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, 1999
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: 1,565,203 shares of the Company's Common
Stock (no par value) were outstanding as of September 30, 1999.
<PAGE>
INDEX
Page
Number
Part I. Financial Information (unaudited):
Item 1.
Interim Financial Statements:
Consolidated Balance Sheet as of Sept. 30, 1999 and Dec. 31, 1998.........4
Consolidated Statements of Income, three months ended
Sept. 30, 1999 and 1998, and nine months ended Sept. 30, 1999 and 1998...5
Consolidated Statement of Shareholders' Equity and Comprehensive
Income for nine months ended September 30, 1999...........................6
Consolidated Statements of Cash Flows for nine months ended
September 30, 1999 and 1998...............................................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...............21
Part II. Other Information
Item 6...................................................................21
Signatures...............................................................21
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Unaudited interim consolidated financial statements follow.
3
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Balance Sheets September 30 December 31
1999 1998
Assets (unaudited) (unaudited)
<S> <C> <C>
Cash and due from banks $10,836,485 $ 12,304,296
Short term investments 3,295,885 18,934,366
--------- ----------
Total cash and cash equivalents 14,132,370 31,238,662
Investment securities held to maturity, net (fair value of $17,643,000
at September 30, 1999 and $19,066,000 at Dec. 31, 1998) 17,578,384 18,278,233
Investment securities available for sale, at fair value 31,621,656 19,765,936
Mortgage-backed securities held to maturity, net (fair value of
$454,000 at September 30, 1999 and $602,000 at Dec. 31, 1998) 458,828 601,940
------- -------
Total investment securities 49,658,868 38,646,109
Loans:
Commercial 159,609,563 137,634,020
Consumer 24,477,491 23,064,800
Real estate mortgages 22,751,818 24,946,777
---------- ----------
Total loans 206,838,872 185,645,597
Less unearned income 756,419 627,169
Less allowance for loan losses 4,336,701 3,958,008
--------- ---------
Net loans 201,745,752 181,060,420
Premises and equipment - net 8,884,118 7,289,461
Land available for sale - net 2,970,290 3,128,914
Accrued interest and other assets 3,775,609 3,325,318
--------- ------------
Total assets $281,167,007 $264,688,884
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing demand $ 48,494,728 $ 47,401,813
NOW 28,324,181 29,087,082
Savings and money market 84,484,869 75,129,137
Time 91,835,334 87,938,732
---------- ----------
Total deposits 253,139,112 239,556,764
Short term borrowing 1,400,000 0
Accrued interest, taxes, and other liabilities 1,490,438 1,635,587
--------- ---------
Total liabilities 256,029,550 241,192,351
Shareholders' Equity
Common stock, no par value. Authorized 4,200,000 shares; 1,565,203
shares issued and outstanding at September 30, 1999 and 1,562,768
shares issued and outstanding at December 31, 1998 4,919,280 4,821,775
Retained earnings 20,531,991 18,728,787
Unearned management retention plan (151,608) (66,220)
Accumulated other comprehensive income (loss), net (162,206) 12,191
--------- ------
Total stockholders' equity 25,137,457 23,496,533
Total liabilities and stockholders' equity $281,167,007 $264,688,884
============ ============
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Income
Unaudited Three Months Ended Sept. Nine Months Ended Sept.
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $4,921,956 $4,538,914 $13,692,001 $12,807,746
Interest and dividends on investment securities:
U.S. Treasury and agency securities 387,874 261,502 1,073,894 1,067,402
Obligations of state and political subdivisions 211,479 197,138 623,979 583,267
Other securities 15,890 13,210 45,661 30,032
Interest on short term investments 93,858 135,410 414,249 244,451
------ ------- ------- -------
Total interest income 5,631,057 5,146,174 15,849,784 14,732,898
--------- --------- ---------- ----------
Interest expense:
Interest on deposits 1,964,996 1,881,989 5,853,169 5,434,726
Other interest expense 1,128 3,890 2,032 10,712
----- ----- ----- ------
Total interest expense 1,966,124 1,885,879 5,855,201 5,445,438
--------- --------- --------- ---------
Net interest income 3,664,933 3,260,295 9,994,583 9,287,460
Provision for loan losses 210,000 170,000 630,000 470,000
------- ------- ------- -------
Net interest income after provision for loan losses 3,454,933 3,090,295 9,364,583 8,817,460
--------- --------- --------- ---------
Non-interest income:
Service charges 491,523 416,180 1,286,215 1,188,897
Gain on sale of loans 26,479 62,909 36,541 202,383
Trust fees 35,088 21,663 103,042 52,198
Other 2,652 3,490 29,295 9,860
----- ----- ------ -----
Total non-interest income 555,742 504,242 1,455,093 1,453,338
------- ------- --------- ---------
Non-interest expense:
Salaries and employee benefits 1,226,947 1,066,661 3,548,369 3,185,178
Net occupancy 172,331 170,348 519,700 450,556
Equipment expense 200,236 209,082 501,010 471,080
Professional and service fees 127,969 113,487 387,413 238,300
Printing and supplies 92,123 65,538 235,798 172,757
Michigan Single Business Tax 22,100 57,300 121,000 152,800
Provision for real estate losses 160,000 0 240,000 0
Other 447,568 357,778 1,394,536 1,134,601
------- ------- --------- ---------
Total non-interest expense 2,449,274 2,040,194 6,947,826 5,805,272
--------- --------- --------- ---------
Income before federal income taxes 1,561,401 1,554,343 3,871,850 4,465,526
Federal income taxes 469,300 494,000 1,130,200 1,352,000
------- ------- --------- ---------
Net income $1,092,101 $ 1,060,343 $2,741,650 $3,113,526
========== =========== ========== ==========
Per share statistics*
Basic EPS $.70 $.68 $1.74 $1.98
Diluted EPS $.70 $.68 $1.74 $1.98
Cash Dividends $.20 $.20 $ .56 $ .56
*Based on 1,563,589 average shares outstanding Sept. 30,
1999 and 1,573,215 average shares outstanding Sept. 30, 1998.
</TABLE>
See notes to interim consolidated financial statements
5
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity and Comprehensive Income
For the Three Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income Total
----- -------- ---- ------ -----
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1998 $5,250,000 17,953,384 10,200 23,213,584
Net income 1,060,343 1,060,343
Change in unrealized gain on debt securities
available for sale, net of tax effect 16,740 16,740
------
Total comprehensive income 1,077,083
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 (20(cent)per share) (312,473) (312,473)
--------- ------- ------- ---------
Balances at September 30, 1998 $4,815,580 18,701,254 (66,220) 26,940 23,477,554
========== ========== ======= ======= ==========
</TABLE>
See notes to interim consolidated financial statements
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (Loss) Total
----- -------- ---- ------------ -----
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1999 $4,821,880 19,753,231 (66,220) (169,962) 24,338,929
Net income 1,092,101 1,092,101
Change in unrealized gain on debt securities
available for sale, net of tax effect 7,756 7,756
-----
Total comprehensive income 1,099,857
Shares issued for management retention plan 97,400 (97,400)
Amortization of management retention plan 12,012 12,012
Cash dividends (20(cent)per share) (313,043) (313,043)
---------- --------- ------- -------- ---------
Balances at September 30, 1999 $4,919,280 20,532,289 (151,608) (162,206) 25,137,755
========== ========== ======== ======== ==========
</TABLE>
See notes to interim consolidated financial statements
6
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity and Comprehensive Income
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<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
========== ========== ======= ====== ==========
</TABLE>
See notes to interim consolidated financial statements
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income Total
----- -------- ---- ------ -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $4,821,775 18,728,787 (66,220) 12,191 23,496,533
Net income 2,741,650 2,741,650
Change in unrealized gain on debt securities
available for sale, net of tax effect (174,397) (174,397)
---------
Total comprehensive income 2,567,253
Shares issued for management retention plan 97,400 (97,400)
Amortization of management retention plan 12,012 12,012
Shares issued for employee awards 105 105
Cash dividends (60(cent)per share) (938,446) (938,446)
-------- -------- ------- ------- -------
Balances at September 30, 1999 $4,919,280 20,531,991 (151,608) (162,206) 25,137,457
========== ========== ======== ======== ==========
</TABLE>
See notes to interim consolidated financial statements
7
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
Unaudited Nine months ended Sept. 30
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $2,741,650 $3,113,526
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 630,000 470,000
Depreciation and amortization 519,707 435,618
Net amortization on investment securities 65,407 26,154
Loss on disposal of equipment 18,360 725
Gain on sale of loans (27 ,941) (202,383)
Proceeds from sale of loans 12,461,368 14,476,034
Origination of loans held for sale (12,675,563) (14,363,746)
(Increase) decrease in accrued interest income and other assets (86,667) 545,772
Increase (decrease) in accrued interest, taxes, and other liabilities (246,349) (516,911)
--------- ---------
Net cash provided by operating activities 3,399,972 3,984,789
--------- ---------
Cash flows from investing activities:
Purchases of available for sale securities (15,164,836) (8,044,578)
Proceeds from maturities and calls of available for sale securities 2,000,000 10,000,000
Purchases of held to maturity securities (2,481,596) (2,818,408)
Proceeds from maturities and calls of held to maturity securities 3,968,000 10,390,000
Proceeds from held to maturity mortgage-backed securities paydowns 335,970 374,080
Net increase in loans (21,074,980) (24,883,123)
Capital expenditures (2,132,724) (5,684,793)
----------- -----------
Net cash used in investing activities (34,550,166) (20,666,822)
----------- ------------
Cash flows from financing activities:
Net increase in deposits 13,582,348 22,194,329
Increase in borrowings 1,400,000 0
Dividends paid (938,446) (879,473)
Stock buyback 0 (525,000)
- ----------
Net cash provided by financing activities 14,043,902 20,789,856
---------- ----------
Net decrease in cash and cash equivalents (17,106,292) 4,107,823
Cash and cash equivalents at beginning of year 31,238,662 18,738,564
---------- ----------
Cash and cash equivalents at end of period $14,132,370 $22,846,387
=========== ===========
Supplemental disclosures:
Interest paid $5,631,952 $ 5,439,063
Federal income taxes paid 1,192,000 1,430,000
Loans transferred to other real estate 0 335,713
Loans charged off 415,960 99,014
</TABLE>
See notes to interim consolidated financial statements
8
<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, 1999, and
consolidated results of operations for the three months and nine months ended
September 30, 1999 and 1998 and consolidated cash flows for the nine months
ended September 30, 1999 and 1998.
2. The results of operations for the three months and nine months ended
September 30, 1999 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 1998
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 $1,947,000 at September 30, 1999 and
$1,544,000 at December 31, 1998. (See Management's Discussion and Analysis of
financial condition and results of operations).
6. Basic EPS is computed by dividing net income by the weighted average common
shares outstanding.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
Third Quarter Year to Date
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $1,092,101 $1,060,343 $2,741,650 $3,113,526
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Shares outstanding (basic) 1,565,203 1,569,704 1,563,589 1,573,215
- ------------------------------------------------------------------------------------------------------------------
Diluted shares 0 0 0 0
-------------- --------------- -------------- -------------
- ------------------------------------------------------------------------------------------------------------------
Shares outstanding (diluted) 1,565,203 1,569,704 1,563,589 1,573,215
- ------------------------------------------------------------------------------------------------------------------
Earnings per share:
- ------------------------------------------------------------------------------------------------------------------
Basic EPS $.70 $.68 $1.74 $1.98
- ------------------------------------------------------------------------------------------------------------------
Diluted EPS $.70 $.68 $1.74 $1.98
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<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, 1999 and 1998, 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) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $1,092 $1,060 $2,742 $3,114
Diluted Net Income per Share $.70 $ .68 $1.74 $1.98
</TABLE>
Net income for the three months ended September 30, 1999 increased approximately
$32,000 (3%) from the amount reported for the third quarter of the prior year.
Contributing to the earnings growth were increases in net interest income of
$405,000 (12%) and non-interest income of $52,000 (10%) while federal tax
expense decreased $25,000. However, non-interest expense increased $409,000
(20%) and the loan loss provision increased $40,000, partially offsetting the
effects of the quarterly increase in net interest income and non-interest
income.
Net income for the first nine months of the year decreased $372,000 (12%)
compared to the same period last year. Contributing to this decrease was an
increase of $1,143,000 (20%) in non-interest expense and an increase of $160,000
(34%) in the loan loss provision, partially offset by an increase of $707,000
(8%) in net interest income and a decrease in federal income tax expense of
$222,000 (16%).
10
<PAGE>
<TABLE>
Net Interest Income Third Quarter Year-to-Date
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income $5,631 $5,146 $15,850 $14,733
Interest Expense 1,966 1,886 5,855 5,445
----- ----- ----- ----
Net Interest Income $3,665 $3,260 $ 9,995 $9,288
</TABLE>
The Company's 1999 third quarter net interest income increased $405,000 (12%)
when compared with the same period in the prior year, while net interest income
for the year to date was $708,000 (8%) higher than that of 1998. 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, 1999 and 1998
---------------Third Quarter Averages----------------
1999 1998
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Short Term Investments $ 7,282 $ 93.8 5.04% $ 9,775 $ 135.5 5.43%
Securities: Taxable 30,999 403.8 5.21% 18,413 274.6 5.97%
Tax-exempt(1) 17,147 294.6 6.87% 15,401 273.1 7.09%
Loans(2)(3) 203,532 4,927.1 9.47% 182,329 4,544.1 9.75%
------- -------- -------- -------
Total earning assets/total
interest income 258,960 $5,719.3 8.67% 225,918 $5,227.3 9.08%
-------- --------
Cash & due from banks 11,438 10,094
All other assets 16,461 13,533
Allowance for loan loss (4,332) (3,874)
------- --------
Total assets $282,527 $245,671
======== ========
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings & NOW accounts $ 115,432 $ 770.2 2.65% $ 92,946 $ 720.1 3.07%
Time 90,562 1,194.8 5.23% 81,476 1,161.9 5.66%
Other borrowings 98 1.1 4.49% 244 3.9 6.22%
-- --------- -------- -------
Total interest bearing
liabilities/total interest expense 206,092 $ 1,966.1 3.78% 174,666 $1,885.9 4.28%
--------- --------
Non-interest bearing deposits 49,614 45,574
All other liabilities 1,825 1,985
Shareholders' Equity 24,996 23,446
------ --------
Total liabilities and
shareholders' equity $282,527 $245,671
======== ========
Interest spread 4.89% 4.80%
===== =====
Net interest income-FTE $ 3,753.2 $ 3,341.4
========= =========
Net interest margin 5.65% 5.77%
===== =====
</TABLE>
11
<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 $179,000 in 1999 and
$159,000 in 1998.
<TABLE>
----------------Year to Date Averages-----------------
1999 1998
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Short term investments $ 11,535 $ 412.9 4.72% $ 5,940 $ 244.6 5.43%
Securities: Taxable 28,971 1,119.5 5.17% 24,367 1,097.3 6.02%
Tax-exempt(1) 16,700 875.0 6.99% 15,112 808.7 7.14%
Loans(2)(3) 195,186 13,742.8 9.31% 173,055 12,822.4 9.79%
------- -------- --------- --------
Total earning assets/total
interest income 252,392 $16,150.2 8.47% 218,474 $14,973.0 9.07%
--------- ---------
Cash & due from banks 11,640 9,181
All other assets 16,198 11,370
Allowance for loan loss (4,192) (3,678)
------- -------
Total assets $276,038 $ 235,347
======== ==========
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings & NOW accounts $109,017 $ 2,176.3 2.67% $ 88,933 $ 2,009.9 3.02%
Time 92,002 3,676.9 5.34% 79,873 3,424.8 5.73%
Other borrowings 57 2.0 4.66% 239 10.7 5.90%
-- --- -------- ------
Total interest bearing
liabilities/total interest expense 201,076 $ 5,855.2 3.89% 169,045 $5,445.4 4.31%
--------- --------
Non-interest bearing deposits 48,298 41,718
All other liabilities 2,240 1,785
Shareholders' Equity 24,424 22,799
------ --------
Total liabilities and
shareholders' equity $276,038 $ 235,347
======== =========
Interest spread 4.58% 4.76%
===== =====
Net interest income-FTE $ 10,295.0 $9,527.6
========== ========
Net interest margin 5.37% 5.74%
===== =====
</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 $447,000 in 1999 and
$450,000 in 1998.
12
<PAGE>
Interest Earning Assets/Interest Income
On a tax equivalent basis, net interest income increased approximately $412,000
in the third quarter of 1999 compared to that of 1998. Interest income improved
$492,000 in 1999. A $21,000,000 (12%) growth in average loan balances
contributed to the increase in loan interest income. Although yields decreased
by 28 basis points, primarily due to a 50 basis point decline in the Bank's
prime lending rate, there were some favorable occurrences that lessened the
significance of the decline in yield. In the third quarter, the Bank recorded
approximately $160,000 of interest income related to the payoff of two loans,
which had been on non-accrual.
In the third quarter, tax equivalent income on short and long term investments
increased because the average balance increased $12,000,000 (27%) although the
rate earned decreased 55 basis points. The 27% increase in investment balances
compared to the 12% growth in loans contributed to the overall decline in rates
on earning assets as the lower yielding investment portfolio absorbed the excess
deposit growth which the loan portfolio could not utilize.
For the first nine months of the year, tax equivalent net interest income
increased $767,000. Interest income increased $1,177,000 in 1999. Again, the
increase was primarily attributable to loan growth. Loan interest income
increased $920,000, with average balances up $22,000,000 although yields
declined 48 basis points. The growth in loans was primarily in the commercial
loans where average balances increased approximately 19% for the year. The lack
of growth in the mortgage loan portfolio is due to the Bank's policy of selling
fixed rate mortgage loans which have original maturities of fifteen years or
more. New nonconforming variable rate mortgages, which are retained in the loan
portfolio, have not kept up with mortgage loan run off. The Bank sold
$10,600,000 mortgage loans to the secondary market during the first nine months
of 1999.
For the first nine months of 1999, income on short and long term investments
increased $257,000 from that earned the prior year due to a $12,000,000 increase
in average balances although yields decreased 70 basis points.
Interest Bearing Liabilities/Interest Expense
In the third quarter of 1999, interest expense increased $80,000 due to an
increase in average balances of $31,400,000 although the rate paid declined 50
basis points. Savings and NOW interest expense increased $50,000 because
balances increased $22,500,000 although rates decreased 42 basis points.
Interest on time deposits increased $33,000 in the third quarter of 1999 over
the prior year. The increase was entirely due to growth of $9,000,000 as the
rate declined 43 basis points. The deposit growth was the result of the Bank's
marketing efforts to increase its share of Livingston County deposits. Deposit
rates are set based on market studies. Special rates are offered from time to
time to meet rate sensitivity goals.
13
<PAGE>
In the first three quarters of the year, interest expense was approximately
$410,000 higher than 1998 due to average balances of interest bearing
liabilities increasing $32,000,000 although the rate paid decreased 42 basis
points. Savings and NOW interest expense increased $166,000 because balances
increased $20,000,000 although the interest rate declined 35 basis points.
Interest on time deposits increased $252,000 because the balance increased
$12,000,000 while the rate decreased 39 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
September 30, 1999 the Bank's liquidity was 17.24%.
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 $20,500,000 at September 30, 1999 compared to $18,000,000 at December 31,
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 nine
months of the year, short term investments averaged nearly $11,500,000. In
addition, the bank has a $16,000,000 line of credit available at the FHLB and
the Bank has pledged certain mortgage loans and investment securities as
collateral for the borrowing. 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. Management has decided to maintain higher than usual
liquidity ratios this year to meet any cash needs related to Year 2000 customer
demand.
In addition to liquidity issues, ALCO discusses the Bank's performance and 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.
Interest rate risk is also addressed by ALCO. Interest rate risk is the
potential for economic losses due to future rate changes and can be reflected as
a loss of future net interest income and/or loss of current market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while, at the same time, maximizing
income. Tools used by management include the standard GAP report which lays out
the repricing schedule for various asse and liability categories and an interest
rate shock simulation report. The Bank has no market risk sensitive instruments
held for trading purposes. The Bank does not enter into futures, forwards,
swaps, or options to manage interest rate risk. However, 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 including commitments to
extend credit and letters of credit. A commitment or letter of credit is not
recorded as an asset until the instrument is exercised.
14
<PAGE>
Interest Rate Sensitivity
<TABLE>
(dollars in thousands) 0-3 4-12 1-5 5+
Months Months Years Years Total
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Assets:
Loans................................. $64,163 $29,625 $100,622 $12,429 $206,839
Securities............................ 2,226 16,792 19,312 11,329 49,659
Short term investments................ 3,296 3,296
Other assets.......................... 21,373 21,373
------- ------- -------- ------ --------
Total assets....................... $69,685 $46,417 $119,934 $45,131 $281,167
Liabilities & Shareholders' Equity:
Demand, Savings & NOW................. $50,138 $16,396 $61,668 $33,102 $161,304
Time.................................. 23,158 35,372 33,290 15 91,835
Other liabilities and equity.......... 28,028 28,028
------- ------- ------- ------ --------
Total liabilities and equity....... $73,296 $51,768 $94,958 $61,145 $281,167
Rate sensitivity gap and ratios:
Gap for period........................ (3,611) (5,351) 24,976 (16,014)
Cumulative gap........................ (3,611) (8,962) 16,014
Cumulative rate sensitive ratio.......... .95 .93 1.07 1.00
Dec. 31, 1998 rate sensitive ratio....... 1.28 .92 1.08 1.00
</TABLE>
Based on the liability sensitive position of the Bank at September 30, 1999, if
interest rates increase 200 basis points and management did not respond,
management estimates that annualized net interest income would decrease
approximately $300,000, while a similar decrease 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 Third Quarter Year-to-Date
- -------------------------
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $210 $170 $630 $470
</TABLE>
The provision for loan losses increased $40,000 in the third quarter of 1999
compared to the prior year. Year to date the provision has increased $160,000
(34%). 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 appropriate. As of September 30, 1999, the allowance
for loan loss as a percent of loans was 2.10%,
15
<PAGE>
compared to 2.16% a year earlier. For the first nine months of 1999, the Bank
had net charge offs of $251,000, compared with net recoveries of $77,000 last
year. Non-accrual, past due 90 days, and renegotiated loans were .94% and .40%
of total loans outstanding at September 30, 1999 and 1998 respectively and .83%
of total loans at December 31, 1998.
Impaired loans, as defined by Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, totaled approximately
$4,500,000 at September 30, 1999, compared to $4,300,000 at December 31, 1998
and included non-accrual, and past due 90 days other than homogenous residential
and consumer loans, and, at September 30, 1999, $3,000,000 of commercial loans
separately identified as impaired. A loan is considered impaired when it is
probable that all or part of amounts du according to the contractual terms of
the loan agreement will be uncollectible. Approximately $3,400,000 of the
impaired balance relates to two borrowers. One of the loans, for $2,400,000, is
current and making regular payments but was put on the watch list in its
construction phase. The cash generated solely by the business is currently not
adequate to cover debt service. The other loan has reached its redemption period
subsequent to quarter end and is now in Other Real Estate. Included in loans
charged off this year is $100,000 related to this loan.
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 $4,500,000 had specific reserves calculated in
accordance with SFAS No. 114 of $1,000,000 at September 30, 1999.
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,
1999 compared to December 31, 1998.
<TABLE>
Nonperforming Assets
- ---------------------
(in thousands) Sept. 30, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Non-accrual loans $1,863 $1,519
90 days or more past due and still accruing 84 25
-- --
Total nonperforming loans 1,947 1,544
Other real estate 0 0
- -
Total nonperforming assets $1,947 $1,544
Nonperforming loans as a percent of total loans .94 % .83 %
Nonperforming assets as a percent of total loans .94 % .83 %
Loan loss reserve to nonperforming loans 223% 256%
</TABLE>
16
<PAGE>
The following table sets forth loan balances and summarizes the changes in the
allowance for loan losses for the first nine months of 1999 and 1998.
<TABLE>
Year to date Year to date
Loans: (dollars in thousands) Sept. 30, 1999 Sept. 30, 1998
-------------- --------------
<S> <C> <C>
Average daily balance of loans for the year to date 195,186 173,055
Amount of loans (gross) outstanding at end of the
Quarter 206,083 183,488
Allowance for loan losses:
Balance at beginning of year 3,958 3,424
Loans charged off:
Real estate 0 0
Commercial 268 20
Consumer 148 79
----- --
Total charge-offs 416 99
Recoveries of loans previously charged off:
Real estate 35 0
Commercial 78 132
Consumer 52 44
-- --
Total recoveries 165 176
Net loans charged off (recoveries) 251 (77)
Additions to allowance charged to operations 630 470
--- ---
Balance at end of quarter $4,337 $3,971
Ratios:
Net loans charged off (annualized) to average
loans outstanding .17% (.06%)
Allowance for loan losses to loans outstanding 2.10% 2.16%
</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) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $556 $504 $1,455 $1,453
</TABLE>
Non-interest income, which includes service charges on deposit accounts, loan
and customer service fees, other operating income, and gain on sale of assets
increased by $52,000 (10%) in the third quarter of 1999 compared to the same
period in the previous year. Service charges on loans and deposits increased
$75,000 primarily due to growth in those areas. Trust income increased $13,000
due to seasoning in the Trust Department which has now been operating for two
years. Partly offsetting these increase was a
17
<PAGE>
decrease of $36,000 in income related to loan sales. This decrease was a result
of reduced loan volume and rising mortgage interest rates.
For the year, non-interest income increased $2,000. Service charges increased
$97,000 over the prior year, trust income increased $51,000, and other income
increased $20,000 due to a gain on the sale of repossessed property. Offsetting
these increases was a decrease in income related to loan sales of $166,000.
<TABLE>
Non-interest Expense Third Quarter Year-to-Date
- --------------------
(in thousands) 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $2,449 $2,040 $6,948 $5,805
</TABLE>
Non-interest expense increased $409,000 (20%) in the third quarter of 1999
compared to the same period last year. Contributing to this increase was an
increase of $160,000 in salaries and benefits expense due to hiring staff for
the new branch as well as normal salary increases. Printing and supplies
increased $27,000 largely due to ordering supplies for the new branch as well as
extra printing costs related to informing customers about Year 2000 readiness.
The $160,000 provision for real estate losses was the result of a re-evaluation
by management of property held for sale. Other non-interest expense increased
$90,000 primarily as a result of expenses related to the outsourcing of various
services.
For the nine months of 1999 non-interest expense was nearly $1,143,000 (20%)
higher than 1998. Salaries and benefits were up $363,000 for the year, and
occupancy was $69,000 higher, primarily due to opening the new branch. Equipment
expense increased $31,000 due to increased depreciation costs related to the
purchase of computer equipment and programs. Fees increased $149,000 due to
costs related to converting paper records to CDs, hiring outside help to conduct
Year 2000 testing, and hiring a computer specialist to update the Bank's systems
for processing mortgage loans. Printing and supplies increased $63,000 due to
new forms and media required for the computer network as well as costs
associated with opening the new branch. Other non-interest expense increased
$260,000 due to approximately $20,000 in costs associated with educating bank
personnel on the use of the new computer system, approximately $50,000 in
increased telephone costs related to the computer network, approximately
$130,000 in cost related to outsourcing various services, and approximately
$30,000 in increased postage costs due to extra mailings as a result of the
computer conversion.
<TABLE>
Income Tax Expense Third Quarter Year-to-Date
- ------------------
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $469 $494 $1,130 $1,352
</TABLE>
Fluctuations in income taxes resulted primarily from changes in the level of
profitability and in variations in the amount of tax-exempt income.
18
<PAGE>
<TABLE>
Capital September 30, 1999 December 31, 1998
- ------- ------------------ -----------------
(in thousands)
<S> <C> <C>
Shareholders' Equity* $25,300 $23,484
Ratio of Equity to Total Assets 9.00% 8.87%
</TABLE>
*Amounts exclude securities valuation adjustments recorded under Statement of
Financial Accounting Standards No. 115 amounting to ($162,000) at September 30,
1999 and $12,000 at December 31, 1998.
A financial institution's capital ratio is looked upon by the regulators and the
public as an indication of its soundness. Stockholders' equity, excluding the
securities valuation adjustment, increased $1,816,000 (7%) 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 $938,000. In addition, the Company issued
2,438 shares for $97,505, of which 2,435 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, 1999 was 10.05%, and total risk-based capital was 11.30%. At September 30,
1998 these ratios were 10.46% and 11.71% 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 7.72% at September 30, 1999 and 7.78% in 1998. 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.
In 1998 the Company exercised an option to purchase an 18 acre tract of land in
northwest Brighton primarily to acquire a prime site for a new branch. The cost
of the property was approximately $4,000,000. Land valued at approximately
$800,000 was sold to the Bank for the new branch. The Company is currently
marketing the remaining acreage which is not needed for the branch. In
conjunction with marketing the land, management periodically assesses its market
value, the cost of necessary improvements, and holding costs. As a result of
these assessments, management has written down the value approximately $300,000.
Management will continue to monitor the carrying value of the property.
Additionally, the Bank has purchased land in Howell for another branch at a cost
of approximately $250,000. Building of this branch will be financed from
internally generated funds, probably within the next two years.
19
<PAGE>
Year 2000
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 three 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 ban 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, worked on the action plan. The objective was 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 plan consisted of five phases: awareness, assessment,
renovation, validation, and implementation. All phases are complete and the
Company's computer systems are deemed to be Year 2000 compliant.
The Company spent approximately $1,500,000 on hardware and software in 1998.
During the first quarter of 1999, the Company spent approximately $100,000 for
Year 2000 testing. 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. The Company has developed a contingency plan to
address Year 2000 issues.
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.
Accounting Standards
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 us 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.
20
<PAGE>
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB No.
133. Statement 137 extends the effective date to fiscal years beginning after
June 15, 2000.
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,
1998.
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 1999.
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, 1999 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: November 9, 1999
21
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,836,000
<INT-BEARING-DEPOSITS> 3,296,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 49,905,000
<INVESTMENTS-MARKET> 49,724,000
<LOANS> 206,082,000
<ALLOWANCE> 4,337,000
<TOTAL-ASSETS> 281,167,000
<DEPOSITS> 253,139,000
<SHORT-TERM> 1,400,000
<LIABILITIES-OTHER> 1,490,438
<LONG-TERM> 0
0
0
<COMMON> 4,919,000
<OTHER-SE> 20,532,000
<TOTAL-LIABILITIES-AND-EQUITY> 281,167,000
<INTEREST-LOAN> 13,692,000
<INTEREST-INVEST> 1,744,000
<INTEREST-OTHER> 414,000
<INTEREST-TOTAL> 15,850,000
<INTEREST-DEPOSIT> 5,853,000
<INTEREST-EXPENSE> 2,000
<INTEREST-INCOME-NET> 9,995,000
<LOAN-LOSSES> 630,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,948,000
<INCOME-PRETAX> 3,872,000
<INCOME-PRE-EXTRAORDINARY> 2,742,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,742,000
<EPS-BASIC> 1.74
<EPS-DILUTED> 1.74
<YIELD-ACTUAL> 5.37
<LOANS-NON> 1,863,000
<LOANS-PAST> 84
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,958,000
<CHARGE-OFFS> 416,000
<RECOVERIES> 165,000
<ALLOWANCE-CLOSE> 4,337,000
<ALLOWANCE-DOMESTIC> 4,337,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
