[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: 3,164,888 shares of the Company’s Common Stock (no par value) were outstanding as of August 13, 2003.
INDEX
| Page Number |
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| Part I. | Financial Information (unaudited): |
||
|
Item 1. Interim Financial Statements: Consolidated Balance Sheets as of June 30, 2003 and Dec. 31, 2002....................................... Consolidated Statements of Income, three months ended June 30, 2003 and 2002, and six months ended June 30, 2003 and 2002................................. Consolidated Statement of Stockholders' Equity and Comprehensive Income for three months ended June 30, 2003 and 2002.......................................................... Consolidated Statement of Stockholders' Equity and Comprehensive Income for six months ended June 30, 2003 and 2002.............................................................. Consolidated Statements of Cash Flows for six months ended June 30, 2003 and 2002............................................................................................................ Notes to Interim Consolidated Financial Statements................................................................ |
4 5 6 7 8 9 |
||
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... |
10 |
||
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................................... |
23 |
||
| Part II. | Other Information |
||
|
Item 4........................................................................................................................................ |
23 | ||
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Item 6........................................................................................................................................ |
24 | ||
|
Signatures................................................................................................................................... |
25 | ||
2
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Unaudited interim consolidated financial statements follow.
3
Consolidated Balance Sheets (unaudited) June 30 December 31
- --------------------------- 2003 2002
Assets ---- ----
Cash and due from banks $ 19,327,428 $ 13,389,226
Short term investments 7,948,129 19,649,178
--------- ----------
Total cash and cash equivalents 27,275,557 33,038,404
Certificates of deposit 2,716,000 3,880,000
Investment securities held to maturity, net (fair value of $16,880,000
at June 30, 2003 and $18,011,000 at Dec. 31, 2002) 15,645,029 16,863,210
Investment securities available for sale, at fair value 19,770,192 16,753,001
Mortgage-backed securities held to maturity, net (fair value of
$26,000 at Dec. 31, 2002) 0 26,033
Mortgage-backed securities available for sale, at fair value 6,224,684 9,924,802
FHLBI and FRB stock, at cost 1,057,450 1,044,250
--------- ---------
Total investment securities 42,697,355 44,611,296
Loans:
Commercial 277,864,596 263,002,466
Consumer 32,987,054 33,666,705
Real estate mortgages 34,078,196 31,291,141
---------- ----------
Total loans 344,929,846 327,960,312
Less unearned income 886,073 843,052
Less allowance for loan losses 5,882,437 5,794,399
--------- ---------
Net loans 338,161,336 321,322,861
Premises and equipment - net 10,880,572 10,256,828
Land available for sale - net 1,400,290 1,530,290
Other real estate owned, held for sale 95,000 738,206
Accrued interest and other assets 5,273,353 5,308,124
--------- ---------
Total assets $428,499,463 $420,686,009
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing demand $ 73,854,783 $ 62,231,909
NOW 38,725,882 41,423,298
Savings and money market 128,765,108 138,961,869
Time 134,293,349 131,455,135
----------- -----------
Total deposits 375,639,122 374,072,211
Short term borrowings 5,000,000 0
Other borrowings 5,327,708 5,569,255
Accrued interest, taxes, and other liabilities 3,255,942 3,464,929
--------- ---------
Total liabilities 389,222,772 383,106,395
Stockholders' Equity
Common stock, no par value. Authorized 4,200,000 shares; 3,164,647
shares issued and outstanding at June 30, 2003 and 3,157,798 shares
issued and outstanding at Dec. 31, 2002 5,622,202 5,465,089
Retained earnings 33,256,070 31,685,849
Unearned management retention plan (228,649) (247,282)
Accumulated other comprehensive income, net 627,068 675,958
------- -------
Total stockholders' equity 39,276,691 37,579,614
---------- ----------
Total liabilities and stockholders' equity $428,499,463 $420,686,009
============ ============
See notes to interim consolidated financial statements
4
Consolidated Statements of Income Three Months Ended June Six Months Ended June
- --------------------------------- 2003 2002 2003 2002
Unaudited ---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans $5,661,240 $5,822,468 $11,322,978 $11,439,994
Interest and dividends on investment securities:
U.S. Treasury and agency securities 221,761 312,293 450,695 656,265
Obligations of state and political subdivisions 193,929 208,604 396,028 427,325
Corporates 47,003 104,507 94,472 233,433
Other securities 14,609 16,714 14,936 28,587
Interest on certificates and other bank deposits 43,115 54,008 121,495 130,371
------ ------ ------- -------
Total interest and dividend income 6,181,657 6,518,594 12,400,604 12,915,975
--------- --------- ---------- ----------
Interest expense:
Interest on deposits 1,452,969 1,827,796 3,077,053 3,843,410
Interest on other borrowings 98,599 197,575 196,341 315,240
------ ------- ------- -------
Total interest expense 1,551,568 2,025,371 3,273,394 4,158,650
--------- --------- --------- ---------
Net interest income 4,630,089 4,493,223 9,127,210 8,757,325
Provision for loan losses 275,000 0 600,000 0
------- -------- -------- --------
Net interest income after provision for loan losses 4,355,089 4,493,223 8,527,210 8,757,325
--------- --------- --------- ---------
Non-interest income:
Service charges 676,043 740,641 1,423,196 1,384,444
Gain on sale of loans 96,711 47,527 238,133 154,888
Gain on sale/call of investments 3,823 3,488 3,823 6,269
Trust fees 70,360 63,418 124,432 108,822
Other 69,237 (3,010) 63,436 (7,009)
------ ------- ------ -------
Total non-interest income 916,174 852,064 1,853,020 1,647,414
------- ------- --------- ---------
Non-interest expense:
Salaries and employee benefits 1,790,258 1,700,741 3,579,640 3,265,828
Net occupancy 243,462 231,831 479,783 437,662
Equipment expense 291,490 212,564 572,475 423,053
Professional and service fees 452,939 485,574 592,554 620,595
Printing and supplies 92,062 87,238 159,517 159,293
Advertising 99,769 67,497 171,735 153,979
Other 392,420 261,611 1,024,489 786,746
------- ------- --------- -------
Total non-interest expense 3,362,400 3,047,056 6,580,193 5,847,156
--------- --------- --------- ---------
Income before federal income taxes 1,908,863 2,298,231 3,800,037 4,557,583
Federal income taxes 581,450 709,100 1,154,975 1,392,900
------- ------- --------- ---------
Net income $1,327,413 $1,589,131 $2,645,062 $3,164,683
========== ========== ========== ==========
Per share statistics*
Basic EPS $.42 $.51 $.84 $1.01
Diluted EPS $.42 $.51 $.84 $1.01
Dividends $.17 $.163 $.34 $.288
*Based on average shares outstanding. See Notes to Interim Consolidated Financial Statements. Shares restated to give effect of a 2 for 1 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.
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 June 30, 2003 and 2002 (Unaudited)
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (loss) Total
----- -------- ---- ------------- -----
Balances at March 31, 2002 $5,256,419 28,543,423 (209,801) (103,820) 33,486,221
Issued 5,246 shares for management retention plan 109,799 (109,799) 0
Amortization of management retention plan 19,226 19,226
Issued 2,448 shares for employee purchase plan 40,931 40,931
Issued 218 shares for current directors fees 4,741 4,741
Issued 1,128 shares for directors' variable fee plan 23,609 23,609
Comprehensive income:
Net income 1,589,131 1,589,131
Change in unrealized gain on debt securities
available for sale, net of tax effect 406,184 406,184
-------
Total comprehensive income 1,995,315
=========
Cash dividends (16.25(cent)per share) (512,503) (512,503)
---------- --------- ------- ------- ---------
Balances at June 30, 2002 $5,435,499 29,620,051 (300,374) 302,364 35,057,540
========== ========== ========= ======= ==========
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (loss) Total
----- -------- ---- ------------- -----
Balances at March 31, 2003 $5,488,298 32,466,638 (220,735) 600,281 38,334,482
Issued 3,036 shares for management retention plan 72,454 (72,454) 0
Amortization of management retention plan 64,540 64,540
Issued 757 shares for employee purchase plan 15,511 15,511
Issued 251 shares for current directors fees 5,943 5,943
Issued 1,689 shares for directors' variable fee plan 39,996 39,996
Comprehensive income:
Net income 1,327,413 1,327,413
Change in unrealized gain (loss) on debt securities
available for sale, net of tax effect 26,787 26,787
------
Total comprehensive income 1,354,200
=========
Cash dividends (17.0(cent)per share) (537,981) (537,981)
---------- --------- ------- ------- ---------
Balances at June 30, 2003 $5,622,202 33,256,070 (228,649) 627,068 39,276,691
========== ========== ========= ======= ==========
See notes to interim consolidated financial statements
6
FNBH BANCORP, INC. AND
SUBSIDIARY
Consolidated Statement
of Stockholders’ Equity and Comprehensive Income
For the Six Months
Ended June 30, 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 5,246 shares for management retention plan 109,799 (109,799) 0
Amortization of management retention plan 40,568 40,568
Issued 2,970 shares for employee purchase plan 50,580 50,580
Issued 218 shares for current stock directors fees 4,741 4,741
Issued 1,128 shares for directors' variable fee plan 23,609 23,609
Comprehensive income:
Net income 3,164,683 3,164,683
Change in unrealized gain (loss) on debt securities
available for sale, net of tax effect 275,403 275,403
-------
Total comprehensive income 3,440,086
=========
Cash dividends (28.75(cent)per share) (905,847) (905,847)
---------- --------- ------- ------- ---------
Balances at June 30, 2002 $5,435,499 29,620,051 (300,374) 302,364 35,057,540
========== ========== ========= ======= ==========
Unearned Accumulated
Management Other
Common Retained Retention Comprehensive
Stock Earnings Plan Income (loss) Total
----- -------- ---- ------------- -----
Balances at December 31, 2002 $5,465,089 31,685,849 (247,282) 675,958 37,579,614
Issued 3,036 shares for management retention plan 72,454 (72,454) 0
Amortization of management retention plan 91,087 91,087
Issued 1,674 shares for employee purchase plan 33,970 33,970
Issued 450 shares for current stock directors fees 10,693 10,693
Issued 1,689 shares for directors' variable fee plan 39,996 39,996
Comprehensive income:
Net income 2,645,062 2,645,062
Change in unrealized gain (loss) on debt securities
available for sale, net of tax effect (48,890) (48,890)
--------
Total comprehensive income 2,596,172
=========
Cash dividends (34.0(cent)per share) (1,074,841) (1,074,841)
---------- ----------- ------- ------- -----------
Balances at June 30, 2003 $5,622,202 33,256,070 (228,649) 627,068 39,276,691
========== ========== ========= ======= ==========
See notes to interim consolidated financial statements
7
Consolidated Statements of Cash Flows
- -------------------------------------
Unaudited Six months ended June 30
2003 2002
---- ----
Cash flows from operating activities:
Net income $2,645,062 $3,164,683
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 600,000 0
Depreciation and amortization 555,875 440,262
Net amortization on investment securities 74,807 132,304
Earned portion of management retention plan 91,087 40,568
Loss on disposal of equipment 3,668 0
Gain on sale of investments (3,823) (6,269)
Gain on sale of loans (238,133) (154,888)
Gain on sale of other real estate owned (22,710) 0
Proceeds from sale of loans 14,168,518 9,937,160
Origination of loans held for sale (14,470,200) (10,450,208)
Proceeds from sale of other real estate owned, held for sale 760,916 0
(Increase) decrease in accrued interest income and other assets 69,771 (1,168,585)
Decrease in accrued interest, taxes, and other liabilities (183,887) (272,199)
--------- ---------
Net cash provided by operating activities 4,050,951 1,662,828
--------- ---------
Cash flows from investing activities:
Purchases of available for sale securities (3,008,471) (6,035,081)
Purchases/Stock dividend FHLBI stock (13,200) (211,500)
Purchases of held to maturity securities (234,270) 0
Proceeds from sales of available for sale securities 0 5,113,970
Proceeds from maturities and calls of available for sale securities 1,453,350 3,000,000
Proceeds from mortgage-backed securities paydowns-available for sale 3,545,530 1,454,972
Proceeds from maturities and calls of held to maturity securities 0 1,169,000
Proceeds from mortgage-backed securities paydowns-held to maturity 26,028 32,197
Purchases of brokered CDs (1,089,000) 0
Maturity of brokered CDs 2,253,000 291,000
Purchase of loans 0 (1,671,644)
Net increase in loans (16,898,660) (24,399,912)
Capital expenditures (1,183,287) (1,250,225)
----------- -----------
Net cash used in investing activities (15,148,980) (22,507,223)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits 1,566,911 (10,933,172)
Increase in brokered CDs 0 4,037,000
Increase in borrowings 5,000,000 11,400,000
Payments on FHLB note (241,547) (223,656)
Shares issued for employee purchase and directors compensation 84,659 78,930
Dividends paid (1,074,841) (905,847)
----------- ---------
Net cash provided by financing activities 5,335,182 3,453,255
--------- ---------
Net decrease in cash and cash equivalents (5,762,847) (17,391,140)
Cash and cash equivalents at beginning of year 33,038,404 34,642,995
---------- ----------
Cash and cash equivalents at end of period $27,275,557 $17,251,855
=========== ===========
Supplemental disclosures:
Interest paid $3,275,619 $ 4,101,799
Federal income taxes paid 1,200,000 1,265,000
Loans transferred to other real estate 95,000 1,285,018
Loans charged off 604,264 534,403
See notes to interim consolidated financial statements
8
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 June 30, 2003, and consolidated results of operations for the three months and six months ended June 30, 2003 and 2002 and consolidated cash flows for the six months ended June 30, 2003 and 2002.
2. The results of operations for the three months and six months ended June 30, 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 $6,498,000 at June 30, 2003, $1,600,000 at June 30, 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 dilutive earnings per share (EPS) are computed by dividing net income by the respective weighted average common shares outstanding.
Second Quarter Year to Date
2003 2002 2003 2002
---- ---- ---- ----
Net income $1,327,413 $1,589,131 $2,645,062 $3,164,683
Shares outstanding (basic) 3,162,563 3,150,209 3,160,297 3,148,492
Dilutive shares 0 0 0 0
--------- --------- --------- ---------
Shares outstanding (diluted) 3,162,563 3,150,209 3,160,297 3,148,492
Earnings per share:
Basic EPS $.42 $.51 $.84 $ 1.01
Diluted EPS $.42 $.51 $.84 $1.01
9
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 and six months ended June 30, 2003 and 2002, and also provides information relating to the Company’s financial condition, focusing on its liquidity and capital resources.
Earnings (in thousands Second Quarter Year-to-Date - -------- 2003 2002 2003 2002 except per share data) ---- ---- ---- ---- Net income $1,327 $1,589 $2,645 $3,165 Net Income per Share $ .42 $ .51 $ .84 $ 1.01
Net income for the three months ended June 30, 2003 decreased approximately $262,000 (17%) compared to the same period last year. In the second quarter of the current year net interest income increased $137,000 (3%), non-interest income grew $64,000 (8%), and the provision for federal income taxes decreased $128,000 (18%). Offsetting these favorable occurrences was an increase in the provision for loan losses of $275,000 and an increase in non-interest expense of $315,000 (10%).
Net income for the first half of the year decreased $520,000 (16%) from that reported last year. Contributing to the decline in 2003 earnings was a provision for loan losses of $600,000 in 2003 compared to no provision in 2002 as well as an increase in non-interest expense of $733,000 (13%). Partially offsetting these decreases in income were increases of $370,000 (4%) in net interest income, increased non-interest income of $206,000 (13%) and a decrease of $238,000 (17%) in the provision for federal income tax.
10
Net Interest Income Second Quarter Year-to-Date
- ------------------- 2003 2002 2003 2002
(in thousands) ---- ---- ---- ----
Interest Income $6,182 $6,518 $12,400 $12,916
Interest Expense 1,552 2,025 3,273 4,159
------ ------ ------ ------
Net Interest Income $4,630 $4,493 $9,127 $8,757
The following table illustrates some of the significant factors contributing to the increase in net interest income for the period and for the year to date.
TABLE 1
INTEREST YIELDS AND
COSTS (in thousands)
June 30, 2003 and 2002
---------------Second Quarter Averages----------------
2003 2002
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets:
Short term investments $ 7,977 $ 43.1 2.14% $7,054 $ 54.0 3.03%
Securities: Taxable 27,143 283.3 4.18% 36,692 433.5 4.73%
Tax-exempt(1) 16,018 279.1 6.97% 17,064 296.5 6.95%
Loans(2)(3) 338,824 5,696.6 6.67% 309,101 5,862.3 7.52%
------- ------- ------- -------
Total earning assets/total
interest income 389,962 $6,302.1 6.41% 369,911 $6,646.3 7.13%
-------- --------
Cash & due from banks 12,707 13,942
All other assets 18,357 18,125
Allowance for loan loss (5,964) (5,483)
------- -------
Total assets $415,062 $396,495
======== ========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
Savings & NOW accounts $167,021 $ 359.6 .86% $ 148,872 $ 557.6 1.50%
Time 134,146 1,093.3 3.27% 126,998 1,270.2 4.01%
Short term borrowings 155 .3 .67% 18,563 94.8 2.02%
FHLB Advances 5,328 98.3 7.30% 5,569 102.8 7.30%
----- ---- ----- -----
Total interest bearing
liabilities/total interest expense 306,650 $1,551.5 2.03% 300,002 $2,025.4 2.70%
-------- --------
Non-interest bearing deposits 65,935 58,633
All other liabilities 3,454 3,509
Stockholders' Equity 39,023 34,351
------ ------
Total liabilities and
shareholders' equity $415,062 $396,495
======== ========
Interest spread 4.39% 4.43%
===== =====
Net interest income-FTE $4,750.6 $4,620.9
======== ========
Net interest margin 4.82% 4.94%
===== =====
| (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-accruing loans are included in the average daily loan balances. |
| (3) | Interest on loans includes origination fees totaling $172,000 in 2003 and $199,000 in 2002. |
11
----------------Year to Date Averages-----------------
2003 2002
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets:
Short term investments $ 13,404 $ 120.9 1.79% $ 9,424 $ 128.4 2.71%
Securities: Taxable 27,093 560.1 4.13% 38,392 918.3 4.78%
Tax-exempt(1) 16,321 566.0 6.94% 17,459 605.9 6.94%
Loans(2)(3) 335,110 11,392.1 6.78% 301,737 11,518.3 7.61%
------- -------- ------- --------
Total earning assets/total
interest income 391,928 $ 12,639.1 6.43% 367,012 $13,170.9 7.16%
---------- ---------
Cash & due from banks 12,593 14,163
All other assets 18,431 17,260
Allowance for loan loss (5,875) (5,546)
------- -------
Total assets $417,077 $392,889
======== ========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
Savings & NOW accounts $172,998 $ 880.4 1.03% $151,132 $1,130.2 1.51%
Time 132,782 2,196.7 3.34% 129,408 2,713.2 4.23%
Short-term borrowings 82 .3 .71% 10,979 110.4 2.00%
FHLB Notes 5,346 196.0 7.29% 5,587 204.8 7.29%
----- ----- ----- -----
Total interest bearing
liabilities/total interest expense 311,208 $3,273.4 2.12% 297,106 $4,158.6 2.82%
-------- --------
Non-interest bearing deposits 63,685 58,606
All other liabilities 3,571 3,456
Stockholders' Equity 38,613 33,721
------ ------
Total liabilities and
shareholders' equity $417,077 $392,889
======== ========
Interest spread 4.31% 4.34%
===== =====
Net interest income-FTE $9,365.7 $9,012.3
======== ========
Net interest margin 4.75% 4.87%
===== =====
| (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 computations above, non-accruing loans are included in the average daily loan balances. |
| (3) | Interest on loans includes origination fees totaling $330,000 in 2003 and $409,000 in 2002. |
Interest Earning
Assets/Interest Income
On a tax equivalent basis, interest
income decreased approximately $344,000 in the second quarter of 2003 compared to that of
2002. The decrease was the result of a 72 basis point reduction in the yield on earning
assets. This negative trend was partially offset by a $20,000,000 (5%) growth in average
balances of earning assets.
Loan interest decreased approximately $166,000 due to a 85 basis point decrease in interest rates although average balances increased $30,000,000 (10%). The decline in loans rates was the result of overall lower interest rates this year compared to last year and a higher mix of variable rate loans. In particular, the prime interest rate was 4.25% throughout the second quarter of this year compared to 4.75% in the second quarter of 2002. In the second quarter, tax equivalent income on short and long term investments
12
decreased approximately $179,000. The decrease can be attributed to a $9,700,000 decrease in average balances as well as the mix of investments. Taxable investment securities have had considerable runoff as securities with higher yields have prepaid or been called. Yields on short and long term investments decreased by 42 basis points for the three months ended June 30, 2003 over the comparable period last year.
For the first half of the year, tax equivalent interest income decreased approximately $532,000. Loan interest income decreased approximately $126,000. The interest rate earned on loans decreased 83 basis points while average balances increased $33,000,000 (11%). Loan growth was concentrated in the commercial portfolio where balances increased $28,000,000 (11%) on average. Consumer loans had a slight increase of $1,600,000 (5%) while mortgage loans increased $4,300,000 (15%). In addition to the growth in mortgage loans retained in the portfolio, the Bank sold approximately $14,000,000 residential mortgage loans, compared to $9,700,000 in the first half of 2002. For the first six months of the year, income on short and long term investments decreased $406,000 from that earned in the prior year due to a $8,500,000 decrease in average balances and a change in mix as described above, lowering the yields earned by 69 basis points.
Interest Bearing
Liabilities/Interest Expense
In the second quarter of 2003,
interest expense decreased $474,000 due to a decrease in the interest rate paid of 67
basis points although average balances increased $6,700,000 (2%). Savings and NOW interest
expense decreased approximately $198,000. The decrease was due to the interest rate
declining 64 basis points as the average balance increased $18,000,000 (12%). Interest on
time deposits decreased $177,000 in the second quarter of 2003 over the prior year. The
decrease was due to a decrease of 74 basis points in rates paid offset by an increase in
the average balance of $7,100,000. In the second quarter of 2003 the Company had average
short term borrowings of $155,000 compared to 19,000,000 in the second quarter of 2002.
The interest rate averaged less than 1.00% in 2003 compared to 2.02% for the same quarter
in 2002 on these borrowings. Management has reduced reliance on third-party funding
sources as the maturities and paydowns of investment securities as well as deposit growth
have been used to fund loan demand. Included in the average balance for short term
borrowings were Fed Funds Purchased, Federal Home Loan Bank of Indianapolis (FHLBI) short
term borrowings, and repurchase agreements. Included in FHLB advances are two loans,
entered into in 2000, from the FHLBI. One borrowing, originally for $3,000,000, was
initiated to match the maturity of a fixed rate loan made to a local township. The other
borrowing was intended to help with the Bank’s rate sensitivity position. It is
reasonable to expect that part of future loan growth will continue to be funded with FHLBI
borrowings.
In the first half of the year, interest expense decreased $885,000 from that of the previous year. Contributing to this decrease was a 70 basis point decrease in rates while average balances of interest bearing liabilities increased $14,000,000 (5%). Savings and NOW interest expense decreased approximately $250,000 because the interest rate decreased 48 basis points although average balances increased $22,000,000 (14%). Interest on time
13
deposits decreased approximately $517,000 because the rate decreased 89 basis points although the average balance increased $3,400,000 (3%). In the first half of 2003, the Bank incurred virtually no interest expense to borrow short term money compared to $110,000 in 2002. The short term borrowings were necessary as loan growth outpaced deposit growth in 2002. The FHLBI advances are discussed above.
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 primarily met 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 June 30, 2003, the Company had a $4,400,000 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 “Large Certificates”, which are generally considered to be more volatile and sensitive to changes in rates, consists principally of local depositors known to the Bank. As of June 30, 2003, the Bank had Large Certificates totaling approximately $46,000,000 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 with a correspondent bank and by Federal Home Loan Bank borrowings. The Bank has a line of credit of approximately $25,000,000 available at the FHLBI. As of June 30, 2003 approximately $10,300,000 of the line had been used for overnight borrowings and for long term advances, previously described. The Bank has pledged certain mortgage loans as collateral for this borrowing. The Bank also has a repurchase agreement in place where it can borrow from 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
14
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.
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, other balance sheet ratios, and profitability ratios.
Interest Rate Sensitivity
- -------------------------
(dollars in thousands) 0-3 4-12 1-5 5+
Months Months Years Years Total
------ ------ ----- ----- -----
Assets:
Loans...................................... $163,663 $50,290 $121,363 $8,728 $344,044
Securities................................. 3,548 9,952 22,928 5,318 41,746
Short term investments.... 7,948 7,948
-------- ------- -------- ------- --------
Total rate sensitive assets.......... $175,353 $61,794 $145,261 $14,046 $396,454
Liabilities & Stockholders' Equity:
Savings & NOW........................... $79,555 0 0 $49,210 $128,765
Time.................................... 24,316 42,123 67,449 405 134,293
Other borrowings........................ 5,000 261 3,915 1,152 10,328
----- ------- ------- ------- ------
Total rate sensitive liabilities..... $108,871 $42,384 $71,364 $50,767 $273,386
Rate sensitivity gap and ratios:
Gap for period.......................... $66,482 $19,410 $73,897 $(36,721)
Cumulative gap.......................... 66,482 85,892 159,789 123,068
Cumulative rate sensitive ratio............ 1.61 1.57 1.72 1.45
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 asset sensitive as of June 30, 2003. An asset sensitive position would normally indicate increased net interest income in a rising rate environment. Recently medium and long term treasury rates have increased, however the majority of the Bank’s rate sensitive loans are tied to the prime rate which dropped 25 basis points on June 27, 2003. 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
15
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 movement of interest rates.
Provision for Loan Losses Second Quarter Year-to-Date
- ------------------------- 2003 2002 2003 2002
(in thousands) ---- ---- ---- ----
Total $275 $0 $600 $0
==== == ==== ==
The Company provided a loan loss provision of $275,000 in the second quarter of 2003 having provided no provision in the same period last year. The provision in the second quarter of 2003 is based upon an analysis of losses inherent in the portfolio and other economic factors. Nonperforming loans did not increase significantly during the second quarter of 2003 but continue to be $2,400,000 higher than at December 31, 2002 and $4,900,000 higher than June 30, 2002. Net charge offs for the second quarter of 2003 were $366,000 compared to $326,000 in the same period in 2002. Depressed economic market conditions have had an impact on the loan portfolio and the related allowance and charge offs. If the economy remains sluggish, it is expected to continue to impact the loan portfolio.
Year to date the provision is $600,000 compared to no provision last year. Although loans increased 5% in the first half of the year, management determined that a higher allowance was needed based on the level of risk in the portfolio and the level of nonperforming loans. At June 30, 2003, the allowance for loan loss as a percent of loans was 1.71%, compared to 1.65% a year earlier and 1.77% at December 31, 2002. For the first six months of 2003, the Bank had net charge offs of $512,000, compared to $498,000 in the first half of 2002. Non-accrual, past due 90 days, and renegotiated loans were 1.92% and .51% of total loans outstanding at June 30, 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 $9,800,000 at June 30, 2003, and included non-accrual, and past due 90 days other than homogenous residential and consumer loans, and $3,500,000 of commercial loans separately identified as impaired. Impaired loans totaled $9,300,000 at December 31, 2002. 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.
Subsequent to June 30, 2003 the underlying collateral on a $1.3 million loan classified as impaired was sold. The Bank incurred no loss on this loan and all principal and interest due were satisfied. 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
16
analysis of the value of the underlying collateral for those loans, historical loss experience, relevant economic factors, the level of nonperforming loans, loans that have been identified as impaired, and the overall credit quality of the portfolio. Management continues to refine its techniques in this analysis. Impaired loans had specific reserves calculated in accordance with SFAS No. 114 of $1,650,000 at June 30, 2003, $2,000,000 at December 31, 2002, and $1,200,000 at June 30, 2002.
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.
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. The following table describes nonperforming assets at June 30, 2003 compared to December 31, 2002.
Nonperforming Assets
- -------------------- June 30,2003 December 31, 2002
(in thousands) ------------ -----------------
Non-accrual loans $5,659 $3,288
90 days or more past due and still accruing 839 809
--- ---
Total nonperforming loans 6,498 4,097
Other real estate 95 738
-- ---
Total nonperforming assets $6,593 $4,835
Nonperforming loans as a percent of total loans 1.92% 1.25%
Loan loss reserve as a percent of nonperforming loans 91% 141%
The following table sets forth loan balances and summarizes the changes in the allowance for loan losses for the first six months of 2003 and 2002.
Year to date Year to date
Loans: (dollars in thousands) June 30, 2003 June 30, 2002
------------- -------------
Average daily balance of loans for the year to date 335,110 301,737
Amount of loans, net of unearned income, outstanding at end
of the quarter 344,044 312,522
Allowance for loan losses:
Balance at beginning of year 5,794 5,668
Loans charged off:
Real estate 0 0
Commercial 498 493
Consumer 106 42
--- --
Total charge-offs 604 535
Recoveries of loans previously charged off:
Real estate 0 0
Commercial 65 8
Consumer 27 29
-- --
Total recoveries 92 37
17
Net loans charged off 512 498
Additions to allowance charged to operations 600 0
--- ---
Balance at end of quarter $5,882 $5,170
Ratios:
Net loans charged off (annualized) to average
loans outstanding .30% .33%
Allowance for loan losses to loans outstanding 1.71% 1.65%
Non-interest Income Second Quarter Year-to-Date
- ------------------- 2003 2002 2003 2002
(in thousands) ---- ---- ---- ----
Total $916 $852 $1,853 $1,647
==== ==== ====== ======
Non-interest income, which includes service charges on deposit accounts, loan fees, trust fees, other operating income, and gain (loss) on sale of assets, increased by $64,000 (8%) in the second quarter of 2003 compared to the same period in the previous year. Gain on the sale of loans increased $49,000 (104%) due to increased volume of residential mortgage sales. In the second quarter of 2003 the Company sold $5,800,000 in residential mortgage loans compared to $2,700,000 in the same period the previous year. Trust fees increased $7,000 (11%) due to higher assets under management. Other income increased $72,000 due to gains on the sale of other real estate owned and the reversal of a reserve for other real estate owned of $45,000. Service charge income decreased approximately $65,000 (9%) primarily the result of an impairment charge for mortgage servicing rights recorded in the second half of 2003 of $145,000.The impairment reserve on capitalized mortgage loan servicing rights totaled $145,000 at June 30, 2003 and was $0 at December 31, 2002 and June 30, 2002. The recording of the impairment reserve was necessary due to a decrease in the value of mortgage servicing rights in 2003 as a result of low mortgage interest rates and higher expected future prepayment speeds. Mortgage servicing rights at June 30, 2003 were $238,000 on approximately $43,400,000 of outstanding mortgages, or 54 basis points.
For the year, non-interest income increased $206,000 (13%). Contributing to the increase was a $39,000 (3%) increase in service charge income primarily the result of increased business offset by the impairment charge for mortgage servicing rights mentioned above. Gains on the sale of loans increased approximately $83,000 (54%) due to increased volume for the year to date, $14,000,000 in the current year compared to $9,700,000 in the previous. Trust fees increased $16,000 (14%) due to higher assets under management. Other income increased $70,000 due to gains on the sale of other real estate and the reserve mentioned above.
Non-interest Expense Second Quarter Year-to-Date
- -------------------- 2003 2002 2003 2002
(in thousands) ---- ---- ---- ----
Total $3,362 $3,047 $6,580 $5,847
====== ====== ====== ======
18
Non-interest expense increased $315,000 (10%) in the second quarter of 2003 compared to the same period last year. There were increases in salaries and benefits expense of $90,000 (5%) principally due to normal merit increases and higher benefit costs. Occupancy expense increased $12,000 (5%) primarily due to costs associated with higher building service expenses and property taxes. Equipment expense increased $79,000 (37%) due to higher equipment maintenance costs and higher depreciation expense as the result of a new branch and the new operations center. Advertising increased $32,000 (48%) as a result of a deposit promotion campaign in the second quarter of 2003 in the Brighton market. Other expenses also increased $131,000 (50%) due to the write-down of the land held for sale as a result of the current market conditions in the commercial real market. Partially offsetting these increases was a $33,000 (7%) decrease in fees for services due to lower outside consultant fees.
For the first half of the year, non-interest expense increased $733,000 (13%) compared to the prior year. There was a $314,000 (10%) increase in salaries and benefits, made up of a $253,000 (12%) increase in salary expense due to merit increases and additional employees to keep pace with the Bank’s growth in assets, and a $61,000 (34%) increase in payroll taxes and medical insurance expense also related to new employees and higher costs. Occupancy expense was $42,000 (10%) higher due primarily to the new branch in Genoa Township which opened in the second quarter last year and the new operations center which opened in January of 2003. Advertising increased $18,000 (12%) due to promotional efforts for the Brighton market mentioned above. “Other” non-interest expense increased $238,000 (30%) primarily due to the valuation reserve for land held for sale discussed above and increases in computer service fees, postage and telephone. Partially offsetting these increases was a decrease in other professional service fees of $28,000 (5%) due to lower outside consultant fees.
Income Tax Expense Second Quarter Year-to-Date - -------------------- 2003 2002 2003 2002 (in thousands) ---- ---- ---- ---- Total $581 $709 $1,155 $1,393
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) June 30, 2003 December 31, 2002
------------- -----------------
Stockholders' Equity* $39,277 $37,580
Ratio of Equity to Total Assets 9.17% 8.93%
*Amounts include securities valuation adjustments recorded under Statement of Financial Accounting Standards No. 115 amounting to $627,000 at June 30, 2003 and $676,000 at December 31, 2002.
A financial institution’s capital ratio is looked upon by the regulators and the public as an indication of its soundness. Stockholders’ equity, excluding the securities valuation adjustment, increased $1,746,000 (5%) during the first half of the year. This increase was principally the result of net income earned by the company reduced by dividends paid of $1,075,000.
19
The Federal Reserve Board provides guidelines for the measurement of capital adequacy. The Bank’s capital, as adjusted under these guidelines, is referred to as risk-based capital. The Bank’s Tier 1 risk-based capital ratio at June 30, 2003 was 10.03%, and total risk-based capital was 11.28%. At June 30, 2002 these ratios were 9.45% and 10.71% 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 8.70% at June 30, 2003 and 8.25% in 2002. The minimum standard leverage ratio is 3% but financial institutions are expected to maintain a leverage ratio 1 to 2 percentage points above the 3% minimum.
In 1998 the Company exercised an option to purchase an 18 acre tract of land in northwest Brighton primarily to acquire a prime site for a new branch. The cost of the property was approximately $4,000,000. In 1999 a new branch of the Bank was built on land valued at approximately $800,000. During 2000 one parcel of the property was sold. The remaining property is held for sale.
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.
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.
Contractual Obligations
As of June 30, 2003, December 31,
2002 and June 30, 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 June
30, 2003, December 31, 2002 and June 30, 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.
20
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). 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. |
21
| In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. Statement No. 149 amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to clarify the definition of a derivative and expand the nature of exemptions from Statement 133. This Statement also clarifies the application of hedge accounting when using certain instruments and the application of paragraph 13 of Statement 133 to embedded derivative instruments in which the underlying is an interest rate. Finally, the Statement modifies the cash flow presentation of derivative instruments that contain financing elements. Statement No. 149 is effective for contracts entered into or modified after June 30, 2003, with early adoption encouraged. Adoption of this Statement did not have a significant impact on the Bank’s results of operations or financial condition. |
| In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. Statement No. 150 applies to three categories of freestanding financial instruments; mandatorily redeemable instruments, instruments with repurchase obligations and instruments with obligations to issue a variable number of shares. Instruments within the scope of Statement No. 150 must be classified as liabilities in the statement of financial position. Statement No. 150 is effective for all freestanding financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement is not expected to 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. |
22
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 - 15(e) and 15d - 15(e) for the period ended June 30, 2003, have concluded that, 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 second quarter report on Form 10-Q for the period ended June 30, 2003. |
| (b) | Changes in Internal Controls. During the fiscal quarter covered by this Report, there have not been any changes in our internal control or financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
PART II — OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The registrant's annual meeting of stockholders was held on April 15, 2003. The stockholders voted on the
election of directors.
The following three nominees for the office of director were elected for a term expiring in 2006:
| Donald K. Burkel Gary R. Boss Richard F. Hopper |
Additionally, the following directors continue in office.
| Term expiring in 2004: | |
| W. Rickard Scofield Randolph E. Rudisill Barbara Draper |
|
| Term expiring in 2005: | |
| R. Michael Yost Dona Scott Laskey Athena Bacalis James R. McAuliffe |
|
23
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:
|
31.1 Certificate of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 31.2 Certificate of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 32.1 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). 32.2 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:
The company filed a report 8-K on April 17, 2003 under Item 12 regarding the Company's First Quarter 2003 Earnings Press Release.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended June 30, 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: August 13, 2003
25
EXHIBIT 31.1
CERTIFICATE OF THE
CHIEF EXECUTIVE OFFICER
OF
FNBH BANCORP, INC.
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):
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 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 report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and we have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; 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 over financial reporting. |
Date: August 13, 2003
|
/s/ Barbara Draper Barbara Draper President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATE OF THE
CHIEF FINANCIAL OFFICER
OF
FNBH BANCORP, INC.
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):
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 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 report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and we have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; 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 over financial reporting. |
Date: August 13, 2003
|
/s/ Janice B. Trouba Janice B. Trouba Chief Financial Officer |
EXHIBIT 32.1
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 June 30, 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 June 30, 2003, fairly presents, in all material respects, the financial condition and results of operations of FNBH Bancorp, Inc.
| FNBH BANCORP, INC. |
||
| Date: August 13, 2003 | By: |
/s/ Barbara Draper
Barbara Draper |
| Its: | Chief Executive Officer | |
The signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to FNBH Bancorp, Inc. and will be retained by FNBH Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
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 June 30, 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 June 30, 2003, fairly presents, in all material respects, the financial condition and results of operations of FNBH Bancorp, Inc.
| FNBH BANCORP, INC. |
||
| Date: August 13, 2003 | By: |
/s/ Janice B. Trouba
Janice B. Trouba |
| Its: | Chief Financial Officer | |
The signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to FNBH Bancorp, Inc. and will be retained by FNBH Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request