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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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, 2001, was
$65,845,416 (common stock, no par value). As of December 31, 2000 there were
outstanding 1,567,748 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 23, 2001 for
the Annual Meeting of Shareholders to be held April 25, 2001 are incorporated by
reference into Parts I, II and III of this report.
1
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, 2001, the Bank had approximately 125 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 suburban 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
2
a relationship with the Federal Home Loan Bank of Indianapolis where it makes
short term investments and where it has a line of credit of $16,000,000, of
which $10,000,000 is available, $6,000,000 funded as of year end. 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, 2000, 43% of outstanding loans were for
either commercial or residential construction or development. As of December 31,
2000, the Bank's certificates of deposit of $100,000 or more constituted
approximately 11% 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 81% of total revenues for the period ended December 31, 2000 and
79% of total revenues for the period ended December 31, 1999. Interest on
investment securities, including short-term investments and federal funds sold,
constituted approximately 10% of total revenues in 2000 and 12% of total
revenues in 1999. 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. Fifty-five percent of the Bank's loan portfolio is in fixed rate
loans. Most of these loans, approximately 83%, mature within five years of
issuance. Approximately $26,000,000 in loans (or about 10% of the Bank's total
loan portfolio) have fixed rates with maturities exceeding five years. Fifty-two
percent of the Bank's interest-bearing deposits are in savings, NOW, and MMDAs,
all of which are variable rate products. Of the approximately $121,400,000 in
certificates, $76,500,000 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, 2000, was 16% asset sensitive, compared to 1% asset sensitive at
December 31, 1999. See discussion and table under "Quantitative and Qualitative
Disclosures about Market Risk" in Item 7 below.
3
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 by management 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
$1,000,000, 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 Bank One. 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 owned financial institution. Based on
deposit information as of June 30, 2000, the Bank holds approximately 19.87% of
local deposits, compared to approximately 19.74% held by Old Kent Bank,
approximately 10.84% held by D&N Bank, approximately 11.06% held by National
City Bank, and approximately
4
8.79% held by Bank One. Information as to asset size of competitor financial
institutions is derived from publicly available reports filed by and with
regulatory agencies. Within the Bank's markets, Old Kent Bank maintains five
branch offices, National City Bank operates six branch offices, D&N Bank has
five branch offices, and Bank One has three branch offices. Management is not
aware of any plans by these financial institutions to expand their presence in
the Bank's market. However, the purchase of Old Kent Bank by Fifth Third Bank
may have an impact on competition.
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:
Balances as of December 31,
---------------------------
(in thousands)
2000 1999 1998 1997 1996
----- ---- ---- ---- ----
Total Assets $348,363 $296,419 $264,894 $226,314 $202,009
Loans, Net of Unearned Income 255,414 209,952 185,018 158,397 136,067
Securities 39,311 50,598 38,646 43,725 47,257
Noninterest-Bearing Deposits 55,252 47,980 47,402 41,631 35,048
Interest-Bearing Deposits 254,961 221,210 192,155 160,668 145,896
Total Deposits 310,214 269,190 239,557 202,299 180,944
Shareholders' Equity 28,887 25,312 23,497 21,732 19,597
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, 2000, this new branch had approximately $22,000,000 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.
5
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 became 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 has as its umbrella regulator the Federal Reserve Board. Functional
regulation of the financial holding company's separately regulated subsidiaries
is 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
6
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.
The Company believes that the GLB Act could significantly increase
competition in its business and, from time to time, will be evaluating in its
planning process 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 banks 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, as
of the day before the enactment of the GLB
7
act, to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto. 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, 2000, was 10.70% and total
risk-based capital was 11.96%. At December 31, 1999, these ratios were 11.36%
and 12.62%, 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,
2000 was 9.19%, while at December 31, 1999 it was 9.13%. 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 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.
8
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 2.06 basis
points annually applied to assessable deposits. During 2000 the Bank paid
$53,000 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 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
9
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, 2000, 1999, and 1998.
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 increased 18
basis points in 2000 as a result of an increase of 51 basis points in yield on
earning assets, partially offset by an increase of 43 basis points in the
interest cost on deposits. In 1999 the interest margin decreased 28 basis points
due to a 49 basis point decrease in yield on earning assets while interest cost
decreased 38 basis points.
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Yield Analysis of Consolidated Average Assets and Liabilities
(dollars in thousands)
2000 1999 1998
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Assets:
Interest earning assets:
Short term investments $ 4,278 $271.7 6.35% $10,384 $507.5 4.89% $8,630 $449.1 5.20%
Securities:
Taxable 29,283 1,607.9 5.49% 30,051 1,526.1 5.08% 23,019 1,386.9 6.02%
Tax-exempt 18,580 1,220.3 6.57% 16,896 1,165.6 6.90% 15,221 1,085.1 7.13%
Loans(1)(2) 238,697 23,407.8 9.81% 198,448 18,790.8 9.47% 175,873 17,317.6 9.85%
---------- ---------- --------- ---------- -------- ---------
Total earning assets and total
interest income 290,838 $26,507.7 9.11% 255,779 $21,990.0 8.60% 222,743 $20,238.7 9.09%
--------- --------- ---------
Cash & due from banks 11,615 11,680 9,836
All other assets 16,022 15,955 11,335
Allowance for loan loss (4,911) (4,219) (3,777)
------- ------ ------
Total assets $313,564 $279,195 $240,137
======== ========= =========
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings, money market, NOW $120,770 $3,434.0 2.84% $111,141 $2,991.6 2.69% $91,552 $2,772.5 3.03%
Time 104,669 6,158.5 5.88% 92,802 4,970.0 5.36% 81,119 4,617.2 5.69%
FLHB and other borrowings 6,259 449.3 7.18% 98 5.3 5.40% 179 10.7 5.98%
--------- --------- ------ --------- ----------
Total interest bearing
liabilities and total interest
expense 231,698 $10,041.8 4.33% 204,041 $7,966.9 3.90% 172,850 $7,400.4 4.28%
--------- -------- --------
Non-interest bearing deposits 51,428 48,240 43,619
All other liabilities 3,220 2,232 1,751
Shareholders' Equity 27,218 24,682 21,917
------ ------ ------
Total liabilities and
shareholders' equity $313,564 $279,195 $240,137
======== ======== ========
Interest spread 4.78% 4.70% 4.81%
==== ===== =====
Net interest income-FTE $16,465.9 $14,023.1 $12,838.3
========= ========= =========
Net interest margin 5.66% 5.48% 5.76%
===== ===== =====
(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 $690,000 in 2000,
$710,000 in 1999, and $600,000 in 1998.
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(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.
Year ended Year ended
December 31, 2000 compared to December 31, 1999 compared to
Year ended December 31, 1999 Year ended December 31, 1998
---------------------------- ----------------------------
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)
------ ---- ---------- ------ ---- ----------
Interest Income:
Short term investments.... $ (298) $ 62 $ (236) $ 91 $ (33) $ 58
Securities:
(39) 121 82 424 (284) 140
Taxable...........................
Tax 116 (61) 55 119 (39) 80
Exempt....................
Loans................................ 3,811 806 4,617 2,223 (750) 1,473
Total interest income...... $ 3,590 $ 928 $4,518 $ 2,857 $(1,106) $ 1,751
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts.. $ 259 $ 183 $ 442 $ 593 $ (374) $ 219
636 553 1,189 665 (312) 353
Time................................
FHLB & other borrowings. 426 18 444 (5) (6)
(1)
Total interest expense.... $ 1,321 $ 754 $ 2,075 $ 1,253 $ (687) $ 566
Net interest income (FTE) $2,269 $ 174 $ 2,443 $ 1,604 $(419) $ 1,185
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.
12
II SECURITIES PORTFOLIO
(A) The following table sets forth the book value of securities at December
31:
(in thousands)
2000 1999 1998
---- ---- ----
Held to maturity:
U.S. Treasury $ 0 $ 0 $ 1,999
States and political subdivisions 18,887 17,709 16,279
Mortgage-backed securities 577 335 602
--- --- ---
Total $ 19,464 $ 18,044 $ 18,880
Available for sale:
U.S. Treasury $ 13,028 $ 22,860 $ 12,092
U.S. Government agencies 5,986 8,861 6,982
Mortgage-backed securities 0 0 0
FRB Stock 44 44 44
FHLB Stock 789 789 648
-------- -------- --------
Total $ 19,847 $ 32,554 $ 19,766
(B) The following table sets forth contractual maturities of securities at
December 31, 2000 and the weighted average yield of such securities:
(dollars in thousands)
Maturing After One Maturing After Five
Maturing Within One But Within Five But Within Ten Years Maturing After Ten
---- ----- --------- ---
Year Years Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Held to maturity
States and political
subdivisions $ 895 7.07% $7,685 6.80% $10,307 6.34% 0
Mortgage backed
Securities 460 5.30% 117 5.62% 0 0
--- --- - -
Total $ 1,355 6.47% $7,802 6.78% $10,307 6.34% $0
======= ====== ======= ==
Tax equivalent adjustment
for calculations of yield $14 $113 $180
=== ==== ====
Available for sale
U.S. Treasury $11,010 5.83% $2,018 6.57%
U.S. Agency $2,992 6.13% $2,994 5.58%
FRB Stock $ 44 6.00%
FHLB Stock 789 8.25%
---
Total $14,002 5.89% $5,012 5.98% $0 $833 8.13%
======= ====== == ====
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:
13
Rate on Tax
Tax-Exempt Rate Adjustment Equivalent Basis
--------------- ---------- ----------------
Under 1 year 5.44% 1.63% 7.07%
1-5 years 5.17% 1.63% 6.80%
5-10 years 4.71% 1.62% 6.34%
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, 2000 included in the
Appendix to the Company's definitive proxy statement, dated March 23, 2001,
relating to the April 25, 2001, 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:
(in thousands)
2000 1999 1998 1997 1996
---- ----- ---- ---- ----
Secured by real estate:
Residential first mortgage $ 31,328 $ 29,904 $ 38,051 $ 38,073 $ 36,148
Residential home equity/other junior liens 9,999 7,822 9,106 13,665 12,883
Construction and land development 35,020 23,375 23,048 19,490 14,042
Other 105,041 89,809 68,960 53,743 43,006
Consumer 20,700 16,811 16,653 14,011 12,272
Commercial 45,239 38,891 26,058 18,299 15,830
Other 8,897 4,043 3,770 1,729 2,360
------ ------ ------- ------ -----
Total Loans (Gross) $256,224 $210,655 $185,646 $159,010 $136,541
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, 2000 which, based on remaining
scheduled repayments of principal, are in the periods indicated.
Maturing
--------
(in thousands)
After one
Within one but within After five
year five years years Total
---- ---------- ----- -----
Real estate construction & land development.... $23,180 $11,840 0 $ 35,020
Real estate other (secured by commercial &
multi-family)................................ 12,391 90,017 2,633 105,041
Commercial (secured by business assets or
Unsecured)................................... 18,963 25,570 706 45,239
Other (loans to farmers, political
Subdivisions, & overdrafts) 1,674 2,076 5,147 8,897
------- -------- ------ --------
Totals......................................... $56,208 $129,503 $8,486 $194,197
14
Below is a schedule of amounts due after one year which are classified
according to their sensitivity to changes in interest rates.
Interest Sensitivity
--------------------
(in thousands)
Fixed Rate Variable Rate
---------- -------------
Due after one but within five years.............. $88,114 $41,389
Due after five years............................. 7,671 815
(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:
(dollars in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Nonperforming Loans:
Nonaccrual loans $608 $ 173 $1,519 $809 $ 109
Loans past due 90 days or more 209 4 25 249 448
--- - -- ---- ---
Total nonperforming loans $817 $ 177 $1,544 $1,058 $ 557
==== ===== ====== ====== =====
Percent of total loans .32% .08% .83% .67% .41%
Additional information concerning nonperforming loans, the Bank's
nonaccrual policy, loan impairment, and loan concentrations is incorporated by
reference to Note 4 of the Company's Consolidated Financial Statements for the
year ended December 31, 2000 included in the Appendix to the Company's
definitive proxy statement, dated March 23, 2001, relating to the April 25,
2001, Annual Meeting of Shareholders (as filed with the Commission as exhibit 13
to this Report).
There were no other interest bearing assets, at December 31, 2000, 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, 2000.
15
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:
(dollars in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loans:
Average daily balance of loans for the year.... $238,860 $198,448 $175,873 $148,096 $130,648
Amount of loans (gross) outstanding at end
of the year.................................. 256,224 210,655 185,646 159,011 136,541
Allowance for loan losses:
Balance at beginning of year.................. 4,483 3,958 3,424 3,335 3,097
Loans charged off:
Real estate................................ 0 0 110 0 70
Commercial................................. 526 322 63 375 129
Consumer................................... 83 164 129 124 88
-- --- --- --- --
Total charge-offs...................... 609 486 302 499 287
Recoveries of loans previously charged off:
Real estate............................... 0 35 96 32 1
Commerical................................ 79 98 51 43 31
Consumer 40 38 49 27 45
-- -- -- -- --
Total recoveries...................... 119 171 196 102 77
Net loans charged off............................ 490 315 106 397 210
Additions to allowance charged to operations..... 1,200 840 640 486 448
----- --- --- --- ---
Balance at end of year................ $5,193 $4,483 $3,958 $3,424 $3,335
Ratios:
Net loans charged off to average loans
outstanding .21% .16% .06% .27% .16%
Allowance for loan losses to loans
outstanding 2.03% 2.13% 2.13% 2.15% 2.44%
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:
(dollars in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Commercial...... $4,725 77.0% $3,803 77.6% $3,384 74.1% $2,785 69.2% $2,401 66.7%
Consumer........ 315 12.2% 441 11.8% 355 12.5% 332 15.6% 465 16.2%
Real Estate...... 153 10.8% 239 10.6% 219 13.4% 307 15.2% 457 17.1%
--- --- --- --- ---
Total...... $5,193 100% $4,483 100% $3,958 100% $3,424 100% $3,335 100%
====== ==== ====== ==== ====== ==== ====== ===== ======
16
V DEPOSITS
The following table sets forth average deposit balances and the weighted
average rates paid thereon for the years ended December 31:
(dollars in thousands)
2000 1999 1998
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
Non-interest bearing demand $51,428 $48,240 $43,619
Savings, money market and NOW 120,769 2.84% 111,141 2.69% 91,552 3.03%
Time deposits 104,669 5.88% 92,802 5.36% 81,119 5.69%
------- ------ ------
Total $276,866 4.26% $252,183 3.90% $216,290 4.28%
======== ======== ========
The table for maturities of negotiated rate time deposits of $100,000 or
more outstanding at December 31, 2000 is incorporated by reference to Note 8 of
the Company's Consolidated Financial Statements for the year ended December 31,
2000 included in the Appendix to the Company's definitive proxy statement, dated
March 23, 2001, relating to the April 25, 2001, 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:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net income as a percent of:
Average common equity 18.76% 15.05% 17.83% 17.84% 19.12%
Average total assets 1.63% 1.33% 1.63% 1.79% 1.88%
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, included in the Appendix to the
Company's definitive proxy statement, dated March 23, 2001, relating to the
April 25, 2001, Annual Meeting of Shareholders and is incorporated herein by
reference.
VII SHORT-TERM BORROWING
The information required in this item is not applicable for this Company.
17
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 2000.
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.
18
The following table sets forth certain information with respect to the
Company's executive officers as of December 31, 2000:
First Selected as an Officer
Name (Age) Position with Company of the Company
---------- --------------------- --------------
Barbara D. Martin (54) President, Chief Executive Officer, 1983
and Director of the Company and the
Bank
Barbara J. Nelson (53) Secretary/Treasurer of the Company 1985
and Senior Vice President,
Cashier, and Chief Financial
Officer of the Bank
Herbert W. Bursch (48) Senior Vice President, Retail 1999
Services, of the Bank
James Wibby (50) Senior Vice President, Senior 1997
Lender, of the Bank
Nancy Morgan (50) Vice President, Human Resources of 1988
the Bank
Jerry Armstong (41) Vice President, Operations, of the 1997
Bank
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, 1999, through December 31, 2000, there were, so far as the
Company's management knows, 301 sales of shares of the Company's Common Stock,
involving a total of 52,305 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 throughout 2000 and during
the last two quarters of 1999, and the lowest price was $40.00 per share in the
first two quarters of 1999. To the knowledge of management, the last sale of
Common Stock occurred on February 23, 2001.
As of March 1, 2001, 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 1999 and 2000, 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.
19
Sales price and dividend information for the years 1999 and 2000:
Sales Prices Cash Dividends Declared
------------ -----------------------
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 $0.5 0(1)
2000 High Low
---- ---- ---
First Quarter $42.00 $42.00 $0.20
Second Quarter $42.00 $42.00 $0.20
Third Quarter $42.00 $42.00 $0.20
Fourth Quarter $42.00 $42.00 $0.55(2)
(1) Includes a special dividend of $0.30 per share.
(2) Includes a special dividend of $0.35 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.
20
Item 6 - Selected Financial Data
The information set forth under the caption "Summary Financial Data" on
page 52 of the Appendix to the Company's definitive proxy statement, as filed
with the Commission and dated March 23, 2001, relating to the April 25, 2001
Annual Meeting of Shareholders, is incorporated herein by reference.
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 39 through
51 of the Appendix to the Company's definitive proxy statement, as filed with
the Commission and dated March 23, 2001, relating to the April 25, 2001 Annual
Meeting of Shareholders, is incorporated herein by reference.
Item 7a - Quantitative and Qualititative Disclosures about Market Risk
Included in Management's Discussion and Analysis
Item 8 - Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data of
the Company appear on pages 12 to 38 of Appendix I to the Company's definitive
Proxy Statement, dated March 23, 2001, relating to the April 25, 2001 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, 2000 and 1999 are reported on page 38 of Appendix I.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
21
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 23, 2001, relating to the April 25, 2001 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 through 7 of the Company' s definitive proxy statement, as filed with
the Commission and dated March 23, 2001, relating to the April 25, 2001 Annual
Meeting of Shareholders, is incorporated herein by reference. Information under
the caption "Committee Report on Executive Compensation" on page 5 and
"Shareholder Return Performance Graph" on page 9 of the definitive proxy
statement is not incorporated by reference herein and is not deemed to be filed
with the Securities and Exchange Commission.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Ownership of Common Stock" on page
8 of the Company's definitive proxy statement, as filed with the Commission and
dated March 23, 2001, relating to the April 25, 2001 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 7 of the Company's definitive proxy statement, as filed with
the Commission and dated March 23, 2001, relating to the April 25, 2001 Annual
Meeting of Shareholders, is incorporated herein by reference.
22
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 23, 2001, relating to the April 25, 2001 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, 2000.
23
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 15, 2001.
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)
24
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 all Amendments to this Report on Form 10-K.
W. Rickard Scofield, Chairman of the Board /s/ W. Rickard Scofield
Donald K. Burkel, Vice Chairman of the Board /s/ Donald K. Burkel
Gary R. Boss, Director /s/ Gary R. Boss
Harry E. Griffith, Director /s/ Harry E. Griffith
Dona Scott Laskey, Director _________________________
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
25
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 23, 2001, for the Annual Meeting of Shareholders to be held
April 25, 2001 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
(23) Consent of Public Accountants
(24) Power of Attorney (included in signature section)
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 Articles Appendix I of Proxy Statement
of Incorporation to Increase dated March 17, 1998
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:
10.1 Howell Branch Lease Agreement Exhibit 10.2 to Form 10
10.2 Company's Long Term Incentive Plan* Appendix II of Proxy Statement
dated March 17, 1998
10.3 FNBH Bancorp Inc. Employees' Stock Exhibit 4 to Registration
Purchase Plan* Statement on Form S-8
(Reg. No. 333-46244)
*Represents a compensation plan
26
EXHIBIT 13
APPENDIX I
FNBH Bancorp, Inc. is a one bank holding company, which owns all of the
outstanding capital stock of First National Bank in Howell (the "Bank"). The
Corporation was formed in 1988 for the purpose of acquiring all of the stock of
the Bank in a shareholder approved reorganization, which became effective May
1989. The Bank was originally organized in 1934 as a national banking
association. The Bank serves primarily four communities, Howell, Brighton,
Hartland, and Fowlerville, all of which are located in Livingston County,
Michigan.
FINANCIAL INFORMATION
FNBH BANCORP, INC., AND SUBSIDIARIES
Page
Independent Auditor's Report................................................ 12
Consolidated Balance Sheets................................................. 13
Consolidated Statements of Income........................................... 15
Consolidated Statements of Stockholders' Equity............................. 17
Consolidated Statements of Cash Flows....................................... 18
Notes to Consolidated Financial Statements.................................. 20
Management's Discussion and Analysis........................................ 39
Summary Financial Data...................................................... 51
Stock and Earnings Highlights............................................... 52
11
INDEPENDENT AUDITOR'S 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-y ear period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
January 19, 2001
12
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
Asset 2000 1999
---------------- ----------------
Cash and cash equivalents:
Cash and due from banks $ 17,501,547 12,113,652
Short-term investments 25,743,118 12,300,630
---------------- ----------------
Total cash and cash equivalents 43,244,665 24,414,282
Investment securities held to maturity, net
(fair value of $19,218,000 in 2000 and $17,650,000 18,886,677 17,709,401
in 1999)
Investment securities available for sale, at fair value 19,847,480 32,554,004
Mortgage-backed securities held to maturity, net (fair 576,994 334,451
value of $578,000 in 2000 and $330,000 in 1999)
---------------- ----------------
Total investment and mortgage-backed 39,311,151 50,597,856
securities
Loans:
Commercial 197,203,204 163,469,045
Consumer 31,180,063 24,826,156
Real estate mortgage 27,840,497 22,360,282
---------------- ----------------
Total loans 256,223,764 210,655,483
Less unearned income (809,746) (703,849)
Less allowance for loan losses (5,193,263) (4,483,283)
---------------- ----------------
Net loans 250,220,755 205,468,351
Bank premises and equipment, net 8,238,743 9,009,661
Land held for sale, net 1,530,290 2,835,290
Accrued interest income and other assets 5,817,824 4,093,780
---------------- ----------------
Total assets $ 348,363,428 296,419,220
================ ================
See accompanying notes to consolidated financial statements.
13
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
Liabilities and Stockholders' Equity 2000 1999
----------------- ---------------
Deposits:
Demand (non-interest bearing) $ 55,252,490 47,980,695
NOW 34,637,247 34,645,921
Savings and money market accounts 98,887,217 89,862,739
Time 121,436,864 96,701,098
----------------- ---------------
Total deposits 310,213,818 269,190,453
FHLB advances 6,000,000 --
Accrued interest, taxes, and other liabilities 3,262,975 1,917,121
----------------- ---------------
Total liabilities 319,476,793 271,107,574
Commitments and contingencies
Stockholders' equity:
Common stock, $-0- par value. Authorized 4,200,000 shares; 1,567,748 shares
issued and outstanding at December 31, 2000 and 1,565,203 shares issued
and outstanding at December 31, 1999 5,025,476 4,919,280
Retained earnings 24,027,158 20,723,357
Unearned management retention plan (183,188) (139,597)
Accumulated other comprehensive income (loss) 17,189 (191,394)
--------------------- --------------------
Total stockholders' equity 28,886,635 25,311,646
--------------------- --------------------
Total liabilities and stockholders' equity $ 348,363,428 296,419,220
See accompanying notes to consolidated financial statements.
14
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Income
Years ended December 31, 2000, 1999, and 1999
Years Ended 2000 1999 1998
-------------------- ------------------ -----------------
Interest and dividend income:
Interest and fees on loans $ 23,254,289 18,725,205 17,293,769
Interest and dividends on investment and
mortgage-backed securities:
U.S. Treasury securities 1,159,774 999,431 1,230,696
Obligations of other U.S. Government
agencies 376,491 461,654 111,575
Obligations of state and political
subdivisions 913,065 838,532 780,637
Other securities 67,717 64,975 44,600
Interest on short-term investments 275,656 507,499 449,102
-------------------- ------------------ -----------------
Total interest and dividend income 26,046,992 21,597,296 19,910,379
-------------------- ------------------ -----------------
Interest expense:
Interest on deposits 9,592,538 7,961,603 7,389,692
Interest on other borrowings 449,272 5,283 10,712
-------------------- ------------------ -----------------
Total interest expense 10,041,810 7,966,886 7,400,404
-------------------- ------------------ -----------------
Net interest income 16,005,182 13,630,410 12,509,975
Provision for loan losses 1,200,000 840,000 640,000
-------------------- ------------------ -----------------
Net interest income after
provision for loan losses 14,805,182 12,790,410 11,869,975
Non-interest income:
Service charges and other fee income 2,322,591 1,762,678 1,537,841
Trust income 192,568 143,707 80,438
Gain on sale of loans 74,354 43,262 274,361
Other 14,377 65,456 61,201
-------------------- ------------------ -----------------
Total non-interest income 2,603,890 2,015,103 1,953,841
-------------------- ------------------ -----------------
See accompanying notes to consolidated financial statements.
15
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Income
Years ended December 31, 2000, 1999, and 1998
2000 1999 1998
Years Ended ------------------ --------------- ----------------
Non-interest expenses:
Salaries and employee benefits $ 5,441,548 4,832,475 4,314,012
Net occupancy expense 773,865 689,777 600,472
Equipment expense 885,036 741,580 724,265
Professional and service fees 456,723 460,742 273,824
Printing and supplies 239,059 335,574 248,406
Michigan Single Business Tax 262,200 164,600 201,900
Provision for real estate losses 155,000 300,000 205,000
Other 1,975,133 2,018,447 1,669,710
------------------ --------------- ----------------
Total non-interest expenses 10,188,564 9,543,195 8,237,589
------------------ --------------- ----------------
Income before Federal income taxes 7,220,508 5,262,318 5,586,227
Federal income taxes 2,115,000 1,547,000 1,679,500
------------------ --------------- ----------------
Net income $ 5,105,508 3,715,318 3,906,727
================== =============== ================
Basic and diluted net income per share $ 3.26 2.38 2.49
================== =============== ================
Cash dividends per share $ 1.15 1.10 1.05
================== =============== ================
See accompanying notes to consolidated financial statements.
16
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2000, 1999, and 1998
Unearned Accumulated
management other
Common Retained retention comprehensive
stock earnings plan income Total
----------- ------------ ----------- ------------- ------------
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
Issued 2,545 shares for management
retention plan 106,890 -- (106,890) -- --
Retired 337 shares for management
retention plan (12,725) -- 12,725 -- --
Issued 337 shares for employee stock 12,031 -- -- 12,031
purchase plan
Amortization of management retention plan -- -- 50,574 -- 50,574
Comprehensive income:
Net income -- 5,105,508 -- -- 5,105,508
Changes in unrealized gain on securities
available for sale, net of tax -- -- -- 208,583 208,583
------------
Total comprehensive income 5,314,091
Cash dividends ($1.15 per share) -- (1,801,707) -- -- (1,801,707)
------------ ------------ ---------- ------------ ------------
Balances at December 31, 2000 $ 5,025,476 24,027,158 (183,188) 17,189 28,886,635
============ ============ ========== ============ ============
See accompanying notes to consolidated financial statements.
17
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years ended December 31, 2000, 1999, and 1998
2000 1999 1998
--------------- -------------- ---------------
Cash flows from operating activities:
Net income $ 5,105,508 3,715,318 3,906,727
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,200,000 840,000 640,000
Depreciation and amortization 912,832 760,047 681,339
Deferred Federal income tax benefit (337,000) (235,600) (261,800)
Net amortization on investment securities 20,635 88,233 44,771
Earned portion of management retention plan 50,574 24,023 16,555
Loss on disposal of equipment 80,800 18,358 20,668
Gain on sale of loans (74,354) (43,262) (274,361)
Proceeds from sale of loans 9,336,943 16,044,643 18,030,745
Origination of loans held for sale (9,470,567) (16,080,472) (18,305,410)
Provision for real estate losses 155,000 300,000 205,000
Increase in accrued interest income and
other assets (237,044) (109,238) (2,121,678)
Increase (decrease) in accrued interest, taxes,
and other liabilities 1,238,554 (30,241) (236,154)
--------------- -------------- ---------------
Net cash provided by operating activities 7,981,881 5,291,809 2,346,402
Cash flows from investing activities:
Purchases of available-for-sale securities (10,982,824) (17,157,030) (16,067,003)
Proceeds from maturities of available-for-sale
securities 24,000,000 3,000,000 10,000,000
Purchases of held-to-maturity securities (2,496,204) (2,919,503) (3,865,946)
Proceeds from maturities and calls of held-to-
maturity securities 605,000 4,268,000 14,490,000
Repayments from mortgage-backed securities
held to maturity 455,981 460,169 472,876
Purchase of loans (2,325,000) -- --
Net increase in loans (43,419,426) (25,181,161) (26,536,607)
Capital expenditures (222,714) (2,498,605) (3,017,056)
--------------- -------------- ---------------
Net cash used in investing activities (34,385,187) (40,028,130) (24,523,736)
See accompanying notes to consolidated financial statements.
18
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years ended December 31, 2000, 1999, and 1998
2000 1999 1998
------------------ ------------------ ------------------
Cash flows from financing activities:
Net increase in deposits $ 41,023,365 29,633,689 37,257,573
Increase in borrowings 6,000,000 -- --
Dividends paid (1,801,707) (1,720,748) (1,645,141)
Shares issued for employee purchase plan 12,031 -- --
Shares repurchased -- -- (525,000)
----------------- ------------------ ------------------
Net cash provided by financing activities 45,233,689 27,912,941 35,087,432
Net increase (decrease) in cash and
cash equivalents 18,830,383 (6,823,380) 12,910,098
Cash and cash equivalents at beginning of year 24,414,282 31,238,662 18,738,564
----------------- ------------------ ------------------
Cash and cash equivalents at end of year $ 43,244,665 24,415,282 31,648,662
================= ================== ==================
Supplemental disclosures:
Interest paid $ 9,272,543 7,904,981 7,397,252
Federal income taxes paid 2,208,000 1,607,000 2,085,000
Supplemental schedule of noncash investing and
financing activities:
Loans transferred to other real estate 649,203 900,000 335,713
Loans charged off 608,520 485,657 301,674
================= ================== ==================
See accompanying notes to consolidated financial statements.
19
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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 accounting
principles generally accepted in the United States of America 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 accounting principles generally accepted in
the United States of America 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 fair 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.
20
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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 market price, or the fair value of the collateral if
the loan is collateral dependent.
21
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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
declines in 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.
22
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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
SFAS No. 130, Reporting Comprehensive Income established 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 reports comprehensive income
within the statement of stockholders' equity. Comprehensive income
include s net income and any changes in equity from non-owner sources
that bypass the income statement.
(k) Earning Per Share
Earnings per share of common stock are based on the weighted average
number of common shares outstanding during the year.
(2) Investment and Mortgage-backed Securities
A summary of the amortized cost and approximate fair value of investment
securities at December 31, 2000 follows:
Held to maturity Available for sale
------------------------------- -------------------------------
Amortized Approximate Amortized Approximate
cost fair value cost fair value
------------ --------------- ------------- ------------
U.S. Treasury and agency
securities $ -- -- 18,988,741 19,014,730
Obligations of states and
political subdivisions 18,886,677 19,218,000 -- --
Federal Reserve Bank stock -- -- 44,250 44,250
Federal Home Loan Bank stock -- -- 788,500 788,500
------------ -------------- ------------- -------------
18,886,677 19,218,000 19,821,491 19,847,480
Mortgage-backed securities 576,994 578,000 -- --
------------ -------------- ------------- -------------
$ 19,463,671 19,796,000 19,821,491 19,847,480
============ ============== ============= =============
23
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
A summary of unrealized gains and losses on investment securities at
December 31, 2000 follows:
Held to maturity Available for sale
-------------------------------------- -------------------------------------
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains losses gains losses
------------------ ------------------ ----------------- -----------------
U.S. Treasury and agency securities
$ -- -- 59,585 33,596
Obligations of states and
political subdivisions 377,574 45,976 -- --
Mortgage-backed securities 1,232 501 -- --
------------------ ------------------ ----------------- -----------------
$ 378,806 46,477 59,585 33,596
================== ================== ================= =================
The amortized cost and approximate fair value of investment securities at
December 31, 2000, 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.
Held to maturity Available for sale
----------------------------------- -----------------------------------
Amortized Approximate Amortized Approximate
cost fair value cost fair value
--------------- --------------- ---------------- ---------------
Due in one year or less $ 895,045 899,000 13,975,405 14,002,391
Due after one year through
five years 7,684,910 7,863,000 5,013,336 5,012,339
Due after five years through
ten years 10,306,722 10,456,000 -- --
--------------- --------------- ---------------- ---------------
18,886,677 19,218,000 18,988,741 19,014,730
Federal Reserve Bank stock -- -- 44,250 44,250
Federal Home Loan Bank stock -- -- 788,500 788,500
Mortgage-backed securities
(principally short-term) 576,994 578,000 -- --
--------------- --------------- ---------------- ---------------
$ 19,463,671 19,796,000 19,821,491 19,847,480
=============== =============== ================ ===============
24
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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, 2000 and 1999 are as follows:
2000 1999
--------------------------------------- ---------------------------------------
Amortized Approximate Amortized Approximate
cost fair value cost fair value
----------------- ------------------- ------------------ -------------------
State of Michigan $ 10,981,883 11,132,000 10,652,008 10,620,000
================= =================== ================== ===================
Investment securities, with an amortized cost of approximately $1,800,000 at
December 31, 2000 and 1999, were pledged to secure public deposits and for other
purposes as required or permitted by law.
A summary of the amortized cost and approximate fair value of investment
securities at December 31, 1999 follows:
Held to maturity Available for sale
-------------------------------------- ---------------------------------------
Amortized Approximate Amortized Approximate
cost fair value cost fair value
---------------- ------------------- ----------------- --------------------
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
================ =================== ================= ====================
25
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
A summary of unrealized gains and losses on investment securities at December
31, 1999 follows:
Held to maturity Available for sale
----------------------------------- -----------------------------------
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains losses gains losses
---------------- ---------------- ---------------- ----------------
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
============== ================ ================ ================
(3) Advances from Federal Home Loan Bank
The Bank has a borrowing capacity of approximately $16,000,000 with the Federal
Home Loan Bank of Indianapolis (" FHLB") and had FHLB advances outstanding of
$6,000,000 and $-0- at December 31, 2000 and 1999, respectively. Variable- or
fixed-rate advances are available with terms ranging from one day to ten years.
An outstanding advance requires 145% collateral coverage by one-to-four family
whole mortgage loans, government and agency securities, highly rated private
mortgage-backed securities, or deposits at the FHLB. A summary of outstanding
advances at December 31, 2000 follows:
Weighted-
average
interest
Maturity rate Amount
-------- ----------- ------------
Fixed rate:
Within one year 7.29% $ 207,089
Two years 7.29 223,656
Three years 7.29 241,547
Four years 7.29 260,872
Five years 7.18 3,281,742
Thereafter 7.29 1,785,094
--------------
$ 6,000,000
==============
(4) Loans
Loans on nonaccrual amounted to $608,000, $173,000, and $1,519,000 at December
31, 2000, 1999, and 1998, respectively. If these loans had continued to accrue
interest in accordance with their original terms, approximately $87,000,
$21,000, and $110,000 of interest income would have been recognized in 2000,
1999, and 1998, respectively. The Bank had no troubled-debt restructured loans
at December 31, 2000 and 1999.
26
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
Details of past-due and nonperforming loans follow:
90 days past due and
still accruing Nonaccrual
------------------------------ ----------------------------------
2000 1999 2000 1999
-------------- ------------- --------------- ---------------
Commercial and mortgage loans secured by
real estate $ 164,000 -- 387,000 93,000
Consumer loans 22,000 3,000 28,000 40,000
Commercial and other loans 23,000 1,000 193,000 40,000
-------------- ------------- --------------- ---------------
$ 209,000 4,000 608,000 173,000
============== ============= =============== ===============
Impaired loans totaled $3,900,000, $3,400,000, and $4,300,000 at December 31,
2000, 1999, and 1998, respectively. Specific reserves relating to these loans
were $1,900,000, $900,000, and $500,000 at December 31, 2000, 1999, and 1998,
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
$306,000, $313,000, and $291,000 for the years ended December 31, 2000, 1999,
and 1998, respectively. Average impaired loans for the years ended December 31,
2000, 1999, and 1998 were approximately $5,200,000, $4,600,000, and $3,800,000,
respectively.
Loans serviced for others were approximately $53,400,000, $49,500,000, and
$44,300,000 at December 31, 2000, 1999, and 1998, respectively.
The Bank capitalized $27,000, $79,000, and $115,000 in mortgage servicing rights
and incurred approximately $44,000, $52,000, and $33,000 in related amortization
expense during 2000, 1999, and 1998, respectively. At December 31, 2000 and
1999, these mortgage servicing rights had a book value of $195,000 and $212,000
and fair value of approximately $390,000 and $380,000, respectively. Mortgage
loans with mortgage servicing rights capitalized totaled approximately
$34,000,000 at December 31, 2000 and $33,000,000 at December 31, 1999. No
valuation allowance for capitalized mortgage servicing rights was considered
necessary as of December 31, 2000 and 1999.
Included in real estate loans at December 31, 2000 and 1999 were approximately
$181,000 and $-0-, 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.
Certain directors and executive officers, including their immediate families and
companies in which they are principal owners, were loan customers of the Bank
during 2000 and 1999. 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.
27
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
Loans to related parties are summarized below for the periods indicated:
2000 1999
---------------- ----------------
Balance at beginning of year $ 798,000 714,000
New loans 24,000 235,000
Loan repayments (326,000) (151,000)
--------------- ----------------
Balance at end of year $ 496,000 798,000
=============== ================
(5) Allowance for Loan Losses
The following represents a summary of the activity in the allowance for
loan losses for the years ended December 31, 2000, 1999, and 1998:
2000 1999 1998
----------------- ---------------- ---------------
Balance at beginning of year $ 4,483,283 3,958,008 3,423,847
Provision charged to operations 1,200,000 840,000 640,000
Loans charged off (608,520) (485,657) (301,674)
Recoveries of loans charged off 118,500 170,932 195,835
----------------- ---------------- ---------------
Balance at end of year $ 5,193,263 4,483,283 3,958,008
================= ================ ===============
(6) Bank Premises and Equipment
A summary of bank premises and equipment, and related accumulated
depreciation and amortization at December 31, 2000 and 1999 follows:
2000 1999
----------------- -----------------
Land and land improvements $ 2,368,791 2,368,791
Bank premises 6,496,071 6,523,383
Furniture and equipment 4,574,756 4,718,009
----------------- -----------------
13,439,618 13,610,183
Less accumulated depreciation and amortization (5,200,875) (4,600,522)
----------------- -----------------
$ 8,238,743 9,009,661
================= =================
(7) 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.
28
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
During 1998, the Bank allocated approximately $800,000 of the carrying
value of the property to land for a branch site. During 2000, one parcel of
the property was sold. The remaining property is held for sale.
The Bank also reduced the carrying cost of the land held for sale by
approximately $155,000, $300,000, and $205,000 during 2000, 1999, and 1998,
respectively, to provide for estimated disposal costs and/or decline in
estimated market value. These charges are included as a component of
non-interest expense.
(8) Time Certificates of Deposit
At December 31, 2000, the scheduled maturities of time deposits with a
remaining term of more than one year were:
Year of maturity:
2002 $ 36,112,665
2003 3,769,746
2004 1,439,043
2005 3,211,202
2006 and beyond 451,185
-----------------
$ 44,983,841
=================
Included in time deposits are certificates of deposit in amounts of
$100,000 or more. These certificates and their remaining maturities at
December 31, 2000, 1999, and 1998 are as follows:
2000 1999 1998
------------------- ----------------- -----------------
Three months or less $ 12,583,794 5,436,960 3,692,410
Three through six months 8,415,061 5,190,724 7,529,933
Six through twelve months 4,954,522 6,731,297 6,610,965
Over twelve months 7,159,896 5,073,865 248,332
------------------- ----------------- -----------------
$ 33,113,273 22,432,846 18,081,640
=================== ================= =================
Interest expense attributable to the above deposits amounted to
approximately $1,516,000, $1,167,000, and $968,000 in 2000, 1999, and 1998,
respectively.
(9) Federal Income Taxes
Federal income tax expense (benefit) consists of:
2000 1999 1998
----------------- ----------------- ----------------
Current $ 2,452,000 1,782,600 1,941,300
Deferred (337,000) (235,600) (261,800)
----------------- ----------------- ----------------
$ 2,115,000 1,547,000 1,679,500
================= ================= ================
29
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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:
2000 1999 1998
------------------ ----------------- -----------------
Computed "expected" tax expense $ 2,455,000 1,789,200 1,899,300
Increase (reduction) in tax resulting from:
Tax-exempt interest and dividends, net (379,300) (294,600) (247,800)
Other, net 39,300 52,400 28,000
------------------ ----------------- -----------------
$ 2,115,000 1,547,000 1,679,500
================== ================= =================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 are presented below:
2000 1999
---------------- -----------------
Deferred tax assets:
Allowance for loan losses $ 1,630,700 1,389,500
Deferred loan fees 11,700 28,000
Unrealized loss on securities available for sale -- 98,500
Other 499,800 346,300
---------------- -----------------
Total gross deferred tax assets 2,142,200 1,862,300
Deferred tax liabilities:
Unrealized gain on securities available for sale 8,800 --
Other 189,200 147,800
---------------- -----------------
Total gross deferred tax liabilities 198,000 147,800
---------------- -----------------
Net deferred tax asset $ 1,944,200 1,714,500
================ =================
The deferred tax assets are subject to certain asset realization tests.
Management believes no valuation allowance is required at December 31,
2000, due to the combination of potential recovery of tax previously paid
and the reversal of certain deductible temporary differences.
30
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(10) Leases
The Bank has a noncancelable operating lease that provides for renewal
options.
Future minimum lease payments under the noncancelable lease as of December
31, 2000 are as follows:
Year ending
December 31
-----------
2001 $ 38,000
2002 39,250
2003 43,000
2004 43,000
2005 43,000
Later years through 2007 75,250
--------------
$ 281,500
==============
Rental expense charged to operations in 2000, 1999, and 1998 amounted to
approximately $41,000, $42,000, and $41,000, respectively, including
amounts paid under short-term, cancelable leases.
(11) 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 2000, 1999, and 1998
was approximately $245,000, $236,000, and $222,000, respectively.
(12) Management Retention Plan
Restricted stock was awarded to key employees beginning in 1998, providing
for the immediate award of the Corporation's stock, subject to a vesting
period which takes place over five 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 2000, 1999, and 1998 amounted to $50,574,
$24,023, and $16,555, respectively.
(13) 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.
31
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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, 2000 and 1999 are as follows:
2000 1999
------------------ -----------------
Fixed rate $ 6,600,000 3,700,000
Variable rate 29,100,000 36,300,000
------------------ -----------------
Total credit commitments $ 35,700,000 40,000,000
================== =================
Letters of credit $ 2,030,000 1,048,000
================== =================
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 commitments at
December 31, 2000 and 1999 is in excess of the committed amount.
(14) 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
quantitative 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).
32
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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, 2000 and 1999:
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
----------------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ---------- ------------ -------- ------------ ---------
As of December 31, 2000:
Total capital
(to risk-weighted assets) $ 29,658,000 11.00% $ 21,572,000 8% $ 26,965,000 10%
Tier 1 capital
(to risk-weighted assets) 26,292,000 9.75% 10,786,000 4% 16,179,000 6%
Tier 1 capital
(to average assets) 26,292,000 8.02% 13,121,000 4% 16,401,000 5%
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%
============== ========== ============ ======= ============ =========
(15) Net Income Per Common 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.
Year ended December 31
-----------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
Basic -
average shares outstanding $ 1,566,390 1,563,996 1,570,537
================== ================== ==================
Net income $ 5,105,508 3,715,318 3,906,727
================== ================== ==================
Net income applicable to common stock $ 5,105,508 3,715,318 3,906,727
================== ================== ==================
Basic net income per share $ 3.26 2.38 2.49
================== ================== ==================
33
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(16) 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.
(17) 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.
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 fixed-rate 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.
FHLB Advances - The fair value of FHLB advances is estimated based on
quoted market prices.
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 $700,000 and $450,000 at December 31, 2000 and 1999,
respectively.
34
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
The estimated fair values of the Bank's financial instruments are as
follows:
2000 1999
------------------------------------ ------------------------------------
Carrying Fair Carrying Fair
Financial Assets value value value value
----------------- ---------------- ---------------- -----------------
Cash and cash equivalents $ 43,245,000 43,200,000 24,414,000 24,000,000
Investment and mortgage-
backed securities 39,311,000 39,600,000 50,598,000 50,500,000
Loans, net 250,221,000 248,400,000 205,468,000 203,100,000
Accrued interest income 2,408,000 2,400,000 1,841,000 1,800,000
Financial Liabilities
Deposits:
Demand 55,252,000 55,300,000 47,981,000 48,000,000
NOW 34,637,000 34,600,000 34,646,000 34,600,000
Savings and money
market accounts 98,887,000 98,900,000 89,863,000 89,900,000
Time 121,437,000 122,300,000 96,701,000 97,000,000
FHLB advances 6,000,000 6,300,000 -- --
Accrued interest payable 993,000 1,000,000 628,000 600,000
================ ================ ================ ================
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.
(18) 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 $4,600,000 was available for
dividends on December 31, 2000 without the approval of the OCC.
35
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(19) Condensed Financial Information - Parent Company Only
The condensed balance sheets at December 31, 2000 and 1999, and the
condensed statements of income and cash flows for the years ended December
31, 2000, 1999, and 1998, of FNBH Bancorp, Inc. follow:
Condensed Balance Sheets
2000 1999
------------------ ------------------
Assets:
Cash $ 31,920 18,784
Investment in subsidiaries:
First National Bank in Howell 26,309,256 21,839,986
H.B. Realty Co. 2,442,490 3,399,472
Other assets 115,719 59,654
------------------ ------------------
$ 28,899,385 25,317,896
================== ==================
Liabilities and stockholders equity:
Other liabilities $ 12,750 6,250
Stockholders' equity 28,886,635 25,311,646
------------------ ------------------
Total liabilities and stockholders equity $ 28,899,385 25,317,896
================== ==================
Condensed Statements of Income
Year ended December 31,
-----------------------------------------------------------
2000 1999 1998
------------------ ----------------- ----------------
Operating income - dividends from
subsidiaries $ 1,835,500 1,720,748 6,872,496
------------------ ----------------- ----------------
Total operating income 1,835,500 1,720,748 6,872,496
------------------ ----------------- ----------------
Operating expenses - administrative
and other expenses 33,697 37,223 40,683
------------------ ----------------- ----------------
Total operating expenses 33,697 37,223 40,683
------------------ ----------------- ----------------
Income before equity in undistributed
net income of subsidiaries 1,801,803 1,683,525 6,831,813
Equity in undistributed net income of
subsidiaries 3,303,705 2,031,793 (2,925,086)
------------------ ----------------- ----------------
Net income $ 5,105,508 3,715,318 3,906,727
================== ================= ================
36
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
Condensed Statements of Cash Flows
Year ended December 31,
-----------------------------------------------------------
2000 1999 1998
------------------- ----------------- ----------------
Net income $ 5,105,508 3,715,318 3,906,727
Adjustments to reconcile net income to
net cash from operating activities:
Increase in other assets (56,065) (20,097) (28,056)
Increase in other liabilities 6,500 6,250 --
Equity in undistributed net income
of subsidiaries (3,303,705) (2,031,793) 2,925,086
------------------- ----------------- ----------------
Total adjustments (3,353,270) (2,045,640) 2,897,030
------------------- ----------------- ----------------
Net cash provided by
operating activities 1,752,238 1,669,678 6,803,757
------------------- ----------------- ----------------
Cash flow from investing activities
-investments in and advancements
to subsidiary, net -- -- (4,678,372)
------------------- ----------------- ----------------
Net cash used in investing
activities -- -- (4,678,372)
------------------- ----------------- ----------------
Cash flow from financing activities:
Dividends paid (1,801,707) (1,720,748) (1,645,141)
Common stock repurchased -- -- (525,000)
Common stock issued 106,196 97,505 96,775
Change in management retention plan (43,591) (73,377) (66,220)
------------------- ----------------- ----------------
Net cash used in
financing activities (1,739,102) (1,696,620) (2,139,586)
------------------- ----------------- ----------------
Net increase (decrease) in
cash 13,136 (26,942) (14,201)
Cash at beginning of year 18,784 45,726 59,927
------------------- ----------------- ----------------
Cash at end of year $ 31,920 18,784 45,726
=================== ================= ================
37
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(20) Quarterly Financial Data - Unaudited
The following table presents summarized quarterly data for each of the two
years ended December 31:
Quarters ended in 2000
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- ---------------- -------------------- ------------------
Selected operations data:
Interest income $ 5,853,715 6,302,364 6,797,141 7,093,772
Net interest income 3,603,459 3,925,697 4,189,862 4,286,164
Provision for loan losses 300,000 300,000 300,000 300,000
Income before income taxes 1,440,452 1,755,408 1,905,332 2,119,316
Net income 1,029,652 1,240,408 1,313,632 1,521,816
Basic net income per share 0.66 0.79 0.84 0.97
Cash dividends per share 0.20 0.20 0.20 0.55
=============== ================ ==================== ==================
Quarters ended in 1999
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- --------------- -------------------- ------------------
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
=============== =============== ==================== ==================
(21) Impact of New Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, in June 1998.
SFAS No. 133, which has been subsequently amended by SFAS No. 137 and SFAS
No. 138, requires companies to record derivatives on the balance sheet as
assets and liabilities, measured at fair value. The accounting for
increases and decreases in the value of derivatives will depend upon the
use of derivatives and whether the derivatives will qualify for hedge
accounting. Management has evaluated the impact of SFAS No. 133 at December
31, 2000 and has concluded that the adoption of this statement will not
have a material effect on the Bank.
The Financial Accounting Standards Board has adopted SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.
SFAS No. 140, which replaces SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, revises
the standards for accounting for the securitization and other transfers of
financial assets and collateral. SFAS No. 140 also requires certain
disclosures, but carries over most of the provisions of SFAS No. 125.
38
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
This statement is effective for transactions occurring after March 31,
2001, with earlier application not allowed and is to be applied
prospectively. The adoption of this statement is not expected to have a
material impact on the Bank's financial statements.
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
At year end 2000 total assets were $348,363,000 representing an 18%
increase from the prior year when assets were $296,419,000. Investment
securities decreased $11.3 million (22%) to $39,311,000 while gross loans
increased $45.6 million (22%) to $256,224,000. Deposits increased $41 million
(15%) to $310,214,000. Stockholders' equity increased $3.6 million (14%) to
$28,887,000.
Securities
Throughout 2000, the securities portfolio provided liquidity as deposit
growth was insufficient to meet the funding needs of the loan department.
Generally, the maturity of U.S. Treasury and Agency securities are laddered to
provide cash flow to meet various funding needs. Approximately $20,000,000 of
the securities portfolio is invested in US government and agency obligations. An
additional $19,000,000 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 securities portfolio
as of December 31:
2000 1999
---- ----
U.S. Treasury & agency securities.................................... 48.4% 62.7%
Agency mortgage backed securities.................................... 1.5% .7%
Tax exempt obligations of states and political subdivisions.......... 48.0% 35.0%
Other 2.1% 1.6%
---- ----
Total securities............................................... 100.0% 100.0%
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 $46,000,000 (22%) in 2000.
As a full service lender, the Bank offers a variety of home mortgage loan
products. The Bank makes, and subsequently sells, fixed rate, long-term
mortgages which conform to secondary market standards. This practice allows the
Bank to meet the housing credit needs of its service area, while at the same
39
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 2000 the Bank sold $4,400,000 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 an acceptable payment record. During 2000 the Bank made approximately
$7,500,000 in variable rate mortgage loans which it retained in the mortgage
portfolio.
The Bank experienced a significant amount of loan demand throughout 2000.
Growth in Livingston 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 $197,203,000, a 21% increase for the year. Additionally,
the Bank originated $5,000,000 in commercial loans which it sold in part or
total to other banks due to legal lending limits. Consumer loans increased
$6,400,000, or about 25%, from the preceding year.
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. A portion of the loans listed in
residential first mortgages represent commercial loans where the borrower has
pledged his/her residence as collateral. In the majority of the loans to
commercial customers, the Bank is relying on the borrower's cash flow to service
the loans. "Other" real estate loans include $103,000,000 in loans secured by
commercial property, with the remaining $2,000,000 secured by multi-family
units. The most significant loan growth was in commercial loans secured by
business property which increased $15,200,000, 17% over the prior year, and in
construction and land development loans which increased $11,600,000, a 50%
increase.
The following table shows the balance and percentage makeup of loans as of
December 31:
(dollars in thousands)
2000 1999
---- ----
Balances Percentage Balances Percentage
-------- ---------- -------- ----------
Secured by real estate:
Residential first mortgage $ 31,328 12.2% $ 29,904 14.2%
Residential home equity/other junior liens 9,999 3.9% 7,822 3.7%
Construction and land development 35,020 13.7% 23,375 11.1%
Other 105,041 41.0% 89,809 42.6%
Consumer 20,700 8.1% 16,811 8.0%
Commercial 45,239 17.6% 38,891 18.5%
Other 8,897 3.5% 4,043 1.9%
----- ---- ------- ----
Total Loans (Gross) $256,224 100.0% $210,655 100.0%
40
The Bank's loan personnel have endeavored to make 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 consultant 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:
(Dollars in thousands)
2000 1999 1998
---- ---- ----
Nonperforming Loans:
Nonaccrual loans...................................... $ 608 $173 $1,519
Loans past due 90 days and still accruing............. 209 4 25
--- - --
Total nonperforming loans.......................... 817 177 1,544
Other real estate..................................... 649 0 0
Total nonperforming assets.......................... $1,466 $ 177 $1,544
====== ===== ======
Nonperforming loans as a percent of total loans....... .32% .08% .83%
Nonperforming assets as a percent of total loans...... .57% .08% .83%
Nonperforming loans as a percent of the loan loss
reserve............................................. 16% 4% 27%
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 increase in nonperforming assets is primarily due to the foreclosure of
a commercial piece of property resulting in a $649,000 increase in other real
estate. Additionally, there were two large loans more than 90 days delinquent as
of year end. These loans are well collateralized and should not result in losses
for the Company.
Impaired loans totaled $3,900,000 at December 31, 2000, compared to
$3,400,000 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 $3,200,000 of commercial loans separately
identified as impaired.
During 2000 the Bank charged off loans totaling $609,000 and recovered
$119,000 for a net charge off amount of $490,000. In the previous year, the Bank
had net charge offs totaling $315,000.
The allowance for loan losses totaled $5,193,000 at year end which was
2.03% of total loans, compared to $4,483,000 (2.13%) in 1999. Management
considers this to be adequate to cover probable 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. Economic factors
considered in arriving at the loan loss reserve adequacy as of December 31, 2000
included layoffs in the automotive industry, lower levels of consumer
confidence, and fewer housing starts. Management also considered the increase in
nonperforming loans, an upward trend in charge offs, and the increased size of
the loan portfolio. In light of these factors, management determined that the
increased provision of $1,200,000 and resulting $5,200,000 allowance was
appropriate.
41
The following table shows changes in the loan loss reserve for the years
ended December 31:
(Dollars in thousands)
2000 1999 1998
---- ---- ----
Balance at beginning of the year....................... $4,483 $3,958 $3,424
Additions (deduction):
Loans charged off................................... (609) (486) (302)
Recoveries of loans previously charged off.......... 119 171 196
Provision charged to operations..................... 1,200 840 640
------- ----- ---
Balance at end of the year............................. $5,193 $4,483 $3,958
Allowance for loan losses to loans outstanding 2.03% 2.13% 2.13%
Deposits
Deposit balances of $310,214,000 at December 31, 2000 were approximately
$41 million (15.2%) 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 $24 million (10%) during 2000.
Non-interest bearing demand deposits increased $2.6 million, about 5% on
average. Average savings and NOW balances increased $9.6 million (9%) while
average time deposits increased $12 million or about 13%.
The following table sets forth average deposit balances for the years ended
December 31:
(in thousands)
2000 1999 1998
---- ---- ----
Non-interest bearing demand $ 51,528 $ 48,914 $ 43,619
Savings, NOW and money market 120,770 111,141 91,463
Time deposits 104,669 92,802 81,118
------- ------ ------
Total average deposits $276,967 $252,857 $216,200
The increase in savings deposits was primarily due to a $8.3 million (18%)
increase in money market accounts. The 13% 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. See Note 8 of the Consolidated Financial Statements for a maturity
schedule of over $100,000 certificates.
Capital
The Company's capital at year end totaled $28,887,000, a $3,575,000 (14%)
increase over the prior year. Banking regulators have established 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
42
be 5% for a well capitalized institution. The Bank's leverage ratio was 8.02% at
year end 2000. 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 9.75% at year end 2000. 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 11.00% at year end.
The Bank's 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:
2000 1999 1998
---- ---- ----
Equity to asset ratio 7.59% 7.44% 7.14%
Tier 1 leverage ratio 8.02% 7.74% 7.47%
Tier 1 risk-based capital 9.75% 9.90% 10.17%
Total risk-based capital 11.00% 11.15% 11.42%
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 2000 the
Company paid dividends totaling $1,802,000, or 35% of earnings. Book value of
the stock was $18.43 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 are three parcels of vacant land. The Company has
sold one parcel, and intends to sell the remaining two pieces which are valued
at approximately $1.5 million.
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
Company's liquidity ratio averaged 15.5% in 2000.
Deposits are the principal source of funds for the Company. 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 $33,100,000 at December 31, 2000 compared to $22,400,000 the prior
year, consists of local depositors known to the Bank.
It is management's intention to handle unexpected liquidity needs through
the Bank's Federal Funds position. In addition, the Company has a $16,000,000
line of credit available at the Federal Home Loan Bank of Indianapolis (FHLBI).
The line of credit can be increased by purchasing more FHLBI stock. The Company
has pledged certain mortgage loans and investment securities as collateral for
the borrowing. At December 31, 2000, the Company had $6,000,000 in borrowings
against the line. 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 $4,300,000. Periodically the Bank borrowed money through the Fed
Funds market. Fed Funds Purchased balances averaged $1,400,000 for the year.
43
Quantitative and Qualitative Disclosures about Market Risk
ALCO reviews other areas of 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. However, the
Company 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
13 of the Consolidated Financial Statements).
44
The table below shows the scheduled maturity and repricing of the Bank's
interest sensitive assets and liabilities as of December 31, 2000:
0-3 4-12 1-5 5+
Months Months Years Years Total
------ ------ ----- ----- -----
Assets:
Loans, net.............................. $87,400 $41,901 $114,293 $12,630 $256,224
Securities.............................. 5,926 10,264 12,814 10,307 39,311
Short term investments.................. 25,743 25,743
------ ------ -------- ------ ------
Total assets $119,069 $52,165 $127,107 $22,937 $321,278
Liabilities & Shareholders' Equity:
MMDA, Savings & NOW..................... $63,612 $7,201 $26,705 $36,006 $133,524
Time.................................... 37,636 38,789 44,561 451 121,437
FHLB advances........................... 207 4,008 1,785 6,000
--- ------ ----- ----- -----
Total liabilities and equity......... $101,455 $45,990 $75,274 $38,242 $260,961
Rate sensitivity gap and ratios:
Gap for period.......................... $17,614 $ 6,175 $51,833 $(15,305)
Cumulative gap.......................... 17,614 23,789 75,622 60,317
Cumulative rate sensitive ratio............ 1.17 1.16 1.34 1.23
December 31, 1999 rate sensitive ratio.... 1.06 1.01 1.36 1.24
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 16% asset sensitive. Accordingly, if market
interest rates decrease, this positive 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 a downward movement of
interest rates would not significantly reduce net interest income.
45
Total Average Interest Rate Estimated Fair Value
Assets:
Loans, net $250,221 9.49% $248,400
Securities 39,311 5.53% 39,600
Short term investments 25,743 6.50% 25,700
Liabilities:
Savings, NOW, MMDA $133,524 2.85% 133,500
Time 121,437 6.37% 122,300
FHLB borrowings 6,000 7.23% 6,300
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 as 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 and FHLB borrowings is estimated using rates currently
offered for deposits with similar remaining maturities.
RESULTS OF OPERATIONS
Net income of $5,100,000 was an increase of $1,400,000 (37%) over 1999
earnings. The Company's earnings resulted in a return on average assets (ROA) of
1.63% and a return on average stockholders' equity (ROE) of 18.76%. Net income
per share was $3.26 in 2000 compared with $2.38 in 1999. Earnings in 1999 were
hampered by costs associated with conversion to a new computer system and
preparation for Y2K.
The following table contains key performance ratios for years ended
December 31:
2000 1999 1998
---- ---- ----
Net income to:
Average stockholders' equity 18.76% 15.05% 17.83%
Average assets 1.63% 1.33% 1.63%
Basic earnings per common share: $3.26 $2.38 $2.49
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:
46
2000 1999 1998
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
Interest earning assets:
Short term investments $4,278 6.35% $10,384 4.89% $8,630 5.31%
Taxable securities 29,283 5.49% 30,051 5.08% 23,019 6.02%
Tax-exempt securities 18,580 6.57% 16,896 6.90% 15,221 7.13%
Loans 238,697 9.81% 198,448 9.47% 175,873 9.85%
------- ------- -------
Total earning assets $290,838 9.11% $255,779 8.60% $222,743 9.09%
Interest bearing funds:
Savings/NOW accounts $120,770 2.84% $111,141 2.69% $ 91,552 3.03%
Time deposits 104,669 5.88% 92,802 5.36% 81,119 5.69%
Federal funds purchased 1,366 6.67% 98 5.40% 179 5.98%
FHLB advances 4,893 7.23%
----- -------- --------
Total interest bearing funds: $231,698 4.33% $204,041 3.90% $172,850 4.28%
Interest spread 4.78% 4.70% 4.81%
Net interest margin 5.66% 5.48% 5.76%
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 $700,000 in 2000, $710,000 in 1999, and $600,000 in
1998.
47
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. 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.
Year ended Year ended
December 31, 2000 compared December 31, 1999
to Year ended December 31, compared to Year ended December 31,
1999 1998
---- ----
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)
------ ---- --------- ------ ---- ----------
Interest Income:
Federal funds sold.......... $ (298) $ 62 $ (236) $ 91 $ (33) $ 58
Securities:
(39) 121 82 424 (284) 140
Taxable....................
Tax Exempt................. 116 (61) 55 119 (39) 80
Loans....................... 3,811 806 4,617 2,223 (750) 1,473
Total interest income....... $3,590 $928 $4,518 $ 2,857 $(1,106) $1,751
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts....... $259 $183 $442 $ 593 $(374) $ 219
Time....................... 636 553 1,189 665 (312) 353
Short-term borrowings....... 68 18 86 (5) (1) (6)
FHLB advance................ 358 0 358
Total interest expense... $ 1,321 $754 $ 2,075 $ 1,253 $ (687) $566
Net interest income (FTE)... $ 2,269 $174 $ 2,443 $ 1,604 $ (419) $1,185
Tax equivalent net interest income increased $2,443,000 in 2000 over the
prior year due to a $4,518,000 increase in interest income partially offset by
approximately $2,075,000 increase in interest expense. The increase in income is
attributable to an increase in average earning assets of $35,000,000 and a 51
basis point increase in the yield earned on those balances. Loan interest income
was $4,617,000 higher in 2000 than the previous year. The increase was due to an
increase of $40,200,000 in average balances and a 34 basis point increase 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 $82,000 in 2000 due to a 41 basis point increase in
rate. Average balances decreased $800,000. Tax-exempt bonds earned $55,000 more
in 2000 than the previous year. The average balance of these securities
increased $1,700,000 while the rate declined 33 basis points. Interest income on
short term investments decreased $236,000 due to a decrease in average balances
of $6,100,000, partially offset by an increase in rates of 146 basis points.
Interest expense increased $2,075,000 in 2000 because average balances
increased approximately $27,657,000 and interest rates increased 43 basis
points. The interest cost for savings and NOW accounts increased $442,000
because average savings and NOW balances increased $9,600,000 and interest rates
48
increased 15 basis points. Interest on time deposits increased $1,189,000
because average time deposits increased $11,900,000 and interest rates increased
52 basis points. Growth in savings and NOW balances were primarily in money
market accounts where a tiered rate structure encourages higher balances. Growth
in time deposits was encouraged by competitive pricing and periodically offering
special rates on specific products. Interest on short term borrowings increased
$86,000 as deposit growth in the first three quarters of the year was
insufficient to meet loan growth. The annual average balance in Fed Funds
purchased in 2000 was $1,400,000 compared to just $98,000 in 1999. Additionally,
the Company entered into two long term borrowing relationships with the Federal
Home Loan Bank of Indianapolis in 2000. The loans total $6,000,000 and have an
average interest rate of 7.23%.
In the previous year, net interest income had increased $1,185,000. The
increase in net interest income was the result of an increase in interest income
of $1,751,000, partially offset by an increase in interest expense of
approximately $566,000. The increase in interest income in 1999 was the result
of a $33,000,000 increase in earning assets partially offset by a 49 basis point
decrease in interest rates. The increase in interest expense was the result of
average balances increasing $31,200,000, partially offset by a 38 basis point
decline in interest rates.
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 prime will decline if the Fed continues to cut interest
rates while the interest cost on deposits will not decline proportionately due
to competition for deposits between 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:
2000 1999 1998
---- ---- ----
As a percent of average earning assets:
Loans 82.07% 77.59% 78.95%
Securities 16.46% 18.35% 17.18%
Short term investments 1.47% 4.06% 3.87%
----- ----- -----
Average earning assets 100.00% 100.00% 100.00%
Savings and NOW 41.52% 43.45% 41.10%
Time deposits 35.99% 36.28% 36.42%
Short term borrowing .47% .04% .08%
FHLB advances 1.68% ______ ______
-----
Average interest bearing liabilities 79.66% 79.77% 77.60%
Earning asset ratio 92.75% 91.61% 92.76%
Free-funds ratio 20.34% 20.23% 22.40%
49
Provision for Loan Losses
The provision for loan losses increased to $1,200,000 in 2000 compared to
$840,000 in 1999. At year end the ratio of allowance for loan loss to loans was
2.03%, compared to 2.13% 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.
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 $600,000 (29%) in 2000 compared
to the previous year. Service charge income increased 32% to $2,323,000,
primarily due to changes made to service charges on loans, deposits, and other
services that were instituted in the second quarter. Trust fees increased
$49,000 in 2000, less than anticipated as the department was not fully staffed
throughout the year. The $74,000 gain realized on the sale of real estate
mortgage loans was a $31,000 increase over 1999. Sales volume was down from the
previous year but a more favorable rate environment allowed for better returns.
Non-interest Expense
Non-interest expense ended the year at $10,189,000, a 7% increase over
other operating expenses of $9,543,000 in 1999. The most significant component
of non-interest expense is salaries and benefits expense. In 2000 salaries and
benefits expense increased 13% to $5,442,000, due to the combined effects of
salary increases, increased cost of medical insurance, and an increase in the
employee profit sharing bonus. Occupancy expense increased $84,000, a 12%
increase due to costs associated with having an additional branch open a full
year. Equipment expense increased $143,000, 19%, due to the depreciation expense
related to technology and equipment at the new branch. Overall other expenses
decreased in 2000, except for Michigan Single Business tax which increased due
to increased profitability.
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 increased $568,000 to $2,115,000 (37%) in 2000. For further
information see Note 9 "Federal Income Taxes" in the Company's Consolidated
Financial Statements.
Prospective Accounting Changes
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, in June 1998.
SFAS No. 133, which has been subsequently amended by SFAS No. 137 and SFAS
No. 138, requires companies to record derivatives on the balance sheet as assets
and liabilities, measured at fair value. The accounting for increases and
decreases in the value of derivatives will depend upon the use of derivatives
and whether the derivatives will qualify for hedge accounting. Management has
adopted SFAS No. 133 as of January 1, 2001 and has concluded that the adoption
of this Statement will not have a material effect on the Company.
The Financial Accounting Standards Board issued SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
SFAS No. 140, which replaces SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, revises the
standards for accounting for the securitization and other transfers of financial
assets and collateral. SFAS No. 140 also requires certain disclosures, but
carries over most of the provisions of SFAS No. 125.
This Statement is effective for transactions occurring after March 31,
2001, with earlier application not allowed and is to be applied prospectively.
The adoption of this Statement is not expected to have a material impact on the
Company's financial statements.
50
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Income Statement Data:
Interest income $26,047 $21,597 $19,910 $17,276 $15,717
Interest expense 10,042 7,967 7,400 6,305 5,644
Net interest income 16,005 13,630 12,510 10,971 10,073
Provision for loan losses 1,200 840 640 486 448
Non-interest income 2,604 2,015 1,954 1,851 1,686
Non-interest expense 10,188 9,543 8,238 6,982 6,151
Income before tax 7,221 5,262 5,586 5,354 5,160
Net income 5,106 3,715 3,907 3,733 3,574
Basic and Diluted Per Share Data(1):
Net income $3.26 $2.38 $2.49 $2.37 $2.27
Dividends paid 1.15 1.10 1.05 1.00 .93
Weighted average shares 1,566,390 1,563,996 1,570,537 1,575,000 1,575,000
outstanding
Balance Sheet Data:
Total assets 348,363 296,419 264,894 226,314 202,009
Loans, net 255,414 209,952 185,018 158,397 136,067
Allowance for loan losses 5,193 4,483 3,958 3,424 3,335
Deposits 310,214 269,193 239,557 202,299 180,944
Shareholders' equity 28,887 25,312 23,497 21,732 19,597
Ratios:
Dividend payout ratio 35.29% 46.31% 42.11% 42.19% 41.13%
Equity to asset ratio 8.68% 8.84 % 9.13% 10.05% 9.82%
(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.
51
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, 1999, through December 31, 2000, there were, so far as the
Company's management knows, 301 sales of shares of the Company's Common Stock,
involving a total of 52,305 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 throughout 2000 and during
the last two quarters of 1999, and the lowest price was $40.00 per share in the
first two quarters of 1999. To the knowledge of management, the last sale of
Common Stock occurred on February 23, 2001.
As of March 1, 2001, 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 1999 and 2000, 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 1999 and 2000:
Sales Prices Cash Dividends Declared
------------ -----------------------
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(1)
2000 High Low
---- ---- ---
First Quarter $42.00 $42.00 $0.20
Second Quarter $42.00 $42.00 $0.20
Third Quarter $42.00 $42.00 $0.20
Fourth Quarter $42.00 $42.00 $0.55(2)
(1) Includes a special dividend of $0.30 per share.
(2) Includes a special dividend of $0.35 per share.
52
EXHIBIT 21
SUBSIDIARIES
Name Jurisdiction of Incorporation
---- -----------------------------
First National Bank in Howell................................Michigan
H.B. Realty Co...............................................Michigan
EXHIBIT 23
The Board of Directors
FNBH Bancorp, Inc.
We consent to incorporation by reference in the registration statement (No.
33-46244) on Form S-8 of FNBH Bancorp, Inc. of our report dated January 19,
2001, relating to the consolidated balance sheets of FNBH Bancorp, Inc. as of
December 31, 2000, and 1999, and the related consolidated statements of income,
stockholder's equity, comprehensive income and cash flows for each of the years
in the three-year period ended December 31, 2000, which appears in the December
31, 2000 annual report on Form 10-K of FNBH Bancorp, Inc.
/s/ KPMG
Detroit, Michigan
March 28, 2001