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 September 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: 1,562,588 shares of the Company's Common
Stock (no par value) were outstanding as of September 30, 1998.
Page 1 of a Total
of 21 Pages
<PAGE>
INDEX
Page
Number
Part I. Financial Information (unaudited):
Item 1.
Interim Financial Statements:
Consolidated Balance Sheet as of Sept. 30, 1998 and Dec. 31, 1997...........4
Consolidated Statements of Income, three months ended
Sept. 30, 1998 and 1997, and nine months ended Sept. 30, 1998 and 1997.....5
Consolidated Statement of Shareholders' Equity and Comprehensive
Income for nine months ended September 30, 1998.............................6
Consolidated Statements of Cash Flows for nine months ended
September 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 6.....................................................................20
Signatures.................................................................21
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Unaudited interim consolidated financial statements follow.
3
<PAGE>
<TABLE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets September 30 December 31
1998 1997
Assets (unaudited)
<S> <C> <C>
Cash and due from banks $10,437,412 $ 15,638,564
Short term investments 12,408,975 3,100,000
---------- ---------
Total cash and cash equivalents 22,846,387 18,738,564
Investment securities held to maturity, net (fair value of $22,122,000
at September 30, 1998 and $30,571,000 at Dec. 31, 1997) 22,028,742 30,065,021
Investment securities available for sale, at fair value 11,086,217 13,026,347
Mortgage-backed securities held to maturity, net (fair value of
$701,000 at September 30, 1998 and $632,000 at Dec. 31, 1997) 700,951 633,372
------- -------
Total investment securities 33,815,910 43,724,740
Loans:
Commercial 134,487,198 110,005,566
Consumer 25,792,714 24,896,572
Real estate mortgages 23,820,091 24,108,647
---------- ----------
Total loans 184,100,003 159,010,785
Less unearned income 611,871 613,444
Less allowance for loan losses 3,971,262 3,423,847
--------- ---------
Net loans 179,516,870 154,973,494
Premises and equipment - net 10,222,862 4,974,412
Accrued interest and other assets 3,081,562 3,903,047
Other real estate owned 275,713 0
-------- ---------
Total assets $249,759,304 $226,314,257
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing demand $ 46,285,960 $ 41,630,813
NOW 25,866,868 23,699,151
Savings and money market 70,596,214 60,839,930
Time 81,744,478 76,129,297
---------- ----------
Total deposits 224,493,520 202,299,191
Accrued interest, taxes, and other liabilities 1,788,230 2,283,041
--------- ---------
Total liabilities 226,281,750 204,582,232
Shareholders' Equity
Common stock, no par value. Authorized 4,200,000 shares; 1,562,588
shares issued and outstanding at September 30, 1998 and 1,575,000
shares issued and outstanding at December 31, 1997 4,815,580 5,250,000
Retained earnings 18,701,254 16,467,201
Unearned management retention plan (66,220) 0
Accumulated other comprehensive income, net 26,940 14,824
------ ------
Total stockholders' equity 23,477,554 21,732,025
Total liabilities and stockholders' equity $249,759,304 $226,314,257
============ ============
See notes to interim consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Unaudited Three Months Ended Sept. Nine Months Ended Sept.
1998 1997 1998 1997
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $4,538,914 $3,759,274 $12,807,746 $10,569,360
Interest and dividends on investment securities:
U.S. Treasury and agency securities 261,502 452,522 1,067,402 1,459,957
Obligations of state and political subdivisions 197,138 175,115 583,267 521,579
Other securities 13,210 0 30,032 1,328
Interest on short term investments 135,410 19,603 244,451 77,248
------- ------ ------- ------
Total interest income 5,146,174 4,406,514 14,732,898 12,629,472
--------- --------- ---------- ----------
Interest expense:
Interest on deposits 1,881,989 1,602,965 5,434,726 4,589,221
Other interest expense 3,890 13,417 10,712 34,909
----- ------ ------ ------
Total interest expense 1,885,879 1,616,382 5,445,438 4,624,130
--------- --------- --------- ---------
Net interest income 3,260,295 2,790,132 9,287,460 8,005,342
Provision for loan losses 170,000 112,125 470,000 336,375
------- ------- ------- -------
Net interest income after provision for loan losses 3,090,295 2,678,007 8,817,460 7,668,967
---------- --------- --------- ---------
Non-interest income:
Service charges 416,180 405,364 1,188,897 1,171,633
Gain on sale of loans 62,909 40,912 202,383 113,067
Other 25,153 89,474 62,058 110,274
------ ------ ------ -------
Total non-interest income 504,242 535,750 1,453,338 1,394,974
------- ------- --------- ---------
Non-interest expense:
Salaries and employee benefits 1,066,661 1,036,621 3,185,178 2,848,854
Net occupancy 170,348 133,494 450,556 404,921
Equipment expense 209,082 118,063 471,080 335,943
Professional and service fees 113,487 69,244 238,300 259,174
Printing and supplies 65,538 53,662 172,757 175,376
Michigan Single Business Tax 57,300 54,000 152,800 142,100
Other 357,778 376,363 1,134,601 1,041,335
------- ------- --------- ---------
Total non-interest expense 2,040,194 1,841,447 5,805,272 5,207,703
--------- --------- --------- ---------
Income before federal income taxes 1,554,343 1,372,310 4,465,526 3,856,238
Federal income taxes 494,000 409,500 1,352,000 1,147,000
------- ------- --------- ---------
Net income $1,060,343 $ 962,810 $3,113,526 $2,709,238
========== ========== ========== ==========
Per share statistics*
Basic EPS $.68 $.61 $1.98 $1.72
Diluted EPS $.68 $.61 $1.98 $1.72
Cash Dividends $.20 $.15 $ .56 $ .45
*Based on 1,573,215 average shares outstanding Sept. 30, 1998 and
1,575,000 average shares outstanding Sept. 30, 1997.
See notes to interim consolidated financial statements
</TABLE>
5
<PAGE>
<TABLE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity and Comprehensive Income
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
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 2,709,238 2,709,238
Change in unrealized gain on debt securities
available for sale, net of tax effect (11,315) (11,315)
--------
Total comprehensive income 2,697,923
Cash dividends (45(cent)per share) (708,750) (708,750)
---------- ---------- ------- ----------
Balances at September 30, 1997 $5,250,000 16,309,422 26,859 21,586,281
========== ========== ======= ==========
See notes to interim consolidated financial statements
</TABLE>
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income Total
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $5,250,000 16,467,201 14,824 21,732,025
Net income 3,113,526 3,113,526
Change in unrealized gain on debt securities
available for sale, net of tax effect 12,116 12,116
------
Total comprehensive income 3,125,642
Shares purchased @ $35 per share (525,000) (525,000)
Shares issued for management retention plan 82,775 (82,775)
Shares issued for directors' compensation 7,805 7,805
Amortization of management retention plan 16,555 16,555
Cash dividends (56(cent)per share) (879,473) (879,473)
---------- ---------- ------- ------ ----------
Balances at September 30, 1998 $4,815,580 18,701,254 (66,220) 26,940 23,477,554
========== ========== ======= ====== ==========
See notes to interim consolidated financial statements
</TABLE>
6
<PAGE>
<TABLE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Unaudited Nine months ended Sept. 30
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net income $3,113,526 $ 2,709,238
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 470,000 336,375
Depreciation and amortization 435,618 322,468
Net amortization on investment securities 26,154 27,113
Loss on disposal of equipment 725 718
Gain on sale of loans - (113,067)
Gain on sale of securities (202,383) (1,546)
Proceeds from sale of loans 14,476,034 7,490,568
Origination of loans held for sale (14,363,746) (7,737,344)
(Increase) decrease in accrued interest income and other assets 545,772 731,888
Increase (decrease) in accrued interest, taxes, and other liabilities (516,911) 160,134
--------- -------
Net cash provided by operating activiti es 3,984,789 3,926,545
--------- ---------
Cash flows from investing activities:
Purchases of available for sale securities (8,044,578) (995,781)
Proceeds from sales of available for sale securities - 4,001,562
Proceeds from maturities and calls of available for sale securities 10,000,000 5,000,000
Proceeds from mortgage-backed securities paydowns-available for sale - 8,702
Purchases of held to maturity securities (2,818,408) (4,661,189)
Proceeds from maturities and calls of held to maturity securities 10,390,000 500,000
Proceeds from mortgage-backed securities paydowns-held to maturity 374,080 240,355
Net increase in loans (24,883,123) (21,129,983)
Capital expenditures (5,684,793) (261,943)
----------- --------
Net cash used in investing activities (20,666,822) (17,298,277)
------------ -----------
Cash flows from financing activities:
Net increase in deposits 22,194,329 11,774,502
Dividends paid (879,473) (708,750)
Stock buyback (525,000) -
--------- ----------
Net cash provided by financing activities 20,789,856 11,065,752
---------- ----------
Net decrease in cash and cash equivalents 4,107,823 (2,305,980)
Cash and cash equivalents at beginning of year 18,738,564 13,569,216
---------- ----------
Cash and cash equivalents at end of period $22,846,387 $11,263,236
=========== ===========
Supplemental disclosures:
Interest paid $5,439,063 $ 4,539,687
Federal income taxes paid 1,430,000 1,140,000
Loans transferred to other real estate 335,713 -
Loans charged off 99,014 219,294
See notes to interim consolidated financial statements
</TABLE>
7
<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 September 30, 1998, and
consolidated results of operations for the three months and nine months ended
September 30, 1998 and 1997 and consolidated cash flows for the nine months
ended September 30, 1998 and 1997.
2. The results of operations for the three months and nine months ended
September 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 $731,000 at September 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.
8
<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,
and credit quality and credit risk management.
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 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 nine months ended
September 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 Third Quarter Year-to-Date
except per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $1,060 $963 $3,114 $2,709
Diluted Net Income per Share $.68 $.61 $1.98 $1.72
</TABLE>
Net income for the three months ended September 30, 1998 increased approximately
$100,000 (10%) from the amount reported for the third quarter of the prior year.
For the quarter, net interest income increased $470,000 (17%). However,
non-interest income decreased $32,000 (6%), the loan loss provision increased
58,000 (52%), non-interest expense increased nearly $200,000 (11%), and federal
tax accruals increased $84,000 (21%) partially offsetting the effects of the
quarterly increase in net interest income.
Net income for the first nine months of the year increased $404,000 (15%)
compared to the same period last year. Contributing to this increase was an
increase of $1,282,000 (16%) in net interest income and an increase of $58,000
(4%) in non-interest income, partially offset by an increase of $134,000 (40%)
in the loan loss provision, an increase of $598,000 (11%) in non-interest
expense, and an increase in federal tax accruals of $205,000 (18%).
9
<PAGE>
<TABLE>
Net Interest Income Third Quarter Year-to-Date
(in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income $5,146 $4,406 $14,733 $12,629
Interest Expense 1,886 1,616 5,446 4,624
----- ----- ----- -----
Net Interest Income $3,260 $2,790 $ 9,287 $8,005
</TABLE>
The Company's 1998 third quarter net interest income increased $470,000 (17%)
when compared with the same period in the prior year, while net interest income
for the year to date was $1,282,000 (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.
<TABLE>
TABLE 1
INTEREST YIELDS AND COSTS (in thousands)
September 30, 1998 and 1997
---------------Third Quarter Averages----------------
1998 1997
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
Assets:
<S> <C> <C> <C> <C> <C> <C>
Short Term Investments $ 9,775 $ 135.5 5.43% $ 1,450 $ 19.6 5.29%
Securities: Taxable 18,413 274.6 5.97% 30,368 452.5 5.96%
Tax-exempt(1) 15,401 273.1 7.13% 13,289 243.3 7.32%
Loans(2)(3) 182,329 4,544.1 9.75% 152,146 3,763.7 9.68%
------- -------- -------- -------
Total earning assets/total
interest income 225,918 $5,227.3 9.08% 197,253 $4,479.1 8.89%
------- -------- ------- --------
Cash & due from banks 10,094 7,776
All other assets 13,533 7,747
Allowance for loan loss (3,874) (3,585)
------- --------
Total assets $245,671 $209,191
======== ========
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings & NOW accounts $ 92,946 $ 720.1 3.07% $ 77,202 $ 550.4 2.83%
Time 81,476 1,161.9 5.66% 72,376 1,052.6 5.77%
Other borrowings 244 3.9 6.22% 922 13.4 5.69%
--- --------- ------- ------
Total interest bearing
liabilities/total interest expense 174,666 $ 1,885.9 4.28% 150,500 $1,616.4 4.26%
--------- --------
Non-interest bearing deposits 45,574 35,543
All other liabilities 1,985 1,815
Shareholders' Equity 23,446 21,333
------ -------
Total liabilities and
shareholders' equity $245,671 $209,191
======== ========
Interest spread 4.80% 4.63%
===== =====
Net interest income-FTE $ 3,341.4 $ 2,862.7
========= =========
Net interest margin 5.77% 5.67%
===== =====
</TABLE>
10
<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.
(2) 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 $159,000 in 1998
and $106,500 in 1997.
<TABLE>
----------------Year to Date Averages-----------------
1998 1997
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
Assets:
<S> <C> <C> <C> <C> <C> <C>
Short term investments $ 5,940 $ 244.6 5.43% $ 1,944 $ 77.2 5.24%
Securities: Taxable 24,367 1,097.3 6.02% 32,693 1,461.3 5.96%
Tax-exempt(1) 15,112 808.7 7.14% 13,124 727.2 7.39%
Loans(2)(3) 173,055 12,822.4 9.79% 144,999 10,584.1 9.66%
------- -------- ------- --------
Total earning assets/total
interest income 218,474 $14,973.0 9.07% 192,760 $12,849.8 8.84%
--------- ---------
Cash & due from banks 9,181 7,437
All other assets 11,370 8,187
Allowance for loan loss (3,678) (3,475)
------- ------
Total assets $235,347 $ 204,909
======== ========
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings & NOW accounts $ 88,933 $ 2,009.9 3.02% $ 78,703 $ 1,620.9 2.75%
Time 79,873 3,424.8 5.73% 69,844 2,968.3 5.68%
Other borrowings 239 10.7 5.90% 809 34.9 5.69%
---- ---- ------- ------
Total interest bearing
liabilities/total interest expense 169,045 $ 5,445.4 4.31% 149,356 $4,624.1 4.14%
--------- --------
Non-interest bearing deposits 41,718 33,226
All other liabilities 1,785 1,670
Shareholders' Equity 22,799 20,657
------ --------
Total liabilities and
shareholders' equity $235,347 $ 204,909
======== =========
Interest spread 4.76% 4.70%
===== =====
Net interest income-FTE $ 9,527.6 $8,225.7
========= ========
Net interest margin 5.74% 5.63%
===== =====
</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 $450,000 in 1998
and $254,000 in 1997
11
<PAGE>
Interest Earning Assets/Interest Income
On a tax equivalent basis, net interest income increased approximately $479,000
in the third quarter of 1998 compared to that of 1997. Improved earning asset
yields combined with a $30,000,000 (20%) growth in average loan balances led to
the net interest income growth. The amortization of loan origination fees
increased $52,500 compared to the third 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. Since the Bank's loan portfolio is primarily made up of
commercial loans, approximately $50,000,000 of which are variable rate loans
tied to prime, the recent decrease in prime is expected to have some impact on
the interest margin in the next quarter.
For the first nine months of the year, tax equivalent net interest income
increased $1,302,000. Again, the increase was primarily attributable to loan
growth. Loan interest income increased $2,238,000, with average balances up
$28,000,000 and yields increased 13 basis points. The growth in loans was
primarily in the commercial sector where average balances increased
approximately $26,000,000 (26%) for the year. Average consumer loans increased
$1,765,000 (7%). Average mortgage loans increased $515,000 (2%). This moderate
mortgage loan growth is due to the Bank's policy of selling fixed rate mortgage
loans which mature in fifteen years or more. Mortgage demand has been strong,
generating additional fee income. The Bank sold $13,400,000 in mortgage loans
during the first nine months of 1998.
Interest Bearing Liabilities/Interest Expense
In the third quarter of 1998, interest expense increased $270,000 both due to an
increase in rates of 2 basis points and an increase in average balances of
$24,000,000. Savings and NOW interest expense increased $170,000 because
balances increased $15,700,000 and rates increased 24 basis points. Interest on
time deposits increased $110,000 in the third quarter of 1998 over the prior
year. The increase was entirely due to growth as the rate declined 11 basis
points. The deposit growth was the result of the Bank's marketing efforts to
increase its share of Livingston County deposits.
In the first three quarters of the year, interest expense was approximately
$821,000 higher than 1997 due to average balances of interest bearing
liabilities increasing $20,000,000 and the rate paid increasing 17 basis points.
Savings and NOW interest expense increased $389,000 because balances increased
$10,200,000 and the interest rate increased 27 basis points. Interest on time
deposits increased $457,000 because the balance increased $10,000,000 and the
rate increased 5 basis points.
12
<PAGE>
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
September 30, the Bank's liquidity was 16.7%.
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 $17,200,000 at September 30, 1998 ($14,900,000 at December 31, 1997),
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 nine
months of the year, short term investments averaged nearly $5,900,000 while
purchased funds averaged $239,000. 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.
During the third quarter, $9,000,000 in Treasury securities matured. Because of
the relatively flat yield curve and the unfavorable investing atmosphere of the
third quarter, a portion of these funds were invested short term with the
Federal Home Loan Bank. These funds are available on an overnight call and add
to the Bank's liquidity position. In addition, the Bank has a $13,000,000 line
of credit available at the Federal Home Loan Bank. The Bank has pledged certain
mortgage loans and investment securities as collateral for the FHLB borrowing.
Also impacting the Bank's liquidity was a $4,000,000 purchase of land. Part of
this land is being used as a branch site, 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 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 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.
13
<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.................................. $74,010 $30,124 $71,838 $7,516 $183,488
Securities............................. 4,100 5,915 12,795 11,006 33,816
Fed funds.............................. 12,409 12,409
Other assets........................... 20,046 20,046
------- ------- ------- ------ ------
Total assets........................ $90,519 $36,039 $84,633 $38,568 $249,759
Liabilities & Shareholders' Equity:
Demand, Savings & NOW.................. $43,978 $15,398 $53,027 $30,346 $142,749
Time................................... 22,813 40,784 18,120 28 81,745
Other liabilities and equity.......... 25,265 25,265
------- ------- ------- ------ --------
Total liabilities and equity....... $66,791 $56,182 $71,147 $55,639 $249,759
Rate sensitivity gap and ratios:
Gap for period......................... 23,728 (20,143) 13,486 (17,071)
Cumulative gap........................ 23,728 3,585 17,071
Cumulative rate sensitive ratio........... 1.36 1.03 1.09 1.00
Dec. 31, 1997 rate sensitive ratio........ 1.27 1.16 1.09 1.00
</TABLE>
Based on the asset sensitive position of the Bank at September 30, 1998, if
interest rates decrease 200 basis points and management did not respond,
management estimates that annualized net interest income would decrease
approximately $150,000, while a similar increase in rates would cause net
interest income to increase by a like amount. This forecast assumes that short
and long term rates change equally. However, the Bank's commercial loan
portfolio currently has $50,000,000 variable rate loans tied to prime. In the
event that short term rates decline more than long term rates, the effect on
income may be greater than $150,000. 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 Third Quarter Year-to-Date
(in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $170 $112 $470 $336
</TABLE>
The provision for loan losses increased $58,000 in the third quarter of 1998
compared to the prior year. Year to date the provision has increased $134,000
(40%). Because of the significant amount of loan growth the Bank has experienced
in the last year, principally in the commercial loan portfolio, an increase in
the provision was deemed advisable. In September of 1998, the allowance for loan
loss as a percent of loans was 2.16%, compared to 2.24% a year earlier. For the
first nine months of 1998, the Bank had net recoveries of $68,000, compared with
net charge offs of $131,500 last year. Non-accrual,
14
<PAGE>
past due 90 days, and renegotiated loans were .40% and .95% of total loans
outstanding at September 30, 1998 and 1997 respectively and .67% of total loans
at December 31, 1997.
Impaired loans, as defined by Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, totaled approximately
$3,700,000 at September 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 September 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 uncollectible. The majority of the impaired loan
balance relates to one borrower whose loan is considered to be generally
adequately collateralized.
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 $3,600,000 had specific reserves calculated in
accordance with SFAS No. 114 of $460,000 at September 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 September 30,
1998 compared to December 31, 1997.
<TABLE>
Nonperforming Assets
(in thousands) Sept. 30, 1998 December 31, 1997
<S> <C> <C>
Non-accrual loans $731 $809
90 days or more past due and still accruing 0 249
--- ---
Total nonperforming loans 731 1,058
Other real estate 276 0
---- ---
Total nonperforming assets $1,007 $1,058
Nonperforming loans as a percent of total loans .40 % .67 %
Nonperforming assets as a percent of total loans .55 % .67 %
Nonperforming loans as a percent of the loan loss reserve 18% 31%
</TABLE>
15
<PAGE>
The following table sets forth loan balances and summarizes the changes in the
allowance for loan losses for the first nine months of 1998 and 1997.
<TABLE>
Loans: (dollars in thousands) Year to date Year to date
Sept. 30, 1998 Sept. 30, 1997
<S> <C> <C>
Average daily balance of loans for the year to date 173,055 144,999
Amount of loans (gross) outstanding at end of the
Quarter 183,488 158,021
Allowance for loan losses:
Balance at beginning of year 3,424 3,335
Loans charged off:
Real estate 0 0
Commercial 20 163
Consumer 79 56
-- --
Total charge-offs 99 219
Recoveries of loans previously charged off:
Real estate 0 33
Commercial 132 33
Consumer 44 22
-- --
Total recoveries 176 88
Net loans charged off (recoveries) (77) 131
Additions to allowance charged to operations 470 336
--- ---
Balance at end of quarter $3,971 $3,540
Ratios:
Net loans charged off (annualized) to average
loans outstanding (.04%) .12%
Allowance for loan losses to loans outstanding 2.16% 2.24%
</TABLE>
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 Third Quarter Year-to-Date
(in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $504 $536 $1,453 $1,395
</TABLE>
Non-interest income, which includes service charges on deposit accounts, loan
and customer service fees, other operating income, and gain (loss) on sale of
assets decreased by $32,000 (6%) in the third quarter of 1998 compared to the
same period in the previous year. The reason for the decline was that 1997
non-interest income included a nonrecurring gain of $86,000 on the sale of other
real estate.
16
<PAGE>
For the year, non-interest income increased $58,000, chiefly the result of an
increase in gains from the sale of mortgage loans. With the interest rate on
mortgage loans at a relatively low level, borrowers have been looking to
refinance, creating much loan activity amid a favorable rate environment in
which to sell loans on the secondary market.
<TABLE>
Non-interest Expense Third Quarter Year-to-Date
(in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $2,040 $1,841 $5,805 $5,208
</TABLE>
Non-interest expense increased $199,000 (11%) in the third quarter of 1998
compared to the same period last year. Contributing to this increase is an
increase of $37,000 in occupancy expense, at least partly due to increased
property taxes related to land owned by the Company, and an increase of $90,000
in equipment expense largely due to the costs related to deploying a LAN and the
related depreciation expense.
For the year non-interest expense was nearly $600,000 (11%) higher than 1997,
for the same reasons mentioned above and due to increases in salary expense
related to normal salary increases, addition of a trust department, and
increased profit share accruals. Equipment costs, especially, are expected to
continue to increase in the fourth quarter and into next year. A new computer
system will be fully functional in the fourth quarter with increased
depreciation costs and support services.
<TABLE>
Income Tax Expense Third Quarter Year-to-Date
(in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $494 $410 $1,352 $1,147
</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 $84,00 0 in the third quarter and $105,000 in the year to date tax
accrual were principally the result of increasing income.
<TABLE>
Capital September 30, 1998 December 31, 1997
(in thousands)
<S> <C> <C>
Shareholders' Equity* $23,451 $21,717
Ratio of Equity to Total Assets 9.39% 9.60%
</TABLE>
*Amounts exclude securities valuation adjustments recorded under Statement of
Financial Accounting Standards No. 115 amounting to $27,000 at September 30,
1998 and $15,000 at December 31, 1997.
17
<PAGE>
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 $1,892,000 (8%) during the first nine
months of the year. This increase was the result of net income earned by the
company reduced by dividends paid of $879,473. In addition, the Company
purchased 15,000 shares of its common stock for $525,000 and issued 2,588 shares
for $90,580, of which 2,365 shares were issued to certain employees under the
Company's long term incentive plan.
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 September
30, 1998 was 10.46%, and total risk-based capital was 11.71%. At September 30,
1997 these ratios were 14.29% and 15.54% respectively. Minimum regulatory Tier 1
risk-based and total risk-based capital ratios under the Federal Reserve Board
guidelines are 4% and 8% respectively and well capitalized ratios are 6% and 10%
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 7.78% at September 30, 1998 and 10.29% in 1997. The minimum standard
leverage ratio is 3% and well capitalized banks must maintain a leverage ratio
of at least 5%. All of the Bank's capital ratios meet the well capitalized
standards.
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. Preparation for the
Year 2000 problem began two years ago when a technology plan was drafted.
Although the plan identified ten major technology initiatives to be completed in
two to three years, the Year 2000 project was given first priority and efforts
began immediately. A national bank consulting firm was hired to help prepare an
action plan. The engagement included management education, an inventory of all
systems, risk assessment, an action plan, and a project schedule.
A steering committee, comprised of ten key employees representing all
departments of the bank, is working on the action plan. The plan consists of
five phases: awareness, assessment, renovation, validation, and implementation.
The awareness and assessment phases are complete. All "mission critical" systems
have been identified. The objective is to ensure that any system used by the
company that relies on dates will not be affected by the Year 2000 problem, not
only computers but power systems, vault timers, elevators, etc. The committee is
in the process of completing steps for the renovation, validation, and
implementation phases. Applications that have been identified as being date
sensitive are being tested. Testing for most of the mission critical systems
including PC and server hardware and software is complete. Simulation testing
will be completed for core and ancillary systems in the fourth quarter. The
Company has spent approximately $1,500,000 on hardware and software in the first
three quarters of 1998 and the capital expenditures are essentially complete for
this project. The main frame computer system
18
<PAGE>
that processes the Bank's business will be converted to a client server system
in the fourth quarter. When the conversion is complete, the Company expects to
be Year 2000 compliant. However, in spite of thorough testing, the Company can
give no guarantee that the systems of other service providers, on which the
Company relies, will be fully compliant. Nor can the Company guarantee that some
non "mission critical" software or hardware program will not fail.
The committee also recognizes that the Company has relationships with vendors
and customers which are important to the smooth functioning of its business. As
a result, 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. Site
preparation is complete and building construction will begin in the fourth
quarter. Cost of the branch building is estimated at approximately $1,200,000
and management anticipates that the branch will be open by the end of the second
quarter in 1999. The Company currently is attempting to sell a substantial
portion of the acreage which is not needed for the branch. A road has been
constructed on the property. Any additional improvements that are needed to
enhance the salability of the property are not expected to exceed $200,000.
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 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
19
<PAGE>
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.
PART II - OTHER INFORMATION
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 third quarter of 1998.
20
<PAGE>
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 September 30, 1998 to be signed on its behalf by the undersigned hereunto
duly authorized.
FNBH BANCORP, INC.
_________________________________________________
Barbara D. Martin
President and Chief Executive Officer
/s/ Barbara J. Nelson
Barbara J. Nelson
Treasurer
DATE: November 12, 1998
21
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 10,437,000
<INT-BEARING-DEPOSITS> 10,009,000
<FED-FUNDS-SOLD> 2,400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 33,816,000
<INVESTMENTS-MARKET> 33,909,000
<LOANS> 183,388,000
<ALLOWANCE> 3,971,000
<TOTAL-ASSETS> 249,759,000
<DEPOSITS> 224,494,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,788,230
<LONG-TERM> 0
0
0
<COMMON> 4,816,000
<OTHER-SE> 18,662,000
<TOTAL-LIABILITIES-AND-EQUITY> 249,759,000
<INTEREST-LOAN> 12,808,000
<INTEREST-INVEST> 1,681,000
<INTEREST-OTHER> 244,000
<INTEREST-TOTAL> 14,733,000
<INTEREST-DEPOSIT> 5,435,000
<INTEREST-EXPENSE> 11,000
<INTEREST-INCOME-NET> 9,287,000
<LOAN-LOSSES> 470,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,805,000
<INCOME-PRETAX> 4,466,000
<INCOME-PRE-EXTRAORDINARY> 3,114,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,114,000
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.98
<YIELD-ACTUAL> 5.74
<LOANS-NON> 731,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,424,000
<CHARGE-OFFS> 99,000
<RECOVERIES> 176,000
<ALLOWANCE-CLOSE> 3,971,000
<ALLOWANCE-DOMESTIC> 3,971,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
