SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
--------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission file number 0-25752
FNBH BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2869722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 East Grand River, Howell, Michigan 48843
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517)546-3150
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_ No___
The number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date: 1,562,768 shares of the Company's Common
Stock (no par value) were outstanding as of June 30, 1999.
<PAGE>
INDEX
Page
Number
Part I. Financial Information (unaudited):
Item 1.
Interim Financial Statements:
Consolidated Balance Sheet as of June 30, 1999 and Dec. 31, 1998........4
Consolidated Statements of Income, three months ended
June 30, 1999 and 1998, and six months ended June 30, 1999 and 1998.....5
Consolidated Statement of Stockholders' Equity and Comprehensive
Income for six months ended June 30, 1999 and 1998......................6
Consolidated Statements of Cash Flows for six months ended
June 30, 1999 and 1998................................................7
Notes to Interim Consolidated Financial Statements....................8
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................9
Item 3.
Quantitative and Qualitative Disclosures about Market Risk...........20
Part II. Other Information
Item 4...............................................................20
Item 6...............................................................20
Signatures...........................................................21
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Unaudited interim consolidated financial statements follow.
3
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Balance Sheets (unaudited) June 30 December 31
1999 1998
-------- -----------
<S> <C> <C>
Assets
Cash and due from banks $ 10,361,333 $ 12,304,296
Short term investments 10,069,224 18,934,366
---------- ----------
Total cash and cash equivalents 20,430,557 31,238,662
Investment securities held to maturity, net (fair value of $16,957,000
at June 30, 1999 and $19,066,000 at Dec. 31, 1998) 16,790,971 18,278,233
Investment securities available for sale, at fair value 30,628,437 19,765,936
Mortgage-backed securities held to maturity, net (fair value of
$514,000 at June 30, 1999 and $602,000 at Dec. 31, 1998) 518,084 601,940
------- -------
Total investment securities 47,937,492 38,646,109
Loans:
Commercial 153,053,775 137,634,020
Consumer 24,347,407 23,064,800
Real estate mortgages 23,700,445 24,946,777
----------- -----------
Total loans 201,101,627 185,645,597
Less unearned income 542,138 627,169
Less allowance for loan losses 4,273,117 3,958,008
--------- ---------
Net loans 196,286,372 181,060,420
Premises and equipment - net 8,311,541 7,289,461
Land available for sale - net 3,048,914 3,128,914
Accrued interest and other assets 3,710,114 3,325,318
Total assets $279,724,990 $264,688,884
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing demand $ 52,074,758 $ 47,401,813
NOW 27,196,632 29,087,082
Savings and money market 81,809,534 75,129,137
Time 92,762,937 87,938,732
---------- ----------
Total deposits 253,843,861 239,556,764
Accrued interest, taxes, and other liabilities 1,542,200 1,635,587
--------- ---------
Total liabilities 255,386,061 241,192,351
Stockholders' Equity
Common stock, no par value. Authorized 4,200,000 shares; 1,562,768
shares issued and outstanding at June 30, 1999 and Dec. 31, 1998 4,821,880 4,821,775
Retained earnings 19,753,231 18,728,787
Unearned management retention plan (66,220) (66,220)
Accumulated other comprehensive income (loss), net (169,962) 12,191
--------- ------
Total stockholders' equity 24,338,929 23,496,533
Total liabilities and stockholders' equity $279,724,990 $264,688,884
============ ============
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Income
Unaudited Three Months Ended June Six Months Ended June
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $4,437,173 $4,267,024 $8,770,045 $8,268,832
Interest and dividends on investment securities:
U.S. Treasury and agency securities 358,103 383,088 686,020 805,900
Obligations of state and political subdivisions 204,757 196,705 412,500 386,129
Other securities 16,687 16,822 29,771 16,822
Interest on short term investments 115,580 43,541 320,391 109,041
------- ------ ------- -------
Total interest income 5,132,300 4,907,180 10,218,727 9,586,724
--------- --------- ---------- ---------
Interest expense:
Interest on deposits 1,951,423 1,796,380 3,888,173 3,552,737
Other interest expense 203 6,156 904 6,822
--- ----- --- -----
Total interest expense 1,951,626 1,802,536 3,889,077 3,559,559
--------- --------- --------- ---------
Net interest income 3,180,674 3,104,644 6,329,650 6,027,165
Provision for loan losses 210,000 150,000 420,000 300,000
------- ------- ------- -------
Net interest income after provision for loan losses 2,970,674 2,954,644 5,909,650 5,727,165
--------- --------- --------- ---------
Non-interest income:
Service charges 527,354 400,656 794,692 772,717
Gain (loss) on sale of loans (49,417) 80,044 10,062 139,474
Trust income 33,667 17,534 67,954 30,535
Other 31,517 2,970 26,643 6,370
------ ----- ------ -----
Total non-interest income 543,121 501,204 899,351 949,096
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 1,161,980 1,076,685 2,321,422 2,118,517
Net occupancy 181,316 147,303 347,369 280,208
Equipment expense 185,695 146,665 300,774 261,998
Fees 111,339 73,118 259,444 124,813
Printing and supplies 80,075 41,498 143,675 107,219
Michigan Single Business Tax 47,300 43,500 98,900 95,500
Other 579,818 367,588 1,026,968 776,823
------- ------- --------- -------
Total non-interest expense 2,347,523 1,896,357 4,498,552 3,765,078
--------- --------- --------- ---------
Income before federal income taxes 1,166,272 1,559,491 2,310,449 2,911,183
Federal income taxes 343,900 453,000 660,900 858,000
------- ------- ------- -------
Net income $822,372 $1,106,491 $1,649,549 $2,053,183
======== ========== ========== ==========
Per share statistics*
Basic EPS $ .53 $.70 $1.05 $1.30
Diluted EPS $ .53 $.70 $1.05 $1.30
Dividends $ .20 $.18 $ .40 $ .36
</TABLE>
*Based on 1,562,768 average shares outstanding during the period ended June 30,
1999 and 1,575,000 average shares outstanding during the period ended June 30,
1998. See notes to interim consolidated financial statements.
5
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity and Comprehensive Income
For the Six Months Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
Accumulated Other
Comprehensive
Common Retained Income (loss)
Stock Earnings Total
<S> <C> <C> <C> <C>
Balances at December 31, 1997 $5,250,000 16,467,201 14,824 21,732,025
Net income 2,053,183 2,053,183
Change in unrealized gain(loss) on debt securities
available for sale, net of tax effect (4,624) (4,624)
Total comprehensive income 2,048,559
Cash dividends (36(cent)per share) (567,000) (567,000)
---------- --------- ------- ---------
Balances at June 30, 1998 $5,250,000 17,953,384 10,200 23,213,584
========== ========== ======= ==========
</TABLE>
See notes to interim consolidated financial statements
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (loss) Total
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $4,821,775 18,728,787 (66,220) 12,191 23,496,533
Net income 1,649,549 1,649,549
Change in unrealized gain (loss) on debt securities
available for sale, net of tax effect (182,153) (182,153)
---------
Total comprehensive income 1,467,396
Shares issued for employee awards 105 105
Cash dividends (40(cent)per share) (625,105) (625,105)
---------- --------- -------- --------- ----------
Balances at June 30, 1999 $4,821,880 19,753,231 (66,220) (169,962) 24,338,929
========== ========== ======== ========= ==========
</TABLE>
See notes to interim consolidated financial statements
6
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
Unaudited Six months ended June 30
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,649,549 $ 2,053,183
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 420,000 300,000
Depreciation and amortization 319,100 247,042
Net amortization on investment securities 42,615 15,534
Loss on disposal of equipment 18,360 723
Gain on sale of loans (10,062) (139,574)
Proceeds from sale of loans 8,244,550 11,276,972
Origination of loans held for sale (9,086,850) (11,493,348)
(Increase) decrease in accrued interest income and other assets (384,796) 566,476
Increase (decrease) in accrued interest, taxes, and other liabilities 80,413 (700,975)
------ ---------
Net cash provided by operating activities 1,292,879 2,126,033
--------- ---------
Cash flows from investing activities:
Purchases of available for sale securities (14,167,570) (2,006,021)
Proceeds from maturities and calls of available for sale securities 2,000,000 6,000,000
Purchases of held to maturity securities (1,587,420) (2,636,291)
Proceeds from maturities and calls of held to maturity securities 3,868,000 5,290,000
Proceeds from mortgage-backed securities paydowns-held to maturity 277,040 89,878
Net increase in loans (14,793,481) (21,737,473)
Capital expenditures (1,359,545) (5,199,167)
----------- -----------
Net cash used in investing activities (25,762,976) (20,199,074)
------------ -----------
Cash flows from financing activities:
Net increase in deposits 14,287,097 13,753,687
Dividends paid (625,105) (567,000)
--------- ---------
Net cash provided by financing activities 13,661,992 13,186,687
---------- ----------
Net decrease in cash and cash equivalents (10,808,105) (4,886,354)
Cash and cash equivalents at beginning of year 31,238,662 18,738,564
---------- ----------
Cash and cash equivalents at end of period $20,430,557 $13,852,210
=========== ===========
Supplemental disclosures:
Interest paid $ 4,000,724 $ 3,551,715
Federal income taxes paid 752,000 915,000
Loans transferred from other real estate 0 335,713
Loans charged off 233,386 66,945
</TABLE>
See notes to interim consolidated financial statements
7
<PAGE>
Notes to Interim Consolidated Financial Statements(unaudited)
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
1. In the opinion of management of the Registrant, the unaudited consolidated
financial statements filed with this Form 10-Q contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
consolidated financial position of the Registrant as of June 30, 1999, and
consolidated results of operations for the three months and six months ended
June 30, 1999 and 1998 and consolidated cash flows for the six months ended June
30, 1999 and 1998.
2. The results of operations for the three months and six months ended June 30,
1999 are not necessarily indicative of the results to be expected for the full
year.
3. The accompanying unaudited consolidated financial statements should be read
in conjunction with the Notes to Consolidated Financial Statements in the 1998
Annual Report contained in the Registrant's report on Form 10-K filing.
4. The provision for income taxes represents Federal income tax expense
calculated using annualized rates on taxable income generated during the
respective periods.
5. Management's assessment of the allowance for loan losses is based on an
evaluation of the loan portfolio, recent loss experience, current economic
conditions, and other pertinent factors. Loans on non-accrual status and those
past due more than 90 days amounted to $2,115,000 at June 30, 1999 and
$1,544,000 at December 31, 1998. (See Management's Discussion and Analysis of
financial condition and results of operations).
6. Basic EPS is computed by dividing net income by the weighted average common
shares outstanding.
<TABLE>
- -------------------------------------------------------------------------------------------------------
Second Quarter Year to Date
- -------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $822,372 $1,106,491 $1,649,549 $2,053,183
- -------------------------------------------------------------------------------------------------------
Shares outstanding (basic) 1,562,768 1,575,000 1,562,768 1,575,000
- -------------------------------------------------------------------------------------------------------
Diluted shares 0 0 0 0
- -------------------------------------------------------------------------------------------------------
Shares outstanding (diluted) 1,562,768 1,575,000 1,562,768 1,575,000
- -------------------------------------------------------------------------------------------------------
Earnings per share:
- -------------------------------------------------------------------------------------------------------
Basic EPS $.53 $.70 $1.05 $1.30
- -------------------------------------------------------------------------------------------------------
Diluted EPS $.53 $.70 $1.05 $1.30
- -------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Interim Financial Statements
This report includes certain forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, that involve inherent
risks and uncertainties. A number of important factors could cause actual
results to differ materially from those in the forward-looking statements. Those
factors include the economic environment, competition, products and pricing in
business areas in which the Company operates, prevailing interest rates, changes
in government regulations and policies affecting financial service companies,
credit quality and credit risk management, acquisitions and integration of
acquired businesses.
FNBH Bancorp, Inc. (the Company), a Michigan business corporation, is a one bank
holding company, which owns all of the outstanding capital stock of First
National Bank in Howell (the Bank) and all of the outstanding stock of HB Realty
Co., a subsidiary which owns real estate. The following is a discussion of the
Company's results of operations for the three months and six months ended June
30, 1999 and 1998, and also provides information relating to the Company's
financial condition, focusing on its liquidity and capital resources.
<TABLE>
Earnings (in thousands Second Quarter Year-to-Date
except per share data) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $822 $1,106 $1,650 $2,053
Net Income per Share $ .53 $ .70 $1.05 $1.30
</TABLE>
Net income for the three months ended June 30, 1999 decreased approximately
$284,000 (26%) from that reported for the same period last year. The primary
reason for the decline was an increase of $452,000 in non-interest expense. This
increase was primarily the result of non-recurring expenditures related to a
computer conversion and increased estimated holding costs related to real estate
the Company owns. Partially offsetting these negative factors, were increases in
net interest income and in non-interest income and a decrease in federal income
taxes. The increase in net interest income was the result of overall growth in
the Bank's assets as the net interest margin declined. Net income for the first
half of the year decreased $403,000 (20%) compared to the same period last year.
Contributing to this decrease was an increase of $734,000 (19%) in non-interest
expense, $120,000 (40%) in the loan loss provision, partially offset by an
increase of $303,000 (5%) in net interest income and a decrease of $197,000
(23%) in federal tax accruals.
9
<PAGE>
<TABLE>
Net Interest Income Second Quarter Year-to-Date
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income $5,132 $4,907 $10,219 $9,587
Interest Expense 1,952 1,802 3,889 3,560
------- ------ ------- ------
Net Interest Income $ 3,180 $3,105 $6,330 $6,027
</TABLE>
The Company's 1999 second quarter net interest income increased $75,000 (2%)
when compared with the same period in the prior year, while net interest income
for the year to date was $303,000 (5%) higher than that of 1998. The following
table illustrates some of the significant factors contributing to the increase
in net interest income for the period and for the year to date.
TABLE 1
INTEREST YIELDS AND COSTS (in thousands)
June 30, 1999 and 1998
<TABLE>
---------------Second Quarter Averages----------------
1999 1998
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets:
Short term investments $ 10,061 $ 114.8 4.52% $ 3,165 $ 43.5 5.43%
Securities: Taxable 29,821 375.8 5.04% 26,233 399.9 6.10%
Tax-exempt(1) 16,487 285.0 6.91% 15,325 272.9 7.12%
Loans(2)(3) 196,213 4,497.0 9.07% 173,449 4,272.3 9.74%
--------- --------- ---------- ---------
Total earning assets/total
interest income 252,582 $5,272.6 8.27% 218,172 $4,988.6 9.05%
--------- ---------
Cash & due from banks 11,285 9,099
All other assets 14,750 11,090
Allowance for loan loss (4,201) (3,656)
--------- ----------
Total assets $274,416 $234,705
========= ==========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
Savings & NOW accounts $ 105,078 $692.7 2.64% $ 87,383 $ 653.4 3.00%
Time 94,108 1,258.7 5.36% 79,830 1,143.0 5.74%
Purchased funds 11 .2 7.23% 426 6.1 5.66%
--------- --------- ---------- ---------
Total interest bearing
liabilities/total interest expense 199,197 $ 1,951.6 3.93% 167,639 $1,802.5 4.31%
--------- ---------
Non-interest bearing deposits 48,806 42,277
All other liabilities 1,980 2,003
Stockholders' Equity 24,433 22,786
--------- ----------
Total liabilities and
shareholders' equity $274,416 $234,705
========= ----------
Interest spread 4.34% 4.74%
===== =====
Net interest income-FTE $ 3,321.0 $ 3,186.1
========= =========
Net interest margin 5.17% 5.75%
===== =====
</TABLE>
10
<PAGE>
(1) Average yields in the above table have been adjusted to a
tax-equivalent basis using a 34% tax rate and exclude the effect of
any market value adjustments recorded under Statement of Financial
Standards No. 115.
(2) For purposes of the computation above, non-accruing loans are included
in the average daily loan balances.
(3) Interest on loans includes origination fees totaling $139,000 in 1999
and $138,000 in 1998.
<TABLE>
----------------Year to Date Averages-----------------
1999 1998
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets:
Short term investments $ 13,694 $ 319.6 4.64% $ 3,991 $ 109.0 5.43%
Securities: Taxable 28,273 716.5 5.11% 27,402 822.7 6.05%
Tax-exempt(1) 16,475 573.8 6.97% 14,964 535.6 7.16%
Loans(2)(3) 190,346 8,780.6 9.19% 168,341 8,278.4 9.80%
-------- ---------- ---------- --------
Total earning assets/total
interest income 248,788 $ 10,390.5 8.33% 214,698 $9,745.7 9.06%
---------- --------
Cash & due from banks 12,299 8,718
All other assets 15,593 10,261
Allowance for loan loss (4,121) (3,578)
-------- ----------
Total assets $272,559 $ 230,099
======== ==========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
Savings & NOW accounts $105,773 $ 1,406.1 2.68% $ 86,893 $1,289.9 2.99%
Time 92,734 2,482.1 5.40% 79,058 2,262.9 5.77%
Purchased funds 37 .9 4.86% 237 6.8 5.73%
-------- ---------- ---------- --------
Total interest bearing
liabilities/total interest expense 198,544 $ 3,889.1 3.95% 166,188 $3,559.6 4.32%
---------- --------
Non-interest bearing deposits 48,154 39,462
All other liabilities 1,731 1,979
Stockholders' Equity 24,130 22,470
-------- ----------
Total liabilities and
shareholders' equity $272,559 $ 230,099
======== ==========
Interest spread 4.38% 4.74%
===== =====
Net interest income-FTE $ 6,501.4 $6,186.1
========== ========
Net interest margin 5.18% 5.71%
===== =====
</TABLE>
(1) Average yields in the above table have been adjusted to a
tax-equivalent basis using a 34% tax rate and exclude the effect of
any market value adjustments recorded under Statement of Financial
Standards No. 115.
(2) For purposes of the computations above, non-accruing loans are
included in the average daily loan balances.
(3) Interest on loans includes origination fees totaling $268,000 in 1999
and $291,000 in 1998.
11
<PAGE>
Interest Earning Assets/Interest Income
On a tax equivalent basis, interest income increased approximately $284,000 in
the second quarter of 1999 compared to that of 1998. A $23,000,000 (13%) growth
in average loan balances led to the net interest income growth. The rate earned
on loans declined 67 basis points. Contributing to the decline in yield was a
decrease in the Bank's prime lending rate of 75 basis points which continued
until July 1 when it increased 25 basis points.
In the second quarter, tax equivalent income on short and long term investments
increased because the average balance increased $11,600,000 although the rate
earned decreased 90 basis points. The 26% increase in investment balances
compared to the 13% growth in loans contributed to the overall decline in rates
on earning assets as the lower yielding investment portfolio absorbed the excess
deposit growth which the loan portfolio could not utilize.
For the first half of the year, tax equivalent interest income increased
$645,000. Again, the increase was primarily attributable to growth. Loan
interest income increased $500,000, with average balances up $22,000,000 while
yields declined 61 basis points. The growth in the loan portfolio was primarily
in commercial loans which increased 20% on average. The lack of growth in the
mortgage loan portfolio is attributable to the Bank's policy of selling fixed
rate mortgage loans. New nonconforming variable rate mortgages, which are
retained in the loan portfolio, have not kept up with mortgage loan run off. The
Bank sold approximately $7,700,000 mortgage loans to the secondary market during
the first half of 1999.
For the first six months of the year, income on short and long term investments
increased $143,000 from that earned the prior year due to a $12,000,000 increase
in average balances although the yields decreased by 84 basis points.
Interest Bearing Liabilities/Interest Expense
In the second quarter of 1998, interest expense increased $149,000 due to an
increase in average balances of $31,600,000 although the interest rate paid
declined 38 basis points. Savings and NOW interest expense increased $39,000
because balances increased $17,700,000 although rates declined 36 basis points.
Interest on time deposits increased $116,000 in the second quarter of 1999 over
the prior year. Balances increased $14,300,000 although the rate paid on time
deposits decreased 38 basis points compared to that of 1998. The deposit growth
was the result of the Bank's marketing efforts to increase its share of
Livingston County deposits. Deposit rates are set based on market studies.
Special rates are offered from time to time to meet rate sensitivity goals. The
decline in deposit rates was not as significant as that earned on assets
resulting in a decline in the interest margin.
In the first half of the year, interest expense was $330,000 higher than 1998
due to average balances of interest bearing liabilities increasing $32,400,000
although the average rate declined 37 basis points. Savings and NOW interest
expense increased
12
<PAGE>
$116,000 because balances increased $19,900,000 although the interest rate
decreased 31 basis points. Interest on time deposits increased $229,000 because
the balance increased $13,700,000 although the rate decreased 37 basis points.
Liquidity
Liquidity is monitored by the Bank's Asset/Liability Management Committee (ALCO)
which meets at least monthly. ALCO developed, and the Board of Directors
approved, a liquidity policy which targets a 15% liquidity ratio. As of June 30,
the Bank's liquidity ratio was 19.33%.
Deposits are the principal source of funds for the Bank. Management monitors
rates at other financial institutions in the area to ascertain that its rates
are competitive in the market. Management also attempts to offer a wide variety
of products to meet the needs of its customers. The Bank does not deal in
brokered funds, and the makeup of its over $100,000 certificates, which amounted
to $22,400,000 at June 30, 1999 compared to $18,000,000 at December 31, 1998,
consists of local depositors known to the Bank.
It is the intention of the Bank's management to handle unexpected liquidity
needs through its Federal Funds position. The goal is to maintain a daily Fed
Funds balance sufficient to cover required cash draws. During the first half of
the year, short term investments averaged approximately $13,700,000. Because of
the relatively flat yield curve and the unfavorable investing atmosphere in the
second half of 1998, proceeds from some matured Treasury bonds were invested
short term with the Federal Home Loa Bank of Indianapolis. These funds are
available on call and add to the Bank's liquidity position. In addition, the
Bank has a $13,000,000 line of credit available at the FHLB and the Bank has
pledged certain mortgage loans and investment securities as collateral for this
borrowing. In the event the Bank must borrow for an extended period, management
may look to "available for sale" securities in the investment portfolio for
liquidity. Management has decided to maintain higher than usual liquidity ratios
this year to meet any cash needs related to Year 2000 customer demand.
In addition to liquidity issues, ALCO discusses the Bank's performance and the
current economic outlook and its impact on the Bank and current interest rate
forecasts. Actual results are compared to budget in terms of growth and income.
A yield and cost analysis is done to monitor interest margin. Various ratios are
discussed including capital ratios and liquidity.
Interest rate risk is also addressed by ALCO. Interest rate risk is the
potential for economic losses due to future rate changes and can be reflected as
a loss of future net interest income and/or loss of current market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while, at the same time, maximizing
income. Tools used by management include the standard GAP report which lays out
the repricing schedule for various asse and liability categories and an interest
rate shock simulation report. The Bank has no market risk sensitive instruments
held for trading purposes. The Bank does not enter into futures,
13
<PAGE>
forwards, swaps, or options to manage interest rate risk. However, the Bank is a
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers including commitments
to extend credit and letters of credit. A commitment or letter of credit is not
recorded as an asset until the instrument is exercised.
<TABLE>
Interest Rate Sensitivity
(dollars in thousands) 0-3 4-12 1-5 5+
Months Months Years Years Total
<S> <C> <C> <C> <C> <C>
Assets:
Loans................................. $58,812 $30,839 $97,586 $13,865 $201,102
Securities............................ 933 13,266 22,568 11,170 47,937
Fed funds............................. 10,069 10,069
Other assets.......................... 20,902 20,902
------- ------- -------- ------ ------
Total assets....................... $69,814 $44,105 $120,154 $45,937 $280,010
Liabilities & Stockholders' Equity:
Demand, Savings & NOW................. $47,325 $17,095 $63,981 $32,680 $161,081
Time.................................. 38,981 23,249 30,518 15 92,763
Other liabilities and equity.......... 26,166 26,166
------- ------- ------- ------ ------
Total liabilities and equity....... $86,306 $40,344 $94,499 $58,861 $280,010
Rate sensitivity gap and ratios:
Gap for period........................ $ (16,491) $3,761 $25,655 $(12,924)
Cumulative gap........................ (16,491) (12,731) 12,924
Cumulative rate sensitive ratio.......... .81 .90 1.06 1.00
Dec. 31, 1998 rate sensitive ratio....... 1.28 .92 1.08 1.00
</TABLE>
Given the liability sensitive position of the Bank at June 30, 1999, if interest
rates increase 200 basis points and management did not respond, management
estimates that annualized net interest income would decrease approximately
$260,000, while a similar decrease in rates would cause net interest income to
increase by a like amount. In the preceding table, the entire balance of
savings, MMDA, and NOW are not categorized as 0-3 months, although they are
variable rate products. Some of these balances ar core deposits which are not
considered rate sensitive based on the Bank's historical experience and industry
practice.
<TABLE>
Provision for Loan Losses Second Quarter Year-to-Date
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $210 $150 $420 $300
==== ==== ==== ====
The provision for loan losses increased $60,000 in the second quarter of 1999
compared to the prior year. Year to date the provision has increased $120,000.
The increase in the loan loss provision was deemed appropriate principally due
to the 20% growth in commercial loans. In June of 1999, the allowance for loan
loss as a percent of loans was 2.12%, compared to 2.05% a year earlier and 2.13%
at December 31, 1998. For the first
14
<PAGE>
six months of 1999, the Bank had net charge offs of $105,000, compared to
$21,000 in the first half of 1998. Non-accrual, past due 90 days, and
renegotiated loans were 1.05% and .58% of total loans outstanding at June 30,
1999 and 1998 respectively and .83% of total loans at December 31, 1998.
Impaired loans, as defined by Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, totaled approximately
$5,100,000 at June 30, 1999, compared to $4,300,000 at December 31, 1998 and
included non-accrual, and past due 90 days other than homogenous residential and
consumer loans, and, at June 30, 1999, $3,100,000 of commercial loans separately
identified as impaired. A loan is considered impaired when it is probable that
all or part of amounts due according to the contractual terms of the loan
agreement will be uncollectable on a timely basis. Approximately $4,200,000 of
the impaired balance relates to three borrowers. These loans are considered by
management to be well collateralized. One of the loans, for $2,400,000 is
current and making regular payments but was put on the watch list in its
construction phase. The other two loans are in the process of foreclosure. Any
loss that might occur from these loans is not expected to have a material impact
on the Company's financial condition or results of operations.
Management assessment of the allowance for loan losses is based on the
composition of the loan portfolio, an evaluation of specific credits, historical
loss experience, the level of nonperforming loans and loans that have been
identified as impaired. Externally, the local economy and events or trends which
might negatively impact the loan portfolio are also considered. Certain impaired
loans with a balance of $5,100,000 had specific reserves calculated in
accordance with SFAS No. 114 of $630,000 at June 30, 1999.
Nonperforming assets are loans for which the accrual of interest has been
discontinued, accruing loans 90 days or more past due in payments, and other
real estate which has been acquired primarily through foreclosure and is waiting
disposition. The following table describes nonperforming assets at June 30, 1999
compared to December 31, 1998. The loans categorized as ninety days past due are
all well secured and in the process of collection.
<PAGE>
Nonperforming Assets Quarter Ended Year Ended
(in thousands) June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Non-accrual loans $2,102 $1,519
90 days or more past due and still accruing 13 25
------ ------
Total nonperforming loans 2,115 1,544
Other real estate 0 0
------ ------
Total nonperforming assets $2,115 $1,544
Nonperforming loans as a percent of total loans 1.05% .83%
Nonperforming assets as a percent of total loans 1.05% .83%
Loan loss reserve to nonperforming loans 202% 256%
</TABLE>
15
<PAGE>
Nonperforming loans have increased in 1999 compared to the end of the year
primarily due to the addition of one large loan for $800,000 to non-accrual
loans. This loan is in foreclosure and will likely be redeemed before the end of
the year. 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
The following table sets forth loan balances and summarizes the changes in the
allowance for loan losses for the first six months of 1999 and 1998.
<TABLE>
Year to date Year to date
Loans: (dollars in thousands) June 30, 1999 June 30, 1998
<S> <C> <C>
Average daily balance of loans for the year to date 190,346 168,341
Amount of loans (gross) outstanding at end of the
quarter 201,102 181,075
Allowance for loan losses:
Balance at beginning of year 3,958 3,424
Loans charged off:
Real estate 0 0
Commercial 158 18
Consumer 75 49
-- --
Total charge-offs 233 67
Recoveries of loans previously charged off:
Real estate 35 0
Commercial 65 13
Consumer 28 33
-- --
Total recoveries 128 46
Net loans charged off 105 21
Additions to allowance charged to operations 420 300
--- ---
Balance at end of quarter $4,273 $3,703
Ratios:
Net loans charged off (annualized) to average
loans outstanding .11% .02%
Allowance for loan losses to loans outstanding 2.12% 2.05%
</TABLE>
<TABLE>
Non-interest Income Second Quarter Year-to-Date
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $543 $501 $899 $949
==== ==== ==== ====
</TABLE>
Non-interest income, which includes service charges on deposit accounts, loan
fees, trust fees, other operating income, and gain (loss) on sale of assets and
securities transactions, increased by $42,000 (8%) in the second quarter of 1999
compared to the same period in the previous year. The most significant increase
was in service charges on deposits and
16
<PAGE>
loans which increased $127,000 as the Bank recovered service charges in the
second quarter which had not been collected in the first quarter due to computer
conversion problems. Additionally, trust fees doubled due to seasoning of the
Trust Department which has now been operating for nearly two years. Other income
was up for the quarter due to a gain on the sale of repossessed property. Partly
offsetting these increases was a decrease of $129,000 in income related to loan
sales. This decrease was a result of reduced loan volume and rising interest
rates.
For the year, non-interest income decreased $50,000 (5%). The decline was due to
the loss on loan sales which resulted in $129,000 less income in 1999 compared
to the previous year.
<TABLE>
Non-interest Expense Second Quarter Year-to-Date
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $2,348 $1,896 $4,499 $3,765
====== ====== ====== ======
</TABLE>
Non-interest expense increased $452,000 (24%) in the second quarter of 1999
compared to the same period last year. All categories of non-interest expense
increased. Salaries and benefits increased $85,000 due to the hiring of staff
for the new branch opening in the third quarter as well as normal salary
increases. Occupancy increased $34,000 primarily due to property tax accruals
for the new branch and adjacent land to be sold. Equipment expense increased due
to increased depreciation costs related to the purchase of computer equipment
and programs. Fees increased $38,000 primarily due to costs associated with
converting paper records to CDs. Printing and supplies increased $39,000 due to
new forms and media required for the computer network. Other expense increased
$212,000 due to costs related to having to outsource certain systems on a
temporary basis, increased telephone costs related to the computer network, and
increased estimated holding cost and/or sale cost pertaining to real estate held
fo sale.
For the first half of the year, non-interest expense increased $734,000 (19%) in
all of the above mentioned categories. Building expenses are expected to
increase as the year progresses and the new branch in Brighton is put in
service.
<TABLE>
Income Tax Expense Second Quarter Year-to-Date
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $344 $453 $661 $858
==== ==== ==== ====
</TABLE>
Fluctuations in income taxes resulted primarily from changes in the level of
profitability and in variations in the amount of tax-exempt income.
17
<PAGE>
<TABLE>
Capital (in thousands) June 30, 1999 December 31, 1998
<S> <C> <C>
Stockholders' Equity* $24,509 $23,484
Ratio of Equity to Total Assets 8.75% 8.87%
</TABLE>
*Amounts exclude securities valuation adjustments recorded under Statement of
Financial Accounting Standards No. 115 amounting to ($170,000) at June 30, 1999
and $12,000 at December 31, 1998.
A financial institution's capital ratio is looked upon by the regulators and the
public as an indication of its soundness. Stockholders' equity, excluding the
securities valuation adjustment, increased $1,025,000 (4%) during the first half
of the year. This increase was the result of net income earned by the company
reduced by dividends paid of $625,000.
The Federal Reserve Board provides guidelines for the measurement of capital
adequacy. The Bank's capital, as adjusted under these guidelines, is referred to
as risk-based capital. The Bank's Tier 1 risk-based capital ratio at June 30,
1999 was 9.81%, and total risk-based capital was 11.06%. At June 30, 1998 these
ratios were 10.78% and 12.03% respectively. Minimum regulatory Tier 1 risk-based
and total risk-based capital ratios under the Federal Reserve Board guidelines
are 4% and 8% respectively.
The capital guidelines also provide for a standard to measure risk-based capital
to total assets which is called the leverage ratio. The Bank's leverage ratio
was 7.47% at June 30, 1999 and 8.15% in 1998. The minimum standard leverage
ratio is 3% but financial institutions are expected to maintain a leverage ratio
1 to 2 percentage points above the 3% minimum.
In 1998 the Company exercised an option to purchase an 18 acre tract of land in
northwest Brighton primarily to acquire a prime site for a new branch. The cost
of the property was approximately $4,000,000. Approximately $800,000 of the cost
has been allocated to a branch site. The Company is currently marketing the
remaining acreage which is not needed for the branch. A road has been
constructed on the property. Any additional improvements that are needed to
enhance the salability of the property are not expected to exceed $200,000.
Construction of the new branch is nearly complete. Land and building will cost
approximately $2,000,000 with an additional $500,000 for furniture and
equipment. The branch is expected to be open in the third quarter. Additionally
the Bank has purchased land in Howell for another branch at a cost of
approximately $250,000. These projects will be financed from internally
generated funds.
Year 2000
Year 2000 issues are an important focus of management's attention. The Company
is highly dependent on technology and most bank products are dependent on the
software's
18
<PAGE>
ability to make the transition to the Year 2000. Preparation for the Year 2000
problem began three years ago when a technology plan was drafted. Although the
plan identified ten major technology initiatives to be completed in two to three
years, the Year 2000 project was given first priority and efforts began
immediately. A national ban consulting firm was hired to help prepare an action
plan. The engagement included management education, an inventory of all systems,
risk assessment, an action plan, and a project schedule.
A steering committee, comprised of ten key employees representing all
departments of the Bank, worked on the action plan. The objective was to ensure
that any system used by the company that relies on dates will not be affected by
the Year 2000 problem, not only computers but power systems, vault timers,
elevators, etc. The plan consisted of five phases: awareness, assessment,
renovation, validation, and implementation. All phases are complete and the
Company's computer systems are deemed to be Year 2000 compliant.
The Company spent approximately $1,500,000 on new hardware and software in 1998.
During the first quarter of 1999, the Company spent approximately $100,000 for
Year 2000 testing. However, in spite of thorough testing, the Company can give
no guarantee that the systems of other service providers, on which the Company
relies, will be fully compliant. The Company has developed a contingency plan to
address Year 2000 issues.
The committee also recognizes that the Company has relationships with vendors
and customers which are important to the smooth functioning of its business. As
a result, the Company has analyzed significant vendors and customers Year 2000
readiness and has determined that any failures they may have are not expected to
have a material effect on the Company.
Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires recognition of all derivatives
as either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. the accounting for gains and
losses on derivatives depends on the intended use of the derivative. This
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000, 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.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activites - Deferral of the Effective Date of FASB no.
133. Statement 137 extends the effective date to fiscal years beginning after
June 15, 2000. Entities who have already adopted Statement 133 are not permitted
to revert back to pre-Statement 133 accounting.
19
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes in the market risk faced by the Company has occurred since
December 31, 1998.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The registrant's annual meeting of stockholders was held on April 21, 1999. The
stockholders voted on the election of directors.
Votes were cast as follows for the four nominees for the office of director.
Term expiring in 2002:
Shares voted for Shares voted against
Charles N. Holkins 1,079,508 7,000
Dona Scott Laskey 1,034,104 52,404
James R. McAuliffe 1,086,508 0
R. Michael Yost 1,085,108 1,400
Additionally, the following directors continue in office.
Term expiring in 2000:
Gary R. Boss
Donald K. Burkel
Harry E. Griffith
Term expiring in 2001:
W. Rickard Scofield
Randolph E. Rudisill
Barbara D. Martin
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
There are none applicable.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the second quarter of 1999.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 to be signed on its behalf by the undersigned hereunto duly
authorized.
FNBH BANCORP, INC.
____________________________________________
Barbara D. Martin
President and Chief Executive Officer
/s/ Barbara J. Nelson
Barbara J. Nelson
Treasurer
DATE: August 10, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 10,361,000
<INT-BEARING-DEPOSITS> 3,269,000
<FED-FUNDS-SOLD> 6,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 48,195,000
<INVESTMENTS-MARKET> 48,099,000
<LOANS> 200,559,000
<ALLOWANCE> 4,273,000
<TOTAL-ASSETS> 279,725,000
<DEPOSITS> 253,844,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,542,000
<LONG-TERM> 0
0
0
<COMMON> 4,822,000
<OTHER-SE> 19,517,000
<TOTAL-LIABILITIES-AND-EQUITY> 279,725,000
<INTEREST-LOAN> 8,770,000
<INTEREST-INVEST> 1,128,000
<INTEREST-OTHER> 321,000
<INTEREST-TOTAL> 10,219,000
<INTEREST-DEPOSIT> 3,888,000
<INTEREST-EXPENSE> 1,000
<INTEREST-INCOME-NET> 6,330,000
<LOAN-LOSSES> 420,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,499,000
<INCOME-PRETAX> 2,310,000
<INCOME-PRE-EXTRAORDINARY> 2,310,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,650,000
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 5.18
<LOANS-NON> 2,102,000
<LOANS-PAST> 13,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,958,000
<CHARGE-OFFS> 233,000
<RECOVERIES> 128,000
<ALLOWANCE-CLOSE> 4,273,000
<ALLOWANCE-DOMESTIC> 4,273,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
