SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
--------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-25752
FNBH BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2869722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 East Grand River, Howell, Michigan 48843
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517)546-3150
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. ______
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on a per share price of $25 as of March 1, 1997, was
$39,375,000 (common stock, no par value). As of December 31, 1996 there were
outstanding 1,575,000 shares of the Company's Common Stock (no par value). Stock
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.
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 23, 1997 are incorporated by reference into Parts II and III of
this report.
<PAGE>
PART I
Included in this Form 10-K are certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1993, as amended, and
Section 21 E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on the beliefs of the Company's management
as well as on assumptions made by and information currently available to the
Company at the times such statements were made. Actual results could differ
materially from those included in such forward-looking statements as a result
of, among other things, factors set forth below in this Report generally, and
certain economic and business factors, some of which may be beyond the control
of the Company. Investors are cautioned that all forward-looking statements
involve risks and uncertainty.
Item 1 - Business
FNBH Bancorp, Inc. (the Company), a Michigan business corporation, 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. As of March 1, 1997, the Bank had approximately 110 full-time and
part-time employees. None of the Bank's employees is subject to collective
bargaining agreements. The Company does not directly employ any personnel. The
Bank serves primarily four communities, Howell, Brighton, Hartland, and
Fowlerville, all of which are located in Livingston County. The county has
historically been rural in character but has a growing urban population
especially in the southeast quadrant of the county, primarily attributable to
growth around the City of Brighton.
Bank Services
The 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 maintains correspondent
relationships with major banks in Detroit, pursuant to which the Bank engages in
federal funds sale and purchase transactions, the clearance of checks and
certain foreign currency transactions. In addition, the Bank participates with
other financial institutions to fund certain large loans which would exceed the
Bank's legal lending limit if made solely by the Bank.
The Bank's deposits are generated in the normal course of business and the
loss of any one depositor would not have a materially adverse effect on the
business of the Bank.
<PAGE>
No material portion of the Bank's loans is concentrated within a single industry
or group of related industries. As of December 31, 1996, the Bank's certificates
of deposit of $100,000 or more constituted approximately 7% of total deposit
liabilities. The Bank's deposits are primarily from its service area and the
Bank does not seek or encourage large deposits from outside the area.
The Company's cash revenues are derived primarily from dividends paid by
the Bank. The Bank's principal sources of revenue are interest and fees on loans
and interest on investment securities. Interest and fees on loans constituted
approximately 77% and 80% of total revenues for the periods ended December 31,
1996 and December 31, 1995, respectively. Interest on investment securities,
including short-term investments and federal funds sold, constituted
approximately 16% and 14% of total revenues in 1996 and 1995. Revenues were also
generated from deposit service charges and other financial service fees.
The Bank provides real estate, consumer, and commercial loans to customers
in its market. Fifty-one percent of the Bank's loan portfolio is in fixed rate
loans. Most of these loans, approximately 94% , mature within five years of
issuance. Approximately $4,400,000 in loans (or roughly 3% of the Bank's total
loan portfolio) have fixed rates with maturities exceeding five years.
Fifty-five percent of the Bank's interest-bearing deposits are in savings, NOW,
and MMDAs, all of which are variable rate products. Of the approximately
$65,800,000 in certificates, $38,800,000 mature within a year, with the balance
maturing within a five year period.
Requests to the Bank for credit are considered on the basis of credit
worthiness of each applicant, without consideration to race, color, religion,
national origin, sex, marital status, physical handicap, age, or the receipt of
income from public assistance programs. Consideration is also given to the
applicant's capacity for repayment, collateral, capital and alternative sources
of repayment. Loan applications are accepted at all the Bank's offices and are
approved under each lending officer's authority. Loan requests in excess of
$200,000 are required to be presented to the Board of Directors or the Executive
Committee of the Board for its review and approval.
As described in more detail below, the Bank's ratio of rate sensitive
assets to rate sensitive liabilities for the period ended December 31, 1996, was
11% asset sensitive, compared to 18% at December 31, 1995. See discussion and
table under "Liquidity and Funds Management" in Item 7 below.
The Bank sells participations in commercial loans to other financial
institutions approved by the Bank, for the purpose of meeting legal lending
limit requirements or loan concentration considerations. The Bank regularly
sells fixed rate residential mortgages to Freddie Mac. Those residential real
estate mortgage loan requests that do not meet Freddie Mac criteria are reviewed
by the Bank for approval and, if approved, are retained in the Bank's loan
portfolio. The Bank also may purchase loans which meet its normal credit
standards.
<PAGE>
The Bank's investment policy is considered to be generally conservative. It
provides for unlimited investment in U.S. government bonds, with a maximum
maturity of five years. Municipal bonds may be purchased to provide nontaxable
income, with the maximum life of municipal bonds limited to approximately ten
years with a double A rating or better. A single A rated bond may be purchased
if it matures in four years or less. Nonrated bonds may be purchased from local
communities that are familiar to the Bank, with a maximum block size of a single
purchase limited to $200,000. Investments in states other than Michigan may not
exceed 20% of the municipal portfolio, and investments in a single issuer may
not exceed 10% of equity capital. Mortgage backed securities, which are fully
collateralized by securities issued by government sponsored agencies, may be
purchased in block sizes of up to $500,000, provided the average life expectancy
does not exceed seven years. In addition, certain collateralized mortgage
obligations may be purchased if their average life does not exceed five years.
In any case, investments in mortgage backed securities may not exceed 10% of the
investment portfolio.
In addition to the above referenced thresholds affecting the acquisition of
investment securities, holdings of approved "non high-risk mortgage securities"
are required to be "stress tested" at least annually. Any security that fails
this test is required to be marked to market. The acquisition of "high-risk
mortgage securities" is prohibited. In no case may the Bank participate in such
activities as gains trading, "when-issued" trading, "pair offs", corporate
settlement of government and agency securities, repositioning repurchase
agreements, and short sales. All securities dealers effecting transactions in
securities held or purchased by the Bank must be approved by the Board of
Directors.
Bank Competition
The Bank has six offices within the four communities it serves, all of
which are located in Livingston County, Michigan. Three of the offices,
including the main office, are located in Howell. The other three facilities are
located in Brighton, Hartland, and Fowlerville. See "Properties" below for more
detail on these facilities. Within these communities, its principal competitors
are Old Kent Bank, First of America Bank, D&N Bank, and Michigan National Bank.
Each of these financial institutions, which are headquartered in larger
metropolitan areas, have significantly greater assets and financial resources
than the Company. Among the principal competitors in the communities in which
the Bank operates, the Bank is the only locally based financial institution.
Based on deposit information as of June 30, 1996, the Bank holds approximately
17% of local deposits, compared to approximately 22% held by Old Kent Bank,
approximately 17% held by First of America, approximately 11% held by D&N Bank,
and approximately 9% held by Michigan National Bank. Information as to asset
size of competitor financial institutions is derived from publicly available
reports filed by and with regulatory agencies. Within the Bank's markets, Old
Kent Bank maintains four branch offices, First of America Bank operates six
branch offices, D&N Bank has five branch offices, and
<PAGE>
Michigan National Bank has three branch offices. Management of the Bank is not
aware of any plans by these financial institutions to expand their presence in
the Bank's market, although a de novo bank was opened in Brighton in 1996.
The financial services industry continues to become increasingly
competitive. Principal methods of competition include loan and deposit pricing,
advertising and marketing programs, and the types and quality of services
provided. The deregulation of the financial services industry has led to
increased competition among banks and other financial institutions for a
significant portion of funds which have traditionally been deposited with
commercial banks. Competition within the Bank's market has been relatively
stable within the past years. Management continues to evaluate the opportunities
for the expansion of products and services, such as trust services, the offer of
nonproprietary mutual fund products, telephone, computer or on-line banking, and
additional branching opportunities. Within the next year, management of the Bank
anticipates establishing a trust department and offering telephone banking.
Growth of Bank
The following table sets forth certain information regarding the growth of
the Bank:
<TABLE>
Balances as of December 31,
(in thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets ................ $202,009 $182,958 $168,438 $155,556 $154,703
Loans, Net of Unearned Income 136,067 127,463 117,008 112,820 108,957
Securities .................. 47,257 35,251 33,891 28,425 25,086
Noninterest-Bearing Deposits 35,048 30,815 29,513 22,000 23,682
Interest-Bearing Deposits ... 145,896 133,060 122,194 118,489 117,243
Total Deposits .............. 180,944 163,875 151,707 140,489 140,925
Shareholders' Equity ........ 19,597 17,530 15,305 13,814 12,255
</TABLE>
During most of the five years presented, the Bank operated six branch
facilities: one in downtown Howell, one at Lake Chemung (five miles east of
downtown Howell), one on the east side of Brighton, one in a shopping center in
Hartland, one in the village of Fowlerville, and the sixth, opened in September
of 1992, was a grocery store branch, located west of downtown Howell. In July of
1995, the Bank moved its Hartland facility from the shopping center, which was a
leased building, to a new building, built on property purchased by the Bank,
just east of the shopping center site. The Bank experienced a decrease in
deposits in 1993 but steady growth since that time. The 1994 growth is primarily
attributable to the growth at the Bank's Brighton and Fowlerville branch
facilities. In 1995, all branches, except Brighton, and in 1996 all the Bank's
branches grew due to general growth in the county.
<PAGE>
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. This summary is qualified in its entirety by reference
to the particular statutes and regulations. Changes in applicable laws and
regulations may have a material effect on the Company and the Bank and their
respective businesses.
The Company operates in a highly regulated industry, and thus may be
affected by changes in state and federal legislation and regulations. As a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended (the "Act"), the Company is subject to supervision and examination by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board")
and is required to file with the Federal Reserve Board annual reports and
information regarding its business operations and those of its subsidiaries.
The Act requires a bank holding company to obtain the approval of the
Federal Reserve Board before it may acquire more than 5% of the voting stock or
substantially all of the assets of any bank or merge or consolidate with any
other bank holding company. If the effect of a proposed acquisition, merger or
consolidation may substantially lessen competition or tend to create a monopoly,
the Federal Reserve Board cannot approve the acquisition unless it finds that
the anticompetitive effects of the acquisition, merger, or consolidation are
clearly outweighed by the convenience and needs of the community to be served.
The Act also provides that the consummation of any acquisition, merger or
consolidation must be delayed at least 15 days following the approval of the
Federal Reserve Board and that any action brought under the antitrust laws of
the United States during the time will delay the effectiveness of its approval
during the pendency of the action unless otherwise ordered by the board.
The Riegle-Neal Interstate Banking and Branching Efficiency Act authorizes
adequately capitalized and adequately managed bank holding companies to acquire
banks located outside their respective home states, irrespective of state law.
This legislation also authorizes, effective June 1, 1997 (subject to individual
state's rights to accelerate this date or prohibit interstate branching within
their borders), banking organizations to branch nationwide by acquisition or
consolidation of existing banks in other states. Subject to the approval of the
Michigan Financial Institutions Bureau, effective November 29, 1995, Michigan
law authorizes out-of-state banks to acquire and establish branches in Michigan,
provided the laws of the state of the out-of-state institution permit Michigan
banks to acquire or establish branches in that state. Interstate acquisitions
are subject to the approval of various federal and state agencies and subject to
other conditions.
Subject to certain exceptions, a bank holding company is also prohibited
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank and from engaging directly or
indirectly in activities unrelated to banking or managing or controlling banks.
One of the exceptions to this
<PAGE>
prohibition permits activities by a bank holding company or its subsidiaries
which the Federal Reserve Board has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
determining whether a particular activity is a proper incident to banking or
managing or controlling banks, the Federal Reserve Board considers whether
performance of the activity by an affiliate of a bank holding company can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency that outweigh possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve Board has adopted regulations prescribing those activities which it
presently regards as permissible for bank holding companies and their
subsidiaries. Some of these activities include: performing certain data
processing services; certain personal and real property leasing; making,
acquiring, or servicing loans and other extensions of credit as would be made by
a mortgage, finance, credit card or other factoring company; bank related
courier services; and, under certain circumstances, acting as any or all of the
following: investment or financial advisor, insurance agent or broker, and
underwriter for credit life insurance and credit accident and health insurance.
The Act does not place geographic restrictions on the activities of the nonbank
subsidiary's of bank holding companies. The recent enactment of the Economic
Growth and Regulatory Paperwork Reduction Act of 1996 streamlines the nonbanking
activities application process for well capitalized and well managed bank
holding companies.
The Act, the Federal Reserve Act, and the Federal Deposit Insurance Act
also subject bank holding companies and their subsidiaries to certain
restrictions on any extensions of credit by subsidiary banks to the bank holding
company or any of its subsidiaries, or investments in the stock or other
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower. Further, under the Act and regulations of the Federal
Reserve Board, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of any property or furnishing of service.
The Federal Deposit Insurance Act was amended in 1991 by the FDIC
Improvement Act of 1991. The FDIC Improvement Act provides for regulatory
intervention should a bank's capital deteriorate, limits certain real estate
lending and increases audit requirements. The FDIC has been granted authority to
impose special assessments on banks to repay borrowings of the FDIC. The FDIC
Improvement Act defines a reserve ratio at which the Bank Insurance Fund ("BIF")
is to be maintained through FDIC semi-annual assessment rates on the BIF member
banks. The FDIC has also established a system of risk-based deposit insurance
premiums under the FDIC Improvement Act. This system established four levels of
premium rates based on the risk classification of the institution. As a national
bank, the Bank's premiums are paid to BIF. Given the designation as a well
managed, well capitalized institution, the Bank pays the lowest assessment rate
possible to BIF. During 1996, because the BIF reserves had reached the legally
mandated level of 1.25% of insured deposits, the Bank paid only an annual
membership fee of $2,000.
<PAGE>
As required by the Deposit Insurance Funds Act of 1996, in 1997 the Bank
will commence making payments to the FDIC for the Financing Corporation (FICO)
bonds that were issued previously. The FICO rate for BIF members banks is 1.296
basis points annually applied to assessable deposits.
The Federal Reserve Board provides guidelines for the measurement of
capital adequacy of bank holding companies. The Company's capital, as adjusted
under these guidelines, is referred to as risk-based capital. The Company's Tier
1 risk-based capital ratio at December 31, 1996 was 14.71% and total risk-based
capital was 15.96%. At December 31, 1995, these ratios were 14.30% and 15.55%,
respectively. Minimum regulatory Tier 1 risk-based and total risk-based capital
ratios under the Federal Reserve Board guidelines are 4% and 8%, respectively.
These same capital ratios are applied at the bank level by the Federal Deposit
Insurance Corporation, under which a well-capitalized bank is defined as one
with at least 10% risk-based capital. Capital guidelines also provide for a
standard to measure risk-based capital to total assets. This is referred to as
the leverage ratio. The Company's leverage ratio at December 31, 1996 was 9.86%,
while at December 31, 1995 it was 9.83%. The minimum standard leverage ratio is
3%. See also "Capital" discussion in Item 7 below.
The Bank is organized as a national banking association and is therefore
regulated and supervised by the Office of the Comptroller of the Currency (the
"OCC"). The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC"). Consequently, the Bank is also subject to the provisions
of the Federal Deposit Insurance Act. As a bank holding company, the Company is
subject to the direct supervision of the Federal Reserve Board. As a result of
such supervision and regulation, the Bank is subject to requirements to maintain
reserves against deposits, restrictions on the nature and amount of loans which
may be made and the interest which may be charged thereon, restrictions relating
to investments and other activities, limitations based on capital and surplus,
and limitations on the payment of dividends on its capital stock. The various
regulatory and legal requirements referenced above are primarily for the
protection of the Bank's depositors and customers rather than the shareholders
of the Company.
As a Michigan business corporation, the Company may generally declare and
pay dividends, provided the Company is not insolvent and that the payment of the
dividend would not render it insolvent, and, after giving the effect of the
distribution, that the Company's total assets would equal or exceed its total
liabilities plus the dissolution preference of any senior equity securities (of
which there currently are none). The payment of dividends to its shareholders is
limited by the Company's ability to obtain funds from the Bank and by the
above-referenced regulatory capital guidelines. As a national bank, the Bank may
not pay a dividend on its common stock if the dividend would exceed the net
undivided profits then on hand after deducting losses and bad debts.
Additionally, the prior approval of the Office of the Comptroller of the
Currency, or its designee, is required for any dividend to a bank holding
company by an affiliated national bank if the total of all dividends, including
any proposed dividend declared by such bank
<PAGE>
in any calendar year, exceeds the total of its net profits for that year
combined with its retained net profits for the preceding two years, less any
required transfers to surplus.
The Michigan Legislature adopted, effective March 28, 1996, the Credit
Reform Act. This statute, together with amendments to other related laws,
permits regulated lenders, indirectly including Michigan-chartered banks, to
charge and collect higher rates of interest and increased fees on certain types
of loans to individuals and businesses. The laws prohibit "excessive fees and
charges," and authorize governmental authorities and borrowers to bring actions
for injunctive relief and statutory and actual damages for violations by
lenders. The statutes specifically authorize class actions, and also civil money
penalties for knowing and willful, or persistent violations.
FDIC regulations which became effective April 1, 1996, impose limitations
(and in certain cases, prohibitions) on (i) certain "golden parachute" severance
payments by troubled depository institutions and their affiliated holding
companies to institution-affiliated parties (primarily directors, officers,
employees, or principal shareholders of the institution), and (ii) certain
indemnification payments by a depository institution or its affiliated holding
company, regardless of financial condition, to institution-affiliated parties.
The FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by the Company or the Bank to their
respective directors or officers otherwise permitted under the Michigan Business
Corporation Act ("MBCA") or the National Bank Act, respectively.
On September 30, 1996, EGRPRA was signed into law, which provides for the
recapitalization of SAIF and includes approximately 40 regulatory relief
initiatives. Among other matters, this legislation provides for expedited
application procedures for nonbanking activities by well capitalized and well
managed bank holding companies, provides reform to the Fair Credit Reporting
Act, and provides other forms of regulatory relief to the financial services
industry.
I SELECTED STATISTICAL INFORMATION
(A) Distribution of Assets, Liabilities, and Shareholders' Equity:
(B) Interest Rates and Interest Differential:
The table on the following page shows the daily average balances for major
categories of interest earning assets and interest bearing liabilities, interest
earned (on a taxable equivalent basis) or paid, and the effective rate or yield,
for the three years ended December 31, 1996, 1995, and 1994.
Net interest income is the difference between interest earned on loans,
securities and other earning assets and interest paid on deposits and borrowed
funds. In the following tables, the interest earned on investments and loans is
expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the
<PAGE>
effective yields earned on earning assets. The tax equivalent adjustment is
based on a federal income tax rate of 34%. The following Yield Analysis shows
that the Bank's interest margin decreased 31 basis points (5%) in 1996 as a
result of both a decrease in yield on earning assets and an increase in interest
cost on deposits. In 1995 the interest margin increased 23 basis points (4%) due
to an increase in yield on earning assets.
<TABLE>
Yield Analysis of Consolidated Average Assets and Liabilities
(dollars in thousands)
1996 1995 1994
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Federal funds sold ........... $5,135 $269.2 5.24% $3,084 $177.7 5.76% $4,983 $202.4 4.06%
Securities:
Taxable ................... 32,042 1,906.4 5.95% 25,591 1,444.5 5.64% 23,419 1,263.3 5.39%
Tax-exempt ................ 11,172 853.4 7.64% 9,413 779.5 8.28% 7,601 678.7 8.93%
Loans(1)(2) .................. 130,648 12,946.8 9.91% 122,500 12,237.8 9.99% 114,384 10,489.6 9.17%
------- -------- ------- -------- ------- --------
Total earning assets and total
interest income ........... 178,997 $15,975.8 8.93% 160,588 $14,639.5 9.12% 150,387 $12,634.0 8.40%
--------- --------- ---------
Cash & due from banks ........ 7,195 6,432 5,708
All other assets ............. 7,341 6,443 5,708
Allowance for loan loss....... (3,281) (2,934) (2,424)
-------- -------- --------
Total assets .............. $190,252 $170,529 $159,379
======== ======== ========
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings/NOW accounts ......... $76,128 $2,129.9 2.80% $70,057 $ 1,826.6 2.61% $71,448 $1,731.5 2.42%
Time ......................... 62,577 3,514.5 5.62% 54,924 3,045.1 5.54% 46,882 2,106.4 4.49%
Federal funds purchased ...... 4 .2 5.58% 105 6.8 6.43% 0 0 N/A
------- -------- ------- --------- ------- --------
Total interest bearing
liabilities and total
interest expense............ 138,709 $5,644.6 4.07% 125,086 $ 4,878.5 3.90% 118,330 $3,837.9 3.24%
-------- --------- --------
Non-interest bearing deposits 31,005 27,348 25,233
All other liabilities ........ 1,664 1,797 1,090
Shareholders' Equity ......... 18,874 16,298 14,726
------- ------- -------
Total liabilities and
shareholders' equity ...... $190,252 $170,529 $159,379
======== ======== ========
Interest spread .............. 4.86% 5.22% 5.16%
===== ===== =====
Net interest income-FTE ...... $10,331.2 $9,761.0 $8,796.1
========= ======== ========
Net interest margin .......... 5.77% 6.08% 5.85%
===== ===== =====
</TABLE>
(1) Nonaccruing loans are not significant during the three year period and, for
purposes of the computations above, are included in average daily loan
balances.
(2) Interest on loans includes origination fees totaling $451,000 in 1996,
$440,000 in 1995, and $453,000 in 1994.
<PAGE>
(C) 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 Year December 31, 1995 compared to Year
ended December 31, 1995 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
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.
<PAGE>
II SECURITIES PORTFOLIO
(A) The following table sets forth the book value of securities at December
31:
<TABLE>
(in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Held to maturity:
U.S. Treasury ......................... $13,996 $ 9,511 $19,120
U.S. Government agencies .............. 1,017 2,033 1,998
States and political subdivisions ..... 12,765 9,878 8,964
Mortgage-backed securities ............ 352 614 733
FRB Stock ............................. 44 44 44
------- ------- -------
Total .............................. $28,174 $22,080 $30,859
Available for sale:
U.S. Treasury ......................... $18,046 $11,090 $ 1,966
U.S. Government agencies .............. 1,001 2,025 999
Mortgage-backed securities ............ 36 56 67
Other securities ...................... 0 0 0
------- ------- -------
Total .............................. $19,083 $13,171 $ 3,032
</TABLE>
(B)The following table sets forth contractual maturities of securities at
December 31, 1996 and the weighted average yield of such securities:
<TABLE>
(Dollars in thousands)
Maturing After Maturing After
Maturing Within One But Within Five But Within Maturing After Ten
One Year Five Years Ten Years Years
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity
U.S. Treasury ........... $ 1,005 5.09% $12,991 5.99%
U.S. Government agencies 1,017 6.04%
States and political
subdivisions ......... 824 9.21% 4,076 8.51% 7,865 7.72%
Mortgage backed
securities ........... 144 6.50% 208 7.04%
FRB Stock ............... ____ ____ _____ 44 6.00%
Total ................ $ 2,990 6.62% $17,275 6.60% $7,865 7.72% $44 6.00%
======= ======== ====== =======
Tax equivalent adjustment
for calculations of yield $ 16 $ 78 $ 150
======= ======= ======
Available for sale
U.S. Treasury ........... $ 8,019 6.02% $10,027 5.98%
U.S. Government agencies 1,001 5.70%
Mortgage backed
securities ........... _______ 36 7.50% ______ _______
Total ................ $ 9,020 5.98% $10,063 5.99% $ 0 $ 0
======= ======= ====== =======
</TABLE>
<PAGE>
The rates set forth in the tables above for obligations of state and
political subdivisions have been restated on a fully tax equivalent basis
assuming a 34% marginal tax rate. The amount of the adjustment is as follows:
<TABLE>
Rate on Tax
Tax-Exempt Rate Adjustment Equivalent Basis
<S> <C> <C> <C>
Under 1 year 6.08% 3.13% 9.21%
1-5 years 5.63% 2.88% 8.51%
5-10 years 5.13% 2.59% 7.72%
</TABLE>
Additional statistical information concerning the Bank's securities
portfolio is incorporated by reference in Note 2, Pages 14-18, of the Company's
Consolidated Financial Statements for the year ended December 31, 1996.
III LOAN PORTFOLIO
(A)The table below shows loans outstanding at December 31:
<TABLE>
(in thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Secured by real estate:
Residential first mortgage $ 36,148 $ 36,871 $ 33,842 $ 35,239 $ 38,281
Residential home equity/other junior liens 12,883 10,566 8,819 9,142 8,890
Construction and land development 14,042 9,075 8,150 6,505 4,446
Other 43,006 42,454 40,103 36,873 32,288
Consumer 12,272 11,233 10,730 10,739 11,956
Commercial 15,830 14,546 12,324 11,119 11,284
Other 2,360 3,213 3,559 3,746 2,345
-------- -------- -------- -------- --------
Total Loans (Gross) $136,541 $127,958 $117,527 $113,363 $109,490
</TABLE>
The loan portfolio is periodically reviewed and the results of these reviews are
reported to the Company's Board of Directors. The purpose of these reviews is to
verify proper loan documentation, to provide for the early identification of
potential problem loans, and to evaluate the adequacy of the allowance for loan
losses.
<PAGE>
(B)The following table shows the amount of commercial, financial, and
agricultural loans outstanding as of December 31, 1996 which, based on remaining
scheduled repayments of principal, are in the periods indicated.
<TABLE>
Maturing
(in thousands of dollars)
After one
Within one but within After five
year five years years Total
<S> <C> <C> <C> <C>
Real estate construction & land development..... $ 9,584 $ 2,459 $12,043
Real estate other (secured by commercial &
multi-family)................................... 6,550 33,911 2,545 43,006
Commercial (secured by business assets or
unsecured)...................................... 6,596 9,177 57 15,830
Other (loans to farmers, political
subdivisions, & overdrafts).................. 227 2,133 0 2,360
------- ------- ------ ------
Totals.......................................... $22,957 $47,680 $2,602 $73,239
</TABLE>
Below is a schedule of amounts due after one year which are classified
according to their sensitivity to changes in interest rates.
<TABLE>
Interest Sensitivity
(in thousands of dollars)
Fixed Rate Variable Rate
<S> <C> <C>
Due after one but within five years...........$33,658 $14,022
Due after five years.......................... 1,055 1,547
</TABLE>
(C) Nonperforming loans consist of loans accounted for on a nonaccrual
basis and loans contractually past due 90 days or more as to interest or
principal payments (but not included in nonaccrual loans). The aggregate amount
of non-performing loans, as of December 31, is presented in the table below:
<TABLE>
(Dollars in thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming Loans:
Nonaccrual loans $ 109 $ 926 $ 983 $1,568 $709
Loans past due 90 days or more 448 66 295 34 289
--- -- --- -- ---
Total nonperforming loans $ 557 $ 992 $1,278 $1,602 $998
====== ====== ====== ====== ====
Percent of total loans .41% .78% 1.09% 1.41% .91%
</TABLE>
Additional information concerning nonperforming loans, the Bank's
nonaccrual policy, loan impairment, and loan concentrations is incorporated by
reference to Note 3 on Pages 18-20 of the Company's Consolidated Financial
Statements for the year ended December 31, 1996.
There were no other interest bearing assets at December 31, 1996 that would
be required to be disclosed under Item III(C) , if such assets were loans.
There were no foreign loans outstanding at December 31, 1996.
<PAGE>
IV SUMMARY OF LOAN LOSS EXPERIENCE
(A)The following table sets forth loan balances and summarizes the changes
in the allowance for loan losses for each of the years ended December 31:
<TABLE>
(Dollars in thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans:
Average daily balance of loans
for the year ...................... $ 130,648 $ 122,500 $ 114,384 $ 113,161 $ 108,500
Amount of loans (gross) outstanding
at end of the year ................ 136,541 127,958 117,527 113,363 109,490
Allowance for loan losses:
Balance at beginning of year .............. 3,097 2,672 2,205 2,044 1,643
Loans charged off:
Real estate ............................ 70 0 12 0 0
Commercial ............................. 129 118 37 275 105
Consumer ............................... 88 91 72 122 56
--------- --------- --------- --------- ---------
Total charge-offs .................. 287 209 121 397 161
Recoveries of loans previously charged off:
Real estate ............................ 1 0 0 0 0
Commerical ............................. 31 95 64 68 16
Consumer ............................... 45 91 76 41 27
--------- --------- --------- --------- ---------
Total recoveries .................. 77 186 140 109 43
Net loans charged off (recoveries) ........... 210 23 (19) 288 118
Additions to allowance charged to operations . 448 448 448 449 519
--------- --------- --------- --------- ---------
Balance at end of year ............ $ 3,335 $ 3,097 $ 2,672 $ 2,205 $ 2,044
Ratios:
Net loans charged off to average loans
outstanding .16% .02% (.02%) .25% .11%
Allowance for loan losses to loans
outstanding 2.44% 2.42% 2.27% 1.94% 1.87%
</TABLE>
The allowance for loan losses reflected above is a valuation allowance in
its entirety and the only allowance available to absorb future loan losses.
<PAGE>
(B)The following table presents the portion of the allowance for loan
losses applicable to each loan category and the percent of loans in each
category to total loans, as of December 31:
<TABLE>
(Dollars in thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.. $ 830 66.7% $851 64.7% $1,093 61.3% $1,206 57.7% $1,527 46.3%
Real estate. 70 17.1% 60 19.5% 45 23.1% 113 26.3% 146 28.7%
Consumer ... 90 16.2% 74 15.8% 95 15.6% 144 16.0% 223 25.0%
Unallocated. 2,345 2,112 1,439 742 148
------ ------ ------ ------ ------
Total $3,335 100% $3,097 100% $2,672 100% $2,205 100% $2,044 100%
====== ===== ====== ===== ====== ===== ====== ===== ====== ====
</TABLE>
V DEPOSITS
The following table sets forth average deposit balances and the weighted
average rates paid thereon for the years ended December 31:
<TABLE>
(Dollars in
thousands)
1996 1995 1994
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 31,005 $ 27,348 $ 25,233
Savings, NOW, and money market 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%
------ ------ ------
Total $169,710 4.07% $152,329 3.20% $143,563 2.67%
======== ======== ========
</TABLE>
The table for maturities of negotiated rate time deposits of $100,000 or
more outstanding at December 31, 1996 is incorporated by reference to note 6 on
Page 22 of the Company's Consolidated Financial Statements for the year ended
December 31, 1996.
VI RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets, and certain other ratios, for the years ended December 31 follow:
<TABLE>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income as a percent of:
Average common equity 19.12% 19.60% 16.63% 17.43% 17.30%
Average total assets 1.88% 1.88% 1.52% 1.51% 1.35%
</TABLE>
Additional performance ratios are set forth in Selected Financial Data, in
Item 6, Part II of this Report. Any significant changes in the current trend of
the above ratios are reviewed in Management's Discussion and Analysis of
Financial Condition and Results of Operations, set forth in Item 7, Part II of
this Report.
<PAGE>
VII SHORT-TERM BORROWING
The information required in this item is not applicable for this Company.
Item 2 - Properties
The Bank operates from six facilities, located in four communities, in
Livingston County, Michigan. The executive offices of the Company are located at
the Bank's main office, 101 East Grand River, Howell, Michigan. The Bank
maintains two branches in Howell at 5990 East Grand River and 2400 West Grand
River. The Bank also maintains branch offices at 9911 East Grand River,
Brighton, Michigan, 760 South Grand Avenue, Fowlerville, Michigan, and 10700
Highland Road, Hartland, Michigan. All of the offices have ATM machines and all
except the W. Grand River branch, which is in a grocery store, have drive up
services. All of the properties are owned by the Bank except for the West Grand
River branch which is leased. The lease is for fifteen years, expiring September
2007. The average lease payment over the life of the lease is $3,167 monthly.
Item 3 - Legal Proceedings
The Company is not involved in any material legal proceedings. The Bank is
involved in ordinary routine litigation incident to its business; however, no
such proceedings are expected to result in any material adverse effect on the
operations or earnings of the Bank. Neither the Bank nor the Company is involved
in any proceedings to which any director, principal officer, affiliate thereof,
or person who owns of record or beneficially more than five percent (5%) of the
outstanding stock of either the Company or the Bank, or any associate of the
foregoing, is a party or has a material interest adverse to the Company or the
Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
Additional Item--Executive Officers
Executive officers of the Company are appointed annually by the Board of
Directors. There are no family relationships among these officers and/or the
directors of the Company, or any arrangement or understanding between any
officer and any other person pursuant to which the officer was elected.
<PAGE>
The following table sets forth certain information with respect to the
Company's executive officers as of December 31, 1996:
First Selected
as an Officer
Name (Age) Position with Company of the Company
Barbara D. Martin (50) President, Chief Executive 1983
Officer and Director
Janet L. Miesle (60) Secretary of the Company and 1980
Senior Vice President and Cashier
of the Bank
Barbara J. Nelson (49) Treasurer of the Company and Vice 1985
President and Controller of the
Bank
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
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 some
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.
<PAGE>
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)
</TABLE>
(1) Includes a special dividend of $0.23 per share.
(2) Includes a special dividend of $0.42 per share.
The holders of the Company's Common Stock are entitled to dividends when,
as and if declared by the Board of Directors of the Company out of funds legally
available for that purpose. Dividends have been paid on a quarterly basis. In
determining dividends, the Board of Directors considers the earnings, capital
requirements and financial condition of the Company and the Bank, along with
other relevant factors. The Company's principal source of funds for cash
dividends is the dividends paid by the Bank. The ability of the Company and Bank
to pay dividends is subject to regulatory restrictions and requirements.
<PAGE>
Item 6 - Selected Financial Data
<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 13,815 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.
Item 7 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
<PAGE>
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 portfolios 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
<PAGE>
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 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 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>
<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
(total nonperforming loans and other real estate) 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. A loan is considered impaired when
it is probable that all or part of amounts due according to the contractural
terms of the loan agreement will be uncollectible. 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
<PAGE>
lending staff, conservative underwriting, 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. 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>
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.
<PAGE>
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.
<TABLE>
The following table lists various capital ratios at December 31:
1996 1995 1994
---- ---- ----
<S> <C> <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.
<PAGE>
In the coming year the Bank will likely spend in excess of $1,000,000 on
various technology needs. In addition, the Bank has received regulatory approval
to establish a new branch in the northwest part of Brighton. These projects will
be financed from internally generated funds.
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.
<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%.
<PAGE>
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 $2.03 $1.54
</TABLE>
*restated to give effect to 3 for 1 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.
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 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.
<PAGE>
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 Year December 31, 1995 compared to Year
ended December 31, 1995 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
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
<PAGE>
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 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 uncertain. With competition intense for
deposits, management does not expect deposit rates to decline in 1997.
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>
<PAGE>
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 17% 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
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 1996 other non-interest income is a nonrecurring $70,000 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. Further increases in salary and
other expense are anticipated in 1977 as a trust officer will be hired and some
start up costs for a trust department will be incurred.
<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.
Item 8 - Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data of
the Company appear in the Appendix to the Company's definitive Proxy Statement,
dated March 27, 1997, commencing at page 23, relating to the April 23, 1997
Annual Meeting of shareholders, as filed with the Commission. This Appendix is
incorporated herein by reference and included as Exhibit 13 to this report on
Form 10-K:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statement
Independent Auditors' Report
Quarterly financial data relating to results of operations for the
years ended December 31, 1996 and 1995 are reported on page ?? of the Appendix.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant
Directors
The information with respect to Directors and Nominees of the Registrant,
set forth under the caption "Election of Directors" on pages 1 through 3 of the
Company's definitive proxy statement, as filed with the Commission and dated
March 27, 1997, relating to the April 23, 1997 Annual Meeting of Shareholders,
is incorporated herein by reference.
Executive Officers
The information called for by this item is contained in Part I of this Form
10-K Report.
Item 11 - Executive Compensation
The information set forth under the caption "Summary Compensation Table" on
page 4 of the Company's definitive proxy statement, as filed with the Commission
and dated March 27, 1997, relating to the April 23, 1997 Annual Meeting of
Shareholders, is incorporated herein by reference. Information under the caption
"Committee Report on Executive Compensation" on pages 3 and 4 of the definitive
proxy statement is not incorporated by reference herein and is not deemed to be
filed with the Securities and Exchange Commission.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Ownership of Common Stock" on
page 6 of the Company's definitive proxy statement, as filed with the Commission
and dated March 27, 1997, relating to the April 23, 1997 Annual Meeting of
Shareholders, is incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions with
Management" on page 5 of the Company's definitive proxy statement, as filed with
the Commission and dated March 27, 1997, relating to the April 23, 1997 Annual
Meeting of Shareholders, is incorporated herein by reference.
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) 1. Financial Statements
All financial statements of the Registrant are incorporated herein by
reference as set forth in the Appendix to the Registrant's Definitive
Proxy Statement, dated March 27, 1997, relating to the April 23, 1997
Annual Meeting of Shareholders, a copy of which is filed as Exhibit 13
to this Report on Form 10-K.
2. Financial Statement Schedules
Not applicable.
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on Form
10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, dated March 13, 1997.
FNBH BANCORP, INC.
/s/ Barbara D. Martin Barbara D. Martin, President & Chief Executive
Officer (Principal Executive Officer)
/s/ Barbara J. Nelson Barbara J. Nelson, Treasurer
(Principal Accounting Officer)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated. Each director of the Registrant, who's
signature appears below, hereby appoints Barbara D. Martin and Barbara J.
Nelson, and each of them severally, as his or her attorney-in-fact, to sign in
his or her name and on his or her behalf, as a director of the Registrant, and
to file with the Commission any and all Amendments to this Report on Form 10-K.
Roy A. Westran, Chairman of the Board /s/ Roy A. Westran
Harry E. Griffith, Vice Chairman of the Board /s/ Harry E. Griffith
Gary R. Boss, Director /s/ Gary R. Boss
Peter H. Burgher, Director /s/ Peter H. Burgher
Donald K. Burkel, Director /s/ Donald K. Burkel
Rebecca S. English, Director /s/ Rebecca S. English
Charles N. Holkins, Director /s/ Charles N. Holkins
S. W. Itsell, Director /s/ S. W. Itsell
Dona Scott Laskey, Director /s/ Dona Scott Laskey
Barbara D. Martin, Director /s/ Barbara D. Martin
W. Rickard Scofield, Director /s/ W. Rickard Scofield
R. Michael Yost, Director /s/ R. Michael Yost
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the
applicable assigned number:
Exhibit
Number Page
----
(13) The Company's Financial Statements, on pages 23 to 40 of the
Appendix to the Company's Proxy Statement for Annual Meeting
of Shareholders to be held April 23, 1997. This Appendix was
filed with the Commission as part of the Company's Proxy
Statement and was delivered to Company shareholders in
compliance with Rule 14(a)-3 of the Securities Exchange Act
of 1934, as amended.....................................................38
(21) Subsidiaries of the Registrant..........................................70
The following exhibits, indexed according to the applicable assigned
number, were previously filed by the Registrant and are incorporated by
reference in this Form 10-K Annual Report.
Exhibit
Number Original Filing Form and Date
- ------ -----------------------------
3.1 Restated Articles of Incorporation Exhibit 3.1 of Form 10, effective
of the Registrant June 30, 1995 ("Form 10")
3.2 Bylaws of the Registrant Exhibit 3.2 of Form 10
4 Form of Registrant's Stock Certificate Exhibit 4 of Form 10
Material Contracts:
10.2 Howell Branch Lease Agreement Exhibit 10.2 to Form 10
<PAGE>
<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>
EXHIBIT 21
SUBSIDIARIES
Name Jurisdiction of Incorporation
First National Bank in Howell Michigan
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,069,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,083,000
<INVESTMENTS-CARRYING> 28,174,000
<INVESTMENTS-MARKET> 28,513,000
<LOANS> 136,067,000
<ALLOWANCE> 3,335,000
<TOTAL-ASSETS> 202,009,000
<DEPOSITS> 180,944,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,468,000
<LONG-TERM> 0
0
0
<COMMON> 5,250,000
<OTHER-SE> 14,347,000
<TOTAL-LIABILITIES-AND-EQUITY> 202,009,000
<INTEREST-LOAN> 12,932,000
<INTEREST-INVEST> 2,516,000
<INTEREST-OTHER> 269,000
<INTEREST-TOTAL> 15,717,000
<INTEREST-DEPOSIT> 5,644,000
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 10,073,000
<LOAN-LOSSES> 448,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,151,000
<INCOME-PRETAX> 5,159,000
<INCOME-PRE-EXTRAORDINARY> 3,574,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,574,000
<EPS-PRIMARY> 2.27
<EPS-DILUTED> 2.27
<YIELD-ACTUAL> 5.77
<LOANS-NON> 109,000
<LOANS-PAST> 448,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,097,000
<CHARGE-OFFS> 287,000
<RECOVERIES> 77,000
<ALLOWANCE-CLOSE> 3,335,000
<ALLOWANCE-DOMESTIC> 3,335,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
