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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 0-25752
FNBH BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2869722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 East Grand River, Howell, Michigan 48843
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517)546-3150
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes__X__ No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on a per share price of $42 as of March 1, 2001, was
$65,845,416 (common stock, no par value). As of December 31, 2000 there were
outstanding 1,567,748 shares of the Company's Common Stock (no par value).
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement and appendix dated March 23, 2001 for
the Annual Meeting of Shareholders to be held April 25, 2001 are incorporated by
reference into Parts I, II and III of this report.
1
PART I
Included in this Form 10-K are certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1993, as amended, and
Section 21 E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on the beliefs of the Company's management
as well as on assumptions made by and information currently available to the
Company at the times such statements were made. Actual results could differ
materially from those included in such forward-looking statements as a result
of, among other things, factors set forth below in this Report generally, and
certain economic and business factors, some of which may be beyond the control
of the Company. Investors are cautioned that all forward-looking statements
involve risks and uncertainty.
Item 1 - Business
FNBH Bancorp, Inc. (the Company), a Michigan business corporation, is a one
bank holding company, which owns all of the outstanding capital stock of First
National Bank in Howell (the "Bank"). The Company was formed in 1988 for the
purpose of acquiring all of the stock of the Bank in a shareholder approved
reorganization, which became effective May, 1989.
The Bank was originally organized in 1934 as a national banking
association. As of March 1, 2001, the Bank had approximately 125 full-time and
part-time employees. None of the Bank's employees is subject to collective
bargaining agreements. The Company does not directly employ any personnel. The
Bank serves primarily four communities, Howell, Brighton, Hartland, and
Fowlerville, all of which are located in Livingston County. The county has
historically been rural in character but has a growing suburban population
especially in the southeast quadrant of the county, primarily attributable to
growth around the City of Brighton.
On November 26, 1997 H.B. Realty Co., a subsidiary of the Company, was
established to purchase land for a future branch site of the Bank and to hold
title to other Bank real estate when it is considered prudent to do so.
Bank Services
The Bank is a full service bank offering a wide range of commercial and
personal banking services. These services include checking accounts, savings
accounts, certificates of deposit, commercial loans, real estate loans,
installment loans, trust and investment services, collections, traveler's
checks, night depository, safe deposit box and U.S. Savings Bonds. The Bank
maintains correspondent relationships with major banks in Detroit, pursuant to
which the Bank engages in federal funds sale and purchase transactions, the
clearance of checks and certain foreign currency transactions. The Bank also has
2
a relationship with the Federal Home Loan Bank of Indianapolis where it makes
short term investments and where it has a line of credit of $16,000,000, of
which $10,000,000 is available, $6,000,000 funded as of year end. In addition,
the Bank participates with other financial institutions to fund certain large
loans which would exceed the Bank's legal lending limit if made solely by the
Bank.
The Bank's deposits are generated in the normal course of business and the
loss of any one depositor would not have a materially adverse effect on the
business of the Bank. As of December 31, 2000, 43% of outstanding loans were for
either commercial or residential construction or development. As of December 31,
2000, the Bank's certificates of deposit of $100,000 or more constituted
approximately 11% of total deposit liabilities. The Bank's deposits are
primarily from its service area and the Bank does not seek or encourage large
deposits from outside the area.
The Company's cash revenues are derived primarily from dividends paid by
the Bank. The Bank's principal sources of revenue are interest and fees on loans
and interest on investment securities. Interest and fees on loans constituted
approximately 81% of total revenues for the period ended December 31, 2000 and
79% of total revenues for the period ended December 31, 1999. Interest on
investment securities, including short-term investments and federal funds sold,
constituted approximately 10% of total revenues in 2000 and 12% of total
revenues in 1999. Revenues were also generated from deposit service charges and
other financial service fees.
The Bank provides real estate, consumer, and commercial loans to customers
in its market. Fifty-five percent of the Bank's loan portfolio is in fixed rate
loans. Most of these loans, approximately 83%, mature within five years of
issuance. Approximately $26,000,000 in loans (or about 10% of the Bank's total
loan portfolio) have fixed rates with maturities exceeding five years. Fifty-two
percent of the Bank's interest-bearing deposits are in savings, NOW, and MMDAs,
all of which are variable rate products. Of the approximately $121,400,000 in
certificates, $76,500,000 mature within a year, with the majority of the balance
maturing within a five year period.
Requests to the Bank for credit are considered on the basis of credit
worthiness of each applicant, without consideration to race, color, religion,
national origin, sex, marital status, physical handicap, age, or the receipt of
income from public assistance programs. Consideration is also given to the
applicant's capacity for repayment, collateral, capital and alternative sources
of repayment. Loan applications are accepted at all the Bank's offices and are
approved under each lending officer's authority. Loan requests in excess of
$400,000 are required to be presented to the Board of Directors or the Executive
Committee of the Board for its review and approval.
As described in more detail below, the Bank's cumulative one year gap ratio
of rate sensitive assets to rate sensitive liabilities for the period ended
December 31, 2000, was 16% asset sensitive, compared to 1% asset sensitive at
December 31, 1999. See discussion and table under "Quantitative and Qualitative
Disclosures about Market Risk" in Item 7 below.
3
The Bank sells participations in commercial loans to other financial
institutions approved by the Bank, for the purpose of meeting legal lending
limit requirements or loan concentration considerations. The Bank regularly
sells fixed rate residential mortgages to Freddie Mac while retaining servicing
on the sold loans. Those residential real estate mortgage loan requests that do
not meet Freddie Mac criteria are reviewed by the Bank for approval and, if
approved, are retained in the Bank's loan portfolio. The Bank also may purchase
loans which meet its normal credit standards.
The Bank's investment policy is considered by management to be generally
conservative. It provides for unlimited investment in U.S. government and agency
bonds, with a maximum maturity of five years. Municipal bonds may be purchased
to provide nontaxable income, with the maximum life of municipal bonds limited
to approximately ten years with a double A rating or better. A single A rated
bond may be purchased if it matures in four years or less. Non-rated bonds may
be purchased from local communities that are familiar to the Bank, with a
maximum block size of a single purchase limited to $300,000. Investments in
states other than Michigan may not exceed 20% of the municipal portfolio, and
investments in a single issuer may not exceed 10% of equity capital. Mortgage
backed securities, which are fully collateralized by securities issued by
government sponsored agencies, may be purchased in block sizes of up to
$1,000,000, provided the average life expectancy does not exceed seven years. In
addition, certain collateralized mortgage obligations may be purchased if their
average life does not exceed five years. In any case, investments in mortgage
backed securities may not exceed 10% of the investment portfolio.
The acquisition of "high-risk mortgage securities" is prohibited. In no
case may the Bank participate in such activities as gains trading, "when-issued"
trading, "pair offs", corporate settlement of government and agency securities,
repositioning repurchase agreements, and short sales. All securities dealers
effecting transactions in securities held or purchased by the Bank must be
approved by the Board of Directors.
Bank Competition
The Bank has seven offices within the four communities it serves, all of
which are located in Livingston County, Michigan. Three of the offices,
including the main office, are located in Howell. There are two facilities in
Brighton, and one each in Hartland, and Fowlerville. See "Properties" below for
more detail on these facilities. Within these communities, its principal
competitors are Old Kent Bank, National City Bank, D&N Bank, and Bank One. Each
of these financial institutions, which are headquartered in larger metropolitan
areas, have significantly greater assets and financial resources than the
Company. Among the principal competitors in the communities in which the Bank
operates, the Bank is the only locally owned financial institution. Based on
deposit information as of June 30, 2000, the Bank holds approximately 19.87% of
local deposits, compared to approximately 19.74% held by Old Kent Bank,
approximately 10.84% held by D&N Bank, approximately 11.06% held by National
City Bank, and approximately
4
8.79% held by Bank One. Information as to asset size of competitor financial
institutions is derived from publicly available reports filed by and with
regulatory agencies. Within the Bank's markets, Old Kent Bank maintains five
branch offices, National City Bank operates six branch offices, D&N Bank has
five branch offices, and Bank One has three branch offices. Management is not
aware of any plans by these financial institutions to expand their presence in
the Bank's market. However, the purchase of Old Kent Bank by Fifth Third Bank
may have an impact on competition.
The financial services industry continues to become increasingly
competitive. Principal methods of competition include loan and deposit pricing,
advertising and marketing programs, and the types and quality of services
provided. The deregulation of the financial services industry and the easing of
restrictions on bank and holding company activities have led to increased
competition among banks and other financial providers for funds, loans, and a
broad array of other financial services. Competition within the Bank's market
has been relatively stable within the past years. Management continues to
evaluate the opportunities for the expansion of products and services.
Growth of Bank
The following table sets forth certain information regarding the growth of
the Bank:
Balances as of December 31,
---------------------------
(in thousands)
2000 1999 1998 1997 1996
----- ---- ---- ---- ----
Total Assets $348,363 $296,419 $264,894 $226,314 $202,009
Loans, Net of Unearned Income 255,414 209,952 185,018 158,397 136,067
Securities 39,311 50,598 38,646 43,725 47,257
Noninterest-Bearing Deposits 55,252 47,980 47,402 41,631 35,048
Interest-Bearing Deposits 254,961 221,210 192,155 160,668 145,896
Total Deposits 310,214 269,190 239,557 202,299 180,944
Shareholders' Equity 28,887 25,312 23,497 21,732 19,597
Through 1998, the Bank operated six branch facilities: one in downtown
Howell, one at Lake Chemung (five miles east of downtown Howell), one on the
east side of Brighton, one in Hartland, one in the village of Fowlerville, and
the sixth is a grocery store branch, located west of downtown Howell. In August
of 1999, the Bank opened a new regional facility on the west side of Brighton.
As of December 31, 2000, this new branch had approximately $22,000,000 in
deposits. In the time period presented, all of the Bank's branches grew due to
general growth in the county.
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. This summary is qualified in its entirety by reference
to the particular statutes and regulations. Changes in applicable laws and
regulations may have a material effect on the Company and the Bank and their
respective businesses.
5
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), the FDIC, the Office of the
Comptroller of the Currency (the "OCC"), the Internal Revenue Service, and state
taxing authorities. The effect of such statutes, regulations and policies can be
significant and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Bank, and the public, rather than
shareholders of the Company.
Federal law and regulations establish supervisory standards applicable to
the lending activities of the Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
Recent Legislation
The Gramm-Leach-Bliley Act of 1999 (the "GLB Act") removed large parts of a
regulatory framework that had its origins in the Depression Era of the 1930s.
Effective March 11, 2000, new opportunities became available for banks, other
depository institutions, insurance companies and securities firms to enter into
combinations that permit a single financial services organization to offer
customers more financial products and services. The GLB Act provides for a new
regulatory framework for regulation through the "financial holding company,"
which has as its umbrella regulator the Federal Reserve Board. Functional
regulation of the financial holding company's separately regulated subsidiaries
is conducted by their primary functional regulator. In order to qualify as a
financial holding company, a bank holding company must file an election to
become a financial holding company and each of its banks must be "well
capitalized" and "well managed." In addition, the GLB Act makes satisfactory or
above Community Reinvestment Act compliance for insured depository institutions
and their financial holding companies necessary in order for them to engage in
new financial activities. The GLB Act provides a federal right to privacy of
non-public personal information of
6
individual customers. The Company and the Bank are also subject to certain state
laws that deal with the use and distribution of non-public personal information.
The Company believes that the GLB Act could significantly increase
competition in its business and, from time to time, will be evaluating in its
planning process the desirability of electing to become a financial holding
company. The Company believes that it is qualified to elect financial holding
company status but has not yet decided to do so.
The Company
As a registered bank holding company under the Bank Holding Company Act of
1956, as amended (the "Act"), the Company is subject to supervision and
examination by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") and is required to file, with the Federal Reserve Board, annual
reports and information regarding its business operations and those of its
subsidiaries.
The Act requires a bank holding company to obtain the approval of the
Federal Reserve Board before it may acquire more than 5% of the voting stock or
substantially all of the assets of any bank or merge or consolidate with any
other bank holding company. If the effect of a proposed acquisition, merger or
consolidation may substantially lessen competition or tend to create a monopoly,
the Federal Reserve Board cannot approve the acquisition unless it finds that
the anticompetitive effects of the acquisition, merger, or consolidation are
clearly outweighed by the convenience and needs of the community to be served.
The Act also provides that the consummation of any acquisition, merger or
consolidation must be delayed at least 15 days following the approval of the
Federal Reserve Board and that any action brought under the antitrust laws of
the United States during the time will delay the effectiveness of its approval
during the pendency of the action unless otherwise ordered by the board.
The Riegle-Neal Interstate Banking and Branching Efficiency Act authorizes
adequately capitalized and adequately managed bank holding companies to acquire
banks located outside their respective home states, irrespective of state law.
This legislation also authorizes, effective June 1, 1997 (subject to individual
state's rights to accelerate this date or prohibit interstate branching within
their borders), banking organizations to branch nationwide by acquisition or
consolidation of existing banks in other states. Michigan law authorizes
out-of-state banks to acquire and establish branches in Michigan, provided the
laws of the state of the out-of-state institution permit Michigan banks to
acquire or establish branches in that state. Interstate acquisitions are subject
to the approval of various federal and state agencies and subject to other
conditions.
Subject to certain exceptions, a bank holding company is also prohibited
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank and from engaging directly or
indirectly in activities unrelated to banking or managing or controlling banks.
One of the exceptions to this prohibition permits activities by a bank holding
company or its subsidiaries which the Federal Reserve Board has determined, as
of the day before the enactment of the GLB
7
act, to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto. The Federal Reserve Board has adopted regulations
prescribing those activities which it presently regards as permissible for bank
holding companies and their subsidiaries. Some of these activities include:
performing certain data processing services; certain personal and real property
leasing; making, acquiring, or servicing loans and other extensions of credit as
would be made by a mortgage, finance, credit card or other factoring company;
bank related courier services; and, under certain circumstances, acting as any
or all of the following: investment or financial advisor, insurance agent or
broker, and underwriter for credit life insurance and credit accident and health
insurance. The Act does not place geographic restrictions on the activities of
the nonbank subsidiaries of bank holding companies. The enactment of the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 streamlines the
nonbanking activities application process for well capitalized and well managed
bank holding companies.
The Act, the Federal Reserve Act, and the Federal Deposit Insurance Act
also subject bank holding companies and their subsidiaries to certain
restrictions on any extensions of credit by subsidiary banks to the bank holding
company or any of its subsidiaries, or investments in the stock or other
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower. Further, under the Act and regulations of the Federal
Reserve Board, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of any property or furnishing of service.
The Federal Reserve Board provides guidelines for the measurement of
capital adequacy of bank holding companies. The Company's capital, as adjusted
under these guidelines, is referred to as risk-based capital. The Company's Tier
1 risk-based capital ratio, at December 31, 2000, was 10.70% and total
risk-based capital was 11.96%. At December 31, 1999, these ratios were 11.36%
and 12.62%, respectively. Minimum regulatory Tier 1 risk-based and total
risk-based capital ratios under the Federal Reserve Board guidelines are 4% and
8%, respectively. These same capital ratios are applied at the bank level by the
Federal Deposit Insurance Corporation, under which a well-capitalized bank is
defined as one with at least 10% risk-based capital. Capital guidelines also
provide for a standard to measure risk-based capital to total assets. This is
referred to as the leverage ratio. The Company 's leverage ratio at December 31,
2000 was 9.19%, while at December 31, 1999 it was 9.13%. The minimum standard
leverage ratio is 3%. See also "Capital" discussion in Item 7 below.
As a Michigan business corporation, the Company may generally declare and
pay dividends, provided the Company is not insolvent and that the payment of the
dividend would not render it insolvent, and, after giving the effect of the
distribution, that the Company's total assets would equal or exceed its total
liabilities plus the dissolution preference of any senior equity securities (of
which there currently are none). The payment of dividends to its shareholders is
limited by the Company's ability to obtain funds from the Bank and by the
above-referenced regulatory capital guidelines.
8
The Bank
The Bank is organized as a national banking association and is therefore
regulated and supervised by the OCC. The deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC"). Consequently, the Bank is also
subject to the provisions of the Federal Deposit Insurance Act. As a result of
such supervision and regulation, the Bank is subject to requirements to maintain
reserves against deposits, restrictions on the nature and amount of loans which
may be made and the interest which may be charged thereon, restrictions relating
to investments and other activities, limitations based on capital and surplus,
and limitations on the payment of dividends on its capital stock. The various
regulatory and legal requirements referenced above are primarily for the
protection of the Bank's depositors and customers rather than the shareholders
of the Company.
As a national bank, the Bank may not pay a dividend on its common stock if
the dividend would exceed the net undivided profits then on hand after deducting
losses and bad debts. Additionally, the prior approval of the Office of the
Comptroller of the Currency, or its designee, is required for any dividend to a
bank holding company by an affiliated national bank if the total of all
dividends, including any proposed dividend declared by such bank in any calendar
year, exceeds the total of its net profits for that year combined with its
retained net profits for the preceding two years, less any required transfers to
surplus.
The Federal Deposit Insurance Act was amended in 1991 by the FDIC
Improvement Act of 1991. The FDIC Improvement Act provides for regulatory
intervention should a bank's capital deteriorate, limits certain real estate
lending and increases audit requirements. The FDIC has been granted authority to
impose special assessments on banks to repay borrowings of the FDIC. The FDIC
Improvement Act defines a reserve ratio at which the Bank Insurance Fund ("BIF")
is to be maintained through FDIC semi-annual assessment rates on the BIF member
banks. The FDIC has also established a system of risk-based deposit insurance
premiums under the FDIC Improvement Act. This system established four levels of
premium rates based on the risk classification of the institution. As a national
bank, the Bank's premiums are paid to BIF. Given the designation as a well
managed, well capitalized institution, the Bank pays the lowest assessment rate
possible to BIF.
As required by the Deposit Insurance Funds Act of 1996, in 1997 the Bank
commenced making payments to the FDIC for the Financing Corporation (FICO) bonds
that were issued previously. The FICO rate for BIF member banks is 2.06 basis
points annually applied to assessable deposits. During 2000 the Bank paid
$53,000 to the FDIC.
In 1996 the Michigan Legislature adopted the Credit Reform Act. This
statute, together with amendments to other related laws, permits regulated
lenders, indirectly including Michigan-chartered banks, to charge and collect
higher rates of interest and increased fees on certain types of loans to
individuals and businesses. The laws prohibit "excessive fees and charges," and
authorize governmental authorities and borrowers to
9
bring actions for injunctive relief and statutory and actual damages for
violations by lenders. The statutes specifically authorize class actions, and
also civil money penalties, for knowing and willful or persistent violations.
I SELECTED STATISTICAL INFORMATION
(A) Distribution of Assets, Liabilities, and Shareholders' Equity:
(B) Interest Rates and Interest Differential:
The table on the following page shows the daily average balances for major
categories of interest earning assets and interest bearing liabilities, interest
earned (on a taxable equivalent basis) or paid, and the effective rate or yield,
for the three years ended December 31, 2000, 1999, and 1998.
Net interest income is the difference between interest earned on loans,
securities and other earning assets and interest paid on deposits and borrowed
funds. In the following tables, the interest earned on investments and loans is
expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a federal income tax rate of 34%. The
following Yield Analysis shows that the Bank's interest margin increased 18
basis points in 2000 as a result of an increase of 51 basis points in yield on
earning assets, partially offset by an increase of 43 basis points in the
interest cost on deposits. In 1999 the interest margin decreased 28 basis points
due to a 49 basis point decrease in yield on earning assets while interest cost
decreased 38 basis points.
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Yield Analysis of Consolidated Average Assets and Liabilities
(dollars in thousands)
2000 1999 1998
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Assets:
Interest earning assets:
Short term investments $ 4,278 $271.7 6.35% $10,384 $507.5 4.89% $8,630 $449.1 5.20%
Securities:
Taxable 29,283 1,607.9 5.49% 30,051 1,526.1 5.08% 23,019 1,386.9 6.02%
Tax-exempt 18,580 1,220.3 6.57% 16,896 1,165.6 6.90% 15,221 1,085.1 7.13%
Loans(1)(2) 238,697 23,407.8 9.81% 198,448 18,790.8 9.47% 175,873 17,317.6 9.85%
---------- ---------- --------- ---------- -------- ---------
Total earning assets and total
interest income 290,838 $26,507.7 9.11% 255,779 $21,990.0 8.60% 222,743 $20,238.7 9.09%
--------- --------- ---------
Cash & due from banks 11,615 11,680 9,836
All other assets 16,022 15,955 11,335
Allowance for loan loss (4,911) (4,219) (3,777)
------- ------ ------
Total assets $313,564 $279,195 $240,137
======== ========= =========
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings, money market, NOW $120,770 $3,434.0 2.84% $111,141 $2,991.6 2.69% $91,552 $2,772.5 3.03%
Time 104,669 6,158.5 5.88% 92,802 4,970.0 5.36% 81,119 4,617.2 5.69%
FLHB and other borrowings 6,259 449.3 7.18% 98 5.3 5.40% 179 10.7 5.98%
--------- --------- ------ --------- ----------
Total interest bearing
liabilities and total interest
expense 231,698 $10,041.8 4.33% 204,041 $7,966.9 3.90% 172,850 $7,400.4 4.28%
--------- -------- --------
Non-interest bearing deposits 51,428 48,240 43,619
All other liabilities 3,220 2,232 1,751
Shareholders' Equity 27,218 24,682 21,917
------ ------ ------
Total liabilities and
shareholders' equity $313,564 $279,195 $240,137
======== ======== ========
Interest spread 4.78% 4.70% 4.81%
==== ===== =====
Net interest income-FTE $16,465.9 $14,023.1 $12,838.3
========= ========= =========
Net interest margin 5.66% 5.48% 5.76%
===== ===== =====
(1) Nonaccruing loans are not significant during the three year period and, for
purposes of the computations above, are included in average daily loan
balances.
(2) Interest on loans includes origination fees totaling $690,000 in 2000,
$710,000 in 1999, and $600,000 in 1998.
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(C) The following table sets forth the effects of volume and rate changes on net
interest income on a taxable equivalent basis. All figures are stated in
thousands of dollars.
Year ended Year ended
December 31, 2000 compared to December 31, 1999 compared to
Year ended December 31, 1999 Year ended December 31, 1998
---------------------------- ----------------------------
Amount of Increase/(Decrease) Amount of Increase/(Decrease)
due to change in due to change in
---------------- ----------------
Total Total
Amount Amount
Of of
Average Increase/ Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
Interest Income:
Short term investments.... $ (298) $ 62 $ (236) $ 91 $ (33) $ 58
Securities:
(39) 121 82 424 (284) 140
Taxable...........................
Tax 116 (61) 55 119 (39) 80
Exempt....................
Loans................................ 3,811 806 4,617 2,223 (750) 1,473
Total interest income...... $ 3,590 $ 928 $4,518 $ 2,857 $(1,106) $ 1,751
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts.. $ 259 $ 183 $ 442 $ 593 $ (374) $ 219
636 553 1,189 665 (312) 353
Time................................
FHLB & other borrowings. 426 18 444 (5) (6)
(1)
Total interest expense.... $ 1,321 $ 754 $ 2,075 $ 1,253 $ (687) $ 566
Net interest income (FTE) $2,269 $ 174 $ 2,443 $ 1,604 $(419) $ 1,185
The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
12
II SECURITIES PORTFOLIO
(A) The following table sets forth the book value of securities at December
31:
(in thousands)
2000 1999 1998
---- ---- ----
Held to maturity:
U.S. Treasury $ 0 $ 0 $ 1,999
States and political subdivisions 18,887 17,709 16,279
Mortgage-backed securities 577 335 602
--- --- ---
Total $ 19,464 $ 18,044 $ 18,880
Available for sale:
U.S. Treasury $ 13,028 $ 22,860 $ 12,092
U.S. Government agencies 5,986 8,861 6,982
Mortgage-backed securities 0 0 0
FRB Stock 44 44 44
FHLB Stock 789 789 648
-------- -------- --------
Total $ 19,847 $ 32,554 $ 19,766
(B) The following table sets forth contractual maturities of securities at
December 31, 2000 and the weighted average yield of such securities:
(dollars in thousands)
Maturing After One Maturing After Five
Maturing Within One But Within Five But Within Ten Years Maturing After Ten
---- ----- --------- ---
Year Years Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Held to maturity
States and political
subdivisions $ 895 7.07% $7,685 6.80% $10,307 6.34% 0
Mortgage backed
Securities 460 5.30% 117 5.62% 0 0
--- --- - -
Total $ 1,355 6.47% $7,802 6.78% $10,307 6.34% $0
======= ====== ======= ==
Tax equivalent adjustment
for calculations of yield $14 $113 $180
=== ==== ====
Available for sale
U.S. Treasury $11,010 5.83% $2,018 6.57%
U.S. Agency $2,992 6.13% $2,994 5.58%
FRB Stock $ 44 6.00%
FHLB Stock 789 8.25%
---
Total $14,002 5.89% $5,012 5.98% $0 $833 8.13%
======= ====== == ====
The rates set forth in the tables above for obligations of state and
political subdivisions have been restated on a fully tax equivalent basis
assuming a 34% marginal tax rate. The amount of the adjustment is as follows:
13
Rate on Tax
Tax-Exempt Rate Adjustment Equivalent Basis
--------------- ---------- ----------------
Under 1 year 5.44% 1.63% 7.07%
1-5 years 5.17% 1.63% 6.80%
5-10 years 4.71% 1.62% 6.34%
Additional statistical information concerning the Bank's securities
portfolio is incorporated by reference in Note 2 of the Company's Consolidated
Financial Statements for the year ended December 31, 2000 included in the
Appendix to the Company's definitive proxy statement, dated March 23, 2001,
relating to the April 25, 2001, Annual Meeting of Shareholders (as filed with
the Commission as exhibit 13 to the Report).
III LOAN PORTFOLIO
(A) The table below shows loans outstanding at December 31:
(in thousands)
2000 1999 1998 1997 1996
---- ----- ---- ---- ----
Secured by real estate:
Residential first mortgage $ 31,328 $ 29,904 $ 38,051 $ 38,073 $ 36,148
Residential home equity/other junior liens 9,999 7,822 9,106 13,665 12,883
Construction and land development 35,020 23,375 23,048 19,490 14,042
Other 105,041 89,809 68,960 53,743 43,006
Consumer 20,700 16,811 16,653 14,011 12,272
Commercial 45,239 38,891 26,058 18,299 15,830
Other 8,897 4,043 3,770 1,729 2,360
------ ------ ------- ------ -----
Total Loans (Gross) $256,224 $210,655 $185,646 $159,010 $136,541
The loan portfolio is periodically reviewed and the results of these
reviews are reported to the Company's Board of Directors. The purpose of these
reviews is to verify proper loan documentation, to provide for the early
identification of potential problem loans, and to evaluate the adequacy of the
allowance for loan losses.
(B) The following table shows the amount of commercial, financial, and
agricultural loans outstanding as of December 31, 2000 which, based on remaining
scheduled repayments of principal, are in the periods indicated.
Maturing
--------
(in thousands)
After one
Within one but within After five
year five years years Total
---- ---------- ----- -----
Real estate construction & land development.... $23,180 $11,840 0 $ 35,020
Real estate other (secured by commercial &
multi-family)................................ 12,391 90,017 2,633 105,041
Commercial (secured by business assets or
Unsecured)................................... 18,963 25,570 706 45,239
Other (loans to farmers, political
Subdivisions, & overdrafts) 1,674 2,076 5,147 8,897
------- -------- ------ --------
Totals......................................... $56,208 $129,503 $8,486 $194,197
14
Below is a schedule of amounts due after one year which are classified
according to their sensitivity to changes in interest rates.
Interest Sensitivity
--------------------
(in thousands)
Fixed Rate Variable Rate
---------- -------------
Due after one but within five years.............. $88,114 $41,389
Due after five years............................. 7,671 815
(C) Nonperforming loans consist of loans accounted for on a nonaccrual
basis and loans contractually past due 90 days or more as to interest or
principal payments (but not included in nonaccrual loans). The aggregate amount
of non-performing loans, as of December 31, is presented in the table below:
(dollars in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Nonperforming Loans:
Nonaccrual loans $608 $ 173 $1,519 $809 $ 109
Loans past due 90 days or more 209 4 25 249 448
--- - -- ---- ---
Total nonperforming loans $817 $ 177 $1,544 $1,058 $ 557
==== ===== ====== ====== =====
Percent of total loans .32% .08% .83% .67% .41%
Additional information concerning nonperforming loans, the Bank's
nonaccrual policy, loan impairment, and loan concentrations is incorporated by
reference to Note 4 of the Company's Consolidated Financial Statements for the
year ended December 31, 2000 included in the Appendix to the Company's
definitive proxy statement, dated March 23, 2001, relating to the April 25,
2001, Annual Meeting of Shareholders (as filed with the Commission as exhibit 13
to this Report).
There were no other interest bearing assets, at December 31, 2000, that
would be required to be disclosed under Item III(C), if such assets were loans.
There were no foreign loans outstanding at December 31, 2000.
15
IV SUMMARY OF LOAN LOSS EXPERIENCE
(A) The following table sets forth loan balances and summarizes the changes
in the allowance for loan losses for each of the years ended December 31:
(dollars in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loans:
Average daily balance of loans for the year.... $238,860 $198,448 $175,873 $148,096 $130,648
Amount of loans (gross) outstanding at end
of the year.................................. 256,224 210,655 185,646 159,011 136,541
Allowance for loan losses:
Balance at beginning of year.................. 4,483 3,958 3,424 3,335 3,097
Loans charged off:
Real estate................................ 0 0 110 0 70
Commercial................................. 526 322 63 375 129
Consumer................................... 83 164 129 124 88
-- --- --- --- --
Total charge-offs...................... 609 486 302 499 287
Recoveries of loans previously charged off:
Real estate............................... 0 35 96 32 1
Commerical................................ 79 98 51 43 31
Consumer 40 38 49 27 45
-- -- -- -- --
Total recoveries...................... 119 171 196 102 77
Net loans charged off............................ 490 315 106 397 210
Additions to allowance charged to operations..... 1,200 840 640 486 448
----- --- --- --- ---
Balance at end of year................ $5,193 $4,483 $3,958 $3,424 $3,335
Ratios:
Net loans charged off to average loans
outstanding .21% .16% .06% .27% .16%
Allowance for loan losses to loans
outstanding 2.03% 2.13% 2.13% 2.15% 2.44%
The allowance for loan losses reflected above is a valuation allowance in
its entirety and the only allowance available to absorb future loan losses.
(B) The following table presents the portion of the allowance for loan
losses applicable to each loan category and the percent of loans in each
category to total loans, as of December 31:
(dollars in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Commercial...... $4,725 77.0% $3,803 77.6% $3,384 74.1% $2,785 69.2% $2,401 66.7%
Consumer........ 315 12.2% 441 11.8% 355 12.5% 332 15.6% 465 16.2%
Real Estate...... 153 10.8% 239 10.6% 219 13.4% 307 15.2% 457 17.1%
--- --- --- --- ---
Total...... $5,193 100% $4,483 100% $3,958 100% $3,424 100% $3,335 100%
====== ==== ====== ==== ====== ==== ====== ===== ======
16
V DEPOSITS
The following table sets forth average deposit balances and the weighted
average rates paid thereon for the years ended December 31:
(dollars in thousands)
2000 1999 1998
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
Non-interest bearing demand $51,428 $48,240 $43,619
Savings, money market and NOW 120,769 2.84% 111,141 2.69% 91,552 3.03%
Time deposits 104,669 5.88% 92,802 5.36% 81,119 5.69%
------- ------ ------
Total $276,866 4.26% $252,183 3.90% $216,290 4.28%
======== ======== ========
The table for maturities of negotiated rate time deposits of $100,000 or
more outstanding at December 31, 2000 is incorporated by reference to Note 8 of
the Company's Consolidated Financial Statements for the year ended December 31,
2000 included in the Appendix to the Company's definitive proxy statement, dated
March 23, 2001, relating to the April 25, 2001, Annual Meeting of Shareholders
(as filed with the Commission as exhibit 13 to the Report).
VI RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets, and certain other ratios, for the years ended December 31 follow:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net income as a percent of:
Average common equity 18.76% 15.05% 17.83% 17.84% 19.12%
Average total assets 1.63% 1.33% 1.63% 1.79% 1.88%
Additional performance ratios are set forth in Selected Financial Data, in
Item 6, Part II of this Report. Any significant changes in the current trend of
the above ratios are reviewed in Management's Discussion and Analysis of
Financial Condition and Results of Operations, included in the Appendix to the
Company's definitive proxy statement, dated March 23, 2001, relating to the
April 25, 2001, Annual Meeting of Shareholders and is incorporated herein by
reference.
VII SHORT-TERM BORROWING
The information required in this item is not applicable for this Company.
17
Item 2 - Properties
The Bank operates from seven facilities, located in four communities, in
Livingston County, Michigan. The executive offices of the Company are located at
the Bank's main office, 101 East Grand River, Howell, Michigan. The Bank
maintains two branches in Howell at 5990 East Grand River and 2400 West Grand
River. The Bank also maintains branch offices at 9911 East Grand River,
Brighton, Michigan, 8080 Challis Road, Brighton Michigan, 760 South Grand
Avenue, Fowlerville, Michigan, and 10700 Highland Road, Hartland, Michigan. All
of the offices have ATM machines and all except the West Grand River branch,
which is in a grocery store, have drive up services. All of the properties are
owned by the Bank except for the West Grand River branch which is leased. The
lease is for fifteen years, expiring September 2007. The average lease payment
over the life of the lease is $3,167 monthly.
Item 3 - Legal Proceedings
The Company is not involved in any material legal proceedings. The Bank is
involved in ordinary routine litigation incident to its business; however, no
such proceedings are expected to result in any material adverse effect on the
operations or earnings of the Bank. Neither the Bank nor the Company is involved
in any proceedings to which any director, principal officer, affiliate thereof,
or person who owns of record or beneficially more than five percent (5%) of the
outstanding stock of either the Company or the Bank, or any associate of the
foregoing, is a party or has a material interest adverse to the Company or the
Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
Additional Item--Executive Officers
Executive officers of the Company are appointed annually by the Board of
Directors. There are no family relationships among these officers and/or the
directors of the Company, or any arrangement or understanding between any
officer and any other person pursuant to which the officer was elected.
18
The following table sets forth certain information with respect to the
Company's executive officers as of December 31, 2000:
First Selected as an Officer
Name (Age) Position with Company of the Company
---------- --------------------- --------------
Barbara D. Martin (54) President, Chief Executive Officer, 1983
and Director of the Company and the
Bank
Barbara J. Nelson (53) Secretary/Treasurer of the Company 1985
and Senior Vice President,
Cashier, and Chief Financial
Officer of the Bank
Herbert W. Bursch (48) Senior Vice President, Retail 1999
Services, of the Bank
James Wibby (50) Senior Vice President, Senior 1997
Lender, of the Bank
Nancy Morgan (50) Vice President, Human Resources of 1988
the Bank
Jerry Armstong (41) Vice President, Operations, of the 1997
Bank
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
There is no active market for the Company's Common Stock, and there is no
published information with respect to its market price. There are occasional
direct sales by shareholders of which the Company's management is generally
aware. It is the understanding of the management of the Company that over the
last two years, the Company's Common Stock has sold at a premium to book value.
From January 1, 1999, through December 31, 2000, there were, so far as the
Company's management knows, 301 sales of shares of the Company's Common Stock,
involving a total of 52,305 shares. The price was reported to management in
these transactions; however there may have been other transactions involving the
Company stock at prices not reported to management. During this period, the
highest price known to be paid was $42.00 per share throughout 2000 and during
the last two quarters of 1999, and the lowest price was $40.00 per share in the
first two quarters of 1999. To the knowledge of management, the last sale of
Common Stock occurred on February 23, 2001.
As of March 1, 2001, there were approximately 850 holders of record of the
Company's Stock. The following table sets forth the range of high and low sales
prices of the Company's Common Stock during 1999 and 2000, based on information
made available to the Company, as well as per share cash dividends declared
during those periods. Although management is not aware of any transactions at
higher or lower prices, there may have been transactions at prices outside the
ranges listed in the table.
19
Sales price and dividend information for the years 1999 and 2000:
Sales Prices Cash Dividends Declared
------------ -----------------------
1999 High Low
---- ---- ---
First Quarter $40.00 $40.00 $0.20
Second Quarter $40.00 $40.00 $0.20
Third Quarter $42.00 $40.00 $0.20
Fourth Quarter $42.00 $42.00 $0.5 0(1)
2000 High Low
---- ---- ---
First Quarter $42.00 $42.00 $0.20
Second Quarter $42.00 $42.00 $0.20
Third Quarter $42.00 $42.00 $0.20
Fourth Quarter $42.00 $42.00 $0.55(2)
(1) Includes a special dividend of $0.30 per share.
(2) Includes a special dividend of $0.35 per share.
The holders of the Company's Common Stock are entitled to dividends when,
as, and if declared by the Board of Directors of the Company out of funds
legally available for that purpose. Dividends have been paid on a quarterly
basis. In determining dividends, the Board of Directors considers the earnings,
capital requirements and financial condition of the Company and the Bank, along
with other relevant factors. The Company's principal source of funds for cash
dividends is the dividends paid by the Bank. The ability of the Company and Bank
to pay dividends is subject to regulatory restrictions and requirements.
20
Item 6 - Selected Financial Data
The information set forth under the caption "Summary Financial Data" on
page 52 of the Appendix to the Company's definitive proxy statement, as filed
with the Commission and dated March 23, 2001, relating to the April 25, 2001
Annual Meeting of Shareholders, is incorporated herein by reference.
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 39 through
51 of the Appendix to the Company's definitive proxy statement, as filed with
the Commission and dated March 23, 2001, relating to the April 25, 2001 Annual
Meeting of Shareholders, is incorporated herein by reference.
Item 7a - Quantitative and Qualititative Disclosures about Market Risk
Included in Management's Discussion and Analysis
Item 8 - Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data of
the Company appear on pages 12 to 38 of Appendix I to the Company's definitive
Proxy Statement, dated March 23, 2001, relating to the April 25, 2001 Annual
Meeting of shareholders, as filed with the Commission. This Appendix is
incorporated herein by reference and included as Exhibit 13 to this report on
Form 10-K:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statement
Independent Auditors' Report
Quarterly financial data relating to results of operations for the years
ended December 31, 2000 and 1999 are reported on page 38 of Appendix I.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
21
PART III
Item 10 - Directors and Executive Officers of the Registrant
Directors
The information with respect to Directors and Nominees of the Registrant,
set forth under the caption "Election of Directors" on pages 2 through 4 of the
Company's definitive proxy statement, as filed with the Commission and dated
March 23, 2001, relating to the April 25, 2001 Annual Meeting of Shareholders,
is incorporated herein by reference.
Executive Officers
The information called for by this item is contained in Part I of this Form
10-K Report.
Item 11 - Executive Compensation
The information set forth under the caption "Summary Compensation Table" on
pages 5 through 7 of the Company' s definitive proxy statement, as filed with
the Commission and dated March 23, 2001, relating to the April 25, 2001 Annual
Meeting of Shareholders, is incorporated herein by reference. Information under
the caption "Committee Report on Executive Compensation" on page 5 and
"Shareholder Return Performance Graph" on page 9 of the definitive proxy
statement is not incorporated by reference herein and is not deemed to be filed
with the Securities and Exchange Commission.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Ownership of Common Stock" on page
8 of the Company's definitive proxy statement, as filed with the Commission and
dated March 23, 2001, relating to the April 25, 2001 Annual Meeting of
Shareholders, is incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions with
Management" on page 7 of the Company's definitive proxy statement, as filed with
the Commission and dated March 23, 2001, relating to the April 25, 2001 Annual
Meeting of Shareholders, is incorporated herein by reference.
22
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) 1. Financial Statements
All financial statements of the Registrant are incorporated herein by
reference as set forth in Appendix I to the Registrant's Definitive Proxy
Statement, dated March 23, 2001, relating to the April 25, 2001 Annual Meeting
of Shareholders, a copy of which is filed as Exhibit 13 to this Report on Form
10-K.
2. Financial Statement Schedules
Not applicable.
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on
Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 2000.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, dated March 15, 2001.
FNBH BANCORP, INC.
/s/ Barbara D. Martin Barbara D. Martin, President & Chief Executive
Officer (Principal Executive Officer)
/s/ Barbara J. Nelson Barbara J. Nelson, Secretary/Treasurer
(Principal Accounting Officer)
24
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated. Each director of the Registrant, who's
signature appears below, hereby appoints Barbara D. Martin and Barbara J.
Nelson, and each of them severally, as his or her attorney-in-fact, to sign in
his or her name and on his or her behalf, as a director of the Registrant, and
to file with the Commission any and all Amendments to this Report on Form 10-K.
W. Rickard Scofield, Chairman of the Board /s/ W. Rickard Scofield
Donald K. Burkel, Vice Chairman of the Board /s/ Donald K. Burkel
Gary R. Boss, Director /s/ Gary R. Boss
Harry E. Griffith, Director /s/ Harry E. Griffith
Dona Scott Laskey, Director _________________________
Barbara D. Martin, Director /s/ Barbara D. Martin
James R. McAuliffe, Director /s/ James R. McAuliffe
Randolph E. Rudisill, Director /s/ Randolph E. Rudisill
R. Michael Yost, Director /s/ R. Michael Yost
25
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the
applicable assigned number:
Exhibit
Number Page
- ------ ----
(13) Pages 11-52 of Appendix I to the Company's Proxy Statement, dated
March 23, 2001, for the Annual Meeting of Shareholders to be held
April 25, 2001 representing that portion of the Appendix incorporated
by reference in this report. This Appendix was filed with the
Commission as part of the Company's Proxy Statement and was delivered
to Company shareholders in compliance with Rule 14(a)-3 of the
Securities Exchange Act of 1934, as amended..............................38
(21) Subsidiaries of the Registrant...........................................40
(23) Consent of Public Accountants
(24) Power of Attorney (included in signature section)
The following exhibits, indexed according to the applicable assigned
number, were previously filed by the Registrant and are incorporated by
reference in this Form 10-K Annual Report.
Exhibit
Number Original Filing Form and Date
- ------ -----------------------------
3.1 Restated Articles of Incorporation Exhibit 3.1 of Form 10, effective
of the Registrant June 30, 1995 ("Form 10")
3.2 Amendment to the Company's Articles Appendix I of Proxy Statement
of Incorporation to Increase dated March 17, 1998
Authorized Shares
3.3 Bylaws of the Registrant Exhibit 3.2 of Form 10
4 Form of Registrant's Stock Certificate Exhibit 4 of Form 10
Material Contracts:
10.1 Howell Branch Lease Agreement Exhibit 10.2 to Form 10
10.2 Company's Long Term Incentive Plan* Appendix II of Proxy Statement
dated March 17, 1998
10.3 FNBH Bancorp Inc. Employees' Stock Exhibit 4 to Registration
Purchase Plan* Statement on Form S-8
(Reg. No. 333-46244)
*Represents a compensation plan
26
EXHIBIT 13
APPENDIX I
FNBH Bancorp, Inc. is a one bank holding company, which owns all of the
outstanding capital stock of First National Bank in Howell (the "Bank"). The
Corporation was formed in 1988 for the purpose of acquiring all of the stock of
the Bank in a shareholder approved reorganization, which became effective May
1989. The Bank was originally organized in 1934 as a national banking
association. The Bank serves primarily four communities, Howell, Brighton,
Hartland, and Fowlerville, all of which are located in Livingston County,
Michigan.
FINANCIAL INFORMATION
FNBH BANCORP, INC., AND SUBSIDIARIES
Page
Independent Auditor's Report................................................ 12
Consolidated Balance Sheets................................................. 13
Consolidated Statements of Income........................................... 15
Consolidated Statements of Stockholders' Equity............................. 17
Consolidated Statements of Cash Flows....................................... 18
Notes to Consolidated Financial Statements.................................. 20
Management's Discussion and Analysis........................................ 39
Summary Financial Data...................................................... 51
Stock and Earnings Highlights............................................... 52
11
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
FNBH Bancorp, Inc.:
We have audited the consolidated balance sheets of FNBH Bancorp, Inc. and
subsidiaries ("Corporation") as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FNBH Bancorp, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-y ear period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
January 19, 2001
12
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
Asset 2000 1999
---------------- ----------------
Cash and cash equivalents:
Cash and due from banks $ 17,501,547 12,113,652
Short-term investments 25,743,118 12,300,630
---------------- ----------------
Total cash and cash equivalents 43,244,665 24,414,282
Investment securities held to maturity, net
(fair value of $19,218,000 in 2000 and $17,650,000 18,886,677 17,709,401
in 1999)
Investment securities available for sale, at fair value 19,847,480 32,554,004
Mortgage-backed securities held to maturity, net (fair 576,994 334,451
value of $578,000 in 2000 and $330,000 in 1999)
---------------- ----------------
Total investment and mortgage-backed 39,311,151 50,597,856
securities
Loans:
Commercial 197,203,204 163,469,045
Consumer 31,180,063 24,826,156
Real estate mortgage 27,840,497 22,360,282
---------------- ----------------
Total loans 256,223,764 210,655,483
Less unearned income (809,746) (703,849)
Less allowance for loan losses (5,193,263) (4,483,283)
---------------- ----------------
Net loans 250,220,755 205,468,351
Bank premises and equipment, net 8,238,743 9,009,661
Land held for sale, net 1,530,290 2,835,290
Accrued interest income and other assets 5,817,824 4,093,780
---------------- ----------------
Total assets $ 348,363,428 296,419,220
================ ================
See accompanying notes to consolidated financial statements.
13
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
Liabilities and Stockholders' Equity 2000 1999
----------------- ---------------
Deposits:
Demand (non-interest bearing) $ 55,252,490 47,980,695
NOW 34,637,247 34,645,921
Savings and money market accounts 98,887,217 89,862,739
Time 121,436,864 96,701,098
----------------- ---------------
Total deposits 310,213,818 269,190,453
FHLB advances 6,000,000 --
Accrued interest, taxes, and other liabilities 3,262,975 1,917,121
----------------- ---------------
Total liabilities 319,476,793 271,107,574
Commitments and contingencies
Stockholders' equity:
Common stock, $-0- par value. Authorized 4,200,000 shares; 1,567,748 shares
issued and outstanding at December 31, 2000 and 1,565,203 shares issued
and outstanding at December 31, 1999 5,025,476 4,919,280
Retained earnings 24,027,158 20,723,357
Unearned management retention plan (183,188) (139,597)
Accumulated other comprehensive income (loss) 17,189 (191,394)
--------------------- --------------------
Total stockholders' equity 28,886,635 25,311,646
--------------------- --------------------
Total liabilities and stockholders' equity $ 348,363,428 296,419,220
See accompanying notes to consolidated financial statements.
14
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Income
Years ended December 31, 2000, 1999, and 1999
Years Ended 2000 1999 1998
-------------------- ------------------ -----------------
Interest and dividend income:
Interest and fees on loans $ 23,254,289 18,725,205 17,293,769
Interest and dividends on investment and
mortgage-backed securities:
U.S. Treasury securities 1,159,774 999,431 1,230,696
Obligations of other U.S. Government
agencies 376,491 461,654 111,575
Obligations of state and political
subdivisions 913,065 838,532 780,637
Other securities 67,717 64,975 44,600
Interest on short-term investments 275,656 507,499 449,102
-------------------- ------------------ -----------------
Total interest and dividend income 26,046,992 21,597,296 19,910,379
-------------------- ------------------ -----------------
Interest expense:
Interest on deposits 9,592,538 7,961,603 7,389,692
Interest on other borrowings 449,272 5,283 10,712
-------------------- ------------------ -----------------
Total interest expense 10,041,810 7,966,886 7,400,404
-------------------- ------------------ -----------------
Net interest income 16,005,182 13,630,410 12,509,975
Provision for loan losses 1,200,000 840,000 640,000
-------------------- ------------------ -----------------
Net interest income after
provision for loan losses 14,805,182 12,790,410 11,869,975
Non-interest income:
Service charges and other fee income 2,322,591 1,762,678 1,537,841
Trust income 192,568 143,707 80,438
Gain on sale of loans 74,354 43,262 274,361
Other 14,377 65,456 61,201
-------------------- ------------------ -----------------
Total non-interest income 2,603,890 2,015,103 1,953,841
-------------------- ------------------ -----------------
See accompanying notes to consolidated financial statements.
15
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Income
Years ended December 31, 2000, 1999, and 1998
2000 1999 1998
Years Ended ------------------ --------------- ----------------
Non-interest expenses:
Salaries and employee benefits $ 5,441,548 4,832,475 4,314,012
Net occupancy expense 773,865 689,777 600,472
Equipment expense 885,036 741,580 724,265
Professional and service fees 456,723 460,742 273,824
Printing and supplies 239,059 335,574 248,406
Michigan Single Business Tax 262,200 164,600 201,900
Provision for real estate losses 155,000 300,000 205,000
Other 1,975,133 2,018,447 1,669,710
------------------ --------------- ----------------
Total non-interest expenses 10,188,564 9,543,195 8,237,589
------------------ --------------- ----------------
Income before Federal income taxes 7,220,508 5,262,318 5,586,227
Federal income taxes 2,115,000 1,547,000 1,679,500
------------------ --------------- ----------------
Net income $ 5,105,508 3,715,318 3,906,727
================== =============== ================
Basic and diluted net income per share $ 3.26 2.38 2.49
================== =============== ================
Cash dividends per share $ 1.15 1.10 1.05
================== =============== ================
See accompanying notes to consolidated financial statements.
16
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2000, 1999, and 1998
Unearned Accumulated
management other
Common Retained retention comprehensive
stock earnings plan income Total
----------- ------------ ----------- ------------- ------------
Balances at December 31, 1997 5,250,000 16,467,201 -- 14,824 21,732,025
Repurchase of 15,000 shares at $35 per share (525,000) -- -- -- (525,000)
Issued 2,365 shares for management
retention plan 82,775 -- (82,775) -- --
Issued 400 shares for directors' compensation 14,000 -- -- -- 14,000
Amortization of management retention plan -- -- 16,555 -- 16,555
Comprehensive income:
Net income -- 3,906,727 -- -- 3,906,727
Changes in unrealized gain on securities
available for sale, net of tax -- -- -- (2,633) (2,633)
------------
Total comprehensive income 3,904,094
Cash dividends ($1.05 per share) -- (1,645,141) -- -- (1,645,141)
------------ ------------ ---------- ----------- ------------
Balances at December 31, 1998 4,821,775 18,728,787 (66,220) 12,191 23,496,533
Issued 2,435 shares for management
retention plan 97,400 -- (97,400) -- --
Issued 3 shares for employee awards 105 -- -- -- 105
Amortization of management retention plan -- -- 24,023 -- 24,023
Comprehensive income:
Net income -- 3,715,318 -- -- 3,715,318
Changes in unrealized gain (loss) on securities
available for sale, net of tax -- -- -- (203,585) (203,585)
------------
Total comprehensive income 3,511,733
Cash dividends ($1.10 per share) -- (1,720,748) -- -- (1,720,748)
------------ ------------ ---------- ------------ ------------
Balances at December 31, 1999 $ 4,919,280 20,723,357 (139,597) (191,394) 25,311,646
Issued 2,545 shares for management
retention plan 106,890 -- (106,890) -- --
Retired 337 shares for management
retention plan (12,725) -- 12,725 -- --
Issued 337 shares for employee stock 12,031 -- -- 12,031
purchase plan
Amortization of management retention plan -- -- 50,574 -- 50,574
Comprehensive income:
Net income -- 5,105,508 -- -- 5,105,508
Changes in unrealized gain on securities
available for sale, net of tax -- -- -- 208,583 208,583
------------
Total comprehensive income 5,314,091
Cash dividends ($1.15 per share) -- (1,801,707) -- -- (1,801,707)
------------ ------------ ---------- ------------ ------------
Balances at December 31, 2000 $ 5,025,476 24,027,158 (183,188) 17,189 28,886,635
============ ============ ========== ============ ============
See accompanying notes to consolidated financial statements.
17
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years ended December 31, 2000, 1999, and 1998
2000 1999 1998
--------------- -------------- ---------------
Cash flows from operating activities:
Net income $ 5,105,508 3,715,318 3,906,727
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,200,000 840,000 640,000
Depreciation and amortization 912,832 760,047 681,339
Deferred Federal income tax benefit (337,000) (235,600) (261,800)
Net amortization on investment securities 20,635 88,233 44,771
Earned portion of management retention plan 50,574 24,023 16,555
Loss on disposal of equipment 80,800 18,358 20,668
Gain on sale of loans (74,354) (43,262) (274,361)
Proceeds from sale of loans 9,336,943 16,044,643 18,030,745
Origination of loans held for sale (9,470,567) (16,080,472) (18,305,410)
Provision for real estate losses 155,000 300,000 205,000
Increase in accrued interest income and
other assets (237,044) (109,238) (2,121,678)
Increase (decrease) in accrued interest, taxes,
and other liabilities 1,238,554 (30,241) (236,154)
--------------- -------------- ---------------
Net cash provided by operating activities 7,981,881 5,291,809 2,346,402
Cash flows from investing activities:
Purchases of available-for-sale securities (10,982,824) (17,157,030) (16,067,003)
Proceeds from maturities of available-for-sale
securities 24,000,000 3,000,000 10,000,000
Purchases of held-to-maturity securities (2,496,204) (2,919,503) (3,865,946)
Proceeds from maturities and calls of held-to-
maturity securities 605,000 4,268,000 14,490,000
Repayments from mortgage-backed securities
held to maturity 455,981 460,169 472,876
Purchase of loans (2,325,000) -- --
Net increase in loans (43,419,426) (25,181,161) (26,536,607)
Capital expenditures (222,714) (2,498,605) (3,017,056)
--------------- -------------- ---------------
Net cash used in investing activities (34,385,187) (40,028,130) (24,523,736)
See accompanying notes to consolidated financial statements.
18
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years ended December 31, 2000, 1999, and 1998
2000 1999 1998
------------------ ------------------ ------------------
Cash flows from financing activities:
Net increase in deposits $ 41,023,365 29,633,689 37,257,573
Increase in borrowings 6,000,000 -- --
Dividends paid (1,801,707) (1,720,748) (1,645,141)
Shares issued for employee purchase plan 12,031 -- --
Shares repurchased -- -- (525,000)
----------------- ------------------ ------------------
Net cash provided by financing activities 45,233,689 27,912,941 35,087,432
Net increase (decrease) in cash and
cash equivalents 18,830,383 (6,823,380) 12,910,098
Cash and cash equivalents at beginning of year 24,414,282 31,238,662 18,738,564
----------------- ------------------ ------------------
Cash and cash equivalents at end of year $ 43,244,665 24,415,282 31,648,662
================= ================== ==================
Supplemental disclosures:
Interest paid $ 9,272,543 7,904,981 7,397,252
Federal income taxes paid 2,208,000 1,607,000 2,085,000
Supplemental schedule of noncash investing and
financing activities:
Loans transferred to other real estate 649,203 900,000 335,713
Loans charged off 608,520 485,657 301,674
================= ================== ==================
See accompanying notes to consolidated financial statements.
19
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of FNBH
Bancorp, Inc. and its wholly-owned subsidiaries, First National Bank
in Howell and H.B. Realty Co. All significant intercompany balances
and transactions have been eliminated.
First National Bank in Howell ("Bank") is a full-service bank offering
a wide range of commercial and personal banking services. These
services include checking accounts, savings accounts, certificates of
deposit, commercial loans, real estate loans, installment loans,
collections, traveler's checks, night depository, safe deposit box,
U.S. Savings Bonds, and trust services. The Bank serves primarily four
communities - Howell, Brighton, Hartland, and Fowlerville - all of
which are located in Livingston County, Michigan.
H.B. Realty Co. was established on November 26, 1997 to purchase land
for a future branch site of the Bank and to hold title to other Bank
real estate when it is considered prudent to do so.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The accounting and
reporting policies of FNBH Bancorp, Inc. and subsidiaries
("Corporation") conform to accounting principles generally accepted in
the United States of America and to general practice within the
banking industry. The following is a description of the more
significant of these policies.
(b) Investment and Mortgage-backed Securities
Investment securities held to maturity are those securities which
management has the ability and positive intent to hold to maturity.
Investment securities held to maturity are stated at cost, adjusted
for amortization of premium and accretion of discount.
Investment securities that fail to meet the ability and
positive-intent criteria are accounted for as securities available for
sale and stated at fair value, with unrealized gains and losses, net
of income taxes, reported as a separate component of other
comprehensive income until realized.
Trading account securities are carried at fair value. Realized and
unrealized gains or losses on trading securities are included in
non-interest income.
Gains or losses on the sale of securities are computed based on the
adjusted cost of the specific security.
20
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(c) Loans
Loans are stated at their principal amount outstanding, net of an
allowance for loan losses. Interest on loans is accrued daily based on
the outstanding principal balance. Loan origination fees and certain
direct loan origination costs are deferred and recognized over the
lives of the related loans as an adjustment of the yield. Mortgage
loans held for sale are carried at the lower of cost or market,
determined on a net aggregate basis. Market is determined on the basis
of delivery prices in the secondary mortgage market. When loans are
sold, gains and losses are recognized based on the specific
identification method.
The Bank originates mortgage loans for sale to the secondary market
and sells the loans with servicing retained.
The total cost of mortgage loans originated with the intent to sell is
allocated between the loan servicing right and the mortgage loan
without servicing, based on their relative fair value at the date of
origination. The capitalized cost of loan servicing rights is
amortized in proportion to, and over the period of, estimated net
future servicing revenue.
Mortgage servicing rights are periodically evaluated for impairment.
For purposes of measuring impairment, mortgage servicing rights are
stratified based on predominant risk characteristics of the underlying
serviced loans. These risk characteristics include loan type, term,
year originated, and note rate. Impairment represents the excess of
cost of an individual mortgage servicing rights stratum over its fair
value and is recognized through a valuation allowance.
Fair values for individual strata are based on quoted market prices
for comparable transactions, if available, or estimated fair value.
Estimates of fair value include assumptions about prepayment, default
and interest rates, and other factors which are subject to change over
time. Changes in these underlying assumptions could cause the fair
value of mortgage servicing rights, and the related valuation
allowance, to change significantly in the future.
(d) Allowance for Loan Losses
The allowance for loan losses is based on management's periodic
evaluation of the loan portfolio and reflects an amount that, in
management's opinion, is adequate to absorb losses in the existing
portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions,
prior loan loss experience, the composition of the loan portfolio, and
management's evaluation of the collectibility of specific loans.
Although the Bank evaluates the adequacy of the allowance for loan
losses based on information known to management at a given time,
various regulatory agencies, as part of their normal examination
process, may require future additions to the allowance for loan
losses.
Impaired loans have been identified in accordance with provisions of
Statement of Financial Accounting Standards ("SFAS") No. 114. The Bank
considers a loan to be impaired when it is probable that it will be
unable to collect all or part of amounts due according to the
contractual terms of the loan agreement. Impaired loans are measured
based on the present value of expected cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at a
loan's observable market price, or the fair value of the collateral if
the loan is collateral dependent.
21
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(e) Nonperforming Assets
The Bank charges off all or part of loans when amounts are deemed to
be uncollectible, although collection efforts may continue and future
recoveries may occur.
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, loans for which the terms have been
renegotiated to less than market rates due to a serious weakening of
the borrower's financial condition, loans 90 days past due and still
accruing, and other real estate, which has been acquired primarily
through foreclosure and is awaiting disposition.
Loans are generally placed on a nonaccrual basis when principal or
interest is past due 90 days or more and when, in the opinion of
management, full collection of principal and interest is unlikely. At
the time a loan is placed on nonaccrual status, interest previously
accrued but not yet collected is charged against current income.
Income on such loans is then recognized only to the extent that cash
is received and where future collection of principal is probable.
Interest income on impaired loans is accrued based on the principal
amounts outstanding. The accrual of interest is discontinued when an
impaired loan becomes 90 days past due. The Bank utilized the "fair
value of collateral" method to measure impairment, as virtually all of
the loans considered to be impaired are commercial mortgage loans.
(f) Real Estate
Other real estate owned at the time of foreclosure is recorded at the
lower of the Bank's cost of acquisition or the asset's fair market
value, net of disposal cost, which becomes the property's new basis.
Any write-downs at date of acquisition are charged to the allowance
for loan losses. Expenses incurred in maintaining assets and
subsequent write-downs to reflect declines in value are charged to
other expense.
Real estate held for sale is recorded at the lower of carrying amount
or estimated fair value less estimated disposal costs. Subsequent
declines in estimated fair value and/or disposal costs are recorded as
a component of non-interest expense.
(g) Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization, computed
on the straight-line method, are charged to operations over the
estimated useful lives of the assets.
(h) Federal Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
22
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(i) Statements of Cash Flows
For purposes of reporting cash flows, cash equivalents include amounts
due from banks and federal funds sold and other short-term
investments.
(j) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income established standards for
the reporting and display of comprehensive income and its components
(such as changes in unrealized gains and losses on securities
available for sale) in a financial statement that is displayed with
the same prominence as other financial statements. In accordance with
the adoption of SFAS No. 130, the Bank reports comprehensive income
within the statement of stockholders' equity. Comprehensive income
include s net income and any changes in equity from non-owner sources
that bypass the income statement.
(k) Earning Per Share
Earnings per share of common stock are based on the weighted average
number of common shares outstanding during the year.
(2) Investment and Mortgage-backed Securities
A summary of the amortized cost and approximate fair value of investment
securities at December 31, 2000 follows:
Held to maturity Available for sale
------------------------------- -------------------------------
Amortized Approximate Amortized Approximate
cost fair value cost fair value
------------ --------------- ---------