposes in accordance with United States generally accepted accounting
principles.
Fentura Financial Inc.’s management assessed the effectiveness of the Corporation’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 (COSO) in “Internal
Control-Integrated Framework.” Based on that assessment, management determined that, as of
December 31, 2007, the Corporation’s internal control over financial reporting is effective, based
on those criteria.
There was no change in the Corporation’s internal control over financial reporting that occurred
during the Corporation’s fiscal quarter ended December 31, 2007, that materially affected, or is
reasonably likely to affect, the Corporation’s internal control over financial reporting.
This annual report does not include an attestation report of the Corporation’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by the Corporation’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.
|
|
|
| ITEM 9B |
|
OTHER INFORMATION |
None
20
PART III
|
|
|
| ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The Company’s executive officers are identified under “Additional Item” in Part I of this
Report on Form 10-K. The other information required by this item appears under the captions “2008
Election of Directors,” “The Corporation’s Board of Directors,” “Code of Ethics,” “Committees of
the Corporation Board,” and “Compliance with Section 16 Reporting” on pages 3, 4, 5, 6, 7, 8, 9, 10
and 21, respectively, of the Company’s 2008 Notice of Annual Shareholders Meeting and Proxy
Statement, and is incorporated herein by reference.
The Board of Directors of the Company has determined that Kenneth R. Elston, a director and
member of the Audit Committee, qualifies as an “Audit Committee financial expert” as defined in
rules adopted by the Securities and Exchange Commission pursuant to the Sarbanes-Oxley Act of 2002
and is independent pursuant to NASDAQ listing standards.
The Board of Directors of the Company has adopted a Code of Ethics, which details principles
and responsibilities governing ethical conduct for all Company directors and executive officers.
The Code of Ethics is filed as an Exhibit to this Annual Report on Form 10-K.
|
|
|
| ITEM 11. |
|
EXECUTIVE COMPENSATION |
The information required by this item appears under the captions “Director Compensation,”
“Report of Compensation/ESOP Committee,” “Executive Compensation,” “Payments upon
Termination/Change in Control” and “Compensation/ESOP Committee Interlocks,” on pages 9 through 21
of the Company’s 2008 Notice of Annual Shareholders Meeting and Proxy Statement, and is
incorporated herein by reference.
|
|
|
| ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS |
The information required by this item appears under the caption “Stock Ownership of Directors,
Executive Officers and Certain Major Shareholders” on pages 6 and 7 of the Company’s 2008 Notice of
Annual Shareholders Meeting and Proxy Statement, and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans. The Company had the
following equity compensation plans at December 31, 2007:
21
EQUITY COMPENSATION PLAN INFORMATION
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of securities |
| |
|
|
|
|
|
|
|
|
|
remaining available for |
| |
|
|
|
|
|
|
|
|
|
future issuance under |
| |
|
|
|
|
|
|
|
|
|
equity compensation |
| |
|
Number of securities to |
|
Weighted-average |
|
plans (excluding |
| |
|
be issued upon exercise |
|
exercise price of |
|
securities reflected |
| |
|
of outstanding options |
|
outstanding options |
|
in column (1)) |
| Plan Category |
|
(1) |
|
(2) |
|
(3) |
Equity compensation
plans approved by
security holders |
|
|
40,228 |
|
|
$ |
29.74 |
|
|
|
120,400 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved by
security holders |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
40,228 |
|
|
$ |
29.74 |
|
|
|
120,400 |
|
| |
|
|
These equity compensation plans are more fully described in Note 11 to the Consolidated
Financial Statements.
|
|
|
| ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item appears under the captions “Independence of Directors
and Attendance at Meetings” and “Other Information — Transactions with Certain Interested Parties”
on pages 8 and 22 and 23 respectively, of the Company’s 2008 Notice of Annual Shareholders Meeting
and Proxy Statement, and is incorporated herein by reference.
|
|
|
| ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item appears under the caption “Relationship with Independent
Public Accountants” on pages 21 and 22 of the Company’s 2008 Notice of Annual Shareholders Meeting
and Proxy Statement and is incorporated herein by reference.
PART IV
|
|
|
| ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (a) |
|
1. Financial Statements:
The following consolidated financial statements of the Company and Report of Crowe
Chizek and Company LLC, Independent Registered Public Accounting Firm, are
incorporated by reference under Item 8 “Financial Statements and Supplementary Data”
of this document:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial statements
Report of Crowe Chizek and Company LLC, Independent Registered Public Accounting
Firm |
22
| |
2. |
|
Financial Statement Schedules
All schedules are omitted — see Item 15(c) below. |
| |
3. |
|
Exhibits:
The exhibits listed on the “Exhibit Index” following the signature page of this
report are filed herewith and are incorporated herein by reference. |
| (b) |
|
Exhibits:
The “Exhibit Index” follows the signature page of this report and is incorporated herein by
reference. |
| (c) |
|
Financial Statement Schedules:
All financial statement schedules normally required by Article 9 of Regulation S-X are
omitted since they are either not applicable or the required information is shown in the
consolidated financial statements or notes thereto. |
23
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, dated March 14, 2008.
| |
|
|
|
|
|
|
| |
|
Fentura Financial, Inc. |
|
|
| |
|
(Registrant) |
|
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Donald L. Grill |
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald L. Grill |
|
|
|
|
|
|
On behalf of the registrant |
|
|
|
|
|
|
and as President & CEO |
|
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Douglas J. Kelley |
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas J. Kelley
Chief Financial Officer
(Principal Accounting 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. Each director of the Registrant, whose signature appears below, hereby appoints Forrest
A. Shook and Donald L. Grill, and each of them severally, as his or her attorney-in-fact, to sign
his or her name and on his or her behalf, as a director of the Registrant, and to file with the
Commission any and all amendments to this report on Form 10-K.
| |
|
|
|
|
| Signature |
|
Capacity |
|
Date |
|
|
Chairman of the Board
|
|
March 14, 2008 |
Forrest A. Shook
|
|
Director |
|
|
|
|
|
|
|
|
|
Director
|
|
March 14, 2008 |
Donald L. Grill |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 14, 2008 |
Kenneth R. Elston |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 14, 2008 |
J. David Karr |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 14, 2008 |
Thomas P. McKenney |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 14, 2008 |
Thomas L. Miller |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 14, 2008 |
Brian P. Petty |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 14, 2008 |
Douglas W. Rotman |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 14, 2008 |
Ian W. Schonsheck |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 14, 2008 |
Sheryl E. Stephens |
|
|
|
|
24
FENTURA FINANCIAL, INC.
2007 Annual Report on Form 10-K
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| No. |
|
Exhibit |
| |
2
|
|
Agreement and Plan of Merger By and Among Fentura Financial, Inc., West Michigan Financial
Corporation and West Michigan Community Bank dated as of October 14, 2003, and joined in
by WMFC Acquisition Subsidiary, Inc. and Amendment No. 1 thereto (Incorporated by
reference to Exhibits 2.1 and 2.2 to the Registrant’s Current Report on Form 8-K dated
March 15, 2004). |
|
|
|
3(i)
|
|
Articles of Incorporation of Fentura Financial, Inc. (Incorporated by reference to Form
10-SB Registration Number 0-23550). |
|
|
|
3(ii)
|
|
Bylaws of Fentura Financial, Inc. (Incorporated by reference to Form 10-SB Registration
Number 0-23550). |
|
|
|
3(iii)
|
|
Amendment to the Articles of Incorporation of Fentura Financial, Inc. (Incorporated by
reference to Exhibit 3(iii) to the Form 10-K Filed March 20, 2001). |
|
|
|
3(iv)
|
|
Amendment to the Articles of Incorporation of Fentura Financial, Inc. (Incorporated by
reference to Exhibit 3 filed with Form 10-Q for the quarter ended March 31, 2002). |
|
|
|
4.1
|
|
Amended and Restated Automatic Dividend Reinvestment Plan (Incorporated by reference to
Registration Statement on Form S-3 — Registration No. 333-75194). |
|
|
|
10.1
|
|
Supplemental Executive Retirement Agreement with Donald Grill dated March 16, 2007
(Incorporated by reference from Current Report filed on Form 8-K on March 22, 2007). |
|
|
|
10.2
|
|
Supplemental Executive Retirement Agreement with Robert Sewick dated March 16, 2007
(Incorporated by reference from Current Report filed on Form 8-K on March 22, 2007). |
|
|
|
10.3
|
|
Severance Compensation Agreement with Donald Grill dated March 16, 2007 (Incorporated by
reference from Current Report filed on Form 8-K in March 22, 2007). |
|
|
|
10.4
|
|
Severance Compensation Agreement with Donald Grill dated March 16, 2007 (Incorporated by
reference from Current Report filed on Form 8-K in March 22, 2007). |
|
|
|
10.5
|
|
Non-Employee Director Stock Option Plan (Incorporated by reference to Form 10-K SB filed
on March 17, 1996). |
|
|
|
10.6
|
|
Form of Non Employee Stock Option Plan Agreement (Incorporated by reference to Form 10-Q
SB filed on May 2, 1996) |
|
|
|
10.7
|
|
Retainer Stock Option Plan for Directors (Incorporated by reference to Form 10-K SB filed
on March 17, 1996). |
|
|
|
10.8
|
|
Employee Stock Option Plan (Incorporated by reference to Form 10-K SB filed on March 17,
1996). |
|
|
|
10.9
|
|
Form of Employee Stock Option Plan Agreement (Incorporated by reference to Form 10-K SB
filed on March 17, 1996). |
25
| |
|
|
| Exhibit |
|
|
| No. |
|
Exhibit |
| |
10.10
|
|
Stock Purchase Plan between The State Bank and Donald E. Johnson, Jr., Mary Alice J.
Heaton, and Linda J. LeMieux dated November 17, 1996 (Incorporated by reference to Exhibit
10.19 to the Form 10-K SB filed March 20, 1997). |
|
|
|
10.11
|
|
Stock Purchase Plan (Incorporated by reference to Exhibit 99.1 Form S-8 filed on August
10, 2004). |
|
|
|
10.12
|
|
Form of Severance Compensation Agreement between the Registrant, The State Bank, and
Ronald Justice. (Incorporated by reference to Exhibit 10.10 to the Form 10-K filed March
28, 2005). |
|
|
|
10.13
|
|
Severance Compensation Agreement between the Registrant and Dennis Leyder dated March 9,
2006. (Incorporated by reference to Exhibit 99.1 to the Form 8-K filed March 10, 2006). |
|
|
|
10.14
|
|
Severance Compensation Agreement between the Registrant and Douglas Kelley dated March 9,
2006. (Incorporated by reference to Exhibit 99.2 to the Form 8-K filed March 10, 2006). |
|
|
|
10.15
|
|
Severance Compensation Agreement between the Registrant and Holly Pingatore dated March 9,
2006. (Incorporated by reference to Exhibit 99.3 to the Form 8-K filed March 10, 2006). |
10.16
|
|
Nonqualified Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.12 to
the Form 10-K filed March 28, 2005). |
|
|
|
10.17
|
|
Fentura Bancorp, Inc. Employee Deferred Compensation and Stock Ownership Plan.
(Incorporated by reference to Exhibit 10.13 to the Form 10-K filed March 28, 2005). |
|
|
|
10.18
|
|
2006 Executive Stock Bonus Plan (Filed as Exhibit 10.1 Form 8-K filed on December 4, 2006). |
|
|
|
13
|
|
Rule 14a-3 Annual Report to Security Holders (This report, except for those portions which
are expressly incorporated by reference in this filing, is furnished for the information
of the Securities and Exchange Commission and is not deemed filed as a part of this
Report). |
|
|
|
14
|
|
Code of Ethics for Directors and Executive Officers (Filed herewith). |
|
|
|
21.1
|
|
Subsidiaries of the Registrant (Filed herewith). |
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm (Filed herewith). |
|
|
|
24
|
|
Powers of Attorney. Contained on the signature page of this report. |
|
|
|
31.1
|
|
Certificate of President and Chief Executive Officer of Fentura Financial, Inc. pursuant
to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
31.2
|
|
Certificate of Chief Financial Officer of Fentura Financial, Inc. pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certificate of Chief Executive Office and Chief Financial Officer of Fentura Financial,
Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
26