SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
--------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission file number 0-25752
FNBH BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2869722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 East Grand River, Howell, Michigan 48843
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517)546-3150
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_ No___
The number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date: 1,565,203 shares of the Company's Common
Stock (no par value) were outstanding as of June 30, 2000.
1
<PAGE>
INDEX
Page
Number
Part I. Financial Information (unaudited):
Item 1.
Interim Financial Statements:
Consolidated Balance Sheet as of June 30, 2000 and Dec. 31, 1999......4
Consolidated Statements of Income, three months ended
June 30, 2000 and 1999, and six months ended June 30, 2000
and 1999..............................................................5
Consolidated Statement of Stockholders' Equity and Comprehensive
Income for three months ended June 30, 2000 and 1999..................6
Consolidated Statement of Stockholders' Equity and Comprehensive
Income for six months ended June 30, 2000 and 1999....................7
Consolidated Statements of Cash Flows for six months ended
June 30, 2000 and 1999................................................8
Notes to Interim Consolidated Financial Statements....................9
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................10
Item 3.
Quantitative and Qualitative Disclosures about Market Risk...........20
Part II. Other Information
Item 4...............................................................20
Item 6...............................................................21
Signatures...........................................................21
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Unaudited interim consolidated financial statements follow.
3
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Balance Sheets (unaudited) June 30 December 31
--------------------------- 2000 1999
Assets ---- ----
<S> <C> <C>
Cash and due from banks $13,243,306 $ 12,113,652
Short term investments 112,825 12,300,630
Total cash and cash equivalents 13,356,131 24,414,282
Investment securities held to maturity, net (fair value of $18,699,000
at June 30, 2000 and $17,650,000 at Dec. 31, 1999) 18,897,623 17,709,401
Investment securities available for sale, at fair value 27,593,410 32,554,004
Mortgage-backed securities held to maturity, net (fair value of
$823,000 at June 30, 2000 and $330,000 at Dec. 31, 1999) 826,120 334,451
------- -------
Total investment securities 47,317,153 50,597,856
Loans:
Commercial 190,229,101 163,469,045
Consumer 29,033,510 24,826,156
Real estate mortgages 24,764,255 22,360,282
---------- ----------
Total loans 244,026,866 210,655,483
Less unearned income 816,919 703,849
Less allowance for loan losses 4,854,012 4,483,283
--------- ---------
Net loans 238,355,935 205,468,351
Premises and equipment - net 8,631,460 9,009,661
Land available for sale - net 2,780,290 2,835,290
Accrued interest and other assets 4,310,782 4,093,780
--------- ---------
Total assets $314,751,751 $296,419,220
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing demand $ 54,393,455 $ 47,980,695
NOW 28,525,550 34,645,921
Savings and money market 90,386,918 89,862,739
Time 103,125,982 96,701,098
----------- ----------
Total deposits 276,431,905 269,190,453
Short term borrowing 2,850,000 0
Notes payable 6,000,000 0
Accrued interest, taxes, and other liabilities 2,446,176 1,917,121
--------- ---------
Total liabilities 287,728,081 271,107,574
Stockholders' Equity
Common stock, no par value. Authorized 4,200,000 shares; 1,565,203
shares issued and outstanding at June 30, 2000 and Dec. 31, 1999 4,919,280 4,919,280
Retained earnings 22,367,336 20,723,357
Unearned management retention plan (118,576) (139,597)
Accumulated other comprehensive loss, net (144,370) (191,394)
--------- ---------
Total stockholders' equity 27,023,670 25,311,646
Total liabilities and stockholders' equity $314,751,751 $296,419,220
============ ============
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Income
--------------------------------- Three Months Ended June Six Months Ended June
Unaudited 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $5,635,956 $4,437,173 $10,742,895 $8,770,045
Interest and dividends on investment securities:
U.S. Treasury and agency securities 388,893 358,103 844,212 686,020
Obligations of state and political subdivisions 228,647 204,757 449,434 412,500
Other securities 18,443 16,687 34,311 29,771
Interest on short term investments 30,425 115,580 85,227 320,391
------ ------- ------ -------
Total interest income 6,302,364 5,132,300 12,156,079 10,218,727
--------- --------- ---------- ----------
Interest expense:
Interest on deposits 2,265,152 1,951,423 4,469,216 3,888,173
Other interest expense 111,515 203 157,707 904
------- --- ------- ---
Total interest expense 2,376,667 1,951,626 4,626,923 3,889,077
--------- --------- --------- ---------
Net interest income 3,925,697 3,180,674 7,529,156 6,329,650
Provision for loan losses 300,000 210,000 600,000 420,000
------- ------- ------- -------
Net interest income after provision for loan losses 3,625,697 2,970,674 6,929,156 5,909,650
--------- --------- --------- ---------
Non-interest income:
Service charges 543,076 527,354 994,848 794,692
Gain (loss) on sale of loans 17,751 (49,417) 33,994 10,062
Trust income 47,364 33,667 91,659 67,954
Other 6,714 31,517 11,061 26,643
----- ------ ------ ------
Total non-interest income 614,905 543,121 1,131,562 899,351
------- ------- --------- -------
Non-interest expense:
Salaries and employee benefits 1,322,489 1,161,980 2,671,116 2,321,422
Net occupancy 174,400 181,316 364,210 347,369
Equipment expense 229,461 185,695 461,960 300,774
Fees 96,810 111,339 159,773 259,444
Printing and supplies 66,172 80,075 128,396 143,675
Michigan Single Business Tax 60,300 47,300 120,500 98,900
Other 535,562 579,818 958,903 1,026,968
------- ------- ------- ---------
Total non-interest expense 2,485,194 2,347,523 4,864,858 4,498,552
--------- --------- --------- ---------
Income before federal income taxes 1,755,408 1,166,272 3,195,860 2,310,449
Federal income taxes 515,000 343,900 925,800 660,900
------- ------- ------- -------
Net income $1,240,408 $822,372 $2,270,060 $1,649,549
========== ======== ========== ==========
Per share statistics*
Basic EPS $.79 $.53 $1.45 $1.06
Diluted EPS $.79 $.53 $1.45 $1.06
Dividends $.20 $.20 $.40 $.40
</TABLE>
*Based on 1,565,203 average shares outstanding during the period ended June 30,
2000 and 1,562,768 average shares outstanding during the period ended June 30,
1999.
See notes to interim consolidated financial statements.
5
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity and Comprehensive Income
For the Three Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (loss) Total
----- -------- ---- ------------- -----
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1999 $4,821,775 19,243,412 (66,220) (46,804) 23,952,163
Net income 822,372 822,372
Change in unrealized loss on debt securities
available for sale, net of tax effect (123,158) (123,158)
---------
Total comprehensive income 699,214
Shares issued for employee awards 105 105
Cash dividends (20(cent)per share) (312,553) (312,553)
---------- ---------- ------- --------- ----------
Balances at June 30, 1999 $4,821,880 19,753,231 (66,220) (169,962) 24,338,929
========== ========== ======= ========= ==========
</TABLE>
See notes to interim consolidated financial statements
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Plan Comprehensive
Stock Earnings Income (loss) Total
----- -------- -------------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balances at March 31, 2000 $4,919,280 21,439,969 (127,585) (188,258) 26,043,406
Net income 1,240,408 1,240,408
Change in unrealized loss on debt
securities 43,888 43,888
------
available for sale, net of tax effect
Total comprehensive income 1,284,296
Amortization of management retention plan 9,009 9,009
Cash dividends (20(cent)per share) (313,041) (313,041)
---------- ---------- -------- --------- ----------
Balances at June 30, 2000 $4,919,280 22,367,336 (118,576) (144,370) 27,023,670
========== ========== ======== ========= ==========
</TABLE>
6
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity and Comprehensive Income
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (loss) Total
----- -------- ---- ------------- -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $4,821,775 18,728,787 (66,220) 12,191 23,496,533
Net income 1,649,549 1,649,549
Change in unrealized gain (loss) on debt securities
available for sale, net of tax effect (182,153) (182,153)
---------
Total comprehensive income 1,467,396
Shares issued for employee awards 105 105
Cash dividends (40(cent)per share) (625,105) (625,105)
---------- ---------- ------- -------- ----------
Balances at June 30, 1999 $4,821,880 19,753,231 (66,220) (169,962) 24,338,929
========== ========== ======= ======== ==========
</TABLE>
See notes to interim consolidated financial statements
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Plan Comprehensive
Stock Earnings Income (loss) Total
----- -------- -------------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1999 $4,919,280 20,723,357 (139,597) (191,394) 25,311,646
Net income 2,270,060 2,270,060
Change in unrealized loss on debt
securities 47,024 47,024
------
available for sale, net of tax effect
Total comprehensive income 2,317,084
Amortization of management retention plan 21,021 21,021
Cash dividends (40(cent)per share) (626,081) (626,081)
--------- ---------- -------- -------- ----------
Balances at June 30, 2000 $4,919,280 22,367,336 (118,576) (144,370) 27,023,670
========== ========== ======== ======== ==========
</TABLE>
7
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Cash Flows
Unaudited Six months ended June 30
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $2,270,060 $ 1,649,549
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 600,000 420,000
Depreciation and amortization 468,565 319,100
Net amortization on investment securities 25,202 42,615
Earned portion of management retention plan 21,021 0
Loss on disposal of equipment 0 18,360
Gain on sale of loans (33,994) (10,062)
Proceeds from sale of loans 2,719,233 8,244,550
Origination of loans held for sale (3,068,216) (9,086,850)
Increase in accrued interest income and other assets (162,002) (384,796)
Increase in accrued interest, taxes, and other liabilities 504,855 80,413
------- ------
Net cash provided by operating activities 3,344,724 1,292,879
--------- ---------
Cash flows from investing activities:
Purchases of available for sale securities (5,982,298) (14,167,570)
Proceeds from maturities and calls of available for sale securities 11,000,000 2,000,000
Purchases of held to maturity securities (2,496,205) (1,587,420)
Proceeds from maturities and calls of held to maturity securities 605,000 3,868,000
Proceeds from mortgage-backed securities paydowns-held to maturity 200,228 277,040
Net increase in loans (33,104,607) (14,793,481)
Capital expenditures (90,364) (1,359,545)
-------- -----------
Net cash used in investing activities (29,868,246) (25,762,976)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 7,241,452 14,287,097
Net increase in borrowings 8,850,000 0
Dividends paid (626,081) (625,105)
--------- ---------
Net cash provided by financing activities 15,465,371 13,661,992
---------- ----------
Net decrease in cash and cash equivalents (11,058,151) (10,808,105)
Cash and cash equivalents at beginning of year 24,414,282 31,238,662
---------- ----------
Cash and cash equivalents at end of period $13,356,131 $20,430,557
=========== ===========
Supplemental disclosures:
Interest paid $ 4,671,297 $ 4,000,724
Federal income taxes paid 850,000 752,000
Loans charged off 268,947 233,386
</TABLE>
See notes to interim consolidated financial statements
8
<PAGE>
Notes to Interim Consolidated Financial Statements(unaudited)
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
1. In the opinion of management of the Registrant, the unaudited consolidated
financial statements filed with this Form 10-Q contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
consolidated financial position of the Registrant as of June 30, 2000, and
consolidated results of operations for the three months and six months ended
June 30, 2000 and 1999 and consolidated cash flows for the six months ended June
30, 2000 and 1999.
2. The results of operations for the three months and six months ended June 30,
2000 are not necessarily indicative of the results to be expected for the full
year.
3. The accompanying unaudited consolidated financial statements should be read
in conjunction with the 1999 Annual Report contained in the Registrant's report
on Form 10-K filing.
4. The provision for income taxes represents Federal income tax expense
calculated using annualized rates on taxable income generated during the
respective periods.
5. Management's assessment of the allowance for loan losses is based on an
evaluation of the loan portfolio, recent loss experience, current economic
conditions, and other pertinent factors. Loans on non-accrual status and those
past due more than 90 days amounted to $1,680,000 at June 30, 2000, $2,115,000
at June 30, 1999, and $177,000 at December 31, 1999. (See Management's
Discussion and Analysis of financial condition and results of operations).
6. Basic and dilutive earnings per share (EPS) are computed by dividing net
income by the respective weighted average common shares outstanding.
<TABLE>
Second Quarter Year to Date
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,240,408 $822,372 $2,270,060 $1,649,549
Shares outstanding (basic) 1,565,203 1,562,768 1,565,203 1,562,768
Dilutive shares 0 0 0 0
--------- --------- --------- ---------
Shares outstanding (diluted) 1,565,203 1,562,768 1,565,203 1,562,768
Earnings per share:
Basic EPS $.79 $.53 $1.45 $1.06
Diluted EPS $.79 $.53 $1.45 $1.06
</TABLE>
9
<PAGE>
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Interim Financial Statements
This report includes certain forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, that involve inherent
risks and uncertainties. A number of important factors could cause actual
results to differ materially from those in the forward-looking statements. Those
factors include the economic environment, competition, products and pricing in
business areas in which FNBH Bancorp, Inc. (the Company) operates, prevailing
interest rates, changes in government regulations and policies affecting
financial service companies, credit quality and credit risk management,
acquisitions and integration of acquired businesses.
The Company, a Michigan business corporation, is a one bank holding company,
which owns all of the outstanding capital stock of First National Bank in Howell
(the Bank) and all of the outstanding stock of HB Realty Co., a subsidiary which
owns real estate. The following is a discussion of the Company's results of
operations for the three months and six months ended June 30, 2000 and 1999, and
also provides information relating to the Company's financial condition,
focusing on its liquidity and capital resources.
<TABLE>
Earnings (in thousands Second Quarter Year-to-Date
except per share data) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,240 $822 $2,270 $1,650
Net Income per Share $ .79 $ .53 $1.45 $1.06
</TABLE>
Net income for the three months ended June 30, 2000 increased approximately
$418,000 (51%) from that reported for the same period last year. Second quarter
1999 income was hampered by costs related to a computer conversion. Contributing
to the increased earnings in the second quarter of 2000 were increases of
$745,000 (23%) in net interest income and $72,000 (13%) in non-interest income.
The increase in net interest income was the result of overall growth in the
Bank's net interest earning assets as well as a 32 basis point increase in the
tax equivalent interest margin. Partially offsetting these favorable occurrences
were increases in the loan loss provision of $90,000 (43%), non-interest expense
of $137,000 (6%), and the federal tax provision of $171,000 (50%).
Net income for the first half of the year increased $620,000 (38%) compared to
the same period last year. Earnings in the first half of 1999 were hindered by
computer conversion costs as well as those related to Year 2000 testing which
were primarily incurred in the first quarter of the year. Contributing to 2000
earnings were an increase of $1,199,000 (19%) in net interest income and
$233,000 (26%) in non-interest income. Partially offsetting these increases were
increases in expenses of $366,000 (8%) in non-interest
10
<PAGE>
expense, $180,000 (43%) in the loan loss provision, and $265,000 (40%) in
federal tax accruals.
<TABLE>
Net Interest Income Second Quarter Year-to-Date
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income $6,302 $5,132 $12,156 $10,219
Interest Expense 2,376 1,951 4,627 3,889
------ ----- ----- -----
Net Interest Income $ 3,926 $3,181 $7,529 $6,330
</TABLE>
The following table illustrates some of the significant factors contributing to
the increase in net interest income for the period and for the year to date.
<TABLE>
TABLE 1
INTEREST YIELDS AND COSTS (in thousands)
June 30, 2000 and 1999
---------------Second Quarter Averages----------------
2000 1999
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Short term investments $ 1,862 $ 30.4 6.46% $ 10,061 $ 114.8 4.52%
Securities: Taxable 30,048 407.4 5.42% 29,821 375.8 5.04%
Tax-exempt(1) 18,559 314.6 6.78% 16,487 285.0 6.91%
Loans(2)(3) 233,139 5,673.6 9.63% 196,213 4,497.0 9.07%
-------- -------- -------- --------
Total earning assets/total
interest income 283,608 $6,426.0 8.97% 252,582 $5,272.6 8.27%
-------- --------
Cash & due from banks 11,877 11,285
All other assets 16,091 14,750
Allowance for loan loss (4,867) (4,201)
-------- --------
Total assets $306,709 $274,416
======== ========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
Savings & NOW accounts $120,168 $ 854.7 2.85% $ 105,078 $ 692.7 2.64%
Time 99,901 1,410.5 5.66% 94,108 1,258.7 5.36%
Fed funds purchased 597 11.5 7.61% 11 .2 7.23%
FHLB Notes 5,433 100.0 7.28% 0 0
----- ----- ----- -----
Total interest bearing
liabilities/total interest expense 226,099 $ 2,376.7 4.21% 199,197 $1,951.6 3.93%
--------- --------
Non-interest bearing deposits 51,329 48,806
All other liabilities 2,589 2,164
Stockholders' Equity 26,692 24,249
------- -------
Total liabilities and
shareholders' equity $306,709 $274,416
======== --------
Interest spread 4.76% 4.34%
===== =====
Net interest income-FTE $ 4,049.3 $ 3,321.0
========= =========
Net interest margin 5.62% 5.17%
===== =====
</TABLE>
11
<PAGE>
(1) Average yields in the above table have been adjusted to a tax-equivalent
basis using a 34% tax rate and exclude the effect of any market value
adjustments recorded under Statement of Financial Standards No. 115.
(2) For purposes of the computation above, non-accruing loans are included in
the average daily loan balances.
(3) Interest on loans includes origination
fees totaling $177,000 in 2000 and $139,000 in 1999.
<TABLE>
----------------Year to Date Averages-----------------
2000 1999
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Short term investments $ 2,915 $ 85.2 5.78% $ 13,694 $ 319.6 4.64%
Securities: Taxable 33,008 878.5 5.34% 28,273 716.5 5.11%
Tax-exempt (1) 18,263 619.4 6.78% 16,475 573.8 6.97%
Loans(2)(3) 225,192 10,807.4 9.51% 190,346 8,780.6 9.19%
------- -------- ------- --------
Total earning assets/total
interest income 279,378 $ 12,390.5 8.80% 248,788 $10,390.5 8.33%
---------- ---------
Cash & due from banks 11,060 12,299
All other assets 16,220 15,593
Allowance for loan loss (4,728) (4,121)
Total assets $301,930 $272,559
======== ========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
Savings & NOW accounts $121,067 $ 1,714.9 2.84% $105,773 $ 1,406.1 2.68%
Time 98,938 2,754.3 5.58% 92,734 2,482.1 5.40%
Purchased funds 667 20.1 5.97% 37 .9 4.86%
FHLB Notes 3,775 137.6 7.21% 0 0
----- ----- ----- -----
Total interest bearing
liabilities/total interest expense 224,447 $ 4,626.9 4.13% 198,544 $3,889.1 3.95%
--------- --------
Non-interest bearing deposits 48,507 48,154
All other liabilities 2,755 1,924
Stockholders' Equity 26,221 23,937
------- -------
Total liabilities and
shareholders' equity $301,930 $ 272,559
======== =========
Interest spread 4.67% 4.38%
===== =====
Net interest income-FTE $7,763.6 $6,501.4
======== ========
Net interest margin 5.48% 5.18%
===== =====
</TABLE>
(1) Average yields in the above table have been adjusted to a tax-equivalent
basis using a 34% tax rate and exclude the effect of any market value
adjustments recorded under Statement of Financial Standards No. 115.
(2) For purposes of the computations above, non-accruing loans are included in
the average daily loan balances.
(3) Interest on loans includes origination fees totaling $325,000 in 2000 and
$268,000 in 1999.
12
<PAGE>
Interest Earning Assets/Interest Income
On a tax equivalent basis, interest income increased approximately $1,153,000 in
the second quarter of 2000 compared to that of 1999. A $37,000,000 (19%) growth
in average loan balances accompanied by a 56 basis point increase in interest
yields on those loans generated the net interest income growth.
In the second quarter, tax equivalent income on short and long term investments
decreased approximately $23,000 because the average balances decreased
$6,000,000 although the rate earned increased 46 basis points.
For the first half of the year, tax equivalent interest income increased
$2,000,000. Loan interest income increased $2,027,000, with average balances up
$35,000,000 (18%) and yields up 32 basis points. The growth in the loan
portfolio was primarily in commercial loans which increased $31,500,000 (18%) on
average, while consumer loans increased $3,600,000 (15%) and mortgage loans
decreased $900,000. The Bank's resources in the loan department are primarily
deployed making commercial loans. Contributing to the lack of growth in the
mortgage loan portfolio is the Bank's policy of selling fixed rate mortgage
loans. Additionally, higher interest rates have dampened demand. The Bank sold
approximately $1,900,000 mortgage loans to the secondary market during the first
half of 2000, compared to $7,700,000 in the first half of 1999.
For the first six months of the year, income on short and long term investments
decreased $27,000 from that earned the prior year due to a $4,300,000 decrease
in average balances although the yields increased by 33 basis points.
Interest Bearing Liabilities/Interest Expense
In the second quarter of 2000, interest expense increased $425,000 due to an
increase in average balances of $26,900,000 and in the interest rate paid by 28
basis points. Savings and NOW interest expense increased $162,000 because
balances increased $15,000,000 and rates increased 21 basis points. Interest on
time deposits increased $152,000 in the second quarter of 2000 over the prior
year. Balances increased $5,800,000 and the rate paid increased 30 basis points
compared to that of 1999. The deposit growth was the result of the Bank's
marketing efforts to increase its share of Livingston County deposits.
In the first half of the year, interest expense was $738,000 higher than the
previous year due to average balances of interest bearing liabilities increasing
$25,900,000 and the average rate increased 18 basis points. Savings and NOW
interest expense increased $309,000 because balances increased $15,300,000 and
the interest rate increased 16 basis points. Interest on time deposits increased
$272,000 because the balance increased $6,200,000 and the rate increased 18
basis points.
Additionally the Bank's interest costs increased due to borrowings from the
Federal Home Loan Bank. The Bank has two loans, each for $3,000,000. One
borrowing was initiated to match the maturity of a fixed rate loan made to a
local township. The other borrowing was intended to help with the Bank's rate
sensitivity position. Interest
13
<PAGE>
expense related to these loans amounted to $138,000 in the first half of the
year. It is reasonable to expect that part of future loan growth will continue
to be funded with FHLB borrowings.
Liquidity
Liquidity is monitored by the Bank's Asset/Liability Management Committee (ALCO)
which meets at least monthly. ALCO developed, and the Board of Directors
approved, a liquidity policy which targets a 15% liquidity ratio. For the first
six months of the year, the Bank's liquidity ratio averaged 16.58% although it
was 13.17% at June 30. ALCO will continue to monitor this ratio as the year
progresses.
Deposits are the principal source of funds for the Bank. Management monitors
rates at other financial institutions in the area to ascertain that its rates
are competitive in the market. Management also attempts to offer a wide variety
of products to meet the needs of its customers. The Bank does not deal in
brokered funds, and the makeup of its over $100,000 certificates, which amounted
to $24,400,000 at June 30, 2000 compared to $22,400,000 at December 31, 1999,
consists of local depositors known to the Bank.
It is the intention of the Bank's management to handle unexpected liquidity
needs through its Federal Funds position. The goal is to maintain a daily Fed
Funds balance sufficient to cover required cash draws. During the first half of
the year, short term investments averaged approximately $2,900,000. From time to
time the Bank will borrow Fed Funds from a correspondent bank. In addition, the
Bank has a $16,000,000 line of credit available at the FHLB ($6,000,000 of which
has been used, as mentioned previously) and the Bank has pledged certain
mortgage loans and investment securities as collateral for this borrowing. In
the event the Bank must borrow for an extended period, management may look to
"available for sale" securities in the investment portfolio for liquidity.
In addition to liquidity issues, ALCO discusses the Bank's performance and the
current economic outlook and its impact on the Bank and current interest rate
forecasts. Actual results are compared to budget in terms of growth and income.
A yield and cost analysis is done to monitor interest margin. Various ratios are
discussed including capital ratios and liquidity.
Interest rate risk is also addressed by ALCO. Interest rate risk is the
potential for economic losses due to future rate changes and can be reflected as
a loss of future net interest income and/or loss of current market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while, at the same time, maximizing
income. Tools used by management include the standard GAP report which lays out
the repricing schedule for various 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 a
party to financial instruments with off-balance sheet risk in the normal course
of business to meet
14
<PAGE>
the financing needs of its customers including commitments to extend credit and
letters of credit. A commitment or letter of credit is not recorded as an asset
until the instrument is exercised.
<TABLE>
Interest Rate Sensitivity
(dollars in thousands) 0-3 4-12 1-5 5+
Months Months Years Years Total
Assets: ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Loans.............................. $80,009 $37,612 $114,028 $12,378 $244,027
Securities......................... 5,813 13,194 16,487 11,823 47,317
Short term investments............. 113 113
Other assets....................... 23,295 23,295
------- ------- -------- ------ ------
Total assets................. $85,935 $50,806 $130,515 $47,496 $314,752
Liabilities & Stockholders' Equity:
Demand, Savings & NOW........... $55,679 $17,466 $67,287 $32,874 $173,306
Time............................ 32,156 52,243 18,101 626 103,126
Other borrowings................ 2,850 207 4,008 1,785 8,850
Other liabilities and equity.... 29,470 29,470
------- ------- ------- ------ ------
Total liabilities and equity.. $90,685 $69,916 $89,396 $64,755 $314,752
Rate sensitivity gap and ratios:
Gap for period.................. $(4,750) ($19,110) $41,119 $(17,259)
Cumulative gap.................. (4,750) (23,860) 17,259
Cumulative rate sensitive ratio.... .95 .85 1.07 1.00
Dec. 31, 1999 rate sensitive ratio. 1.06 .94 1.08 1.00
</TABLE>
In the preceding table, the entire balance of savings, MMDA, and NOW are not
categorized as 0-3 months, although they are variable rate products. Some of
these balances are core deposits which are not considered rate sensitive based
on the Bank's historical experience and industry practice.
<TABLE>
Provision for Loan Losses Second Quarter Year-to-Date
-------------------------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $300 $210 $600 $420
==== ==== ==== ====
</TABLE>
The provision for loan losses increased $90,000 in the second quarter of 2000
compared to the prior year. Year to date the provision has increased $180,000.
The increase in the loan loss provision was deemed appropriate principally due
to an increase in impaired loans and related allocations of reserves somewhat
offset by lower average delinquencies other than non-performers. In June of
2000, the allowance for loan loss as a percent of loans was 2.00%, compared to
2.13% a year earlier and 2.13% at December 31, 1999. For the first six months of
2000, the Bank had net charge offs of $229,000, compared to $105,000 in the
first half of 1999. Non-accrual, past due 90 days, and renegotiated loans were
.69% and 1.05% of total loans outstanding at June 30, 2000 and 1999,
respectively, and .08% of total loans at December 31, 1999.
15
<PAGE>
Impaired loans, as defined by Statement of Financial Accounting Standards (SFAS)
No. 114, Accounting by Creditors for Impairment of a Loan, totaled approximately
$6,200,000 at June 30, 2000, and included non-accrual, and past due 90 days
other than homogenous residential and consumer loans, and $4,700,000 of
commercial loans separately identified as impaired. Impaired loans totaled
$3,400,000 at December 31, 1999. A loan is considered impaired when it is
probable that all or part of amounts due according to the contractual terms of
the loan agreement will be uncollectable on a timely basis. One of the loans,
for $2,400,000 is current and making regular payments, however the cash
generated solely by the business is currently not adequate to cover debt
service. Another loan, for $1,700,000, is also current but the borrower's
financial statements are weak. Both loans are secured with first mortgages on
commercial real estate.
Management assessment of the allowance for loan losses is based on the
composition of the loan portfolio, an evaluation of specific credits, historical
loss experience, the level of nonperforming loans and loans that have been
identified as impaired. Externally, the local economy and events or trends which
might negatively impact the loan portfolio are also considered. Impaired loans
had specific reserves calculated in accordance with SFAS No. 114 of $1,500,000
at June 30, 2000.
Nonperforming assets are loans for which the accrual of interest has been
discontinued, accruing loans 90 days or more past due in payments, and other
real estate which has been acquired primarily through foreclosure and is waiting
disposition. The following table describes nonperforming assets at June 30, 2000
compared to December 31, 1999.
<TABLE>
Nonperforming Assets
(in thousands) June 30,2000 December 31, 1999
<S> <C> <C>
Non-accrual loans $1,680 $ 173
90 days or more past due and still accruing 0 4
------ ----
Total nonperforming loans 1,680 177
Other real estate 0 0
------ ----
Total nonperforming assets $1,680 $ 177
Nonperforming loans as a percent of total loans .69% .08%
Nonperforming assets as a percent of total loans .69% .08%
Loan loss reserve as a percent of nonperforming loans 289% 2533%
</TABLE>
16
<PAGE>
The following table sets forth loan balances and summarizes the changes in the
allowance for loan losses for the first six months of 2000 and 1999.
<TABLE>
Year to date Year to date
Loans: (dollars in thousands) June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Average daily balance of loans for the year to date 225,192 190,346
Amount of loans, net of unearned income, outstanding at
end of the quarter 243,210 200,559
Allowance for loan losses:
Balance at beginning of year 4,483 3,958
Loans charged off:
Real estate 0 0
Commercial 233 158
Consumer 36 75
-- --
Total charge-offs 269 233
Recoveries of loans previously charged off:
Real estate 0 35
Commercial 18 65
Consumer 22 28
-- --
Total recoveries 40 128
Net loans charged off 229 105
Additions to allowance charged to operations 600 420
---- ---
Balance at end of quarter $4,854 $4,273
Ratios:
Net loans charged off (annualized) to average
loans outstanding .20% .11%
Allowance for loan losses to loans outstanding 2.00% 2.13%
</TABLE>
<TABLE>
Non-interest Income Second Quarter Year-to-Date
-------------------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $615 $543 $1,132 $899
==== ==== ====== ====
</TABLE>
Non-interest income, which includes service charges on deposit accounts, loan
fees, trust fees, other operating income, and gain (loss) on sale of assets,
increased by $72,000 (13%) in the second quarter of 2000 compared to the same
period in the previous year. The most significant increase was in gains from
loan sales. In the second quarter of 1999, the Bank had a net loss of $49,000
related to loan sales. This year's $18,000 gain resulted in a $67,000 increase
year to year. Partially offsetting this increase was a $22,000 decrease in
"other" non-interest income. Last year this number was unusually high due to a
gain on the sale of repossessed property.
17
<PAGE>
For the year, non-interest income increased $233,000 (26%). The increase was
primarily due to a $200,000 increase in service charge income. In the first
quarter of 1999 service charge income was uncharacteristically low due to
computer conversion related problems.
<TABLE>
Non-interest Expense Second Quarter Year-to-Date
--------------------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $2,485 $2,348 $4,865 $4,499
====== ====== ====== ======
</TABLE>
Non-interest expense increased $137,000 (6%) in the second quarter of 2000
compared to the same period last year. There were increases in salaries and
benefits expense of $161,000 (14%) principally due to an increase in the profit
sharing accrual, a result of the company's improved earnings in 2000. Equipment
expense increased $44,000 (24%) due to increased maintenance and depreciation
costs related to the purchase of enhanced technology used at the new branch as
well as normal computer equipment and software upgrades. Other areas of
non-interest expense decreased in the second quarter of 2000 compared to the
prior year.
For the first half of the year, non-interest expense increased $366,000 (8%)
compared to the prior year. There was a $350,000 (15%) increase in salaries and
benefits, made up of a $112,000 (6%) increase in salary expense, a $47,000 (67%)
increase in health insurance costs, and a $193,000 (117%) increase in profit
sharing accruals. The increase in salary expense was the result of increased
staff due to the new branch and normal salary increases. The increase in health
insurance cost is partly because last year the Company had some credits in the
plan which kept 1999 costs low. The increase in profit sharing accruals is the
result of increased earnings in the current year. Occupancy expense is $17,000
(5%) higher due to the new branch which was opened in the third quarter of last
year. Equipment expense is $161,000 (54%) higher for the reasons mentioned
above. Michigan taxes are $22,000 (22%) higher due to improved earnings. Other
areas of non-interest expense are lower this year than the prior year. In 1999
the Company experienced extraordinary costs due to Year 2000 and the computer
conversion.
<TABLE>
Income Tax Expense Second Quarter Year-to-Date
------------------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $515 $344 $926 $661
==== ==== ==== ====
</TABLE>
Fluctuations in income taxes resulted primarily from changes in the level of
profitability.
18
<PAGE>
<TABLE>
Capital (in thousands) June 30, 2000 December 31, 1999
------- ------------- -----------------
<S> <C> <C>
Stockholders' Equity* $27,168 $25,503
Ratio of Equity to Total Assets 8.75% 8.60%
</TABLE>
*Amounts exclude securities valuation adjustments recorded under Statement of
Financial Accounting Standards No. 115 amounting to ($144,000) at June 30, 2000
and ($191,000) at December 31, 1999.
A financial institution's capital ratio is looked upon by the regulators and the
public as an indication of its soundness. Stockholders' equity, excluding the
securities valuation adjustment, increased $1,700,000 (6.5%) during the first
half of the year. This increase was the result of net income earned by the
company reduced by dividends paid of $626,000.
The Federal Reserve Board provides guidelines for the measurement of capital
adequacy. The Bank's capital, as adjusted under these guidelines, is referred to
as risk-based capital. The Bank's Tier 1 risk-based capital ratio at June 30,
2000 was 9.46%, and total risk-based capital was 10.71%. At June 30, 1999 these
ratios were 9.81% and 11.06% respectively. Minimum regulatory Tier 1 risk-based
and total risk-based capital ratios under the Federal Reserve Board guidelines
are 4% and 8% respectively.
The capital guidelines also provide for a standard to measure risk-based capital
to total assets which is called the leverage ratio. The Bank's leverage ratio
was 7.99% at June 30, 2000 and 7.47% in 1999. The minimum standard leverage
ratio is 3% but financial institutions are expected to maintain a leverage ratio
1 to 2 percentage points above the 3% minimum.
In 1998 the Company exercised an option to purchase an 18 acre tract of land in
northwest Brighton primarily to acquire a prime site for a new branch. The cost
of the property was approximately $4,000,000. In 1999 a new branch of the Bank
was built on land valued at approximately $800,000. The Company is currently
attempting to sell the remaining acreage which is not needed for the branch. The
current book value of the land is $2,800,000. Improvements needed to enhance the
salability of the property are not expected to exceed $200,000.
The Company also owns two other branch sites, one in Howell which cost
approximately $250,000 and one in Hamburg which cost approximately $330,000. The
Company does not expect to build either branch this year, but may begin an
expansion of the Company's computer facility in the fourth quarter to provide
additional space for back office functions. Any building project is expected to
be financed from internally generated funds.
19
<PAGE>
Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires recognition of all derivatives
as either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. the accounting for gains and
losses on derivatives depends on the intended use of the derivative. This
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, with earlier application encouraged. Retroactive application is
not permitted.
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 No. 137 extends the effective date to fiscal years beginning
after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, Accounting for Derivative
Instruments and Hedging Activities - An Amendment of FASB No. 133. Statement No.
138 amends certain provisions of SFAS No. 133.
Since the Company does not hold derivatives, SFAS 133, as amended by SFAS 137
and SFAS 138, is not expected to have an impact on the Company's financial
condition or operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the market risk faced by the Company since
December 31, 1999 other than previously discussed.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The registrant's annual meeting of stockholders was held on April 19, 2000. The
stockholders voted on the election of directors.
Votes were cast as follows for the three nominees for the office of director.
Term expiring in 2003:
Shares voted for Shares voted against
Gary R. Boss 930,115 13,918
Donald K. Burkel 943,616 417
Harry E. Griffith 943,126 907
20
<PAGE>
Additionally, the following directors continue in office.
Term expiring in 2001:
W. Rickard Scofield
Randolph E. Rudisill
Barbara D. Martin
Term expiring in 2002:
Dona Scott Laskey
James R. McAuliffe
R. Michael Yost
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
There are none applicable.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the second quarter of
2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 to be signed on its behalf by the undersigned hereunto duly
authorized.
FNBH BANCORP, INC.
Barbara D. Martin
President and Chief Executive Officer
Barbara J. Nelson
Treasurer
DATE: August 10, 2000
