SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
--------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-25752
FNBH BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2869722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 East Grand River, Howell, Michigan 48843
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517)546-3150
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. _X_
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on a per share price of $40 as of March 1, 1999, was
$62,510,720 (common stock, no par value). As of December 31, 1998 there were
outstanding 1,562,765 shares of the Company's Common Stock (no par value).
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement and appendix dated March 19, 1999 for
the Annual Meeting of Shareholders to be held April 21, 1999 are incorporated by
reference into Parts I, II and III of this report.
<PAGE>
PART I
Included in this Form 10-K are certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1993, as amended, and
Section 21 E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on the beliefs of the Company's management
as well as on assumptions made by and information currently available to the
Company at the times such statements were made. Actual results could differ
materially from those included in such forward-looking statements as a result
of, among other things, factors set forth below in this Report generally, and
certain economic and business factors, some of which may be beyond the control
of the Company. Investors are cautioned that all forward-looking statements
involve risks and uncertainty.
Item 1 - Business
FNBH Bancorp, Inc. (the Company), a Michigan business corporation, is a one
bank holding company, which owns all of the outstanding capital stock of First
National Bank in Howell (the "Bank"). The Company was formed in 1988 for the
purpose of acquiring all of the stock of the Bank in a shareholder approved
reorganization, which became effective May, 1989.
The Bank was originally organized in 1934 as a national banking
association. As of March 1, 1999, the Bank had approximately 107 full-time and
part-time employees. None of the Bank's employees is subject to collective
bargaining agreements. The Company does not directly employ any personnel. The
Bank serves primarily four communities, Howell, Brighton, Hartland, and
Fowlerville, all of which are located in Livingston County. The county has
historically been rural in character but has a growing urban population
especially in the southeast quadrant of the county, primarily attributable to
growth around the City of Brighton.
On November 26, 1997 H.B. Realty Co., a subsidiary of the Company, was
established to purchase land for a future branch site of the Bank and to hold
title to other Bank real estate when it is considered prudent to do so.
Bank Services
The Bank is a full service bank offering a wide range of commercial and
personal banking services. These services include checking accounts, savings
accounts, certificates of deposit, commercial loans, real estate loans,
installment loans, trust and investment services, collections, traveler's
checks, night depository, safe deposit box and U.S. Savings Bonds. The Bank
maintains correspondent relationships with major banks in Detroit, pursuant to
which the Bank engages in federal funds sale and purchase transactions, the
clearance of checks and certain foreign currency transactions. The Bank also has
a relationship with the Federal Home Loan Bank of Indianapolis where it makes
<PAGE>
short term investments and where it has a line of credit of $13,000,000
available. In addition, the Bank participates with other financial institutions
to fund certain large loans which would exceed the Bank's legal lending limit if
made solely by the Bank.
The Bank's deposits are generated in the normal course of business and the
loss of any one depositor would not have a materially adverse effect on the
business of the Bank. No material portion of the Bank's loans is concentrated
within a single industry or group of related industries. As of December 31,
1998, t he Bank's certificates of deposit of $100,000 or more constituted
approximately 8% of total deposit liabilities. The Bank's deposits are primarily
from its service area and the Bank does not seek or encourage large deposits
from outside the area.
The Company's cash revenues are derived primarily from dividends paid by
the Bank. The Bank's principal sources of revenue are interest and fees on loans
and interest on investment securities. Interest and fees on loans constituted
approximately 80% and 76% of total revenues for the periods ended December 31,
1998 and December 31, 1997, respectively. Interest on investment securities,
including short-term investments and federal funds sold, constituted
approximately 12% and 14% of total revenues in 1998 and 1997. Revenues were also
generated from deposit service charges and other financial service fees.
The Bank provides real estate, consumer, and commercial loans to customers
in its market. Sixty percent of the Bank's loan portfolio is in fixed rate
loans. Most of these loans, approximately 85%, mature within five years of
issuance. Approximately $12,000,000 in loans (or about 6.5% of the Bank's total
loan portfolio) have fixed rates with maturities exceeding five years.
Fifty-four percent of the Bank's interest-bearing deposits are in savings, NOW,
and MMDAs, all of which are variable rate products. Of the approximately
$87,900,000 in certificates, $70,400,000 mature within a year, with the balance
maturing within a five year period.
Requests to the Bank for credit are considered on the basis of credit
worthiness of each applicant, without consideration to race, color, religion,
national origin, sex, marital status, physical handicap, age, or the receipt of
income from public assistance programs. Consideration is also given to the
applicant's capacity for repayment, collateral, capital and alternative sources
of repayment. Loan applications are accepted at all the Bank's offices and are
approved under each lending officer's authority. Loan requests in excess of
$400,000 are required to be presented to the Board of Directors or the Executive
Committee of the Board for its review and approval.
As described in more detail below, the Bank's cumulative one year gap ratio
of rate sensitive assets to rate sensitive liabilities for the period ended
December 31, 1998, was 8% liability sensitive, compared to 16% asset sensitive
at December 31, 1997. See discussion and table under "Quantitative and
Qualitative Disclosures about Market Risk" in Item 7 below.
<PAGE>
The Bank sells participations in commercial loans to other financial
institutions approved by the Bank, for the purpose of meeting legal lending
limit requirements or loan concentration considerations. The Bank regularly
sells fixed rate residential mortgages to Freddie Mac while retaining servicing
on the sold loans. Those residential real estate mortgage loan requests that do
not meet Freddie Mac criteria are reviewed by the Bank for approval and, if
approved, are retained in the Bank's loan portfolio. The Bank also may purchase
loans which meet its normal credit standards.
The Bank's investment policy is considered to be generally conservative. It
provides for unlimited investment in U.S. government and agency bonds, with a
maximum maturity of five years. Municipal bonds may be purchased to provide
nontaxable income, with the maximum life of municipal bonds limited to
approximately ten years with a double A rating or better. A single A rated bond
may be purchased if it matures in four years or less. Non-rated bonds may be
purchased from local communities that are familiar to the Bank, with a maximum
block size of a single purchase limited to $300,000. Investments in states other
than Michigan may not exceed 20% of the municipal portfolio, and investments in
a single issuer may not exceed 10% of equity capital. Mortgage backed
securities, which are fully collateralized by securities issued by government
sponsored agencies, may be purchased in block sizes of up to $500,000, provided
the average life expectancy does not exceed seven years. In addition, certain
collateralized mortgage obligations may be purchased if their average life does
not exceed five years. In any case, investments in mortgage backed securities
may not exceed 10% of the investment portfolio.
In addition to the above referenced thresholds affecting the acquisition of
investment securities, holdings of approved "non high-risk mortgage securities"
are required to be "stress tested" at least annually. Any security that fails
this test is required to be marked to market. The acquisition of "high-risk
mortgage securities" is prohibited. In no case may the Bank participate in such
activities as gains trading, "when-issued" trading, "pair offs", corporate
settlement of government and agency securities, repositioning repurchase
agreements, and short sales. All securities dealers effecting transactions in
securities held or purchased by the Bank must be approved by the Board of
Directors.
Bank Competition
The Bank has six offices within the four communities it serves, all of which are
located in Livingston County, Michigan. Three of the offices, including the main
office, are located in Howell. The other three facilities are located in
Brighton, Hartland, and Fowlerville. See "Properties" below for more detail on
these facilities. Within these communities, its principal competitors are Old
Kent Bank, National City Bank, D&N Bank, and Michigan National Bank. Each of
these financial institutions, which are headquartered in larger metropolitan
areas, have significantly greater assets and financial resources than the
Company. Among the principal competitors in the communities in which the Bank
operates, the Bank is the only locally based financial institution. Based
<PAGE>
on deposit information as of June 30, 1998, the Bank holds approximately 19% of
local deposits, compared to approximately 20% held by Old Kent Bank,
approximately 15% held by National City Bank, approximately 11% held by D&N
Bank, and approximately 10% held by Michigan National Bank. Information as to
asset size of competitor financial institutions is derived from publicly
available reports filed by and with regulatory agencies. Within the Bank's
markets, Old Kent Bank maintains four branch offices, National City Bank
operates six branch offices, D&N Bank has five branch offices, and Michigan
National Bank has three branch offices. Management is not aware of any plans by
these financial institutions to expand their presence in the Bank's market.
The financial services industry continues to become increasingly
competitive. Principal methods of competition include loan and deposit pricing,
advertising and marketing programs, and the types and quality of services
provided. The deregulation of the financial services industry has led to
increased competition among banks and other financial institutions for a
significant portion of funds which have traditionally been deposited with
commercial banks. Competition within the Bank's market has been relatively
stable within the past years. Management continues to evaluate the opportunities
for the expansion of products and services, such as offering nonproprietary
mutual fund products, telephone, computer or on-line banking, and additional
branching opportunities. The Bank currently has an additional branch in Brighton
under construction which should be open for business in the third quarter of
1999.
Growth of Bank
The following table sets forth certain information regarding the growth of
the Bank:
<TABLE>
Balances as of December 31,
---------------------------
(in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $264,894 $226,314 $202,009 $182,958 $168,438
Loans, Net of Unearned Income 185,018 158,397 136,067 127,463 117,008
Securities 38,646 43,725 47,257 35,251 33,891
Noninterest-Bearing Deposits 47,402 41,631 35,048 30,815 29,513
Interest-Bearing Deposits 192,155 160,668 145,896 133,060 122,194
Total Deposits 239,557 202,299 180,944 163,875 151,707
Shareholders' Equity 23,497 21,732 19,597 17,530 15,305
</TABLE>
During the five years presented, the Bank operated six branch facilities:
one in downtown Howell, one at Lake Chemung (five miles east of downtown
Howell), one on the east side of Brighton, one in a shopping center in Hartland,
one in the village of Fowlerville, and the sixth was a grocery store branch,
located west of downtown Howell. In July of 1995, the Bank moved its Hartland
facility from the shopping center, which was a leased building, to a new
building, built on property purchased by the Bank, just east of the shopping
center site. In the time period presented, all of the Bank's branches grew due
to general growth in the county.
<PAGE>
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. This summary is qualified in its entirety by reference
to the particular statutes and regulations. Changes in applicable laws and
regulations may have a material effect on the Company and the Bank and their
respective businesses.
The Company operates in a highly regulated industry, and thus may be
affected by changes in state and federal legislation and regulations. As a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended (the "Act"), the Company is subject to supervision and examination by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board")
and is required to file, with the Federal Reserve Board, annual reports and
information regarding its business operations and those of its subsidiaries.
The Act requires a bank holding company to obtain the approval of the
Federal Reserve Board before it may acquire more than 5% of the voting stock or
substantially all of the assets of any bank or merge or consolidate with any
other bank holding company. If the effect of a proposed acquisition, merger or
consolidation may substantially lessen competition or tend to create a monopoly,
the Federal Reserve Board cannot approve the acquisition unless it finds that
the anticompetitive effects of the acquisition, merger, or consolidation are
clearly outweighed by the convenience and needs of the community to be served.
The Act also provides that the consummation of any acquisition, merger or
consolidation must be delayed at least 15 days following the approval of the
Federal Reserve Board and that any action brought under the antitrust laws of
the United States during the time will delay the effectiveness of its approval
during the pendency of the action unless otherwise ordered by the board.
The Riegle-Neal Interstate Banking and Branching Efficiency Act authorizes
adequately capitalized and adequately managed bank holding companies to acquire
banks located outside their respective home states, irrespective of state law.
This legislation also authorizes, effective June 1, 1997 (subject to individual
state's rights to accelerate this date or prohibit interstate branching within
their borders), banking organizations to branch nationwide by acquisition or
consolidation of existing banks in other states. Michigan law authorizes
out-of-state banks to acquire and establish branches in Michigan, provided the
laws of the state of the out-of-state institution permit Michigan banks to
acquire or establish branches in that state. Interstate acquisitions are subject
to the approval of various federal and state agencies and subject to other
conditions.
Subject to certain exceptions, a bank holding company is also prohibited
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank and from engaging directly or
indirectly in activities unrelated to banking or managing or controlling banks.
One of the exceptions to this prohibition permits activities by a bank holding
company or its subsidiaries which the Federal Reserve Board has determined to be
so closely related to banking or managing or
<PAGE>
controlling banks as to be a proper incident thereto. In determining whether a
particular activity is a proper incident to banking or managing or controlling
banks, the Federal Reserve Board considers whether performance of the activity
by an affiliate of a bank holding company can reasonably be expected to produce
benefits to the public, such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The Federal Reserve Board has adopted
regulations prescribing those activities which it presently regards as
permissible for bank holding companies and their subsidiaries. Some of these
activities include: performing certain data processing services; certain
personal and real property leasing; making, acquiring, or servicing loans and
other extensions of credit as would be made by a mortgage, finance, credit card
or other factoring company; bank related courier services; and, under certain
circumstances, acting as any or all of the following: investment or financial
advisor, insurance agent or broker, and underwriter for credit life insurance
and credit accident and health insurance. The Act does not place geographic
restrictions on the activities of the nonbank subsidiary's of bank holding
companies. The enactment of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 streamlines the nonbanking activities application process
for well capitalized and well managed bank holding companies.
The Act, the Federal Reserve Act, and the Federal Deposit Insurance Act
also subject bank holding companies and their subsidiaries to certain
restrictions on any extensions of credit by subsidiary banks to the bank holding
company or any of its subsidiaries, or investments in the stock or other
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower. Further, under the Act and regulations of the Federal
Reserve Board, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of any property or furnishing of service.
The Federal Deposit Insurance Act was amended in 1991 by the FDIC
Improvement Act of 1991. The FDIC Improvement Act provides for regulatory
intervention should a bank's capital deteriorate, limits certain real estate
lending and increases audit requirements. The FDIC has been granted authority to
impose special assessments on banks to repay borrowings of the FDIC. The FDIC
Improvement Act defines a reserve ratio at which the Bank Insurance Fund ("BIF")
is to be maintained through FDIC semi-annual assessment rates on the BIF member
banks. The FDIC has also established a system of risk-based deposit insurance
premiums under the FDIC Improvement Act. This system established four levels of
premium rates based on the risk classification of the institution. As a national
bank, the Bank's premiums are paid to BIF. Given the designation as a well
managed, well capitalized institution, the Bank pays the lowest assessment rate
possible to BIF.
As required by the Deposit Insurance Funds Act of 1996, in 1997 the Bank
commenced making payments to the FDIC for the Financing Corporation (FICO) bonds
<PAGE>
that were issued previously. The FICO rate for BIF members banks is 1.220 basis
points annually applied to assessable deposits. During 1998 the Bank paid
$24,000 to the FDIC.
The Federal Reserve Board provides guidelines for the measurement of
capital adequacy of bank holding companies. The Company's capital, as adjusted
under these guidelines, is referred to as risk-based capital. The Company's Tier
1 risk-based capital ratio, at December 31, 1998, was 12.52% and total
risk-based capital was 13.79%. At December 31, 1997, these ratios were 14.32%
and 15.58%, respectively. Minimum regulatory Tier 1 risk-based and total
risk-based capital ratios under the Federal Reserve Board guidelines are 4% and
8%, respectively. These same capital ratios are applied at the bank level by the
Federal Deposit Insurance Corporation, under which a well- capitalized bank is
defined as one with at least 10% risk-based capital. Capital guidelines also
provide for a standard to measure risk-based capital to total assets. This is
referred to as the leverage ratio. The Company's leverage ratio at December 31,
1998 was 9.14%, while at December 31, 1997 it was 9.96%. The minimum standard
leverage ratio is 3%. See also "Capital" discussion in Item 7 below.
The Bank is organized as a national banking association and is therefore
regulated and supervised by the Office of the Comptroller of the Currency (the
"OCC"). The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC"). Consequently, the Bank is also subject to the provisions
of the Federal Deposit Insurance Act. As a bank holding company, the Company is
subject to the direct supervision of the Federal Reserve Board. As a result of
such supervision and regulation, the Bank is subject to requirements to maintain
reserves against deposits, restrictions on the nature and amount of loans which
may be made and the interest which may be charged thereon, restrictions relating
to investments and other activities, limitations based on capital and surplus,
and limitations on the payment of dividends on its capital stock. The various
regulatory and legal requirements referenced above are primarily for the
protection of the Bank's depositors and customers rather than the shareholders
of the Company.
As a Michigan business corporation, the Company may generally declare and
pay dividends, provided the Company is not insolvent and that the payment of the
dividend would not render it insolvent, and, after giving the effect of the
distribution, that the Company's total assets would equal or exceed its total
liabilities plus the dissolution preference of any senior equity securities (of
which there currently are none). The payment of dividends to its shareholders is
limited by the Company's ability to obtain funds from the Bank and by the
above-referenced regulatory capital guidelines. As a national bank, the Bank may
not pay a dividend on its common stock if the dividend would exceed the net
undivided profits then on hand after deducting losses and bad debts.
Additionally, the prior approval of the Office of the Comptroller of the
Currency, or its designee, is required for any dividend to a bank holding
company by an affiliated national bank if the total of all dividends, including
any proposed dividend declared by such bank in any calendar year, exceeds the
total of its net profits for that year combined with its retained net profits
for the preceding two years, less any required transfers to surplus.
<PAGE>
In 1996 the Michigan Legislature adopted the Credit Reform Act. This
statute, together with amendments to other related laws, permits regulated
lenders, indirectly including Michigan-chartered banks, to charge and collect
higher rates of interest and increased fees on certain types of loans to
individuals and businesses. The laws prohibit "excessive fees and charges," and
authorize governmental authorities and borrowers to bring actions for injunctive
relief and statutory and actual damages for violations by lenders. The statutes
specifically authorize class actions, and also civil money penalties, for
knowing and willful or persistent violations.
FDIC regulations which became effective April 1, 1996, impose limitations
(and in certain cases, prohibitions) on (i) certain "golden parachute" severance
payments by troubled depository institutions and their affiliated holding
companies to institution-affiliated parties (primarily directors, officers,
employees, or principal shareholders of the institution), and (ii) certain
indemnification payments by a depository institution or its affiliated holding
company, regardless of financial condition, to institution-affiliated parties.
The FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by the Company or the Bank to their
respective directors or officers otherwise permitted under the Michigan Business
Corporation Act ("MBCA") or the National Bank Act, respectively.
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act (EGRPRA) was signed into law, which provides for the
recapitalization of SAIF and includes approximately 40 regulatory relief
initiatives. Among other matters, this legislation provides for expedited
application procedures for nonbanking activities by well capitalized and well
managed bank holding companies, provides reform to the Fair Credit Reporting
Act, and provides other forms of regulatory relief to the financial services
industry.
I SELECTED STATISTICAL INFORMATION
<PAGE>
(A) Distribution of Assets, Liabilities, and Shareholders' Equity:
(B) Interest Rates and Interest Differential:
The table on the following page shows the daily average balances for major
categories of interest earning assets and interest bearing liabilities, interest
earned (on a taxable equivalent basis) or paid, and the effective rate or yield,
for the three years ended December 31, 1998, 1997, and 1996.
Net interest income is the difference between interest earned on loans,
securities and other earning assets and interest paid on deposits and borrowed
funds. In the following tables, the interest earned on investments and loans is
expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a federal income tax rate of 34%. The
following Yield Analysis shows that the Bank's interest margin increased one
basis point in 1998 as a result of an increase of twelve basis points in yield
on earning assets, partially offset by an increase of ten basis points in the
interest cost on deposits. In 1997 the interest margin decreased two basis
points due to an increase in interest cost on deposits partially offset by an
increase in yield on earning assets.
<PAGE>
<TABLE>
Yield Analysis of Consolidated Average Assets and Liabilities
(dollars in thousands)
1998 1997 1996
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ----- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Federal funds sold $8,630 $449.1 5.31% $2,754 $148.8 5.40% $5,135 $269.2 5.24%
Securities:
Taxable 23,019 1,386.9 6.02% 31,873 1,906.0 5.98% 32,042 1,906.4 5.95%
Tax-exempt 15,221 1,085.1 7.13% 13,262 975.8 7.36% 11,172 853.4 7.64%
Loans(1)(2) 175,873 17,317.6 9.85% 148,096 14,540.3 9.82% 130,648 12,946.8 9.91%
------- -------- ------- -------- ------- --------
Total earning assets and total
interest income 222,743 $20,238.7 9.09% 195,985 $17,570.9 8.97% 178,997 $15,975.8 8.93%
Cash & due from banks 9,836 --------- 7,620 --------- 7,195 ---------
All other assets 11,335 8,089 7,341
Allowance for loan loss (3,777) (3,499) (3,281)
-------- -------- --------
Total assets $240,137 $208,195 $190,252
======== ======== ========
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings/NOW accounts $91,552 $2,772.5 3.03% $79,104 $2,210.5 2.79% $76,128 $2,129.9 2.80%
Time 81,119 4,617.2 5.69% 71,093 4,059.5 5.71% 62,577 3,514.5 5.62%
Federal funds purchased 179 10.7 5.98% 610 35.3 5.77% 4 .2 5.58%
------- -------- ------- -------- ------- --------
Total interest bearing
liabilities and total interest
expense 172,850 $7,400.4 4.28% 150,807 $6,305.3 4.18% 138,709 $5,644.6 4.07%
Non-interest bearing deposits 43,619 -------- 34,668 -------- 31,005 --------
All other liabilities 1,751 1,792 1,664
Shareholders' Equity 21,917 20,928 18,874
Total liabilities and -------- -------- --------
shareholders' equity $240,137 $208,195 $190,252
======== ======== ========
Interest spread 4.81% 4.79% 4.86%
===== ===== =====
Net interest income-FTE $12,838.3 $11,265.6 $10,331.2
========= ========= =========
Net interest margin 5.76% 5.75% 5.77%
===== ===== =====
</TABLE>
(1) Nonaccruing loans are not significant during the three year period and, for
purposes of the computations above, are included in average daily loan balances.
(2) Interest on loans includes origination fees totaling $600,000 in 1998,
$380,000 in 1997, and $451,000 in 1996.
<PAGE>
(C) The following table sets forth the effects of volume and rate changes on net
interest income on a taxable equivalent basis. All figures are stated in
thousands of dollars.
<TABLE>
Year ended Year ended
December 31, 1998 compared to December 31, 1997 compared to
Year ended December 31, 1997 Year ended December 31, 1996
---------------------------- ----------------------------
Amount of Increase/(Decrease) Amount of Increase/(Decrease)
due to change in due to change in
---------------- ----------------
Total Total
Amount Amount
Of of
Average Increase/ Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Short term investments.... $ 317 $ (17) $ 300 $ (125) $ 4 $ (121)
Securities:
Taxable................. (529) 11 (518) (10) 10 0
Tax Exempt.............. 144 (35) 109 160 (37) 123
Loans..................... 2,727 50 2,777 1,729 (136) 1,593
Total interest income... $ 2,659 $ 9 $ 2,668 $ 1,754 $ (159) $ 1,595
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts.... $ 348 $ 214 $ 562 $ 83 $ (2) 81
Time.................... 572 (15) 557 478 67 545
Short-term borrowings..... (25) 1 (24) 34 1 35
Total interest expense. $ 895 $ 200 $ 1,095 $ 595 $ 66 $ 661
Net interest income (FTE). $ 1,764 $ (191) $ 1,573 $ 1,159 $ (225) $ 934
</TABLE>
The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
<PAGE>
II SECURITIES PORTFOLIO
(A)The following table sets forth the book value of securities at December
31:
<TABLE>
(in thousands)
1998 1997 1996
---- ---- ----
Held to maturity:
<S> <C> <C> <C>
U.S. Treasury $ 1,999 $ 15,993 $ 13,996
U.S. Government agencies 0 0 1,017
States and political subdivisions 16,279 14,028 12,765
Mortgage-backed securities 602 633 352
--- --- ---
Total $ 18,880 $ 30,654 $ 28,130
Available for sale:
U.S. Treasury $ 12,092 $ 13,026 $ 18,046
U.S. Government agencies 6,982 0 1,001
Mortgage-backed securities 0 0 36
FRB Stock 44 44 44
FHLB Stock 648 0 0
-------- -------- --------
Total $ 19,766 $ 13,070 $ 19,127
</TABLE>
(B)The following table sets forth contractual maturities of securities at
December 31, 1998 and the weighted average yield of such securities:
<TABLE>
(Dollars in thousands)
Maturing After Maturing After
Maturing Within One But Within Five But Within Maturing After
One Year Five Years Ten Years Ten Years
-------- ---------- --------- ---------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity
U.S. Treasury $ 1,999 6.09%
States and political
subdivisions 1,095 7.95% $3,726 5.82% $11,458 6.73%
Mortgage backed
Securities 251 5.20% 351 5.74%
--- ---
Total $ 3,345 6.63% $4,077 5.81% $11,458 6.73% $0
======== ====== ======= ==
Tax equivalent adjustment
for calculations of yield $20 $70 $214
===
Available for sale
U.S. Treasury $ 4,021 5.73% $ 8,071 4.80%
U.S. Agency 6,982 4.93%
FRB Stock $ 44 6.00%
FHLB Stock 648 7.98%
---
Total $ 4,021 5.73% $15,053 4.86% $0 $692 7.85%
======== ======= ==
</TABLE>
<PAGE>
The rates set forth in the tables above for obligations of state and
political subdivisions have been restated on a fully tax equivalent basis
assuming a 34% marginal tax rate. The amount of the adjustment is as follows:
<TABLE>
Rate on Tax
Tax-Exempt Rate Adjustment Equivalent Basis
--------------- ---------- ----------------
<S> <C> <C> <C>
Under 1 year 6.11% 1.84% 7.95%
1-5 years 5.29% .53% 5.82%
5-10 years 4.86% 1.87% 6.73%
</TABLE>
Additional statistical information concerning the Bank's securities portfolio is
incorporated by reference in Note 2 of the Company's Consolidated Financial
Statements for the year ended December 31, 1998.
III LOAN PORTFOLIO
(A)The table below shows loans outstanding at December 31:
<TABLE>
(in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Secured by real estate:
Residential first mortgage $ 38,051 $ 38,073 $ 36,148 $ 36,871 $ 33,842
Residential home equity/other junior liens 9,106 13,665 12,883 10,566 8,819
Construction and land development 23,048 19,490 14,042 9,075 8,150
Other 68,960 53,743 43,006 42,454 40,103
Consumer 16,653 14,011 12,272 11,233 10,730
Commercial 26,058 18,299 15,830 14,546 12,324
Other 3,770 1,729 2,360 3,213 3,559
-------- -------- -------- -------- --------
Total Loans (Gross) $185,646 $159,010 $136,541 $127,958 $117,527
</TABLE>
The loan portfolio is periodically reviewed and the results of these reviews are
reported to the Company's Board of Directors. The purpose of these reviews is to
verify proper loan documentation, to provide for the early identification of
potential problem loans, and to evaluate the adequacy of the allowance for loan
losses.
<PAGE>
(B)The following table shows the amount of commercial, financial, and
agricultural loans outstanding as of December 31, 1998 which, based on remaining
scheduled repayments of principal, are in the periods indicated.
<TABLE>
Maturing
--------
(in thousands of dollars)
After one
Within one but within After five
year five years years Total
---- ---------- ----- -----
<S> <C> <C> <C> <C>
Real estate construction & land development... $16,339 $ 6,709 0 $ 23,048
Real estate other (secured by commercial &
multi-family).............................. 13,440 51,305 4,215 68,960
Commercial (secured by business assets or
Unsecured)................................. 8,535 15,540 1,983 26,058
Other (loans to farmers, political
Subdivisions, & overdrafts) ............... 95 3,435 240 3,770
------- ------- ------ --------
Totals................................. $38,409 $76,989 $6,438 $121,836
</TABLE>
Below is a schedule of amounts due after one year which are classified according
to their sensitivity to changes in interest rates.
<TABLE>
Interest Sensitivity
----------------------
(in thousands of dollars)
Fixed Rate Variable Rate
---------- -------------
<S> <C> <C>
Due after one but within five years............... $60,087 $16,902
Due after five years.............................. 4,377 2,061
</TABLE>
(C) Nonperforming loans consist of loans accounted for on a nonaccrual
basis and loans contractually past due 90 days or more as to interest or
principal payments (but not included in nonaccrual loans). The aggregate amount
of non-performing loans, as of December 31, is presented in the table below:
<TABLE>
(Dollars in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming Loans:
Nonaccrual loans $ 1,519 $ 809 $ 109 $ 926 $ 983
Loans past due 90 days or more 25 249 448 66 295
-- --- --- -- ---
Total nonperforming loans $ 1,544 $ 1,058 $ 557 $ 992 $ 1,278
======= ======= ====== ====== =======
Percent of total loans .83% .67% .41% .78% 1.09%
</TABLE>
Additional information concerning nonperforming loans, the Bank's
nonaccrual policy, loan impairment, and loan concentrations is incorporated by
reference to Note 3 of the Company's Consolidated Financial Statements for the
year ended December 31, 1998.
There were no other interest bearing assets, at December 31, 1998, that
would be required to be disclosed under Item III(C), if such assets were loans.
There were no foreign loans outstanding at December 31, 1998.
<PAGE>
IV SUMMARY OF LOAN LOSS EXPERIENCE
(A)The following table sets forth loan balances and summarizes the changes
in the allowance for loan losses for each of the years ended December 31:
<TABLE>
(Dollars in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Loans:
<S> <C> <C> <C> <C> <C>
Average daily balance of loans for the year.... $172,090 $148,097 $130,648 $122,500 $114,384
Amount of loans (gross) outstanding at end
of the year................................ 185,646 159,011 136,541 127,958 117,527
Allowance for loan losses:
Balance at beginning of year.................. 3,424 3,335 3,097 2,672 2,205
Loans charged off:
Real estate................................ 110 0 70 0 12
Commercial................................. 63 375 129 118 37
Consumer................................... 129 124 88 91 72
--- --- -- -- --
Total charge-offs...................... 302 499 287 209 121
Recoveries of loans previously charged off:
Real estate............................... 96 32 1 0 0
Commercial................................ 51 43 31 95 64
Consumer.................................. 49 27 45 91 76
-- -- -- -- --
Total recoveries...................... 196 102 77 186 140
Net loans charged off (recoveries)............... 106 397 210 23 (19)
Additions to allowance charged to operations..... 640 486 448 448 448
---- --- --- --- ---
Balance at end of year................ $ 3,958 $ 3,424 $ 3,335 $ 3,097 $ 2,672
Ratios:
Net loans charged off to average loans
outstanding .06% .27% .16% .02% (.02%)
Allowance for loan losses to loans
outstanding 2.13% 2.15% 2.44% 2.42% 2.27%
</TABLE>
The allowance for loan losses reflected above is a valuation allowance in
its entirety and the only allowance available to absorb future loan losses.
(B)The following table presents the portion of the allowance for loan
losses applicable to each loan category and the percent of loans in each
category to total loans, as of December 31:
<TABLE>
(Dollars in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial..... $2,437 91.0% $ 1,810 90.1% $ 830 66.7% $ 851 64.7% $ 1,093 61.3%
Real estate.... 53 2.0% 95 4.7% 70 17.1% 60 19.5% 45 23.1%
Consumer....... 189 7.0% 105 5.2% 90 16.2% 74 15.8% 95 15.6%
Unallocated.... 1,279 1,414 2,345 2,112 1,439
---- ----- ------ ------ -----
Total.... $3,958 100% $3,424 100% $3,335 100% $3,097 100% $2,672 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== =====
</TABLE>
<PAGE>
V DEPOSITS
The following table sets forth average deposit balances and the weighted
average rates paid thereon for the years ended December 31:
<TABLE>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 43,619 $ 34,668 $ 31,005
Savings, NOW, and money market 91,552 3.03% 79,104 2.79% 76,128 2.80%
Time deposits 81,119 5.69% 71,093 5.71% 62,577 5.62%
------ ------ ------
Total $216,290 4.28% $184,865 4.18% $169,710 4.07%
======== ======== ========
</TABLE>
The table for maturities of negotiated rate time deposits of $100,000 or
more outstanding at December 31, 1998 is incorporated by reference to note 7 of
the Company's Consolidated Financial Statements for the year ended December 31,
1998.
VI RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets, and certain other ratios, for the years ended December 31 follow:
<TABLE>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income as a percent of:
Average common equity 17.83% 17.84% 19.12% 19.60% 16.63%
Average total assets 1.63% 1.79% 1.88% 1.88% 1.52%
</TABLE>
Additional performance ratios are set forth in Selected Financial Data, in
Item 6, Part II of this Report. Any significant changes in the current trend of
the above ratios are reviewed in Management's Discussion and Analysis of
Financial Condition and Results of Operations, set forth in Item 7, Part II of
this Report.
VII SHORT-TERM BORROWING
The information required in this item is not applicable for this Company.
Item 2 - Properties
The Bank operates from six facilities, located in four communities, in
Livingston County, Michigan. The executive offices of the Company are located at
the Bank's main office, 101 East Grand River, Howell, Michigan. The Bank
maintains two branches in Howell at 5990 East Grand River and 2400 West Grand
River. The Bank also maintains branch offices at 9911 East Grand River,
Brighton, Michigan, 760 South Grand Avenue, Fowlerville, Michigan, and 10700
Highland Road, Hartland, Michigan. All of the offices have ATM machines and all
except the West Grand River branch, which is in a grocery store, have drive up
services. All of the properties are owned by the Bank except for the
<PAGE>
West Grand River branch which is leased. The lease is for fifteen years,
expiring September 2007. The average lease payment over the life of the lease is
$3,167 monthly.
Item 3 - Legal Proceedings
The Company is not involved in any material legal proceedings. The Bank is
involved in ordinary routine litigation incident to its business; however, no
such proceedings are expected to result in any material adverse effect on the
operations or earnings of the Bank. Neither the Bank nor the Company is involved
in any proceedings to which any director, principal officer, affiliate thereof,
or person who owns of record or beneficially more than five percent (5%) of the
outstanding stock of either the Company or the Bank, or any associate of the
foregoing, is a party or has a material interest adverse to the Company or the
Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
Additional Item--Executive Officers
Executive officers of the Company are appointed annually by the Board of
Directors. There are no family relationships among these officers and/or the
directors of the Company, or any arrangement or understanding between any
officer and any other person pursuant to which the officer was elected.
The following table sets forth certain information with respect to the
Company's executive officers as of December 31, 1998:
<TABLE>
First Selected as an Officer
Name (Age) Position with Company of the Company
--------- --------------------- --------------
<S> <C> <C>
Barbara D. Martin (52) President, Chief Executive Officer, 1983
and Director of the Company and the
Bank
Barbara J. Nelson (51) Secretary/Treasurer of the Company 1985
and Senior Vice President, Cashier,
and Chief Financial Officer of the
Bank
John D. Logan(49) Senior Vice President, Trust and 1997
Investments, of the Bank
James Wibby(48) Senior Vice President, Loans, of the 1997
Bank
Jerry Armstong(39) Vice President, Operations 1997
</TABLE>
<PAGE>
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
There is no active market for the Company's Common Stock, and there is no
published information with respect to its market price. There are occasional
direct sales by shareholders of which the Company's management is generally
aware. It is the understanding of the management of the Company that over the
last two years, the Company's Common Stock has sold at a premium to book value.
From January 1, 1997, through December 31, 1998, there were, so far as the
Company's management knows, 306 sales of shares of the Company's Common Stock,
involving a total of 129,223 shares. The price was reported to management in
these transactions, however there may have been other transactions involving the
company stock at prices not reported to management. During this period, the
highest price known to be paid was $35.00 per share during the last three
quarters of 1998 and the lowest price was $25.00 per share in the first quarter
of 1997. To the knowledge of management, the last sale of Common Stock occurred
on February 10, 1999. All per share information has been restated to give effect
to a three for one stock split, payable as a dividend of two shares for each one
share of company stock held of record January 16, 1997, paid February 16, 1997.
As of March 1, 1999, there were approximately 820 holders of record of the
Company's Stock. The following table sets forth the range of high and low sales
prices of the Company's Common Stock during 1997 and 1998, based on information
made available to the Company, as well as per share cash dividends declared
during those periods. Although management is not aware of any transactions at
higher or lower prices, there may have been transactions at prices outside the
ranges listed in the table.
Sales price and dividend information for the years 1997 and 1998:
<TABLE>
Sales Prices Cash Dividends Declared
------------ -----------------------
1997 High Low
---- ---- ---
<S> <C> <C> <C>
First Quarter $25.00 $25.00 $0.15
Second Quarter $27.50 $25.00 $0.15
Third Quarter $27.50 $27.50 $0.15
Fourth Quarter $30.00 $27.50 $0.55(1)
1998 High Low
---- ---- ---
First Quarter $30.00 $30.00 $0.18
Second Quarter $35.00 $35.00 $0.18
Third Quarter $35.00 $35.00 $0.20
Fourth Quarter $35.00 $35.00 $0.49(2)
</TABLE>
(1) Includes a special dividend of $0.40 per share.
(2) Includes a special dividend of $0.29 per share.
The holders of the Company's Common Stock are entitled to dividends when,
as and if declared by the Board of Directors of the Company out of funds legally
available for that purpose. Dividends have been paid on a quarterly basis. In
determining
<PAGE>
dividends, the Board of Directors considers the earnings, capital requirements
and financial condition of the Company and the Bank, along with other relevant
factors. The Company's principal source of funds for cash dividends is the
dividends paid by the Bank. The ability of the Company and Bank to pay dividends
is subject to regulatory restrictions and requirements.
Item 6 - Selected Financial Data
<TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $19,910 $17,276 $15,717 $14,394 $12,412
Interest expense 7,400 6,305 5,644 4,879 3,838
Net interest income 12,510 10,971 10,073 9,515 8,574
Provision for loan losses 640 486 448 448 448
Non-interest income 1,749 1,851 1,686 1,418 1,195
Non-interest expense 8,033 6,982 6,151 5,867 5,864
Income before tax 5,586 5,354 5,160 4,618 3,457
Net income 3,907 3,733 3,574 3,200 2,418
Basic Per Share Data(1):
Net income $2.49 2.37 2.27 2.03 1.54
Dividends paid 1.05 1.00 .93 .68 .55
Weighted average shares
outstanding 1,570,537 1,575,000 1,575,000 1,575,000 1,575,000
Balance Sheet Data:
Total assets 264,894 226,314 202,009 182,958 168,438
Loans 185,018 158,397 136,067 127,463 117,008
Allowance for loan losses 3,958 3,424 3,335 3,097 2,672
Deposits 239,557 202,299 180,944 163,875 151,707
Shareholders' equity 23,497 21,732 19,597 17,530 15,305
Ratios:
Dividend payout ratio 42.11% 42.19% 41.13% 33.46% 35.82%
Equity to asset ratio 9.13% 10.05% 9.82% 9.61% 9.14%
</TABLE>
(1) Per share data for all years has been restated to give effect to the
three-for-one stock split, payable as a dividend paid in February 1997.
<PAGE>
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion provides information about the consolidated financial
condition and results of operations of FNBH Bancorp, Inc. ("Company") and its
subsidiaries, First National Bank in Howell ("Bank") and HB Realty Co., and
should be read in conjunction with the Consolidated Financial Statements.
FINANCIAL CONDITION
During 1998 total assets increased 17% to $264,894,000. Contributing to
this $39 million increase was a $27 million (17%) increase in loans. Deposits
increased $37 million (18%) to $239,557,000. Stockholders' equity increased $1.8
million (8%) to $23,497,000.
Securities
The security portfolio is an important source of liquidity for the Bank to
meet unusual deposit fluctuations. A primary concern of the management of the
Bank is to ensure the safety of funds entrusted to it by its depositors and
shareholders. Approximately $22,000,000 of the security portfolio is invested in
US government and agency obligations. An additional $16,000,000 of the portfolio
consists of tax exempt obligations of states and political subdivisions. The
Company's current and projected tax position makes these investments
advantageous. The Bank's investment policy requires purchases of tax exempt
issues to be of bonds with AA ratings or better if the maturity exceeds 4 years
unless the bond is a local, nonrated issue. Other securities consist of equity
holdings in the Federal Reserve Bank and the Federal Home Loan Bank.
The following table shows the percentage makeup of the security portfolio
as of December 31:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
U.S. Treasury & agency securities................................ 54.5% 66.3%
Agency mortgage backed securities................................ 1.6% 1.4%
Tax exempt obligations of states and political subdivisions...... 42.1% 32.1%
Other 1.8% .2%
------ ------
Total securities........................................... 100.0% 100.0%
</TABLE>
Loans
The loan personnel of the Bank are committed to making quality loans
that produce a good rate of return for the Bank and also serve the community by
providing funds for home purchases, business purposes, and consumer needs. The
overall loan portfolio grew $27,000,000 (17%) in 1998.
<PAGE>
As a full service lender, the Bank offers a variety of home mortgage loan
products. The Bank makes fixed rate, long-term mortgages which conform to
secondary market standards which it sells. This practice allows the Bank to meet
the housing credit needs of its service area, while at the same time maintaining
loan to deposit ratios and interest sensitivity and liquidity positions within
Bank policy. The Bank retains servicing on sold mortgages thereby furthering the
customer relationship and adding to servicing income. During 1998 the Bank sold
$17,000,000 in residential mortgages.
The Bank has also been able to service customers with loan needs which do
not conform to secondary market requirements by offering variable rate products
which are retained in the mortgage portfolio. These loans are considered
nonconforming as they do not meet certain requirements of the secondary market.
During 1998 the Bank made approximately $7,000,000 in nonconforming loans which
it retained in the mortgage portfolio.
During 1998, the Bank experienced a significant amount of loan demand.
Growth in the county resulted in a need for financing commercial projects, some
of which were for the construction of commercial buildings and some of which
were for the development of residential subdivisions. Commercial loans ended the
year at $137,634,000, a 25% increase for the year. Consumer loans declined
slightly.
The following table reflects the makeup of the commercial and consumer
loans in the Consolidated Financial Statements. Included in the residential
first mortgage totals below are the "real estate mortgage" loans listed in the
Consolidated Financial Statements and other loans to customers who pledge their
homes as collateral for their borrowings. In the majority of the loans to
commercial customers, the Bank is relying on the borrower's cash flow to service
the loans. However, these loans may be secured by personal or commercial real
estate. A portion of the loans listed in residential first mortgages represent
commercial loans where the borrower has pledged his/her residence as collateral.
"Other" real estate loans include $65,000,000 in loans secured by commercial
property with the remaining $4,000,000 secured by multi-family units. The most
significant loan growth was in commercial loans secured by business property
which increased $15,200,000, 28% over the prior year, and in commercial loans
not secured by real estate which increased $7,800,000, a 42% increase.
<PAGE>
The following table shows the balance and percentage makeup of loans as of
December 31:
<TABLE>
(dollars in thousands)
1998 1997
---- ----
Balances Percentage Balances Percentage
Secured by real estate:
<S> <C> <C> <C> <C>
Residential first mortgage $ 38,051 20.5% $ 38,073 23.9%
Residential home equity/other junior
liens 9,106 4.9% 13,665 8.6%
Construction and land development 23,048 12.4% 19,490 12.3%
Other 68,960 37.1% 53,743 33.8%
Consumer 16,653 9.0% 14,011 8.8%
Commercial 26,058 14.1% 18,299 11.5%
Other 3,770 2.0% 1,729 1.1%
------ ------ -------- ------
Total Loans (Gross) $185,646 100.0% $159,010 100.0%
</TABLE>
The Bank's loan personnel have endeavored to make high quality loans using
well established policies and procedures and a thorough loan review process.
Loans in excess of $400,000 are approved by a committee of the Board or the
Board. The Bank has hired an independent person to review the quality of the
loan portfolio on a regular basis. Loan quality is demonstrated by the ratios of
nonperforming loans and assets as a percentage of the loan portfolio as
illustrated in the table below for December 31:
<TABLE>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Nonperforming Loans:
<S> <C> <C> <C>
Nonaccrual loans........................................ $ 1,519 $ 809 $109
Loans past due 90 days or more.......................... 25 249 448
-- --- ---
Total nonperforming loans............................ 1,544 1,058 557
Other real estate....................................... 0 0 723
- - ---
Total nonperforming assets............................ $1,544 $1,058 $1,280
====== ====== ======
Nonperforming loans as a percent of total loans........ .83% .67% .41%
Nonperforming assets as a percent of total loans........ .83% .67% .94%
Nonperforming loans as a percent of the loan loss
reserve.............................................. 27% 31% 17%
</TABLE>
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, accruing loans 90 days or more past due in
payments, and other real estate which has been acquired primarily through
foreclosure and is waiting disposition. Loans are generally placed on a
nonaccrual basis when principal or interest is past due 90 days or more and
when, in the opinion of management, full collection of principal and interest is
unlikely.
<PAGE>
Nonperforming loans increased $490,000 to $1,544,000 at December 31, 1998.
The increase in nonperforming loans is primarily due to the addition of a
$700,000 loan to nonaccrual status. The loan is well collateralized and is not
expected to result in losses that would have a material adverse impact on the
Company's financial condition or results of operation.
Impaired loans totaled $4,300,000 at December 31, 1998, compared to
$3,100,000 at the prior year end. Included in impaired loans are nonperforming
loans from the above table, except for homogenous residential mortgage and
consumer loans, and an additional $3,200,000 of commercial loans separately
identified as impaired. The increase in impaired loans is primarily due to the
addition of the $700,000 loan to nonaccrual loans mentioned above.
During 1998 the Bank charged off loans totaling $302,000 and recovered
$196,000 for a net charge off amount of $106,000. In the previous year, the Bank
had net charge offs totaling $397,000. Because of the 25% commercial loan
growth, management increased the loan loss provision in the second half of the
year to $340,000 from the $300,000 provided for in the first half of the year.
The allowance for loan losses totaled $3,958,000 at year end which was
2.13% of total loans, compared to 2.15% of loans in 1997. Management considers
this to be adequate to cover any anticipated losses. Management regularly
evaluates the allowance for loan losses based on the composition of the loan
portfolio, an evaluation of specific credits, historical loss experience, the
level of nonperforming loans and loans that have been identified as impaired.
Externally, the local economy and events or trends which might negatively impact
the loan portfolio are also considered.
The following table shows changes in the loan loss reserve for the years
ended December 31:
<TABLE>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of the year.............. $3,424 $3,335 $3,097
Additions (deduction):
Loans charged off.......................... (302) (499) (287)
Recoveries of loans charged off............ 196 102 77
Provision charged to operations............ 640 486 448
---- ---- ----
Balance at end of the year.................... $3,958 $3,424 $3,335
Allowance for loan losses to loans outstanding 2.13% 2.15% 2.44%
</TABLE>
Deposits
Deposit balances of $239,557,000 at December 31, 1998 were approximately
$37 million (18%) higher than the previous year end. Because year end deposit
balances can
<PAGE>
fluctuate in unusual ways, it is more meaningful to analyze changes in average
balances. Average deposits increased $31.3 million during 1998, about 17%.
Non-interest bearing demand deposits increased $8.9 million, about 26% on
average. Average savings and NOW balances increased $12.4 million (16%) while
average time deposits increased $10 million or about 14%.
The following table sets forth average deposit balances for the years ended
December 31:
<TABLE>
(in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Non-interest bearing demand $ 43,619 $ 34,668 $ 31,005
Savings, NOW and money market 91,552 79,104 76,128
Time deposits 81,119 71,093 62,577
------ -------- --------
Total average deposits $216,290 $184,865 $169,710
</TABLE>
The increase in savings deposits was primarily due to a $15.6 million
increase in money market accounts. The growth in time deposits was the result of
maintaining competitive rates in the market and selectively offering special
rates on particular time products.
The majority of the Bank's deposits are from core customer sources-long
term relationships with local personal, business, and public customers. In some
financial institutions, the presence of interest bearing certificates greater
than $100,000 indicates a reliance upon purchased funds. However, large
certificates in the Bank's portfolio consist primarily of core deposits of local
customers. The Bank does not support growth through purchased funds or brokered
deposits. See Note 7 of the Consolidated Financial Statements for a maturity
schedule of over $100,000 certificates.
Capital
The Company's capital at year end totaled $23,497,000, a $1,800,000 (8%)
increase over the prior year. Banking regulators have set forth various ratios
of capital to assets to assess a financial institution's soundness. Tier 1
capital is equal to shareholders' equity while Tier 2 capital includes a portion
of the allowance for loan losses. The regulatory agencies have set capital
standards for "well capitalized" institutions. The leverage ratio, which divides
Tier 1 capital by three months average assets, must be 5% for a well capitalized
institution. The Bank's leverage ratio was 7.47% at year end 1998. Tier 1
risk-based capital, which includes some off balance sheet items in assets and
weights assets by risk, must be 6% for a well capitalized institution. The
Bank's was 10.17% at year end 1998. Total risk-based capital, which includes
Tier 1 and Tier 2 capital, must be 10% for a well capitalized institution. The
Bank's total risk based capital ratio was 11.42% at year end. The Bank's strong
capital ratios put it in the best classification on which the FDIC bases its
assessment charge.
<PAGE>
The following table lists various Bank capital ratios at December 31:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Equity to asset ratio 7.14% 9.19% 9.67%
Tier 1 leverage ratio 7.47% 9.50% 9.86%
Tier 1 risk-based capital 10.17% 14.12% 14.71%
Total risk-based capital 11.42% 15.37% 15.96%
</TABLE>
The decline in the Bank's capital ratio is the result of dividends paid to
the parent company to enable a subsidiary company to purchase land, some of
which will be used for a branch site, the remainder to be sold. After the sale
is completed it is anticipated that the Bank's capital account will be
recredited for a substantial portion of the dividends related to the purchase.
The Company's ability to pay dividends is subject to various regulatory
requirements. Management believes, however, that earnings will continue to
generate adequate capital to continue the payment of dividends. In 1998 the
Company paid dividends totaling $1,645,000, or 42% of earnings. Book value of
the stock was $15.04 at year end.
The Company maintains a five year plan which was the result of a formal
strategic planning process. Management and the Board continue to monitor long
term goals which include expanded services to achieve growth and retaining
earnings to fund growth, while providing return to shareholders.
In the coming year, the Bank will spend approximately $1,800,000 to build
and furnish a new branch in the northwest part of Brighton. Included in land is
approximately $800,000 for the building site. Adjoining the building site is
vacant land which the corporation intends to sell. The vacant land, totaling
approximately $3,100,000, is included in other assets.
Liquidity and Funds Management
Liquidity is monitored by the Bank's Asset/Liability Management Committee
(ALCO) which meets at least monthly. ALCO developed, and the Board of Directors
approved, a liquidity policy which requires a minimum 15% liquidity ratio. The
Bank's liquidity ratio averaged 18% in 1998.
Deposits are the principal source of funds for the Bank. Management
monitors rates at other financial institutions in the area to ascertain that its
rates are competitive in the market. Management also attempts to offer a wide
variety of products to meet the needs of its customers. The Company does not
deal in brokered funds and the makeup of its over $100,000 certificates consists
of local depositors known to the Bank.
<PAGE>
It is the intention of the Bank's management to handle unexpected liquidity
needs through its Federal Funds position. The goal is to maintain a daily Fed
Funds balance sufficient to cover required cash draws. The Bank's policy
requires all purchases of Fed Funds to be approved by senior management so that
liquidity needs are known. In the event the Bank must borrow for an extended
period, management may look to "available for sale" securities in the investment
portfolio for liquidity or borrow from the Federal Home Loan Bank where a
$13,000,000 line of credit is available.
Throughout the past year, Fed Funds Sold balances have averaged
approximately $5,600,000 compared to $3,000,000 the prior year. Periodically the
Bank borrowed money through the Fed Funds market.
Quantitative and Qualitative Disclosures about Market Risk
The Bank's Asset/Liability Management committee (ALCO) meets monthly to
review the Bank's performance. The committee discusses the current economic
outlook and its impact on the Bank and current interest rate forecasts. Actual
results are compared to budget in terms of growth and income. A yield and cost
analysis is done to monitor interest margin. Various ratios are discussed
including capital ratios and liquidity. The Bank's exposure to market risk is
reviewed.
Interest rate risk is the potential of economic losses due to future rate
changes and can be reflected as a loss of future net interest income and/or a
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 asset 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 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 (see Note 11 of the Consolidated Financial Statements).
<PAGE>
The table below shows the scheduled maturity and repricing of the Bank's
assets and liabilities as of December 31, 1998:
<TABLE>
0-3 4-12 1-5 5+
Months Months Years Years Total
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Assets:
Loans................................ $57,080 $32,701 $83,838 $12,027 $185,646
Securities........................... 4,150 3,215 19,131 12,150 38,646
Short term investments............... 18,934 18,934
Other assets......................... 21,668 21,668
------- ------- -------- ------ --------
Total assets...................... $80,164 $35,916 $102,969 $45,845 $264,894
Liabilities & Shareholders' Equity:
Demand, Savings & NOW................ $39,421 $16,678 $59,131 $36,388 $151,618
Certificates of Deposit.............. 23,278 46,876 17,785 0 87,939
Other liabilities and equity......... 25,337 25,337
------- ------- ------- ------ --------
Total liabilities and equity...... $62,699 $63,554 $76,916 $61,725 $264,894
Rate sensitivity gap and ratios:
Gap for period....................... $17,465 $(27,638) $26,053 $(15,880)
Cumulative gap....................... 17,465 (10,173) 15,880
Cumulative rate sensitive ratio......... 1.28 .92 1.08 1.00
December 31, 1997 rate sensitive
ratio................................... 1.27 1.16 1.09 1.00
</TABLE>
<TABLE>
Total Average Interest Rate Estimated Fair Value
----- --------------------- --------------------
<S> <C> <C> <C>
Assets:
Loans $185,646 9.85% $187,500
Securities 38,646 6.46% 39,400
Short term investments 18,934 5.20% 18,900
Liabilities:
Savings, NOW, MMDA $104,216 3.03% 104,200
Certificates of Deposit 87,939 5.69% 89,300
</TABLE>
Estimated fair value for securities are based on quoted market prices. For
variable rate loans that reprice frequently and with no significant change in
credit risk, fair values are generally based on carrying values. The fair values
for fixed rate one-to-four family residential mortgage loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan
<PAGE>
characteristics. The fair value of other types of loans is estimated by
discounting future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. Because it has a one day maturity, the carrying value is
used as fair value for Fed Funds sold. The fair value of deposits with no stated
maturity, such as savings, NOW and money market accounts is equal to the amount
payable on demand. The fair value of certificates of deposit is estimated using
rates currently offered for deposits with similar remaining maturities.
As noted above, the entire balance of savings, NOW and MMDAs is 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.
Given the liability sensitive position of the Bank at December 31, 1998, if
interest rates increase 200 basis points and management did not respond,
management estimates that pretax net interest income would decrease
approximately $500,000 while a similar decrease in rates would cause pretax net
interest income to increase by a like amount. See discussion under "Net Interest
Income" below.
RESULTS OF OPERATIONS
The Company achieved record earnings in 1998. Net income of $3,907,000 was
an increase of $173,000 (4.6%) over 1997 earnings. The increase was due to an
increase in net interest income partially offset by an increase in non-interest
expense. The Company's return on average assets (ROA) was 1.63% in 1998, a 16
basis point decrease from the prior year. The ROA declined because income grew
at 4.6% while average assets grew at 15%. The return on average stockholders'
equity (ROE) was 17.83%, a decrease of 1 basis point from the ROE reported in
1997.
The following table contains key performance ratios for years ended
December 31:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income to:
Average stockholders' equity 17.83% 17.84% 19.12%
Average assets 1.63% 1.79% 1.88%
Basic earnings per common share:* $2.49 $2.37 $2.27
</TABLE>
*restated to give effe ct to 3 for 1 stock split, payable as a dividend of two
shares for each one share of company stock held of record January 16, 1997, paid
February 16, 1997.
Net Interest Income
Net interest income is the difference between interest earned on earning
assets and interest paid on deposits. It is the major component of earnings for
a financial institution. For analytical purposes, the interest earned on
investments and loans is expressed on a fully taxable equivalent (FTE) basis.
Tax-exempt interest is increased to an amount
<PAGE>
comparable to interest subject to federal income taxes in order to properly
evaluate the effective yields earned on earning assets. The tax equivalent
adjustment is based on a federal income tax rate of 34%.
The following table shows the average balance and percentage earned or paid
on key components of earning assets and paying liabilities for the year ended
December 31:
<TABLE>
1998 1997 1996
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Short term investments $ 8,630 5.31% $ 2,754 5.40% $ 5,135 5.24%
Taxable securities 23,019 6.02% 31,873 5.98% 32,042 5.95%
Tax-exempt securities 15,221 7.13% 13,262 7.36% 11,172 7.64%
Loans 175,873 9.85% 148,096 9.82% 130,648 9.91%
------- ------- -------
Total earning assets $222,743 9.09% $195,985 8.97% $178,997 8.93%
Interest bearing funds:
Savings/NOW accounts $ 91,552 3.03% $ 79,104 2.79% $ 76,128 2.80%
Time deposits 81,119 5.69% 71,093 5.71% 62,577 5.62%
Federal funds purchased 179 5.98% 610 5.77% 4 5.58%
------- --------- --------
Total interest bearing funds: $172,850 4.28% $150,807 4.18% $138,709 4.07%
Interest spread 4.81% 4.79% 4.86%
Net interest margin 5.76% 5.75% 5.77%
</TABLE>
Tax equivalent interest income in each of the three years includes loan
origination fees of $600,000 in 1998, $380,000 in 1997, and $451,000 in 1996. A
substantial portion of loan origination fees is deferred for recognition in
future periods or is considered in determining the gain or loss on the sale of
real estate mortgage loans.
<PAGE>
The following table sets forth the effects of volume and rate changes on
net interest income on a taxable equivalent basis. All figures are stated in
thousands of dollars.
<TABLE>
Year ended Year ended
December 31, 1998 compared to December 31, 1997 compared to
Year ended December 31, 1997 Year ended December 31, 1996
---------------------------- ----------------------------
Amount of Increase/(Decrease) Amount of Increase/(Decrease)
due to change in Due to change in
---------------- ----------------
Total Total
Amount Amount
Of Of
Average Increase/ Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal funds sold........... $ 317 $ (17) $ 300 $ (125) $ 4 $ (121)
Securities:
Taxable.................... (529) 11 (518) (10) 10 0
Tax Exempt................. 144 (35) 109 160 (37) 123
Loans........................ 2,727 50 2,777 1,729 (136) 1,593
Total interest income...... $ 2,659 $ 9 $ 2,668 $ 1,754 $ (159) $ 1,595
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts....... $ 348 $ 214 $ 562 $ 83 $ (2) $ 81
Time....................... 572 (15) 557 478 67 545
Short-term borrowings........ (25) 1 (24) 34 1 35
Total interest expense.... $ 895 $ 200 $ 1,095 $ 595 $ 66 $ 661
Net interest income (FTE).... $ 1,764 $ (191) $ 1,573 $ 1,159 $ (225) $ 934
</TABLE>
The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
Net interest income increased $1,571,000 in 1998 over the prior year due to
a $2,667,000 increase in interest income partially offset by approximately
$1,096,000 increase in interest expense. The increase in income can be
attributed to an increase in average earning assets of $27,000,000 and an
increase in the yield of 12 basis points. Loan interest income was $2,777,000
higher in 1998 than the previous year. The increase was due to an increase of
$27,800,000 in average balances and a 3 basis point increase in rates. Loan
demand was strong in 1998 and management of the Bank endeavored to meet the
needs of the community by allowing the investment portfolio to decline to
satisfy loan demand. Income on taxable securities declined in 1998 primarily due
to an $8,800,000 decrease in average balances. Interest rates increased 4 basis
points. Tax-exempt bonds earned $109,000 more in 1998 than the previous year.
The average balance of these
<PAGE>
securities increased $2,000,000 while the rate declined 23 basis points.
Interest income on short term investments increased $300,000 due to an increase
in average balances of $5,900,000, partially offset by a decrease in rates of 9
basis points
Interest expense increased $1,096,000 in 1998 because average balances
increased approximately $22,000,000 and interest rates increased 10 basis
points. The interest cost for savings and NOW accounts increased $562,000
because average savings and NOW balances increased $12,400,000 and interest
rates increased 24 basis points. Interest on certificates of deposit increased
$558,000 because average time deposits increased $10,000,000 although interest
rates declined 2 basis points. Savings balances increased as customers responded
favorably to the tiered rate structure now being offered on money market
accounts. Growth in time deposits was encouraged by competitive pricing and
periodically offering special rates on specific products.
In the previous year, net interest income had increased nearly $934,000.
The increase in net interest income was the result of an increase in interest
income of $1,595,000, partially offset by an increase in interest expense of
approximately $661,000. The increase in interest income in 1997 was the result
of a $17,000,000 increase in earning assets and an increase in yields on earning
assets of 4 basis points. The increase in interest expense was the result of
average balances increasing $12,000,000 and interest rates increasing 11 basis
points.
In the coming year, management expects growth to continue in both loans and
deposits but at a more moderate pace than that experienced in 1998. An economic
decline could adversely affect growth. The interest spread and interest margin
will likely decline somewhat due to the bank's high concentration of prime
related loans and the related reductions of prime in the fourth quarter of 1998.
The interest cost on deposits is expected to continue to rise as competition for
deposits intensifies among the bank and non-bank players.
<PAGE>
The following table shows the composition of average earning assets and
interest paying liabilities for the years ended December 31:
<TABLE>
1998 1997 1996
---- ---- ----
As a percent of average earning assets:
<S> <C> <C> <C>
Loans 78.95% 75.56% 72.99%
Securities 17.18% 23.03% 24.14%
Short term investments 3.87% 1.41% 2.87%
----- ------ ------
Average earning assets 100.00% 100.00% 100.00%
Savings and NOW 41.10% 40.36% 42.53%
Time deposits 36.42% 36.27% 34.96%
Short term borrowing .08% .31% 0
----- ------ ------
Average interest bearing liabilities 77.60% 76.94% 77.49%
Earning asset ratio 92.76% 94.14% 94.08%
Free-funds ratio 22.40% 23.06% 22.51%
</TABLE>
Provision for Loan Losses
The provision for loan losses increased to $640,000 in 1998 compared to
$486,000 in 1997. This increase was deemed appropriate due to the 25% inc rease
in commercial loans. The provision was sufficient to produce a ratio of
allowance for loan loss to loans of 2.13% and a ratio of nonperforming loans to
the allowance for loan loss of 27% at year end. Management analysis of the
adequacy of the allowance considers the portfolio mix as well as economic
conditions within the Bank's market.
Non-interest Income
Non-interest income, which includes service charges on deposit accounts,
loan fees, other operating income, and gain(loss) on sale of assets and
securities transactions, declined approximately $102,000 (5.5%) in 1998 compared
to the previous year. On the positive side, trust income increased $76,000 in
1998, the first full year that the Trust Department was functional. Gain on loan
sales increased $109,000. This number is very volatile as the volume of loan
sales is dependent on the amount of mortgage demand and on the movement of
mortgage rates. In 1998 the Bank benefited from a low rate environment which
created good mortgage demand. Service charges on deposit accounts declined
slightly as depositors took advantage of service free options. "Other"
non-interest income includes a $20,000 loss on the disposal of computer
equipment and a $200,000 provision for estimated selling costs related to the
previously mentioned land held for sale. Included in 1997 other non-interest
income is an $86,000 gain on the sale of other real estate.
Non-interest Expense
Non-interest expense increased 15% in 1998. The most significant component
of non-interest expense is salaries and benefits expense. In 1998 salaries and
benefits expense increased 14% to $4,300,000, due to the combined effects of
salary increases, staffing of the trust department, and an increase in the
employee profit sharing bonus.
<PAGE>
Equipment expense increased $244,000 due to the depreciation expense related to
the more than $1,500,000 investment in technology made in 1998. Other expense
increased $255,000 (18%). The most notable factors contributing to the increase
in other expense were increases in expense related to upgrading technology and
related costs of training employees.
Year 2000
Year 2000 issues have been a major concern of the Bank's management in
1998. The Bank is highly dependent on technology and several applications 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, assessment, and renovation 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 validation and
implementation phases. Applications that have been identified as being date
sensitive are being tested. The Company has spent approximately $1,500,000 on
hardware and software in 1998 and the capital expenditures are essentially
complete for this project. The main frame computer system that processes the
Bank's business has been converted to a client server system. The vendor
warrants that the software running on the system is Year 2000 compliant. In the
coming year, the Company will spend approximately $100,000 on testing to
determine that all the Bank's systems are 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 Company expects to have a contingency plan drafted by
the first quarter of 1999 in the unlikely event a failure were to occur.
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.
<PAGE>
Federal Income Tax Expense
Fluctuations in income taxes resulted primarily from changes in the level
of profitability and in variations in the amount of tax-exempt income. Income
tax expense increased $59,000 to $1,679,500 (3.6%) in 1998. For further
information see Note 8 "Federal Income Taxes" in the Company's Consolidated
Financial Statements.
Prospective Accounting Changes
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires recognition of all derivatives
as either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. The accounting for gains and
losses on derivatives depends on the intended use of the derivative. This
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, with earlier application encouraged. Retroactive application is
not permitted. SFAS 133 is not expected to have a significant impact on the
financial condition or operations of the Corporation.
Item 7a - Quantitative and Qualititative Disclosures about Market Risk
Included in Management's Discussion and Analysis set forth in Item 7
Item 8 - Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data of
the Company appear on pages 23 to 30 of Appendix I to the Company's definitive
Proxy Statement, dated March 19, 1999, relating to the April 21, 1999 Annual
Meeting of shareholders, as filed with the Commission. This Appendix is
incorporated herein by reference and included as Exhibit 13 to this report on
Form 10-K:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statement
Independent Auditors' Report
Quarterly financial data relating to results of operations for the
years ended December 31, 1998 and 1997 are reported on page 50 of Appendix I.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant
Directors
The information with respect to Directors and Nominees of the Registrant,
set forth under the caption "Election of Directors" on pages 1 through 3 of the
Company's definitive proxy statement, as filed with the Commission and dated
March 19, 1999, relating to the April 21, 1999 Annual Meeting of Shareholders,
is incorporated herein by reference.
Executive Officers
The information called for by this item is contained in Part I of this Form
10-K Report.
Item 11 - Executive Compensation
The information set forth under the caption "Summary Compensation Table" on
page 5 of the Company's definitive proxy statement, as filed with the Commission
and dated March 19, 1999, relating to the April 21, 1999 Annual Meeting of
Shareholders, is incorporated herein by reference. Information under the caption
"Committee Report on Executive Compensation" on pages 3 and 4 and "Shareholder
Return Performance Graph" on page 8 of the definitive proxy statement is not
incorporated by reference herein and is not deemed to be filed with the
Securities and Exchange Commission.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Ownership of Common Stock" on
page 7 of the Company's definitive proxy statement, as filed with the Commission
and dated March 19, 1999, relating to the April 21, 1999 Annual Meeting of
Shareholders, is incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions with
Management" on page 6 of the Company's definitive proxy statement, as filed with
the Commission and dated March 19, 1999, relating to the April 21, 1999 Annual
Meeting of Shareholders, is incorporated herein by reference.
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) 1. Financial Statements
All financial statements of the Registrant are incorporated herein by
reference as set forth in Appendix I to the Registrant's Definitive
Proxy Statement, dated March 19, 1999, relating to the April 21, 1999
Annual Meeting of Shareholders, a copy of which is filed as Exhibit 13
to this Report on Form 10-K.
2. Financial Statement Schedules
Not applicable.
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on
Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, dated March 11, 1999.
FNBH BANCORP, INC.
/s/ Barbara D. Martin Barbara D. Martin, President & Chief Executive
Officer (Principal Executive Officer)
/s/ Barbara J. Nelson Barbara J. Nelson, Secretary/Treasurer
(Principal Accounting Officer)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated. Each director of the Registrant, who's
signature appears below, hereby appoints Barbara D. Martin and Barbara J.
Nelson, and each of them severally, as his or her attorney-in-fact, to sign in
his or her name and on his or her behalf, as a director of the Registrant, and
to file with the Commission any and all Amendments to this Report on Form 10-K.
W. Rickard Scofield, Chairman of the Board /s/ W. Rickard Scofield
Charles N. Holkins, Vice Chairman of the Board /s/ Charles N. Holkins
Gary R. Boss, Director /s/ Gary R. Boss
Donald K. Burkel, Director /s/ Donald K. Burkel
Harry E. Griffith, Director /s/ Harry E. Griffith
Dona Scott Laskey, Director /s/ Dona Scott Lakskey
Barbara D. Martin, Director /s/ Barbara D. Martin
James R. McAuliffe, Director /s/ James R. McAuliffe
Randolph E. Rudisill, Director /s/ Randolph E. Rudisill
R. Michael Yost, Director /s/ R. Michael Yost
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the applicable
assigned number:
Exhibit
Number Page
- ------ ----
*10.1 Form Restrictive Stock Agreement......................................
(13) Pages 10-52 of Appendix I to the Company's Proxy Statement, dated
March 19, 1999, for the Annual Meeting of Shareholders to be held
April 21, 1999 representing that portion of the Appendix
incorporated by reference in Item 8 of this report. This Appendix
was filed with the Commission as part of the Company's Proxy
Statement and was delivered to Company shareholders in compliance
with Rule 14(a)-3 of the Securities Exchange Act of 1934, as
amended................................................................38
(21) Subsidiaries of the Registrant.........................................40
The following exhibits, indexed according to the applicable assigned
number, were previously filed by the Registrant and are incorporated by
reference in this Form 10-K Annual Report.
Exhibit
Number Original Filing Form and Date
- ------ -----------------------------
3.1 Restated Articles of Incorporation Exhibit 3.1 of Form 10, effective
of the Registrant June 30, 1995 ("Form 10")
3.2 Amendment to the Company's Articles Appendix I of Proxy Statement
of Incorporation to Increase dated March 17, 1998
Authorized Shares
3.3 Bylaws of the Registrant Exhibit 3.2 of Form 10
4 Form of Registrant's Stock Certificate Exhibit 4 of Form 10
Material Contracts:
10.2 Howell Branch Lease Agreement Exhibit 10.2 to Form 10
*10.3 Company's Long Term Incentive Plan Appendix II of Proxy Statement
dated March 17, 1998
*Represents a compensatory arrangement
<PAGE>
EXHIBIT 10.1
RESTRICTED SHARE GRANT AGREEMENT
AGREEMENT made as of the 1st day of July, 1998, by FNBH BANCORP, INC., a
Michigan corporation (the "Company"), and Name of Employee (the "Employee").
RECITALS
The FNBH Bancorp, Inc. Long-Term Incentive Plan authorizes the award of
shares of restricted stock to employees of the Company upon such terms and
conditions as may be determined by the Compensation Committee of the Board of
Directors.
The Committee has approved a grant of restricted shares to the Employee
upon the terms and conditions set forth in this Agreement, including a condition
that all shares will be forfeited if the Employee does not continue as an
employee of the Company or a Subsidiary for the five year period specified in
this Agreement.
The Company and the Employee desire to confirm in this Agreement the terms,
conditions and restrictions applicable to the grant of restricted stock.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
1.1 "Board" means the Board of Directors of the Company.
1.2 "Committee" means the Compensation Committee of the Board.
1.3 "Common Stock" means the common stock of the Company, no par value.
1.4 "Company" means FNBH Bancorp, Inc., a Michigan corporation, its
successors and assigns.
1.5 "Effective Date of this Agreement" means July 1, 1998.
1.6 "Plan" means the FNBH Bancorp, Inc. Long-Term Incentive Plan.
1.7 "Restricted Share" means a Share which is subject to the restriction on
sale, pledge or other transfer imposed by Section 3.1. An "Unrestricted Share"
is a Share which is no longer a Restricted Share.
1.8 "Reverted Shares" means Shares which have reverted to the Company
pursuant to Section 5.3.
<PAGE>
1.9 "Shares" means the shares of Common Stock awarded, issued and delivered
to the Employee under this Agreement. If, as a result of a stock split, stock
dividend, combination of stock, or any other change or exchange of securities,
by reclassification, reorganization, recapitalization or otherwise, the Shares
shall be increased or decreased, or changed into or exchanged for a different
number or kind of shares of stock or other securities of the Company or another
corporation, the term "Shares" shall mean and include the shares of stock or
other securities issued with respect to the Shares.
1.10 "Vested Shares" shall have the meaning expressed in Section 5.1.
2. GRANT AND ACCEPTANCE OF AWARD; TAX ELECTION
2.1 Grant. The Company confirms the award to the Employee of Number of
Shares shares of Common Stock (the "Shares") as restricted stock, upon the
terms, restrictions and conditions of this Agreement and the Plan. The award of
Shares shall be effective as of the Effective Date of this Agreement. The
Company agrees to issue to the Employee a certificate representing the Shares
promptly after the Effective Date of this Agreement, which shall be held by the
Company until all of the shares become Vested Shares. Prior to that time, upon
the request of Employee, the Company may issue a certificate representing those
Shares that are Vested Shares.
2.2 Acceptance. The Employee accepts this award of Shares and agrees to
hold them subject to the terms, restrictions and conditions of this Agreement.
2.3 Tax Election. The Employee may elect to be taxed in 1998 on the fair
market value of the Shares awarded by signing an election to be so taxed under
Section 83(b) of the Internal Revenue Code, and filing such election with the
Internal Revenue Service within thirty (30) days after the Effective Date of
this Agreement. If the Employee chooses not to make such an election, the
Employee will be taxed on the fair market value of the Shares in the year in
which the restrictions lapse.
2.4 Withholding. The Employee recognizes that in the year the Employee is
taxed on the grant of Shares (either at the time of vesting under Section 5.1 or
5.2, or if an election is made under Section 2.3), the Company will be required
by federal regulations to deduct and withhold income taxes measured by the
market value of the Shares at the withholding rate (currently 28 percent) in
effect at that time. If the Employee elects to be taxed in 1998 on the fair
market value of the Shares, the Employee shall choose either (a) to pay the
Company in cash the amount to be withheld or (b) to direct the Company to
withhold 28 percent of the Shares (Tax Shares shares) and itself pay the amount
to be withheld. If the Employee chooses the latter, the Employee will receive a
certificate for Net Shares shares. In either event, the Employee will be
responsible to pay when due all income taxes on the fair market value of the
Shares in excess of the amount which is withheld.
2
<PAGE>
3. RESTRICTIONS ON TRANSFER OF SHARES; LAPSE OF RESTRICTIONS
3.1 Transfer Prohibition. The Employee shall not sell, pledge or otherwise
assign or transfer any Share or any interest in any Share while such Share is a
Restricted Share.
3.2 Restricted Shares. Every Share shall be a Restricted Share until the
restrictions lapse as provided in Section 3.5.
3.3 Securities Law Compliance. The Employee shall not sell or transfer any
Share or any interest in any Share, whether such Share is or is not a Restricted
Share, unless either (a) the Company shall consent in writing to such transfer,
or (b) the Company shall have received an opinion of counsel satisfactory to the
Company to the effect that such transfer will not violate the registration
requirements imposed by the Securities Act of 1933 or any other provision of law
which the Company shall desire such opinion to cover.
3.4 Legend. Every certificate representing a Share shall at all times bear
the following legend required under Section 7.2(b) of the Plan:
3.5 Unrestricted Shares. The restrictions imposed by Section 3.1 shall
lapse at the time a Share becomes a Vested Share pursuant to Section 5.1 or
Section 5.2. At that time, the Share will be an Unrestricted Share.
3.6 Rights of Shareholder. Except for the restrictions imposed in this
Article 3 and unless the Shares have reverted to the Company pursuant to Section
5.3, the Employee shall have all the rights of a shareholder with respect to the
Restricted Shares, including the right to vote and to receive the dividends
declared and paid thereon.
4. ACQUISITION WARRANTIES
In order to induce the Company to issue and deliver the Shares on the terms
of this Agreement, the Employee warrants to and agrees with the Company as
follows:
4.1 No Participating Interest. The Employee is acquiring the Shares for the
Employee's own account, and has not made any arrangement to convey any interest
in the Shares to any person, other than to transfer Reverted Shares to the
Company pursuant to Section 5.4.
4.2 Ability to Evaluate. Because of the Employee's knowledge and experience
in financial and business matters, the Employee is capable of evaluating the
merits and risks of acquiring the Shares under the arrangements prescribed by
this Agreement.
4.3 Familiarity with Company. The Employee is familiar with the business,
financial condition, earnings and prospects of the Company, and confirms that
the Company has not made any representation regarding the foregoing matters or
the merits of this Agreement.
3
<PAGE>
4.4 All Questions Answered. The Employee understands all of the terms of
this Agreement and the consequences to the Employee of any actions which may be
taken under this Agreement. The Employee confirms there are no questions
relating to any such matters which have not been answered to the Employee's
complete satisfaction.
5. VESTING AND REVERSION
5.1 Vesting of Shares. The Shares issued hereunder which have not
previously reverted to the Company shall become Vested Shares with respect to
the percentage of Shares set forth opposite the following dates:
<TABLE>
Percent of Shares
Date Vested to Date
---- --------------
<S> <C>
January 1, 1999 20%
January 1, 2000 40%
January 1, 2001 60%
January 1, 2002 80%
January 1, 2003 100%
</TABLE>
5.2 One Hundred Percent Vesting. All Shares issued hereunder which have not
previously reverted to the Company shall become Vested Shares
(a) upon the Employee's death;
(b) if the Employee's employment by the Company or a Subsidiary ends
at a time when the Employee is permanently disabled, as determined by a
physician approved by the Committee; or
(c) if the Employee's employment by the Company or Subsidiary ends
upon Employee's Retirement (as defined in the Plan),
whichever of the foregoing is first to occur.
5.3 Reversion. Except as provided in Section 5.2, all Shares which have not
become Vested Shares shall automatically revert to the Company at any time the
Employee shall no longer be employed by the Company or a Subsidiary for any
reason whatsoever. No compensation shall be payable to the Employee for shares
which revert to the Company.
5.4 Effect of Reversion. Upon reversion of any Shares (a) absolute
ownership thereof shall automatically revert to the Company at that time, (b)
such Shares shall be deemed to be "Reverted Shares" for purposes of this
Agreement, (c) all the Employee's rights and interests in the Reverted Shares
shall cease at that time, and (d) the Employee shall be obligated immediately to
surrender to the Company the certificates representing the Reverted Shares, but
the failure to do so shall not impair the immediate effect of clauses (a), (b)
and (c) above.
5
<PAGE>
6. GENERAL PROVISIONS
6.1 No Right to Employment. This Agreement is not an employment contract.
Neither the Plan nor this Agreement or anything else changes the at will
employment status of the Employee.
6.2 Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be valid and enforceable, but if any
provision of this Agreement shall be held to be prohibited or unenforceable
under applicable law (a) such provision shall be deemed amended to accomplish
the objectives of the provision as originally written to the fullest extent
permitted by law, and (b) all other provisions of this Agreement shall remain in
full force and effect.
6.3 Captions. The captions used in this Agreement are for convenience only,
do not constitute a part of this Agreement and all of the provisions of this
Agreement shall be enforced and construed as if no captions had been used.
6.4 Complete Agreement. This Agreement contains the complete agreement
between the parties relating in any way to the subject matter of this Agreement
and supersedes any prior understandings, agreements or representations, written
or oral, which may have related to such subject matter in any way.
6.5 Notices.
(a) Procedures Required. Each communication given or delivered under
this Agreement must be in writing and may be given by personal delivery or
by certified mail. A written communication shall be deemed to have been
given on the date it shall be delivered to the address required by this
Agreement.
(b) Communications to the Company. Communications to the Company shall
be addressed to it at the principal corporate headquarters and marked to
the attention of the Company's president.
(c) Communications to the Employee. Every communication to the
Employee shall be addressed to the Employee at the address given
immediately below the Employee's signature to this Agreement, or to such
other address as the Employee shall specify to the Company.
6.6 Assignment. This Agreement is not assignable by the Employee during the
Employee's lifetime. This Agreement shall be binding upon and inure to the
benefit of (a) the successors and assigns of the Company, and (b) any person to
whom the Employee's rights under this Agreement may pass by reason of the
Employee's death.
6
<PAGE>
6.7 Amendment. This Agreement may be amended, modified or terminated by
written agreement between the Company and the Employee.
6.8 Waiver. No delay or omission in exercising any right hereunder shall
operate as a waiver of such right or of any other right hereunder. A waiver upon
any one occasion shall not be construed as a bar or waiver of any right or
remedy on any other occasion. All of the rights and remedies of the parties
hereto, whether evidenced hereby or granted by law, shall be cumulative.
6.9 Choice of Law. This Agreement shall be deemed to be a contract made
under the laws of the State of Michigan and for all purposes shall be construed
in accordance with and governed by the laws of the State of Michigan.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
Employee: FNBH BANCORP, INC.
________________________ By__________________________
Employee
Its
Address:
________________________
________________________
::ODMA\PCDOCS\GRR\163683\2
7
<PAGE>
EXHIBIT 21
SUBSIDIARIES
Name Jurisdiction of Incorporation
---- -----------------------------
First National Bank in Howell Michigan
H.B. Realty Co...............................................Michigan
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,304,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 18,934,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 38,646,000
<INVESTMENTS-MARKET> 39,434,000
<LOANS> 185,018,000
<ALLOWANCE> 3,958,000
<TOTAL-ASSETS> 264,894,000
<DEPOSITS> 239,557,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,841,000
<LONG-TERM> 0
0
0
<COMMON> 4,822,000
<OTHER-SE> 18,675,000
<TOTAL-LIABILITIES-AND-EQUITY> 264,894,000
<INTEREST-LOAN> 17,294,000
<INTEREST-INVEST> 2,168,000
<INTEREST-OTHER> 449,000
<INTEREST-TOTAL> 19,910,000
<INTEREST-DEPOSIT> 7,390,000
<INTEREST-EXPENSE> 11,000
<INTEREST-INCOME-NET> 12,510,000
<LOAN-LOSSES> 640,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,033,000
<INCOME-PRETAX> 5,586,000
<INCOME-PRE-EXTRAORDINARY> 3,907,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,907,000
<EPS-PRIMARY> 2.49
<EPS-DILUTED> 2.49
<YIELD-ACTUAL> 5.76
<LOANS-NON> 1,519,000
<LOANS-PAST> 25,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,424,000
<CHARGE-OFFS> 302,000
<RECOVERIES> 196,000
<ALLOWANCE-CLOSE> 3,958,000
<ALLOWANCE-DOMESTIC> 3,958,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
