SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[ ] Confidential, for use of the Commission only (as permitted by
Rule 14a-b(e)(2)
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
FNBH BANCORP, INC.
(Name of registrant as specified in its charter)
FNBH BANCORP, INC.
(Name of person(s) filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
(1) Title of each class of securities to which transaction applies:_______
(2) Aggregate number of securities to which transaciton applies:__________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined:_____________
(4) Proposed maximum aggregate value of transaction:______________________
(5) Total fee Paid:_______________________________________________________
[ ] Fee previously paid with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:_______________________________________________
(2) Form, schedule, or registration statement no..:_______________________
(3) Filing party:_________________________________________________________
(4) Date filed:___________________________________________________________
<PAGE>
FNBH BANCORP, INC.
101 East Grand River
Howell, Michigan 48844-0800
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 23, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Annual
Meeting") of FNBH Bancorp, Inc. (the "Corporation"), a Michigan corporation,
will be held on April 23, 1997, at 7 p.m. at the main office of First National
Bank in Howell, 101 E. Grand River, Howell, Michigan, for the following
purposes:
1. To elect five (5) directors, four (4) to hold office for three year
terms and one (1) for a two year term.
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed March 1, 1997, as the record date for the
determination of shareholders entitled to notice of and to vote at the meeting
or any adjournment thereof.
By order of the Board of Directors
BARBARA J. NELSON, Secretary
Your vote is important. Even if you plan to attend the meeting, please
date and sign the enclosed proxy form, indicate your choice with
respect to the matters to be voted upon, and return it promptly in the
enclosed envelope. Note that if the stock is held in more than one
name, that all parties must sign the proxy form.
Dated: March 27, 1997
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FNBH BANCORP, INC.
101 E. Grand River
Howell, Michigan 48844-0800
PROXY STATEMENT
This Proxy Statement and the enclosed proxy are furnished in connection
with the solicitation of proxies by the Board of Directors of FNBH Bancorp, Inc.
(the "Corporation"), a Michigan bank holding Corporation, to be voted at the
Annual Meeting of Shareholders of the Corporation to be held on Wednesday, April
23, 1997, at 7 p.m., at the main office of First National Bank in Howell (the
"Bank"), 101 E. Grand River, Howell, Michigan, or at any adjournment or
adjournments thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting of Shareholders and in this Proxy Statement.
VOTING AT THE MEETING
This Proxy Statement has been mailed on or about March 27, 1997, to all
holders of record of common stock of the Corporation as of the record date. The
Board of Directors of the Corporation has fixed the close of business on March
1, 1997, as the record date for the determination of shareholders entitled to
notice of and to vote at the Annual Meeting of Shareholders and any adjournment
thereof. The Corporation has only one class of common stock, of which there are
presently 1,575,000 shares outstanding. Each outstanding share will entitle the
holder thereof to one vote on each separate matter presented for vote at the
meeting. Votes cast at the meeting and submitted by proxy are counted by the
inspectors of the meeting who are appointed by the Corporation.
If a Proxy in the enclosed form is properly executed and returned to the
Corporation, the shares as represented by the Proxy will be voted at the Annual
Meeting and any adjournment thereof. If a shareholder specifies a choice, the
Proxy will be voted as specified. If no choice is specified, the shares
represented by the Proxy will be voted for the election of all of the nominees
named in the Proxy Statement and in accordance with the judgment of the persons
named as proxies with respect to any other matter which may come before the
meeting. A proxy may be revoked before exercise by notifying the Chairman of the
Board in writing or in open meeting, by submitting a proxy of a later date or
attending the meeting and voting in person. All shareholders are encouraged to
date and sign the enclosed proxy form, indicate your choice with respect to the
matters to be voted upon, and return it to the Corporation.
ELECTION OF DIRECTORS
The Articles of Incorporation of the Corporation provide for the division
of the Board of Directors into three (3) classes of nearly equal size with
staggered three year terms of office. Five persons have been nominated for
election to the Board, four to serve three (3) year terms expiring at the 2000
Annual Meeting of Shareholders and one for a two (2) year term expiring at the
1999 Annual Meeting. The Board has nominated Donald K. Burkel, Harry E.
Griffith, Gary R. Boss, and Peter H. Burgher to serve as directors for three
year terms, and has nominated R. Michael Yost for a two year term. All the
nominees except Mr. Burgher and Mr. Yost are incumbent directors previously
elected by the Corporation's shareholders. Mr. Burgher and Mr. Yost were
appointed as directors by the Board in February 1997.
Unless otherwise directed by a shareholder's proxy, the persons named as
proxy holders in the Corporation's proxy will vote for the nominees named above.
In the event any of such nominees shall become unavailable, which is not
anticipated, the Board of Directors in its discretion may designate substitute
nominees, in which event the enclosed proxy will be voted for such substitute
nominees. Proxies cannot be voted for a greater number of persons than the
number of nominees named.
A plurality of the votes cast at the meeting is required to elect the
nominees as directors of the Corporation. As such, the five individuals who
receive the largest number of votes cast at the meeting will be elected as
directors. Shares not voted at the meeting, whether by abstention, broker
nonvote, or otherwise, will not be treated as votes cast at the meeting.
The Board of Directors recommends a vote FOR the election of all the
persons nominated by the Board.
<PAGE>
INFORMATION ABOUT DIRECTORS AND DIRECTOR NOMINEES
The following information relating to the principal occupation or
employment has been furnished to the Corporation by the respective directors and
director nominees. Each of those persons have been engaged in the occupations
stated below for more than five years.
<TABLE>
Director of
Name Principal Occupation Age Corporation Since*
Nominees for Election as Directors for Terms Expiring in 2000
<S> <C> <C> <C>
Donald K. Burkel Co-owner of Oasis Truck Plaza, a full facility 61 1991
truck plaza, and Fowlerville Farms, Inc., a
restaurant, gasoline and gift shop operation
Harry E. Griffith Realtor, President of Crandall Realty, Inc., a real 66 1973
estate brokerage and appraisal corporation
Gary R. Boss President of Boss Engineering Co., an engineering 54 1995
and survey corporation
Peter H. Burgher Chairman and President Marelco Power Systems, 64 1997
Inc.
Nominee for Election as Director for Term Expiring in 1999
R. Michael Yost Manager, Group Operations and Administration, 48 1997
AAA, MI.
Directors Whose Terms Expire in 1999
S. W. Itsell Retired President of First National Bank in Howell 91 1954
Dona Scott Laskey Attorney 53 1973
Charles N. Holkins C. N. Holkins & Son, a hardware and lumber sales 57 1984
corporation
Directors Whose Terms Expire in 1998
Rebecca S. English CPA, Partner in Bredernitz, Wagner & Co. 44 1993
W. Rickard Scofield President of May & Scofield, Inc., a manufacturer 44 1992
of automotive subassemblies, since 1993, and
Vice President prior to that time
Roy A. Westran Retired President of Citizens Insurance Co. of 71 1970
America, an insurance corporation
Barbara D. Martin President and CEO of Corporation and Bank 50 1984
</TABLE>
* The Corporation was formed and organized in 1988; dates preceding 1988
reference status as a director of the Bank. All persons who are
directors of the Corporation are also directors of the Bank.
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The Audit Committee, comprised of Dona Laskey, S. W. Itsell, Donald Burkel,
and Rebecca English, met on six occasions during 1996. Its primary duties and
responsibilities include annually recommending to the Board of Directors an
independent public accounting firm to be appointed auditors of the Corporation
and the Bank, reviewing the scope and fees for the audit, reviewing all the
reports received from the independent public accountants, and coordinating
matters with the internal auditing department.
The Nominating Committee of the Board, comprised of Messrs. Griffith,
Burkel, VanWinkle, Holkins, and Westran and Ms. Martin, met once during 1996.
This Committee is responsible for reviewing and making recommendations as to the
composition of the Board of Directors, to recommend nominees for election to the
Board and recommends individuals to fill vacancies which may occur between
annual meetings. Under the terms of the Corporation's Restated Articles of
Incorporation, the Committee is authorized to consider Board nominations for
qualified persons recommended by shareholders provided that any recommendation
is submitted in writing, on or before the 60th day preceding the anniversary
date on the previous annual meeting. The recommendation must include a
description of the proposed nominee, his or her consent to serve as a director
and other biographical data on the nominee.
The Board also has a Compensation Committee comprised of Messrs. VanWinkle,
Griffith, Itsell, Westran, and Holkins. This Committee met twice in 1996. This
Committee approves the compensation and benefits of senior management of the
Bank and Corporation. The Board also has other committees, such as the Finance
Committee, the Executive Committee and the Search Committee.
The Board of Directors of the Corporation held a total of six meetings
during 1996. No director other than Ms. Martin and Mr. Griffith attended less
than 75% of the aggregate number of meetings of the Board of Directors and the
committees on which he or she served. There are no family relationships between
or among the directors, nominees or executive officers of the Corporation.
REMUNERATION OF DIRECTORS
Directors are paid $250 for each Board meeting held and $250 for each Board
committee meeting attended; however, no fees are paid to employees of the Bank
who serve on the Board. Members of the Board of Directors of the Bank are paid
at the rate of $500 per Board meeting held, and $250 for each Board committee
meeting attended.
COMPENSATION OF EXECUTIVE OFFICERS
Committee Report on Executive Compensation
The Corporation has no paid employees. The Corporation's sole subsidiary,
First National Bank in Howell, employs all officers and staff. Decisions on the
compensation of the Bank's executive officers are made by the Board of Directors
after receiving recommendations from the Board's Compensation Committee. The
Corporation's policies of compensation are designed to reward employees for the
achievement of annual and long-term corporate goals, as well as individual
accomplishments. The various means of compensation, which apply to other
employees as well as executive officers, are intended to encourage management to
increase the value of the Corporation as an asset to its shareholders, to reward
and challenge individuals, to achieve and reward superior operating results, and
to attract and retain superior personnel.
The Corporation's compensation program is comprised of several elements:
salary, incentive bonus, and a defined contribution plan.
The salaries of the Bank's Chief Executive Officer and other Bank
executives are established based on a performance appraisal system. Each
executive's performance, other than that of the Chief Executive Officer, is
evaluated by his or her superior. Wage bands for particular positions are
established based on information obtained from other similar sized banks and the
Michigan Banker's Association annual surveys for use by the Board's Compensation
Committee and the Board of Directors in comparing salaries paid by the Bank with
salaries paid for comparable positions by other banks which are similar in size
to First National Bank in Howell. The Board of Directors and the Compensation
Committee consider other relevant factors such as individual job performance,
experience, expertise, and tenure. The Board intends to maintain the base
salaries of executive officers and senior managers at rates that are competitive
with
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<PAGE>
other banks who are similar in size to the Bank in order to retain superior
personnel and to be able to hire personnel of a high caliber to continue to
achieve and exceed the Bank's operating and financial objectives.
An incentive bonus is paid after year end to all employees employed by the
Bank the entire year, if the Bank's earnings are above that projected in the
Bank's annual budget for the year and there is a return of at least 1.2% on
average assets for the year after payment of the incentive bonus. The formula
used in 1996 provided that all profits in excess of budget would go to employees
until all received a 5% bonus. Thereafter, each $10,000 increment of profit over
budget was split evenly between employees and the Bank. There are three
different levels at which profit share is paid: one for staff, one for
supervisor and non-officer exempt employees, and another for officers. The exact
formula for the profit sharing bonus is determined each year by the Board of
Directors.
The defined contribution retirement plan covers all employees 21 years of
age or older who have completed one year of service as defined in the plan
agreement. Contributions are equal to 5% of total employee earnings plus 50% of
employee contributions (limited to 10% of their earnings), or the maximum amount
permitted by the Internal Revenue Code.
Chief Executive Officer Compensation
The Compensation Committee reviews Ms. Martin's performance and base salary
as president and chief executive officer annually and recommends adjustments in
her salary to the Board of Directors based on her performance. In making
recommendations to the Board of Directors as to her salary, the Compensation
Committee considers the prevailing salaries for presidents and chief executive
officers of similar sized banks. As a result of that survey, the Committee
established a salary range for Ms. Martin of $116,300 to $174,400 for 1996. The
decision regarding Ms. Martin's 1996 salary was based on the prevailing salary
range, on the Corporation's financial performance for the year and the
Corporation's strong earnings and corporate growth. The Committee further
considered Ms. Martin's leadership in the Corporation and her effectiveness in
implementing the directions and policies of the Board of Directors.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Bank during the
last three years to its Chief Executive Officer and its other executive officers
whose annual compensation exceeded $100,000 (the "Named Executives"). There are
no employees of the Corporation; all personnel are employed by the Bank.
<TABLE>
All Other
Name and Principal Position Year Salary(1) Bonus Compensation(2)
--------------------------- ---- --------- ----- ---------------
<S> <C> <C> <C> <C>
Barbara D. Martin, President and 1996 $120,000 $17,172 $12,306
Chief Executive Officer 1995 112,000 22,490 11,569
1994 107,000 20,897 10,562
</TABLE>
(1) Includes amounts deferred pursuant to Section 401(k) of the Internal
Revenue Code.
(2) The amounts disclosed in this column include (a) amounts contributed by
the Bank to the Bank's Profit Sharing Plan, pursuant to which
substantially all salaried employees of the Bank participate; and (b)
the dollar value of premiums paid by the Bank for term life insurance
on behalf of the named executives as follows:
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Barbara D. Martin (a) $12,000 $11,200 $ 9,970
(b) 306 369 592
</TABLE>
Neither the Corporation nor the Bank maintain any option or other
equity based compensation plans.
4
<PAGE>
CERTAIN TRANSACTIONS WITH MANAGEMENT
Certain directors and officers of the Corporation have had and are expected
to have in the future, transactions with the Bank, or have been directors or
officers of corporations, or members of partnerships, which have had and are
expected to have in the future, transactions with the Bank. All such
transactions with officers and directors, either directly or indirectly, have
been made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and these transactions do
not involve more than the normal risk of collectibility or present other
unfavorable features. All such future transactions, including transactions with
principal shareholders and other Corporation affiliates, will be made in the
ordinary course of business, on terms no less favorable to the Corporation than
with other customers, and for loans in excess of $200,000, will be subject to
approval by a majority of the Corporation's independent, outside disinterested
directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 of the Securities Exchange Act of 1934, the
Corporation's directors and executive officers, as well as any person holding
more than 10% of its common stock, are required to report initial statements of
ownership of the Corporation's securities and changes in such ownership to the
Securities and Exchange Commission. To the Corporation's knowledge, all the
required reports were filed by such persons during 1996, except for one late
report filed by Mr. Boss covering one transaction, one late report filed by Mr.
Burkel covering one transaction, and one late report filed by Mr. Itsell
covering one transaction.
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<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information as of March 1, 1997, as
to the common stock of the Corporation owned beneficially by each director, each
Named Executive in the Summary Compensation Table above, and by all directors
and executive officers of the Corporation as a group. Charles K. and Mary B.
VanWinkle, listed in the table below, are the only shareholders known to the
Corporation to have been the beneficial owner of more than five percent (5%) of
the Corporation's outstanding common stock as of March 1, 1997.
<TABLE>
Number of Shares(1) Percent of Class
<S> <C> <C>
Charles K. and Mary B. VanWinkle (2) 152,508 9.68%
Gary R. Boss 1,500 *
Peter H. Burgher 100 *
Donald K. Burkel 3,300 *
Rebecca S. English 600 *
Harry E. Griffith 7,164 *
Charles N. Holkins 16,800(3) 1.07%
S. W. Itsell 2,535 *
Dona Scott Laskey 24,876(4) 1.66%
Barbara D. Martin 22,602(5) 1.44%
W. Rickard Scofield 2,400 *
Roy A. Westran 17,480(6) *
R. Michael Yost 600 *
All Executive Officers and Directors as a
Group (17 persons) 100,611 6.19%
</TABLE>
*Represents less than one percent
(1) Reflects three for one stock split, paid February 16, 1997, as a
dividend of two shares for each one share of Common Stock held of
record on January 16, 1997. This information is based upon the
Corporation's records as of March 1, 1997, and information supplied by
the persons listed above. The number of shares stated in this column
include shares owned of record by the shareholder and shares which,
under federal securities regulations, are deemed to be beneficially
owned by the shareholder. Unless otherwise indicated below, the persons
named in the table have sole voting and sole investment power or share
voting and investment power with their respective spouses, with respect
to all shares beneficially owned.
(2) Reflects shares held as co-trustees, whose mailing address is 130
Inverness, Howell, Michigan 48843.
(3) Represents 16,800 shares held by Mr. Holkins or his wife as trustees.
(4) Includes 876 shares owned by an adult child residing with Ms. Laskey.
(5) Includes 17,949 shares held for the benefit of Ms. Martin's minor
children.
(6) Includes 7,820 shares owned by adult children residing with Mr.
Westran.
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SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on the Corporation's common stock with
that of the cumulative total return on the NASDAQ Bank Stocks Index and the
NASDAQ Stock Market Index for the five year period ended December 31, 1996. The
following information is based on an investment of $100, on January 1, 1992, in
the Corporation's common stock, the NASDAQ Bank Stocks Index and the NASDAQ
Stock Market Index, with dividends reinvested. There has been only limited
trading in the Corporation's Common Stock, there are no market makers for such
shares, and the Corporation's stock does not trade on any stock exchange or the
NASDAQ market. Accordingly, the returns reflected in the following graph and
table are based on sale prices of the Corporation's stock of which management is
aware. There may have been sales at higher or lower prices of which management
is not aware.
<TABLE>
December 31,
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
FNBH Bancorp, Inc. 100 193 208 250 282 296
NASDAQ Bank Stocks Index 100 146 166 165 246 326
NASDAQ Stock Market Index 100 116 134 131 185 227
</TABLE>
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<PAGE>
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of the Corporation as of and for the year ended
December 31, 1996, have been examined by KPMG Peat Marwick LLP, independent
public accountants. A representative of KPMG Peat Marwick LLP, will be at the
Annual Meeting of Shareholders and will have an opportunity to make a statement
and will be available to answer appropriate questions. KPMG Peat Marwick LLP has
been reappointed by the Board of Directors as the independent public accountants
of the Corporation for the year ending December 31, 1997.
SHAREHOLDER PROPOSALS
Any shareholder proposal to be considered by the Corporation for inclusion
in the 1998 Annual Meeting of Shareholders proxy materials must be received by
the Corporation no later than November 21, 1997.
OTHER BUSINESS
The Board of Directors is not aware of any matter to be presented for
action at the meeting, other than the matters set forth herein. If any other
business should come before the meeting, the Proxy will be voted in respect
thereof in accordance with the best judgment of the persons authorized therein,
and discretionary authority to do so is included in the proxy. The cost of
soliciting proxies will be borne by the Corporation. In addition to solicitation
by mail, officers and other employees of the Corporation and its subsidiaries
may solicit proxies by telephone or in person, without compensation other than
their regular compensation.
The Summary Annual Report of the Corporation for 1996 is included with this
Proxy Statement. Copies of the report will also be available for all
shareholders attending the Annual Meeting. In addition, certain financial and
related information is included in the Appendix to this Proxy Statement.
Shareholders are urged to sign and return the enclosed proxy in the
enclosed envelope. A prompt response will be helpful and appreciated.
BY ORDER OF THE BOARD OF DIRECTORS
Barbara Nelson
Secretary
March 21, 1997
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<PAGE>
APPENDIX I
FNBH Bancorp, Inc. is a one bank holding company, which owns all of the
outstanding capital stock of First National Bank in Howell (the "Bank"). The
Company was formed in 1988 for the purpose of acquiring all of the stock of the
Bank in a shareholder approved reorganization, which became effective May 1989.
The Bank was originally organized in 1934 as a national banking association. The
Bank serves primarily four communities, Howell, Brighton, Hartland, and
Fowlerville, all of which are located in Livingston County, Michigan.
FINANCIAL INFORMATION
FNBH BANCORP, INC., AND SUBSIDIARY
Management's Discussion and Analysis.........................................10
Summary Financial Data.......................................................20
Stock and Earnings Highlights................................................21
Independent Auditor's Report.................................................23
Consolidated Balance Sheets..................................................24
Consolidated Statements of Income............................................25
Consolidated Statements of Shareholders' Equity..............................26
Consolidated Statements of Cash Flow.........................................27
Notes to Consolidated Financial Statements................................28-40
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Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion provides information about the consolidated financial
condition and results of operations of FNBH Bancorp, Inc. ("Company") and its
subsidiary, First National Bank in Howell ("Bank"), and should be read in
conjunction with the Consolidated Financial Statements.
FINANCIAL CONDITION
During 1996 total assets increased 10% to $202,009,000. Contributing to
this $19 million increase was a $10 million (23%) increase in short and long
term investments and a $8.6 million (7%) increase in loans. Deposits increased
$17 million (10%) to $180,944,000. Stockholders' equity increased $2 million
(12%) to $19,597,000.
Securities
The security portfolio is an important source of liquidity for the Bank to
meet unusual deposit fluctuations. The primary concern of the management of
First National Bank is to ensure the safety of funds entrusted to it by its
depositors and shareholders. Approximately 73% of the security portfolio is
invested in US government and agency obligations. Except for a minor holding of
Federal Reserve Bank stock which the Bank is required to own, the balance of the
portfolio consists of tax exempt obligations of states and political
subdivisions. The Company's current and projected tax position makes these
investments valuable to the Bank. Investment policy requires purchases of tax
exempt bonds to be of bonds with AA ratings or better if the maturity exceeds 4
years unless the bond is a local, nonrated issue.
The following table shows the percentage makeup of the security portfolio
as of December 31:
<TABLE>
1996 1995
<S> <C> <C>
U.S. Treasury & agency securities................. 72.0% 70.0%
Agency mortgage backed securities.................. .8% 1.9%
Tax exempt obligations of states
and political subdivisions....................... 27.1% 28.0%
Other............................................. .1% .1%
--- ---
Total securities............................ 100.0% 100.0%
</TABLE>
In 1995 the Financial Accounting Standards Board allowed companies to make
a one time reclassification of securities from held-to-maturity to available-for
sale. The Bank took advantage of this opportunity to reclassify $7,000,000 of
securities to available-for-sale. Management felt that this move afforded more
latitude to allow future sales to meet liquidity needs, for asset/liability
management purposes, or to obtain improved yields on alternative investments.
Loans
The loan personnel of the Bank are committed to making quality loans that
produce a good rate of return for the Bank and also serve the community by
providing funds for home purchases, business purposes, and consumer needs. The
overall loan portfolio grew $8,600,000 (7%) in 1996.
As a full service lender, the Bank offers a variety of home mortgage loan
products. The Bank makes fixed rate, long-term mortgages which conform to
secondary market standards which it sells. This practice allows the Bank to meet
the housing credit needs of its service area, while at the same time maintaining
loan to deposits ratios and interest sensitivity and liquidity positions within
Bank policy. The Bank retains servicing on sold mortgages thereby furthering the
customer relationship and adding to servicing income. During 1996 the Bank sold
$9,000,000 in residential mortgages.
The Bank has also been able to service customers who do not conform to
secondary market requirements by offering variable rate products which are
retained in the mortgage portfolio. These loans are considered nonconforming as
they do not meet certain collateral requirements of the secondary market and not
because of the credit quality of the
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borrower. Although the mortgage portfolio actually declined by $1,600,000 to
$23,400,000 at year end, its decline would have been greater had the Bank not
made more than $4,000,000 in nonconforming loans which it retained in the
mortgage portfolio.
In 1996 there was good commercial loan demand which resulted in a more than
$8,000,000 (10%) increase over the prior year. Consumer loans increased nearly
$2,000,000 (10%). The table below explains the makeup of the portion of
commercial and consumer loans in the Consolidated Financial Statements that are
collateralized by mortgages.
Included in the residential first mortgage totals in the table below are
the real estate mortgage loans listed in the Consolidated Financial Statements
and loans to commercial customers who pledge their homes as collateral for their
borrowings. "Other" real estate loans include $39,000,000 in loans secured by
commercial property with the remaining $4,000,000 secured by multi-family units.
In the majority of the loans to commercial customers, which are secured by
personal or commercial real estate, the Bank is relying on the borrower's cash
flow to service the loans. The collateral is taken as extra protection.
Construction and land development loans have increased $5,000,000 (55%) as the
growth in the county has fueled the demand for housing and commercial
development.
The growth in home equity and junior lien loans has been the result of an
ongoing marketing campaign. There has been less growth in consumer loans which
consist of auto loans, mobile home loans, or other secured or unsecured loans.
The Bank does not offer credit cards but consumer loan balances include
$1,500,000 in a revolving line of credit product accessible by check. Commercial
loans, which may be secured by business assets or unsecured, continued to grow
in 1996.
The following table shows the balance and percentage makeup of loans as of
December 31:
<TABLE>
(dollars in thousands)
1996 1995
Balances Percentage Balances Percentage
<S> <C> <C> <C> <C>
Secured by real estate:
Residential first mortgage $ 36,148 26.5% $ 36,871 28.8%
Residential home equity/other junior liens 12,883 9.4% 10,566 8.2%
Construction and land development 14,042 10.3% 9,075 7.1%
Other 43,006 31.5% 42,454 33.2%
Consumer 12,272 9.0% 11,233 8.8%
Commercial 15,830 11.6% 14,546 11.4%
Other 2,360 1.7% 3,213 2.5%
Total Loans (Gross) $136,541 100.0% $127,958 100.0%
</TABLE>
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<PAGE>
The Bank's loan personnel have endeavored to make high quality loans using
well established policies and procedures and a thorough loan review process.
Loans in excess of $200,000 are approved by a committee of the Board or the
Board. The Bank has hired an independent person to review the quality of the
loan portfolio on a regular basis. The extent of loan quality is demonstrated by
the ratios of nonperforming loans and assets as a percentage of the loan
portfolio as illustrated in the table below for December 31:
<TABLE>
(Dollars in thousands)
1996 1995 1994
<S> <C> <C> <C>
Nonperforming Loans:
Nonaccrual loans........................... $ 109 $ 926 $983
Loans past due 90 days or more............. 448 66 295
Total nonperforming loans................ 557 992 1,278
Other real estate.......................... 723 46 135
Total nonperforming assets............... $1,280 $1,038 $1,413
Nonperforming loans as a percent
of total loans............................ .41% .78% 1.09%
Nonperforming assets as a percent
of total loans............................ .94% .81% 1.20%
Nonperforming loans as a percent
of the loan loss reserve.................. 17% 32% 48%
</TABLE>
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, accruing loans 90 days or more past due in
payments, and other real estate which has been acquired primarily through
foreclosure and is waiting disposition. Loans are generally placed on a
nonaccrual basis when principal or interest is past due 90 days or more and
when, in the opinion of management, full collection of principal and interest is
unlikely.
Nonperforming loans decreased $435,000 to $557,000 at December 31, 1996.
However the $723,000 in other real estate at year end 1996 was included in the
$926,000 in nonaccrual loans at December 31, 1995. Total nonperforming assets
increased $242,000 during the year. The health of the local economy, sound
underwriting standards, and a concerted collection effort on the part of the
Bank have helped contribute to the low delinquency rate.
As indicated in Notes 1 and 3 of the Consolidated Financial Statements, the
Bank adopted Statement of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan" in 1995. Impaired loans totaled $820,000 at
December 31, 1996, compared to $900,000 at the prior year end. Included in
impaired loans are nonperforming loans from the above table, except for
homogenous residential mortgage and consumer loans, and an additional $600,000
of commercial loans separately identified as impaired.
During 1996 the Bank charged off loans totaling $287,000 and recovered
$77,000 for a net charge off amount of $210,000. In the previous year, the Bank
had net charge offs totaling $23,000. These low net charge off figures can be
attributed to a seasoned lending staff, a good economic environment, aggressive
charge off policies, and repeated collection efforts. The provision for loan
losses has remained unchanged for the past three years at $448,500.
The allowance for loan losses totaled $3,335,000 at year end which was
2.44% of total loans and more than two and a half times non-performing loans.
Management considers this to be adequate to cover any anticipated losses.
Management regularly evaluates the allowance for loan losses based on the
composition of the loan portfolio, an evaluation of specific credits, historical
loss experience, the level of nonperforming loans and loans that have been
identified as impaired. Externally, the local economy and events or trends which
might negatively impact the loan portfolio are also considered.
12
<PAGE>
The following table shows changes in the loan loss reserve for the years
ended December 31:
<TABLE>
(Dollars in thousands)
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of the year................... $3,097 $2,672 $2,205
Additions (deduction):
Loans charged off............................... (287) (209) (121)
Recoveries of loans previously charged off...... 77 186 140
Provision charged to operations................. 448 448 448
Balance at end of the year......................... $3,335 $3,097 $2,672
Allowance for loan losses to loans outstanding..... 2.44% 2.42% 2.27%
</TABLE>
Deposits
Deposit balances of $180,944,000 at December 31, 1996 were more than $17
million (10%) higher than the previous year end. Because year end deposit
balances can fluctuate in unusual ways, it is more meaningful to analyze changes
in average balances. Average deposits increased $17.4 million during 1996, about
11%. Non-interest bearing demand deposits increased $3.5 million, about 13% on
average. Average savings and NOW balances increased $.6 million (9%) while
average time deposits increased $7.5 million or about 14%. The following table
sets forth average deposit balances for the years ended December 31:
<TABLE>
(in thousands)
1996 1995 1994
<S> <C> <C> <C>
Non-interest bearing demand $ 31,005 $ 27,348 $ 25,233
Savings, NOW and money market 76,128 70,057 71,448
Time deposits 62,577 54,924 46,882
Total average deposits $169,710 $152,329 $143,563
</TABLE>
The increase in non-interest bearing demand deposits is shared by both
business and consumer customers. The increase in savings deposits was primarily
due to a $5.4 million increase in money market accounts. The growth in
certificates was the result of marketing efforts aimed at attracting CD
customers and special rates that were offered on particular time products.
The majority of the Bank's deposits are from core customer sources-long
term relationships with local personal, business, and public customers. In some
financial institutions, the presence of interest bearing certificates greater
than $100,000 often indicates a reliance upon purchased funds. However, large
certificates in the Bank's portfolio consist of core deposits of local
customers. The Bank does not support growth through purchased funds or brokered
deposits. See Note 6 of the Consolidated Financial Statements for a maturity
schedule of over $100,000 certificates.
Capital
The Company's capital at year end totaled $19,600,000, a more than
$2,000,000 (12%) increase over the prior year. Banking regulators have set forth
various ratios of capital to assets to assess a financial institution's
soundness. Tier 1 capital is equal to shareholders' equity while Tier 2 capital
includes a portion of the allowance for loan losses. The regulatory agencies
have set capital standards for "well capitalized" institutions. The leverage
ratio, which divides Tier 1 capital by three months average assets, must be 5%
for a well capitalized institution. The Bank's leverage ratio was 9.86% at year
end 1996. Tier 1 risk-based capital, which includes some off balance sheet items
in assets and weights assets by risk, must be 6% for a well capitalized
institution. The Bank's was 14.71% at year end 1996. Total risk-based capital,
which includes Tier 1 and Tier 2 capital, must be 10% for a well capitalized
institution. The Bank's total risk based capital ratio was 15.96% at year end.
The Bank's strong capital ratios put it in the best classification on which the
FDIC bases its assessment charge.
13
<PAGE>
The following table lists various capital ratios at December 31:
<TABLE>
1996 1995 1994
<S> <C> <C>
Equity to asset ratio 9.82% 9.61% 9.14%
Tier 1 leverage ratio 9.86% 9.83% 9.32%
Tier 1 risk-based capital 14.71% 14.30% 13.88%
Total risk-based capital 15.96% 15.55% 15.13%
</TABLE>
The growth in capital ratios is due to the strong earnings the Bank has
experienced in the last several years. The Company's ability to pay dividends is
subject to various regulatory requirements. Management believes, however, that
earnings will continue to generate adequate capital to continue the payment of
dividends. In 1996 the Company paid dividends totaling $1,470,000, or 41% of
earnings. Book value of the stock was $12.44 at year end, restated to give
effect to a three for one stock split, payable as a dividend of two shares for
each one share of company stock held of record January 16, 1997, paid February
16, 1997.
The Company maintains a five year plan which was the result of a formal
strategic planning process. Management and the Board continue to monitor long
term goals which include expanded services to achieve growth and retaining
earnings to fund growth, while providing return to shareholders.
The Bank has no immediate plans for construction projects requiring sizable
capital expenditures in 1997.
Liquidity and Funds Management
Liquidity is monitored by the Bank's Asset/Liability Management Committee
(ALCO) which meets at least monthly. ALCO developed, and the Board of Directors
approved, a liquidity policy which requires a minimum 15% liquidity ratio.
Throughout 1995 and 1996 the Bank's liquidity ratio exceeded 20%.
Deposits are the principal source of funds for the Bank. Management
monitors rates at other financial institutions in the area to ascertain that its
rates are competitive in the market. Management also attempts to offer a wide
variety of products to meet the needs of its customers. The Company does not
deal in brokered funds and the makeup of its over $100,000 certificates consists
of local depositors known to the Bank.
It is the intention of the Bank's management to handle unexpected liquidity
needs through its Federal Funds position. The goal is to maintain a daily Fed
Funds balance sufficient to cover required cash draws. The Bank's policy
requires all purchases of Fed Funds to be approved by senior management so that
liquidity needs are known. In the event the Bank must borrow for an extended
period, management may look to "available for sale" securities in the investment
portfolio for liquidity.
Throughout the past year, Fed Funds Sold balances have averaged slightly
more than $5,000,000 compared to $3,000,000 the prior year. Management strives
to keep a Fed Funds balance of $3-4 million, a target which will generally meet
liquidity needs. Because of the strong demand deposit growth in 1996, management
chose to remain more liquid. On occasion the Bank borrowed money through the Fed
Funds market. The Bank did not need to sell investment securities for liquidity
and the borrowings were a normal part of doing business in times of strong loan
demand and unpredictable deposit swings.
The Bank's Asset/Liability Management committee (ALCO) meets monthly to
review the Bank's performance. The committee discusses the current economic
outlook and its impact on the Bank and current interest rate forecasts. Actual
results are compared to budget in terms of growth and income. A yield and cost
analysis is done to monitor interest margin. Various ratios are discussed
including capital ratios and liquidity. The quality of the loan portfolio is
reviewed in light of the current allowance. The rate sensitivity report is
analyzed and strategies are created to attempt to produce the desired results.
This report lays out the repricing schedule for various assets and liability
categories.
14
<PAGE>
The table below shows the Bank's rate sensitivity as of December 31, 1996:
<TABLE>
0-3 4-12 1-5 5+
-
Months Months Years Years Total
<S> <C> <C> <C> <C> <C>
Assets:
Loans................................. $51,975 $35,504 $44,256 $ 4,806 $136,541
Securities............................ 3,179 8,820 26,549 8,709 47,257
Fed funds............................. 6,500 6,500
Other assets.......................... ______ ______ ______ 11,711 11,711
Total assets....................... $61,654 $44,324 $70,805 $25,226 $202,009
Liabilities & Shareholders' Equity:
Demand, Savings & NOW................. $52,847 $62,326 $115,173
Time.................................. 11,016 31,775 22,968 12 65,771
Other liabilities and equity.......... ______ ______ ______ 21,065 21,065
Total liabilities and equity....... $63,863 $31,775 $22,968 $83,403 $202,009
Rate sensitivity gap and ratios:
Gap for period........................ $(2,209) $12,549 $47,837 $(58,177)
Cumulative gap........................ (2,209) 10,340 58,177
Cumulative rate sensitive ratio.......... .97 1.11 1.49 1.00
December 31, 1995 rate sensitive ratio... .92 1.18 1.46 1.00
</TABLE>
Given the asset sensitive position of the Bank at December 31, 1996, if
interest rates decrease 200 basis points and management did not respond,
management estimates that pretax income would decrease approximately $400,000
while a similar increase in rates would cause pretax income to increase by a
like amount. See discussion under "Net Interest Income" below. As noted above,
the entire balance of savings, NOW and MMDAs are not categorized as 0-3 months,
although they are variable rate products. Some of these balances are core
deposits which are not considered rate sensitive based on the Bank's historical
experience.
RESULTS OF OPERATIONS
The Company achieved record earnings in 1996. Net income of $3,570,000 was
an increase of $374,000 (12%) over 1995 earnings. The increase was due to an
increase in both net interest income and non-interest income. The Company's
return on average assets was 1.88% in 1996, unchanged from the prior year. The
return on average stockholders' equity (ROE) was 19.12%, a decrease from the
19.60% ROE reported in 1995. The decline in ROE occurred because average equity
grew 14.5% while earnings grew 12%.
The following table contains key performance ratios for years ended
December 31:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Net income to:
Average stockholders' equity 19.12% 19.60% 16.63%
Average assets 1.88% 1.88% 1.52%
Earnings per common share:* $2.27 $2.30 $1.54
</TABLE>
*restated to give effect to 3 for 1 stock split, payable as a dividend on two
shares for each one share of company stock held of record January 16, 1997, paid
February 16, 1997.
Net Interest Income
Net interest income is the difference between interest earned on earning
assets and interest paid on deposits. It is the major component of earnings for
a financial institution. For analytical purposes, the interest earned on
investments and loans is expressed on a fully taxable equivalent (FTE) basis.
Tax-exempt interest is increased to an
15
<PAGE>
amount comparable to interest subject to federal income taxes in order to
properly evaluate the effective yields earned on earning assets. The tax
equivalent adjustment is based on a federal income tax rate of 34%.
The following table shows the average balance and percentage earned or paid
on key components of earning assets and paying liabilities for the year ended
December 31:
<TABLE>
1996 1995 1994
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 5,135 5.24% $ 3,084 5.76% $ 4,983 4.06%
Taxable securities 32,042 5.95% 25,591 5.64% 23,419 5.39%
Tax-exempt securities 11,172 7.64% 9,413 8.28% 7,601 8.93%
Loans 130,648 9.91% 122,500 9.99% 114,384 9.17%
------- ------- -------
Total earning assets $178,997 8.93% $160,588 9.12% $150,387 8.40%
Interest bearing funds:
Savings/NOW accounts $ 76,128 2.80% $ 70,057 2.61% $ 71,448 2.42%
Time deposits 62,577 5.62% 54,924 5.54% 46,882 4.49%
Federal funds purchased 4 5.58% 105 6.43% 0 N/A
----- --------- ----------
Total interest bearing funds: $138,709 4.07% $125,086 3.90% $118,330 3.24%
Interest spread 4.86% 5.22% 5.16%
Net interest margin 5.77% 6.08% 5.85%
</TABLE>
Tax equivalent interest income in each of the three years includes loan
origination fees. A substantial portion of such fees is deferred for recognition
in future periods or is considered in determining the gain or loss on the sale
of real estate mortgage loans. Tax equivalent interest income, however, includes
net loan origination fees totaling $451,000 in 1996, $440,000 in 1995, and
$453,000 in 1994.
The following table sets forth the effects of volume and rate changes on
net interest income on a taxable equivalent basis. All figures are stated in
thousands of dollars.
<TABLE>
Year ended Year ended
December 31, 1996 compared to December 31, 1995 compared to
Year ended December 31, 1995 Year ended December 31, 1994
---------------------------- ----------------------------
Amount of Increase/(Decrease) Amount of Increase/(Decrease)
due to change in due to change in
Total Total
Amount Amount
of of
Average Increase/ Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal funds sold.......... $ 118 $(27) $ 91 $ (77) $ 53 $ (24)
Securities:
Taxable................... 364 98 462 117 64 181
Tax Exempt................ 146 (72) 74 162 (61) 101
Loans....................... 814 (105) 709 744 1,004 1,748
Total interest income..... $1,442 $(106) $1,336 $ 946 $1,060 $2,006
16
<PAGE>
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts...... $ 159 $ 145 $ 304 $ (34) $ 129 $ 95
Time...................... 424 45 469 361 578 939
Short-term borrowings....... (7) 0 (7) 7 0 7
Total interest expense... $ 576 $ 190 $ 766 $ 334 $ 707 $1,041
Net interest income (FTE)... $ 866 $ (296) $ 570 $ 612 $ 353 $ 965
</TABLE>
The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
Net interest income increased $570,000 in 1996 over the prior year due to a
$1,336,000 increase in interest income partially offset by approximately
$766,000 increase in interest expense. The increase in income can be attributed
to an increase in average earning assets of $18,400,000. The increase in income
on earning assets would have been greater had the yield not declined 19 basis
points. Interest income on Fed Funds Sold increased $91,000 due to an increase
in average balances of more than $2,000,000, partially offset by a decrease in
rates of 52 basis points. Income on taxable securities increased approximately
$462,000 as both the average balance and the rate increased. Taxable securities,
which consist mostly of U.S. Treasury notes, grew approximately $6,500,000 on
average. The security portfolio grew to accommodate deposit growth. The yield on
taxable securities increased 31 basis points due to the fact that most of these
bonds are purchased with two year maturities and those purchased in 1994 were
maturing and being replaced with 1996 bonds which are now yielding higher
interest. On the other hand, the Bank generally purchases tax-exempt bonds with
ten year maturities. Rates are lower on bonds being purchased today than those
earned ten years ago on the tax-exempt bonds which they are replacing. Loan
interest was $709,000 higher than in 1995. The increase is due to an increase of
nearly $8,000,000 on average balances, partially offset by an 8 point decline in
rates. Loan growth was largely attributable to growth in construction and land
development loans. In the consumer sector, growth was primarily in home equity
loans.
Interest expense increased in 1996 because average balances increased
approximately $13,600,000 and interest rates increased 17 basis points. The
increase in interest bearing funds balances was fairly evenly split with a
$6,000,000 increase in savings and NOW accounts, while time deposits grew
$7,600,000. Savings balances increased as customers responded favorably to the
more aggressive tiered rates instituted for money market accounts in the third
quarter of 1995. Growth in time deposits was encouraged by competitive pricing
and periodically offering special rates on specific products.
In the previous year, net interest income had increased nearly $1,000,000.
The increase in net interest income was the result of an increase in interest
income of $2,000,000, partially offset by an increase in interest expense of
approximately $1,000,000. The increase in interest income in 1995 was the result
of a $10,000,000 increase in earning assets and an increase in yields on earning
assets of 72 basis points. The increase in interest expense was the result of
average balances increasing nearly $7,000,000 and interest rates increasing 17
basis points.
In the coming year, management expects growth to continue in both loans and
deposits, although deposits may grow faster than loans as was the case in 1996.
The interest spread and interest margin will likely continue to decline unless
the Fed increases rates which is not anticipated at this time. With competition
intense for deposits, management does not expect deposit rates to decline in
1997.
17
<PAGE>
The following table shows the composition of average earning assets and
interest paying liabilities for the years ended December 31:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
As a percent of average earning assets:
Loans 72.99% 76.28% 76.07%
Securities 24.14% 21.80% 20.61%
Fed funds sold 2.87% 1.92% 3.32%
Average earning assets 100.00% 100.00% 100.00%
Savings and NOW 42.53% 43.63% 47.51%
Time deposits 34.96% 34.20% 31.17%
Fed funds purchased 0 .07% 0
Average interest bearing liabilities 77.49% 77.90% 78.68%
Earning asset ratio 94.08% 94.17% 94.36%
Free-funds ratio 22.51% 22.10% 21.32%
</TABLE>
Provision for Loan Losses
The provision for loan losses of $448,500 remained the same for 1996 as it
was the prior two years. This provision was sufficient to produce a ratio of
allowance for loan loss to loans of 2.44% and a ratio of nonperforming loans to
the allowance for loan loss of 32% at year end. (See "Loans" on pages 22 & 23).
The growth in commercial loans, which typically carry more risk, may require
increased provisions in the future. Management analysis of the adequacy of the
allowance considers the portfolio mix as well as economic conditions within the
Bank's market.
Non-interest Income
Non-interest income, which includes service charges on deposit accounts,
loan fees, other operating income, and gain(loss) on sale of assets and
securities transactions, increased by approximately $270,000 (19%) in 1996
compared to the previous year. Most of the increase was due to an increase in
service charge income from loans, deposit accounts, and other banking services.
Service charge income increased $170,000 (13%) over the prior year, due to loan
and deposit growth and adjustments to some charges made to more fairly
compensate the Bank for services performed. Management does not anticipate that
service charge income will continue to grow at the rate experienced in 1996.
"Other" non-interest income increased $32,000 to $96,000 in 1996. Included
in other non-interest income is a nonrecurring $60,000 gain on the sale of other
real estate. In 1995 there were gains of $24,500 on the sale of other real
estate and $20,000 on the sale of equipment.
Non-interest Expense
Non-interest interest expense increased 5% in 1996. The most significant
component of non-interest expense is salaries and benefits expense. In 1996
salaries and benefits expense increased 2.5% to $3,300,000, due to the combined
effects of salary increases and certain positions which were temporarily
unfilled.
Occupancy expense increased $30,000 and equipment expense increased
$13,000. The increase in occupancy was primarily due to increased depreciation
costs as the main office and Brighton branch buildings both had major
renovations that were put in service in 1996. Equipment expense increased
primarily because repair and maintenance costs increased while depreciation
costs decreased. Management anticipates that in 1997 some older equipment will
be replaced which may result in decreased maintenance costs but increased
depreciation.
Other expense increased $160,000 (9%). The most notable factor contributing
to the increase in other expense was a $190,000 increase in fees because the
Bank hired consultants for selected projects.
18
<PAGE>
Federal Income Tax Expense
Fluctuations in income taxes resulted primarily from changes in the level
of profitability and in variations in the amount of tax-exempt income. Income
tax expense increased $168,000 to $1,585,500 (12%) in 1996 compared to a
$379,000 (36%) increase in 1995. For further information see Note 7 "Federal
Income Taxes" in the Company's Consolidated Financial Statements.
Prospective Accounting Changes
In June 1996 the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("Statement 125"), which provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. Those standards are based on consistent application of a financial
components approach that focuses on control. Under the financial components
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement supersedes portions
of Statement 122 and is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996.
Statement 125 is not expected to have a material impact on the operating results
or financial condition of the Bank.
19
<PAGE>
<TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $15,717 $14,394 $12,412 $11,948 $12,564
Interest expense 5,644 4,879 3,838 4,121 4,865
Net interest income 10,073 9,515 8,574 7,827 7,699
Provision for loan losses 448 448 448 449 519
Non-interest income 1,686 1,418 1,195 1,386 1,346
Non-interest expense 6,151 5,867 5,864 5,674 5,729
Income before tax and
accounting change 5,160 4,618 3,457 3,090 2,797
Net income 3,574 3,200 2,418 2,311 2,032
Per Share Data(1):
Income before accounting
change $2.27 2.03 1.54 1.40 1.29
Income after cumulative effect
of accounting change(2) 2.27 2.03 1.54 1.47 1.29
Dividends paid .93 .68 .55 .50 .46
Weighted average shares
outstanding 1,575,000 1,575,000 1,575,000 1,575,000 1,575,000
Balance Sheet Data:
Total assets 202,009 182,958 168,438 155,556 154,703
Loans 136,067 127,463 117,008 112,820 108,957
Allowance for loan losses 3,335 3,097 2,672 2,205 2,044
Deposits 180,944 163,875 151,707 140,489 140,925
Shareholders' equity 19,597 17,530 15,305 13,814 12,255
Ratios:
Dividend payout ratio 41.13% 33.46% 35.82% 34.07% 35.84%
Equity to asset ratio 9.82% 9.61% 9.14% 8.45% 7.83%
</TABLE>
(1) Per share data for all years has been restated to give effect to the
three-for-one stock split, payable as a dividend paid in February 1997.
(2) Reflects adjustment due to a change in accounting for income taxes in 1993.
20
<PAGE>
STOCK AND EARNINGS HIGHLIGHTS
There is no active market for the Company's Common Stock, and there is no
published information with respect to its market price. There are occasional
direct sales by shareholders of which the Company's management is generally
aware. It is the understanding of the management of the Company that over the
last two years, the Company's Common Stock has sold at a premium to book value.
From January 1, 1995, through December 31, 1996, there were, so far as the
Company's management knows, 136 sales of shares of the Company's Common Stock,
involving a total of 59,931 shares. The price was reported to management in only
a few of these transactions, and management has no way of confirming the prices
which were reported. During this period, the highest price known to be paid was
$20.00 per share in the last half of 1995 and during all of 1996, and the lowest
price was $18.33 per share in February 1995. To the knowledge of management, the
last sale of Common Stock occurred on February 14, 1997. All per share
information has been restated to give effect to a three for one stock split,
payable as a dividend of two shares for each one share of company stock held of
record January 16, 1997, paid February 16, 1997.
As of March 1, 1997, there were approximately 590 holders of record of the
Company's Stock. The following table sets forth the range of high and low sales
prices of the Company's Common Stock during 1995 and 1996, based on information
made available to the Company, as well as per share cash dividends declared
during those periods. Although management is not aware of any transactions at
higher or lower prices, there may have been transactions at prices outside the
ranges listed in the table.
Sales price and dividend information for the years 1995 and 1996:
<TABLE>
Sales Prices Cash Dividends Declared
1995 High Low
<S> <C> <C> <C>
First Quarter $18.33 $18.33 $0.10
Second Quarter $20.00 $18.33 $0.12
Third Quarter $20.00 $20.00 $0.12
Fourth Quarter $20.00 $20.00 $0.35(1)
1996 High Low
First Quarter $20.00 $20.00 $0.12
Second Quarter $20.00 $20.00 $0.13
Third Quarter $20.00 $20.00 $0.13
Fourth Quarter $20.00 $20.00 $0.55(2)
(1) Includes a special dividend of $0.23 per share.
(2) Includes a special dividend of $0.42 per share.
</TABLE>
21
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1996 and 1995
With Independent Auditors' Report Thereon)
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Table of Contents
Page(s)
Independent Auditors' Report 1
Consolidated Balance Sheets 2-3
Consolidated Statements of Income 4-5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7-8
Notes to Consolidated Financial Statements 9-35
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
FNBH Bancorp, Inc.:
We have audited the consolidated balance sheets of FNBH Bancorp, Inc., and
subsidiary ("Corporation") as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FNBH Bancorp, Inc.,
and subsidiary as of DecemberE31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 3, the Corporation changed its method of accounting
for mortgage servicing rights in 1996 to adopt the provisions of SFAS No. 122
Accounting for Mortgage Servicing Rights, an amendment of SFAS No. 65. As
discussed in Notes 1 and 3, the Corporation changed its method of accounting for
impaired loans in 1995 to adopt the provisions of SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures.
/s/ KPMG Peat Marwick LLP
Detroit, Michigan
January 16, 1997
<PAGE>
<TABLE>
FNBH BANCORP, INC., AND SUBSIDIARY
Consolidated Balance Sheets, Continued
December 31, 1996 and 1995
Assets 1996 1995
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks ....... $ 7,069,216 $ 8,055,641
Federal funds sold ........... 6,500,000 8,400,000
Total cash and cash equivalents . 13,569,216 16,455,641
Investment securities held-to-
maturity, net (fair value of
$28,160,000 in 1996 and
$21,897,000 in 1995) (note 2) .. 27,821,614 21,465,669
Investment securities available-
for-sale, at fair value (note 2) 19,047,187 13,115,000
Mortgage-backed securities
held-to-maturity, net (fair
value of $353,000 in 1996 and
$620,000 in 1995) (note 2) ..... 351,930 614,118
Mortgage-backed securities
available for sale, at fair
value (note 2) ................. 35,960 56,483
Total investment and mortgage-
backed securities .............. 47,256,691 35,251,270
Loans (note 3):
Commercial .................... 91,015,036 82,793,050
Real estate mortgage .......... 23,402,833 25,001,209
Consumer
22,122,885 20,164,158
Total loans ..................... 136,540,754 127,958,417
Less unearned income ............ (473,311) (495,463)
Less allowance for
loan losses (note 4) ......... (3,335,044) (3,096,690)
Net loans ....................... 132,732,399 124,366,264
Other real estate owned ......... 723,011 45,688
Bank premises and equipment,
net (note 5) .................. 4,818,603 4,287,299
Accrued interest income and
other assets (note 7) .......... 2,909,324 2,551,343
Total assets ................... $ 202,009,244 $ 182,957,505
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
FNBH BANCORP, INC., AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
Liabilities and Stockholders' Equity 1996 1995
<S> <C> <C>
Deposits:
Demand (non-interest bearing) ........... $ 35,047,948 $ 30,815,052
NOW ..................................... 25,145,241 22,318,050
Savings and money market accounts ....... 54,979,331 51,564,415
Time (note 6) ........................... 65,771,249 59,177,115
Total deposits ........................... 180,943,769 163,874,632
Accrued interest, taxes,
and other liabilities ................... 1,468,367 1,553,105
Total liabilities ........................ 182,412,136 165,427,737
Stockholders' equity:
Common stock, $0 par value
Authorized 2,100,000 shares;
1,575,000 shares issued and
outstanding at December 31,
1996 and 1995 .......................... 5,250,000 5,250,000
Retained earnings ...................... 14,308,934 12,205,242
Net unrealized gain on
securities available-for-sale,
net of tax (note 2) .................... 38,174 74,526
Total stockholders' equity ............... 19,597,108 17,529,768
Commitments and contingent
liabilities (notes 9, 10, and 11)
Total liabilities and stockholders' equity $202,009,244 $182,957,505
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
FNBH BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1996, 1995, and 1994
1996 1995 1994
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans ....................... $ 12,932,241 $ 12,219,074 $ 10,473,297
Interest and dividends on investment
and mortgage-backed securities:
U.S. Treasury securities ...................... 1,639,212 1,167,705 1,094,947
Obligations of other U.S. government agencies . 264,493 274,156 160,367
Obligations of state and political subdivisions 609,437 552,542 473,184
Other securities .............................. 2,655 2,655 7,989
Interest on federal funds sold ................ 269,257 177,663 202,357
------------ ------------ ------------
Total interest income ......................... 15,717,295 14,393,795 12,412,141
------------ ------------ ------------
Interest expense:
Interest on deposits ............................. 5,644,358 4,871,772 3,837,913
Interest on other borrowings ..................... 213 6,766 --
------------ ------------ ------------
Total interest expense ........................ 5,644,571 4,878,538 3,837,913
------------ ------------ ------------
Net interest income ........................... 10,072,724 9,515,257 8,574,228
Provision for loan losses (note 4) ................. 448,500 448,500 448,500
------------ ------------ ------------
Net interest income
after provision for loan losses .............. 9,624,224 9,066,757 8,125,728
Non-interest income:
Service charges ............................. 1,487,042 1,314,004 1,180,434
Loss on sale of securities (note 2) ......... -- (30,004) (80,980)
Gain on sale of loans ....................... 103,209 69,387 58,326
Other ....................................... 95,660 64,088 37,130
------------ ------------ ------------
Total non-interest income ................. 1,685,911 1,417,475 1,194,910
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
FNBH BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Income, Continued
Years ended December 31, 1996, 1995, and 1994
1996 1995 1994
<S> <C> <C> <C>
Non-interest expenses:
Salaries and employee benefits . $3,287,930 $3,207,779 $3,109,116
Net occupancy expense .......... 494,218 463,043 503,093
Equipment expense .............. 444,697 431,728 464,453
Printing and supplies .......... 227,239 220,289 185,453
Other (note 8) ................. 1,696,859 1,543,731 1,601,545
---------- ---------- ----------
Total non-interest expenses 6,150,943 5,866,570 5,863,660
---------- ---------- ----------
Income before federal income taxes 5,159,192 4,617,662 3,456,978
Federal income taxes (note 7) .... 1,585,500 1,417,500 1,038,500
---------- ---------- ----------
Net income ................ 3,573,692 3,200,162 2,418,478
---------- ---------- ----------
Net income per share ............. $ 2.27 $ 2.03 $ 1.54
========== ========== ==========
Cash dividends per share ......... $ .93 $ .68 $ .55
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
FNBH BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995, and 1994
Net Unrealized
Gain (Loss) on
Securities
Available-for-
Common Retained Sale, Net of
Stock Earnings Tax (Note 2) Total
----- -------- -------- -----
<S> <C> <C> <C> <C>
Balances as of December 31, 1993 ........... $ 5,250,000 $ 8,529,102 $ 35,448 $ 13,814,550
Net income ................................. -- 2,418,478 -- 2,418,478
Changes in unrealized loss on
securities available for sale .......... -- -- (62,046) (62,046)
net of tax
Cash dividends ($.55 per share) ............ -- (866,250) -- (866,250)
Balances at December 31, 1994 .............. 5,250,000 10,081,330 (26,598) 15,304,732
Net income ................................. -- 3,200,162 -- 3,200,162
Changes in unrealized loss on
securities available for sale-- ........ -- -- 101,382 101,382
net of tax
Implementation of Guide to
Implementation of Statement ............ -- -- (258) (258)
115, net of tax
Cash dividends ($.68 per share) ............ -- (1,076,250) -- (1,076,250)
Balances at December 31, 1995 .............. 5,250,000 12,205,242 74,526 17,529,768
Net income ................................. -- 3,573,692 -- 3,573,692
Changes in unrealized gain on securities
available for sale, net ................... -- -- (36,352) (36,352)
of tax
Cash dividends ($.93 per share) ............ -- (1,470,000) -- (1,470,000)
Balances at December 31, 1996 .............. $ 5,250,000 $ 14,308,934 $ 38,174 $ 19,597,108
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
FNBH BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................. $ 3,573,692 $ 3,200,162 $ 2,418,478
Adjustments to reconcile
net income to net cash
provided by operating activities:
Provision for loan losses .............. 448,500 448,500 448,500
Depreciation and amortization .......... 402,592 384,315 423,791
Deferred federal income tax
expense (benefit) ................... (42,900) 8,000 (214,000)
Net amortization on investment
securities ......................... 50,581 88,873 132,757
Loss on disposal of equipment .......... 1,668 3,762 17,305
Loss on sales of securities ............ -- 30,004 80,980
Gain on sale of loans .................. (103,209) (69,387) (58,326)
Proceeds from sale of loans ............ 10,920,683 5,557,668 9,486,872
Origination of loans held for sale ..... (11,608,783) (5,738,281) (9,486,872)
(Increase) decrease in accrued
interest income and other assets ..... (992,404) 23,041 12,807
Increase (decrease) in accrued
interest, taxes, and other
liabilities .......................... (66,038) 74,400 205,325
Net cash provided by operating activities . 2,584,382 4,011,057 3,467,617
Cash flows from investing activities:
Purchases of available-for-sale
securities .......................... (9,979,018) (6,016,056) (2,999,531)
Proceeds from sales of
available-for-sale securities ....... -- 3,037,422 1,925,859
Proceeds from maturities of
available-for-sale securities ....... 4,000,000 -- 2,000,000
Repayments from mortgage-backed
securities available-for-sale ....... 19,531 14,954 146,350
Purchases of held-to-maturity securities (17,608,826) (3,447,071) (15,242,811)
Proceeds from maturities and calls
of held-to-maturity securities ...... 11,316,782 4,965,000 8,202,000
Repayments from mortgage-backed
securities held to maturity ......... 140,477 119,662 194,432
Net increase in loans .................. (8,023,327) (10,228,892) (4,111,361)
Capital expenditures ................... (935,563) (1,231,516) (391,657)
Net cash used by investing activities. (21,069,944) (12,786,497) (10,276,719)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
FNBH BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows,
Continued Years ended December 31,
1996, 1995, and 1994
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits ............ $ 17,069,137 $ 12,167,639 $ 11,218,377
Dividends paid ...................... (1,470,000) (1,076,250) (866,250)
Net cash provided by
financing activities .......... 15,599,137 11,091,389 10,352,127
Net increase (decrease) in
cash and cash equivalents .......... (2,886,425) 2,315,949 3,543,025
Cash and cash equivalents
at beginning of year ............... 16,455,641 14,139,692 10,596,667
Cash and cash equivalents
at end of year ..................... $ 13,569,216 $ 16,455,641 $ 14,139,692
Supplemental disclosures:
Interest paid ........................ $ 5,674,395 $ 4,826,022 $ 3,816,845
Federal income taxes paid ............ 1,645,000 1,427,500 1,109,000
Loans transferred to other real estate 723,011 45,688 132,701
Loans charged off .................... 287,285 209,300 120,574
Transfer of investment securities to
available-for-sale classification: ... -- 7,058,046 --
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of FNBH
Bancorp, Inc., and its wholly owned subsidiary, First National Bank in
Howell. All significant intercompany balances and transactions have
been eliminated.
First National Bank in Howell ("Bank") is a full-service bank offering
a wide range of commercial and personal banking services. These
services include checking accounts, savings accounts, certificates of
deposit, commercial loans, real estate loans, installment loans,
collections, traveler's checks, night depository, safe deposit box,
and U.S. Savings Bonds. The Bank serves primarily four
communitiesNHowell, Brighton, Hartland, and FowlervilleNall of which
are located in Livingston County, Michigan.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. The accounting and reporting policies of FNBH
Bancorp, Inc., and subsidiary ("Corporation") conform to generally
accepted accounting principles and to general practice within the
banking industry. The following is a description of the more
significant of these policies.
(b) Investment and Mortgage-Backed Securities
Investment securities at December 31, 1996 and 1995, consist of U.S.
Treasury, municipal bond, and government agency securities. In
accordance with SFAS No. 115, the Bank classifies its debt and
marketable equity securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Bank has
the ability and intent to hold the security until maturity. All other
securities not included in trading or held-to-maturity are classified
as available-for-sale.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
(b) Investment and Mortgage-Backed Securities, Continued
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings
and are reported as a separate component of stockholders' equity until
realized. Transfers of securities between categories are recorded at
fair value at the date of transfer.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a charge to earnings, resulting in the
establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
respective security as an adjustment to yield using the
effective-interest method. Dividend and interest income is recognized
when earned. Realized gains and losses for securities classified as
available-for-sale are included in earnings and are derived using the
specific-identification method for determining the cost of securities
sold.
(c) Loans
Loans are stated at their principal amount outstanding, net of an
allowance for loan losses. Interest on loans is accrued daily based on
the outstanding principal balance. Loan origination fees and certain
direct loan origination costs are deferred and recognized over the
lives of the related loans as an adjustment of the yield. Mortgage
loans held for sale are carried at the lower of cost or market
determined on an net aggregate basis. Market is determined on the
basis of delivery prices in the secondary mortgage market. When loans
are sold, gains and losses are recognized based on the
specific-identification method.
Effective January 1, 1996, the Bank adopted the provisions of
statement of Financial Accounting Standards (SFAS) No. 122, Accounting
for Mortgage Servicing Rights, an amendment of SFAS No. 65. The Bank
originates mortgage loans for sale to the secondary market, and sells
the loans with servicing retained.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
(c) Loans, Continued
Beginning in 1996, the total cost of mortgage loans originated with
the intent to sell is allocated between the loan servicing right and
the mortgage loan without servicing, based on their relative fair
value at the date of origination. The capitalized cost of loan
servicing rights is amortized in proportion to, and over the period
of, estimated net future servicing revenue.
Mortgage servicing rights are periodically evaluated for impairment.
For purposes of measuring impairment, mortgage servicing rights are
stratified based on predominant risks characteristics of the
underlying serviced loans. These risk characteristics include loan
type, term, year originated, and note rate. Impairment represents the
excess of cost of an individual mortgage servicing rights stratum over
its fair value, and is recognized though a valuation allowance.
Fair values for individual strata are based on quoted market prices
for comparable transactions if available or estimated fair value.
Estimates of fair value include assumptions about prepayment, default
and interest rates, and other factors which are subject to change over
time. Changes in these underlying assumptions could cause the fair
value of mortgage servicing rights, and the related valuation
allowance, to change significantly in the future.
(d) Allowance for Loan Losses
The allowance for loan losses is based on management's periodic
evaluation of the loan portfolio and reflects an amount that, in
management's opinion, is adequate to absorb losses in the existing
portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions,
prior loan loss experience, the composition of the loan portfolio, and
management's evaluation of the collectibility of specific loans.
Although the Bank carefully evaluates the adequacy of the allowance
for loan losses based on information known to management at a given
time, various regulatory agencies, as part of their normal examination
process, may require future additions to the allowance for loan
losses.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
(e) Nonperforming Assets
Effective January 1, 1995, the Bank adopted the provisions of SFAS No.
114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114
requires that impaired loans be measured based on the present value of
expected future cash flows, discounted at the loan's effective
interest rate or at the loan's observed market price, or the fair
value of the collateral if the loan is collateral-dependent. This
statement applies to all loans that are restructured in a
troubled-debt restructuring involving a modification of terms. SFAS
No. 114 was amended in October 1994 by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures. This amendment allows for interest income on impaired
loans to be recognized using existing methods and deletes those income
recognition provisions described in SFAS No. 114.
The bank considers a loan to be impaired when it is probable that it
will be unable to collect all or part of amounts due according to the
contractual terms of the loan agreement. In evaluating the portfolio
for impairment, management takes into consideration several factors,
including current economic conditions, past loan loss experience, the
estimated value of any underlying collateral, the overall balance and
composition of the loan portfolio, and management's evaluation of
collectibility of specific loans.
The Bank charges off all or part of loans when amounts are deemed to
be uncollectible, although collection efforts may continue and future
recoveries may occur.
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, loans for which the terms have been
renegotiated to less than market rates due to a serious weakening of
the borrower's financial condition, and other real estate, which has
been acquired primarily through foreclosure and is awaiting
disposition.
Loans are generally placed on a nonaccrual basis when principal or
interest is past due 90 days or more and when, in the opinion of
management, full collection of principal and interest is unlikely. At
the time a loan is placed on nonaccrual status, interest previously
accrued but not yet collected is charged against current income.
Income on such loans is then recognized only to the extent that cash
is received and where future collection of principal is probable.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
(e) Nonperforming Assets, Continued
Interest income on impaired loans is accrued based on the principal
amounts outstanding. The accrual of interest is discontinued when an
impaired loan becomes 90 days past due. The Bank utilized the "fair
value of collateral" method to measure impairment, as virtually all of
the loans considered to be impaired are commercial mortgage loans.
(f) Other Real Estate Owned
Other real estate owned at the time of foreclosure is recorded at the
lower of the Bank's cost of acquisition or the asset's fair market
value, net of disposal cost, which becomes the property's new basis.
Any write-downs at date of acquisition are charged to the allowance
for loan losses. Expenses incurred in maintaining assets and
subsequent write-downs to reflect declines in value are charged to
other expense.
(g) Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization, computed
on the straight-line method, are charged to operations over the
estimated useful lives of the assets.
(h) Federal Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on different tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
(i) Pension Plan
The Bank sponsors a defined contribution money purchase thrift plan
covering all employees 21 years of age or older who have completed one
year of service as defined in the plan agreement. Contributions are
equal to 5Epercent of total employee earnings plus 50Epercent of
employee contributions (limited to 10Epercent of their earnings), or
the maximum amount permitted by the Internal Revenue Code. The pension
plan expense of the Bank for 1996, 1995, and 1994 was approximately
$200,000, $175,000, and $185,000, respectively.
(j) Statements of Cash Flows
For purposes of reporting cash flows, cash equivalents include amounts
due from banks and federal funds sold.
(k) Stock Split
On January 16, 1997, the Board declared a three-for-one stock split,
payable as a dividend of two shares for each one share of company
stock held of record January 16, 1997. The dividend is payable
February 16, 1997. The stock split increased FNBH Bancorp's
outstanding common shares from 525,000 to 1,575,000 shares. Additional
paid-in capital and common stock were not restated as a result of the
stock split as the par value of the stock was zero. All references in
the Consolidated Financial Statements and Notes thereto to numbers of
shares, per-share amounts, and market prices of the Company's common
stock have been restated giving retroactive recognition to the stock
split.
(2) Investment and Mortgage-Backed Securities
During November 1995, the Financial Accounting Standards Board issued
a Guide to Implementation of Statement 115 on Accounting for Certain
Investment in Debt and Equity Securities. This guide allowed for a
one-time change in the classification of SFAS No. 115 securities as of
the date of the implementation guide, but no later than December 31,
1995. As a result, the Bank made a one-time transfer of approximately
$7,000,000 of investment securities held to maturity to
available-for-sale in 1995. The market value of the securities was
$7,065,000 at the date of transfer.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Investment and Mortgage-Backed Securities, Continued
A summary of the amortized cost and approximate fair value of
investment securities at December 31, 1996, follows:
<TABLE>
Held to Maturity Available for Sale
Amortized Approximate Amortized Approximate
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities ............. $13,995,601 $14,038,000 $17,989,344 $18,046,250
Obligations of other U.S. ............
government agencies ................ 1,017,277 1,020,000 1,000,185 1,000,937
Obligations of states and
political subdivisions ........... 12,764,486 13,058,000 -- --
Other securities ..................... 44,250 44,000 -- --
27,821,614 28,160,000 18,989,529 19,047,187
Mortgage-backed
securities ....................... 351,930 353,000 35,745 35,960
$28,173,544 $28,513,000 $19,025,274 $19,083,147
</TABLE>
<TABLE>
A summary of unrealized gains and losses on investment securities at
December 31, 1996, follows:
Held to Maturity Available for Sale
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasury securities . $ 53,730 $ 11,331 $ 63,565 $ 6,659
Obligations of other U.S.
government agencies ...... 2,723 -- 752 --
Obligations of states and
political subdivisions ... 318,349 24,835 -- --
Other securities ......... -- 250 -- --
Mortgage-backed securities 1,070 -- 215 --
$375,872 $ 36,416 $ 64,532 $ 6,659
</TABLE>
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Investment and Mortgage-Backed Securities, Continued
The amortized cost and approximate fair value of investment securities
at December 31, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
Held to Maturity Available for Sale
Amortized Approximate Amortized Approximate
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
Due in one year or less $ 2,845,885 $ 2,851,000 $ 9,003,200 $ 9,020,312
Due after one year through
five years 17,066,724 17,242,000 9,986,329 10,026,875
Due after five years
through ten years 7,864,755 8,023,000 -- --
Due after ten years 44,250 44,000 -- --
27,821,614 28,160,000 18,989,529 19,047,187
Mortgage-backed securities
(principally short-term) 351,930 353,000 35,745 35,960
$ 28,173,544 $ 28,513,000 $ 19,025,274 $ 19,083,147
</TABLE>
The amortized cost and approximate fair value of investment securities
of states (including all their political subdivisions) that
individually exceeded 10Epercent of stockholders' equity at
December 31, 1996 and 1995, are as follows:
<TABLE>
1996 1995
Amortized Approximate Amortized Approximate
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
State of Michigan $6,875,131 $7,014,526 $5,243,554 $5,449,000
</TABLE>
Investment securities, with an amortized cost of approximately
$500,000 at December 31, 1996 and 1995, were pledged to secure public
deposits and for other purposes as required or permitted by law.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Investment and Mortgage-Backed Securities, Continued
A summary of the amortized cost and approximate fair value of
investment securities at December 31, 1995, follows:
<TABLE>
Held to Maturity Available for Sale
Amortized Approximate Amortized Approximate
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 9,510,704 $ 9,525,000 $ 11,002,723 $ 11,090,313
Obligations of other U.S.
government agencies 2,033,158 2,049,000 2,000,559 2,024,687
Obligations of states and
political subdivisions 9,877,557 10,279,000 -- --
Other securities 44,250 44,000 -- --
21,465,669 21,897,000 13,003,282 13,115,000
Mortgage-backed securities 614,118 620,000 55,275 56,483
$ 22,079,787 $ 22,517,000 $ 13,058,557 $ 13,171,483
</TABLE>
A summary of unrealized gains and losses on investment securities at
December 31, 1995, follows:
<TABLE>
Held to Maturity Available for Sale
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 31,253 $ 16,957 $ 87,590 $ --
Obligations of other U.S.
government agencies 15,842 -- 24,128 --
Obligations of states and
political subdivisions 405,315 3,872 -- --
Other securities -- 250 -- --
Mortgage-backed securities 5,882 -- 1,208 --
$ 458,292 $ 21,079 $ 112,926 $ --
</TABLE>
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Investment and Mortgage-Backed Securities, Continued
In 1996, no investment securities available-for-sale were sold.
Accordingly, no realized gains or losses were recorded. The Bank
recognized gross losses of $30,004 and $80,980 during 1995 and 1994,
respectively, on the sale of investment securities available-for-sale.
No gains were realized in 1995 and 1994.
(3) Loans
Loans on nonaccrual amounted to $109,000, $926,000, and $983,000 at
December 31, 1996, 1995, and 1994, respectively. If these loans had
continued to accrue interest in accordance with their original terms,
approximately $12,000, $138,000, and $116,000 of interest income would
have been realized in 1996, 1995, and 1994, respectively. The Bank had
no troubled-debt restructured loans at December 31, 1996 and 1995.
Details of past-due and nonperforming loans follow:
<TABLE>
90 Days Past Due
and Still Accruing Nonaccrual
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Commercial and mortgage
loans secured by real
estate $434,000 $64,000 $ 80,000 $918,000
Consumer loans -- 2,000 2,000 --
Commercial and other 14,000 -- 27,000 8,000
loans
$448,000 $66,000 $109,000 $926,000
</TABLE>
Impaired loans totaled $820,000 and $900,000 at December 31, 1996 and
1995, respectively. Specific reserves relating to these loans were
$70,000 and $280,000 at DecemberE31, 1996 and 1995, respectively.
These reserves were calculated in accordance with SFAS No.E114. No
adjustments to the provision or allowance for loan losses was required
as a result of the 1995 adoption of SFAS No. 114. There were no other
loans considered impaired for which there was no related specific
reserve.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued
Cash receipts received and recognized as income on impaired loans
approximated $210,000 and $100,000 for the year ended December 31,
1996 and 1995, respectively. Average impaired loans for the year ended
December 31, 1996 and 1995, were approximately $970,000 and
$1,100,000, respectively .
Loans serviced for others were approximately $33,900,000, $29,500,000,
and $29,700,000 at December 31, 1996, 1995, and 1994, respectively.
During 1996, the Bank capitalized $63,000 in mortgage servicing rights
and incurred approximately $8,000 in related amortization expense. At
December 31, 1996, these mortgage service rights had a fair value of
approximately $60,000. Mortgage loans with mortgage servicing rights
capitalized totaled approximately $9,000,000 at December 31, 1996. No
valuation allowances for capitalized mortgage servicing rights were
considered necessary as of December 31, 1996.
The ongoing impact of FAS 122 is dependent upon, among other things,
the volume of loan originations, the general levels of market interest
rates, and the rate of estimated prepayments. Accordingly, management
is unable to predict with any reasonable certainty what effect FAS 122
will have on the Bank's future results of operations or its financial
condition.
Included in real estate loans at December 31, 1996 were approximately
$688,000 of fixed rate mortgage loans held for sale.
There were no mortgage loans held for sale at December 31, 1995.
The Bank's primary market area is considered to be Livingston County,
Michigan. The Bank is not dependent upon any single industry or
business for its banking opportunities.
Certain directors and executive officers, including their immediate
families and companies in which they are principal owners, were loan
customers of the Bank during 1996, and 1995. Such loans were made in
the ordinary course of business in accordance with the Bank's normal
lending policies, including the interest rate charged and
collateralization, and do not represent more than a normal collection
risk.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued
Loans to related parties are summarized below for the periods
indicated:
<TABLE>
1996 1995
<S> <C> <C>
Balance at beginning of year $ 885,000 $ 403,000
New loans .................. 400,000 599,000
Loan repayments ............ (239,000) (117,000)
Balance at end of year ..... $ 1,046,000 $ 885,000
</TABLE>
(4) Allowance for Loan Losses
The following represents a summary of the activity in the allowance
for loan losses for the years ended December 31, 1996, 1995, and 1994:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year .. $ 3,096,690 $ 2,672,007 $ 2,204,743
Provision charged to operations 448,500 448,500 448,500
Loans charged off ............. (287,285) (209,300) (120,574)
Recoveries of loans charged off 77,139 185,483 139,338
Balance at end of year ........ $ 3,335,044 $ 3,096,690 $ 2,672,007
</TABLE>
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5) Bank Premises and Equipment
Asummary of bank premises and equipment, and related accumulated
depreciation and amortization at December 31, 1996 and 1995, follows:
<TABLE>
1996 1995
<S> <C> <C>
Land and land improvements .. $ 1,028,961 $ 1,034,526
Bank premises ............... 4,297,656 3,745,378
Furniture and equipment ..... 2,992,840 2,777,037
8,319,457 7,556,941
Less accumulated depreciation
and amortization ........... (3,500,854) (3,269,642)
$ 4,818,603 $ 4,287,299
</TABLE>
(6) Time Certificates of Deposit
At December 31, 1996, the scheduled maturities of time deposits with a
remaining term of more than one year were:
Year of Maturity 1996
1998 $ 10,923,529
1999 6,337,357
2000 3,142,743
2001 2,666,229
Thereafter 11,858
$ 23,081,716
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) Time Certificates of Deposit, Continued
Included in time deposits are certificates of deposit in amounts of
$100,000 or more. These certificates and their remaining maturities at
December 31, 1996, 1995, and 1994, are as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Three months or less .... $ 2,608,872 $ 5,154,950 $ 4,313,339
Three through six months 3,411,513 300,000 600,000
Six through twelve months 4,009,637 3,014,681 608,646
Over twelve months ...... 2,183,637 1,351,748 1,477,881
$12,213,659 $ 9,821,379 $ 6,999,866
</TABLE>
Interest expense attributable to the above deposits amounted to
approximately $591,000, $467,000, and $266,000 in 1996, 1995, and
1994, respectively.
(7) Federal Income Taxes
Income tax expense from operations consists of:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Current $ 1,628,400 $ 1,409,500 $ 1,252,500
Deferred (42,900) 8,000 (214,000)
$ 1,585,500 $ 1,417,500 $ 1,038,500
</TABLE>
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7) Federal Income Taxes, Continued
Income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to pretax income as a
result of the following:
<TABLE>
<S> <C> <C> <C>
Computed "expected" tax expense ........... $ 1,754,125 $ 1,570,000 $ 1,175,373
Increase (reduction) in tax resulting from:
Tax-exempt interest and dividends, net .... (193,100) (181,300) (159,480)
Other, net ................................ 24,475 28,800 22,607
$ 1,585,500 $ 1,417,500 $ 1,038,500
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995, are presented below:
<TABLE>
1996 1995
<S> <C> <C>
Deferred tax assets:
Loan loss reserve .................. $ 999,100 $ 918,100
Deferred loan fees ................. -- 15,000
Other .............................. 158,900 160,700
Total gross deferred tax assets .... 1,158,000 1,093,800
Deferred tax liabilities:
Deferred fees ...................... (15,400) --
Unrealized gain on securities
available for sale ............... (19,700) (13,702)
Other .............................. (25,700) (19,800)
Total gross deferred tax liabilities (60,800) (33,502)
Net deferred tax asset ............. $ 1,097,200 $ 1,060,298
</TABLE>
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8) Supplementary Income Statement Information
Other than the items listed, other non-interest expenses did not
include any amounts that exceeded 1 percent of total revenue, which is
the sum of total interest income and total non-interest income.
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Other fees ................. $328,475 $133,616 $170,482
Supplies ................... $227,239 $220,289 $185,453
Marketing .................. $188,834 $176,504 $161,935
Michigan Single Business Tax $159,000 $149,800 $158,500
</TABLE>
(9) Leases
The Bank has several noncancelable operating leases that provide for
renewal options.
Future minimum lease payments under noncancelable leases as of
December 31, 1996, are as follows:
Year ending December 31:
1997 34,000
1998 38,000
1999 38,000
2000 38,000
2001 38,000
Later years, through 2007 243,500
Rental expense charged to operations in 1996, 1995, and 1994 amounted
to approximately $39,000, $66,000, and $94,000, respectively,
including amounts paid under short-term, cancelable leases.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(10) Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments are loan commitments to
extend credit and letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amounts
recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of the nonperformance
by the other party to the financial instruments for loan commitments
to extend credit and letters of credit is represented by the
contractual amounts of these instruments. The Bank uses the same
credit policies in making credit commitments as it does for
on-balance-sheet loans.
Financial instruments whose contract amounts represent credit risk at
December 31, 1996 and 1995, are as follows:
<TABLE>
1996 1995
<S> <C> <C>
Fixed-rate $8,200,000 $5,600,000
Variable-rate 30,800,000 22,200,000
Total credit commitments $39,000,000 $27,800,000
Letters of credit $ 710,000 $ 850,000
</TABLE>
Loan commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held
varies, but may include accounts receivable; inventory; property,
plant, and equipment; residential real estate; and income-producing
commercial properties. Market risk may arise if interest rates move
adversely subsequent to the extension of commitments.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(10) Financial Instruments with Off-Balance-Sheet Risk, Continued
Letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. All
letters of credit are short-term guarantees of one year or less. The
credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers. The Bank
primarily holds real estate as collateral supporting those commitments
for which collateral is deemed necessary. The extent of collateral
held on those commitments at December 31, 1996 and 1995, is in excess
of the committed amount.
(11) Capital
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital
classification is also subject to qualitative judgments by regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and Tier 1 capital (as defined ) to
average assets (as defined).
The most recent notification from the Office of the Comptroller of the
Currency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the institution's category.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Capital, Continued
The Bank's actual capital amounts and ratios are also presented in the
following table as of December 31, 1996 and 1995:
<TABLE>
1996 1995
<S> <C> <C>
Tier 1 ................................. $ 19,526,000 $ 17,393,000
Tier 2 ................................. 1,660,000 1,520,000
Total risk-based capital ............... 21,186,000 18,913,000
Risk-weighted assets ................... 130,002,000 119,899,000
Risk-weighted off-balance sheet exposure 2,776,000 1,695,000
Total risk-weighted assets ............. 132,778,000 121,594,000
</TABLE>
<TABLE>
Minimum Ratios
for Well-
Capitalized
Institutions 1996 1995 1994
<S> <C> <C> <C>
Tier 1 risk-based capital 6.00% 14.71% 14.30% 13.90%
ratio
Total risk-based capital ratio 10.00% 15.96% 15.55% 15.13%
Tier 1 leverage ratio 5.00% 9.86% 9.83% 9.32%
</TABLE>
(12) Contingent Liabilities
The Bank is subject to various claims and legal proceedings arising
out of the normal course of business, none of which, in the opinion of
management, is expected to have a material effect on the Bank's
financial position or results of operations.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(13) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial
instruments for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, cannot be
realized in immediate settlement of the instrument.
Fair-value methods and assumptions for the Bank's financial
instruments are as follows:
Cash and Cash Equivalents
The carrying amounts reported in the consolidated balance sheet for
cash and federal funds sold reasonably approximate those assets' fair
values.
Investment and Mortgage-Backed Securities
Fair values for investment and mortgage-backed securities are based on
quoted market prices. The carrying amount of accrued interest
receivable approximates their fair values.
Loans Receivable
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are generally based on
carrying values. The fair values for fixed-rate one- to four-family
residential mortgage loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. The fair value of
other types of loans is estimated by discounting future cash flows
using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. The carrying amount of accrued interest receivable
approximates the loans' fair value.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(13) Fair Value of Financial Instruments, Continued
Deposit Liabilities
The fair value of deposits with no stated maturity, such as demand
deposits, savings, NOW, and money market accounts, is equal to the
amount payable on demand. The fair value of certificates of deposits
is estimated using rates currently offered for deposits with similar
remaining maturities. The fair value of accrued interest payable
approximates its carrying value.
Off-Balance-Sheet Instruments
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of
commitments to extend credit, including letters of credit,
approximates book value of $330,000 and $200,000 at December 31, 1996
and 1995, respectively.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(13) Fair Value of Financial Instruments, Continued
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
Financial Assets
<S> <C> <C> <C>
Cash and short-term investments $ 13,569 $ 13,500 $ 16,456 $ 16,500
Investment securities 47,257 47,600 35,251 35,700
Loans:
Commercial loans 91,015 90,400 82,793 81,000
Real estate loans 23,403 23,600 25,001 25,500
Consumer loans 22,123 22,200 20,164 20,300
Less:
Allowance for loan losses (3,335) (3,335) (3,097) (3,097)
Unearned fees (473) (473) (495) (495)
1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
Financial Liabilities
Demand deposits $ 35,048 $ 35,000 $ 30,815 $ 30,800
NOW accounts 25,145 25,100 22,318 22,300
Savings and money market
accounts 54,979 55,000 51,564 51,600
Time deposits 65,771 66,600 59,177 59,900
</TABLE>
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(13) Fair Value of Financial Instruments, Continued
Limitations
Fair-value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discounts
that could result from offering for sale at one time the Corporation's
entire holdings of a particular financial instrument. Because no
market exists for a significant portion of the Corporation's financial
instruments, fair-value estimates are based on judgments regarding
future loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment, and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.
(14) Dividend Restrictions
On a parent company-only basis, the Corporation's only source of funds
is dividends paid by the Bank. The ability of the Bank to pay
dividends is subject to limitations under various laws and
regulations, and to prudent and sound banking principles. The Bank may
declare a dividend without the approval of the Office of Comptroller
of the Currency (OCC), unless the total dividend in a calendar year
exceeds the total of its net profits for the year combined with its
retained profits of the two preceding years. Under these provisions,
approximately $7,200,000 was available for dividends on JanuaryE1,
1997, without the approval of the OCC.
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Condensed Financial Information - Parent Company Only
The condensed balance sheets at December 31, 1996 and 1995, and the
statements of income and cash flows for the years ended December 31,
1996, 1995, and 1994, of FNBH Bancorp, Inc., follow:
<TABLE>
Condensed Balance Sheets
1996 1995
<S> <C> <C>
Assets:
Cash ............................................ $ 71,570 $ 62,480
Investment in subsidiary ........................ 19,525,538 17,467,288
$19,597,108 $17,529,768
Liabilities and stock equity:
Stockholder's equity ............................ $19,597,108 $17,529,768
Total liabilities and stock equity $19,597,108 $17,529,768
</TABLE>
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Condensed Financial Information - Parent Company Only, Continued
<TABLE>
Condensed Statements of Income
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Operating income - dividends from
subsidiary .............................. $1,522,500 $1,128,750 $ 931,875
Total operating income ... 1,522,500 1,128,750 931,875
Operating expenses - administrative and
other expenses .......................... 43,410 55,220 33,199
Total operating expenses . 43,410 55,220 33,199
Income before equity in undistributed net
income of subsidiary .................... 1,479,090 1,073,530 898,676
Equity in undistributed net income of
subsidiary .............................. 2,094,602 2,126,632 1,519,802
Net income ............... $3,573,692 $3,200,162 $2,418,478
</TABLE>
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Condensed Financial Information - Parent Company Only, Continued
<TABLE>
Condensed Statements of Cash Flows
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Net income ..................................... $ 3,573,692 $ 3,200,162 $ 2,418,478
Adjustments to reconcile net income to
net cash from operating activities:
Decrease in other assets ............. -- -- 780
Equity in undistributed net income of
subsidiaries ............................ (2,094,602) (2,126,632) (1,519,802)
Total adjustments ........... (2,094,602) (2,126,632) (1,519,022)
Net cash provided by
operating activities ..... 1,479,090 1,073,530 899,456
Cash flow from financing activities -
dividends paid ............................. 1,470,000 1,076,250 866,250
Net cash used in financing
activities ............... (1,470,000) (1,076,250) (866,250)
Net increase (decrease) in cash ................ 9,090 (2,720) 33,206
Cash at beginning of period .................... 62,480 65,200 31,994
Cash at end of period .......................... $ 71,570 $ 62,480 $ 65,200
</TABLE>
<PAGE>
FNBH BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Quarterly Financial Data (Unaudited)
The following table presents summarized quarterly data for each of the
two years ended December 31, 1996 (dollars in thousands, except
per-share data):
<TABLE>
Quarters Ended in 1996
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Selected operations data:
Interest income ............ $3,790,357 $3,847,740 $4,017,484 $4,061,714
Net interest income ........ 2,395,843 2,486,027 2,579,619 2,611,235
Provision for loan losses 112,125 112,125 112,125 112,125
Income before income
taxes ...................... 1,248,336 1,407,122 1,287,831 1,215,903
Net income ................. 861,336 979,122 893,331 839,903
Net income per share ....... .55 .62 .57 .53
Cash dividends per share ... .12 .13 .13 .55
</TABLE>
<TABLE>
Quarters Ended in 1995
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Selected operations data:
Interest income ............ $3,390,881 $3,578,073 $3,676,374 $3,748,467
Net interest income ........ 2,289,320 2,367,331 2,414,987 2,443,619
Provision for loan losses 112,125 112,125 112,125 112,125
Income before income
taxes ...................... 1,074,524 1,088,578 1,189,397 1,265,163
Net income ................. 753,024 753,578 821,897 871,663
Net income per share ....... .48 .48 .52 .55
Cash dividends per share ... .10 .12 .12 .35
</TABLE>
<PAGE>
FNBH BANCORP, INC.
101 E. Grand River
Howell, MI 48843
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoint(s) Charles N. Holkins and Helen V.W. McGarry, as
Proxies, each with the power to appoint a substitute, and hereby authorizes them
to represent and to vote, as designated below, all of the shares of common stock
of FNBH Bancorp, Inc. held of record by the undersigned on March 1, 1997, at the
annual meeting of the shareholders to be held on April 23, 1997, or any
adjournment thereof.
1. Elect the following directors to the following classified terms:
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for
(except where marked to the all nominees listed below.
contrary).
(Instruction: To withhold authority to vote for an individual nominee
strike a line through the nominee's name in the list below).
Term expiring in 1999: R. Michael Yost
Term expiring in 2000: Gary R. Boss Peter H. Burgher
Donald K. Burkel Harry E. Griffith
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
When properly executed, this proxy will be voted in the manner directed by the
undersigned shareholder(s). IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE ELECTION OF THE NOMINEES LISTED ABOVE.
The undersigned hereby acknowledge(s) receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement.
PLEASE SIGN AS YOUR NAME APPEARS BELOW. WHEN SHARES ARE HELD JOINTLY, EACH
HOLDER SHOULD SIGN. WHEN SIGNING FOR AN ESTATE, TRUST, OR CORPORATION, THE TITLE
AND CAPACITY SHOULD BE STATED.
_____________________________ __________________________ Dated:__________
Signature Signature
________________
Number of Shares
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