SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN
PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
FIRST MANISTIQUE CORPORATION
(Name of registrant as specified in its charter)
(Name of person(s) filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee Paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule, or registration statement no.:
(3) Filing party:
(4) Date filed:
<PAGE>
FNBH BANCORP, INC.
101 East Grand River
Howell, Michigan 48844-0800
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 19, 2000
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Annual
Meeting") of FNBH Bancorp, Inc. (the "Corporation"), a Michigan corporation,
will be held on April 19, 2000, at 7 p.m. at the Challis Road Branch of First
National Bank in Howell, 8080 Challis Road, Brighton, Michigan, for the
following purposes:
1. To elect three (3) directors, each to hold office for three year
terms.
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed March 1, 2000, as the record date for the
determination of shareholders entitled to notice of and to vote at the meeting
or any adjournment thereof.
By order of the Board of Directors
/s/ Barbara J. Nelson
BARBARA J. NELSON, Secretary
Your vote is important. Even if you plan to attend the meeting, please date
and sign the enclosed proxy form, indicate your choice with respect to the
matters to be voted upon, and return it promptly in the enclosed envelope.
Note that if the stock is held in more than one name, that all parties must
sign the proxy form.
Dated: March 17, 2000
<PAGE>
FNBH BANCORP, INC.
101 E. Grand River
Howell, Michigan 48844-0800
PROXY STATEMENT
This Proxy Statement and the enclosed proxy are furnished in connection
with the solicitation of proxies by the Board of Directors of FNBH Bancorp, Inc.
(the "Corporation"), a Michigan corporation, to be voted at the Annual Meeting
of Shareholders of the Corporation to be held on Wednesday, April 19, 2000, at 7
p.m., at the Challis Road Branch of First National Bank in Howell (the "Bank"),
8080 Challis Road, Brighton, Michigan, or at any adjournment or adjournments
thereof, for the purposes set forth in the accompanying Notice of Annual Meeting
of Shareholders and in this Proxy Statement.
VOTING AT THE MEETING
This Proxy Statement has been mailed on or about March 17, 2000, to all
holders of record of common stock of the Corporation as of the record date. The
Board of Directors of the Corporation has fixed the close of business on March
1, 2000, as the record date for the determination of shareholders entitled to
notice of and to vote at the Annual Meeting of Shareholders and any adjournment
thereof. The Corporation has only one class of common stock, of which there are
presently 1,565,203 shares outstanding. Each outstanding share will entitle the
holder thereof to one vote on each separate matter presented for vote at the
meeting. Votes cast at the meeting and submitted by proxy are counted by the
inspectors of the meeting who are appointed by the Corporation.
If a Proxy in the enclosed form is properly executed and returned to the
Corporation, the shares as represented by the Proxy will be voted at the Annual
Meeting and any adjournment thereof. If a shareholder specifies a choice, the
Proxy will be voted as specified. If no choice is specified, the shares
represented by the Proxy will be voted for the election of all of the nominees
named in the Proxy Statement and in accordance with the judgment of the persons
named as proxies with respect to any other matter which may come before the
meeting. A proxy may be revoked before exercise by notifying the Chairman of the
Board in writing or in open meeting, by submitting a proxy of a later date or
attending the meeting and voting in person. All shareholders are encouraged to
date and sign the enclosed proxy form, indicate your choice with respect to the
matters to be voted upon, and return it to the Corporation.
ELECTION OF DIRECTORS
The Articles of Incorporation of the Corporation provide for the division
of the Board of Directors into three (3) classes of nearly equal size with
staggered three year terms of office. Three persons have been nominated for
election to the Board, each to serve three (3) year terms expiring at the 2003
Annual Meeting of Shareholders. The Board has nominated Donald K. Burkel, Harry
E. Griffith, and Gary R. Boss to serve as directors for three year terms. All
the nominees are incumbent directors previously elected by the Corporation's
shareholders.
Unless otherwise directed by a shareholder's proxy, the persons named as
proxy holders in the Corporation's proxy will vote for the nominees named above.
In the event any of such nominees shall become unavailable, which is not
anticipated, the Board of Directors in its discretion may designate substitute
nominees, in which event the enclosed proxy will be voted for such substitute
nominees. Proxies cannot be voted for a greater number of persons than the
number of nominees named.
A plurality of the votes cast at the meeting is required to elect the
nominees as directors of the Corporation. As such, the three individuals who
receive the largest number of votes cast at the meeting will be elected as
directors. Shares not voted at the meeting, whether by abstention, broker
nonvote, or otherwise, will not be treated as votes cast at the meeting.
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<PAGE>
The Board of Directors recommends a vote FOR the election of all the
persons nominated by the Board.
INFORMATION ABOUT DIRECTORS AND DIRECTOR NOMINEES
The following information relating to the principal occupation or
employment has been furnished to the Corporation by the respective directors and
director nominees. Each of those persons have been engaged in the occupations
stated below for more than five years.
<TABLE>
Director of
Name Principal Occupation Age Corporation Since*
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Nominees for Election as Directors for Terms Expiring in 2003
- -------------------------------------------------------------------------------------------------------------------
Donald K. Burkel Co-owner of Oasis Truck Plaza, a full facility 64 1991
truck plaza, and Fowlerville Farms, Inc., a
restaurant, gasoline and gift shop operation
- -------------------------------------------------------------------------------------------------------------------
Harry E. Griffith Realtor, President of Crandall Realty, Inc., a real 69 1973
estate brokerage and appraisal corporation
- -------------------------------------------------------------------------------------------------------------------
Gary R. Boss Board Chairman of Boss Engineering Co., an 57 1995
engineering and survey corporation
- -------------------------------------------------------------------------------------------------------------------
Directors Whose Terms Expire in 2002
- ------------------------------------------------------------------------------------------------------------------
R. Michael Yost Director, Group Operations and Administration, 51 1997
AAA, Michigan/Wisconsin.
- -------------------------------------------------------------------------------------------------------------------
Dona Scott Laskey Attorney with Sullivan, Ward, Bone, Tyler & 56 1973
Asher, P.C.
- -------------------------------------------------------------------------------------------------------------------
Charles N. Holkins Owner of C. N. Holkins & Son, a hardware and 60 1984
lumber sales company
- -------------------------------------------------------------------------------------------------------------------
James R. McAuliffe President of Citizens Insurance Co. 55 1998
- -------------------------------------------------------------------------------------------------------------------
Directors Whose Terms Expire in 2001
- ----------------------------------------------------------------------------------------------------------------------
W. Rickard Scofield President of May & Scofield, Inc., a manufacturer 47 1992
of automotive subassemblies, and Vice President
prior to that time
- -------------------------------------------------------------------------------------------------------------------
Randolph E. Rudisill President of Thermofil, Inc., a leading 55 1997
manufacturer of reinforced thermoplastics
- -------------------------------------------------------------------------------------------------------------------
Barbara D. Martin President and CEO of Corporation and Bank 53 1984
===================================================================================================================
</TABLE>
The Corporation was formed and organized in 1988; dates preceding 1988
reference status as a director of the Bank. All persons who are directors of the
Corporation are also directors of the Bank.
-4-
<PAGE>
The Audit Committee, comprised of Dona Laskey, Gary Boss, Randolph
Rudisill, and W. Rickard Scofield, met on two occasions during 1999. Its primary
duties and responsibilities include annually recommending to the Board of
Directors an independent public accounting firm to be appointed auditors of the
Corporation and the Bank, reviewing the scope and fees for the audit, reviewing
all the reports received from the independent public accountants, and
coordinating matters with the internal auditing department.
The Nominating Committee of the Board, comprised of Messrs. Burkel,
Rudisill, Yost, Scofield, and Ms. Martin, did not meet in 1999. This Committee
is responsible for reviewing and making recommendations as to the composition of
the Board of Directors, to recommend nominees for election to the Board and
recommends individuals to fill vacancies which may occur between annual
meetings. The Committee is authorized to consider Board nominations for
qualified persons recommended by shareholders that are in compliance with the
procedures set forth in the Corporation's Restated Articles of Incorporation.
Any nomination must be submitted in writing, on or before the 60th day preceding
the anniversary date of the previous annual meeting. The nomination must include
a description of the proposed nominee, his or her consent to serve as a director
and other biographical data on the nominee.
The Board also has a Compensation Committee comprised of Messrs. Rudisill,
Scofield, Griffith, McAuliffe, and Holkins. This Committee met three times in
1999. This Committee approves the compensation and benefits of senior management
of the Bank and Corporation. The Board also has other committees, such as the
Finance Committee and the Executive Committee.
The Board of Directors of the Corporation held a total of five meetings
during 1999. No director attended less than 75% of the aggregate number of
meetings of the Board of Directors and the committees on which he or she served.
There are no family relationships between or among the directors, nominees or
executive officers of the Corporation.
REMUNERATION OF DIRECTORS
Directors are paid $250 for each Board meeting held and $250 for each Board
committee meeting attended; however, no fees are paid to employees of the Bank
who serve on the Board. Members of the Board of Directors of the Bank are paid
at the rate of $700 per Board meeting held, and $250 for each Board committee
meeting attended.
COMPENSATION OF EXECUTIVE OFFICERS
Committee Report on Executive Compensation
The Corporation has no paid employees. The Corporation's sole subsidiary,
First National Bank in Howell, employs all officers and staff. Decisions on the
compensation of the Bank's executive officers are made by the Board of Directors
after receiving recommendations from the Board's Compensation Committee. The
Corporation's policies of compensation are designed to reward employees for the
achievement of annual and long-term corporate goals, as well as individual
accomplishments. The various means of compensation, which apply to other
employees as well as executive officers, are intended to encourage management to
increase the value of the Corporation as an asset to its shareholders, to reward
and challenge individuals, to achieve and reward superior operating results, and
to attract and retain superior personnel.
The Corporation's compensation program is comprised of several elements:
salary, incentive bonus, and a defined contribution plan.
-5-
<PAGE>
The salaries of the Bank's Chief Executive Officer and other Bank
executives are established based on a performance appraisal system. Each
executive's performance, other than that of the Chief Executive Officer, is
evaluated by his or her superior. Wage bands for particular positions are
established based on information obtained from other similar sized banks and the
Michigan Banker's Association annual surveys for use by the Board's Compensation
Committee and the Board of Directors in comparin salaries paid by the Bank with
salaries paid for comparable positions by other banks which are similar in size
to First National Bank in Howell. The Board of Directors and the Compensation
Committee consider other relevant factors such as individual job performance,
experience, expertise, and tenure. The Board intends to maintain the base
salaries of executive officers and senior managers at rates that are competitive
with other banks who are similar in size to the Bank in order to retain superior
personnel and to be able to hire personnel of a high caliber to continue to
achieve and exceed the Bank's operating and financial objectives.
-6-
<PAGE>
An incentive bonus is paid after year end to all employees employed by the
Bank the entire year, if the Bank's earnings are at least at the 50th percentile
of the Bank's peer group. Employees receive 75% of the incentive based on
performance relative to peers through the first nine month period ending
September 30 of each year, with the balance, if any, paid based on the
performance for the full year. There are three different levels at which the
bonus is paid: one for staff, one for superviso and non-officer exempt
employees, and another for officers. The exact formula for the bonus plan is
determined each year by the Board of Directors.
The 401(k) plan covers all employees 21 years of age or older who have
completed one year of service as defined in the plan agreement. Contributions
are equal to 5% of total employee earnings plus 50% of employee contributions
(limited to 10% of their earnings), or the maximum amount permitted by the
Internal Revenue Code.
Chief Executive Officer Compensation
The Compensation Committee reviews Ms. Martin's performance and base salary
as president and chief executive officer annually and recommends adjustments in
her salary to the Board of Directors based on her performance. In making
recommendations to the Board of Directors as to her salary, the Compensation
Committee considers the prevailing salaries for presidents and chief executive
officers of similar sized banks. As a result of that survey, the Committee
established a salary range for Ms. Martin of $122,200 to $183,200 for 1999. The
decision regarding Ms. Martin's 1999 salary was based on the prevailing salary
range, on the Corporation's financial performance for the year and the
Corporation's strong earnings and corporate growth. The Committee further
considered Ms. Martin's leadership in the Corporation and her effectiveness in
implementing the directions and policies of the Board of Directors.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Bank during the
last three years to its Chief Executive Officer and its other executive officers
whose annual compensation exceeded $100,000 (the "Named Executives"). There are
no employees of the Corporation; all personnel are employed by the Bank.
<TABLE>
Long-Term
Compensation
Annual Compensation(1) Restricted Stock All Other
Name and Principal Position Year Salary Bonus Other(3) Awards(4) Compensation(5)
--------------------------- ---- ------ ----- ----- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Barbara D. Martin, President
and Chief Executive Officer 1999 $165,000 $27,844(2) $5,500 $31,520 $12,356
1998 157,500 47,250 8,734 29,995 11,916
1997 150,000 45,000 0 0 12,684
Barbara Nelson, Senior Vice
President and Chief Financial
Officer 1999 $94,000 $15,863(2) $1,019 $13,200 $9,651
1998 87,917 26,375 641 9,975 9,321
1997 83,000 24,900 0 0 9,440
James Wibby, Senior Vice President,
Loans 1999 $105,000 $17,719(2) $1,600 $13,520 $10,237
1998 90,000 27,000 0 7,700 6,433
1997 53,231 15,969 0 0 587
John D. Logan, Senior Vice President,
Trust 1999 $90,000 $15,188(2) $838 $12,920 $9,408
1998 86,000 25,800 0 8,785 6,971
1997 63,537 18,866 0 0 695
</TABLE>
(1) Includes amounts deferred pursuant to Section 401(k) of the Internal
Revenue Code.
(2) For bonus payments in 1999, the amounts reflect only 75% of the bonus that
may be earned for that year, based on the Corporation's performance through
September 30 of that year. The balance of any bonus, which is not
calculable at this time, will be reported in subsequent proxy statements
and/or reports for the year in which it is earned.
-7-
<PAGE>
(3) Represents amounts contributed by the Bank as retirement benefits, for the
Named Executives, in excess of the amounts permitted under the Bank's
401(k) Plan.
(4) Amounts represent the aggregate value of restricted shares of Common Stock
(based upon the value of the stock on the date of grant) issued to the
Named Executives for the designated year under the Corporation's Long-Term
Incentive Plan. The 1999 award of restricted shares was based on a per
share value of $40.00, as of July 1, 1999. The shares are subject to
restrictions on transfer and risks of forfeiture which lapse over a period
of 5 years at the annual rate of 20% of the granted shares, subject to
earlier termination of those restrictions and risks upon death, disability
or a change in control of the Corporation. The Named Executives have no
right to the unvested percentage of the restricted shares, except voting
rights and the right to all dividends and all other distributions paid to
holders of the common stock. As of December 31, 1999, the Named Executives
held shares of restricted stock in the following aggregated amounts and
values (based on the per share value of the Corporation's common stock on
December 31, 1999, which equaled $42.00): Ms. Martin -1,645 shares
($69,090); Ms. Nelson - 615 shares ($25,830); Mr. Wibby - 558 shares
($23,436) and Mr. Logan - 574 shares ($24,108).
(5) The amounts disclosed in this column include (a) amounts contributed by the
Bank to the Bank's 401(k) Plan, pursuant to which substantially all
salaried employees of the Bank participate; (b) the dollar value of
premiums paid by the Bank for term life insurance; and (c) disability
insurance on behalf of the Named Executives as follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Barbara D. Martin (a) $11,000 $10,624 $11,392
(b) 369 306 306
(c) 987 986 986
Barbara Nelson (a) $8,381 $8,151 $8,300
(b) 369 306 306
(c) 901 864 834
James Wibby (a) $8,900 $5,250 $0
(b) 369 306 179
(c) 968 877 408
John D. Logan (a) $8,162 $5,813 $0
(b) 369 306 204
(c) 877 852 491
</TABLE>
CERTAIN TRANSACTIONS WITH MANAGEMENT
Certain directors and officers of the Corporation have had and are expected
to have in the future, transactions with the Bank, or have been directors or
officers of corporations, or members of partnerships, which have had and are
expected to have in the future, transactions with the Bank. All such
transactions with officers and directors, either directly or indirectly, have
been made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and these transactions do
not involve more than the normal risk of collectibility or present other
unfavorable features. All such future transactions, including transactions with
principal shareholders and other Corporation affiliates, will be made in the
ordinary course of business, on terms no less favorable to the Corporation than
with other customers, and for loans in excess of $400,000, will be subject to
approval by a majority of the Corporation's independent, outside disinterested
directors.
-8-
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 of the Securities Exchange Act of 1934, the
Corporation's directors and executive officers, as well as any person holding
more than 10% of its common stock, are required to report initial statements of
ownership of the Corporation's securities and changes in such ownership to the
Securities and Exchange Commission. To the Corporation's knowledge, all the
required reports were filed by such persons during 1999.
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information as of March 1, 2000, as
to the Common Stock of the Corporation owned beneficially by each director, each
Named Executive in the Summary Compensation Table above, and by all directors
and executive officers of the Corporation as a group. No shareholders are known
to the Corporation to have been the beneficial owner of more than five percent
(5%) of the Corporation's outstanding common stock as of March 1, 2000.
<TABLE>
Number of Shares(1) Percent of Class
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Gary R. Boss 1,500 *
- ---------------------------------------------------------------------------------------------------------------
Donald K. Burkel 5,100 *
- ---------------------------------------------------------------------------------------------------------------
Harry E. Griffith 3,164(2) *
- ---------------------------------------------------------------------------------------------------------------
Charles N. Holkins 16,800(3) 1.08%
- ---------------------------------------------------------------------------------------------------------------
Dona Scott Laskey 24,000 1.54%
- ---------------------------------------------------------------------------------------------------------------
John D. Logan 4,040 *
- ---------------------------------------------------------------------------------------------------------------
Barbara D. Martin 15,317(4) *
- ---------------------------------------------------------------------------------------------------------------
James R. McAuliffe 109 *
- ---------------------------------------------------------------------------------------------------------------
Barbara J. Nelson 866 *
- ---------------------------------------------------------------------------------------------------------------
Randolph E. Rudisill 282 *
- ---------------------------------------------------------------------------------------------------------------
W. Rickard Scofield 1,730 *
- ---------------------------------------------------------------------------------------------------------------
James Wibby 1,158 *
- ---------------------------------------------------------------------------------------------------------------
R. Michael Yost 1,213 *
- ---------------------------------------------------------------------------------------------------------------
All Executive Officers and Directors as
a Group (16 persons) 75,915 4.85%
===============================================================================================================
</TABLE>
*Represents less than one percent
(1) This information is based upon the Corporation's records as of March 1,
2000, and information supplied by the persons listed above. The number of
shares stated in this column include shares owned of record by the
shareholder and shares which, under federal securities regulations, are
deemed to be beneficially owned by the shareholder. Unless otherwise
indicated below, the persons named in the table have sole voting and sole
investment power or share voting and investment power with their respective
spouses, with respect to all shares beneficially owned.
(2) Shares owned by Mr. Griffith or his wife as trustees.
(3) Represents 16,800 shares held by Mr. Holkins or his wife as trustees.
(4) Includes 8,119 shares held for the benefit of Ms. Martin's minor children.
-9-
<PAGE>
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on the Corporation's common stock with
that of the cumulative total return on the NASDAQ Bank Stocks Index and the
NASDAQ Stock Market Index for the five year period ended December 31, 1999. The
following information is based on an investment of $100, on January 1, 1995, in
the Corporation's common stock, the NASDAQ Bank Stocks Index and the NASDAQ
Stock Market Index, with dividends reinvested. There has been only limited
trading in the Corporation's Common Stock, there are no market makers for such
shares, and the Corporation's stock does not trade on any stock exchange or the
NASDAQ market. Accordingly, the returns reflected in the following graph and
table are based on sale prices of the Corporation's stock of which management is
aware. There may have been sales at higher or lower prices of which management
is not aware.
<TABLE>
December 31
- --------------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FNBH Bancorp, Inc. 100 112.91 118.25 183.21 220.16 271.10
- --------------------------------------------------------------------------------------------------------------------------
NASDAQ Bank Stocks Index 100 149.00 196.73 329.39 327.11 314.42
- --------------------------------------------------------------------------------------------------------------------------
NASDAQ Stock Market Index 100 141.33 173.89 213.07 300.25 542.43
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of the Corporation as of and for the year ended
December 31, 1999, have been audited by KPMG LLP, independent public
accountants. A representative of KPMG LLP, will be at the Annual Meeting of
Shareholders and will have an opportunity to make a statement and will be
available to answer appropriate questions.
SHAREHOLDER PROPOSALS
Any shareholder proposal to be considered by the Corporation for inclusion
in the 2001 Annual Meeting of Shareholders proxy materials must be received by
the Corporation no later than November 15, 2000.
OTHER BUSINESS
The Board of Directors is not aware of any matter to be presented for
action at the meeting, other than the matters set forth herein. If any other
business should come before the meeting, the Proxy will be voted in respect
thereof in accordance with the best judgment of the persons authorized therein,
and discretionary authority to do so is included in the proxy. The cost of
soliciting proxies will be borne by the Corporation. In addition to solicitation
by mail, officers and other employees o the Corporation and its subsidiaries may
solicit proxies by telephone or in person, without compensation other than their
regular compensation.
The Summary Annual Report of the Corporation for 1999 is included with this
Proxy Statement. Copies of the report will also be available for all
shareholders attending the Annual Meeting. In addition, certain financial and
related information is included in the Appendix to this Proxy Statement.
Shareholders are urged to sign and return the enclosed proxy in the
enclosed envelope. A prompt response will be helpful and appreciated.
BY ORDER OF THE BOARD OF DIRECTORS
Barbara Nelson
Secretary
March 17, 2000
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<PAGE>
APPENDIX I
FNBH Bancorp, Inc. is a one bank holding company, which owns all of the
outstanding capital stock of First National Bank in Howell (the "Bank"). The
Corporation 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. The Bank serves primarily four communities, Howell, Brighton,
Hartland, and Fowlerville, all of which are located in Livingston County,
Michigan.
FINANCIAL INFORMATION
FNBH BANCORP, INC., AND SUBSIDIARIES
Page
----
Independent Auditor's Report 11
Consolidated Balance Sheets 12
Consolidated Statements of Income 14
Consolidated Statements of Stockholders' Equity and Comprehensive Income 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 19
Management's Discussion and Analysis 39
Stock and Earnings Highlights 49
Summary Financial Data 50
-12-
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
FNBH Bancorp, Inc.:
We have audited the consolidated balance sheets of FNBH Bancorp, Inc. and
subsidiaries ("Corporation") as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FNBH Bancorp, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
January 20, 2000
-13-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
Assets 1999 1998
----------------- -------------------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 12,113,652 12,304,296
Short-term investments 12,300,630 18,934,366
----------------- -------------------
Total cash and cash equivalents 24,414,282 31,238,662
----------------- -------------------
Investment securities held to maturity, net (fair value
of $17,650,000 in 1999 and $19,066,000 in 1998) 17,709,401 18,278,233
Investment securities available for sale, at fair value 32,554,004 19,765,936
Mortgage-backed securities held to maturity, net (fair
value of $330,000 in 1999 and $602,000 in 1998) 334,451 601,940
----------------- -------------------
Total investment and mortgage-backed
securities 50,597,856 38,646,109
----------------- -------------------
Loans:
Commercial 163,469,045 137,634,020
Consumer 24,826,156 23,064,800
Real estate mortgage 22,360,282 24,946,777
----------------- -------------------
Total loans 210,655,483 185,645,597
Less unearned income (703,849) (627,169)
Less allowance for loan losses (4,483,283) (3,958,008)
----------------- -------------------
Net loans 205,468,351 181,060,420
Bank premises and equipment, net 9,009,661 7,289,461
Land held for sale, net 2,835,290 3,128,914
Accrued interest income and other assets 4,093,780 3,530,318
----------------- -------------------
Total assets $ 296,419,220 264,893,884
================= ===================
</TABLE>
See accompanying notes to consolidated financial statements.
-14-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
Liabilities and Stockholders' Equity 1999 1998
------------------ -------------------
<S> <C> <C>
Deposits:
Demand (non-interest bearing) $ 47,980,695 47,401,813
NOW 34,645,921 29,087,082
Savings and money market accounts 89,862,739 75,129,137
Time 96,701,098 87,938,732
------------------ ------------------
Total deposits 269,190,453 239,556,764
Accrued interest, taxes, and other liabilities 1,917,121 1,840,587
------------------ ------------------
Total liabilities 271,107,574 241,397,351
Commitments and contingencies
Stockholders' equity:
Common stock, $0 par value. Authorized 4,200,000
shares; 1,565,203 shares issued and outstanding
at December 31, 1999 and 1,562,765 shares issued
and outstanding at December 31, 1998 4,919,280 4,821,775
Retained earnings 20,723,357 18,728,787
Unearned management retention plan (139,597) (66,220)
Accumulated other comprehensive income (loss) (191,394) 12,191
------------------ ------------------
Total stockholders' equity 25,311,646 23,496,533
------------------ ------------------
Total liabilities and stockholders' equity $ 296,419,220 264,893,884
================== ==================
</TABLE>
-15-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 18,725,205 17,293,769 14,521,085
Interest and dividends on investment and
mortgage-backed securities:
U.S. Treasury securities 999,431 1,230,696 1,774,730
Obligations of other U.S. Government agencies 461,654 111,575 128,630
Obligations of state and political subdivisions 838,532 780,637 700,488
Other securities 64,975 44,600 2,655
Interest on short-term investments 507,499 449,102 148,799
-------------- ------------- --------------
Total interest and dividend income 21,597,296 19,910,379 17,276,387
-------------- ------------- --------------
Interest expense:
Interest on deposits 7,961,603 7,389,692 6,270,079
Interest on other borrowings 5,283 10,712 35,236
-------------- ------------- --------------
Total interest expense 7,966,886 7,400,404 6,305,315
-------------- -------------- ---------------
Net interest income 13,630,410 12,509,975 10,971,072
Provisions for loan losses 840,000 640,000 486,375
-------------- ------------- --------------
Net interest income after provision for
loan losses 12,790,410 11,869,975 10,484,697
Non-interest income:
Service charges 1,762,678 1,537,841 1,560,775
Trust income 143,707 80,438 4,481
Gain on sale of securities -- -- 1,306
Gain on sale of loans 43,262 274,361 165,843
Other 65,456 61,201 118,854
-------------- ------------- --------------
Total non-interest income 2,015,103 1,953,841 1,851,259
-------------- ------------- --------------
</TABLE>
-16-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Non-interest expenses:
Salaries and employee benefits $ 4,832,475 4,314,012 3,790,828
Net occupancy expense 689,777 600,472 536,152
Equipment expense 741,580 724,265 479,972
Professional and service fees 460,742 273,824 321,115
Printing and supplies 335,574 248,406 244,273
Michigan Single Business Tax 164,600 201,900 195,100
Provision for real estate losses 300,000 205,000 --
Other 2,018,447 1,669,710 1,414,749
--------------- --------------- ---------------
Total non-interest expenses 9,543,195 8,237,589 6,982,189
--------------- --------------- ---------------
Income before Federal income taxes 5,262,318 5,586,227 5,353,767
Federal income taxes 1,547,000 1,679,500 1,620,500
--------------- --------------- ---------------
Net income $ 3,715,318 3,906,727 3,733,267
=============== =============== ===============
Basic and diluted net income per share $ 2.38 2.49 2.37
=============== =============== ===============
Cash dividends per share $ 1.10 1.05 1.00
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
-17-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
Unearned Accumulated
management other
Common Retained retention comprehensive
stock earnings plan income Total
------------- -------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $ 5,250,000 14,308,934 -- 38,174 19,597,108
Comprehensive income:
Net income -- 3,733,267 -- -- 3,733,267
Changes in unrealized gain on securities
available for sale, net of tax -- -- -- (23,350) (23,350)
--------------
Total comprehensive income 3,709,917
Cash dividends ($1.00 per share) -- (1,575,000) -- -- (1,575,000)
------------- -------------- ----------- ------------- ---------------
Balances at December 31, 1997 5,250,000 16,467,201 -- 14,824 21,732,025
Repurchase of 15,000 shares at $35 per share (525,000) -- -- -- (525,000)
Issued 2,365 shares for management
retention plan 82,775 -- (82,775) -- --
Issued 400 shares for directors' compensation 14,000 -- -- -- 14,000
Amortization of management retention plan -- -- 16,555 -- 16,555
Comprehensive income:
Net income -- 3,906,727 -- -- 3,906,727
Changes in unrealized gain on securities
available for sale, net of tax -- -- -- (2,633) (2,633)
-------------
Total comprehensive income 3,904,094
Cash dividends ($1.05 per share) -- (1,645,141) -- -- (1,645,141)
------------- -------------- ----------- ------------- --------------
Balances at December 31, 1998 4,821,775 18,728,787 (66,220) 12,191 23,496,533
Issued 2,435 shares for management
retention plan 97,400 -- (97,400) -- --
Issued 3 shares for employee awards 105 -- -- -- 105
Amortization of management retention plan -- -- 24,023 -- 24,023
Comprehensive income:
Net income -- 3,715,318 -- -- 3,715,318
Changes in unrealized gain (loss) on securities
available for sale, net of tax -- -- -- (203,585) (203,585)
---------------
Total comprehensive income 3,511,733
Cash dividends ($1.10 per share) -- (1,720,748) -- -- (1,720,748)
------------- -------------- ----------- ------------- ---------------
Balances at December 31, 1999 $ 4,919,280 20,723,357 (139,597) (191,394) 25,311,646
============= ============== =========== ============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
-19-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,715,318 3,906,727 3,733,267
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 840,000 640,000 486,375
Depreciation and amortization 760,047 681,339 449,320
Deferred Federal income tax benefit (235,600) (261,800) (1,700)
Net amortization on investment securities 88,233 44,771 34,884
Earned portion of management retention plan 24,023 16,555 --
Loss on disposal of equipment 18,358 20,668 718
Gain on sales of securities -- -- (1,306)
Gain on sale of loans (43,262) (274,361) (165,843)
Proceeds from sale of loans 16,044,643 18,030,745 9,556,579
Origination of loans held for sale (16,080,472) (18,305,410) (9,827,744)
Provision for real estate losses 300,000 205,000 --
Increase in accrued interest income and other assets (109,238) (2,121,678) (269,012)
Increase (decrease) in accrued interest, taxes,
and other liabilities (30,241) (236,154) 826,774
-------------- -------------- -----------
Net cash provided by operating activities 5,291,809 2,346,402 4,822,312
-------------- -------------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (17,157,030) (16,067,003) (3,006,406)
Proceeds from sale of available-for-sale
securities -- -- 4,025,340
Proceeds from maturities of available-for-sale
securities 3,000,000 10,000,000 5,000,000
Repayments from mortgage-backed securities
available for sale -- -- 11,727
Purchases of held-to-maturity securities (2,919,503) (3,865,946) (5,631,408)
Proceeds from maturities and calls of held-to-
maturity securities 4,268,000 14,490,000 2,820,000
Repayments from mortgage-backed securities
held to maturity 460,169 472,876 243,671
Net increase in loans (25,181,161) (26,536,607) (22,290,462)
Capital expenditures (2,498,605) (3,017,056) (605,848)
-------------- -------------- --------------
Net cash used in investing activities (40,028,130) (24,523,736) (19,433,386)
-------------- -------------- --------------
</TABLE>
-20-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 29,633,689 37,257,573 21,355,422
Dividends paid (1,720,748) (1,645,141) (1,575,000)
Shares repurchased -- (525,000) --
------------ ------------ -----------
Net cash provided by financing activities 27,912,941 35,087,432 19,780,422
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents (6,823,380) 12,910,098 5,169,348
Cash and cash equivalents at beginning of year 31,238,662 18,738,564 13,569,216
------------ ------------ -----------
Cash and cash equivalents at end of year $ 24,415,282 31,648,662 18,738,564
============ ============ ===========
Supplemental disclosures:
Interest paid $ 7,904,981 7,397,252 6,195,714
Federal income taxes paid 1,607,000 2,085,000 1,600,000
Supplemental schedule of noncash investing
and financing activities:
Loans transferred to other real estate 900,000 335,713 --
Loans charged off 485,657 301,674 499,084
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of FNBH Bancorp,
Inc. and its wholly-owned subsidiaries, First National Bank in Howell and
H.B. Realty Co. All significant intercompany balances and transactions have
been eliminated.
First National Bank in Howell ("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, collections,
traveler's checks, night depository, safe deposit box, U.S. Savings Bonds,
and trust services. The Bank serves primarily four communities--Howell,
Brighton, Hartland, and Fowlerville--all of which are located in Livingston
County, Michigan.
H.B. Realty Co. was established on November 26, 1997 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The accounting and reporting policies of FNBH Bancorp, Inc. and
subsidiaries ("Corporation") conform to generally accepted accounting
principles and to general practice within the banking industry. The
following is a description of the more significant of these policies.
(b) Investment and Mortgage-backed Securities
Investment securities held to maturity are those securities which
management has the ability and positive intent to hold to maturity.
Investment securities held to maturity are stated at cost, adjusted for
amortization of premium and accretion of discount.
Investment securities that fail to meet the ability and-positive-intent
criteria are accounted for as securities available for sale and stated at
fair value, with unrealized gains and losses, net of income taxes, reported
as a separate component of other comprehensive income until realized.
Trading account securities are carried at market value. Realized and
unrealized gains or losses on trading securities are included in
non-interest income.
Gains or losses on the sale of securities are computed based on the
adjusted cost of the specific security.
-22-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(c) Loans
Loans are stated at their principal amount outstanding, net of an allowance
for loan losses. Interest on loans is accrued daily based on the
outstanding principal balance. Loan origination fees and certain direct
loan origination costs are deferred and recognized over the lives of the
related loans as an adjustment of the yield. Mortgage loans held for sale
are carried at the lower of cost or market, determined on a net aggregate
basis. Market is determined on the basis of delivery prices in the
secondary mortgage market. When loans are sold, gains and losses are
recognized based on the specific identification method.
The Bank originates mortgage loans for sale to the secondary market, and
sells the loans with servicing retained.
The total cost of mortgage loans originated with the intent to sell is
allocated between the loan servicing right and the mortgage loan without
servicing, based on their relative fair value at the date of origination.
The capitalized cost of loan servicing rights is amortized in proportion
to, and over the period of, estimated net future servicing revenue.
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, mortgage servicing rights are stratified
based on predominant risk characteristics of the underlying serviced loans.
These risk characteristics include loan type, term, year originated, and
note rate. Impairment represents the excess of cost of an individual
mortgage servicing rights stratum over its fair value and is recognized
through a valuation allowance.
Fair values for individual strata are based on quoted market prices for
comparable transactions, if available, or estimated fair value. Estimates
of fair value include assumptions about prepayment, default and interest
rates, and other factors which are subject to change over time. Changes in
these underlying assumptions could cause the fair value of mortgage
servicing rights, and the related valuation allowance, to change
significantly in the future.
(d) Allowance for Loan Losses
The allowance for loan losses is based on management's periodic evaluation
of the loan portfolio and reflects an amount that, in management's opinion,
is adequate to absorb losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors, including
current economic conditions, prior loan loss experience, the composition of
the loan portfolio, and management's evaluation of the collectibility of
specific loans. Although the Bank evaluates the adequacy of the allowance
for loan losses based on information known to management at a given time,
various regulatory agencies, as part of their normal examination process,
may require future additions to the allowance for loan losses.
Impaired loans have been identified in accordance with provisions of
Statement of Financial Accounting Standards ("SFAS") No. 114. The Bank
considers a loan to be impaired when it is probable that it will be unable
to collect all or part of amounts due according to the contractual terms of
the loan agreement. Impaired loans are measured based on the present value
of expected cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at a loan's observable marke price, or the fair
value of the collateral if the loan is collateral dependent.
-23-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(e) Nonperforming Assets
The Bank charges off all or part of loans when amounts are deemed to be
uncollectible, although collection efforts may continue and future
recoveries may occur.
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, loans for which the terms have been
renegotiated to less than market rates due to a serious weakening of the
borrower's financial condition, loans 90 days past due and still accruing,
and other real estate, which has been acquired primarily through
foreclosure and is awaiting 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. At the time a loan is
placed on nonaccrual status, interest previously accrued but not yet
collected is charged against current income. Income on such loans is then
recognized only to the extent that cash is received and where future
collection of principal is probable.
Interest income on impaired loans is accrued based on the principal amounts
outstanding. The accrual of interest is discontinued when an impaired loan
becomes 90 days past due. The Bank utilized the "fair value of collateral"
method to measure impairment, as virtually all of the loans considered to
be impaired are commercial mortgage loans.
(f) Real Estate
Other real estate owned at the time of foreclosure is recorded at the lower
of the Bank's cost of acquisition or the asset's fair market value, net of
disposal cost, which becomes the property's new basis. Any write-downs at
date of acquisition are charged to the allowance for loan losses. Expenses
incurred in maintaining assets and subsequent write-downs to reflect
declines in value are charged to other expense.
Real estate held for sale is recorded at the lower of carrying amount or
estimated fair value less estimated disposal costs. Subsequent adjustments
to estimated fair value and/or disposal costs are recorded as a component
of non-interest expense.
(g) Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization, computed on
the straight-line method, are charged to operations over the estimated
useful lives of the assets.
(h) Federal Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
-24-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(i) Statements of Cash Flows
For purposes of reporting cash flows, cash equivalents include amounts due
from banks and federal funds sold and other short term investments.
(j) Comprehensive Income
The Bank adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income, as of January 1, 1998. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (such as
changes in unrealized gains and losses on securities available for sale) in
a financial statement that is displayed with the same prominence as other
financial statements. In accordance with the adoption of SFAS No. 130, the
Bank now reports comprehensive income within the statement of stockholders'
equity. Comprehensive income includes net income and any changes in equity
from non-owner sources that bypass the income statement. The purpose of
reporting comprehensive income is to report a measure of all changes in
equity of an enterprise that result from recognized transactions and other
economic events of the period other than transactions with owners in their
capacity as owners. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
(k) Stock Split
On January 16, 1997, the board of directors declared a 3-for-1 stock split,
payable as a dividend of two shares for each one share of company stock
held by stockholders of record as of January 16, 1997. All references in
the consolidated financial statements and notes thereto to numbers of
shares, per-share amounts, and market prices of the Company's common stock
have been restated giving retroactive recognition to the stock split.
(l) Earning Per Share
Earnings per share of common stock are based on the weighted average number
of common shares outstanding during the year.
(m) Reclassification
Certain reclassifications have been made to conform with the current year
presentation.
-25-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(2) Investment and Mortgage-backed Securities
A summary of the amortized cost and approximate fair value of investment
securities at December 31, 1999 follows:
<TABLE>
Held to maturity Available for sale
----------------------------------- --------------------------------
Amortized Approximate Amortized Approximate
cost fair value cost fair value
-------------- --------------- ------------- ------------
<S> <C> <C>
U.S. Treasury and agency securities $ -- -- 32,011,148 31,721,254
Obligations of states and political subdivisions 17,709,401 17,650,000 -- --
Federal Reserve Bank Stock -- -- 44,250 44,250
Federal Home Loan Bank Stock -- -- 788,500 788,500
----------- ----------- ------------- --------------
17,709,401 17,650,000 32,843,898 32,554,004
Mortgage-backed securities 334,451 330,000 -- --
----------- ----------- ------------- --------------
$18,043,852 17,980,000 32,843,898 32,554,004
=========== =========== ============= ==============
</TABLE>
A summary of unrealized gains and losses on investment securities at
December 31, 1999 follows:
<TABLE>
Held to maturity Available for sale
----------------------------------- -------------------------------
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains losses gains losses
----------------------------------- -------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ -- -- 147 290,041
Obligations of states and political subdivisions 168,724 228,125 -- --
Mortgage-backed securities -- 4,451 -- --
---------- ----------- --------- ----------
$ 168,724 232,576 147 290,041
========== =========== ========= ==========
</TABLE>
-26-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The amortized cost and approximate fair value of investment securities at
December 31, 1999, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
Held to maturity Available for sale
------------------------------------------ -----------------------------------------
Amortized Approximate Amortized Approximate
cost fair value cost fair value
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 606,283 609,000 24,037,298 23,879,889
Due after one year
through five years 6,350,298 6,466,000 7,973,851 7,841,365
Due after five years
through ten years 10,752,820 10,575,000 -- --
---------------- --------------- --------------- ---------------
17,709,401 17,650,000 32,011,149 31,721,254
Federal Reserve Bank
stock -- -- 44,250 44,250
Federal Home Loan
Bank stock -- -- 788,500 788,500
Mortgage-backed
securities (principally
short-term) 334,451 330,000 -- --
---------------- --------------- --------------- ---------------
$ 18,043,852 17,980,000 32,843,899 32,554,004
================ =============== =============== ===============
</TABLE>
The amortized cost and approximate fair value of investment securities of states
(including all their political subdivisions) that individually exceeded 10% of
stockholders' equity at December 31, 1999 and 1998 are as follows:
<TABLE>
1999 1998
--------------------------------------------- ---------------------------------------
Amortized Approximate Amortized Approximate
cost fair value cost fair value
---------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C>
State of Michigan $ 10,652,008 10,620,000 9,753,080 10,094,000
---------------- --------------- ---------------- ------------------
</TABLE>
Investment securities, with an amortized cost of approximately $1,800,000 at
December 31, 1999 and $500,000 at December 31, 1998, were pledged to secure
public deposits and for other purposes as required or permitted by law.
Additionally, the Bank has a blanket collateral agreement with the Federal Home
Loan Bank of Indianapolis (FHLB) pledging the remaining Treasury and agency
securities owned by the Bank. As of December 31, 1999, the Bank had no
borrowings from the FHLB.
-27-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
A summary of the amortized cost and approximate fair value of investment
securities at December 31, 1998 follows:
<TABLE>
Held to maturity Available for sale
------------------------------------ ------------------------------------
Amortized Approximate Amortized Approximate
cost fair value cost fair value
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
U.S. Treasury and
agency securities $ 1,999,129 2,003,000 19,055,396 19,073,886
Obligations of states
and political
subdivisions 16,279,104 17,063,000 -- --
Federal Reserve
Bank Stock -- -- 44,250 44,250
Federal Home Loan
Bank Stock -- -- 647,800 647,800
-------------- ------------- -------------- --------------
18,278,233 19,066,000 19,747,446 19,765,936
Mortgage-backed
securities 601,940 602,000 -- --
-------------- ------------- -------------- --------------
$ 18,880,173 19,668,000 19,747,446 19,765,936
============== ============= ============== ==============
</TABLE>
A summary of unrealized gains and losses on investment securities at December
31, 1998 follows:
<TABLE>
Held to maturity Available for sale
-------------------------------- --------------------------------
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains losses gains losses
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
securities $ 3,871 -- 48,955 30,465
Obligations of states and
political subdivisions 786,742 2,846 -- --
Mortgage-backed securities 67 7 -- --
--------- -------- ----------- --------
$ 790,680 2,853 48,955 30,465
========= ======== =========== ========
</TABLE>
The Bank recognized gross gains of $1,912 and gross losses of $606 in 1997 on
the sale of investment securities available for sale. In 1999 and 1998, no
investment securities available for sale were sold. Accordingly, no realized
gains or losses were recorded.
Proceeds from sales of investment securities available for sale during the years
ended December 31, 1999, 1998, and 1997 were $-0-, $-0-, and $4,025,000,
respectively.
-28-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(3) Loans
Loans on nonaccrual amounted to $173,000, $1,519,000, and $809,000 at
December 31, 1999, 1998, and 1997, respectively. If these loans had
continued to accrue interest in accordance with their original terms,
approximately $21,000, $110,000, and $154,000 of interest income would have
been realized in 1999, 1998, and 1997, respectively. The Bank had no
troubled-debt restructured loans at December 31, 1999 and 1998.
Details of past-due and nonperforming loans follow:
<TABLE>
90 days past due and
still accruing Nonaccrual
----------------------------- ----------------------------------
1999 1998 1999 1998
----------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Commercial and mortgage loans
secured by real estate $ -- 25,000 93,000 1,373,000
Consumer loans 3,000 -- 40,000 83,000
Commercial and other loans 1,000 -- 40,000 63,000
----------- ------------ --------------- ---------------
$ 4,000 25,000 173,000 1,519,000
----------- ------------ --------------- ---------------
</TABLE>
Impaired loans totaled $3,400,000, $4,300,000, and $3,100,000 at December
31, 1999, 1998, and 1997, respectively. Specific reserves relating to these
loans were $900,000, $500,000, and $366,000 at December 31, 1999, 1998, and
1997, respectively. These reserves were calculated in accordance with SFAS
No. 114. There were no loans considered impaired for which there was no
related specific reserve.
Cash receipts received and recognized as income on impaired loans
approximated $313,000, $291,000, and $256,000 for the years ended December
31, 1999, 1998, and 1997, respectively. Average impaired loans for the
years ended December 31, 1999, 1998, and 1999 were approximately
$4,600,000, $3,800,000, and $3,500,000, respectively.
Loans serviced for others were approximately $49,500,000, $44,300,000, and
$38,300,000 at December 31, 1999, 1998, and 1997, respectively.
The Bank capitalized $79,000, $115,000, and $67,000 in mortgage servicing
rights and incurred approximately $52,000, $33,000, and $19,000 in related
amortization expense during 1999, 1998, and 1997, respectively. At December
31, 1999 and 1998, these mortgage servicing rights had a book value of
$212,000 and $185,000 and fair value of approximately $380,000 and
$300,000, respectively. Mortgage loans with mortgage servicing rights
capitalized totaled approximately $33,000,000 at December 31, 1999 an
$26,000,000 at December 31, 1998. No valuation allowance for capitalized
mortgage servicing rights was considered necessary as of December 31, 1999
and 1998.
Included in real estate loans at December 31, 1999 and 1998 were
approximately $-0- and $434,000, respectively, of fixed-rate mortgage loans
held for sale.
The Bank's primary market area is considered to be Livingston County,
Michigan. The Bank is not dependent upon any single industry or business
for its banking opportunities.
-29-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Certain directors and executive officers, including their immediate
families and companies in which they are principal owners, were loan
customers of the Bank during 1999 and 1998. Such loans were made in the
ordinary course of business in accordance with the Bank's normal lending
policies, including the interest rate charged and collateralization, and do
not represent more than a normal credit risk.
Loans to related parties are summarized below for the periods indicated:
<TABLE>
1999 1998
------------- --------------
<S> <C> <C>
Balance at beginning of year $ 714,000 704,000
New loans 235,000 217,000
Loan repayments (151,000) (207,000)
-------------- ------------
Balance at end of year $ 798,000 714,000
============== ============
</TABLE>
(4) Allowance for Loan Losses
The following represents a summary of the activity in the allowance for
loan losses for the years ended December 31, 1999, 1998, and 1997:
<TABLE>
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $ 3,958,008 3,423,847 3,335,044
Provision charged to operations 840,000 640,000 486,375
Loans charged off (485,657) (301,674) (499,084)
Recoveries of loans charged off 170,932 195,835 101,512
-------------- -------------- -------------
Balance at end of year $ 4,483,283 3,958,008 3,423,847
============== ============== =============
</TABLE>
(5) Bank Premises and Equipment
A summary of bank premises and equipment, and related accumulated
depreciation and amortization at December 31, 1999 and 1998 follows:
<TABLE>
1999 1998
-------------- -------------
<S> <C> <C>
Land and land improvements $ 2,368,791 2,116,070
Bank premises 6,523,383 4,928,872
Furniture and equipment 4,718,009 4,328,827
-------------- -------------
13,610,183 11,373,769
Less accumulated depreciation and amortization (4,600,522) (4,084,308)
-------------- -------------
$ 9,009,661 7,289,461
============== =============
</TABLE>
-30-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(6) Land Held for Sale
In 1997, the Bank purchased an option for $900,000, and in 1998 exercised
that option for approximately $3,000,000 for a tract of land. Subsequent
improvements to the land were made amounting to approximately $200,000.
During 1998, the Bank allocated approximately $800,000 of the carrying
value of the property to land for a branch site. The remaining property is
held for sale.
The Bank also reduced the carrying cost of the land held for sale by
approximately $300,000 and $200,000 during 1999 and 1998, respectively, to
provide for estimated disposal costs and/or declined estimated market
value. These charges are included as a component of non-interest expense.
(7) Time Certificates of Deposit
At December 31, 1999, the scheduled maturities of time deposits with a
remaining term of more than one year were:
<TABLE>
Year of maturity:
<S> <C>
2001 $ 24,523,000
2002 3,103,000
2003 987,000
2004 1,113,000
2005 9,000
--------------
$ 29,735,000
==============
</TABLE>
Included in time deposits are certificates of deposit in amounts of
$100,000 or more. These certificates and their remaining maturities at
December 31, 1999, 1998, and 1997 are as follows:
<TABLE>
1999 1998 1997
--------------- ------------- ----------------
<S> <C> <C> <C>
Three months or less $ 5,436,960 3,692,410 2,851,788
Three through six months 5,190,724 7,529,933 4,683,524
Six through twelve months 6,731,297 6,610,965 6,077,151
Over twelve months 5,073,865 248,332 1,305,782
-------------- ------------- ----------------
$ 22,432,846 18,081,640 14,918,245
============== ============= ================
</TABLE>
Interest expense attributable to the above deposits amounted to
approximately $1,167,000, $968,000, and $716,000 in 1999, 1998, and 1997,
respectively.
-31-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(8) Federal Income Taxes
Federal income tax expense (benefit) consists of:
<TABLE>
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Current $ 1,782,600 1,941,300 1,622,200
Deferred (235,600) (261,800) (1,700)
------------- -------------- --------------
$ 1,547,000 1,679,500 1,620,500
============= ============== ==============
</TABLE>
Federal income tax expense differed from the amounts computed by applying
the U.S. Federal income tax rate of 34% to pretax income as a result of the
following:
<TABLE>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 1,789,200 1,899,300 1,820,300
Increase (reduction) in tax resulting from:
Tax-exempt interest and dividends, net (294,600) (247,800) (221,800)
Other, net 52,400 28,000 22,000
------------- ------------- -------------
$ 1,547,000 1,679,500 1,620,500
============= ============= =============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
<TABLE>
1999 1998
------------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 1,389,500 1,210,900
Deferred loan fees 28,000 43,300
Unrealized loss on securities available for sale 98,500 --
Other 346,300 233,600
------------- ------------
Total gross deferred tax assets 1,862,300 1,487,800
Deferred tax liabilities:
Unrealized gain on securities available for sale -- (6,300)
Other (147,800) (107,400)
Total gross deferred tax liabilities (147,800) (113,700)
------------- ------------
Net deferred tax asset $ 1,714,500 1,374,100
============= ============
</TABLE>
The deferred tax assets are subject to certain asset realization tests.
Management believes no valuation allowance is required at December 31, 1999
and 1998, due to the combination of potential recovery of tax previously
paid and the reversal of certain deductible temporary differences.
-32-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(9) Leases
The Bank has several noncancelable operating leases that provide for
renewal options.
Future minimum lease payments under noncancelable leases as of December 31,
1999 are as follows:
<TABLE>
Year ending
December 31
<S> <C>
2000 $ 38,000
2001 38,000
2002 39,250
2003 43,000
2004 43,000
Later years through 2008 118,250
-------------
$ 319,500
=============
</TABLE>
Rental expense charged to operations in 1999, 1998, and 1997 amounted to
approximately $42,000, $41,000, and $41,000, respectively, including
amounts paid under short-term, cancelable leases.
(10) Pension Plan
The Bank sponsors a defined contribution money purchase thrift plan
covering all employees 21 years of age or older who have completed one year
of service as defined in the plan agreement. Contributions are equal to 5%
of total employee earnings plus 50% of employee contributions (limited to
10% of their earnings), or the maximum amount permitted by the Internal
Revenue Code. The pension plan expense of the Bank for 1999, 1998, and 1997
was approximately $236,000, $222,000, and $204,000, respectively.
(11) Management Retention Plan
Restricted stock was awarded to key employees beginning in 1998, providing
for the immediate award of the Bank's stock subject to a vesting period
which takes place over 5 years. The awards are recorded at fair market
value and amortized into salaries expense over the vesting period. The
amount of compensation costs related to restricted stock awards included in
salary expense in 1999 and 1998 amounted to $24,023 and $16,555,
respectively.
(12) Financial Instruments with Off-balance Sheet Risk
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.
These financial instruments are loan commitments to extend credit and
letters of credit. These instruments involve, to varying degrees, elements
of credit risk in excess of the amounts recognized in the consolidated
balance sheets.
-33-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The Bank's exposure to credit loss in the event of the nonperformance by
the other party to the financial instruments for loan commitments to extend
credit and letters of credit is represented by the contractual amounts of
these instruments. The Bank uses the same credit policies in making credit
commitments as it does for on-balance sheet loans.
Financial instruments whose contract amounts represent credit risk at
December 31, 1999 and 1998 are as follows:
<TABLE>
1999 1998
------------- -------------
<S> <C> <C>
Fixed rate $ 3,700,000 8,600,000
Variable rate 36,300,000 39,300,000
------------- -------------
Total credit commitments $ 40,000,000 47,900,000
Letters of credit $ 1,048,000 736,000
============= =============
</TABLE>
Loan commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include accounts receivable; inventory;
property, plant, and equipment; residential real estate; and
income-producing commercial properties. Market risk may arise if interest
rates move adversely subsequent to the extension of commitments.
Letters of credit written are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. All letters of
credit are short-term guarantees of one year or less. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The Bank primarily holds real
estate as collateral supporting those commitments for which collateral is
deemed necessary. The extent of collateral held on those commitment at
December 31, 1999 and 1998 is in excess of the committed amount.
(13) Capital
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitativ measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital classification is also subject to qualitative
judgments by regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as
defined), and Tier 1 capital (as defined) to average assets (as defined).
-34
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The most recent notification from the Office of the Comptroller of the
Currency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
following table as of December 31, 1999 and 1998:
<TABLE>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ---------- -------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital
(to Risk Weighted Assets) 21,227,000 11.42% 14,871,920 >=8% 18,589,900 >=10%
Tier 1 Capital
(to Risk Weighted Assets) 18,903,000 10.17% 7,435,960 >=4% 9,294,950 >=6%
Tier 1 Capital
(to Average Assets) 18,903,000 7.47% 9,530,200 >=4% 11,912,800 >=5v
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) 24,811,000 11.15% 17,794,900 >=8% 22,243,500 >=10%
Tier 1 Capital
(to Risk Weighted Assets) 22,031,000 9.90% 8,897,400 >=4% 11,121,750 >=6%
Tier 1 Capital
(to Average Assets) 22,031,000 7.74% 11,029,000 >=4% 13,786,200 >=5%
============ ====== =========== ===== =========== ======
</TABLE>
-35-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(14) Net Income Per Common Share
SFAS No. 128, Earnings per Share, was adopted in 1997. The Statement
simplifies the standards for computing earnings per share. Basic net income
per common share is computed by dividing net income applicable to common
stock by the weighted average number of shares of common stock outstanding
during the period. Diluted net income per common share is computed by
dividing net income applicable to common stock by the weighted average
number of shares, and potential common stock such as stock options
outstanding during the period, of which there were none.
<TABLE>
Year ended December 31
1999 1998 1999
--------------- --------------- -----------------
<S> <C> <C> <C>
Basic -
average shares outstanding $ 1,563,996 1,570,537 1,575,000
=============== =============== ===============
Net income $ 3,715,318 3,906,727 3,733,267
=============== =============== ===============
Net income applicable to common stock $ 3,715,318 3,906,727 3,733,267
=============== =============== ===============
Basic net income per share $ 2.38 2.49 2.37
=============== =============== ===============
</TABLE>
(15) Contingent Liabilities
The Bank is subject to various claims and legal proceedings arising out of
the normal course of business, none of which, in the opinion of management,
based on the advice of legal counsel, is expected to have a material effect
on the Bank's financial position or results of operations.
(16) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair-value information about financial instruments
for which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair- value
estimates cannot be substantiated by comparison to independent markets and,
in many cases, cannot be realized in immediate settlement of the
instrument.
Fair-value methods and assumptions for the Bank's financial instruments are
as follows:
Cash and Cash Equivalents - The carrying amounts reported in the
consolidated balance sheet for cash, federal funds, and short-term
investments sold reasonably approximate those assets' fair values.
Investment and Mortgage-backed Securities - Fair values for investment and
mortgage-backed securities are based on quoted market prices. The carrying
amount of accrued interest receivable approximates their fair values.
-36-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Loans - 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 value 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.
Accrued Interest Income - The carrying amount of accrued interest income is
a reasonable estimate of fair value.
Deposit Liabilities - The fair value of deposits with no stated maturity,
such as demand deposit, 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.
Accrued Interest Payable - The carrying amount of accrued interest payable
is a reasonable estimate of fair value.
Off-balance Sheet Instruments - The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of
commitments to extend credit, including letters of credit, approximates
book value of $450,000 and $490,000 at December 31, 1999 and 1998,
respectively.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
1999 1998
-------------------------------------- --------------------------------------
Carrying Fair Carrying Fair
Financial Assets value value value value
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 24,414,000 24,414,000 31,239,000 31,239,000
Investment and mortgage-
backed securities 50,598,000 50,534,000 38,646,000 39,434,000
Loans, net 205,468,000 203,100,000 181,060,000 187,500,000
Financial Liabilities
Deposits:
Demand 47,981,000 48,000,000 47,402,000 47,400,000
NOW 34,646,000 34,600,000 29,087,000 29,100,000
Savings and money
market accounts 89,863,000 89,900,000 75,129,000 75,100,000
Time 96,701,000 97,000,000 87,939,000 89,300,000
Accrued interest
income 1,841,000 1,800,000 1,645,000 1,600,000
Accrued interest
payable 628,000 600,000 553,000 600,000
============== ============= ============ =============
</TABLE>
-37-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Limitations
Fair-value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discounts that could result
from offering for sale at one time the Corporation's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Corporation's financial instruments, fair-value estimates
are based on judgments regarding future loss experience current economic
conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment, and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
(17) Dividend Restrictions
On a parent company-only basis, the Corporation's only source of funds is
dividends paid by the Bank. The ability of the Bank to pay dividends is
subject to limitations under various laws and regulations, and to prudent
and sound banking principles. The Bank may declare a dividend without the
approval of the Office of Comptroller of the Currency ("OCC"), unless the
total dividend in a calendar year exceeds the total of its net profits for
the year combined with its retained profits of the two preceding years.
Under these provisions, approximately $2,500,000 was available for
dividends on December 31, 1999 without the approval of the OCC.
(18) Condensed Financial Information - Parent Company Only
The condensed balance sheets at December 31, 1999 and 1998, and the
statements of income and cash flows for the years ended December 31, 1999,
1998, and 1997, of FNBH Bancorp, Inc. follow:
<TABLE>
Condensed Balance Sheets
1999 1998
----------------- ---------------
<S> <C> <C>
Assets:
Cash $ 18,784 45,726
Investment in subsidiaries:
First National Bank in Howell 21,839,986 18,759,233
H.B. Realty Co. 3,399,472 4,652,015
Other assets 59,654 39,557
----------------- ---------------
$ 25,317,896 23,496,531
----------------- ---------------
Liabilities and stock equity:
Other liabilities $ 6,250 --
Stockholder's equity 25,311,646 23,496,531
----------------- ---------------
Total liabilities and stock equity $ 25,317,896 23,496,531
================= ===============
</TABLE>
-38-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
<TABLE>
Condensed Statements of Income
Year ended December 31,
----------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Operating income - dividends from
subsidiaries $ 1,720,748 6,872,496 2,554,996
--------------- -------------- -------------
Total operating income 1,720,478 6,872,496 2,554,996
--------------- -------------- -------------
Operating expenses - administrative and
other expenses 37,223 40,683 39,418
--------------- -------------- -------------
Total operating expenses 37,223 40,683 39,418
--------------- -------------- -------------
Income before equity in undistributed
net income of subsidiaries 1,683,525 6,831,813 2,515,578
Equity in undistributed net income of
subsidiaries 2,031,793 (2,925,086) 1,217,689
--------------- -------------- -------------
Net income $ 3,715,318 3,906,727 3,733,267
=============== ============== =============
</TABLE>
-39-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
<TABLE>
Condensed Statements of Cash Flows
Year ended December 31,
------------------------------------------------------------
1999 1998 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Net income $ 3,715,318 3,906,727 3,733,267
Adjustments to reconcile net income to net
cash from operating activities:
Increase in other assets (20,097) (28,056) (11,500)
Increase in other liabilities 6,250 -- --
Equity in undistributed net income of
subsidiaries (2,031,793) 2,925,086 (1,217,689)
---------------- --------------- ----------------
Total adjustments (2,045,640) 2,897,030 (1,229,189)
---------------- --------------- ----------------
Net cash provided by
operating activities 1,669,678 6,803,757 2,504,078
--------------- --------------- ----------------
Cash flow from investing activities -
investments in and advancements to
subsidiary, net -- (4,678,372) (940,721)
--------------- -------------- ---------------
Net cash used in investing
activities -- (4,678,372) (940,721)
--------------- --------------- ----------------
Cash flow from financing activities:
Dividends paid (1,720,748) (1,645,141) (1,575,000)
Common stock repurchased -- (525,000) --
Common stock issued 97,505 96,775 --
Change in management retention plan (73,377) (66,220) --
--------------- -------------- ---------------
Net cash used in financing
activities (1,696,620) (2,139,586) (1,575,000)
--------------- -------------- ---------------
Net decrease in cash (26,942) (14,201) (11,643)
Cash at beginning of period 45,726 59,927 71,570
--------------- -------------- ---------------
Cash at end of period $ 18,784 45,726 59,927
=============== ============== ===============
</TABLE>
-40-
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(19) Quarterly Financial Data - Unaudited
The following table presents summarized quarterly data for each of the two
years ended December 31:
<TABLE>
Quarters ended in 1999
-----------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Selected operations data:
Interest income $ 5,086,427 5,132,300 5,631,057 5,747,512
Net interest income 3,148,976 3,180,674 3,664,933 3,635,827
Provision for loan losses 210,000 210,000 210,000 210,000
Income before income taxes 1,144,177 1,166,272 1,561,401 1,390,468
Net income 827,177 822,372 1,092,101 973,668
Basic net income per share 0.53 0.53 0.70 0.62
Cash dividends per share 0.20 0.20 0.20 0.50
============== ============ ============ ===========
</TABLE>
<TABLE>
Quarters ended in 1998
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Selected operations data:
Interest income $ 4,679,544 4,907,180 5,146,174 5,177,481
Net interest income 2,922,521 3,104,644 3,260,295 3,222,515
Provision for loan losses 150,000 150,000 170,000 170,000
Income before income taxes 1,351,692 1,559,491 1,554,343 1,120,701
Net income 946,692 1,106,491 1,060,343 793,201
Basic net income per share 0.60 0.70 0.68 0.51
Cash dividends per share 0.18 0.18 0.20 0.49
============== ============ ============ ===========
</TABLE>
-41-
<PAGE>
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 1999 total assets increased 12% to $296,419,000. Investment
securities increased $12 million (31%) while gross loans increased $25 million
(13%). Deposits increased $29.6 million (12%) to $269,190,000. Stockholders'
equity increased $1.8 million (8%) to $25,312,000.
Securities
The securities portfolio is an important source of liquidity for the Bank
to meet unusual deposit fluctuations. Management of the Bank makes investment
decisions which will ensure the safety of funds entrusted to it by its
depositors and shareholders. Approximately $32,000,000 of the securities
portfolio is invested in US government and agency obligations. An additional
$18,000,000 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 to the Bank. 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>
1999 1998
<S> <C> <C>
U.S.Treasury & agency securities 62.7% 54.5%
Agency mortgage backed securities .7% 1.6%
Tax exempt obligations of states and political subdivisions 35.0% 42.1%
Other 1.6% 1.8%
---- ----
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 $25,000,000 (13%) in 1999.
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 1999 the Bank sold
$12,000,000 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. While not meeting secondary market
requirements, these nonconforming mortgages do meet bank loan guidelines and
have a good payment record. During 1999 the Bank made approximately $5,000,000
in variable rate mortgage loans which it retained in the mortgage portfolio.
-42-
<PAGE>
During 1999, 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 $163,469,000, a 19% increase for the year. Additionally, the Bank
originated $4,000,000 in commercial loans which it sold in part or total to
other banks due to legal lending limits Consumer loans increased $1,800,000,
about 8%.
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 $87,000,000 in loans secured by commercial
property with the remaining $3,000,000 secured by multi-family units. The most
significant loan growth was in commercial loans secured by business property
which increased $20,800,000, 30% over the prior year, and in commercial loans
not secured by real estate which increased $12,800,000, a 49% increase.
The following table shows the balance and percentage makeup of loans as of
December 31:
<TABLE>
(Dollars in thousands)
1999 1998
Balances Percentage Balances Percentage
<S> <C> <C> <C> <C>
Secured by real estate:
Residential first mortgage $ 29,904 14.2% $ 38,051 20.5%
Residential home equity/other junior liens 7,822 3.7% 9,106 4.9%
Construction and land development 23,375 11.1% 23,048 12.4%
Other 89,809 42.6% 68,960 37.1%
Consumer 16,811 8.0% 16,653 9.0%
Commercial 38,891 18.5% 26,058 14.1%
Other 4,043 1.9% 3,770 2.0%
------ ------ -------- ------
Total Loans (Gross) $210,655 100.0% $185,646 100.0%
</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)
1999 1998 1997
<S> <C> <C> <C>
Nonperforming Loans: Nonaccrual loans $ 173 $1,519 $ 809
Loans past due 90 days and still accruing 4 25 249
- -- ---
Total nonperforming loans 177 1,544 1,058
Other real estate 0 0 0
- - -
Total nonperforming assets $ 177 $1,544 $1,058
======= ====== ======
Nonperforming loans as a percent of total loans .08% .83% .67%
Nonperforming assets as a percent of total loans .08% .83% .67%
Nonperforming loans as a percent of the loan loss
reserve 4% 39% 31%
</TABLE>
-43-
<PAGE>
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.
The $1,400,000 decrease in nonperforming loans is primarily due to the
foreclosure and subsequent sale of property for an approximately $1,000,000 loan
that was nonperforming in 1998.
Impaired loans totaled $3,400,000 at December 31, 1999, compared to
$4,300,000 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 $3,380,000 of commercial loans separately
identified as impaired. The decrease in impaired loans is primarily due to the
decline in nonaccrual loans mentioned above.
During 1999 the Bank charged off loans totaling $486,000 and recovered
$171,000 for a net charge off amount of $315,000. In the previous year, the Bank
had net charge offs totaling $106,000.
The allowance for loan losses totaled $4,483,000 at year end which was
2.13% of total loans, the same percentage it was in 1998. 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 o 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)
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of the year $3,958 $3,424 $3,335
Additions (deduction):
Loans charged off (486) (302) (499)
Recoveries of loans previously charged off 171 196 102
Provision charged to operations 840 640 486
---- ---- ---
Balance at end of the year $4,483 $3,958 $3,424
Allowance for loan losses to loans outstanding 2.13% 2.13% 2.15%
</TABLE>
Deposits
Deposit balances of $269,190,000 at December 31, 1999 were nearly $30
million (12.4%) higher than the previous year end. Because year end deposit
balances can fluctuate in unusual ways, it is more meaningful to analyze changes
in average balances. Average deposits increased $37 million (17%) during 1999.
Non-interest bearing demand deposits increased $5.3 million, about 12% on
average. Average savings and NOW balances increased $19.7 million (21.5%) while
average time deposits increased $11.7 million or about 14%.
The following table sets forth average deposit balances for the years ended
December 31:
<TABLE>
(Dollars in thousands)
1999 1998 1997
<S> <C> <C> <C>
Non-interest bearing demand $ 48,914 $ 43,619 $ 34,707
Savings, NOW and money market 111,141 91,463 79,104
Time deposits 92,802 81,118 71,093
------ -------- --------
Total average deposits $252,857 $216,200 $184,904
</TABLE>
-44-
<PAGE>
The increase in savings deposits was primarily due to a $13.1 million
increase in money market accounts. The growth in certificates 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 $25,312,000, 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 7.74% at year end 1999. 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 9.90% at year end 1999. 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 11.15% at year end. The Bank's strong capital
ratios put it in the best classification on which the FDIC bases its assessment
charge.
The following table lists various Bank capital ratios at December 31:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Equity to asset ratio 7.02% 7.14% 9.19%
Tier 1 leverage ratio 7.74% 7.47% 9.50%
Tier 1 risk-based capital 9.90% 10.17% 14.12%
Total risk-based capital 11.15% 11.42% 15.37%
</TABLE>
The 1998 decline in the Bank's capital ratio was the result of dividends
paid to the parent company to enable a subsidiary company to purchase land, some
of which was intended for a branch site, the remainder to be sold. In 1999 a
portion of the land was sold to the Bank for a branch site. The Bank's capital
account was credited for the proceeds of the sale. As the remaining land is
sold, the Bank's capital account will be recredited for the proceeds from the
sale.
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 1999 the
Company paid dividends totaling $1,721,000, or 46% of earnings. Book value of
the stock was $16.17 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 1999, the Bank opened a new branch in the northwest part of Brighton.
Adjoining the building site is vacant land, valued at approximately $2,800,000,
which the company intends to sell. In the coming year, the Bank plans to focus
on expanding service through technological delivery systems.
-45-
<PAGE>
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 targets a minimum 15% liquidity ratio. The
Bank's liquidity ratio averaged 19.6% in 1999.
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, which
amounted to $22,400,000 at December 31, 1999 compared to $18,100,000 the prior
year, 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. In addition, the Bank has
a $16,000,000 line of credit available at the Federal Home Loan Bank of
Indianapolis. The Bank has pledged certain mortgage loans and investment
securities as collateral for the borrowing. In the event the Bank must borrow
for an extended period, management may look to "available for sale" securities
in the investment portfolio for liquidity.
Throughout the past year, Fed Funds Sold balances have averaged
approximately $10,400,000 compared to $8,600,000 the prior year. Management kept
larger than normal balances in Fed Funds in 1999 in order to be ready for
whatever demands there might be for Year 2000 issues. As it turned out, there
was no unusual demand for cash.
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 quality of the loan portfolio is
reviewed in light of the current allowance. The Bank's exposure to market risk
is reviewed.
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 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 12 of the Consolidated Financial Statements).
-46-
<PAGE>
The table below shows the scheduled maturity and repricing of the Bank's
assets and liabilities as of December 31, 1999:
<TABLE>
0-3 4-12 1-5 5+
Months Months Years Years Total
<S> <C> <C> <C> <C> <C>
Assets:
Loans, net $63,711 $30,472 $106,833 $9,639 $210,655
Securities 5,828 19,674 14,343 10,753 50,598
Short term investments 12,301 12,301
Other assets 22,865 22,865
------- ------- -------- ------ ------
Total assets $81,840 $50,146 $121,176 $43,257 $296,419
Liabilities & Shareholders' Equity:
Demand, Savings & NOW $56,906 $16,717 $63,371 $35,495 $172,489
Time 20,423 46,528 29,741 9 96,701
Other liabilities and equity 27,229 27,229
------- ------- ------- ------ ------
Total liabilities and equity $77,329 $63,245 $93,112 $62,733 $296,419
Rate sensitivity gap and ratios:
Gap for period $4,511 $(13,099) $28,064 $(19,476)
Cumulative gap 4,511 (8,588) 19,476
Cumulative rate sensitive ratio 1.06 .94 1.08 1.00
December 31, 1998 rate sensitive ratio 1.28 .92 1.08 1.00
</TABLE>
<TABLE>
Total Average Interest Rate Estimated Fair Value
<S> <C> <C> <C>
Assets:
Loans, net $205,468 9.47% $203,100
Securities 50,598 5.73% 50,534
Short term investments 12,301 4.89% 12,301
Liabilities:
Savings, NOW, MMDA $124,509 2.69% 124,500
Time 96,701 5.36% 97,000
</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 value
of other 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 a 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.
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.
-47-
<PAGE>
Given the liability sensitive position of the Bank at December 31, 1999, if
interest rates increase 200 basis points and management did not respond,
management estimates that pretax net interest income would decrease
approximately $100,000 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 recorded net income of $3,715,000 in 1999 compared to
$3,907,000 in 1998. While net interest income climbed $1,120,000, costs
associated with conversion to a new computer system and preparations for Y2K
reduced net income. Also, dampening profits were the start-up costs of opening a
new branch and the effect of the excess land acquired with that branch site. The
Company's return on average assets (ROA) was 1.33% in 1999, a 30 basis point
decline from the prior year. The return on average stockholders' equity (ROE)
was 15.05%, down from the 17.83% reported in 1998.
The following table contains key performance ratios for years ended
December 31:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Net income to:
Average stockholders' equity 15.05% 17.83% 17.84%
Average assets 1.33% 1.63% 1.79%
Basic earnings per common share: $2.38 $2.49 $2.37
</TABLE>
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 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>
1999 1998 1997
---- ---- ----
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 $ 10,384 4.89% $ 8,630 5.20% $ 2,754 5.40%
Taxable securities 30,051 5.08% 23,019 6.02% 31,873 5.98%
Tax-exempt securities 16,896 6.90% 15,221 7.13% 13,262 7.36%
Loans 198,448 9.47% 175,873 9.85% 148,096 9.82%
------- ------- -------
Total earning assets $255,779 8.60% $222,743 9.09% $195,985 8.97%
Interest bearing funds:
Savings/NOW accounts $111,141 2.69% $ 91,552 3.03% $ 79,104 2.79%
Time deposits 92,802 5.36% 81,119 5.69% 71,093 5.71%
Federal funds purchased 98 5.40% 179 5.98% 610 5.77%
------ --------- ----------
Total interest bearing funds: $204,041 3.90% $172,850 4.28% $150,807 4.18%
Interest spread 4.70% 4.81% 4.79%
Net interest margin 5.48% 5.76% 5.75%
</TABLE>
-48-
<PAGE>
Tax equivalent interest income in each of the three years includes loan
origination fees. A substantial portion of such 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. Tax equivalent interest income includes net loan
origination fees totaling $710,000 in 1999, $600,000 in 1998, and $380,000 in
1997.
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, 1999 compared to December 31, 1998 compared to
Year ended December 31, 1998 Year ended December 31, 1997
---------------------------- ----------------------------
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 $ 91 $ (33) $ 58 $ 317 $ (17) $ 300
Securities:
Taxable 424 (284) 140 (529) 10 (519)
Tax Exempt 119 (39) 80 144 (35) 109
Loans 2,223 (750) 1,473 2,727 50 2,777
Total interest income $ 2,857 $ (1,106) $ 1,751 $ 2,659 $ 8 $ 2,667
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts $ 593 $ (374) $ 219 $ 348 $ 214 $ 562
Time 665 (312) 353 573 (15) 558
Short-term borrowings (5) (1) (6) (25) 1 (24)
Total interest expense $ 1,253 $ (687) $ 566 $ 896 $ 200 $ 1,096
Net interest income (FTE) $ 1,604 $ (419) $ 1,185 $ 1,763 $ (192) $ 1,571
</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.
Tax equivalent net interest income increased $1,185,000 in 1999 over the
prior year due to a $1,751,000 increase in interest income partially offset by
approximately $566,000 increase in interest expense. The increase in income is
attributable to an increase in average earning assets of $33,000,000 as the
yield declined 49 basis points. Loan interest income was $1,473,000 higher in
1999 than the previous year. The increase was due to an increase of $22,600,000
in average balances partly offset by a 38 basis point decrease in rates. Loan
growth was fueled by general growth in Livingston County which created a demand
for consumer and commercial building projects. Income on taxable securities
increased in 1999 due to a $7,000,000 increase in average balances. Interest
rates decreased 94 basis points. Tax-exempt bonds earned $80,000 more in 1999
than the previous year. The average balance of these securities increased
$1,700,000 while the rate declined 23 basis points. Interest income on short
term investments increased $58,000 due to an increase in average balances of
$1,754,000, partially offset by a decrease in rates of 42 basis points.
-49-
<PAGE>
Interest expense increased $566,000 in 1999 because average balances
increased approximately $31,200,000 although interest rates decreased 38 basis
points. The interest cost for savings and NOW accounts increased $219,000
because average savings and NOW balances increased $19,600,000 while interest
rates declined 34 basis points. Interest on time deposits increased $353,000
because average time deposits increased $11,700,000 although interest rates
declined 33 basis points. Money market account once again enjoyed growth as
customers responded favorably to the tiered rate structure now being offered and
rising interest rates. 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 $1,571,000.
The increase in net interest income was the result of an increase in interest
income of $2,667,000, partially offset by an increase in interest expense of
approximately $1,096,000. The increase in interest income in 1998 was the result
of a $26,800,000 increase in earning assets and an increase in yields on earning
assets of 12 basis points. The increase in interest expense was the result of
average balances increasing $22,000,000 and interest rates increasing 10 basis
points.
In the coming year, management expects growth to continue in both loans and
deposits. An economic decline could, however, adversely affect growth. The
interest spread and interest margin will likely continue to decline due, in
part, to the fact that the interest cost on deposits is expected to continue to
rise as competition for deposits intensifies among the bank and non-bank
players.
The following table shows the composition of average earning assets and
interest paying liabilities for the years ended December 31:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
As a percent of average earning assets:
Loans 77.59% 78.95% 75.56%
Securities 18.35% 17.18% 23.03%
Short term investments 4.06% 3.87% 1.41%
----- ----- -----
Average earning assets 100.00% 100.00% 100.00%
Savings and NOW 43.45% 41.10% 40.36%
Time deposits 36.28% 36.42% 36.27%
Short term borrowing .04% .08% .31%
----- ---- -----
Average interest bearing liabilities 79.77% 77.60% 76.94%
Earning asset ratio 91.61% 92.76% 94.14%
Free-funds ratio 20.23% 22.40% 23.06%
</TABLE>
Provision for Loan Losses
The provision for loan losses increased to $840,000 in 1999 compared to
$640,000 in 1998. At year end the ratio of allowance for loan loss to loans was
2.13%, consistent with that of the 1998. Principally because of the 19%
commercial loan growth, management increased the loan loss provision by $200,000
in 1999. Management analyzes the adequacy of the allowance quarterly taking into
consideration the portfolio mix, historical loss experience, the level of
nonperforming loans and loans that have been identified as impaired, as well as
economic conditions within the Bank's market.
-50-
<PAGE>
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, increased approximately $61,000 (3%) in 1999 compared
to the previous year. Contributing to this increase was a $225,000 increase in
charges for services and a $63,000 increase in trust fees collected. Both of
these items increased due to growth, of the Bank and of the Trust Department.
Partly offsetting the above mentioned increases, the gain on loan sales declined
$231,000. This decrease was principally the result of reduced loan volume and
rising mortgage rates. This reduced amount of gains is expected to continue into
the year 2000.
Non-interest Expense
Non-interest expense increased 16% in 1999. The most significant component
of non-interest expense is salaries and benefits expense. In 1999 salaries and
benefits expense increased 12% to $4,800,000, due to the combined effects of
salary increases and staffing of a new branch. Occupancy expense increased
$89,000 (15%) due to the new branch which was put in service in August. Other
expense increased $698,000 (21%). The costs associated with conversion to a new
computer system and preparations for Year 2000 reduced net income. Also,
dampening profits were the start-up costs of opening the Challis Road branch and
the effect of the excess land acquired with that branch site.
Year 2000 issues were a major concern of the Bank's management in 1998 and
1999. A great deal of time and money was spent to replace equipment and programs
that were suspect and to conduct exhaustive testing of systems. The Bank had no
failure of equipment or programs at the turn of the millennium.
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 decreased $133,000 to $1,547,000 (8%) in 1999. 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.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB No.
133. Statement 137 extends the effective date of SFAS 133 to fiscal years
beginning after June 15, 2000.
-51-
<PAGE>
STOCK AND EARNINGS HIGHLIGHTS
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, 1998, through December 31, 1999, there were, so far as the
Company's management knows, 369 sales of shares of the Company's Common Stock,
involving a total of 115,338 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 $42.00 per share during the last two quarters
of 1999, and the lowest price was $30.00 per share in the first quarter of 1998.
To the knowledge of management, the last sale of Common Stock occurred on
February 29, 2000.
As of March 1, 2000, there were approximately 850 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 1998 and 1999, 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 1998 and 1999:
<TABLE>
Sales Prices Cash Dividends Declared
<S> <C> <C> <C>
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(1)
1999 High Low
First Quarter $40.00 $40.00 $0.20
Second Quarter $40.00 $40.00 $0.20
Third Quarter $42.00 $40.00 $0.20
Fourth Quarter $42.00 $42.00 $0.50(2)
</TABLE>
(1) Includes a special dividend of $0.29 per share.
(2) Includes a special dividend of $0.30 per share.
-52-
<PAGE>
<TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
1999 1998 1997 1996 1995
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income $21,597 $19,910 $17,276 $15,717 $14,394
Interest expense 7,967 7,400 6,305 5,644 4,879
Net interest income 13,630 12,510 10,971 10,073 9,515
Provision for loan losses 840 640 486 448 448
Non-interest income 2,015 1,954 1,851 1,686 1,418
Non-interest expense 9,543 8,238 6,982 6,151 5,867
Income before tax 5,262 5,586 5,354 5,160 4,618
Net income 3,715 3,907 3,733 3,574 3,200
Basic Per Share Data(1):
Net income $2.38 $2.49 $2.37 $2.27 $2.03
Dividends paid 1.10 1.05 1.00 .93 .68
Weighted average shares
outstanding 1,563,996 1,570,537 1,575,000 1,575,000 1,575,000
Balance Sheet Data:
Total assets 296,419 264,894 226,314 202,009 182,958
Loans, net 209,952 185,018 158,397 136,067 127,463
Allowance for loan losses 4,483 3,958 3,424 3,335 3,097
Deposits 269,190 239,557 202,299 180,944 163,875
Shareholders' equity 25,312 23,497 21,732 19,597 17,530
Ratios:
Dividend payout ratio 46.31% 42.11% 42.19% 41.13% 33.46%
Equity to asset ratio 8.84% 9.13% 10.05% 9.82% 9.61%
</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.
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<PAGE>
Board of Directors
W. Rickard Scofield, Chairman
Charles N. Holkins, Vice Chairman
Gary R. Boss
Donald K. Burkel
Harry E. Griffith
Dona Scott Laskey
James R. McAuliffe
Barbara Draper Martin
Randolph E. Rudisill
R. Michael Yost
Helen V. W. McGarry, Director Emeritus
Donald E. Monroe, Director Emeritus
Roy A. Westran, Director Emeritus
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<PAGE>
Officers
Barbara Draper Martin, President and Chief Executive Officer
Herbert W. Bursch, Senior Vice President, Retail Delivery Services
John D. Logan, Senior Vice President, Trust & Investments
Barbara J. Nelson, Senior Vice President and CFO
James Wibby, Senior Vice President, Senior Lender
Dennis P. Gehringer, Senior Vice President, Commercial Lender
Douglas A. Schyck, Senior Vice President, Commercial Lender
Jerry Armstrong, Vice President, Operations
John M. Hulyk, Vice President, Commercial Lender
Nancy Morgan, Vice President, Human Resources
Tomas E. Bell, Jr. , Assistant Vice President, Commercial Lender
David R. Pothier, Assistant Vice President, Commercial Lender
Patricia Griffith, Controller
Gabi Bresett, Branch Manager
Donna Gehringer, Branch Manager
Dawn Little, Branch Manager
Kay E. Pearce, Branch Manager
Lauri L. Trapp, Branch Manager
Diane Miller, Mortgage Officer
Carole Smoter, Loan Officer
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