SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
--------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
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
-----------------------
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___
The number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date: 1,575,000 shares of the Company's Common
Stock (no par value) were outstanding as of June 30, 1998.
<PAGE>
INDEX
Page
Number
Part I. Financial Information (unaudited):
Item 1.
Interim Financial Statements:
Consolidated Balance Sheet as of June 30, 1998 and Dec. 31, 1997.............4
Consolidated Statements of Income, three months ended June 30, 1998
and 1997, and six months ended June 30, 1998 and 1997........................5
Consolidated Statement of Shareholders' Equity and Comprehensive
Income for six months ended June 30, 1998....................................6
Consolidated Statements of Cash Flows for six months ended
June 30, 1998 and 1997.......................................................7
Notes to Interim Consolidated Financial Statements...........................8
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations................................9
Item 3.
Quantitative and Qualitative Disclosures about Market Risk..................20
Part II. Other Information
Item 4......................................................................20
Item 6......................................................................21
Signatures..................................................................21
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Unaudited interim consolidated financial statements follow.
<PAGE>
<TABLE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets June 30 December 31
1998 1997
Assets (unaudited)
<S> <C> <C>
Cash and due from banks .............................................. $ 12,652,210 $ 15,638,564
Federal funds sold ................................................... 1,200,000 3,100,000
------------ ------------
Total cash and cash equivalents ................................... 13,852,210 18,738,564
Investment securities held to maturity, net (fair value of $27,540,000
at June 30, 1998 and $30,571,000 at Dec. 31, 1997) ................ 26,953,957 30,065,021
Investment securities available for sale, at fair value .............. 9,024,810 13,026,347
Mortgage-backed securities held to maturity, net (fair value of
$984,000 at June 30, 1998 and $632,000 at Dec. 31, 1997) .......... 985,900 633,372
----------- ------------
Total investment securities .................................... 36,964,667 43,724,740
Loans:
Commercial ........................................................ 131,792,622 110,005,566
Consumer .......................................................... 25,926,259 24,896,572
Real estate mortgages ............................................. 23,355,942 24,108,647
------------ ------------
Total loans .................................................... 181,074,823 159,010,785
Less unearned income .............................................. 605,121 613,444
Less allowance for loan losses .................................... 3,702,785 3,423,847
------------ ------------
Net loans ...................................................... 176,766,917 154,973,494
Premises and equipment - net ........................................ 9,925,813 4,974,412
Accrued interest and other assets .................................... 3,060,858 3,903,047
Other real estate owned .............................................. 275,713 0
------------ ------------
Total assets ................................................... $240,846,178 $226,314,257
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing demand ....................................... $ 47,704,929 $ 41,630,813
NOW ............................................................... 22,667,539 23,699,151
Savings and money market .......................................... 65,370,401 60,839,930
Time .............................................................. 80,310,009 76,129,297
------------- ------------
Total deposits ................................................. 216,052,878 202,299,191
Accrued interest, taxes, and other liabilities ....................... 1,579,716 2,283,041
------------- ------------
Total liabilities .............................................. 217,632,594 204,582,232
Shareholders' Equity*
Common stock, no par value. Authorized 4,200,000 shares; 1,575,000
shares issued and outstanding at June 30, 1998 and Dec. 31, 1997 ..... 5,250,000 5,250,000
Retained earnings .................................................... 17,953,384 16,467,201
Accumulated other comprehensive income, net .......................... 10,200 14,824
------------ ------------
Total stockholders' equity ..................................... 23,213,584 21,732,025
Total liabilities and stockholders' equity $240,846,178 $226,314,257
============ ============
</TABLE>
See notes to interim consolidated financial statements
<PAGE>
<TABLE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Unaudited Three Months Ended June Six Months Ended June
1998 1997 1998 1997
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $4,267,024 $3,510,183 $8,268,832 $6,810,086
Interest and dividends on investment securities:
U.S. Treasury and agency securities 383,088 486,837 805,900 1,007,435
Obligations of state and political subdivisions 196,705 172,836 386,129 346,464
Other securities 16,822 1,328 16,822 1,328
Interest on federal funds sold 43,541 5,694 109,041 57,645
--------- --------- --------- ---------
Total interest income 4,907,180 4,176,878 9,586,724 8,222,958
--------- --------- --------- ---------
Interest expense:
Interest on deposits 1,796,380 1,505,860 3,552,737 2,986,256
Other interest expense 6,156 21,492 6,822 21,492
--------- --------- --------- ---------
Total interest expense 1,802,536 1,527,352 3,559,559 3,007,748
--------- --------- --------- ---------
Net interest income 3,104,644 2,649,526 6,027,165 5,215,210
Provision for loan losses 150,000 112,125 300,000 224,250
--------- --------- --------- ---------
Net interest income after provision for loan losses 2,954,644 2,537,401 5,727,165 4,990,960
--------- --------- --------- ---------
Non-interest income:
Service charges 400,656 386,069 772,717 766,269
Gain on sale of securities 0 1,546 0 1,546
Gain on sale of loans 80,044 34,316 139,474 72,155
Other 20,504 8,946 36,905 19,254
------- ------- ------- -------
Total non-interest income 501,204 430,877 949,096 859,224
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 1,076,685 895,682 2,118,517 1,812,233
Net occupancy 147,303 129,578 280,208 271,427
Equipment expense 146,665 109,638 261,998 217,880
Fees 73,118 143,021 124,813 189,930
Printing and supplies 41,498 67,933 107,219 121,714
Michigan Single Business Tax 43,500 39,100 95,500 88,100
Other 367,588 382,104 776,823 664,972
--------- --------- --------- ---------
Total non-interest expense 1,896,357 1,767,056 3,765,078 3,366,256
--------- --------- --------- ---------
Income before federal income taxes 1,559,491 1,201,222 2,911,183 2,483,928
Federal income taxes 453,000 353,000 858,000 737,500
---------- --------- ---------- ----------
Net income $1,106,491 $ 848,222 $2,053,183 $1,746,428
========== ========== ========== ==========
Per share statistics*
Basic EPS $ .70 $.54 $1.30 $1.11
Diluted EPS $ .70 $.54 $1.30 $1.11
Dividends $ .18 $.15 $ .36 $ .30
Book Value $14.74 $13.24 $14.74 $13.24
*Based on 1,575,000 shares outstanding in all time periods.
</TABLE>
See notes to interim consolidated financial statements
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity and Comprehensive Income
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income Total
<S> <C> <C> <C> <C>
Balances at December 31, 1996 $5,250,000 14,308,934 38,174 19,597,108
Net income 1,746,428 1,746,428
Change in unrealized gain on debt securities
available for sale, net of tax effect (17,651) (17,651)
Cash dividends (30 cents per share) (472,500) (472,500)
Balances at June 30, 1997 $5,250,000 15,582,862 20,523 20,853,385
</TABLE>
See notes to interim consolidated financial statements
<TABLE>
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income Total
<S> <C> <C> <C> <C>
Balances at December 31, 1997 $5,250,000 16,467,201 14,824 21,732,025
Net income 2,053,183 2,053,183
Change in unrealized gain on debt securities
available for sale, net of tax effect (4,624) (4,624)
Cash dividends (36 cents per share) (567,000) (567,000)
Balances at June 30, 1998 $5,250,000 17,953,384 10,200 23,213,584
</TABLE>
See notes to interim consolidated financial statements
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Cash Flows
Unaudited Six months ended June 30
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................................. $ 2,053,183 $ 1,746,428
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses ................................................ 300,000 224,250
Depreciation and amortization ............................................ 247,042 208,695
Net amortization on investment securities ................................ 15,534 18,330
Loss on disposal of equipment ............................................ 723 718
Gain on sale of loans .................................................... (139,574) (72,155)
Gain on sale of securities ............................................... 0 (1,546)
Proceeds from sale of loans .............................................. 11,276,972 4,825,189
Origination of loans held for sale ....................................... (11,493,348) (4,784,694)
Decrease in accrued interest income and other assets ..................... 566,476 78,067
Increase (decrease) in accrued interest, taxes, and other liabilities .... (700,975) 105,215
------------ ------------
Net cash provided by operating activities ............................. 2,126,033 2,348,497
------------ ------------
Cash flows from investing activities:
Purchases of available for sale securities .................................. (2,006,021) (995,781)
Proceeds from sales of available for sale securities ........................ 0 4,001,563
Proceeds from maturities and calls of available for sale securities ........ 6,000,000 4,000,000
Proceeds from mortgage-backed securities paydowns-available for sale ........ 0 6,372
Purchases of held to maturity securities .................................... (2,636,291) (4,555,522)
Proceeds from maturities and calls of held to maturity securities ........... 5,290,000 500,000
Proceeds from mortgage-backed securities paydowns-held to maturity .......... 89,878 207,347
Net increase in loans ....................................................... (21,737,473) (11,482,899)
Capital expenditures ........................................................ (5,199,167) (166,615)
------------ ------------
Net cash used in investing activities ................................. (20,199,074) (8,485,535)
------------ ------------
Cash flows from financing activities:
Net increase in deposits .................................................... 13,753,687 3,063,347
Dividends paid .............................................................. (567,000) (472,500)
------------ ------------
Net cash provided by financing activities ............................. 13,186,687 2,590,847
------------ ------------
Net decrease in cash and cash equivalents ...................................... (4,886,354) (3,546,191)
Cash and cash equivalents at beginning of year ................................. 18,738,564 13,569,216
------------ ------------
Cash and cash equivalents at end of period ..................................... $ 13,852,210 $ 10,023,025
============ ============
Supplemental disclosures:
Interest paid ............................................................... $ 3,551,715 $ 2,949,393
Federal income taxes paid ................................................... 915,000 600,000
Loans transferred from other real estate .................................... 335,713 38,600
Loans charged off ........................................................... 66,945 95,899
</TABLE>
See notes to interim consolidated financial statements
<PAGE>
Notes to Interim Consolidated Financial Statements(unaudited)
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
1. In the opinion of management of the Registrant, the unaudited consolidated
financial statements filed with this Form 10-Q contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
consolidated financial position of the Registrant as of June 30, 1998, and
consolidated results of operations for the three months and six months ended
June 30, 1998 and 1997 and consolidated cash flows for the six months ended June
30, 1998 and 1997.
2. The results of operations for the three months and six months ended June 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
3. The accompanying unaudited consolidated financial statements should be read
in conjunction with the Notes to Consolidated Financial Statements in the 1997
Annual Report contained in the Registrant's report on Form 10-K filing.
4. The provision for income taxes represents Federal income tax expense
calculated using annualized rates on taxable income generated during the
respective periods.
5. Management's assessment of the allowance for loan losses is based on an
evaluation of the loan portfolio, recent loss experience, current economic
conditions, and other pertinent factors. Loans on non-accrual status and those
past due more than 90 days amounted to $1,057,000 at June 30, 1998 and
$1,058,000 at December 31, 1997. (See Management's Discussion and Analysis of
financial condition and results of operations).
6. The Company has adopted Financial Accounting Standards Board (FASB) Statement
No. 128, Earnings Per Share, effective for periods ending after December 15,
1997. SFAS 128 establishes standards for computing and presenting earnings per
share (EPS). Basic EPS is computed by dividing net income by the weighted
average common shares outstanding. Diluted EPS reflects dilution if options to
issue common stock were exercised or converted into common stock.
<PAGE>
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Interim Financial Statements
This report includes certain forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, that involve inherent
risks and uncertainties. A number of important factors could cause actual
results to differ materially from those in the forward-looking statements. Those
factors include the economic environment, competition, products and pricing in
business areas in which the Company operates, prevailing interest rates, changes
in government regulations and policies affecting financial service companies,
credit quality and credit risk management, acquisitions and integration of
acquired businesses.
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) and all of the outstanding stock of HB Realty
Co., a subsidiary which owns real estate. The following is a discussion of the
Company's results of operations for the three months and six months ended June
30, 1998 and 1997, and also provides information relating to the Company's
financial condition, focusing on its liquidity and capital resources.
<TABLE>
Earnings (in thousands Second Quarter Year-to-Date
except per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,106 $848 $2,053 $1,746
Net Income per Share $ .70 $ .54 $1.30 $1.11
</TABLE>
Net income for the three months ended June 30, 1998 increased approximately
$258,000 (30%) over the amount reported for the same period last year.
Contributing to this increase were quarterly increases in net interest income of
approximately $455,000 (17%) as well as increases in non-interest income of
approximately $70,000 (16%). However, there were also increases of approximately
$129,000 (7%) in non-interest expense, $38,000 (16%) in the loan loss provision,
and $100,000 (28%) in the federal income tax accrual. Net income for the first
half of the year increased $307,000 (18%) compared to the same period last year.
Contributing to this increase was an increase of
$812,000 (16%) in net interest income and a $90,000 (10%) increase in
non-interest income, partially offset by increases of $399,000 (12%) in
non-interest expense, $76,000 (34%) in the loan loss provision, and $120,000
(16%) in federal tax accruals.
<PAGE>
<TABLE>
Net Interest Income Second Quarter Year-to-Date
(in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income $4,907 $4,177 $9,587 $8,223
Interest Expense 1,802 1,527 3,560 3,008
------ ----- ----- -----
Net Interest Income $3,105 $2,650 $6,027 $5,215
</TABLE>
The Company's 1998 second quarter net interest income increased $455,000 (17%)
when compared with the same period in the prior year, while net interest income
for the year to date was $812,000 (16%) higher than that of 1997. The following
table illustrates some of the factors contributing to the increase in net
interest income for the period and for the year to date.
<PAGE>
<TABLE>
TABLE 1
INTEREST YIELDS AND COSTS (in thousands)
June 30, 1998 and 1997
---------------Second Quarter Averages----------------
1998 1997
Average Average
Balance Interest Rate Balance Interest Rate
Assets:
<S> <C> <C> <C> <C> <C> <C>
Fed funds sold $ 3,165 $ 43.5 5.43% $ 422 $ 5.7 5.35%
Securities: Taxable 26,233 399.9 6.10% 32,724 488.1 5.97%
Tax-exempt(1) 15,325 272.9 7.12% 13,074 240.9 7.37%
Loans(2)(3) 173,449 4,272.3 9.74% 145,205 3,587.6 9.77%
Total earning assets/total
interest income 218,172 $4,988.6 9.05% 191,425 $4,322.3 8.95%
Cash & due from banks 9,099 7,458
All other assets 11,090 8,349
Allowance for loan loss (3,656) (3,471)
Total assets $234,705 $203,761
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings & NOW accounts $ 87,383 $ 653.4 3.00% $ 76,848 $ 515.8 2.69%
Time 79,830 1,143.0 5.74% 70,008 990.1 5.67%
Purchased funds 426 6.1 5.66% 1,493 21.5 5.69%
Total interest bearing
liabilities/total interest expense 167,639 $ 1,802.5 4.31% 148,349 $1,527.4 4.13%
Non-interest bearing deposits 42,277 33,239
All other liabilities 2,003 1,527
Shareholders' Equity 22,786 20,646
Total liabilities and
shareholders' equity $234,705 $203,761
Interest spread 4.74% 4.82%
Net interest income-FTE $ 3,186.1 $ 2,794.9
Net interest margin 5.75% 5.75%
</TABLE>
<PAGE>
(1) Average yields in the above table have been adjusted to a
tax-equivalent basis using a 34% tax rate and exclude the effect of
any market value adjustments recorded under Statement of Financial
Standards No. 115. For purposes of the computation above, non-accruing
loans are included in the average daily loan balances.
(3) Interest on loans includes origination fees totaling $138,000 in 1998
and $72,000 in 1997.
<TABLE>
----------------Year to Date Averages-----------------
1998 1997
Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets:
Fed. funds sold $ 3,991 $ 109.0 5.43% $ 2,195 $ 57.6 5.22%
Securities: Taxable 27,402 822.7 6.05% 33,874 1,008.8 5.96%
Tax-exempt(1) 14,964 535.6 7.16% 13,040 483.7 7.42%
Loans(2)(3) 168,341 8,278.4 9.80% 141,366 6,820.1 9.63%
Total earning assets/total
interest income 214,698 $ 9,745.7 9.06% 190,475 $8,370.2 8.77%
Cash & due from banks 8,718 7,266
All other assets 10,261 8,411
Allowance for loan loss (3,578) (3,419)
Total assets $230,099 $ 202,733
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings & NOW accounts $ 86,893 $ 1,289.9 2.99% $ 79,466 $ 1,070.5 2.72%
Time 79,058 2,262.9 5.77% 68,557 1,915.7 5.64%
Purchased funds 237 6.8 5.73% 751 21.5 5.69%
Total interest bearing
liabilities/total interest expense 166,188 $ 3,559.6 4.32% 148,774 $3,007.7 4.08%
Non-interest bearing deposits 39,462 32,092
All other liabilities 1,979 1,673
Shareholders' Equity 22,470 20,194
Total liabilities and
shareholders' equity $230,099 $ 202,733
Interest spread 4.74% 4.69%
Net interest income-FTE $ 6,186.1 $5,362.5
Net interest margin 5.71% 5.59%
</TABLE>
(1) Average yields in the above table have been adjusted to a
tax-equivalent basis using a 34% tax rate and exclude the effect of
any market value adjustments recorded under Statement of Financial
Standards No. 115.
(2) For purposes of the computations above, non-accruing loans are
included in the average daily loan balances.
(3) Interest on loans includes origination fees totaling $291,000 in 1998
and $147,000 in 1997.
<PAGE>
Interest Earning Assets/Interest Income
On a tax equivalent basis, interest income increased approximately $666,000 in
the second quarter of 1998 compared to that of 1997. Improved earning asset
yields combined with a $28,000,000 (19%) growth in average loan balances led to
the net interest income growth. Commercial loan originations exceeded
$33,500,000 this quarter compared to $29,000,000 in the same quarter a year ago.
Origination fees increased $66,000 compared to the second quarter of last year.
The growth in the loan portfolio has been funded by deposit growth and by a
reduction in the security portfolio. The change in mix in the composition of the
Bank's earning assets has resulted in an increase in the yield on earning
assets. Management is committed to continuing to meet the credit needs of the
community and will continue to promote deposit growth to do so. In addition, the
Bank has a line of credit available at the Federal Home Loan Bank to fund loan
growth if deposits are insufficient. Possible growth in net interest income over
the near term is expected to be reduced by the acquisition in June, 1998 of a
$4,000,000 parcel of land, a non-earning asset, as discussed elsewhere.
For the first half of the year, tax equivalent net interest income increased
$824,000. Again, the increase was primarily attributable to loan growth. Loan
interest income increased $1,460,000, with average balances up $27,000,000 and
yields increased 17 basis points. The growth in loans was primarily in the
commercial sector where average balances increased approximately $24,000,000
(25%) for the year. Average consumer loans increased $2,400,000 (11%). Average
mortgage loans increased $650,000 (3%). This moderate mortgage loan growth is
due to the Bank's policy of selling fixed rate mortgage loans with fifteen year
and longer maturities. The Bank sold $10,400,000 in mortgage loans during the
first half of 1998. For the first six months of the year, income on taxable
securities decreased $186,000 from that earned the prior year due to a
$6,500,000 decrease in average balances although the yields earned increased by
9 basis points. Income on tax-exempt securities was $52,000 higher than the
first half of 1997. Rates declined 26 basis points while average balances
increased $1,900,000.
Interest Bearing Liabilities/Interest Expense
In the second quarter of 1998, interest expense increased $275,000 both due to
an increase in rates of 18 basis points and an increase in average balances of
$19,300,000. Savings and NOW interest expense increased $138,000 because
balances increased $10,500,000 and rates increased 31 basis points. Interest on
time deposits increased $153,000 in the second quarter of 1998 over the prior
year. Balances increased $9,800,000 and the rate paid on time deposits increased
7 basis points compared to that of 1997. The deposit growth was the result of
the Bank's marketing efforts to increase its share of Livingston County
deposits. The increase in rates on certificates reflects prevailing trends in
the market.
In the first half of the year, interest expense was $552,000 higher than 1997
both due to average balances of interest bearing liabilities increasing
$17,400,000 and the average rate increasing 24 basis points. Savings and NOW
interest expense increased $219,000
<PAGE>
because balances increased $7,400,000 and the interest rate increased 27 basis
points. Interest on time deposits increased $347,000 because the balance
increased $10,500,000 and the rate increased 13 basis points
Liquidity
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 targets a 15% liquidity ratio. As of June 30,
the Bank's liquidity ratio was 15.5%.
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 Bank does not deal in
brokered funds, and the makeup of its over $100,000 certificates, which amounted
to $16,600,000 at June 30, 1998, 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. During the first half of
the year, Fed Funds sold balances averaged nearly $4,000,000 while purchased
funds averaged $237,000. In addition, the Bank purchased stock in the Federal
Home Loan Bank of Indianapolis in the first quarter of this year. As a result,
the Bank has a $13,000,000 line of credit currently available. The Bank has
pledged certain mortgage loans and investment securities as collateral for this
borrowing. Also impacting the Bank's liquidity was a $4,000,000 purchase of
land. Part of this land will be used to build a branch, but a substantial
portion of the land is expected to be sold. When it is sold, the cash generated
will improve the Bank's liquidity ratio. 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.
In addition to liquidity issues, ALCO 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. The rate sensitivity
report describes the repricing schedule for various asset and liability
categories.
<PAGE>
<TABLE>
Interest Rate Sensitivity
(dollars in thousands) 0-3 4-12 1-5 5+
Months Months Years Years Total
Assets:
<S> <C> <C> <C> <C> <C>
Loans...................................... $76,060 $30,863 $67,199 $ 6,348 $180,470
Securities................................. 9,135 9,950 6,989 10,891 36,965
Fed funds.................................. 1,200 1,200
Other assets............................... 22,211 22,211
Total assets............................ $86,395 $40,813 $74,188 $39,450 $240,846
Liabilities & Shareholders' Equity:
Demand, Savings & NOW...................... $39,260 $15,266 $52,665 $28,552 $135,743
Time....................................... 20,807 35,709 23,457 337 80,310
Other liabilities and equity............... 24,793 24,793
Total liabilities and equity............ $60,067 $50,975 $76,122 $53,682 $240,846
Rate sensitivity gap and ratios:
Gap for period............................. $26,328 $ (10,162) $(1,934) $(14,232)
Cumulative gap............................. 26,328 16,166 14,232
Cumulative rate sensitive ratio............... 1.44 1.15 1.08 1.00
Dec. 31, 1997 rate sensitive ratio............ 1.27 1.16 1.09 1.00
</TABLE>
Given the asset sensitive position of the Bank at June 30, 1998, if interest
rates decrease 200 basis points and management did not respond, management
estimates that annualized net interest income would decrease approximately
$250,000, while a similar increase in rates would cause net interest income to
increase by a like amount. In the preceding table, the entire balance of
savings, MMDA, and NOW 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 and industry
practice.
<TABLE>
Provision for Loan Losses Second Quarter Year-to-Date
(in thousands) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Total $150 $112 $300 $224
</TABLE>
The provision for loan losses increased $38,000 in the second quarter of 1998
compared to the prior year. Year to date the provision has increased $76,000. In
June of 1998, the allowance for loan loss as a percent of loans was 2.05%,
compared to 2.39% a year earlier and 2.15% at December 31, 1997. For the first
six months of 1998, the Bank had net charge offs of $21,000, the same amount it
had in the first half of 1997. Non-accrual, past due 90 days, and renegotiated
loans were .58% and 1.41% of total loans outstanding at June 30, 1998 and 1997
respectively and .67% of total loans at December 31, 1997.
<PAGE>
Impaired loans, as defined by Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, totaled approximately
$3,900,000 at June 30, 1998, compared to $3,100,000 at December 31, 1997 and
included non-accrual, and past due 90 days other than homogenous residential and
consumer loans, and, at June 30, 1998, $3,200,000 of commercial loans separately
identified as impaired. A loan is considered impaired when it is probable that
all or part of amounts due according to the contractual terms of the loan
agreement will be uncollectable on a timely basis. The majority of the impaired
balance relates to one borrower whose loan is considered to be well
collateralized. Any loss that might occur from it is not expected to have a
material impact on the Company's financial condition or results of operations.
Management assessment of the allowance for loan losses is 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. Certain impaired
loans with a balance of $3,700,000 had specific reserves calculated in
accordance with SFAS No. 114 of $500,000 at June 30, 1998.
Nonperforming assets are 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. The following table describes nonperforming assets at June 30, 1998
compared to December 31, 1997. The loans categorized as ninety days past due are
all well secured and in the process of collection.
<TABLE>
Nonperforming Assets Quarter Ended Year Ended
(in thousands) June 30, 1998 December 31, 1997
<S> <C> <C>
Non-accrual loans $1,023 $809
90 days or more past due and still accruing 34 249
Total nonperforming loans 1,057 1,058
Other real estate 276 0
Total nonperforming assets $1,333 $1,058
Nonperforming loans as a percent of total loans .58% .67%
Nonperforming assets as a percent of total loans .74% .67%
Nonperforming loans as a percent of the loan loss reserve 36% 31%
</TABLE>
<PAGE>
The following table sets forth loan balances and summarizes the changes in the
allowance for loan losses for the first six months of 1998 and 1997.
<TABLE>
Loans: (dollars in thousands) Year to date Year to date
June 30, 1998 June 30, 1997
<S> <C> <C>
Average daily balance of loans for the year to date 168,341 141,366
Amount of loans (gross) outstanding at end of the
quarter 181,075 148,071
Allowance for loan losses:
Balance at beginning of year 3,424 3,335
Loans charged off:
Real estate 0 0
Commercial 18 44
Consumer 49 52
Total charge-offs 67 96
Recoveries of loans previously charged off:
Real estate 0 33
Commercial 13 24
Consumer 33 18
Total recoveries 46 75
Net loans charged off 21 21
Additions to allowance charged to operations 300 224
Balance at end of quarter $3,703 $3,538
Ratios:
Net loans charged off (annualized) to average
loans outstanding .02% .03%
Allowance for loan losses to loans outstanding 2.05% 2.39%
</TABLE>
Nonperforming loans have decreased in 1998 compared to the prior year end,
although non-performing assets have increased due to the foreclosure of a piece
of commercial real estate. Management is pursuing sale of this property. 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
<TABLE>
Non-interest Income Second Quarter Year-to-Date
(in thousands) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Total $501 $431 $949 $859
==== ==== ==== ====
</TABLE>
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
<PAGE>
by $70,000 (16%) in the second quarter of 1998 compared to the same period in
the previous year. Although all categories of non-interest income increased in
the second quarter, the most significant change was to the gain on sale of loans
which increased $46,000 (133%) over the previous year. Driven by customers'
desires to refinance in the low rate environment of the current year, the volume
of loan sales in the second quarter of 1998 was four times what it was in 1997.
For the year, non-interest income increased $90,000 (10%). Again, the most
significant increase was to gain on loan sales which was $67,000 higher in 1998
than it was in the previous year.
<TABLE>
Non-interest Expense Second Quarter Year-to-Date
(in thousands) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Total $1,896 $1,767 $3,765 $3,366
====== ====== ====== ======
</TABLE>
Non-interest expense increased $129,000 (7%) in the second quarter of 1998
compared to the same period last year. Contributing to this increase was an
increase of $180,000 in salaries and benefits expense and a $37,000 increase in
equipment expense. Salaries increased due to normal salary increases, addition
of a trust department, and increased profit sharing accruals. Equipment
depreciation and maintenance costs increased as the Bank has purchased and
installed a personal computer network in preparation for a computer conversion
to take place in the fourth quarter.
For the first half of the year, non-interest expense increased $400,000 (12%)
primarily in the above mentioned categories. Both building and equipment
expenses are expected to increase as the year progresses. Building costs will
increase as a new branch is constructed in Brighton. Equipment cost will
escalate as the Bank's core computer system is changed. Management is committed
to investing resources in initiatives that will keep the Bank competitive in the
future.
<TABLE>
Income Tax Expense Second Quarter Year-to-Date
(in thousands) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Total $453 $353 $858 $738
==== ==== ==== ====
</TABLE>
Fluctuations in income taxes resulted primarily from changes in the level of
profitability and in variations in the amount of tax-exempt income. The
increases of $100,000 in the second quarter tax accrual and $120,000 in the year
to date tax accrual were principally the result of increasing income.
<PAGE>
<TABLE>
Capital (in thousands) June 30, 1998 December 31, 1997
<S> <C> <C>
Shareholders' Equity* $23,203 $21,717
Ratio of Equity to Total Assets 9.63% 9.60%
</TABLE>
*Amounts exclude securities valuation adjustments recorded under Statement of
Financial Accounting Standards No. 115 amounting to $10,000 at June 30, 1998 and
$15,000 at December 31, 1997.
A financial institution's capital ratio is looked upon by the regulators and the
public as an indication of its soundness. Shareholders' equity, excluding the
securities valuation adjustment, increased $1,486,000 (7%) during the first half
of the year. This increase was the result of net income earned by the company
reduced by dividends paid of $567,000.
The Federal Reserve Board provides guidelines for the measurement of capital
adequacy. The Bank's capital, as adjusted under these guidelines, is referred to
as risk-based capital. The Bank's Tier 1 risk-based capital ratio at June 30,
1998 was 10.78%, and total risk-based capital was 12.03%. At June 30, 1997 these
ratios were 14.56% and 15.81% respectively. Minimum regulatory Tier 1 risk-based
and total risk-based capital ratios under the Federal Reserve Board guidelines
are 4% and 8% respectively.
The capital guidelines also provide for a standard to measure risk-based capital
to total assets which is called the leverage ratio. The Bank's leverage ratio
was 8.15% at June 30, 1998 and 10.20% in 1997. The minimum standard leverage
ratio is 3% but financial institutions are expected to maintain a leverage ratio
1 to 2 percentage points above the 3% minimum.
Year 2000 issues are an important focus of management's attention. The Company
is highly dependent on technology and most bank products are dependent on the
software's ability to make the transition to the Year 2000. A committee is in
the process of testing applications that have been identified as being date
sensitive. In the first half of this year, the Company has spent approximately
$850,000 on hardware and software and will likely spend an additional $450,000
on various technology needs as the year progresses. When all upgrades are
installed, the Company expects to be Year 2000 compliant. In addition, the
Company has analyzed significant vendors and customers' Year 2000 readiness and
has determined that any failures they may have are not expected to have a
material effect on the Company.
In June of this year, the Company exercised an option to purchase an 18 acre
tract of land in northwest Brighton. The cost of the property was approximately
$4,000,000. A portion of the land will be used for a new branch building.
Construction is expected to begin in the third quarter. Cost of the branch
building is estimated at approximately $1,000,000 and management anticipates
that the branch will be open in the first half of 1999. The Company currently
has listed for sale a substantial portion of the acreage
<PAGE>
which is not needed for the branch. Improvements to the land, such as a road,
will be needed to enhance the salability of the property. Cost of these
improvements is estimated to be approximately $250,000. These projects will be
financed from internally generated funds.
Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130 Reporting Comprehensive Income (SFAS
130). SFAS 130 establishes standards for reporting and displaying comprehensive
income and its components, including but not limited to unrealized gains or
losses on securities available for sale, in the financial statements. This
statement was effective for both interim and annual periods beginning after
December 15, 1997. SFAS 130 requires reclassification of all prior period
amounts.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information (SFAS
131). SFAS 131 establishes standards for the way that public entities report
information about operating segments in financial statements. This statement is
effective for annual reporting for 1998 calendar year entities. Although this
statement applies to interim financial statements, interim reporting is not
required in the initial year of application.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits
(SFAS 132). SFAS 132 revises employers' disclosures about pension and other
postretirement benefit plans. SFAS 132 standardizes the disclosure requirements
for pensions and other postretirement benefits, requires additional information
on changes in the benefit obligations and fair values of plan assets, and
eliminates certain disclosures. This Statement is effective for fiscal years
beginning after December 15, 1997, with earlier adoption encouraged. Restatement
of disclosures for earlier periods provided for comparative purposes is
required.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires recognition of all derivatives
as either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. the accounting for gains and
losses on derivatives depends on the intended use of the derivative. This
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, with earlier application encouraged. Retroactive application is
not permitted. SFAS 133 is not expected to have a significant impact on the
financial condition or operations of the Corporation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes in the market risk faced by the Company has occurred since
December 31, 1997.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The registrant's annual meeting of shareholders was held on April 22, 1998. The
shareholders voted on the election of directors.
Votes were cast as follows for the three nominees for the office of director.
Term expiring in 2001:
Shares voted for Shares voted against
Rebecca S. English 1,029,281 8,863
W. Rickard Scofield 1,037,700 444
Barbara D. Martin 1,038,060 84
Randolph E. Rudisill 1,037,667 477
Additionally, the following directors continue in office.
Term expiring in 1999:
Dona Scott Laskey
Charles N. Holkins
R. Michael Yost
Term expiring in 2000:
Gary R. Boss
Donald K. Burkel
Harry E. Griffith
Votes were cast as follows to approve an amendment to the Corporation's Articles
of Incorporation to increase the number of authorized shares from 2,100,000 to
4,200,000.
Shares voted for Shares voted against Shares Abstained
976,942 25,814 35,388
Votes were cast as follows to approve the adoption of the Corporation's Long-
Term Incentive Plan.
Shares voted for Shares voted against Shares Abstained
903,175 34,752 100,217
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
There are none applicable.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the second quarter of 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 to be signed on its behalf by the undersigned hereunto duly
authorized.
FNBH BANCORP, INC.
/s/ Barbara D. Martin
Barbara D. Martin
President and Chief Executive Officer
/s/ Barbara J. Nelson
Barbara J. Nelson
Treasurer
DATE: August 10, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 12,652,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 36,965,000
<INVESTMENTS-MARKET> 37,549,000
<LOANS> 180,470,000
<ALLOWANCE> 3,703,000
<TOTAL-ASSETS> 240,846,000
<DEPOSITS> 216,053,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,580,000
<LONG-TERM> 0
0
0
<COMMON> 5,250,000
<OTHER-SE> 17,964,000
<TOTAL-LIABILITIES-AND-EQUITY> 240,846,000
<INTEREST-LOAN> 8,269,000
<INTEREST-INVEST> 1,209,000
<INTEREST-OTHER> 109,000
<INTEREST-TOTAL> 9,587,000
<INTEREST-DEPOSIT> 3,553,000
<INTEREST-EXPENSE> 7,000
<INTEREST-INCOME-NET> 6,027,000
<LOAN-LOSSES> 300,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,765,000
<INCOME-PRETAX> 2,911,000
<INCOME-PRE-EXTRAORDINARY> 2,053,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,053,000
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 5.71
<LOANS-NON> 1,023,000
<LOANS-PAST> 34,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,424,000
<CHARGE-OFFS> 67,000
<RECOVERIES> 46,000
<ALLOWANCE-CLOSE> 3,703,000
<ALLOWANCE-DOMESTIC> 3,703,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
