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 September 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: 1,567,411 shares of the Company's Common
Stock (no par value) were outstanding as of September 30, 2000.
1
<PAGE>
INDEX
Page
Number
------
Part I. Financial Information (unaudited):
Item 1.
Interim Financial Statements:
Consolidated Balance Sheet as of Sept. 30, 2000 and Dec. 31, 1999.....4
Consolidated Statements of Income, three months ended Sept. 30,
2000 and 1999, and nine months ended Sept. 30, 2000 and 1999..........5
Consolidated Statement of Stockholders' Equity and Comprehensive
Income for three months ended September 30, 2000 and 1999.............6
Consolidated Statement of Stockholders' Equity and Comprehensive
Income for nine months ended September 30, 2000 and 1999..............7
Consolidated Statements of Cash Flows for six months ended
September 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...........21
Part II. Other Information
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) September 30 December 31
--------------------------- 2000 1999
Assets ---- ----
<S> <C> <C>
Cash and due from banks $16,261,170 $ 12,113,652
Short term investments 589,673 12,300,630
------- ----------
Total cash and cash equivalents 16,850,843 24,414,282
Investment securities held to maturity, net (fair value of $18,960,000
at September 30, 2000 and $17,650,000 at Dec. 31, 1999) 18,891,963 17,709,401
Investment securities available for sale, at fair value 24,720,563 32,554,004
Mortgage-backed securities held to maturity, net (fair value of
$725,000 at September 30, 2000 and $330,000 at Dec. 31, 1999) 724,232 334,451
------- -------
Total investment securities 44,336,758 50,597,856
Loans:
Commercial 196,178,172 163,469,045
Consumer 30,100,060 24,826,156
Real estate mortgages 26,475,315 22,360,282
---------- ----------
Total loans 252,753,547 210,655,483
Less unearned income 814,960 703,849
Less allowance for loan losses 5,164,039 4,483,283
--------- ---------
Net loans 246,774,548 205,468,351
Premises and equipment - net 8,406,257 9,009,661
Land available for sale - net 2,680,290 2,835,290
Accrued interest and other assets 4,672,116 4,093,780
--------- ---------
Total assets $323,720,812 $296,419,220
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing demand $ 55,510,922 $ 47,980,695
NOW 33,365,693 34,645,921
Savings and money market 90,107,861 89,862,739
Time 107,877,706 96,701,098
----------- ----------
Total deposits 286,862,182 269,190,453
FHLB advances 6,000,000 0
Accrued interest, taxes, and other liabilities 2,729,862 1,917,121
--------- ---------
Total liabilities 295,592,044 271,107,574
Stockholders' Equity
Common stock, no par value. Authorized 4,200,000 shares; 1,567,411
shares issued and outstanding at September 30, 2000 and 1,565,203
shares issued and outstanding at December 31, 1999 5,013,445 4,919,280
Retained earnings 23,367,419 20,723,357
Unearned management retention plan (196,606) (139,597)
Accumulated other comprehensive loss, net (55,490) (191,394)
------- --------
Total stockholders' equity 28,128,768 25,311,646
Total liabilities and stockholders' equity $323,720,812 $296,419,220
============ ============
See notes to interim consolidated financial statements
</TABLE>
4
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Income
Unaudited Three Months Ended Sept. Nine Months Ended Sept.
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $6,174,610 $4,921,956 $16,917,505 $13,692,001
Interest and dividends on investment securities:
U.S. Treasury and agency securities 362,583 387,874 1,206,795 1,073,894
Obligations of state and political subdivisions 231,629 211,479 681,063 623,979
Other securities 15,231 15,890 49,542 45,661
Interest on short term investments 13,088 93,858 98,315 414,249
------ ------ ------ -------
Total interest income 6,797,141 5,631,057 18,953,220 15,849,784
--------- --------- ---------- ----------
Interest expense:
Interest on deposits 2,428,940 1,964,996 6,898,156 5,853,169
Other interest expense 178,339 1,128 336,046 2,032
------- ----- ------- -----
Total interest expense 2,607,279 1,966,124 7,234,202 5,855,201
--------- --------- --------- ---------
Net interest income 4,189,862 3,664,933 11,719,018 9,994,583
Provision for loan losses 300,000 210,000 900,000 630,000
------- ------- ------- -------
Net interest income after provision for loan losses 3,889,862 3,454,933 10,819,018 9,364,583
--------- --------- ---------- ---------
Non-interest income:
Service charges 666,216 491,523 1,661,064 1,286,215
Gain on sale of loans 20,695 26,479 54,689 36,541
Trust income 51,232 35,088 142,891 103,042
Other (5,479) 2,652 5,582 29,295
------- ----- ----- ------
Total non-interest income 732,664 555,742 1,864,226 1,455,093
------- ------- --------- ---------
Non-interest expense:
Salaries and employee benefits 1,395,905 1,226,947 4,067,021 3,548,369
Net occupancy 217,667 172,331 581,877 519,700
Equipment expense 207,350 200,236 669,310 501,010
Outside service fees 354,698 219,276 649,380 710,905
Printing and supplies 47,843 92,123 176,239 235,798
Michigan Single Business Tax 70,100 22,100 190,600 121,000
Provision for real estate losses 100,000 160,000 155,000 240,000
Other 323,631 356,261 1,092,625 1,071,044
------- ------- --------- ---------
Total non-interest expense 2,717,194 2,449,274 7,582,052 6,947,826
--------- --------- --------- ---------
Income before federal income taxes 1,905,332 1,561,401 5,101,192 3,871,850
Federal income taxes 591,700 469,300 1,517,500 1,130,200
------- ------- --------- ---------
Net income $1,313,632 $1,092,101 $3,583,692 $2,741,650
========== ========== ========== ==========
Per share statistics*
Basic EPS $.84 $.70 $2.29 $1.74
Diluted EPS $.84 $.70 $2.29 $1.74
Dividends $.20 $.20 $.60 $.60
</TABLE>
*Based on 1,566,046 average shares outstanding during the period ended September
30, 2000 and 1,563,589 average shares outstanding during the period ended
September 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 September 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 June 30, 1999 $4,821,880 19,753,231 (66,220) (169,962) 24,338,929
Net income 1,092,101 1,092,101
Change in unrealized loss on debt securities
available for sale, net of tax effect 7,756 7,756
-----
Total comprehensive income 1,099,857
Shares issued for management retention plan 97,400 (97,400)
Amortization of management retention plan 12,012 12,012
Cash dividends (20(cent)per share) (313,341) (313,341)
--------- -------- --------- -------- ---------
Balances at September 30, 1999 $4,919,280 20,531,991 (151,608) (162,206) 25,137,457
========== ========== ========= ========= ==========
</TABLE>
See notes to interim consolidated financial statements
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (loss) Total
----- -------- ---- ------------- -----
<S> <C> <C> <C> <C> <C>
Balances at June 30, 2000 $4,919,280 22,367,336 (118,576) (201,355) 26,966,685
Net income 1,313,632 1,313,632
Change in unrealized loss on debt
securities 145,865 145,865
-------
available for sale, net of tax effect
Total comprehensive income 1,459,497
Shares issued for management retention plan 106,890 (106,890)
Amortization of management retention plan 16,135 16,135
Forfeitures management retention plan (12,725) 12,725
Cash dividends (20(cent)per share) (313,549) (313,549)
---------- -------- ------- -------- ---------
Balances at September 30, 2000 $5,013,445 23,367,419 (196,606) (55,490) 28,128,768
========== ========== ========= ======== ==========
</TABLE>
6
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity and Comprehensive Income
For the Nine Months Ended September 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 2,741,650 2,741,650
Change in unrealized gain (loss) on debt securities
available for sale, net of tax effect (174,397) (174,397)
---------
Total comprehensive income 2,567,253
Shares issued for management retention plan 97,400 (97,400)
Amortization of management retention plan 12,012 12,012
Shares issued for employee awards 105 105
Cash dividends (60(cent)per share) (938,446) (938,446)
--------- ---------- ------- ------- ---------
Balances at September 30, 1999 $4,919,280 20,531,991 (151,608) (162,206) 25,137,457
========== ========== ========= ========= ==========
</TABLE>
See notes to interim consolidated financial statements
<TABLE>
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (loss) Total
----- -------- ---- ------------- -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1999 $4,919,280 20,723,357 (139,597) (191,394) 25,311,646
Net income 3,583,692 3,583,692
Change in unrealized loss on debt
securities 135,904 135,904
-------
available for sale, net of tax effect
Total comprehensive income 3,719,596
Shares issued for management retention plan 106,890 (106,890)
Amortization of management retention plan 37,156 37,156
Forfeitures management retention plan (12,725) 12,725
Cash dividends (60(cent)per share) (939,630) (939,630)
---------- --------- ------- -------- ---------
Balances at September 30, 2000 $5,013,445 23,367,419 (196,606) (55,490) 28,128,768
========== ========== ========= ======== ==========
</TABLE>
7
<PAGE>
FNBH BANCORP, INC. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Cash Flows
Unaudited Nine months ended Sept. 30
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $3,583,692 $ 2,741,650
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 900,000 630,000
Depreciation and amortization 690,650 519,707
Net amortization on investment securities 25,735 65,407
Earned portion of management retention plan 37,156 12,012
Loss on disposal of equipment 79,866 18,360
Gain on sale of loans (54,689) (27,941)
Proceeds from sale of loans 2,864,415 12,461,368
Origination of loans held for sale (2,873,815) (12,675,563)
Increase in accrued interest income and other assets (423,336) (86,667)
Increase (decrease) in accrued interest, taxes, and other liabilities 742,741 (246,349)
------- ---------
Net cash provided by operating activities 5,572,415 3,411,984
--------- ---------
Cash flows from investing activities:
Purchases of available for sale securities (7,973,357) (15,164,836)
Proceeds from maturities and calls of available for sale securities 16,000,000 2,000,000
Purchases of held to maturity securities (2,496,205) (2,481,596)
Proceeds from maturities and calls of held to maturity securities 605,000 3,968,000
Proceeds from mortgage-backed securities paydowns-held to maturity 305,829 335,970
Net increase in loans (42,142,108) (21,086,992)
Capital expenditures (167,112) (2,132,724)
--------- -----------
Net cash used in investing activities (35,867,953) (34,562,178)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 17,671,729 13,582,348
Net increase in borrowings 6,000,000 1,400,000
Dividends paid (939,630) (938,446)
--------- ---------
Net cash provided by financing activities 22,732,099 14,043,902
----------- ----------
Net decrease in cash and cash equivalents (7,563,439) (17,106,292)
Cash and cash equivalents at beginning of year 24,414,282 31,238,662
---------- ----------
Cash and cash equivalents at end of period $16,850,843 $14,132,370
=========== ===========
Supplemental disclosures:
Interest paid $ 6,773,553 $ 5,631,952
Federal income taxes paid 1,482,000 1,192,000
Loans charged off 282,368 415,960
</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 September 30, 2000, and
consolidated results of operations for the three months and nine months ended
September 30, 2000 and 1999 and consolidated cash flows for the nine months
ended September 30, 2000 and 1999.
2. The results of operations for the three months and nine months ended
September 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 $1,978,000 at September 30, 2000,
$1,947,000 at September 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>
Third Quarter Year to Date
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,313,632 $1,092,101 $3,583,692 $2,741,650
Shares outstanding (basic) 1,567,715 1,565,203 1,566,046 1,563,589
Dilutive shares 0 0 0 0
--------- --------- --------- ---------
Shares outstanding (diluted) 1,567,715 1,565,203 1,566,046 1,563,589
Earnings per share:
Basic EPS $.84 $.70 $2.29 $1.74
Diluted EPS $.84 $.70 $2.29 $1.74
</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 nine months ended September 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 Third Quarter Year-to-Date
except per share data) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,314 $1,092 $3,584 $2,742
Net Income per Share $ .84 $ .70 $2.29 $1.74
</TABLE>
Net income for the three months ended September 30, 2000 increased approximately
$222,000 (20%) from that reported for the same period last year. Contributing to
the increased earnings in the third quarter of 2000 were increases of $525,000
(14%) in net interest income and $177,000 (32%) in non-interest income. The
increase in net interest income was the result of overall growth in the Bank's
net interest earning assets. Partially offsetting these favorable occurrences
were increases in the loan loss provision of $90,000 (43%), non-interest expense
of $268,000 (11%), and the federal tax provision of $122,000 (26%).
Net income for the first nine months of the year increased $842,000 (31%)
compared to the same period last year. Earnings in the three quarters 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 that year.
Contributing to 2000 earnings were an increase of $1,724,000 (17%) in net
interest income and $409,000 (28%) in non-interest income. Partially offsetting
these increases were increases in expenses of $634,000 (9%)
10
<PAGE>
in non-interest expense, $270,000 (43%) in the loan loss provision, and $388,000
(34%) in federal tax accruals.
<TABLE>
Net Interest Income Third Quarter Year-to-Date
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income $6,797 $5,631 $18,953 $15,850
Interest Expense 2,607 1,966 7,234 5,855
------ ----- ----- -----
Net Interest Income $4,190 $3,665 $11,719 $9,995
</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)
September 30, 2000 and 1999
---------------Third Quarter Averages----------------
2000 1999
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Short term investments $ 633 $ 13.1 8.09% $ 7,282 $ 93.8 5.04%
Securities: Taxable 27,505 377.8 5.49% 30,999 403.8 5.21%
Tax-exempt(1) 18,895 317.5 6.72% 17,147 294.6 6.87%
Loans(2)(3) 249,341 6,190.4 9.71% 203,532 4,927.1 9.47%
-------- ------- -------- -------
Total earning assets/total
interest income 296,374 $6,898.8 9.13% 258,960 $5,719.3 8.67%
-------- --------
Cash & due from banks 11,720 11,438
All other assets 15,940 16,461
Allowance for loan loss (4,976) (4,332)
-------- -------
Total assets $319,058 $282,527
======== ========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
Savings & NOW accounts $120,243 $ 856.5 2.83% $ 115,432 $ 770.2 2.65%
Time 104,787 1,572.5 5.95% 90,562 1,194.8 5.23%
Overnight borrowing 3,880 67.5 6.81% 98 1.1 4.49%
FHLB advances 6,000 110.8 7.23% 0 0
----- ----- ---- -----
Total interest bearing
liabilities/total interest expense 234,910 $ 2,607.3 4.40% 206,092 $1,966.1 3.78%
--------- --------
Non-interest bearing deposits 53,401 49,614
All other liabilities 2,899 1,945
Stockholders' Equity 27,848 24,876
-------- ------
Total liabilities and
shareholders' equity $319,058 $282,527
======== ========
Interest spread 4.73% 4.89%
===== =====
Net interest income-FTE $ 4,291.5 $ 3,753.2
========= =========
Net interest margin 5.64% 5.65%
===== =====
</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
$179,000 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 $ 2,146 $ 95.7 5.86% $ 11,535 $ 412.9 4.72%
Securities: Taxable 31,155 1,258.9 5.38% 28,971 1,119.5 5.17%
Tax-exempt(1) 18,476 936.9 6.76% 16,700 875.0 6.99%
Loans(2)(3) 233,359 17,012.0 9.61% 195,186 13,742.8 9.31%
------- --------- --------- ---------
Total earning assets/total
interest income 285,136 $ 19,303.5 8.93% 253,392 $16,150.2 8.47%
---------- ---------
Cash & due from banks 11,280 11,640
All other assets 16,198 16,198
Allowance for loan loss (4,811) (4,192)
------- -------
Total assets $307,803 $276,038
======== ========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
Savings & NOW accounts $120,784 $ 2,571.4 2.84% $109,017 $ 2,176.3 2.67%
Time 100,888 4,326.8 5.71% 92,002 3,676.9 5.34%
Overnight borrowing 87.6 6.59% 57 2.0 4.66%
FHLB advances 4,522 248.4 7.25% 0 0
----- ----- ---- ----
Total interest bearing
liabilities/total interest expense 227,948 $ 7,234.2 4.23% 201,076 $5,855.2 3.89%
--------- --------
Non-interest bearing deposits 50,110 48,298
All other liabilities 2,996 2,240
Stockholders' Equity 26,749 24,424
------ ------
Total liabilities and
shareholders' equity $307,803 $ 276,038
======== =========
Interest spread 4.70% 4.58%
===== =====
Net interest income-FTE $12,069.3 $10,295.0
========= =========
Net interest margin 5.56% 5.37%
===== =====
</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 $502,000 in 2000 and
$447,000 in 1999.
12
<PAGE>
Interest Earning Assets/Interest Income
On a tax equivalent basis, interest income increased approximately $1,180,000 in
the third quarter of 2000 compared to that of 1999. A $46,000,000 (23%) growth
in average loan balances accompanied by a 24 basis point increase in interest
yields on those loans generated the net interest income growth.
In the third quarter, tax equivalent income on short and long term investments
decreased approximately $84,000 because the average balances decreased
$8,400,000 although the rate earned increased 30 basis points.
For the nine months of the year, tax equivalent interest income increased
$3,150,000. Loan interest income increased $3,270,000, with average balances up
$38,000,000 (20%) and yields up 30 basis points. The growth in the loan
portfolio was primarily in commercial loans which increased $33,700,000 (23%) on
average, while consumer loans increased $4,100,000 (17%) and mortgage loans
increased $373,000 (2%). The Bank's resources in the loan department are
primarily deployed making commercial loans. Contributing to the low 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 $3,300,000 mortgage loans to the secondary market during the three
quarters of 2000, compared to $10,600,000 in the first nine months of 1999.
For the first three quarters of the year, income on short and long term
investments decreased $116,000 from that earned the prior year due to a
$5,400,000 decrease in average balances although the yields increased by 29
basis points.
Interest Bearing Liabilities/Interest Expense
In the third quarter of 2000, interest expense increased $641,000 due to an
increase in average balances of $28,800,000 and in the interest rate paid by 62
basis points. Savings and NOW interest expense increased $86,000 because
balances increased $5,000,000 and rates increased 18 basis points. Interest on
time deposits increased $378,000 in the third quarter of 2000 over the prior
year. Balances increased $14,200,000 and the rate paid increased 72 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 three quarters of the year, interest expense was $1,379,000 higher
than the previous year due to average balances of interest bearing liabilities
increasing $26,900,000 and the average rate increased 34 basis points. Savings
and NOW interest expense increased $395,000 because balances increased
$11,800,000 and the interest rate increased 17 basis points. Interest on time
deposits increased $650,000 because the balance increased $8,900,000 and the
rate increased 37 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
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<PAGE>
borrowing was intended to help with the Bank's rate sensitivity position.
Interest expense related to these loans amounted to $248,000 in the first three
quarters 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
nine months of the year, the Bank's liquidity ratio averaged 15.43% although it
was 13.66% at September 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 $26,480,000 at September 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 three
quarters of the year, short term investments averaged approximately $2,146,000.
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
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<PAGE>
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers including commitments to
extend credit and letters of credit. A commitment or letter of credit is not
recorded as an asset until the instrument is exercised.
<TABLE>
Interest Rate Sensitivity
(dollars in thousands) 0-3 4-12 1-5 5+
Months Months Years Years Total
------ ------ ----- ----- -----
Assets:
<S> <C> <C> <C> <C> <C>
Loans $87,068 $39,883 $112,258 $12,730 $251,939
Securities 8,818 8,258 16,003 11,258 44,337
Short term investments.... 590 590
Other assets 26,855 26,855
------- ------- -------- ------- --------
Total assets $96,476 $48,141 $128,261 $50,843 $323,721
Liabilities & Stockholders' Equity:
Demand, Savings & NOW.............. $56,348 $18,182 $69,095 $35,359 $178,984
Time 48,436 32,924 25,961 557 107,878
Other borrowings...................... 207 4,008 1,785 6,000
Other liabilities and equity 30,859 30,859
-------- ------- ------- ------ ------
Total liabilities and equity $104,784 $51,313 $99,064 $68,560 $323,721
Rate sensitivity gap and ratios:
Gap for period $(8,308) ($3,172) $29,197 $(17,717)
Cumulative gap (8,308) (11,480) 17,717
Cumulative rate sensitive ratio.......... .92 .93 1.07 1.00
Dec. 31, 1999 rate sensitive ratio....... 1.06 .94 1.08 1.00
</TABLE>
The preceding table sets forth the time periods in which earning assets and
interest bearing liabilities will mature or may re-price in accordance with
their contractual terms. 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 and are not considered rate sensitive.
Allocations are made to time periods based on the Bank's historical experience
and management's analysis of industry trends.
In the gap table above, the short term (one year and less) cumulative interest
rate sensitivity is negative. Accordingly, if market interest rates increase,
this negative gap position indicates that the interest margin would be
negatively affected. However, gap analysis is limited and may not provide an
accurate indication of the impact of general interest rate movements on the net
interest margin since repricing of various categories of assets and liabilities
is subject to the Bank's needs, competitive pressures, and the needs of the
Bank's customers. In addition, various assets and liabilities indicated as
repricing within the same period may in fact reprice at different times within
the period and at different rate indices. Additionally, simulation modeling,
which measures the impact of upward and downward movements of interest rates on
interest margin, indicates that an upward movement of interest rates would not
significantly reduce net interest income.
15
<PAGE>
<TABLE>
Provision for Loan Losses Third Quarter Year-to-Date
-------------------------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $300 $210 $900 $630
==== ==== ==== ====
</TABLE>
The provision for loan losses increased $90,000 in the third quarter of 2000
compared to the prior year. Year to date the provision has increased $270,000.
The increase in the loan loss provision was deemed appropriate principally due
to an increase in impaired loans and related allocations of reserves. In
September of 2000, the allowance for loan loss as a percent of loans was 2.05%,
compared to 2.10% a year earlier and 2.13% at December 31, 1999. For the first
nine months of 2000, the Bank had net charge offs of $219,000, compared to
$251,000 in the first nine months of 1999. Non-accrual, past due 90 days, and
renegotiated loans were .79% and .94% of total loans outstanding at September
30, 2000 and 1999, respectively, and .08% of total loans at December 31, 1999.
Impaired loans, as defined by Statement of Financial Accounting Standards (SFAS)
No. 114, Accounting by Creditors for Impairment of a Loan, totaled approximately
$6,100,000 at September 30, 2000, and included non-accrual, and past due 90 days
other than homogenous residential and consumer loans, and $4,600,000 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 making payments with occasional lateness. The cash generated
solely by the business is currently not adequate to cover debt service. Another
loan, for $1,700,000, is 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 $1,700,000
at September 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 September 30,
2000 compared to December 31, 1999.
16
<PAGE>
<TABLE>
Nonperforming Assets
(in thousands) September 30,2000 December 31, 1999
----------------- -----------------
<S> <C> <C>
Non-accrual loans $1,579 $ 173
90 days or more past due and still accruing 399 4
------ ------
Total nonperforming loans 1,978 177
Other real estate 0 0
------ ------
Total nonperforming assets $1,978 $ 177
Nonperforming loans as a percent of total loans .79% .08%
Nonperforming assets as a percent of total loans .79% .08%
Loan loss reserve as a percent of nonperforming loans 261% 2533%
</TABLE>
The following table sets forth loan balances and summarizes the changes in the
allowance for loan losses for the first nine months of 2000 and 1999.
<TABLE>
Year to date Year to date
Loans: (dollars in thousands) Sept. 30, 2000 Sept. 30, 1999
-------------- --------------
<S> <C> <C>
Average daily balance of loans for the year to date 233,359 195,186
Amount of loans, net of unearned income, outstanding at
end of the quarter 251,939 206,083
Allowance for loan losses:
Balance at beginning of year 4,483 3,958
Loans charged off:
Real estate 0 0
Commercial 239 268
Consumer 43 148
-- ---
Total charge-offs 282 416
Recoveries of loans previously charged off:
Real estate 0 35
Commercial 25 78
Consumer 38 52
-- --
Total recoveries 63 165
Net loans charged off 219 251
Additions to allowance charged to operations 900 630
---- ---
Balance at end of quarter $5,164 $4,337
Ratios:
Net loans charged off (annualized) to average
loans outstanding .13% .17%
Allowance for loan losses to loans outstanding 2.05% 2.10%
</TABLE>
17
<PAGE>
<TABLE>
Non-interest Income Third Quarter Year-to-Date
-------------------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $733 $556 $1,864 $1,455
==== ==== ====== ======
</TABLE>
Non-interest income, which includes service charges on deposit accounts, loan
fees, customer service fees, trust fees, other operating income, and gain (loss)
on sale of assets, increased by $177,000 (32%) in the third quarter of 2000
compared to the same period in the previous year. Most of the increase came from
service charges which increased $175,000 (36%). A thorough review of the bank's
service charges completed last spring resulted in a new service charge schedule
which went into effect in May accounting for the increased income. Additionally,
trust income increased $16,000 due to growth in trust assets. Partially
offsetting these increases was a $6,000 decrease in gain on loan sales and an
$8,000 decrease in "other" income. For the year, non-interest income increased
$409,000 (28%). The increase was primarily due to a $375,000 (29%) increase in
service charge income. In addition to the increases that resulted from the
changes in service charges assessed in 2000, service charge income in the first
quarter of 1999 was uncharacteristically low due to computer conversion related
problems. Additionally trust income was $40,000 higher for the year and gain on
the sale of loans increased $18,000. Other income decreased $24,000 primarily
due to the write off of some computer equipment in 2000 and because some
repossessed property was sold at a gain in 1999.
<TABLE>
Non-interest Expense Third Quarter Year-to-Date
--------------------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $2,717 $2,449 $7,582 $6,948
====== ====== ====== ======
</TABLE>
Non-interest expense increased $268,000 (11%) in the third quarter of 2000
compared to the same period last year. There were increases in salaries and
benefits expense of $169,000 (14%) principally due to an increase in the profit
sharing accrual, a result of the company's improved earnings in 2000. Occupancy
expense increased $45,000 (26%) primarily due to the costs associated with a new
branch which opened in August of last year. Professional fees increased $38,000
(30%) primarily due to the write off of architectural fees amounting to
approximately $70,000 related to a branch project which has been abandoned.
Michigan Single Business Tax increased $48,000 this year compared to the third
quarter of last year. In 1999 the company benefited from tax credits due to the
investment in fixed assets that resulted from the opening of the new branch in
the third quarter. Other non-interest expense increased $65,000 (14%) in the
current year.
For the first three quarters of the year, non-interest expense increased
$634,000 (9%) compared to the prior year. There was a $519,000 (15%) increase in
salaries and
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<PAGE>
benefits, made up of a $135,000 (5%) increase in salary expense, a $55,000 (48%)
increase in health insurance costs, and a $320,000 (109%) 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 $62,000
(12%) higher due to the new branch which was opened in the third quarter of last
year. Equipment expense is $168,000 (34%) higher 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.
Michigan taxes are $70,000 (57%) higher due to improved earnings and the 1999
tax credit mentioned above. The provision for real estate losses represents an
accrual for possible losses related to a piece of property the Company is
attempting to sell. Management analyzes the value of the property quarterly
based on information available to management regarding the property's salabilty.
<TABLE>
Income Tax Expense Third Quarter Year-to-Date
------------------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total $592 $469 $1,518 $1,130
==== ==== ====== ======
</TABLE>
Fluctuations in income taxes resulted primarily from changes in the level of
profitability.
<TABLE>
Capital (in thousands) September 30, 2000 December 31, 1999
------- ------------------ -----------------
<S> <C> <C>
Stockholders' Equity* $28,184 $25,503
Ratio of Equity to Total Assets 8.71% 8.60%
</TABLE>
*Amounts exclude securities valuation adjustments recorded under Statement of
Financial Accounting Standards No. 115 amounting to ($55,000) at September 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 $2,700,000 (11%) during the first
nine months of the year. This increase was principally the result of net income
earned by the company reduced by dividends paid of $940,000.
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 September
30, 2000 was 9.51%, and total risk-based capital was 10.76%. At September 30,
1999 these ratios were 10.05% and 11.30% respectively. Minimum regulatory Tier 1
risk-based and total risk-based capital ratios under the Federal Reserve Board
guidelines are 4% and 8% respectively.
19
<PAGE>
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 8.16% at September 30, 2000 and 7.72% in 1999. The minimum standard leverage
ratio is 3% but financial institutions are expected to maintain a leverage ratio
2 percentage points above the 3% minimum to be classified as a well capitalized
institution.
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 $2,700,000. 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 expects to commence building the two new branches in 2001 with at least
one completed in that year. Additionally, the Company will expand its computer
facility in 2001 to provide additional space for back office functions. All of
the building projects are expected to be financed from internally generated
funds.
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 a material impact on the Company's
financial condition or operations.
20
<PAGE>
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 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 third 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 September 30, 2000 to be signed on its behalf by the undersigned hereunto
duly authorized.
FNBH BANCORP, INC.
/s/ Barbara D. Martin
Barbara D. Martin
President and Chief Executive Officer
/s/ Barbara J. Nelson
Barbara J. Nelson
Treasurer
DATE: October 9, 2000
21
