[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission file number 0-25752
FNBH BANCORP, INC.
(Exact name of registrant as specified in its charter)
| MICHIGAN (State or other jurisdiction of incorporation or organization) |
38-2869722 (I.R.S. Employer Identification No.) |
101 East Grand River, Howell, Michigan 48843
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517)546-3150
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 3,160,854 shares of the Company’s Common Stock (no par value) were outstanding as of May 8, 2003.
INDEX
| Page Number |
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| Part I. | Financial Information (unaudited): |
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|
Item 1. Interim Financial Statements: Consolidated Balance Sheets as of March 31, 2003 and Dec. 31, 2002..................................... Consolidated Statements of Income, three months ended March 31, 2003 and 2002........................................................................................................... Consolidated Statements of Stockholders' Equity and Comprehensive Income for three months ended March 31, 2003 and 2002........................................................ Consolidated Statements of Cash Flows for three months ended March 31, 2003 and 2002........................................................................................................... Notes to Interim Consolidated Financial Statements.................................................................. |
4 5 6 7 8 |
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|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... |
9 |
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|
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................................... |
20 |
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| Part II. | Other Information |
||
|
Item 6......................................................................................................................................... |
20 | ||
|
Signatures................................................................................................................................... |
21 | ||
2
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
Unaudited interim consolidated
financial statements follow.
3
Consolidated Balance Sheets (Unaudited) March 31 December 31
Assets 2003 2002
---- ----
Cash and due from banks $ 14,500,201 $ 13,389,226
Short-term investments 4,757,830 19,649,178
--------- ----------
Total cash and cash equivalents 19,258,031 33,038,404
Certificates of deposit 4,775,000 3,880,000
Investment securities held to maturity, net (fair value of $17,442,462
at March 31, 2003 and $18,010,672 at Dec. 31, 2002) 16,416,563 16,863,210
Investment securities available for sale, at fair value 18,690,779 16,753,001
Mortgage-backed securities held to maturity, net (fair value of
$26,173 at December 31, 2002) - 26,033
Mortgage-backed securities available for sale, at fair value 8,067,176 9,924,802
FHLBI and FRB stock, at cost 1,044,250 1,044,250
--------- ---------
Total investment securities 44,218,768 44,611,296
Loans:
Commercial 270,066,426 263,002,466
Consumer 32,737,532 33,666,705
Real estate mortgages 32,206,685 31,291,141
---------- ----------
Total loans 335,010,643 327,960,312
Less unearned income 876,891 843,052
Less allowance for loan losses 5,972,979 5,794,399
--------- ---------
Net loans 328,160,773 321,322,861
Bank premises and equipment, net 10,649,606 10,256,828
Land available for sale, net 1,530,290 1,530,290
Other real estate owned, held for sale 193,959 738,206
Accrued interest and other assets 5,679,455 5,308,124
--------- ---------
Total assets $414,465,882 $420,686,009
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing demand $ 65,068,012 $ 62,231,909
NOW 38,473,241 41,423,298
Savings and money market 131,078,331 138,961,869
Time 132,478,274 131,455,135
----------- -----------
Total deposits 367,097,858 374,072,211
Other borrowings 5,327,708 5,569,255
Accrued interest, taxes and other liabilities 3,705,834 3,464,929
--------- ---------
Total liabilities 376,131,400 383,106,395
Stockholders' Equity
Common stock, no par value. Authorized 4,200,000 shares; 3,158,914
shares issued and outstanding at March 31, 2003 and 3,157,798 shares
issued and outstanding at December 31, 2002 5,488,298 5,465,089
Retained earnings 32,466,638 31,685,849
Long-term incentive plan (220,735) (247,282)
Accumulated other comprehensive income, net 600,281 675,958
------- -------
Total stockholders' equity 38,334,482 37,579,614
Total liabilities and stockholders' equity $414,465,882 $420,686,009
============ ============
See notes to interim consolidated financial statements
4
Consolidated Statements of Income (Unaudited) Three months ended March 31
2003 2002
---- ----
Interest and dividend income:
Interest and fees on loans $ 5,661,738 $ 5,617,526
Interest and dividends on investment securities:
U.S. Treasury and agency securities 228,934 343,972
Obligations of state and political subdivisions 202,099 218,721
Corporates 47,469 128,926
Other securities 327 11,873
Interest certificates of deposit and other bank deposits 78,380 76,363
------ ------
Total interest and dividend income 6,218,947 6,397,381
--------- ---------
Interest expense:
Interest on deposits 1,624,084 2,015,614
Interest on other borrowings 97,742 117,665
------ -------
Total interest expense 1,721,826 2,133,279
--------- ---------
Net interest income 4,497,121 4,264,102
Provision for loan losses 325,000 -
------- -------
Net interest income after provision for loan losses 4,172,121 4,264,102
--------- ---------
Non-interest income:
Service charges 747,153 643,803
Gain on sale of loans 141,422 107,361
Gain of sale/call of investments - 2,781
Trust fees 54,072 45,404
Other (5,801) (3,999)
------- -------
Total non-interest income 936,846 795,350
------- -------
Non-interest expense:
Salaries and employee benefits 1,789,382 1,565,087
Net occupancy 236,321 205,831
Equipment expense 280,985 210,489
Professional and service fees 139,615 135,021
Printing and supplies 67,455 72,055
Advertising 71,966 86,482
Other 632,069 525,135
------- -------
Total non-interest expense 3,217,793 2,800,100
--------- ---------
Income before federal income taxes 1,891,174 2,259,352
Federal income taxes 573,525 683,800
------- -------
Net income $1,317,649 $1,575,552
========== ==========
Per share statistics*
Basic EPS $.42 $.50
Diluted EPS $.42 $.50
Dividends $.17 $.125
*Based on 3,158,005 average shares
outstanding during the period ended March 31, 2003 and 3,146,756 average shares
outstanding during the period ended March 31, 2002
See notes to interim consolidated
financial statements
5
FNBH BANCORP, INC. AND
SUBSIDIARY
Consolidated Statement
of Stockholders’ Equity and Comprehensive Income
For the Three Months
Ended March 31, 2003 and 2002
(Unaudited)
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (loss) Total
----- -------- ---- ------------- -----
Balances at December 31, 2001 $5,246,770 $27,361,215 $(231,143) $26,961 $32,403,803
Issued 261 shares for employee purchase plan 9,649 9,649
Amortization of long-term incentive plan 21,342 21,342
Comprehensive income:
Net income 1,575,552 1,575,552
Change in unrealized gain (loss) on debt securities
available for sale, net of tax effect (130,781) (130,781)
Total comprehensive income 1,444,771
Cash dividends (12.5(cent)per share) (393,344) (393,344)
---------- ---------- --------- --------- ----------
Balances at March 31, 2002 $5,256,419 $28,543,423 $(209,801) $(103,820) $33,486,221
========== ========== ========= ========= ==========
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (loss) Total
----- -------- ---- ------------- ----- Unearned Accumulated
Balances at December 31, 2002 $5,465,089 $31,685,849 $(247,282) $675,958 $37,579,614
Issued 917 shares for employee purchase plan 18,459 18,459
Issued 199 shares for current directors' fees 4,750 4,750
Amortization of long-term incentive plan 26,547 26,547
Comprehensive income:
Net income 1,317,649 1,317,649
Change in unrealized gain on debt securities
available for sale, net of tax effect (75,677) (75,677)
Total comprehensive income 1,241,972
Cash dividends (17(cent)per share) (536,860) (536,860)
---------- ---------- --------- --------- ----------
Balances at March 31, 2003 $5,488,298 $32,466,638 $(220,735) $600,281 $38,334,482
========== ========== ========= ========= ==========
See notes to interim consolidated financial statements
6
Consolidated Statements of Cash Flows
Unaudited Three months ended March 31
2003 2002
Cash flows from operating activities:
Net income $ 1,317,649 $ 1,575,552
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 325,000 -
Depreciation and amortization 270,539 209,550
Net amortization on investment securities 39,930 69,512
Earned portion of long-term incentive plan 26,547 21,342
Gain on sale/call of investments - (2,781)
Gain on sale of loans (141,422) (107,361)
Proceeds from sale of loans 8,273,512 7,194,585
Origination of loans held for sale (8,632,900) (7,872,557)
Proceeds from sale of other real estate owned, held for sale 569,247 -
Increase in accrued interest income and other assets (371,331) (1,707,132)
Increase in accrued interest, taxes, and other liabilities 324,105 177,743
------- -------
Net cash provided by (used in) operating activities 2,000,876 (441,547)
--------- ---------
Cash flows from investing activities:
Purchases of available for sale securities (2,000,000) (6,175,081)
Proceeds from sales of available for sale securities - 1,000,000
Proceeds from maturities and calls of available for sale securities - 3,000,000
Proceeds from mortgage-backed securities paydowns-AFS 1,767,692 585,596
Proceeds from maturities and calls of held to maturity securities 445,000 395,000
Proceeds from mortgage-backed securities paydowns-held to maturity 26,028 15,870
Purchases of brokered certificates of deposit (1,089,000) -
Maturity of brokered certificates of deposit 194,000 -
Purchase of loans - (721,644)
Net increase in loans (6,732,101) (15,764,900)
Capital expenditures (663,317) (415,812)
--------- ---------
Net cash used in investing activities (8,051,698) (18,080,971)
----------- ------------
Cash flows from financing activities:
Net decrease in deposits (6,974,353) (15,963,328)
Net increase in short-term borrowings - 15,100,000
Payments on other borrowings (241,547) (223,656)
Dividends paid (536,860) (393,344)
Shares issued for employee purchase plan and directors compensation 23,209 9,649
------ -----
Net cash used in financing activities (7,729,551) (1,470,679)
----------- -----------
Net decrease in cash and cash equivalents (13,780,373) (19,993,197)
Cash and cash equivalents at beginning of year 33,038,404 34,642,995
---------- ----------
Cash and cash equivalents at end of period $19,258,031 $14,649,798
=========== ===========
Supplemental disclosures:
Interest paid $ 1,730,492 $ 2,178,605
Loans transferred to other real estate 70,000 1,285,018
Loans charged off 168,460 184,498
See notes to interim consolidated financial statements
7
Notes to Interim
Consolidated Financial Statements (unaudited)
The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for
complete financial statements.
1. In the opinion of management of the Registrant, the unaudited consolidated financial statements filed with this Form 10-Q contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position of the Registrant as of March 31, 2003, and consolidated results of operations for the three months ended March 31, 2003 and 2002 and consolidated cash flows for the three months ended March 31, 2003 and 2002.
2. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year.
3. The accompanying unaudited consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements in the 2002 Annual Report contained in the Registrant’s report on Form 10-K filing.
4. The provision for income taxes represents Federal income tax expense calculated using annualized rates on taxable income generated during the respective periods.
5. Management’s assessment of the allowance for loan losses is based on an evaluation of the loan portfolio, recent loss experience, current economic conditions, and other pertinent factors. Loans on non-accrual status and those past due more than 90 days amounted to $6,400,000 at March 31, 2003, $2,230,000 at March 31, 2002, and $4,097,000 at December 31, 2002. (See Management’s Discussion and Analysis of financial condition and results of operations).
6. Basic and diluted earnings per share (EPS) are computed by dividing net income by the respective weighted average common shares outstanding.
First Quarter
2003 2002
---- ----
Net income 1,317,649 1,575,552
Shares outstanding (basic) 3,158,005 3,146,756
Dilutive shares 0 0
--------- ---------
Shares outstanding (diluted) 3,158,005 3,146,756
Earnings per share:
Basic EPS $.42 $.50
Diluted EPS $.42 $.50
8
7. All references to share and per share data have been restated to give effect of a two for one stock split, payable as a dividend of one share for each share of company stock held of record July 1, 2002, paid July 10, 2002.
Item 2.
Management’s
Discussion and Analysis
of Financial
Condition and Results of Operations
Interim Financial
Statements
This report includes certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include the economic environment, competition, products and pricing in business areas in which FNBH Bancorp, Inc. (the Company) operates, prevailing interest rates, changes in government regulations and policies affecting financial service companies, credit quality and credit risk management, acquisitions and integration of acquired businesses.
The Company, a Michigan business corporation, is a one bank holding company, which owns all of the outstanding capital stock of First National Bank in Howell (the Bank) and all of the outstanding stock of HB Realty Co., a subsidiary which owns real estate. The following is a discussion of the Company’s results of operations for the three months ended March 31, 2003 and 2002, and also provides information relating to the Company’s financial condition, focusing on its liquidity and capital resources.
Earnings (in thousands except per share data) First Quarter
2003 2002
---- ----
Net income $1,318 $1,576
Basic and diluted net income per share $.42 $.50
The Company's earnings decreased $258,000 (16.4%) for the three months ended March 31, 2003 compared to the same period of the prior year. Contributing to the decline in net income were increases in the provision for loan losses and non interest expenses. Offsetting these unfavorable variances were increases in net interest income, non-interest income and a lower accrual for income tax.
Net Interest Income First Quarter
(in thousands) 2003 2002
---- ----
Interest Income $6,219 $6,397
Interest Expense 1,722 2,133
----- -----
Net Interest Income $4,497 $4,264
9
Net interest income increased $233,000 (5.5%) due to the increased average loans and a lower cost of funding in 2003. Average earning assets and interest bearing liabilities both increased for the period while the yield on both declined. The following table illustrates some of the factors contributing to the increase in net interest income for the first quarter.
TABLE 1
INTEREST YIELDS AND
COSTS (in thousands)
March 31, 2003 and 2002
---------------First Quarter Averages----------------
2003 2002
---- ----
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets:
Short term investments $ 18,890 $ 77.8 1.65% $ 11,820 $ 76.3 2.58%
Securities: Taxable 27,043 276.7 4.09% 40,111 484.8 4.83%
Tax-exempt(1) 16,627 289.8 6.97% 17,857 309.3 6.93%
Loans(2)(3) 331,748 5,695.6 6.88% 293,895 5,656.2 7.71%
Total earning assets/total
interest income 394,308 $6,339.9 6.44% 363,683 $6,526.6 7.19%
Cash & due from banks 12,477 14,387
All other assets 18,113 15,577
Allowance for loan loss (5,784) (5,541)
Total assets $419,114 $388,106
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings & NOW accounts $179,039 $ 520.7 1.18% $153,419 $ 572.6 1.51%
Time 131,384 1,103.4 3.41% 131,863 1,443.0 4.44%
Short term borrowings 8 0.0 1.44% 3,311 15.7 1.89%
FHLB notes 5,365 97.7 7.28% 5,604 102.0 7.28%
------- -------- -------- --------
Total interest bearing
liabilities/total interest expense 315,796 $1,721.8 2.21% 294,197 $2,133.3 2.94%
Non-interest bearing deposits 61,526 58,577
All other liabilities 3,534 3,186
Shareholders' Equity 38,258 32,146
-------- --------
Total liabilities and
shareholders' equity $419,114 $388,106
======== ========
Interest spread 4.23% 4.25%
===== =====
Net interest income-FTE $4,618.1 $4,393.3
======== ========
Net interest margin 4.67% 4.81%
===== =====
| (1) | Average yields in the above table have been adjusted to a tax-equivalent basis using a 34% tax rate and exclude the effect of any market value adjustments recorded under Statement of Financial Accounting Standards No. 115. |
| (2) | For purposes of the computation above, non-accrual loans are included in the average daily loan balances. |
| (3) | Interest on loans includes the amortization of origination fees totaling $158,000 in 2003 and $210,000 in 2002. |
10
Interest Earning
Assets/Interest Income
On a tax equivalent basis, interest
income decreased approximately $187,000 (2.9%) in the first quarter of 2003 compared to
that of 2002. The decrease was due to a decrease of 75 basis points in the interest yield
on earning assets, partially offset by an increase in average earning asset balances of
$30,625,000.
The first quarter average balance in loans increased 12.9% to $331,700,000. The rate earned on loans decreased 83 basis points in 2003 compared to last year. Average commercial loans increased $31,300,000 (11.7%); while average consumer loans increased $1,900,000 (6.2%) and mortgage loans increased $4,700,000 (16.7%). In addition to the increase in portfolio mortgage loans, the Bank also sold approximately $8,200,000 in residential mortgage loans to the secondary market in the first quarter of 2003 compared to $7,000,000 in the first quarter of 2002, resulting in higher gains on the sale of loans in 2003. The increased sales are the result of low mortgage rates in 2003.
In the first quarter, tax equivalent income on short and long term investments decreased approximately $226,000 as the result of a decline in average balances of $7,200,000 and a decline in the yield of approximately 87 basis points. The decrease in the investment balance in the first quarter is because average loan growth outpaced average deposit growth and the proceeds from investment securities were used to fund loan growth. In the first quarter of 2003 non-interest bearing demand deposits increased $2,900,000 due to the low interest rate environment, also helping to fund loan growth.
Interest Bearing
Liabilities/Interest Expense
In the first quarter of 2003,
interest expense decreased approximately $412,000 (19.3%) due to a 73 basis point decrease
in rates although average balances increased approximately $21,600,000 (7.3%). Savings and
NOW interest expense decreased $52,000 because rates decreased 33 basis points although
average balances increased nearly $25,600,000 (16.7%). Interest on time deposits decreased
$340,000 in 2003 compared to the first quarter of the prior year, while average balances
were unchanged but the rate paid on time deposits decreased 103 basis points in that time
period.
Additionally the Bank’s interest costs decreased as proceeds from investment securities were used to fund loan growth. The Bank incurred no interest expense on short term borrowings in 2003 compared to $16,000 in 2002. The Bank also has two longer term advances from the Federal Home Loan Bank of Indianapolis (FHLBI). One borrowing, an amortizing loan contracted in January 2000, was initiated to match the maturity of a fixed rate loan made to a local township. The other borrowing, of $3,000,000 from April 2000, was intended to help with the Bank’s rate sensitivity position. Interest expense related to these loans amounted to $98,000 in the first quarter of the current year compared to $102,000 in 2002. It is reasonable to expect that part of future loan growth will continue to be funded with FHLBI borrowings.
11
Liquidity
Liquidity is monitored by the
Bank’s Asset/Liability Management Committee (ALCO), which meets at least monthly. The
Board of Directors has approved a liquidity policy which requires the Bank, while it is
well capitalized as defined by the Federal Financial Institutions Examination Council
(FFIEC), to maintain a current ratio of no less than 1:1 (core basic surplus liquidity
equal to 0), representing that the Bank’s contingency for unexpected funding outflows
is being met primarily by short-term investments and unencumbered treasury and agency
securities. Additional requirements of the policy are that when FHLBI available credit is
added to core basic surplus liquidity, the Bank must have liquidity totaling 5% of assets
and when brokered CDs and Fed Funds lines are added, the Bank must have liquidity totaling
8% of assets. Should the Bank’s capital ratios fall below the “well
capitalized” level, additional liquidity totaling 5% of assets will be required. As
of March 31, 2003, the Company had a $12,000,000 surplus of core basic liquidity.
Deposits are the principal source of funds for the Bank. Management monitors rates at other financial institutions in the area to ascertain that its rates are competitive in the market. Management also attempts to offer a wide variety of products to meet the needs of its customers. The makeup of the Bank’s over $100,000 certificates, which are generally considered to be more volatile and sensitive to changes in rates, consists of local depositors known to the Bank. As of March 31, 2003, the Bank had certificates over $100,000 totaling approximately $44,300,000 compared to $44,000,000 at December 31, 2002.
It is the intention of the Bank’s management to handle unexpected liquidity needs through its Federal Funds position. The goal is to maintain a daily Fed Funds Sold balance sufficient to cover required cash draws. From time to time the Bank will borrow Fed Funds from a correspondent bank. In addition, the Bank can borrow approximately $25,000,000 from the FHLBI. As of March 31, 2003 the Bank had $5,300,000 in FHLBI borrowings. The Bank has pledged certain mortgage loans as collateral for this borrowing. In addition, the Bank has a repurchase agreement in place with a broker who will lend money against certain securities of the Bank. Finally, management may look to “available for sale” securities in the investment portfolio to meet additional liquidity needs.
Interest Rate Risk
Interest rate risk is also addressed
by ALCO. Interest rate risk is the potential for economic losses due to future rate
changes and can be reflected as a loss of future net interest income and/or loss of
current market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while, at the same time,
maximizing income. Tools used by management include the standard gap report which lays out
the repricing schedule for various asset and liability categories and an interest rate
simulation report. The Bank has no market risk sensitive instruments held for trading
purposes. The Bank has not entered into futures, forwards, swaps, or options to manage
interest rate risk. However, the Bank is party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its customers
including commitments to extend credit and letters of credit. A commitment or letter of
credit is not recorded as an asset until the instrument is exercised.
12
In addition to liquidity and interest rate risk management issues, ALCO discusses the Bank’s performance and the current economic outlook and its impact on the Bank and current interest rate forecasts. Actual results are compared to budget in terms of growth and income. A yield and cost analysis is done to monitor interest margin. Various ratios are discussed including capital ratios, interest rate sensitivity, and liquidity ratios.
Interest Rate Sensitivity
(dollars in thousands)
0-3 4-12 1-5 5+
Months Months Years Years Total
------ ------ ----- ----- -----
Assets:
Loans................................. $159,840 $43,240 $123,800 $7,254 $334,134
Securities............................ 2,547 6,866 27,750 6,145 43,308
Brokered certificates of deposit...... 2,059 1,261 1,455 4,775
Short term investments................ 4,758 4,758
----- ------ ------- ------ -----
Total assets....................... $169,204 $51,367 $153,005 $13,399 $386,975
Liabilities & Shareholders' Equity:
Savings & NOW......................... $84,411 $85,140 $169,551
Time.................................. 18,503 34,874 77,741 1,360 132,478
Other borrowings 0 261 4,270 797 5,328
- --- ----- --- -----
$102,914 $35,135 $82,011 $87,297 $307,357
Total liabilities and equity.......
Rate sensitivity gap and ratios:
Gap for period........................ $66,290 $16,232 $70,994 $(73,898)
Cumulative gap........................ 66,290 82,522 153,516 79,618
Cumulative rate sensitive ratio.......... 1.64 1.60 1.70 1.26
Dec. 31, 2002 rate sensitive ratio....... 1.35 1.43 1.67 1.25
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 20% asset sensitive as of March 31, 2003. 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, provides meaningful insight into strategies management can take to help mitigate the negative impact of interest rates movements. Simulation analysis reflects an expectation that net interest income will improve if interest rates increase, and conversely net interest income will decrease if interest rates decline.
13
Provision for Loan Losses First Quarter
(in thousands) 2003 2002
---- ----
Total $325 $0
==== ==
The Company provided a loan loss accrual in the first quarter of 2003 after having no provision in the same period last year. The provision in the first quarter of 2003 is based upon an analysis of losses inherent in the portfolio and other economic factors. Non-performing loans are $2,300,000 higher than at December 31, 2002, and $4,200,000 higher than March 31, 2002. At March 31, 2003, the allowance for loan loss as a percent of loans was 1.79%, compared to 1.81% a year earlier, and 1.77% at December 31, 2002. For the first three months of 2003 the Bank had net charge offs of $146,000, compared with net charge offs of $172,000 the previous year. Non-accrual, past due 90 days, and renegotiated loans totaled 1.91% and .73% of total loans outstanding at March 31, 2003 and 2002, respectively, and 1.25% of total loans at December 31, 2002.
Impaired loans, as defined by Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, totaled approximately $10,300,000 at March 31, 2003, compared to $9,300,000 at December 31, 2002, and $8,900,000 at March 31, 2002. Impaired loans included non-accrual, and past due 90 days other than homogenous residential and consumer loans, and an additional $4,200,000 of commercial loans separately identified as impaired. A loan is considered impaired when it is probable that all or part of amounts due according to the contractual terms of the loan agreement will not be collectable on a timely basis. One of the impaired loans for $2,200,000 is secured by commercial real estate; however, the cash generated solely by the business is not adequate to cover debt service. Another loan for $1,000,000 was made to purchase office buildings in Lansing. The buildings are not leased and cash flow has not been sufficient to cover debt service. A third loan for $1,300,000 is secured by real estate and is currently in foreclosure; however, the appraised value of the real estate exceeds the principal loan balance. Nonperforming loans are reviewed regularly for collectability. Any uncollectable balances are promptly charged off.
The adequacy of the allowance for loan losses is determined by management’s assessment of the composition of the loan portfolio, an evaluation of specific credits, an analysis of the value of the underlying collateral for those loans, historical loss experience, and the level of nonperforming loans, loans that have been identified as impaired, and the overall credit quality of the loan portfolio. Management continues to refine its techniques in this analysis. Externally, the local economy and events or trends which might negatively impact the loan portfolio are also considered. Impaired loans had specific reserves calculated in accordance with SFAS No. 114 of $1,900,000 at March 31, 2003, $2,000,000 at December 31, 2002, and $1,400,000 at March 31, 2002.
14
Nonperforming assets are loans for which the accrual of interest has been discontinued, accruing loans 90 days or more past due in payments, and other real estate which has been acquired primarily through foreclosure and is waiting disposition. The following table describes nonperforming assets at March 31, 2003 compared to December 31, 2002. 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. Loans categorized as ninety days past due and still accruing are well secured and in the process of collection.
Nonperforming Assets Quarter Ended Year Ended
(in thousands) March 31, 2003 December 31, 2002
-------------- -----------------
Non-accrual loans $4,987 $3,288
90 days or more past due and still accruing 1,422 809
----- ---
Total nonperforming loans 6,409 4,097
Other real estate 239 738
--- ---
Total nonperforming assets $6,648 $4,835
Nonperforming loans as a percent of total loans 1.91% 1.25%
Loan loss reserve as a percent of nonperforming loans 93% 141%
The following table sets forth loan balances and summarizes the changes in the allowance for loan losses for the first three months of 2003 and 2002.
Year to date Year to date
Loans: March 31, 2003 March 31, 2002
-------------- --------------
(dollars in thousands)
Average daily balance of loans for the year to date 331,748 293,895
Amount of loans, net of unearned income,
outstanding at the end of the quarter 334,134 303,380
Allowance for loan losses:
Balance at beginning of year 5,794 5,668
Loans charged off:
Real Estate Mortgage 0 0
Commercial 122 173
Consumer 46 11
-- --
Total charge-offs 168 184
Recoveries of loans previously charged off:
Real Estate Mortgage 0 0
Commercial 16 3
Consumer 6 9
- -
Total recoveries 22 12
Net loans charged off 146 172
Additions to allowance charged to operations 325 0
--- -
Balance at end of quarter $5,973 $5,496
Ratios:
Net loans charged off (annualized) to average
loans outstanding .18% .23%
Allowance for loan losses to loans outstanding 1.79% 1.81%
15
Non-interest Income First Quarter
(in thousands) 2003 2002
---- ----
Total $937 $795
==== ====
Non-interest income, which includes service charges on deposit and loan accounts, trust fees, other operating income, and gain (loss) on sale of assets, increased by approximately $142,000 (17.8%) in the first quarter of 2003 compared to the same period in the previous year. Service charge income increased $103,400 (16.1%) due to increasing numbers of deposit and loan accounts. The $34,000 (31.7%) increase in gains on the sale of loans is a result of increased volume of mortgage sales and higher gains on sales. In the first quarter of this year the loan department has sold $8,200,000 of new residential mortgage loans compared to $7,000,000 in the same period last year. Trust fees increased slightly, $9,000, the result of growth in the business offset by a general decrease in the market value of trust assets. “Other” income decreased $2,000 due to increased losses on the sale of repossessed vehicles.
Non-interest Expense First Quarter
(in thousands) 2003 2002
---- ----
Total $3,218 $2,800
Non-interest expense increased $418,000 (14.9%) in the first quarter of 2003 compared to the same period last year. Contributing to this increase were increases of $224,300 (14.3%) in salaries and benefits, $30,500 (14.8%) in net occupancy expense, $70,500 (33.5%) increase in equipment costs, and $107,000 (20.4%) increase in other costs. The increase in salaries and benefits expense was principally the result of normal salary increases and additional positions added to keep pace with the Bank’s growth in assets. Occupancy and equipment costs increased primarily due to the opening of a new branch in 2002 and the new operations center in 2003. The increase in other expenses is due primarily to increased costs for legal, audit, and computer fees. Telephone costs are also higher in the first quarter due to new lines for operations center and changes in how ATMs are processed.
Income Tax Expense First Quarter
(in thousands) 2003 2002
---- ----
Total $574 $684
16
Fluctuations in income taxes resulted primarily from changes in the level of profitability and in variations in the amount of tax-exempt income.
Capital (in thousands) March 31, 2003 December 31, 2002
-------------- -----------------
Shareholders' Equity* $38,334 $37,580
Ratio of Equity to Total Assets 9.25% 8.93%
*Amounts include securities valuation adjustments recorded under Statement of Financial Accounting Standards No. 115 amounting to $600,300 at March 31, 2003 and $676,000 at December 31, 2002.
Shareholders’ equity, excluding the securities valuation adjustment, increased $831,000 (2.3%) during the first three months of the year. This increase was the result of net income earned by the Company reduced by dividends paid of $537,000.
A financial institution’s capital ratio is looked upon by the regulators and the public as an indication of its soundness. The Federal Reserve Board provides guidelines for the measurement of capital adequacy. The Bank’s capital, as adjusted under these guidelines, is referred to as risk-based capital. The Bank’s Tier 1 risk-based capital ratio at March 31, 2003 was 9.97%, and total risk-based capital was 11.22%. At March 31, 2002 these ratios were 9.21% and 10.46% respectively. Minimum regulatory Tier 1 risk-based and total risk-based capital ratios under the Federal Reserve Board guidelines are 4% and 8%, respectively.
The capital guidelines also provide for a standard to measure risk-based capital to total assets which is called the leverage ratio. The Bank’s leverage ratio was 8.45% at March 31, 2003 and 8.05% in 2002. The minimum standard leverage ratio is 3%, however; financial institutions are expected to maintain a leverage ratio 2 percentage points above the 3% minimum to be classified as a well capitalized institution.
In 1998 the Company exercised an option to purchase an 18 acre tract of land in northwest Brighton primarily to acquire a prime site for a new branch. The cost of the property was approximately $4,000,000. In 1999 a new branch of the Bank was built on a portion of the land valued at approximately $800,000. During 2000 one parcel of the property was sold. The remaining property is held for sale. Improvements needed to enhance the salability of the property are not expected to exceed $200,000.
The Company also owns a branch site in Hamburg which is valued at approximately $330,000. Construction has begun on the Hamburg branch and is expected to be completed in the fourth quarter of 2003. This building project is expected to be financed from internally generated funds.
17
Contractual Obligations
As of March 31, 2003, December 31,
2002 and March 31, 2002, the Bank had outstanding irrevocable standby letters of credit,
which carry a maximum potential commitment of approximately $3,300,000, $3,100,000 and
$2,100,000, respectively. These letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party. The majority of
these letters of credit are short-term guarantees of one year or less, although some have
maturities which extend as long as two years. 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
March 31, 2003, December 31, 2002 and March 31, 2002, where there is collateral, is in
excess of the committed amount. A letter of credit is not recorded on the balance sheet
until a customer fails to perform.
Critical Accounting
Policies
The Company maintains critical
accounting policies for the allowance for loan losses, mortgage servicing rights and the
classification and valuation of securities. Refer to notes 1c, 1d and 1e of the Notes to
Consolidated Financial Statements for additional information incorporated by reference to
the Annual Report to Shareholders for the year ended December 31, 2002.
Accounting Standards
| In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Statement No. 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers, and amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Statement No. 145 is effective for fiscal years beginning after May 15, 2002, with early adoption of the provisions related to the rescission of Statement No. 4 encouraged. Upon adoption, enterprises must reclassify prior-period items that do not meet the extraordinary-item classification criteria in APB 30. Adoption of this Statement did not have a significant impact on the Bank’s results of operations or financial condition. |
| In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). |
18
| The principal difference between Statement No. 146 and Issue 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. Under Issue 94-3, the liability was recognized at the date of an entity’s commitment to an exit plan. Statement No. 146 is effective for exit or disposal activities (including restructuring) that are initiated after December 31, 2002, with early adoption encouraged. Adoption of this Statement did not have a significant impact on the Bank’s results of operations or financial condition. |
| On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation – Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-based Compensation. SFAS No. 148 amends the disclosure requirements in SFAS No. 123 for stock-based compensation for annual periods ending after December 15, 2002 and for interim periods beginning after December 15, 2002. These disclosure requirements apply to all companies, including those that continue to recognize stock-based compensation under APB Opinion No. 25, Accounting for Stock Issued to Employees. Effective for financial statements for fiscal years ending after December 15, 2002, SFAS No. 148 also provides three alternative transition methods for companies that choose to adopt the fair-value measurement provisions of SFAS No. 123. Earlier application of those transition methods is permitted for entities with a fiscal year ending prior to December 15, 2002, provided that financial statements for the 2002 fiscal year have not been issued as of December 31, 2002. Adoption of this Statement did not have a significant impact on the Bank’s results of operations or financial condition. |
| In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year end. The guarantor may not revise or restate its previous accounting for guarantees issued before the date of the Interpretation’s initial application to reflect the effect of the recognition and measurement provisions of the Interpretation. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. Adoption of the measurement requirements of this Interpretation did not have a significant impact on the Bank’s results of operations or financial condition. |
19
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
There has been no material change in
the market risk faced by the Company since December 31, 2002 other than previously
discussed.
| Item 4. Controls and Procedures | ||
| (a) | Evaluation of Disclosure Controls and Procedures. With the participation of management, the Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13 - 14 and 15d - 14) as of a date within ninety days of this filing (the "Evaluation Date'), have concluded that, as of such date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others in connection with the Company's filing of its first quarter report on Form 10-Q. |
|
| (b) | Changes in Internal Controls. There were no significant changes in the company's internal controls or in other factors that could significantly affect the Company's disclosure controls subsequent to the Evaluation Date through the date of this filing of Form 10-Q, nor were there any significant deficiencies or material weaknesses in the Company's internal controls that would require corrective action. |
|
PART II — OTHER INFORMATION
| Item 6. Exhibits and Reports on Form 8-K |
||
| (a) | The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation
S-K) are filed with this report: |
|
| 99.1 Certificate of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
||
| 99.2 Certificate of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
||
| (b) | Reports on Form 8-K: |
|
| 99.1 The company filed a report 8-K on April 17, 2003 under Item 12 regarding the Company's First Quarter 2003 Earnings Press Release. | ||
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 to be signed on its behalf by the undersigned hereunto duly authorized.
|
FNBH BANCORP, INC. /s/ Barbara Draper Barbara Draper President and Chief Executive Officer /s/ Janice B. Trouba Janice B. Trouba Chief Financial Officer |
DATE: May 8, 2003
21
CERTIFICATIONS
I, Barbara Draper, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of FNBH Bancorp, Inc.; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of April 25, 2003 (the “Evaluation Date”); and |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
|
Date: May 8, 2003 /s/ Barbara Draper Barbara Draper Chief Executive Officer |
I, Janice B. Trouba, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of FNBH Bancorp, Inc.; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of April 25, 2003 (the “Evaluation Date”); and |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
|
Date: May 8, 2003 /s/ Janice B. Trouba Janice B. Trouba Chief Financial Officer |
EXHIBIT 99.1
CERTIFICATE OF THE
CHIEF EXECUTIVE OFFICER
OF
FNBH BANCORP, INC.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):
I, Barbara Draper, Chief Executive Officer of FNBH Bancorp, Inc., certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) that:
(1) The quarterly report on Form 10-Q for the quarterly period ended March 31, 2003, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;
(2) The information contained in this quarterly report on Form 10-Q for the quarterly period ended March 31, 2003, fairly presents, in all material respects, the financial condition and results of operations of FNBH Bancorp, Inc.
| FNBH BANCORP, INC. |
||
| Date: May 8, 2003 | By: |
/s/ Barbara Draper
Barbara Draper |
| Its: | Chief Executive Officer | |
EXHIBIT 99.2
CERTIFICATE OF THE
CHIEF FINANCIAL OFFICER
OF
FNBH BANCORP, INC.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):
I, Janice B. Trouba, Chief Financial Officer of FNBH Bancorp, Inc., certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) that:
(1) The quarterly report on Form 10-Q for the quarterly period ended March 31, 2003, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;
(2) The information contained in this quarterly report on Form 10-Q for the quarterly period ended March 31, 2003, fairly presents, in all material respects, the financial condition and results of operations of FNBH Bancorp, Inc.
| FNBH BANCORP, INC. |
||
| Date: May 8, 2003 | By: |
/s/ Janice B. Trouba
Janice B. Trouba |
| Its: | Chief Financial Officer | |