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 March 31, 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 March 31, 1999.
<PAGE>
INDEX
Page
Number
Part I. Financial Information (unaudited):
Item 1.
Interim Financial Statements:
Consolidated Balance Sheets as of March 31, 1999 and Dec. 31, 1998..........4
Consolidated Statements of Income, three months ended
March 31, 1999 and 1998.....................................................5
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for three months ended March 31, 1999 and 1998.......................6
Consolidated Statements of Cash Flows for three months ended
March 31, 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.................18
Part II. Other Information
Item 6.....................................................................19
Signatures.................................................................19
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 March 31 December 31
1999 1998
---- ----
<S> <C> <C>
Assets (unaudited)
Cash and due from banks $ 10,555,444 $ 12,304,296
Short term investments 12,453,040 18,934,366
---------- ----------
Total cash and cash equivalents 23,008,484 31,238,662
Investment securities held to maturity, net (fair value of $17,304,000
at March 31, 1999 and $19,066,000 at Dec. 31, 1998) 16,713,308 18,278,233
Investment securities available for sale, at fair value 28,678,645 19,765,936
Mortgage-backed securities held to maturity, net (fair value of
$615,000 at March 31, 1999 and $602,000 at Dec. 31, 1998) 616,411 601,940
------- -------
Total investment securities 46,008,364 38,646,109
Loans:
Commercial 145,060,404 137,634,020
Consumer 23,715,703 23,064,800
Real estate mortgages 24,808,825 24,946,777
---------- ----------
Total loans 193,584,932 185,645,597
Less unearned income 660,961 627,169
Less allowance for loan losses 4,114,411 3,958,008
--------- ---------
Net loans 188,809,560 181,060,420
Bank premises and equipment - net 7,603,272 7,289,461
Accrued interest and other assets 7,150,874 6,659,232
--------- ---------
Total assets $272,580,554 $264,893,884
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing demand $ 48,621,138 $ 47,401,813
NOW 26,050,899 29,087,082
Savings and money market 77,145,012 75,129,137
Time 94,468,096 87,938,732
---------- ----------
Total deposits 246,285,145 239,556,764
Accrued interest, taxes, and other liabilities 2,343,246 1,840,587
--------- ---------
Total liabilities 248,628,391 241,397,351
Stockholders' Equity
Common stock, no par value. Authorized 4,200,000 shares; 1,562,768
shares issued and outstanding at March 31, 1999 and December 31, 1998 4,821,775 4,821,775
Retained earnings 19,243,412 18,728,787
Unearned management retention plan (66,220) (66,220)
Accumulated other comprehensive income, net (46,804) 12,191
-------- ------
Total stockholders' equity 23,952,163 23,496,533
Total liabilities and stockholders' equity $272,580,554 $264,893,884
============ ============
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Income
Unaudited Three months ended March 31
1999 1998
---- ----
<S> <C> <C>
Interest income:
Interest and fees on loans $ 4,332,872 $ 4,001,808
Interest and dividends on investment securities:
U.S. Treasury and agency securities 327,917 422,812
Obligations of state and political subdivisions 207,743 189,424
Other securities 13,084 0
Interest on short term investments 204,811 65,500
------- ------
Total interest income 5,086,427 4,679,544
========= =========
Interest expense:
Interest on deposits 1,936,750 1,756,357
Other interest expense 701 666
--- ---
Total interest expense 1,937,451 1,757,023
--------- ---------
Net interest income 3,148,976 2,922,521
Provision for loan losses 210,000 150,000
------- -------
Net interest income after provision for loan losses 2,938,976 2,772,521
--------- ---------
Non-interest income:
Service charges 267,338 372,061
Gain on sale of loans 59,479 59,430
Trust fees 34,287 13,001
Other (4,874) 3,400
------- -------
Total non-interest income 356,230 447,892
------- -------
Non-interest expense:
Salaries and employee benefits 1,159,442 1,041,832
Net occupancy 166,053 132,905
Equipment expense 115,079 115,333
Fees 148,105 51,695
Printing and supplies 63,600 65,721
Michigan Single Business Tax 51,600 52,000
Other 447,150 409,235
------- -------
Total non-interest expense 2,151,029 1,868,721
--------- ---------
Income before federal income taxes 1,144,177 1,351,692
Federal income taxes 317,000 405,000
------- -------
Net income $ 827,177 $ 946,692
========== ==========
Per share statistics*
Basic EPS $ .53 $ .60
Diluted EPS $ .53 $ .60
Dividends $ .20 $ .18
</TABLE>
*Based on 1,562,768 average shares outstanding during the period ended March 31,
1999 and 1,575,000 average shares outstanding during the period ended March 31,
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 Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income Total
----- -------- ------ -----
<S> <C> <C> <C> <C>
Balances at December 31, 1997 $5,250,000 16,467,201 14,824 21,732,025
Net income 946,692 946,692
Change in unrealized gain on debt securities
available for sale, net of tax effect (2,846) (2,846)
-----
Total comprehensive income 943,846
Cash dividends (18(cent)per share) (283,500) (283,500)
---------- -------- ------- ----------
Balances at March 31, 1998 $5,250,000 17,130,393 11,978 22,392,371
========== ========== ======= ==========
</TABLE>
See notes to interim consolidated financial statements
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income Total
----- -------- ---- ------ -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $4,821,775 18,728,787 (66,220) 12,191 23,496,533
Net income 827,177 827,177
Change in unrealized gain (loss) on debt securities
available for sale, net of tax effect (58,995) (58,995)
--------
Total comprehensive income 768,182
Cash dividends (20(cent)per share) (312,552) (312,552)
----------- ---------- --------- -------- ---------
Balances at March 31, 1999 $4,821,775 19,243,412 (66,220) (46,804) 23,952,163
========== ========== ======== ======== ==========
</TABLE>
See notes to interim consolidated financial statements
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Cash Flows
Unaudited Three months ended March 31
1999 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 827,177 $ 946,692
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 210,000 150,000
Depreciation and amortization 127,371 110,767
Net amortization on investment securities 20,284 6,144
Loss on disposal of equipment 18,359 725
Gain on sale of loans (59,479) (59,430)
Proceeds from sale of loans 3,916,581 3,160,461
Origination of loans held for sale (4,787,150) (3,727,477)
Increase in accrued interest income and other assets (491,642) (468,503)
Increase (decrease) in accrued interest, taxes, and other liabilities 533,059 (227,677)
------- --------
Net cash provided by (used in) operating activities 314,560 (108,298)
------- --------
Cash flows from investing activities:
Purchases of available for sale securities (11,016,013) (2,006,021)
Proceeds from maturities and calls of available for sale securities 1,000,000 2,000,000
Purchases of held to maturity securities (710,071) (1,612,814)
Proceeds from maturities and calls of held to maturity securities 3,075,000 2,000,000
Proceeds from mortgage-backed securities paydowns-held to maturity 179,151 62,589
Net increase in loans (7,029,092) (8,003,450)
Capital expenditures (459,541) (873,292)
------- -------
Net cash used in investing activities (14,960,566) (8,432,988)
---------- ---------
Cash flows from financing activities:
Net increase in deposits 6,728,381 2,622,864
Dividends paid (312,553) (283,500)
-------- -------
Net cash provided by financing activities 6,415,828 2,339,364
--------- ---------
Net decrease in cash and cash equivalents (8,230,178) (6,201,922)
Cash and cash equivalents at beginning of year 31,238,662 18,738,564
---------- ----------
Cash and cash equivalents at end of period $23,008,484 $12,536,642
=========== ===========
Supplemental disclosures:
Interest paid $ 1,892,247 $ 1,742,381
Loans transferred to other real estate 0 335,713
Loans charged off 75,793 15,926
See notes to interim consolidated financial statements
</TABLE>
7
<PAGE>
Notes to Interim Consolidated Financial Statements(unaudited)
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
1. In the opinion of management of the Registrant, the unaudited consolidated
financial statements filed with this Form 10-Q contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
consolidated financial position of the Registrant as of March 31, 1999, and
consolidated results of operations for the three months ended March 31, 1999 and
1998 and consolidated cash flows for the three months ended March 31, 1999 and
1998.
2. The results of operations for the three months ended March 31, 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 $2,707,000 at March 31, 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. Diluted EPS reflects dilution of common stock options
issued.
8
<PAGE>
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Interim Financial Statements
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 ended March 31, 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 First Quarter
except per share data) 1999 1998
---- ----
<S> <C> <C>
Net income $ 827 $ 947
Net Income per Share 53(cents) 60(cents)
</TABLE>
Corporate earnings decreased $120,000 (13%) for the three months ended March 31,
1999 compared to the same period of the prior year. The primary reasons for the
decline were a decrease of $115,000 in non-interest income and an increase of
$258,000 in non-interest expense. During the first quarter the Company
experienced unanticipated difficulties with a new computer system. Problems with
billings resulted in decreased income while non-interest expense went up due to
the cost of personnel to rectify the difficulties. Partially offsetting these
negative factors was an increase of $226,000 in net interest income. This
increase was the result of overall growth in the Bank's assets as the net
interest margin declined from 5.66 % in 1998 to 5.13% in 1999.
<TABLE>
Net Interest Income First Quarter
- ------------------- 1999 1998
(in thousands) ---- ----
<S> <C> <C>
Interest Income $5,086 $4,680
Interest Expense 1,937 1,757
------ -----
Net Interest Income $ 3,149 $2,923
</TABLE>
The Company's 1999 first quarter net interest income increased $226,000. The
following table illustrates some of the factors contributing to the increase in
net interest income for the first quarter.
9
<PAGE>
<TABLE>
TABLE 1
INTEREST YIELDS AND COSTS (in thousands)
March 31, 1999 and 1998
---------------First Quarter Averages----------------
1999 1998
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets:
Short term investments $ 17,577 $ 204.8 4.66% $ 4,827 $ 65.5 5.43%
Securities: Taxable 26,728 340.7 5.17% 28,599 422.8 6.03%
Tax-exempt(1) 16,465 288.8 7.02% 14,600 262.7 7.20%
Loans(2)(3) 186,250 4,283.6 9.22% 163,176 4,006.1 9.84%
--------- -------- -------- --------
Total earning assets/total
interest income 247,020 $5,117.9 8.31% 211,202 $ 4,757.1 9.04%
-------- ---------
Cash & due from banks 12,220 8,333
All other assets 14,364 9,418
Allowance for loan loss (4,040) (3,500)
--------- --------
Total assets $ 269,564 $225,453
========= ========
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings & NOW accounts $ 106,485 $ 713.4 2.72% $ 86,399 $ 636.4 2.99%
Time 91,347 1,223.4 5.43% 78,277 1,119.9 5.80%
Fed funds purchased 63 .7 4.43% 45 .7 5.92%
--------- -------- --------- ---------
Total interest bearing
liabilities/total interest expense 197,895 $1,937.5 3.97% 164,721 $ 1,757.0 4.33%
-------- ---------
Non-interest bearing deposits 47,193 36,618
All other liabilities 2,087 1,955
Shareholders' Equity 22,389 22,159
--------- --------
Total liabilities and
shareholders' equity $269,564 $225,453
======== ========
Interest spread 4.34% 4.71%
===== =====
Net interest income-FTE $3,180.4 $ 3,000.1
======== =========
Net interest margin 5.13% 5.66%
===== =====
</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 computation above, non-accrual loans are included
in the average daily loan balances.
(3) Interest on loans includes origination fees totaling $129,000 in 1999
and $153,000 in 1998.
Interest Earning Assets/Interest Income
On a tax equivalent basis, interest income increased approximately $361,000 in
the first quarter of 1999 compared to that of 1998. The increase was due to
growth in the Bank's earning assets as the rate earned on these assets declined
73 basis points.
10
<PAGE>
The first quarter average balance in loans increased 14% to $186,000,000. The
rate earned on these loans declined 61 basis points reflective of the rates in
the Bank's market. The Bank's prime lending rate decreased 75 basis points in
the fourth quarter of 1998 contributing to the decline in yield. The growth in
the loan portfolio was primarily in commercial loans which increased 22% on
average. Consumer loans declined 10% while mortgage loans were unchanged. The
Bank's resources in the loan department are primarily deployed making commercial
loans. The lack of growth in the mortgage portfolio is attributable to the
Bank's policy of selling fixed rate mortgage loans. During the first quarter,
the Bank sold nearly $4,000,000 mortgage loans to the secondary market.
In the first quarter, tax equivalent income on short and long term investments
increased approximately $83,000 because the average balance increased
$12,700,000 although the rate earned decreased 78 basis points. The 27% increase
in investment balances compared to 14% 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.
Interest Bearing Liabilities/Interest Expense
In the first quarter of 1999, interest expense increased approximately $180,000
due to an increase in average balances of approximately $33,000,000 partially
offset by a decrease in rates of 36 basis points. Savings and NOW interest
expense increased $77,000 because average balances increased $20,000,000 (23%)
while rates decreased 27 basis points. Interest on time deposits increased
$103,500 in 1999 over the prior year. Balances increased $13,000,000 (17%) while
the rate paid on time deposits decrease 37 basis points in the first quarter of
1999 from that of 1998. The deposit growth was principally the result of the
Bank's marketing efforts to increase its share of Livingston County deposits.
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 requires a minimum 15% liquidity ratio. As of
March 31, the Bank's liquidity ratio was 21.31%.
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 approximately $24,000,000 at March 31, 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 three
months of the year, the Bank was very liquid as short term investments averaged
approximately $17,600,000 while Fed Funds
11
<PAGE>
Purchased averaged $63,000. 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 Loan Bank
of Indianapolis (FHLB). These funds are available on call and add to the Bank's
liquidity position. In addition, the Bank has a $13,000,000 line available at
the FHLB and the Bank has pledged certain mortgage loans and investment
securities as collateral for this borrowing. In addition, management may look to
"available for sale" securities in the investment portfolio to meet additional
liquidity needs.
In addition to liquidity issues, ALCO discusses the Bank's performance and the
current economic outlook and its impact on the Bank and current interest rate
forecasts. Actual results are compared to budget in terms of growth and income.
A yield and cost analysis is done to monitor interest margin. Various ratios are
discussed including capital ratios and liquidity.
Interest rate risk is also addressed by ALCO. Interest rate risk is the
potential for economic losses due to future rate changes and can be reflected as
a loss of future net interest income and/or loss of current market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while, at the same time, maximizing
income. Tools used by management include the standard GAP report which lays out
the repricing schedule for various asse and liability categories and an interest
rate shock simulation report. The Bank has no market risk sensitive instruments
held for trading purposes. The Bank does not enter into futures, forwards,
swaps, or options to manage interest rate risk. However, the Bank is 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.
12
<PAGE>
<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.................................... $54,056 $33,715 $93,370 $12,444 $193,585
Securities............................... 2,485 6,538 25,292 11,693 46,008
Short term investments................... 12,453 12,453
Other assets............................. 17,194 17,194
------- ------- -------- ------ ------
Total assets.......................... $68,994 $40,253 $118,662 $41,331 $269,240
Liabilities & Shareholders' Equity:
Demand, Savings & NOW.................... $43,966 $16,190 $60,373 $31,288 $151,817
Time..................................... 47,363 29,933 17,150 22 94,468
Other liabilities and equity............. 22,955 22,955
------- ------- ------- ------ ------
Total liabilities and equity.......... $91,329 $46,123 $77,523 $54,265 $269,240
Rate sensitivity gap and ratios:
Gap for period........................... ($22,335) ($5,870) $41,139 $(12,934)
Cumulative gap........................... (22,335) (28,205) 12,934
Cumulative rate sensitive ratio............. .76 .79 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 March 31, 1999, if
interest rates increase 200 basis points and management did not respond,
management estimates that annualized net interest income would decrease
approximately $700,000, while a similar decrease in rates would cause net
interest income to increase by a like amount. 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 and industry
practice.
<TABLE>
Provision for Loan Losses First Quarter
- ------------------------- 1999 1998
(in thousands) ---- ----
<S> <C> <C>
Total $210 $150
==== ====
</TABLE>
The provision for loan losses increased $60,000 (34%) in the first quarter of
1999 compared to the prior year. The increase was deemed appropriate due to the
large increase in commercial loans and the increase in nonperforming assets
discussed below. In March of 1999, the allowance for loan loss as a percent of
loans was 2.13%, consistent with 2.14% a year earlier, and 2.13% at December 31,
1998. For the first three months of 1999, the Bank had net charge offs of
$54,000, compared with net charge offs of $2,000 last year. Non-accrual, past
due 90 days, and renegotiated loans were 1.35% and .53% of total loans
outstanding at March 31, 1999 and 1998 respectively and .83% of total loans at
December 31, 1998.
13
<PAGE>
Impaired loans, as defined by Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, totaled approximately
$5,300,000 at March 31, 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 an additional $3,200,000 of commercial loans separately
identified as impaired. A loan is considered impaired when it is probable that
all or part of amounts due according to the contractual terms of the loan
agreement will not be collectable on a timely basis. Approximately $4,200,000 of
the impaired balance relates to three borrowers. These loans are all 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 them is
not expected to have a material impact on the Company's financial condition or
results of operation.
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 $5,300,000 had specific reserves calculated in
accordance with SFAS No. 114 of $530,000 at Marc 31, 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 March 31,
1999 compared to December 31, 1998. 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.
Loans categorized as ninety days past due and still accruing are well secured
and in the process of collection.
<TABLE>
Nonperforming Assets Quarter Ended Year Ended
(in thousands) March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Non-accrual loans $2,393 $1,519
90 days or more past due and still accruing 314 25
------ ------
Total nonperforming loans 2,707 1,544
Other real estate 0 0
------ ------
Total nonperforming assets $2,707 $1,544
Nonperforming loans as a percent of total loans 1.40% .83%
Nonperforming assets as a percent of total loans 1.40% .83%
Nonperforming loans as a percent of the loan loss reserve 66% 27%
</TABLE>
Nonperforming loans have increased in 1999 compared to the prior year.
Management believes the increase in loan delinquencies is a temporary situation
brought on by billing problems associated with the Bank's computer conversion,
the temporary loss of the loan
14
<PAGE>
collection staff, and two large loans which failed to perform as expected.
Billings have improved as the problems of data conversion have mostly been
resolved and staff has learned how to use the system. The collection department
is now partly staffed. The two loans cited above are in foreclosure and
management is identifying potential purchasers for the properties.
The following table sets forth loan balances and summarizes the changes in the
allowance for loan losses for the first three months of 1999 and 1998.
<TABLE>
Year to date Year to date
Loans: March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
(dollars in thousands)
Average daily balance of loans for the year to date 187,697 163,176
Amount of loans, net of unearned income,
outstanding at the end of the quarter 192,924 167,026
Allowance for loan losses:
Balance at beginning of year 3,958 3,424
Loans charged off:
Real Estate Mortgage 0 0
Commercial 41 11
Consumer 35 5
-- -
Total charge-offs 76 16
Recoveries of loans previously charged off:
Real Estate Mortgage 0 0
Commercial 2 6
Consumer 20 8
-- -
Total recoveries 22 14
Net loans charged off 54 2
Additions to allowance charged to operations 210 150
--- ---
Balance at end of quarter $ 4,114 $ 3,572
Ratios:
Net loans charged off (annualized) to average
loans outstanding .12% .01%
Allowance for loan losses to loans outstanding 2.13% 2.14%
</TABLE>
<TABLE>
Non-interest Income First Quarter
- ------------------- 1999 1998
(in thousands) ---- ----
<S> <C> <C>
Total $356 $448
==== ====
</TABLE>
Non-interest income, which includes service charges on deposit accounts, loan
fees, other operating income, and gain(loss) on sale of assets, decreased by
approximately $92,000 (20%) in the first quarter of 1999 compared to the same
period in the previous year. Part of the decrease was attributable to problems
related to a computer conversion the Bank
15
<PAGE>
had in the fourth quarter of 1998. Certain deposit accounts did not convert
service charge routines correctly resulting in about $40,000 in lost income.
These problems have been resolved and lost service charge income is not expected
to continue. Non-interest income was also decreased by about $20,000 related to
the write off of computer equipment not compatible with the new software.
<TABLE>
Non-interest Expense First Quarter
- -------------------- 1999 1998
(in thousands) ---- ----
<S> <C> <C>
Total $2,151 $1,869
====== ======
</TABLE>
Non-interest expense increased $282,000 (15%) in the first quarter of 1999
compared to the same period last year. Contributing to this increase were
increases of $118,000 (11%) in salaries and benefits, $96,000 in outside service
fees, and $38,000 in other expense. Making up the increase in salary and
benefits expense were normal wage increases and an additional $58,000
attributable to extra contract help and overtime paid to staff related to the
computer conversion. Included in outside service fees is $80,000 related to
hiring outside help to conduct Year 2000 testing. In other expense is the cost
of education and testing of the new computer system and extra postage related to
mailings associated with the computer change.
<TABLE>
Income Tax Expense First Quarter
- ------------------ 1999 1998
(in thousands) ---- ----
<S> <C> <C>
Total $317 $405
==== ====
</TABLE>
Fluctuations in income taxes resulted primarily from changes in the level of
profitability and in variations in the amount of tax-exempt income.
<TABLE>
Capital (in thousands) March 31, 1999 December 31, 1998
- ------- ------------------ -----------------
<S> <C> <C>
Shareholders' Equity* $23,999 $23,484
Ratio of Equity to Total Assets 8.80% 8.87%
</TABLE>
*Amounts exclude securities valuation adjustments recorded under Statement of
Financial Accounting Standards No. 115 amounting to ($47,000) at March 31, 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. Shareholders' equity, excluding the
securities valuation adjustment, increased $515,000 (2%) during the first three
months of the year. This increase was the result of net income earned by the
company reduced by dividends paid of $312,500.
16
<PAGE>
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 March 31,
1999 was 9.11%, and total risk-based capital was 10.36%. At March 31, 1998 these
ratios were 12.73% and 13.48% 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 7.24% at March 31, 1999 and 9.18% 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 currently is attempting to sell
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 early in the third quarter.
Additionally the Bank has purchased land in Howell for another branch at a cost
of approximately $250,000. Construction is expected to start in the first
quarter of 2000. 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 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, is working on the action plan. 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 plan consists of five phases: awareness, assessment,
renovation, validation, and implementation. The
17
<PAGE>
awareness, assessment, and renovation phases are complete. All "mission
critical" systems have been through all five phases and have been determined to
be Year 2000 compliant. There are some non-critical computer systems which will
be tested in the second quarter. The Company spent approximately $1,500,000 on
hardware and software in 1998 and the capital expenditures are essentially
complete for this project. During the first quarter of 1999, the Company spent
approximately $100,000 for Year 2000 testing. Any additional expense involved in
testing non-critical systems is expected to be minimal. 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 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. Certain vendors, however, are beyond our
ability to assess.
Management believes it has an effective plan in place to resolve the Year 2000
issue in a timely manner and, thus far, activities have tracked according to the
original plan. Management is in the process of modifying its existing business
resumption plans and is also developing contingency plans to address the
potential risks in the event of Year 2000 failures, including noncompliance by
third parties.
This Year 2000 statement is designated as a Year 2000 Readiness Disclosure in
accordance with the Year 2000 Information and Readiness Disclosure Act.
Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires recognition of all derivatives
as either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. The accounting for gains and
losses on derivatives depends on the intended us of the derivative. This
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, with earlier application encouraged. Retroactive application is
not permitted. SFAS 133 is not expected to have a significant impact on the
financial condition or operations of the Corporation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the market risk faced by the Company since
December 31, 1998.
18
<PAGE>
PART II - OTHER INFORMATION e
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 first quarter of
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 to be signed on its behalf by the undersigned hereunto duly
authorized.
FNBH BANCORP, INC.
/s/ Barbara D. Martin
Barbara D. Martin
President and Chief Executive Officer
/s/ Barbara J. Nelson
Barbara J. Nelson
Secretary/Treasurer
DATE: May 12, 1999
19
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,555,000
<INT-BEARING-DEPOSITS> 9,853,000
<FED-FUNDS-SOLD> 2,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 46,008,000
<INVESTMENTS-MARKET> 46,598,000
<LOANS> 192,924,000
<ALLOWANCE> 4,114,000
<TOTAL-ASSETS> 272,581,000
<DEPOSITS> 246,628,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,343,000
<LONG-TERM> 0
0
0
<COMMON> 4,822,000
<OTHER-SE> 19,177,000
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<INTEREST-OTHER> 205,000
<INTEREST-TOTAL> 5,087,000
<INTEREST-DEPOSIT> 1,937,000
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<EXPENSE-OTHER> 2,151,000
<INCOME-PRETAX> 1,144,000
<INCOME-PRE-EXTRAORDINARY> 1,144,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 827,000
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
<YIELD-ACTUAL> 5.13
<LOANS-NON> 2,393,000
<LOANS-PAST> 314,000
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 3,958,000
<CHARGE-OFFS> 76,000
<RECOVERIES> 22,000
<ALLOWANCE-CLOSE> 4,114,000
<ALLOWANCE-DOMESTIC> 4,114,000
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</TABLE>
