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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-25752
FNBH BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2869722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 East Grand River, Howell, Michigan 48843
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517)546-3150
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on a per share price of $30 as of March 1, 1998, was
$45,113,220 (common stock, no par value). As of December 31, 1997 there were
outstanding 1,575,000 shares of the Company's Common Stock (no par value).
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 22, 1998 are incorporated by reference into Parts
II and III of this report.
PART I
Included in this Form 10-K are certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1993, as amended, and
Section 21 E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on the beliefs of the Company's management
as well as on assumptions made by and information currently available to the
Company at the times such statements were made. Actual results could differ
materially from those included in such forward-looking statements as a result
of, among other things, factors set forth below in this Report generally, and
certain economic and business factors, some of which may be beyond the control
of the Company. Investors are cautioned that all forward-looking statements
involve risks and uncertainty.
Item 1 - Business
FNBH Bancorp, Inc. (the Company), a Michigan business corporation, is a one
bank holding company, which owns all of the outstanding capital stock of First
National Bank in Howell (the "Bank"). The Company was formed in 1988 for the
purpose of acquiring all of the stock of the Bank in a shareholder approved
reorganization, which became effective May, 1989.
The Bank was originally organized in 1934 as a national banking
association. As of March 1, 1998, the Bank had approximately 110 full-time and
part-time employees. None of the Bank's employees is subject to collective
bargaining agreements. The Company does not directly employ any personnel. The
Bank serves primarily four communities, Howell, Brighton, Hartland, and
Fowlerville, all of which are located in Livingston County. The county has
historically been rural in character but has a growing urban population
especially in the southeast quadrant of the county, primarily attributable to
growth around the City of Brighton.
On November 26, 1997 H.B. Realty Co. was established to purchase land for a
future branch site of the Bank and to hold title to other Bank real estate when
it is considered prudent to do so.
Bank Services
The Bank is a full service bank offering a wide range of commercial and
personal banking services. These services include checking accounts, savings
accounts, certificates of deposit, commercial loans, real estate loans,
installment loans, trust and investment services, collections, traveler's
checks, night depository, safe deposit box and U.S. Savings Bonds. The Bank
maintains correspondent relationships with major banks in Detroit, pursuant to
which the Bank engages in federal funds sale and purchase transactions, the
clearance of checks and certain foreign currency transactions. In
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addition, the Bank participates with other financial institutions to fund
certain large loans which would exceed the Bank's legal lending limit if made
solely by the Bank.
The Bank's deposits are generated in the normal course of business and the
loss of any one depositor would not have a materially adverse effect on the
business of the Bank. No material portion of the Bank's loans is concentrated
within a single industry or group of related industries. As of December 31,
1997, the Bank's certificates of deposit of $100,000 or more constituted
approximately 7% of total deposit liabilities. The Bank's deposits are primarily
from its service area and the Bank does not seek or encourage large deposits
from outside the area.
The Company's cash revenues are derived primarily from dividends paid by
the Bank. The Bank's principal sources of revenue are interest and fees on loans
and interest on investment securities. Interest and fees on loans constituted
approximately 76% and 77% of total revenues for the periods ended December 31,
1997 and December 31, 1996, respectively. Interest on investment securities,
including short-term investments and federal funds sold, constituted
approximately 14% and 16% of total revenues in 1997 and 1996. Revenues were also
generated from deposit service charges and other financial service fees.
The Bank provides real estate, consumer, and commercial loans to customers
in its market. Fifty-six percent of the Bank's loan portfolio is in fixed rate
loans. Most of these loans, approximately 87%, mature within five years of
issuance. Approximately $11,800,000 in loans (or roughly 7% of the Bank's total
loan portfolio) have fixed rates with maturities exceeding five years.
Fifty-three percent of the Bank's interest-bearing deposits are in savings, NOW,
and MMDAs, all of which are variable rate products. Of the approximately
$76,100,000 in certificates, $52,400,000 mature within a year, with the balance
maturing within a five year period.
Requests to the Bank for credit are considered on the basis of credit
worthiness of each applicant, without consideration to race, color, religion,
national origin, sex, marital status, physical handicap, age, or the receipt of
income from public assistance programs. Consideration is also given to the
applicant's capacity for repayment, collateral, capital and alternative sources
of repayment. Loan applications are accepted at all the Bank's offices and are
approved under each lending officer's authority. Loan requests in excess of
$200,000 are required to be presented to the Board of Directors or the Executive
Committee of the Board for its review and approval.
As described in more detail below, the Bank's ratio of rate sensitive
assets to rate sensitive liabilities for the period ended December 31, 1997, was
16% asset sensitive, compared to 11% at December 31, 1996. See discussion and
table under "Quantitative and Qualitative Disclosures about Market Risk" in Item
7 below.
The Bank sells participations in commercial loans to other financial
institutions approved by the Bank, for the purpose of meeting legal lending
limit requirements or loan
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concentration considerations. The Bank regularly sells fixed rate residential
mortgages to Freddie Mac. Those residential real estate mortgage loan requests
that do not meet Freddie Mac criteria are reviewed by the Bank for approval and,
if approved, are retained in the Bank's loan portfolio. The Bank also may
purchase loans which meet its normal credit standards.
The Bank's investment policy is considered to be generally conservative. It
provides for unlimited investment in U.S. government bonds, with a maximum
maturity of five years. Municipal bonds may be purchased to provide nontaxable
income, with the maximum life of municipal bonds limited to approximately ten
years with a double A rating or better. A single A rated bond may be purchased
if it matures in four years or less. Non-rated bonds may be purchased from local
communities that are familiar to the Bank, with a maximum block size of a single
purchase limited to $300,000. Investments in states other than Michigan may not
exceed 20% of the municipal portfolio, and investments in a single issuer may
not exceed 10% of equity capital. Mortgage backed securities, which are fully
collateralized by securities issued by government sponsored agencies, may be
purchased in block sizes of up to $500,000, provided the average life expectancy
does not exceed seven years. In addition, certain collateralized mortgage
obligations may be purchased if their average life does not exceed five years.
In any case, investments in mortgage backed securities may not exceed 10% of the
investment portfolio.
In addition to the above referenced thresholds affecting the acquisition of
investment securities, holdings of approved "non high-risk mortgage securities"
are required to be "stress tested" at least annually. Any security that fails
this test is required to be marked to market. The acquisition of "high-risk
mortgage securities" is prohibited. In no case may the Bank participate in such
activities as gains trading, "when-issued" trading, "pair offs", corporate
settlement of government and agency securities, repositioning repurchase
agreements, and short sales. All securities dealers effecting transactions in
securities held or purchased by the Bank must be approved by the Board of
Directors.
Bank Competition
The Bank has six offices within the four communities it serves, all of
which are located in Livingston County, Michigan. Three of the offices,
including the main office, are located in Howell. The other three facilities are
located in Brighton, Hartland, and Fowlerville. See "Properties" below for more
detail on these facilities. Within these communities, its principal competitors
are Old Kent Bank, First of America Bank, D&N Bank, and Michigan National Bank.
Each of these financial institutions, which are headquartered in larger
metropolitan areas, have significantly greater assets and financial resources
than the Company. Among the principal competitors in the communities in which
the Bank operates, the Bank is the only locally based financial institution.
Based on deposit information as of June 30, 1997, the Bank holds approximately
18% of local deposits, compared to approximately 21% held by Old Kent Bank,
approximately 16%
4
held by First of America, approximately 12% held by D&N Bank, and approximately
9% held by Michigan National Bank. Information as to asset size of competitor
financial institutions is derived from publicly available reports filed by and
with regulatory agencies. Within the Bank's markets, Old Kent Bank maintains
four branch offices, First of America Bank operates six branch offices, D&N Bank
has five branch offices, and Michigan National Bank has three branch offices.
Management is not aware of any plans by these financial institutions to expand
their presence in the Bank's market, although sale of First of America is
pending at this time which may have some impact on the local market.
The financial services industry continues to become increasingly
competitive. Principal methods of competition include loan and deposit pricing,
advertising and marketing programs, and the types and quality of services
provided. The deregulation of the financial services industry has led to
increased competition among banks and other financial institutions for a
significant portion of funds which have traditionally been deposited with
commercial banks. Competition within the Bank's market has been relatively
stable within the past years. Management continues to evaluate the opportunities
for the expansion of products and services, such as offering nonproprietary
mutual fund products, telephone, computer or on-line banking, and additional
branching opportunities. Within the next year, management of the Bank
anticipates offering telephone banking and building an additional branch in
Brighton.
Growth of Bank
The following table sets forth certain information regarding the growth
of the Bank:
Balances as of December 31,
(in thousands)
1997 1996 1995 1994 1993
Total Assets ................ $226,314 $202,009 $182,958 $168,438 $155,556
Loans, Net of Unearned Income 158,397 136,067 127,463 117,008 112,820
Securities .................. 43,725 47,257 35,251 33,891 28,425
Noninterest-Bearing Deposits 41,631 35,048 30,815 29,513 22,000
Interest-Bearing Deposits ... 160,668 145,896 133,060 122,194 118,489
Total Deposits .............. 202,299 180,944 163,875 151,707 140,489
Shareholders' Equity ........ 21,732 19,597 17,530 15,305 13,814
During the five years presented, the Bank operated six branch facilities:
one in downtown Howell, one at Lake Chemung (five miles east of downtown
Howell), one on the east side of Brighton, one in a shopping center in Hartland,
one in the village of Fowlerville, and the sixth, opened in September of 1992,
was a grocery store branch, located west of downtown Howell. In July of 1995,
the Bank moved its Hartland facility from the shopping center, which was a
leased building, to a new building, built on property purchased by the Bank,
just east of the shopping center site. The 1994 growth is primarily attributable
to the growth at the Bank's Brighton and Fowlerville branch
5
facilities. In 1995, all branches, except Brighton, and in 1996 and 1997 all of
the Bank's branches grew due to general growth in the county.
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. This summary is qualified in its entirety by reference
to the particular statutes and regulations. Changes in applicable laws and
regulations may have a material effect on the Company and the Bank and their
respective businesses.
The Company operates in a highly regulated industry, and thus may be
affected by changes in state and federal legislation and regulations. As a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended (the "Act"), the Company is subject to supervision and examination by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board")
and is required to file, with the Federal Reserve Board, annual reports and
information regarding its business operations and those of its subsidiaries.
The Act requires a bank holding company to obtain the approval of the
Federal Reserve Board before it may acquire more than 5% of the voting stock or
substantially all of the assets of any bank or merge or consolidate with any
other bank holding company. If the effect of a proposed acquisition, merger or
consolidation may substantially lessen competition or tend to create a monopoly,
the Federal Reserve Board cannot approve the acquisition unless it finds that
the anticompetitive effects of the acquisition, merger, or consolidation are
clearly outweighed by the convenience and needs of the community to be served.
The Act also provides that the consummation of any acquisition, merger or
consolidation must be delayed at least 15 days following the approval of the
Federal Reserve Board and that any action brought under the antitrust laws of
the United States during the time will delay the effectiveness of its approval
during the pendency of the action unless otherwise ordered by the board.
The Riegle-Neal Interstate Banking and Branching Efficiency Act authorizes
adequately capitalized and adequately managed bank holding companies to acquire
banks located outside their respective home states, irrespective of state law.
This legislation also authorizes, effective June 1, 1997 (subject to individual
state's rights to accelerate this date or prohibit interstate branching within
their borders), banking organizations to branch nationwide by acquisition or
consolidation of existing banks in other states. Subject to the approval of the
Michigan Financial Institutions Bureau, effective November 29, 1995, Michigan
law authorized out-of-state banks to acquire and establish branches in Michigan,
provided the laws of the state of the out-of-state institution permit Michigan
banks to acquire or establish branches in that state. Interstate acquisitions
are
6
subject to the approval of various federal and state agencies and subject to
other conditions.
Subject to certain exceptions, a bank holding company is also prohibited
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank and from engaging directly or
indirectly in activities unrelated to banking or managing or controlling banks.
One of the exceptions to this prohibition permits activities by a bank holding
company or its subsidiaries which the Federal Reserve Board has determined to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. In determining whether a particular activity is a proper
incident to banking or managing or controlling banks, the Federal Reserve Board
considers whether performance of the activity by an affiliate of a bank holding
company can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in efficiency that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The
Federal Reserve Board has adopted regulations prescribing those activities which
it presently regards as permissible for bank holding companies and their
subsidiaries. Some of these activities include: performing certain data
processing services; certain personal and real property leasing; making,
acquiring, or servicing loans and other extensions of credit as would be made by
a mortgage, finance, credit card or other factoring company; bank related
courier services; and, under certain circumstances, acting as any or all of the
following: investment or financial advisor, insurance agent or broker, and
underwriter for credit life insurance and credit accident and health insurance.
The Act does not place geographic restrictions on the activities of the nonbank
subsidiary's of bank holding companies. The recent enactment of the Economic
Growth and Regulatory Paperwork Reduction Act of 1996 streamlines the nonbanking
activities application process for well capitalized and well managed bank
holding companies.
The Act, the Federal Reserve Act, and the Federal Deposit Insurance Act
also subject bank holding companies and their subsidiaries to certain
restrictions on any extensions of credit by subsidiary banks to the bank holding
company or any of its subsidiaries, or investments in the stock or other
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower. Further, under the Act and regulations of the Federal
Reserve Board, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of any property or furnishing of service.
The Federal Deposit Insurance Act was amended in 1991 by the FDIC
Improvement Act of 1991. The FDIC Improvement Act provides for regulatory
intervention should a bank's capital deteriorate, limits certain real estate
lending and increases audit requirements. The FDIC has been granted authority to
impose special assessments on banks to repay borrowings of the FDIC. The FDIC
Improvement Act defines a reserve ratio at which the Bank Insurance Fund ("BIF")
is to be maintained through FDIC semi-annual assessment rates on the BIF member
banks. The FDIC has
7
also established a system of risk-based deposit insurance premiums under the
FDIC Improvement Act. This system established four levels of premium rates based
on the risk classification of the institution. As a national bank, the Bank's
premiums are paid to BIF. Given the designation as a well managed, well
capitalized institution, the Bank pays the lowest assessment rate possible to
BIF.
As required by the Deposit Insurance Funds Act of 1996, in 1997 the Bank
will commence making payments to the FDIC for the Financing Corporation (FICO)
bonds that were issued previously. The FICO rate for BIF members banks is 1.296
basis points annually applied to assessable deposits. During 1997 the Bank paid
$22,000 to the FDIC.
The Federal Reserve Board provides guidelines for the measurement of
capital adequacy of bank holding companies. The Company's capital, as adjusted
under these guidelines, is referred to as risk-based capital. The Company's Tier
1 risk-based capital ratio at December 31, 1997 was 14.32% and total risk-based
capital was 15.58%. At December 31, 1996, these ratios were 14.71% and 15.96%,
respectively. Minimum regulatory Tier 1 risk-based and total risk-based capital
ratios under the Federal Reserve Board guidelines are 4% and 8%, respectively.
These same capital ratios are applied at the bank level by the Federal Deposit
Insurance Corporation, under which a well-capitalized bank is defined as one
with at least 10% risk-based capital. Capital guidelines also provide for a
standard to measure risk-based capital to total assets. This is referred to as
the leverage ratio. The Company's leverage ratio at December 31, 1997 was 9.96%,
while at December 31, 1996 it was 9.86%. The minimum standard leverage ratio is
3%. See also "Capital" discussion in Item 7 below.
The Bank is organized as a national banking association and is therefore
regulated and supervised by the Office of the Comptroller of the Currency (the
"OCC"). The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC"). Consequently, the Bank is also subject to the provisions
of the Federal Deposit Insurance Act. As a bank holding company, the Company is
subject to the direct supervision of the Federal Reserve Board. As a result of
such supervision and regulation, the Bank is subject to requirements to maintain
reserves against deposits, restrictions on the nature and amount of loans which
may be made and the interest which may be charged thereon, restrictions relating
to investments and other activities, limitations based on capital and surplus,
and limitations on the payment of dividends on its capital stock. The various
regulatory and legal requirements referenced above are primarily for the
protection of the Bank's depositors and customers rather than the shareholders
of the Company.
As a Michigan business corporation, the Company may generally declare and
pay dividends, provided the Company is not insolvent and that the payment of the
dividend would not render it insolvent, and, after giving the effect of the
distribution, that the Company's total assets would equal or exceed its total
liabilities plus the dissolution preference of any senior equity securities (of
which there currently are none). The payment of dividends to its shareholders is
limited by the Company's ability to obtain funds from the Bank and by the
above-referenced regulatory capital guidelines. As a
8
national bank, the Bank may not pay a dividend on its common stock if the
dividend would exceed the net undivided profits then on hand after deducting
losses and bad debts. Additionally, the prior approval of the Office of the
Comptroller of the Currency, or its designee, is required for any dividend to a
bank holding company by an affiliated national bank if the total of all
dividends, including any proposed dividend declared by such bank in any calendar
year, exceeds the total of its net profits for that year combined with its
retained net profits for the preceding two years, less any required transfers to
surplus.
The Michigan Legislature adopted, effective March 28, 1996, the Credit
Reform Act. This statute, together with amendments to other related laws,
permits regulated lenders, indirectly including Michigan-chartered banks, to
charge and collect higher rates of interest and increased fees on certain types
of loans to individuals and businesses. The laws prohibit "excessive fees and
charges," and authorize governmental authorities and borrowers to bring actions
for injunctive relief and statutory and actual damages for violations by
lenders. The statutes specifically authorize class actions, and also civil money
penalties for knowing and willful, or persistent violations.
FDIC regulations which became effective April 1, 1996, impose limitations
(and in certain cases, prohibitions) on (i) certain "golden parachute" severance
payments by troubled depository institutions and their affiliated holding
companies to institution-affiliated parties (primarily directors, officers,
employees, or principal shareholders of the institution), and (ii) certain
indemnification payments by a depository institution or its affiliated holding
company, regardless of financial condition, to institution-affiliated parties.
The FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by the Company or the Bank to their
respective directors or officers otherwise permitted under the Michigan Business
Corporation Act ("MBCA") or the National Bank Act, respectively.
On September 30, 1996, EGRPRA was signed into law, which provides for the
recapitalization of SAIF and includes approximately 40 regulatory relief
initiatives. Among other matters, this legislation provides for expedited
application procedures for nonbanking activities by well capitalized and well
managed bank holding companies, provides reform to the Fair Credit Reporting
Act, and provides other forms of regulatory relief to the financial services
industry.
9
I SELECTED STATISTICAL INFORMATION
(A) Distribution of Assets, Liabilities, and Shareholders' Equity:
(B) Interest Rates and Interest Differential:
The table on the following page shows the daily average balances for major
categories of interest earning assets and interest bearing liabilities, interest
earned (on a taxable equivalent basis) or paid, and the effective rate or yield,
for the three years ended December 31, 1997, 1996, and 1995.
Net interest income is the difference between interest earned on loans,
securities and other earning assets and interest paid on deposits and borrowed
funds. In the following tables, the interest earned on investments and loans is
expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a federal income tax rate of 34%. The
following Yield Analysis shows that the Bank's interest margin decreased 2 basis
points in 1997 as a result of an increase of 11 basis points in interest cost on
deposits, partially offset by an increase of 4 basis points in the yield on
earning assets. In 1996 the interest margin decreased 31 basis points due to
both a decrease in yield on earning assets and an increase in interest cost on
deposits.
10
Yield Analysis of Consolidated Average Assets and Liabilities
(dollars in thousands)
1997 1996 1995
Average Yield/ Average Yield/ Average Yield
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Interest earning assets:
Federal funds sold $2,754 $148.8 5.40% $5,135 $269.2 5.24% $3,084 $177.7 5.76%
Securities:
Taxable 31,873 1,906.0 5.98% 32,042 1,906.4 5.95% 25,591 1,444.5 5.64%
Tax-exempt 13,262 975.8 7.36% 11,172 853.4 7.64% 9,413 779.5 8.28%
Loans(1)(2) 148,096 14,540.3 9.82% 130,648 12,946.8 9.91% 122,500 12,237.8 9.99%
Total earning assets and
total interest income 195,985 $17,570.9 8.97% 178,997 $15,975.8 8.93% 160,588 $14,639.5 9.12%
Cash & due from banks 7,620 7,195 6,432
All other assets 8,089 7,341 6,443
Allowance for loan loss (3,499) (3,281) (2,934)
Total assets $208,195 $190,252 170,529
Liabilities and
Shareholders'Equity
Interest bearing deposits:
Savings/NOW accounts $79,104 $2,210.5 2.79% $76,128 $ 2,129.9 2.80% $70,057 $1,826.6 2.61%
Time 71,093 4,059.5 5.71% 62,577 3,514.5 5.62% 54,924 3,045.1 5.54%
Federal funds purchased 610 35.3 5.77% 4 .2 5.58% 105 6.8 6.43%
Total interest bearing
liabilities and total
interest expense 150,807 $6,305.3 4.18% 138,709 $ 5,644.6 4.07% 125,08 $4,878.5 3.90%
Non-interest bearing
deposits 34,668 31,005 27,348
All other liabilities 1,792 1,664 1,797
Shareholders' Equity 20,928 18,874 16,298
Total liabilities and
shareholders' equity $208,195 $190,252 $170,529
Interest spread 4.79% 4.86% 5.22%
Net interest income-FTE $11,265.6 $10,331.2 $9,761.0
Net interest margin 5.75% 5.77% 6.08%
(1) Nonaccruing loans are not significant during the three year period and, for
purposes of the computations above, are included in average daily loan balances.
(2) Interest on loans includes origination fees totaling $380,000 in 1997,
$451,000 in 1996, and $440,000 in 1995.
11
(C) The following table sets forth the effects of volume and rate changes on net
interest income on a taxable equivalent basis. All figures are stated in
thousands of dollars.
Year ended Year ended
December 31, 1997 compared to December 31, 1996 compared to
Year ended December 31, 1996 Year ended December 31, 1995
Amount of Increase/(Decrease) Amount of Increase (Decrease)
due to change in due to change in
Total Total
Amount Amount
Of Of
Average Increase/ Average Increase/
Volume Rate Decrease Volume Rate (Decrease)
Interest Income:
Federal funds sold ....... (125) 4 (121) 118 (27) 91
Securities:
Taxable .................. (10) 10 0 364 98 462
Tax Exempt ............... 160 (37) 123 146 (72) 74
Loans .................... 1,729 (136) 1,593 814 (105) 709
Total interest income .... 1,754 (159) 1,595 1,442 (106) 1,336
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts ..... 83 (2) 81 159 145 304
Time ..................... 478 67 545 424 45 469
Short-term borrowings .... 34 1 35 (7) 0 (7)
Total interest expense ... 595 66 661 576 190 766
Net interest income (FTE) $ 1,159 (225) 934 866 (296) 570
The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
12
II SECURITIES PORTFOLIO
(A)The following table sets forth the book value of securities at December 31:
(in thousands)
1997 1996 1995
Held to maturity:
U.S. Treasury ................... $15,993 $13,996 $ 9,511
U.S. Government agencies ........ 0 1,017 2,033
States and political subdivisions 14,028 12,765 9,878
Mortgage-backed securities ...... 633 352 614
FRB Stock ....................... 44 44 44
Total .......................... $30,698 $28,174 $22,080
Available for sale:
U.S. Treasury ................... $13,026 $18,046 $11,090
U.S. Government agencies ........ 0 1,001 2,025
Mortgage-backed securities ...... 0 36 56
Other securities ................ 0 0 0
Total .......................... $13,026 $19,083 $13,171
(B)The following table sets forth contractual maturities of securities at
December 31, 1997 and the weighted average yield of such securities:
(Dollars in thousands)
Maturing After Maturing After
Maturing Within One But Within Five But Within Maturing After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
Held to maturity
U.S. Treasury $13,998 5.97% $1,995 5.96%
States and politica
subdivisions 492 9.02% 3,559 8.46% 9,977 7.66%
Mortgage backed
Securities 633 6.27%
FRB Stock 44 6.00%
------- ------ ----- ---
Total $14,490 6.07% $6,187 7.43% $9,977 7.66% $44 6.00%
======= ====== ====== ===
Tax equivalent adjustment
for calculations of yield $10 $70 $195
Available for sale
U.S. Treasury $10,018 5.96% $3,008 5.84%
Total $10,018 5.96% $3,008 5.84% $0 $0
======= ====== == ==
The rates set forth in the tables above for obligations of state and
political subdivisions have been restated on a fully tax equivalent basis
assuming a 34% marginal tax rate. The amount of the adjustment is as follows:
13
Rate on Tax
Tax-Exempt Rate Adjustment Equivalent Basis
Under 1 year 5.96% 3.06% 9.02%
1-5 years 5.58% 2.88% 8.46%
5-10 years 5.05% 2.61% 7.66%
Additional statistical information concerning the Bank's securities
portfolio is incorporated by reference in Note 2, Pages 9 and 10, of the
Company's Consolidated Financial Statements for the year ended December 31,
1997.
III LOAN PORTFOLIO
(A)The table below shows loans outstanding at December 31:
(in thousands)
1997 1996 1995 1994 1993
Secured by real estate:
Residential first mortgage $ 38,073 $ 36,148 $ 36,871 $3,842 $ 35,239
Residential home equity/other junior liens 13,6651 2,883 10,566 8,819 9,142
Construction and land development 19,4901 4,042 9,075 8,150 6,505
Other 53,7434 3,006 42,454 40,103 36,873
Consumer 14,0111 2,272 11,233 10,730 10,739
Commercial 18,299 15,830 14,546 12,324 11,119
Other 1,729 2,360 3,213 3,559 3,746
-------- -------- -------- -------- --------
Total Loans (Gross) $159,010 $136,541 $127,958 $117,527 $113,363
The loan portfolio is periodically reviewed and the results of these reviews are
reported to the Company's Board of Directors. The purpose of these reviews is to
verify proper loan documentation, to provide for the early identification of
potential problem loans, and to evaluate the adequacy of the allowance for loan
losses.
(B)The following table shows the amount of commercial, financial, and
agricultural loans outstanding as of December 31, 1997 which, based on remaining
scheduled repayments of principal, are in the periods indicated.
Maturing
(in thousands of dollars)
After one
Within one but within After Five
Year five years Years Total
Real estate construction & land development $12,958 $ 5,321 0 $18,279
Real estate other (secured by commercial &
multi-family) .......................... 10,574 40,366 2,577 53,517
Commercial (secured by business assets or
Unsecured) ............................. 6,378 11,699 219 18,296
Other (loans to farmers, political
Subdivisions, & overdrafts) ............ 46 1,621 0 1,667
------- ------- ------- -------
Totals ................................. $29,956 $59,007 $ 2,796 $91,759
14
Below is a schedule of amounts due after one year which are classified
according to their sensitivity to changes in interest rates.
Interest Sensitivity
(in thousands of dollars)
Fixed Rate Variable Rate
Due after one but within five years $46,053 $12,954
Due after five years .............. 1,039 1,757
(C) Nonperforming loans consist of loans accounted for on a nonaccrual
basis and loans contractually past due 90 days or more as to interest or
principal payments (but not included in nonaccrual loans). The aggregate amount
of non-performing loans, as of December 31, is presented in the table below:
(Dollars in thousands)
1997 1996 1995 1994 1993
Nonperforming Loans:
Nonaccrual loans $ 809 $ 109 $ 926 $983 $ 1,568
Loans past due 90 days or more 249 448 66 295 34
--- --- -- --- --
Total nonperforming loans $ 1,058 $ 557 $992 $1,278 $ 1,602
======= ===== ==== ====== =======
Percent of total loans .67% .41% .78% 1.09% 1.41%
Additional information concerning nonperforming loans, the Bank's
nonaccrual policy, loan impairment, and loan concentrations is incorporated by
reference to Note 3 on Pages 10 of the Company's Consolidated Financial
Statements for the year ended December 31, 1997.
There were no other interest bearing assets at December 31, 1997 that would
be required to be disclosed under Item III(C) , if such assets were loans.
There were no foreign loans outstanding at December 31, 1997.
15
IV SUMMARY OF LOAN LOSS EXPERIENCE
(A)The following table sets forth loan balances and summarizes the changes
in the allowance for loan losses for each of the years ended December 31:
(Dollars in thousands)
1997 1996 1995 1994 1993
Loans:
Average daily balance of loans for the year $ 148,097 $ 130,648 $ 122,500 $ 114,384 $ 113,161
Amount of loans (gross) outstanding at end
of the year .............................. 159,011 136,541 127,958 117,527 113,363
Allowance for loan losses:
Balance at beginning of year ............... 3,335 3,097 2,672 2,205 2,044
Loans charged off:
Real estate .............................. 0 70 0 12 0
Commercial ............................... 375 129 118 37 275
Consumer ................................. 124 88 91 72 122
--- -- -- -- ---
Total charge-offs ...................... 499 287 209 121 397
Recoveries of loans previously charged off:
Real estate .............................. 32 1 0 0 0
Commercial ............................... 43 31 95 64 68
Consumer ................................. 27 45 91 76 41
-- -- -- -- --
Total recoveries ....................... 102 77 186 140 109
Net loans charged off (recoveries) ......... 397 210 23 (19) 288
Additions to allowance charged to operations 486 448 448 448 449
--- --- --- --- ---
Balance at end of year ................. $ 3,424 $ 3,335 $ 3,097 $ 2,672 $ 2,205
Ratios:
Net loans charged off to average loans
outstanding .............................. .27% .16% .02% (.02%) .25%
Allowance for loan losses to loans
outstanding .............................. 2.15% 2.44% 2.42% 2.27% 1.94%
The allowance for loan losses reflected above is a valuation allowance in
its entirety and the only allowance available to absorb future loan losses.
(B)The following table presents the portion of the allowance for loan
losses applicable to each loan category and the percent of loans in each
category to total loans, as of December 31:
(Dollars in thousands)
1997 1996 1995 1994 1993
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial $1,810 90.1% $ 830 66.7% $ 851 64.7% $1,093 61.3% $1,206 57.7%
Real estate 95 4.7% 70 17.1% 60 19.5% 45 23.1% 113 26.3%
Consumer 105 5.2% 90 16.2% 74 15.8% 95 15.6% 144 16.0%
Unallocated 1,414 2,345 2,112 1,439 742
----- ----- ----- ----- ---
Total $3,424 100% $3,335 100% $3,097 100% $2,672 100% $2,205 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
16
V DEPOSITS
The following table sets forth average deposit balances and the weighted
average rates paid thereon for the years ended December 31:
(Dollars in thousands)
1997 1996 1995
Average Average Average
Balance Rate Balance Rate Balance Rate
Non-interest bearing demand $ 34,707 $ 31,005 $ 27,348
Savings, NOW, and money market 79,104 2.79% 76,128 2.80% 70,057 2.61%
Time deposits 71,093 5.71% 62,577 5.62% 54,924 5.54%
------ ------ ------
Total $184,904 4.17% $169,710 4.07% $152,329 3.20%
======== ======== ========
The table for maturities of negotiated rate time deposits of $100,000 or
more outstanding at December 31, 1997 is incorporated by reference to note 6 on
Page 11 of the Company's Consolidated Financial Statements for the year ended
December 31, 1997.
VI RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets, and certain other ratios, for the years ended December 31 follow:
1997 1996 1995 1994 1993
Net income as a percent of:
Average common equity 17.84% 19.12% 19.60% 16.63% 17.43%
Average total assets 1.79% 1.88% 1.88% 1.52% 1.51%
Additional performance ratios are set forth in Selected Financial Data, in
Item 6, Part II of this Report. Any significant changes in the current trend of
the above ratios are reviewed in Management's Discussion and Analysis of
Financial Condition and Results of Operations, set forth in Item 7, Part II of
this Report.
VII SHORT-TERM BORROWING
The information required in this item is not applicable for this Company.
Item 2 - Properties
The Bank operates from six facilities, located in four communities, in
Livingston County, Michigan. The executive offices of the Company are located at
the Bank's main office, 101 East Grand River, Howell, Michigan. The Bank
maintains two branches in Howell at 5990 East Grand River and 2400 West Grand
River. The Bank also maintains branch offices at 9911 East Grand River,
Brighton, Michigan, 760 South Grand Avenue, Fowlerville, Michigan, and 10700
Highland Road, Hartland, Michigan. All of the offices
17
have ATM machines and all except the West Grand River branch, which is in a
grocery store, have drive up services. All of the properties are owned by the
Bank except for the West Grand River branch which is leased. The lease is for
fifteen years, expiring September 2007. The average lease payment over the life
of the lease is $3,167 monthly.
Item 3 - Legal Proceedings
The Company is not involved in any material legal proceedings. The Bank is
involved in ordinary routine litigation incident to its business; however, no
such proceedings are expected to result in any material adverse effect on the
operations or earnings of the Bank. Neither the Bank nor the Company is involved
in any proceedings to which any director, principal officer, affiliate thereof,
or person who owns of record or beneficially more than five percent (5%) of the
outstanding stock of either the Company or the Bank, or any associate of the
foregoing, is a party or has a material interest adverse to the Company or the
Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
Additional Item--Executive Officers
Executive officers of the Company are appointed annually by the Board of
Directors. There are no family relationships among these officers and/or the
directors of the Company, or any arrangement or understanding between any
officer and any other person pursuant to which the officer was elected.
The following table sets forth certain information with respect to the
Company's executive officers as of December 31, 1997:
First Selected as an Officer
Name (Age) Position with Company of the Company
Barbara D. Martin (51) President, Chief Executive 1983
Officer, and Director of the
Company and the Bank
Barbara J. Nelson (50) Secretary/Treasurer of the 1985
Company and Senior Vice
President, Cashier, and Chief
Financial Officer of the Bank
John D. Logan (48) Senior Vice President, Trust and 1997
Investments, of the Bank
James Wibby (47) Senior Vice President, Loans, of 1997
the Bank
Jerry Armstong (38) Vice President, Operations 1997
Donna Gehringer(45) Manager of Branches 1997
18
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
There is no active market for the Company's Common Stock, and there is no
published information with respect to its market price. There are occasional
direct sales by shareholders of which the Company's management is generally
aware. It is the understanding of the management of the Company that over the
last two years, the Company's Common Stock has sold at a premium to book value.
From January 1, 1996, through December 31, 1997, there were, so far as the
Company's management knows, 162 sales of shares of the Company's Common Stock,
involving a total of 48,672 shares. The price was reported to management in
these transactions, however there may have been other transactions involving the
company stock at prices not reported to management. During this period, the
highest price known to be paid was $30.00 per share in the last quarter of 1997
and the lowest price was $20.00 per share paid during all of 1996. To the
knowledge of management, the last sale of Common Stock occurred on January 16,
1998. All per share information has been restated to give effect to a three for
one stock split, payable as a dividend of two shares for each one share of
company stock held of record January 16, 1997, paid February 16, 1997.
As of March 1, 1998, there were approximately 620 holders of record of the
Company's Stock. The following table sets forth the range of high and low sales
prices of the Company's Common Stock during 1996 and 1997, based on information
made available to the Company, as well as per share cash dividends declared
during those periods. Although management is not aware of any transactions at
higher or lower prices, there may have been transactions at prices outside the
ranges listed in the table.
Sales price and dividend information for the years 1996 and 1997:
Sales Prices Cash Dividends Declared
1996 High Low
First Quarter $20.00 $20.00 $0.12
Second Quarter $20.00 $20.00 $0.13
Third Quarter $20.00 $20.00 $0.13
Fourth Quarter $20.00 $20.00 $0.55(1)
1997 High Low
First Quarter $25.00 $25.00 $0.15
Second Quarter $27.50 $25.00 $0.15
Third Quarter $27.50 $27.50 $0.15
Fourth Quarter $30.00 $27.50 $0.55(2)
(1) Includes a special dividend of $0.42 per share.
(2) Includes a special dividend of $0.40 per share.
The holders of the Company's Common Stock are entitled to dividends when, as and
if declared by the Board of Directors of the Company out of funds legally
available for that purpose. Dividends have been paid on a quarterly basis. In
determining dividends, the
19
Board of Directors considers the earnings, capital
requirements and financial condition of the Company and the Bank, along with
other relevant factors. The Company's principal source of funds for cash
dividends is the dividends paid by the Bank. The ability of the Company and Bank
to pay dividends is subject to regulatory restrictions and requirements.
Item 6 - Selected Financial Data
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
1997 1996 1995 1994 1993
Income Statement Data:
Interest income $17,276 $15,717 $14,394 $12,412 $11,948
Interest expense 6,305 5,644 4,879 3,838 4,121
Net interest income 10,971 10,073 9,515 8,574 7,827
Provision for loan losses 486 448 448 448 449
Non-interest income 1,851 1,686 1,418 1,195 1,386
Non-interest expense 6,982 6,151 5,867 5,864 5,674
Income before tax and
accounting change 5,354 5,160 4,618 3,457 3,090
Net income 3,733 3,574 3,200 2,418 2,311
Basic Per Share Data(1):
Income before accounting
change $2.37 2.27 2.03 1.54 1.40
Income after cumulative effect
of accounting change(2) 2.37 2.27 2.03 1.54 1.47
Dividends paid 1.00 .93 .68 .55 .50
Weighted average shares
outstanding 1,575,000 1,575,000 1,575,000 1,575,000 1,575,000
Balance Sheet Data:
Total assets 226,314 202,009 182,958 168,438 155,556
Loans 158,397 136,067 127,463 117,008 112,820
Allowance for loan losses 3,424 3,335 3,097 2,672 2,205
Deposits 202,299 180,944 163,875 151,707 140,489
Shareholders' equity 21,732 19,597 17,530 15,305 13,814
Ratios:
Dividend payout ratio 42.19% 41.13% 33.46% 35.82% 34.07%
Equity to asset ratio 10.05% 9.82% 9.61% 9.14% 8.45%
(1) Per share data for all years has been restated to give effect to the
three-for-one stock split, payable as a dividend paid in February 1997.
(2) Reflects adjustment due to a change in accounting for income taxes in 1993.
20
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion provides information about the consolidated financial
condition and results of operations of FNBH Bancorp, Inc. ("Company") and its
subsidiaries, First National Bank in Howell ("Bank") and HB Realty Co., and
should be read in conjunction with the Consolidated Financial Statements.
FINANCIAL CONDITION
During 1997 total assets increased 12% to $226,314,000. Contributing to
this $24 million increase was a $22.5 million (17%) increase in loans. Deposits
increased $21.4 million (12%) to $202,299,000. Stockholders' equity increased
$2.1 million (11%) to $21,732,000.
Securities
The security portfolio is an important source of liquidity for the Bank to
meet unusual deposit fluctuations. The primary concern of the management of the
Bank is to ensure the safety of funds entrusted to it by its depositors and
shareholders. Approximately $29,000,000 of the security portfolio is invested in
US government obligations. An additional $14,000,000 of the portfolio consists
of tax exempt obligations of states and political subdivisions. The Company's
current and projected tax position makes these investments advantageous to the
Bank. The Bank's investment policy requires purchases of tax exempt issues to be
of bonds with AA ratings or better if the maturity exceeds 4 years unless the
bond is a local, nonrated issue. Except for a minor holding of Federal Reserve
Bank stock which the Bank is required to own, the remainder of the Bank's
investment portfolio consists of government agency mortgage backed securities.
The following table shows the percentage makeup of the security portfolio
as of December 31:
1997 1996
U.S. Treasury & agency securities ......................... 66.3% 72.0%
Agency mortgage backed securities ......................... 1.4% .8%
Tax exempt obligations of states and political subdivisions 32.1% 27.1%
Other ..................................................... 2% .1%
Total securities ...................................... 100.0% 100.0%
Loans
The loan personnel of the Bank are committed to making quality loans that
produce a good rate of return for the Bank and also serve the community by
providing
21
funds for home purchases, business purposes, and consumer needs. The overall
loan portfolio grew $22,500,000 (17%) in 1997.
As a full service lender, the Bank offers a variety of home mortgage loan
products. The Bank makes fixed rate, long-term mortgages which conform to
secondary market standards which it sells. This practice allows the Bank to meet
the housing credit needs of its service area, while at the same time maintaining
loan to deposits ratios and interest sensitivity and liquidity positions within
Bank policy. The Bank retains servicing on sold mortgages thereby furthering the
customer relationship and adding to servicing income. During 1997 the Bank sold
$8,000,000 in residential mortgages.
The Bank has also been able to service customers with loan needs which do
not conform to secondary market requirements by offering variable rate products
which are retained in the mortgage portfolio. These loans are considered
nonconforming as they do not meet certain collateral requirements of the
secondary market and not because of the credit quality of the borrower. During
1997 the Bank made more than $6,000,000 in nonconforming loans which it retained
in the mortgage portfolio.
During 1997, the Bank experienced a significant amount of loan demand.
Growth in the county resulted in a need for financing commercial and consumer
real estate. Commercial loans passed the $100,000,000 mark for the first time in
June and ended the year at $110,000,000, a 21% increase for the year. Consumer
loans increased $2,700,000 (13%).
There was a modest 6% growth in home equity and junior lien loans. Consumer
loans, which consist of auto loans, mobile home loans, or other secured or
unsecured loans, grew at approximately 14%. The Bank does not offer credit cards
but consumer loan balances include $1,500,000 in a revolving line of credit
product accessible by check.
The following table reflects the makeup of the commercial and consumer
loans in the Consolidated Financial Statements that are collateralized by
mortgages. Included in the residential first mortgage totals below are the "real
estate mortgage" loans listed in the Consolidated Financial Statements and other
loans to customers who pledge their homes as collateral for their borrowings. In
the majority of the loans to commercial customers, the Bank is relying on the
borrower's cash flow to service the loans. However, these loans may be secured
by personal or commercial real estate. A portion of the loans listed in
residential first mortgages represent commercial loans where the borrower has
pledged his/her residence as collateral. "Other" real estate loans include
$50,000,000 in loans secured by commercial property with the remaining
$4,000,000 secured by multi-family units. Construction and land development
loans have increased $5,000,000 (39%) as the growth in the county has fueled the
demand for housing and commercial development.
22
The following table shows the balance and percentage makeup of loans as of
December 31:
(dollars in thousands)
1997 1996
Balances Percentage Balances Percentage
Secured by real estate:
Residential first mortgage $ 38,073 23.9% $ 36,1482 6.5%
Residential home equity/other junior liens 13,665 8.6% 12,8839 .4%
Construction and land development 19,4901 2.3% 14,04210 .3%
Other 53,7433 3.8% 43,00631 .5%
Consumer 14,0118 .8% 12,272 9.0%
Commercial 18,2991 1.5% 15,830 11.6%
Other 1,7291 .1% 2,360 1.7%
Total Loans (Gross) $159,010 100.0% $136,541 100.0%
The Bank's loan personnel have endeavored to make high quality loans using
well established policies and procedures and a thorough loan review process.
Loans in excess of $200,000 are approved by a committee of the Board or the
Board. The Bank has hired an independent person to review the quality of the
loan portfolio on a regular basis. Loan quality is demonstrated by the ratios of
nonperforming loans and assets as a percentage of the loan portfolio as
illustrated in the table below for December 31:
(Dollars in thousands)
1997 1996 1995
Nonperforming Loans:
Nonaccrual loans $ 809 $ 109 $926
Loans past due 90 days or more 249 448 66
Total nonperforming loans 1,058 557 992
Other real estate 0 723 46
Total nonperforming assets $1,058 $1,280 $1,038
Nonperforming loans as a percent of total loans 67% .41% .78%
Nonperforming assets as a percent of total loans 67% .94% .81%
Nonperforming loans as a percent of the loan loss reserve 31% 17% 32%
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, accruing loans 90 days or more past due in
payments, and other real estate which has been acquired primarily through
foreclosure and is waiting disposition. Loans are generally placed on a
nonaccrual basis when principal or interest is past due 90 days or more and
when, in the opinion of management, full collection of principal and interest is
unlikely.
Nonperforming loans increased $500,000 to $1,058,000 at December 31, 1997.
Total nonperforming assets decreased $222,000 during the year. The health of the
local economy, sound underwriting standards, and a concerted collection effort
on the part of the Bank have helped contribute to the low delinquency rate.
23
As indicated in Notes 1 and 3 of the Consolidated Financial Statements, the
Bank adopted Statement of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan" in 1995. Impaired loans totaled $3,100,000
at December 31, 1997, compared to $820,000 at the prior year end. Included in
impaired loans are nonperforming loans from the above table, except for
homogenous residential mortgage and consumer loans, and an additional $2,300,000
of commercial loans separately identified as impaired. The increase in impaired
loans is primarily due to problem loans with two large borrowers. Both loans are
well collateralized and are not expected to result in losses that would have a
material adverse impact on the Company's financial condition or results of
operation.
During 1997 the Bank charged off loans totaling $499,000 and recovered
$101,000 for a net charge off amount of $398,000. In the previous year, the Bank
had net charge offs totaling $210,000. The increase in net charge offs is
largely due to one large loan that was written down to the estimated value of
its collateral. As a result, management increased the fourth quarter loan loss
provision to $150,000, from the $112,125 provided for in each of the previous
three quarters.
The allowance for loan losses totaled $3,424,000 at year end which was
2.15% of total loans, down from 2.44% of loans in 1996. The decline is due to
the increase in loan balances and the large charge off taken in 1997. The
allowance for loan losses is more than three times non-performing loans.
Management considers this to be adequate to cover any anticipated losses.
Management regularly evaluates the allowance for loan losses based on the
composition of the loan portfolio, an evaluation of specific credits, historical
loss experience, the level of nonperforming loans and loans that have been
identified as impaired. Externally, the local economy and events or trends which
might negatively impact the loan portfolio are also considered.
The following table shows changes in the loan loss reserve for the years
ended December 31:
(Dollars in thousands)
1997 1996 1995
Balance at beginning of the year....................... $3,335 $3,097 $2,672
Additions (deduction):
Loans charged off...................................... (499) (287) (209)
Recoveries of loans previously charged off............. 102 77 186
Provision charged to operations........................ 486 448 448
Balance at end of the year............................. $3,424 $3,335 $3,097
Allowance for loan losses to loans outstanding......... 2.15% 2.44% 2.42%
Deposits
Deposit balances of $202,299,000 at December 31, 1997 were more than $21
million (12%) higher than the previous year end. Because year end deposit
balances can fluctuate in unusual ways, it is more meaningful to analyze changes
in average balances.
24
Average deposits increased $15.2 million during 1997, about 9%. Non-interest
bearing demand deposits increased $3.7 million, about 12% on average. Average
savings and NOW balances increased $3 million (4%) while average time deposits
increased $8.5 million or about 14%.
The following table sets forth average deposit balances for the years ended
December 31:
(in thousands)
1997 1996 1995
Non-interest bearing demand $ 34,707 $ 31,005 $ 27,348
Savings, NOW and money market 79,104 76,128 70,057
Time deposits 71,093 62,577 54,924
Total average deposits $184,904 $169,710 $152,329
Contributing to the increase in non-interest bearing demand deposits is an
increase in business deposits of 21% from year end 1996 to 1997. The increase in
savings deposits was primarily due to a $4.5 million increase in money market
accounts. The growth in certificates was the result of maintaining competitive
rates in the market and selectively offering special rates on particular time
products.
The majority of the Bank's deposits are from core customer sources-long
term relationships with local personal, business, and public customers. In some
financial institutions, the presence of interest bearing certificates greater
than $100,000 indicates a reliance upon purchased funds. However, large
certificates in the Bank's portfolio consist primarily of core deposits of local
customers. The Bank does not support growth through purchased funds or brokered
deposits. See Note 6 of the Consolidated Financial Statements for a maturity
schedule of over $100,000 certificates.
Capital
The Company's capital at year end totaled $21,732,000, a more than
$2,000,000 (11%) increase over the prior year. Banking regulators have set forth
various ratios of capital to assets to assess a financial institution's
soundness. Tier 1 capital is equal to shareholders' equity while Tier 2 capital
includes a portion of the allowance for loan losses. The regulatory agencies
have set capital standards for "well capitalized" institutions. The leverage
ratio, which divides Tier 1 capital by three months average assets, must be 5%
for a well capitalized institution. The Bank's leverage ratio was 9.50% at year
end 1997. Tier 1 risk-based capital, which includes some off balance sheet items
in assets and weights assets by risk, must be 6% for a well capitalized
institution. The Bank's was 14.12% at year end 1997. Total risk-based capital,
which includes Tier 1 and Tier 2 capital, must be 10% for a well capitalized
institution. The Bank's total risk based capital ratio was 15.37% at year end.
The Bank's strong capital ratios put it in the best classification on which the
FDIC bases its assessment charge.
25
The following table lists various Bank capital ratios at December 31:
1997 1996 1995
Equity to asset ratio 9.19% 9.67% 9.55%
Tier 1 leverage ratio 9.50% 9.86% 9.83%
Tier 1 risk-based capital 14.12% 14.71% 14.30%
Total risk-based capital 15.37% 15.96% 15.55%
The Company's ability to pay dividends is subject to various regulatory
requirements. Management believes, however, that earnings will continue to
generate adequate capital to continue the payment of dividends. In 1997 the
Company paid dividends totaling $1,575,000, or 42% of earnings. Book value of
the stock was $13.80 at year end.
The Company maintains a five year plan which was the result of a formal
strategic planning process. Management and the Board continue to monitor long
term goals which include expanded services to achieve growth and retaining
earnings to fund growth, while providing return to shareholders.
In the coming year, the Bank will spend in excess of $1,000,000 on various
technology improvements including a change to the Bank's core operating system.
In addition, the Bank has received regulatory approval to establish a new branch
in the northwest part of Brighton. Included in other assets is $875,000 paid for
an option to purchase a tract of land in northwest Brighton for $3,000,000. It
is expected that the Bank will exercise the option and that a small part of the
site will be used for the branch and the excess land is expected to be sold.
Construction is expected to begin when all necessary permits have been obtained
from governing agencies.
Liquidity and Funds Management
Liquidity is monitored by the Bank's Asset/Liability Management Committee
(ALCO) which meets at least monthly. ALCO developed, and the Board of Directors
approved, a liquidity policy which requires a minimum 15% liquidity ratio. The
Bank's liquidity ratio averaged 22% in 1997.
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 Company does not
deal in brokered funds and the makeup of its over $100,000 certificates consists
of local depositors known to the Bank.
It is the intention of the Bank's management to handle unexpected liquidity
needs through its Federal Funds position. The goal is to maintain a daily Fed
Funds balance sufficient to cover required cash draws. The Bank's policy
requires all purchases of Fed Funds to be approved by senior management so that
liquidity needs are known. In the
26
event the Bank must borrow for an extended period, management may look to
"available for sale" securities in the investment portfolio for liquidity.
Throughout the past year, Fed Funds Sold balances have averaged slightly
more than $3,000,000 compared to $5,000,000 the prior year. Management strives
to keep a Fed Funds balance of $3-4 million, a target which will generally meet
liquidity needs. Periodically the Bank borrowed money through the Fed Funds
market. In the second quarter of the year, the Bank sold $4,000,000 of its
available for sale investment securities to increase liquidity needed to fund
strong loan demand and seasonal deposit swings.
Quantitative and Qualitative Disclosures about Market Risk
The Bank's Asset/Liability Management committee (ALCO) meets monthly to
review the Bank's performance. The committee discusses the current economic
outlook and its impact on the Bank and current interest rate forecasts. Actual
results are compared to budget in terms of growth and income. A yield and cost
analysis is done to monitor interest margin. Various ratios are discussed
including capital ratios and liquidity. The quality of the loan portfolio is
reviewed in light of the current allowance. The Bank's exposure to market risk
is reviewed.
Interest rate risk is the potential of economic losses due to future rate
changes and can be reflected as a loss of future net interest income and/or a
loss of current market values. The objective is to measure the effect on net
interest income and to adjust the balance sheet to minimize the inherent risk
while at the same time maximizing income. Tools used by management include the
standard GAP report which lays out the repricing schedule for various asset and
liability categories and an interest rate shock simulation report. The Bank has
no market risk sensitive instruments held for trading purposes. The Bank does
not enter 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 (see Note 9 of the Consolidated Financial Statements). It appears
that the Bank's market risk is reasonable at this time.
27
The table below shows the scheduled maturity of the Bank's assets and
liabilities as of December 31, 1997:
0-3 4-12 1-5 5+
Months Months Years Years Total
Assets:
Loans................................. $53,949 $38,007 $60,312 $ 6,743 $159,011
Securities............................ 4,050 20,544 9,147 9,984 43,725
Fed funds............................. 3,100 3,100
Other assets.......................... 20,478 20,478
Total assets.......................... $61,099 $58,551 $69,459 $37,205 $226,314
Liabilities & Shareholders' Equity:
Demand, Savings & NOW................. $35,582 $14,124 $47,534 $28,930 $126,170
Certificates of Deposit............... 12,644 40,523 22,909 53 76,129
Other liabilities and equity.......... 24,015 24,015
Total liabilities and equity.......... $48,226 $54,647 $70,443 $52,998 $226,314
Rate sensitivity gap and ratios:
Gap for period........................ $12,873 $3,904 $ (984) $(15,793)
Cumulative gap........................ 12,873 16,777 15,793
Cumulative rate sensitive ratio....... 1.27 1.16 1.09 1.00
December 31, 1996 rate sensitive ratio .97 1.11 1.49 1.00
Total Average Interest Rate Estimated Fair Value
Assets:
Loans $159,011 9.82% $158,700
Securities 43,725 6.38% 44,200
Fed funds 3,100 5.40% 3,100
Liabilities:
Savings, NOW, MMDA $84,539 2.79% 84,540
Certificates of Deposit 76,129 5.71% 77,400
Estimated fair value for securities are based on quoted market prices. For
variable rate loans that reprice frequently and with no significant change in
credit risk, fair values are generally based on carrying values. The fair values
for fixed rate one-to-four family residential mortgage loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. Because it has a one day
maturity, the carrying value is used as fair value for fed funds sold. The fair
value of deposits with no stated maturity, such as savings, NOW and money market
accounts is
28
equal to the amount payable on demand. The fair value of certificates of deposit
is estimated using rates currently offered for deposits with similar remaining
maturities.
As noted above, the entire balance of savings, NOW and MMDAs is not
categorized as 0-3 months, although they are variable rate products. Some of
these balances are core deposits which are not considered rate sensitive based
on the Bank's historical experience.
Given the asset sensitive position of the Bank at December 31, 1997, if
interest rates decrease 200 basis points and management did not respond,
management estimates that pretax net interest income would decrease
approximately $400,000 while a similar increase in rates would cause pretax net
interest income to increase by a like amount. See discussion under "Net Interest
Income" below.
RESULTS OF OPERATIONS
The Company achieved record earnings in 1997. Net income of $3,733,000 was
an increase of $160,000 (4.5%) over 1996 earnings. The increase was due to an
increase in both net interest income and non-interest income. The Company's
return on average assets (ROA) was 1.79% in 1997, a 9 basis point decrease from
the prior year. The ROA declined because income grew at 4.5% while average
assets grew at 9.4%. The return on average stockholders' equity (ROE) was
17.84%, a decrease of 110 basis points from the ROE reported in 1996. The
decline in ROE occurred because average equity grew 12% while earnings grew
4.5%.
The following table contains key performance ratios for years ended
December 31:
1997 1996 1995
Net income to:
Average stockholders' equity 17.84% 19.12% 19.60%
Average assets 1.79% 1.88% 1.88%
Basic earnings per common share:* $2.37 $2.27 $2.03
* restated to give effect to 3 for 1 stock split, payable as a dividend on two
shares for each one share of company stock held of record January 16, 1997, paid
February 16, 1997.
Net Interest Income
Net interest income is the difference between interest earned on earning
assets and interest paid on deposits. It is the major component of earnings for
a financial institution. For analytical purposes, the interest earned on
investments and loans is expressed on a fully taxable equivalent (FTE) basis.
Tax-exempt interest is increased to an amount comparable to interest subject to
federal income taxes in order to properly evaluate the effective yields earned
on earning assets. The tax equivalent adjustment is based on a federal income
tax rate of 34%.
29
The following table shows the average balance and percentage earned or paid
on key components of earning assets and paying liabilities for the year ended
December 31:
1997 1996 1995
Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate
Interest earning assets:
Federal funds sold $2,754 5.40% $5,135 5.24% $3,084 5.76%
Taxable securities 31,873 5.98% 32,042 5.95% 25,591 5.64%
Tax-exempt securities 13,262 7.36% 11,172 7.64% 9,413 8.28%
Loans 148,096 9.82% 130,648 9.91% 122,500 9.99%
Total earning assets $195,985 8.97% $178,997 8.93% $160,588 9.12%
Interest bearing funds:
Savings/NOW accounts $79,104 2.79% $76,128 2.80% $70,057 2.61%
Time deposits 71,093 5.71% 62,577 5.62% 54,924 5.54%
Federal funds purchased 610 5.77% 4 5.58% 105 6.43%
Total interest bearing funds: $150,807 4.18% $138,709 4.07% $125,086 3.90%
Interest spread 4.79% 4.86% 5.22%
Net interest margin 5.75% 5.77% 6.08%
Tax equivalent interest income in each of the three years includes loan
origination fees. A substantial portion of such fees is deferred for recognition
in future periods or is considered in determining the gain or loss on the sale
of real estate mortgage loans. Tax equivalent interest income, however, includes
net loan origination fees totaling $380,000 in 1997, $451,000 in 1996, and
$440,000 in 1995.
30
The following table sets forth the effects of volume and rate changes on
net interest income on a taxable equivalent basis. All figures are stated in
thousands of dollars.
Year ended Year ended
December 31, 1997 compared to December 31, 1996 compared to
Year ended December 31, 1996 Year ended December 31, 1995
Amount of Increase/(Decrease) Amount of Increase/(Decrease)
due to change in Due to change in
Total Total
Amount Amount
Of Of
Average Increase/ Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
Interest Income:Federal funds sold........ $ (125) $ 4 $ (121) $ 118 $ (27) $ 91
Securities: Taxable....................... (10) 10 0 364 98 462
Tax Exempt................................ 160 (37) 123 146 (72) 74
Loans..................................... 1,729 (136) 1,593 814 (105) 709
Total interest income..................... $ 1,754 $ (159) $1,595 $ 1,442 $ (106) $ 1,336
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts...................... $ 83 $ (2) $ 81 $ 159 $ 145 $ 304
Time...................................... 478 67 545 424 45 469
Short-term borrowings..................... 34 1 35 (7) 0 (7)
Total interest expense.................... $ 595 $ 66 $ 661 $ 576 $ 190 $766
Net interest income (FTE)................. $ 1,159 $ (225) $ 934 $ 866 $ (296) $ 570
The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
Net interest income increased $934,000 in 1997 over the prior year due to a
$1,595,000 increase in interest income partially offset by approximately
$661,000 increase in interest expense. The increase in income can be attributed
to an increase in average earning assets of $17,000,000. The increase in income
on earning assets would have been greater had the yield not declined 7 basis
points. Interest income on Fed Funds Sold decreased $121,000 due to an decrease
in average balances of $2,400,000, partially offset by an increase in rates of
16 basis points. Income on taxable securities was essentially the same in both
1997 and 1996, with a slight decrease in average balances being offset with a
slight increase in interest rates. Tax-exempt bonds earned $123,000 more in 1997
than the previous year. The average balance of these securities increased more
than $2,000,000 while the rate declined 28 basis points. Loan interest income
was $1,593,000 higher in 1997 than the previous year. The increase was due to an
increase of
31
nearly $17,500,000 in average balances, partially offset by a 9 basis point
decline in rates. Loan demand was strong in 1997 and management of the Bank
endeavored to meet the needs of the community by allowing the investment
portfolio to decline to satisfy loan demand. Average commercial loans grew 17%
and average consumer loans grew 16%.
Interest expense increased $661,000 in 1997 because average balances
increased approximately $12,000,000 and interest rates increased 11 basis
points. The interest cost for savings and NOW accounts increased $81,000 because
average savings and NOW balances increased $3,000,000 while interest rates
declined one basis point. Interest on certificates of deposit increased $545,000
because average time deposits increased $8,500,000 and interest rates increased
9 basis points. Savings balances increased as customers responded favorably to
the tiered rate structure now being offered on money market accounts. Growth in
time deposits was encouraged by competitive pricing and periodically offering
special rates on specific products. Fed funds purchased increased $35,000
primarily because the average balance increased $606,000.
In the previous year, net interest income had increased nearly $570,000.
The increase in net interest income was the result of an increase in interest
income of $1,336,000, partially offset by an increase in interest expense of
approximately $766,000. The increase in interest income in 1996 was the result
of an $18,400,000 increase in earning assets partially offset by a decrease in
yields on earning assets of 19 basis points. The increase in interest expense
was the result of average balances increasing $13,600,000 and interest rates
increasing 17 basis points.
In the coming year, management expects growth to continue in both loans and
deposits on the assumption that the economy will remain strong. An economic
decline could adversely affect growth. The interest spread and interest margin
will likely continue to decline unless the Fed increases rates. The interest
cost on deposits is expected to continue to rise as competition for deposits
intensifies among the bank and non-bank players.
The following table shows the composition of average earning assets and
interest paying liabilities for the years ended December 31:
1997 1996 1995
As a percent of average earning assets:
Loans 75.56% 72.99% 76.28%
Securities 23.03% 24.14% 21.80%
Fed funds sold 1.41% 2.87% 1.92%
Average earning assets 100.00% 100.00% 100.00%
Savings and NOW 40.36% 42.53% 43.63%
Time deposits 36.27% 34.96% 34.20%
Fed funds purchased .31% 0 .07%
Average interest bearing
liabilities 76.94% 77.49% 77.90%
Earning asset ratio 94.14% 94.08% 94.17%
Free-funds ratio 23.06% 22.51% 22.10%
32
Provision for Loan Losses
The provision for loan losses increased to $486,000 in 1997 compared to
$448,500 in 1996. This provision was sufficient to produce a ratio of allowance
for loan loss to loans of 2.15% and a ratio of nonperforming loans to the
allowance for loan loss of 31% at year end. Partially due to the growth in
commercial loans, which typically carry more risk, management expects to
increase the provision in the coming year. Management analysis of the adequacy
of the allowance considers the portfolio mix as well as economic conditions
within the Bank's market.
Non-interest Income
Non-interest income, which includes service charges on deposit accounts,
loan fees, other operating income, and gain(loss) on sale of assets and
securities transactions, increased by approximately $160,000 (10%) in 1997
compared to the previous year. Service charge income increased $70,000 (5%) over
the prior year, due to loan and deposit growth. Gain on loan sales increased
$60,000 (60%). This number is very volatile as the volume of loan sales is
dependent on the amount of mortgage demand and on the movement of mortgage
rates. In 1997 the Bank benefited from good mortgage demand and falling mortgage
rates. "Other" non-interest income increased $30,000 in 1997. Included in other
non-interest income is a nonrecurring $86,000 gain on the sale of other real
estate. In 1996 there was a gain of $60,000 on the sale of other real estate.
Non-interest Expense
Non-interest interest expense increased 13.5% in 1997. The most significant
component of non-interest expense is salaries and benefits expense. In 1997
salaries and benefits expense increased 15% to $3,800,000, due to the combined
effects of salary increases, staffing of the trust department, and an increase
in the employee profit sharing bonus.
Occupancy expense increased $40,000 and equipment expense increased
$35,000. The increase in occupancy was primarily due to increased depreciation
costs as the main office and Brighton branch buildings both had major
renovations that were completed during 1996 and had a full year of depreciation
expense in 1997. Equipment expense increased both because maintenance and
depreciation costs increased. In 1998 the Bank will change its core operating
system which will require an estimated $1,200,000 investment in hardware and
software that will result in an increased depreciation expense of approximately
$200,000 in the coming year.
Other expense increased $205,000 (17%). The most notable factors
contributing to the increase in other expense were increases in expense related
to upgrading technology and in legal fees related to the sale of other real
estate, problem loans, property negotiations, and compensation plans.
The Bank's trust department officially opened in August but incurred
expenses for about three quarters of the year and lost approximately $190,000
for the year. It is
33
anticipated that next year the trust department will lose approximately $30,000
more than it did in 1997.
Year 2000 issues will be a focus of management's attention in the coming
year. The Bank is highly dependent on technology and several applications are
dependent on the software's ability to make the transition to the year 2000. The
Bank has hired a consultant who has recommended actions related to year 2000
compliance. A committee is in the process of implementing these steps at this
time. Other than the 1998 increased technology investments previously mentioned,
management does not believe that compliance with Year 2000 will have a material
effect on the Bank's financial condition.
Federal Income Tax Expense
Fluctuations in income taxes resulted primarily from changes in the level
of profitability and in variations in the amount of tax-exempt income. Income
tax expense increased $35,000 to $1,620,500 (2%) in 1997. For further
information see Note 7 "Federal Income Taxes" in the Company's Consolidated
Financial Statements.
Prospective Accounting Changes
The Financial Accounting Standards Board adopted Statement of Financial
Accounting Standards, No. 130, "Reporting Comprehensive Income" (SFAS #130) and
Statement of Financial Accounting Standards, No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS #131) in June of 1997.
SFAS #130 establishes standards for reporting and displaying comprehensive
income and its components, including but not limited to unrealized gains or
losses on securities available for sale, in the financial statements. This
statement is effective for both interim and annual periods beginning after
December 15, 1997 with earlier application permitted. SFAS #130 will require
reclassification of all prior period amounts.
SFAS #131 establishes standards for the way that public entities report
information about operating segments in financial statements. This statement is
effective for both interim and annual periods beginning after December 31, 1997
with restatement of prior period information required.
Item 7a - Quantitative and Qualititative Disclosures about Market Risk
Included in Management's Discussion and Analysis
Item 8 - Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data of
the Company appear on pages 1 to 17 of Appendix III to the Company's definitive
Proxy Statement, dated March 17, 1998, relating to the April 22, 1998 Annual
Meeting of
34
shareholders, as filed with the Commission. This Appendix is incorporated herein
by reference and included as Exhibit 13 to this report on Form 10-K:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statement
Independent Auditors' Report
Quarterly financial data relating to results of operations for the
years ended December 31, 1997 and 1996 are reported on page 17 of Appendix III.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
Directors
The information with respect to Directors and Nominees of the Registrant,
set forth under the caption "Election of Directors" on pages 1 through 3 of the
Company's definitive proxy statement, as filed with the Commission and dated
March 17, 1998, relating to the April 22, 1998 Annual Meeting of Shareholders,
is incorporated herein by reference.
Executive Officers
The information called for by this item is contained in Part I of this Form
10-K Report.
Item 11 - Executive Compensation
The information set forth under the caption "Summary Compensation Table" on
page 7 of the Company's definitive proxy statement, as filed with the Commission
and dated March 17, 1998, relating to the April 22, 1998 Annual Meeting of
Shareholders, is incorporated herein by reference. Information under the caption
"Committee Report on Executive Compensation" on page 6 and "Shareholder Return
Performance Graph" on page 10 of the definitive proxy statement is not
incorporated by reference herein and is not deemed to be filed with the
Securities and Exchange Commission.
35
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Ownership of Common Stock" on
page 9 of the Company's definitive proxy statement, as filed with the Commission
and dated March 17, 1998, relating to the April 22, 1998 Annual Meeting of
Shareholders, is incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions with
Management" on page 8 of the Company's definitive proxy statement, as filed with
the Commission and dated March 17, 1998, relating to the April 22, 1998 Annual
Meeting of Shareholders, is incorporated herein by reference.
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) 1. Financial Statements
All financial statements of the Registrant are incorporated herein by
reference as set forth in Appendix III to the Registrant's Definitive
Proxy Statement, dated March 17, 1998, relating to the April 22, 1998
Annual Meeting of Shareholders, a copy of which is filed as Exhibit 13
to this Report on Form 10-K.
2. Financial Statement Schedules
Not applicable.
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on
Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1997.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, dated March 12, 1998.
FNBH BANCORP, INC.
/s/ Barbara D. Martin Barbara D. Martin, President & Chief Executive
Officer (Principal Executive Officer)
/s/ Barbara J. Nelson Barbara J. Nelson, Secretary/Treasurer
(Principal Accounting Officer)
37
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated. Each director of the Registrant, who's
signature appears below, hereby appoints Barbara D. Martin and Barbara J.
Nelson, and each of them severally, as his or her attorney-in-fact, to sign in
his or her name and on his or her behalf, as a director of the Registrant, and
to file with the Commission any and all Amendments to this Report on Form 10-K.
Roy A. Westran, Chairman of the Board /s/ Roy A. Westran
Harry E. Griffith, Vice Chairman of the Board /s/ Harry E. Griffith
Gary R. Boss, Director /s/ Gary R. Boss
Donald K. Burkel, Director /s/ Donald K. Burkel
Rebecca S. English, Director /s/ Rebecca S. English
Charles N. Holkins, Director /s/ Charles N. Holkins
Dona Scott Laskey, Director /s/ Dona Scott Laskey
Barbara D. Martin, Director /s/ Barbara D. Martin
Randolph E. Rudisill, Director /s/ Randolph E. Rudisill
W. Rickard Scofield, Director /s/ W. Rickard Scofield
R. Michael Yost, Director /s/ R. Michael Yost
38
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the
applicable assigned number:
Exhibit
Number Page
(13) Pages 1-17 of Appendix III to the Company's Proxy Statement for
Annual Meeting of Shareholders to be held April 22, 1998 representing
that portion of the Appendix incorporated by reference in Item 8 of
this report. This Appendix was filed with the Commission as part of the
Company's Proxy Statement and was delivered to Company shareholders in
compliance with Rule 14(a)-3 of the Securities Exchange
Act of 1934, as amended.................................................38
(21) Subsidiaries of the Registrant..........................................40
The following exhibits, indexed according to the applicable assigned
number, were previously filed by the Registrant and are incorporated by
reference in this Form 10-K Annual Report.
Exhibit
Number Original Filing Form and Date
3.1 Restated Articles of Incorporation Exhibit 3.1 of Form 10, effective
of the Registrant June 30, 1995 ("Form 10")
3.2 Bylaws of the Registrant Exhibit 3.2 of Form 10
4 Form of Registrant's Stock Certificate Exhibit 4 of Form 10
Material Contracts:
10.2 Howell Branch Lease Agreement Exhibit 10.2 to Form 10
39
EXHIBIT 21
SUBSIDIARIES
Name Jurisdiction of Incorporation
First National Bank in Howell Michigan
H.B. Realty Co................................................Michigan
40