SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
--------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-25752
FNBH BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2869722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 East Grand River, Howell, Michigan 48843
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517)546-3150
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. _X_
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on a per share price of $42 as of March 1, 2000, was
$65,738,526 (common stock, no par value). As of December 31, 1999 there were
outstanding 1,565,203 shares of the Company's Common Stock (no par value).
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement and appendix dated March 17, 2000 for
the Annual Meeting of Shareholders to be held April 19, 2000 are incorporated by
reference into Parts I, II and III of this report.
<PAGE>
PART I
Included in this Form 10-K are certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1993, as amended, and
Section 21 E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on the beliefs of the Company's management
as well as on assumptions made by and information currently available to the
Company at the times such statements were made. Actual results could differ
materially from those included in such forward- looking statements as a result
of, among other things, factors set forth below in this Report generally, and
certain economic and business factors, some of which may be beyond the control
of the Company. Investors are cautioned that all forward-looking statements
involve risks and uncertainty.
Item 1 - Business
FNBH Bancorp, Inc. (the Company), a Michigan business corporation, is a one
bank holding company, which owns all of the outstanding capital stock of First
National Bank in Howell (the "Bank"). The Company was formed in 1988 for the
purpose of acquiring all of the stock of the Bank in a shareholder approved
reorganization, which became effective May, 1989.
The Bank was originally organized in 1934 as a national banking
association. As of March 1, 2000, the Bank had approximately 118 full-time and
part-time employees. None of the Bank's employees is subject to collective
bargaining agreements. The Company does not directly employ any personnel. The
Bank serves primarily four communities, Howell, Brighton, Hartland, and
Fowlerville, all of which are located in Livingston County. The county has
historically been rural in character but has a growing urban population
especially in the southeast quadrant of the county, primarily attributable to
growth around the City of Brighton.
On November 26, 1997 H.B. Realty Co., a subsidiary of the Company, was
established to purchase land for a future branch site of the Bank and to hold
title to other Bank real estate when it is considered prudent to do so.
Bank Services
The Bank is a full service bank offering a wide range of commercial and
personal banking services. These services include checking accounts, savings
accounts, certificates of deposit, commercial loans, real estate loans,
installment loans, trust and investment services, collections, traveler's
checks, night depository, safe deposit box and U.S. Savings Bonds. The Bank
maintains correspondent relationships with major banks in Detroit, pursuant to
which the Bank engages in federal funds sale and purchase transactions, the
clearance of checks and certain foreign currency transactions. The Bank also has
a relationship with the Federal Home Loan Bank of Indianapolis where it makes
<PAGE>
short term investments and where it has a line of credit of $16,000,000
available. In addition, the Bank participates with other financial institutions
to fund certain large loans which would exceed the Bank's legal lending limit if
made solely by the Bank.
The Bank's deposits are generated in the normal course of business and the
loss of any one depositor would not have a materially adverse effect on the
business of the Bank. As of December 31, 1999, 43% of outstanding loans were for
either commercial or residential construction or development. As of December 31,
1999, the Bank's certificates of deposit of $100,000 or more constituted
approximately 8% of total deposit liabilities. The Bank's deposits are primarily
from its service area and the Bank does not seek or encourage large deposits
from outside the area.
The Company's cash revenues are derived primarily from dividends paid by
the Bank. The Bank's principal sources of revenue are interest and fees on loans
and interest on investment securities. Interest and fees on loans constituted
approximately 80% of total revenues for the periods ended December 31, 1999 and
December 31, 1998. Interest on investment securities, including short-term
investments and federal funds sold, constituted approximately 12% of total
revenues in 1999 and 1998. Revenues were also generated from deposit service
charges and other financial service fees.
The Bank provides real estate, consumer, and commercial loans to customers
in its market. Sixty percent of the Bank's loan portfolio is in fixed rate
loans. Most of these loans, approximately 92%, mature within five years of
issuance. Approximately $11,000,000 in loans (or about 5% of the Bank's total
loan portfolio) have fixed rates with maturities exceeding five years. Fifty-six
percent of the Bank's interest-bearing deposits are in savings, NOW, and MMDAs,
all of which are variable rate products. Of the approximately $96,700,000 in
certificates, $66,951,000 mature within a year, with the majority of the balance
maturing within a five year period.
Requests to the Bank for credit are considered on the basis of credit
worthiness of each applicant, without consideration to race, color, religion,
national origin, sex, marital status, physical handicap, age, or the receipt of
income from public assistance programs. Consideration is also given to the
applicant's capacity for repayment, collateral, capital and alternative sources
of repayment. Loan applications are accepted at all the Bank's offices and are
approved under each lending officer's authority. Loan requests in excess of
$400,000 are required to be presented to the Board of Directors or the Executive
Committee of the Board for its review and approval.
As described in more detail below, the Bank's cumulative one year gap ratio
of rate sensitive assets to rate sensitive liabilities for the period ended
December 31, 1999, was 6% liability sensitive, compared to 8% liability
sensitive at December 31, 1998. See discussion and table under "Quantitative and
Qualitative Disclosures about Market Risk" in Item 7 below.
<PAGE>
The Bank sells participations in commercial loans to other financial
institutions approved by the Bank, for the purpose of meeting legal lending
limit requirements or loan concentration considerations. The Bank regularly
sells fixed rate residential mortgages to Freddie Mac while retaining servicing
on the sold loans. Those residential real estate mortgage loan requests that do
not meet Freddie Mac criteria are reviewed by the Bank for approval and, if
approved, are retained in the Bank's loan portfolio. The Bank also may purchase
loans which meet its normal credit standards.
The Bank's investment policy is considered to be generally conservative. It
provides for unlimited investment in U.S. government and agency bonds, with a
maximum maturity of five years. Municipal bonds may be purchased to provide
nontaxable income, with the maximum life of municipal bonds limited to
approximately ten years with a double A rating or better. A single A rated bond
may be purchased if it matures in four years or less. Non-rated bonds may be
purchased from local communities that are familiar to the Bank, with a maximum
block size of a single purchase limited to $300,000. Investments in states other
than Michigan may not exceed 20% of the municipal portfolio, and investments in
a single issuer may not exceed 10% of equity capital. Mortgage backed
securities, which are fully collateralized by securities issued by government
sponsored agencies, may be purchased in block sizes of up to $500,000, provided
the average life expectancy does not exceed seven years. In addition, certain
collateralized mortgage obligations may be purchased if their average life does
not exceed five years. In any case, investments in mortgage backed securities
may not exceed 10% of the investment portfolio.
The acquisition of "high-risk mortgage securities" is prohibited. In no
case may the Bank participate in such activities as gains trading, "when-issued"
trading, "pair offs", corporate settlement of government and agency securities,
repositioning repurchase agreements, and short sales. All securities dealers
effecting transactions in securities held or purchased by the Bank must be
approved by the Board of Directors.
Bank Competition
The Bank has seven offices within the four communities it serves, all of
which are located in Livingston County, Michigan. Three of the offices,
including the main office, are located in Howell. There are two facilities in
Brighton, and one each in Hartland, and Fowlerville. See "Properties" below for
more detail on these facilities. Within these communities, its principal
competitors are Old Kent Bank, National City Bank, D&N Bank, and Michigan
National Bank. Each of these financial institutions, which are headquartered in
larger metropolitan areas, have significantly greater assets and financial
resources than the Company. Among the principal competitors in the communities
in which the Bank operates, the Bank is the only locally based financial
institution. Based on deposit information as of June 30, 1999, the Bank holds
approximately 19.25% of local deposits, compared to approximately 18.80% held by
Old Kent Bank, approximately 13.45% held by D&N Bank, approximately 11.05% held
b National City Bank, and approximately 8.95% held by Michigan National Bank.
Information as to asset size of competitor financial institutions is derived
from publicly available reports
<PAGE>
filed by and with regulatory agencies. Within the Bank's markets, Old Kent Bank
maintains four branch offices, National City Bank operates six branch offices,
D&N Bank has five branch offices, and Michigan National Bank has three branch
offices. The only competitor expansion of which management is aware is a new
branch of Old Kent Bank coming to Genoa Township.
The financial services industry continues to become increasingly
competitive. Principal methods of competition include loan and deposit pricing,
advertising and marketing programs, and the types and quality of services
provided. The deregulation of the financial services industry and the easing of
restrictions on bank and holding company activities have led to increased
competition among banks and other financial providers for funds, loans, and a
broad array of other financial services. Competition within the Bank's market
has been relatively stable within the past years. Management continues to
evaluate the opportunities for the expansion of products and services.
Growth of Bank
The following table sets forth certain information regarding the growth of
the Bank:
<TABLE>
Balances as of December 31,
---------------------------
(in thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $296,419 $264,894 $226,314 $202,009 $182,958
Loans, Net of Unearned Income 209,964 185,018 158,397 136,067 127,463
Securities 50,598 38,646 43,725 47,257 35,251
Noninterest-Bearing Deposits 47,980 47,402 41,631 35,048 30,815
Interest-Bearing Deposits 221,210 192,155 160,668 145,896 133,060
Total Deposits 269,190 239,557 202,299 180,944 163,875
Shareholders' Equity 25,312 23,497 21,732 19,597 17,530
</TABLE>
Through 1998, the Bank operated six branch facilities: one in downtown
Howell, one at Lake Chemung (five miles east of downtown Howell), one on the
east side of Brighton, one in Hartland, one in the village of Fowlerville, and
the sixth is a grocery store branch, located west of downtown Howell. In August
of 1999, the Bank opened a new regional facility on the west side of Brighton.
As of December 31, 1999, this new branch had approximately $3,900,000 in
deposits. In the time period presented, all of the Bank's branches grew due to
general growth in the county.
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. This summary is qualified in its entirety by reference
to the particular statutes and regulations. Changes in applicable laws and
regulations may have a material effect on the Company and the Bank and their
respective businesses.
<PAGE>
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), the FDIC, the Office of the
Comptroller of the Currency (the "OCC"), the Internal Revenue Service, and state
taxing authorities. The effect of such statutes, regulations and policies can be
significant and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Bank, and the public, rather than
shareholders of the Company.
Federal law and regulations establish supervisory standards applicable to
the lending activities of the Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
Recent Legislation
The Gramm-Leach-Bliley Act of 1999 (the "GLB Act") removed large parts of a
regulatory framework that had its origins in the Depression Era of the 1930s.
Effective March 11, 2000, new opportunities become available for banks, other
depository institutions, insurance companies and securities firms to enter into
combinations that permit a single financial services organization to offer
customers more financial products and services. The GLB Act provides for a new
regulatory framework for regulation through the "financial holding company,"
which will have as its umbrella regulator the Federal Reserve Board. Functional
regulation of the financial holding company's separately regulated subsidiaries
will be conducted by their primary functional regulator. In order to qualify as
a financial holding company, a bank holding company must file an election to
become a financial holding company and each of its banks must be "well
capitalized" and "well managed." In addition, the GLB Act makes satisfactory or
above Community Reinvestment Act compliance for insured depository institutions
and their financial holding companies necessary in order for them to engage in
new financial activities. The GLB Act provides a federal right to privacy of
non-public personal information of individual customers. The Company and the
Bank are also subject to certain state laws that deal with the use and
distribution of non-public personal information.
<PAGE>
The Company believes that the GLB Act could significantly increase
competition in its business and is evaluating the desirability of electing to
become a financial holding company. The Company believes that it is qualified to
elect financial holding company status but has not yet decided to do so.
The Company
As a registered bank holding company under the Bank Holding Company Act of
1956, as amended (the "Act"), the Company is subject to supervision and
examination by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") and is required to file, with the Federal Reserve Board, annual
reports and information regarding its business operations and those of its
subsidiaries.
The Act requires a bank holding company to obtain the approval of the
Federal Reserve Board before it may acquire more than 5% of the voting stock or
substantially all of the assets of any bank or merge or consolidate with any
other bank holding company. If the effect of a proposed acquisition, merger or
consolidation may substantially lessen competition or tend to create a monopoly,
the Federal Reserve Board cannot approve the acquisition unless it finds that
the anticompetitive effects of the acquisition, merger, or consolidation are
clearly outweighed by the convenience and needs of the community to be served.
The Act also provides that the consummation of any acquisition, merger or
consolidation must be delayed at least 15 days following the approval of the
Federal Reserve Board and that any action brought under the antitrust laws of
the United States during the time will delay the effectiveness of its approval
during the pendency of the action unless otherwise ordered by the board.
The Riegle-Neal Interstate Banking and Branching Efficiency Act authorizes
adequately capitalized and adequately managed bank holding companies to acquire
banks located outside their respective home states, irrespective of state law.
This legislation also authorizes, effective June 1, 1997 (subject to individual
state's rights to accelerate this date or prohibit interstate branching within
their borders), banking organizations to branch nationwide by acquisition or
consolidation of existing bank in other states. Michigan law authorizes
out-of-state banks to acquire and establish branches in Michigan, provided the
laws of the state of the out-of-state institution permit Michigan banks to
acquire or establish branches in that state. Interstate acquisitions are subject
to the approval of various federal and state agencies and subject to other
conditions.
Subject to certain exceptions, a bank holding company is also prohibited
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank and from engaging directly or
indirectly in activities unrelated to banking or managing or controlling banks.
One of the exceptions to this prohibition permits activities by a bank holding
company or its subsidiaries which the Federal Reserve Board has determined to be
so closely related to banking o managing or controlling banks as to be a proper
incident thereto. In determining whether a particular activity is a proper
incident to banking or managing or controlling banks, the Federal
<PAGE>
Reserve Board considers whether performance of the activity by an affiliate of a
bank holding company can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board has adopted regulations prescribing
those activities which it presently regards as permissible for bank holding
companies and their subsidiaries. Some of these activities include: performing
certain data processing services; certain personal and real property leasing;
making, acquiring, or servicing loans and other extensions of credit as would be
made by a mortgage, finance, credit card or other factoring company; bank
related courier services; and, under certain circumstances, acting as any or all
of the following: investment or financial advisor, insurance agent or broker,
and underwriter for credit life insurance and credit accident and health
insurance. The Act does not place geographic restrictions on the activities of
the nonbank subsidiaries of bank holding companies. The enactment of the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 streamlines the
nonbanking activities application process for well capitalized and well managed
bank holding companies.
The Act, the Federal Reserve Act, and the Federal Deposit Insurance Act
also subject bank holding companies and their subsidiaries to certain
restrictions on any extensions of credit by subsidiary banks to the bank holding
company or any of its subsidiaries, or investments in the stock or other
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower. Further, under the Act and regulations of the Federal
Reserve Board, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of any property or furnishing of service.
The Federal Reserve Board provides guidelines for the measurement of
capital adequacy of bank holding companies. The Company's capital, as adjusted
under these guidelines, is referred to as risk-based capital. The Company's Tier
1 risk-based capital ratio, at December 31, 1999, was 11.36% and total
risk-based capital was 12.62%. At December 31, 1998, these ratios were 12.52%
and 13.79%, respectively. Minimum regulatory Tier 1 risk-based and total
risk-based capital ratios under the Federal Reserve Board guidelines are 4% and
8%, respectively. These same capital ratios are applied at the bank level by the
Federal Deposit Insurance Corporation, under which a well-capitalized bank is
defined as one with at least 10% risk-based capital. Capital guidelines also
provide for a standard to measure risk-based capital to total assets. This is
referred to as the leverage ratio. The Company's leverage ratio at December 31,
1999 was 9.13%, while at December 31, 1998 it was 9.14%. The minimum standard
leverage ratio is 3%. See also "Capital" discussion in Item 7 below.
As a Michigan business corporation, the Company may generally declare and
pay dividends, provided the Company is not insolvent and that the payment of the
dividend would not render it insolvent, and, after giving the effect of the
distribution, that the Company's total assets would equal or exceed its total
liabilities plus the dissolution
<PAGE>
preference of any senior equity securities (of which there currently are none).
The payment of dividends to its shareholders is limited by the Company's ability
to obtain funds from the Bank and by the above-referenced regulatory capital
guidelines.
The Bank
The Bank is organized as a national banking association and is therefore
regulated and supervised by the OCC. The deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC"). Consequently, the Bank is also
subject to the provisions of the Federal Deposit Insurance Act. As a result of
such supervision and regulation, the Bank is subject to requirements to maintain
reserves against deposits, restrictions on the nature and amount of loans which
may be made and the interest which may be charged thereon, restrictions relating
to investments and other activities, limitations based on capital and surplus,
and limitations on the payment of dividends on its capital stock. The various
regulatory and legal requirements referenced above are primarily for the
protection of the Bank's depositors and customers rather than the shareholders
of the Company.
As a national bank, the Bank may not pay a dividend on its common stock if
the dividend would exceed the net undivided profits then on hand after deducting
losses and bad debts. Additionally, the prior approval of the Office of the
Comptroller of the Currency, or its designee, is required for any dividend to a
bank holding company by an affiliated national bank if the total of all
dividends, including any proposed dividend declared by such bank in any calendar
year, exceeds the total of its net profits for that year combined with its
retained net profits for the preceding two years, less any required transfers to
surplus.
The Federal Deposit Insurance Act was amended in 1991 by the FDIC
Improvement Act of 1991. The FDIC Improvement Act provides for regulatory
intervention should a bank's capital deteriorate, limits certain real estate
lending and increases audit requirements. The FDIC has been granted authority to
impose special assessments on banks to repay borrowings of the FDIC. The FDIC
Improvement Act defines a reserve ratio at which the Bank Insurance Fund ("BIF")
is to be maintained through FDIC semi- annual assessment rates on the BIF member
banks. The FDIC has also established a system of risk-based deposit insurance
premiums under the FDIC Improvement Act. This system established four levels of
premium rates based on the risk classification of the institution. As a national
bank, the Bank's premiums are paid to BIF. Given the designation as a well
managed, well capitalized institution, the Bank pays the lowest assessment rate
possible to BIF.
As required by the Deposit Insurance Funds Act of 1996, in 1997 the Bank
commenced making payments to the FDIC for the Financing Corporation (FICO) bonds
that were issued previously. The FICO rate for BIF member banks is 1.220 basis
points annually applied to assessable deposits. During 1999 the Bank paid
$28,000 to the FDIC.
In 1996 the Michigan Legislature adopted the Credit Reform Act. This
statute, together with amendments to other related laws, permits regulated
lenders, indirectly
<PAGE>
including Michigan-chartered banks, to charge and collect higher rates of
interest and increased fees on certain types of loans to individuals and
businesses. The laws prohibit "excessive fees and charges," and authorize
governmental authorities and borrowers to bring actions for injunctive relief
and statutory and actual damages for violations by lenders. The statutes
specifically authorize class actions, and also civil money penalties, for
knowing and willful or persistent violations.
I SELECTED STATISTICAL INFORMATION
(A) Distribution of Assets, Liabilities, and Shareholders' Equity:
(B) Interest Rates and Interest Differential:
The table on the following page shows the daily average balances for major
categories of interest earning assets and interest bearing liabilities, interest
earned (on a taxable equivalent basis) or paid, and the effective rate or yield,
for the three years ended December 31, 1999, 1998, and 1997.
Net interest income is the difference between interest earned on loans,
securities and other earning assets and interest paid on deposits and borrowed
funds. In the following tables, the interest earned on investments and loans is
expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a federal income tax rate of 34%. The
following Yield Analysis shows that the Bank's interest margin decreased 28
basis point in 1999 as a result of a decrease of 49 basis points in yield on
earning assets, partially offset by a decrease of 38 basis points in the
interest cost on deposits. In 1998 the interest margin increased 1 basis point
due to a 12 basis point increase in yield on earning assets partially offset by
an increase in interest cost of 10 basis points.
<PAGE>
<TABLE>
Yield Analysis of Consolidated Average Assets and Liabilities
(dollars in thousands)
1999 1998 1997
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Short term investments $10,384 $507.5 5.79% $8,630 $449.1 5.20% $2,754 $148.8 5.40%
Securities:
Taxable 30,051 1,526.1 5.08% 23,019 1,386.9 6.02% 31,873 1,906.0 5.98%
Tax-exempt 16,896 1,165.6 6.90% 15,221 1,085.1 7.13% 13,262 975.8 7.36%
Loans(1)(2) 198,448 18,790.8 9.47% 175,873 17,317.6 9.85% 148,096 14,540.3 9.82%
------- --------- ------- --------- -------- ---------
Total earning assets and
total interest income 255,779 $21,990.0 8.60% 222,743 $20,238.7 9.09% 195,985 $15,570.9 8.97%
--------- --------- ---------
Cash & due from banks 11,680 9,836 7,620
All other assets 15,955 11,335 8,089
Allowance for loan loss (4,219) (3,777) (3,499)
------- ------ ------
Total assets $279,195 $240,137 $208,195
======== ======== ========
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings, money market, NOW $111,141 $2,991.6 2.69% $91,552 $2,772.5 3.03% $79,104 $2,210.5 2.79%
Time 92,802 4,970.0 5.36% 81,119 4,617.2 5.69% 71,093 4,059.5 5.71%
Short term borrowings 98 5.3 5.40% 179 10.7 5.98% 610 35.3 5.77%
-------- --------- ------- -------- -------- ---------
Total interest bearing
liabilities and total
interest expense 204,041 $7,966.9 3.90% 172,850 $7,400.4 4.28% 150,807 $6,305.3 4.18%
--------- -------- --------
Non-interest bearing deposits 48,240 43,619 34,668
All other liabilities 2,232 1,751 1,792
Shareholders' Equity 24,682 21,917 20,928
------ ------ ------
Total liabilities and
shareholders' equity $279,195 $240,137 $208,195
======== ======== ========
Interest spread 4.70% 4.81% 4.79%
===== ===== ====
Net interest income-FTE $14,023.1 $12,838.3 $11,265.6
========= ========= =========
Net interest margin 5.48% 5.76% 5.75%
===== ===== =====
</TABLE>
(1) Nonaccruing loans are not significant during the three year period and, for
purposes of the computations above, are included in average daily loan
balances.
(2) Interest on loans includes origination fees totaling $710,000 in 1999,
$600,000 in 1998, and $380,000 in 1997.
<PAGE>
(C) The following table sets forth the effects of volume and rate changes on net
interest income on a taxable equivalent basis. All figures are stated in
thousands of dollars.
<TABLE>
Year ended Year ended
December 31, 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:
Short term investments.......... $ 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.
<PAGE>
II SECURITIES PORTFOLIO
(A)The following table sets forth the book value of securities at December 31:
<TABLE>
(in thousands)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Held to maturity:
U.S. Treasury $ 0 $ 1,999 $ 15,993
States and political subdivisions 17,709 16,279 14,028
Mortgage-backed securities 335 602 633
--- --- ---
Total $ 18,044 $ 18,880 $ 30,654
Available for sale:
U.S. Treasury $ 22,860 $ 12,092 $ 13,026
U.S. Government agencies 8,861 6,982 0
Mortgage-backed securities 0 0 0
FRB Stock 44 44 44
FHLB Stock 789 648 0
--------- --------- ---
Total $ 32,554 $ 19,766 $ 13,070
</TABLE>
(B)The following table sets forth contractual maturities of securities at
December 31, 1999 and the weighted average yield of such securities:
<TABLE>
(dollars in thousands)
Maturing After Maturing After
Maturing Within One But Within Five But Within Maturing After
One Year Five Years Ten Years Ten Years
-------- ---------- --------- ---------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity
States and political
subdivisions $ 606 5.55% $6,350 5.23% $10,753 4.68% 0
Mortgage backed
Securities 184 5.32% 151 5.57% 0 0
--- --- - -
Total $ 790 5.50% $6,123 5.29% $11,131 4.68% $0
======== ====== ======= ==
Tax equivalent adjustment
for calculations of yield $11 $110 $206
=== ==== ====
Available for sale
U.S. Treasury $16,937 4.89% $ 5,922 5.39%
U.S. Agency $ 6,943 4.90% $ 1,919 5.15%
FRB Stock $ 44 6.00%
FHLB Stock 789 8.00%
---
Total $23,880 4.89% $ 7,841 5.33% $0 $ 833 7.89%
======= ======== == =====
</TABLE>
The rates set forth in the tables above for obligations of state and
political subdivisions have been restated on a fully tax equivalent basis
assuming a 34% marginal tax rate. The amount of the adjustment is as follows:
<PAGE>
<TABLE>
Rate on Tax
Tax-Exempt Rate Adjustment Equivalent Basis
--------------- ---------- ----------------
<S> <C> <C> <C>
Under 1 year 5.55% 1.85% 7.40%
1-5 years 5.28% 1.84% 7.12%
5-10 years 4.68% 1.84% 6.52%
</TABLE>
Additional statistical information concerning the Bank's securities
portfolio is incorporated by reference in Note 2 of the Company's Consolidated
Financial Statements for the year ended December 31, 1999 included in the
Appendix to the Company's definitive proxy statement, dated March 17, 2000,
relating to the April 17, 2000, Annual Meeting of Shareholders (as filed with
the Commission as exhibit 13 to the Report).
III LOAN PORTFOLIO
(A)The table below shows loans outstanding at December 31:
<TABLE>
(in thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Secured by real estate:
Residential first mortgage $ 29,904 $ 38,051 $ 38,073 $ 36,148 $ 36,871
Residential home equity/other junior liens 7,822 9,106 13,665 12,883 10,566
Construction and land development 23,375 23,048 19,490 14,042 9,075
Other 89,809 68,960 53,743 43,006 42,454
Consumer 16,811 16,653 14,011 12,272 11,233
Commercial 38,891 26,058 18,299 15,830 14,546
Other 4,043 3,770 1,729 2,360 3,213
----- ----- ----- ----- -----
Total Loans (Gross) $210,655 $185,646 $159,010 $136,541 $127,958
</TABLE>
The loan portfolio is periodically reviewed and the results of these
reviews are reported to the Company's Board of Directors. The purpose of these
reviews is to verify proper loan documentation, to provide for the early
identification of potential problem loans, and to evaluate the adequacy of the
allowance for loan losses.
(B)The following table shows the amount of commercial, financial, and
agricultural loans outstanding as of December 31, 1999 which, based on remaining
scheduled repayments of principal, are in the periods indicated.
<TABLE>
Maturing
(in thousands)
After one
Within one but within After five
year five years years Total
--- ---------- ----- -----
<S> <C> <C> <C> <C>
Real estate construction & land development.... $12,536 $10,829 0 $ 23,375
Real estate other (secured by commercial &
multi-family)............................... 8,528 74,784 6,497 89,809
Commercial (secured by business assets or
Unsecured).................................. 11,970 26,132 789 38,891
Other (loans to farmers, political
Subdivisions, & overdrafts) ................ 297 1,799 1,947 4,043
Totals................................... $33,331 $113,554 $9,233 $156,118
</TABLE>
<PAGE>
Below is a schedule of amounts due after one year which are classified
according to their sensitivity to changes in interest rates.
<TABLE>
Interest Sensitivity
(in thousands)
Fixed Rate Variable Rate
---------- -------------
<S> <C> <C>
Due after one but within five years............... $84,003 $29,551
Due after five years.............................. 6,352 2,881
</TABLE>
(C) Nonperforming loans consist of loans accounted for on a nonaccrual
basis and loans contractually past due 90 days or more as to interest or
principal payments (but not included in nonaccrual loans). The aggregate amount
of non-performing loans, as of December 31, is presented in the table below:
<TABLE>
(dollars in thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming Loans:
Nonaccrual loans $ 173 $ 1,519 $ 809 $ 109 $ 926
Loans past due 90 days or more 4 25 249 448 66
- -- --- --- --
Total nonperforming loans $ 177 $ 1,544 $ 1,058 $ 557 $ 992
====== ======= ======= ====== ======
Percent of total loans .08% .83% .67% .41% .78%
</TABLE>
Additional information concerning nonperforming loans, the Bank's
nonaccrual policy, loan impairment, and loan concentrations is incorporated by
reference to Note 3 of the Company's Consolidated Financial Statements for the
year ended December 31, 1999 included in the Appendix to the Company's
definitive proxy statement, dated March 17, 2000, relating to the April 17,
2000, Annual Meeting of Shareholders (as filed with the Commission as exhibit 13
to the Report).
There were no other interest bearing assets, at December 31, 1999, that
would be required to be disclosed under Item III(C), if such assets were loans.
There were no foreign loans outstanding at December 31, 1999.
<PAGE>
IV SUMMARY OF LOAN LOSS EXPERIENCE
(A)The following table sets forth loan balances and summarizes the changes
in the allowance for loan losses for each of the years ended December 31:
<TABLE>
(dollars in thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans:
Average daily balance of loans for the year.... $198,448 $175,873 $148,096 $130,648 $122,500
Amount of loans (gross) outstanding at end
of the year................................ 210,655 185,646 159,011 136,541 127,958
Allowance for loan losses:
Balance at beginning of year.................. 3,958 3,424 3,335 3,097 2,672
Loans charged off:
Real estate................................ 0 110 0 70 0
Commercial................................. 322 63 375 129 118
Consumer................................... 164 129 124 88 91
--- --- --- -- --
Total charge-offs...................... 486 302 499 287 209
Recoveries of loans previously charged off:
Real estate............................... 35 96 32 1 0
Commercial................................ 98 51 43 31 95
Consumer.................................. 38 49 27 45 91
-- -- -- -- --
Total recoveries...................... 171 196 102 77 186
Net loans charged off............................ 315 106 397 210 23
Additions to allowance charged to operations..... 840 640 486 448 448
--- --- --- --- ---
Balance at end of year................ $ 4,483 $ 3,958 $ 3,424 $ 3,335 $ 3,097
Ratios:
Net loans charged off to average loans
outstanding .16% .06% .27% .16% .02%
Allowance for loan losses to loans
outstanding 2.13% 2.13% 2.15% 2.44% 2.42%
</TABLE>
The allowance for loan losses reflected above is a valuation allowance in
its entirety and the only allowance available to absorb future loan losses.
(B)The following table presents the portion of the allowance for loan
losses applicable to each loan category and the percent of loans in each
category to total loans, as of December 31:
<TABLE>
(dollars in thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........ $3,803 77.6% $ 3,384 74.1% $2,785 69.2% $2,401 66.7% $2,204 64.7%
Consumer.......... 441 11.8% 355 12.5% 332 15.6% 465 16.2% 412 15.8%
Real Estate....... 239 10.6% 219 13.4% 307 15.2% 457 17.1% 481 19.5%
--- ---- --- --- ---
Total....... $4,483 100% $3,958 100% $3,424 100% $3,335 100% $3,097 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
<PAGE>
V DEPOSITS
The following table sets forth average deposit balances and the weighted
average rates paid thereon for the years ended December 31:
<TABLE>
(dollars in thousands)
1999 1998 1997
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 48,240 $ 43,619 $ 34,668
Savings, money market and NOW 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%
------ ------ ------
Total $252,857 3.90% $216,290 4.28% $184,865 4.18%
======== ======== ========
</TABLE>
The table for maturities of negotiated rate time deposits of $100,000 or
more outstanding at December 31, 1999 is incorporated by reference to note 7 of
the Company's Consolidated Financial Statements for the year ended December 31,
1999 included in the Appendix to the Company's definitive proxy statement, dated
March 17, 2000, relating to the April 17, 2000, Annual Meeting of Shareholders
(as filed with the Commission as exhibit 13 to the Report).
VI RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets, and certain other ratios, for the years ended December 31 follow:
<TABLE>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income as a percent of:
Average common equity 15.05% 17.83% 17.84% 19.12% 19.60%
Average total assets 1.33% 1.63% 1.79% 1.88% 1.88%
</TABLE>
Additional performance ratios are set forth in Selected Financial Data, in
Item 6, Part II of this Report. Any significant changes in the current trend of
the above ratios are reviewed in Management's Discussion and Analysis of
Financial Condition and Results of Operations, set forth in Item 7, Part II of
this Report.
VII SHORT-TERM BORROWING
The information required in this item is not applicable for this Company.
<PAGE>
Item 2 - Properties
The Bank operates from seven facilities, located in four communities, in
Livingston County, Michigan. The executive offices of the Company are located at
the Bank's main office, 101 East Grand River, Howell, Michigan. The Bank
maintains two branches in Howell at 5990 East Grand River and 2400 West Grand
River. The Bank also maintains branch offices at 9911 East Grand River,
Brighton, Michigan, 8080 Challis Road, Brighton Michigan, 760 South Grand
Avenue, Fowlerville, Michigan, and 10700 Highland Road, Hartland, Michigan. All
of the offices have ATM machines and all except the West Grand River branch,
which is in a grocery store, have drive up services. All of the properties are
owned by the Bank except for the West Grand River branch which is leased. The
lease is for fifteen years, expiring September 2007. The average lease payment
over the life of the lease is $3,167 monthly.
Item 3 - Legal Proceedings
The Company is not involved in any material legal proceedings. The Bank is
involved in ordinary routine litigation incident to its business; however, no
such proceedings are expected to result in any material adverse effect on the
operations or earnings of the Bank. Neither the Bank nor the Company is involved
in any proceedings to which any director, principal officer, affiliate thereof,
or person who owns of record or beneficially more than five percent (5%) of the
outstanding stock of either the Company or the Bank, or any associate of the
foregoing, is a party or has a material interest adverse to the Company or the
Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
Additional Item--Executive Officers
Executive officers of the Company are appointed annually by the Board of
Directors. There are no family relationships among these officers and/or the
directors of the Company, or any arrangement or understanding between any
officer and any other person pursuant to which the officer was elected.
<PAGE>
The following table sets forth certain information with respect to the
Company's executive officers as of December 31, 1999:
<TABLE>
First Selected as an Officer
Name (Age) Position with Company of the Company
--------- --------------------- --------------
<S> <C> <C>
Barbara D. Martin (53) President, Chief Executive Officer, and Director of the
Company and the Bank 1983
Barbara J. Nelson (52) Secretary/Treasurer of the Company and Senior Vice
President, Cashier, and Chief Financial Officer of the Bank 1985
Herbert W. Bursch (47) Senior Vice President, Retail Services, of the Bank 1999
John D. Logan (50) Senior Vice President, Trust and Investments, of the 1997
James Wibby (49) Senior Vice President, Senior Lender, of the Bank 1997
Nancy Morgan (49) Vice President, Human Resources of the Bank 1988
Jerry Armstong (40) Vice President, Operations, of the Bank 1997
</TABLE>
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
There is no active market for the Company's Common Stock, and there is no
published information with respect to its market price. There are occasional
direct sales by shareholders of which the Company's management is generally
aware. It is the understanding of the management of the Company that over the
last two years, the Company's Common Stock has sold at a premium to book value.
From January 1, 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.
<PAGE>
Sales price and dividend information for the years 1998 and 1999:
<TABLE>
Sales Prices Cash Dividends Declared
------------ -----------------------
1998 High Low
---- ---- ---
<S> <C> <C> <C>
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.
The holders of the Company's Common Stock are entitled to dividends when,
as, and if declared by the Board of Directors of the Company out of funds
legally available for that purpose. Dividends have been paid on a quarterly
basis. In determining dividends, the Board of Directors considers the earnings,
capital requirements and financial condition of the Company and the Bank, along
with other relevant factors. The Company's principal source of funds for cash
dividends is the dividends paid by the Bank. The ability of the Company and Bank
to pay dividends is subject to regulatory restrictions and requirements.
<PAGE>
Item 6 - Selected Financial Data
<TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
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.
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion provides information about the consolidated financial
condition and results of operations of FNBH Bancorp, Inc. ("Company") and its
subsidiaries, First National Bank in Howell ("Bank") and HB Realty Co., and
should be read in conjunction with the Consolidated Financial Statements.
FINANCIAL CONDITION
During 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.
<PAGE>
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.
<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 b 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:
<PAGE>
<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>
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 or trends which might negatively impact
the loan portfolio are also considered.
<PAGE>
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>
(in thousands)
1999 1998 1997
---- ---- ----
<S> <C> <C> ,C>
Non-interest bearing demand $ 48,914 $ 43,619 $ 34,707
Savings, money market, and NOW 111,141 91,463 79,104
Time deposits 92,802 81,118 71,093
------ ------ ------
Total average deposits $252,857 $216,200 $184,904
</TABLE>
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.
<PAGE>
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.
<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
<PAGE>
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).
The table below shows the scheduled maturity and repricing of the Bank's
assets and liabilities as of December 31, 1999:
<TABLE>
0-3 Months 4-12 Months 1-5 5+
Years Years Total
<S> <C> <C> <C> <C> <C>
Assets:
Loans.................................... $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, money
market & 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>
<PAGE>
<TABLE>
Total Average Interest Rate Estimated Fair Value
Assets: ----- --------------------- --------------------
<S> <C> <C> <C>
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, MMDA, NOW $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.
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.
<PAGE>
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>
(dollars in thousands)
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, MMDA, NOW $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>
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.
<PAGE>
The following table sets forth the effects of volume and rate changes on
net interest income on a taxable equivalent basis. All figures are stated in
thousands of dollars.
<TABLE>
Year ended Year ended
December 31, 1999 compared to December 31, 1998 compared to
ended December 31, 1998 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, MMDA, NOW.. $ 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 offse 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 shor 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.
<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 accounts 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.
<PAGE>
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, money market, 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 hav been identified as impaired, as well as
economic conditions within the Bank's market.
Non-interest Income
Non-interest income, which includes service charges on deposit accounts,
loan fees, other operating income, and gain(loss) on sale of assets and
securities transactions, 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%).
<PAGE>
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.
Item 7a - Quantitative and Qualititative Disclosures about Market Risk
Included in Management's Discussion and Analysis
<PAGE>
Item 8 - Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data of
the Company appear on pages 11 to 38 of Appendix I to the Company's definitive
Proxy Statement, dated March 17, 2000, relating to the April 19, 2000 Annual
Meeting of shareholders, as filed with the Commission. This Appendix is
incorporated herein by reference and included as Exhibit 13 to this report on
Form 10-K:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statement
Independent Auditors' Report
Quarterly financial data relating to results of operations for the
years ended December 31, 1999 and 1998 are reported on page 38 of Appendix I.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
Directors
The information with respect to Directors and Nominees of the Registrant,
set forth under the caption "Election of Directors" on pages 2 through 4 of the
Company's definitive proxy statement, as filed with the Commission and dated
March 17, 2000, relating to the April 19, 2000 Annual Meeting of Shareholders,
is incorporated herein by reference.
Executive Officers
The information called for by this item is contained in Part I of this Form
10-K Report.
Item 11 - Executive Compensation
The information set forth under the caption "Summary Compensation Table" on
pages 5 and 6 of the Company's definitive proxy statement, as filed with the
Commission and dated March 17, 2000, relating to the April 19, 2000 Annual
Meeting of Shareholders, is incorporated herein by reference. Information under
the caption "Committee Report on Executive Compensation" on pages 4 and 5 and
"Shareholder Return Performance Graph" on page 8 of the definitive proxy
statement is not incorporated by referenc herein and is not deemed to be filed
with the Securities and Exchange Commission.
<PAGE>
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Ownership of Common Stock" on
page 7 of the Company's definitive proxy statement, as filed with the Commission
and dated March 17, 2000, relating to the April 19, 2000 Annual Meeting of
Shareholders, is incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions with
Management" on page 6 of the Company's definitive proxy statement, as filed with
the Commission and dated March 17, 2000, relating to the April 19, 2000 Annual
Meeting of Shareholders, is incorporated herein by reference.
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) 1. Financial Statements
All financial statements of the Registrant are incorporated herein by
reference as set forth in Appendix I to the Registrant's Definitive Proxy
Statement, dated March 17, 2000, relating to the April 19, 2000 Annual Meeting
of Shareholders, a copy of which is filed as Exhibit 13 to this Report on Form
10-K.
2. Financial Statement Schedules
Not applicable.
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on
Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, dated March 16, 2000.
FNBH BANCORP, INC.
/s/ Barbara D. Martin
Barbara D. Martin, President & Chief Executive
Officer (Principal Executive Officer)
/s/ Barbara J. Nelson
Barbara J. Nelson, Secretary/Treasurer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated. Each director of the Registrant, who's
signature appears below, hereby appoints Barbara D. Martin and Barbara J.
Nelson, and each of them severally, as his or her attorney-in-fact, to sign in
his or her name and on his or her behalf, as a director of the Registrant, and
to file with the Commission any and al Amendments to this Report on Form 10-K.
W. Rickard Scofield, Chairman of the Board /s/ W. Rickard Scofield
Charles N. Holkins, Vice Chairman of the Board /s/ Charles N. Holkins
Gary R. Boss, Director /s/ Gary R. Boss
Donald K. Burkel, Director /s/ Donald K. Burkel
Harry E. Griffith, Director /s/ Harry E. Griffith
Dona Scott Laskey, Director /s/ Dona Scott Laskey
Barbara D. Martin, Director /s/ Barbara D. Martin
James R. McAuliffe, Director /s/ James R. McAuliffe
Randolph E. Rudisill, Director /s/ Randolph E. Rudisill
R. Michael Yost, Director /s/ R. Michael Yost
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the
applicable assigned number:
Exhibit
Number Page
- ------ ----
(13) Pages 11-52 of Appendix I to the Company's Proxy Statement, dated
March 17, 2000, for the Annual Meeting of Shareholders to be held
April 19, 2000 representing that portion of the Appendix
incorporated by reference in this report. This Appendix was filed
with the Commission as part of the Company's Proxy Statement and
was delivered to Company shareholders in compliance with Rule
14(a)-3 of the Securities Exchange Act of 1934, as amended.............38
(21) Subsidiaries of the Registrant..........................................40
(24) Power of Attorney (included in signature section)
(27) Financial Data Schedule.................................................41
The following exhibits, indexed according to the applicable assigned
number, were previously filed by the Registrant and are incorporated by
reference in this Form 10-K Annual Report.
Exhibit
Number Original Filing Form and Date
- ------ -----------------------------
3.1 Restated Articles of Incorporation Exhibit 3.1 of Form 10, effective
of the Registrant June 30, 1995 ("Form 10")
3.2 Amendment to the Company's Appendix I of Proxy Statement
Articles of Incorporation dated March 17, 1998
Increase Authorized Shares
3.3 Bylaws of the Registrant Exhibit 3.2 of Form 10
4 Form of Registrant's Stock Certificate Exhibit 4 of Form 10
Material Contracts:
1.1 Form Restrictive Stock Agreement
10.2 Howell Branch Lease Agreement Exhibit 10.2 to Form 10
10.3 Company's Long Term Incentive Plan* Appendix II of Proxy Statement
dated March 17, 1998
*Represents a compensation plan
<PAGE>
EXHIBIT 13
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
<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.
<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>
<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>
<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.
<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.
<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>
<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.
<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.
<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.
<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.
<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.
<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>
<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.
<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.
<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.
<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>
<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.
<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.
<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.
<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).
<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>
<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.
<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>
<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>
<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>
<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>
<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>
<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.
<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>
<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>
<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.
<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).
<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.
<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>
<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.
<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.
<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.
<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.
<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.
<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
<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
<PAGE>
EXHIBIT 21
SUBSIDIARIES
Name Jurisdiction of Incorporation
---- -----------------------------
First National Bank in Howell...............................Michigan
H.B. Realty Co..............................................Michigan
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,114,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,301,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 50,598,000
<INVESTMENTS-MARKET> 50,534,000
<LOANS> 209,952,000
<ALLOWANCE> 4,483,000
<TOTAL-ASSETS> 296,419,000
<DEPOSITS> 269,190,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,917,000
<LONG-TERM> 0
0
0
<COMMON> 4,919,000
<OTHER-SE> 20,392,000
<TOTAL-LIABILITIES-AND-EQUITY> 296,419,000
<INTEREST-LOAN> 18,725,000
<INTEREST-INVEST> 2,365,000
<INTEREST-OTHER> 507,000
<INTEREST-TOTAL> 21,597,000
<INTEREST-DEPOSIT> 7,962,000
<INTEREST-EXPENSE> 5,000
<INTEREST-INCOME-NET> 12,790,000
<LOAN-LOSSES> 840,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,543,000
<INCOME-PRETAX> 5,262,000
<INCOME-PRE-EXTRAORDINARY> 3,715,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,715,000
<EPS-BASIC> 2.38
<EPS-DILUTED> 2.38
<YIELD-ACTUAL> 5.48
<LOANS-NON> 173,000
<LOANS-PAST> 4,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,958,000
<CHARGE-OFFS> 486,000
<RECOVERIES> 171,000
<ALLOWANCE-CLOSE> 4,483,000
<ALLOWANCE-DOMESTIC> 4,483,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
