SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission file number 0-25752
FNBH BANCORP, INC.
(Exact name of registrant as specified in its charter)
| MICHIGAN (State or other jurisdiction of incorporation or organization) | 38-2806518 (IRS Employer Identification No.) |
101 East Grand River, Howell, Michigan 48843
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517)546-3150
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.
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on a per share price of $43 as of March 1, 2002, was $67,655,125 (common stock, no par value). As of December 31, 2001 there were outstanding 1,573,375 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 15, 2002 for the Annual Meeting of Shareholders to be held April 17, 2002 are incorporated by reference into Parts I, II and III of this report.
PART I
Included or incorporated by reference 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, 2002, the Bank had approximately 138 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 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 $18,000,000, of which $12,200,000 is available, and $5,800,000 is 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, 2001, the Bank's certificates of deposit of $100,000 or more constituted approximately 13% 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 79% of total revenues for the period ended December 31, 2001 and 81% of total revenues for the period ended December 31, 2000. Interest on investment securities, including short-term investments and federal funds sold, constituted approximately 10% of total revenues in 2001 and in 2000. 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. As of December 31, 2001, 30% of outstanding loans were for either commercial or residential construction or development. Fifty-eight percent of the Bank's loan portfolio is in fixed rate loans. Most of these loans, approximately 90%, mature within five years of issuance. Approximately $17,000,000 in loans (or about 6% 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 $134,200,000 in certificates, $109,900,000 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, 2001, was 13% liability sensitive, compared to 16% asset sensitive at December 31, 2000. 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 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 designed to provide a framework within which the Bank may maximize earnings potential by acquiring assets designed to enhance profitability, absorb excess funds, provide liquidity, maintain a high credit quality, implement interest rate risk measures, provide collateral for pledging, generate a favorable return on investments, and provide tax-exempt income as appropriate. Safety, liquidity, and interest rate risk standards will not be compromised in favor of increased return. When making investment decisions the Bank considers investment type, credit quality (including maximum credit exposure to one obligor at any one time) and maturity of investments. Consideration is also given to each investment's risk-weight as determined by regulatory Risk-Based Capital Guidelines.
The portfolio must be coordinated with the overall asset/liability management of the balance sheet. The use of the investment portfolio for market oriented trading activities or speculative purposes is expressly prohibited unless otherwise approved by the Board of Directors. Investments are acquired for which the Bank has both the ability and intent to hold to maturity. Specific limits determine the types, maturities, and amounts of securities the Bank intends to hold. Guidelines on liquidity requirements, as well as an acknowledgement of the Bank's credit profile and capital position may affect the Bank's ability to hold securities to maturity. It is not the intention of management to profit from short term securities price movements. Business reasons for securities purchases and sales will be noted at the time of the transaction. 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 Fifth Third Bank, National City Bank, Republic Bank, and Bank One. Each of these financial institutions, which are headquartered in larger metropolitan areas, has 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, 2001, the Bank holds approximately 21.75% of local deposits, compared to approximately 17.49% held by Fifth Third Bank, approximately 10.77% held by Republic Bank, approximately 10.70% held by National City Bank, and approximately 7.52% 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, Fifth Third Bank maintains five branch offices, National City Bank operates six branch offices, Republic 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.
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 and is anticipating opening a new branch in Howell in the first quarter of 2002.
Growth of Company
The following table sets forth certain information regarding the growth of the Company:
Balances as of December 31,
(in thousands)
2001 2000 1999 1998 1997
Total Assets $392,978 $348,363 $296,419 $264,894 $226,314
Loans, Net of Unearned Income 286,280 255,414 209,952 185,018 158,397
Securities 55,989 39,311 50,598 38,646 43,725
Noninterest-Bearing Deposits 62,938 55,253 47,980 47,402 41,631
Interest-Bearing Deposits 288,731 254,961 221,210 192,155 160,668
Total Deposits 351,669 310,214 269,190 239,557 202,299
Shareholders' Equity 32,404 28,887 25,312 23,497 21,732
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, 2001, this new branch had approximately $35,000,000 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 such statutes and regulations. A change in applicable laws or regulations may have a material effect on the Company, the Bank and the business of the Company and the Bank.
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, but are not limited to, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the FDIC, the Office of the Comptroller of the Currency ("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 Bank or 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.
The Company
General. The Company is a bank holding company and, as such, is registered with, and subject to regulation by, the Federal Reserve Board under the Bank Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic reports of its operations and such additional information as the Federal Reserve Board may require.
In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not do so absent such policy. In addition, if the Bank's capital becomes impaired, the OCC may require the Bank to restore its capital by a special assessment upon the Company as the Bank's sole shareholder. If the Company were to fail to pay any such assessment, the directors of the Bank would be required, under federal law, to sell the shares of the Bank's stock owned by the Company at public auction and use the proceeds of the sale to restore the Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition by the Company of any voting shares of any bank which would result in the Company's direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation of the Company with another bank company, will require the prior written approval of the Federal Reserve Board under the BHCA.
The merger or consolidation of an existing bank subsidiary of the Company with another bank, or the acquisition by such a subsidiary of assets of another bank, or the assumption of liability by such a subsidiary to pay any deposits in another bank, will require the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the BHCA and/or the OCC, may be required.
With certain limited exceptions, the BHCA prohibits any bank company from engaging, either directly or indirectly through a subsidiary, in any activity other than managing or controlling Bank unless the proposed non-banking activity is one that the Federal Reserve Board has determined to be so closely related to banking or managing or controlling Bank as to be a proper incident thereto. Under current Federal Reserve Board regulations, such permissible non-banking activities include such things as mortgage banking, equipment leasing, securities brokerage, and consumer and commercial finance company operations. Well-capitalized and well-managed bank holding companies may engage de novo in certain types of non-banking activities without prior notice to, or approval of, the Federal Reserve Board, provided that written notice of the new activity is given to the Federal Reserve Board within 10 business days after the activity is commenced. If a bank holding company wishes to engage in a non-banking activity by acquiring a going concern, prior notice and/or prior approval will be required, depending upon the activities in which the company to be acquired is engaged, the size of the company to be acquired and the financial and managerial condition of the acquiring bank holding company.
Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The Bank Holding Company Act generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies. While the Company believes it is eligible to elect to operate as a financial holding company, as of the date of this filing, it has not applied for approval to operate as a financial holding company.
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank company may, among other things, be denied approval to acquire or establish additional Bank or non-bank businesses.
The Federal Reserve Board's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a leverage capital requirement expressed as a percentage of total average assets, and (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets. The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders' equity) to total average assets of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.
The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The Federal Reserve Board has not advised the Company of any specific minimum Tier 1 Capital leverage ratio applicable to it.
Dividends. The Company is a corporation separate and distinct from the Bank. Most of the Company's revenues are received by it in the form of dividends paid by the Bank. Thus, the Company's ability to pay dividends to its shareholders is indirectly limited by statutory restrictions on the Bank's ability to pay dividends described below. Further, in a policy statement, the Federal Reserve Board has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. Additionally, the Federal Reserve Board possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by Bank and bank holding companies. Similar enforcement powers over the Bank are possessed by the FDIC. The "prompt corrective action" provisions of federal law and regulation authorizes the Federal Reserve Board to restrict the payment of dividends by the Company for an insured bank which fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve Board, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution a corporation, such as the Company, can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution. The Company's Articles of Incorporation do not authorize the issuance of preferred stock and there are no current plans to seek such authorization.
The Bank
General. The Bank is organized as a national banking association and is, therefore, regulated and supervised by the OCC. The deposit accounts of the Bank are insured by the Bank Insurance Fund (the "BIF") of the FDIC. Consequently, the Bank is also subject to the provisions of the Federal Deposit Insurance Act. The Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC as its primary federal regulator. The OCC and the federal and state laws applicable to the Bank and its operations, extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their respective levels of capital and results of supervisory evaluation. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act ("FDIA") requires the FDIC to establish assessment rates at levels which will maintain the Deposit Insurance Fund at a mandated reserve ratio of not less than 1.25% of estimated insured deposits. For several years, the BIF reserve ratio has been at or above the mandated ratio and assessments have ranged from 0% of deposits for institutions in the lowest risk category, such as the Bank, to .27% of deposits in the highest risk category. However, there is speculation that the reserve may fall below the mandated ratio resulting in increased assessments in the second half of 2002.
FICO Assessments. The Bank, as members of the BIF, is subject to assessments to cover the payments on outstanding obligations of the Financing Corporation ("FICO"). FICO was created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC's Savings Association Insurance Fund (the "SAIF") which insures the deposits of thrift institutions. From now until the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits.
OCC Assessments. National Banks are required to pay supervisory fees to the OCC to fund the operations of the OCC. The amount of supervisory fees paid by a national bank is based upon the bank's total assets, as reported to the OCC.
Capital Requirements. The OCC has established the following minimum capital standards for national banks: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most highly-rated Bank with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders' equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions.
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." Federal regulations define these capital categories as follows:
Total Tier 1
Risk-Based Risk-Based
Capital Ratio Capital Ratio Leverage Ratio
Well capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- A ratio of tangible
equity to total assets
of 2% or less
As of December 31, 2001, each of the Bank's ratios exceeded minimum requirements for the well capitalized category.
Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent Bank; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.
Dividends. Under federal law, the Bank is restricted as to the maximum amount of dividends it may pay on its common stock. The Bank may not pay dividends except out of undivided net profits then on hand after deducting its losses and bad debts. In addition, the Bank is required by federal law to obtain the prior approval of the OCC for the declaration or payment of a dividend, if the total of all dividends declared by the Bank's Board of Directors in any year will exceed the total of (i) the Bank's retained net income (as defined and interpreted by regulation) for that year plus (ii) the retained net income for the preceding two years, less any required transfers to surplus. Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Further, federal regulatory agencies can prohibit a banking institution or bank holding company from engaging in unsafe and unsound business practices and could prohibit payment of dividends if such payment could be deemed an unsafe and unsound business practice.
Insider Transactions. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the Company or its subsidiaries, on investments in the stock or other securities of the Company or its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company, and to "related interests" of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal shareholder of the Company may obtain credit from Bank with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines to promote the safety and soundness of federally insured depository institutions. These guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
Consumer Protection Laws. The Bank's businesses include making a variety of types of loans to individuals. In making these loans, the Bank is subject to State usury and regulatory laws and to various federal statutes, including the privacy of consumer financial information provisions of the Gramm-Leach-Bliley Act and regulations promulgated thereunder, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of the Bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, the Bank is subject to extensive regulation under State and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon the Bank and its directors and officers.
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, 2001, 2000, and 1999.
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 65 basis points in 2001 as a result of a decrease of 85 basis points in yield on earning assets, partially offset by a decrease of 24 basis points in the interest cost on deposits. In 2000 the interest margin increased 18 basis points due to a 51 basis point increase in yield on earning assets partially offset by a 43 basis point increase in interest cost.
Yield Analysis of Consolidated Average Assets and Liabilities
(dollars in thousands)
2001 2000 1999
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Interest earning assets:
Short term investments $19,924 $770.6 3.87% $4,278 $271.7 6.35% $10,384 $507.5 4.89%
Certificates of deposit 929 26.9 2.90%
Securities:
Taxable 24,075 1,372.0 5.70% 29,283 1,607.9 5.49% 30,051 1,526.1 5.08%
Tax-exempt 18,415 1,246.4 6.77% 18,580 1,220.3 6.57% 16,896 1,165.6 6.90%
Loans(1)(2) 270,776 24,182.3 8.93% 238,697 23,407.8 9.81% 198,448 18,790.8 9.47%
Total earning assets and total
interest income 334,119 $27,598.2 8.26% 290,838 $26,507.7 9.11% 255,779 $21,990.0 8.60%
Cash & due from banks 13,634 11,615 11,680
All other assets 15,320 16,022 15,955
Allowance for loan loss
(5,614) (4,911) (4,219)
Total assets $357,459 $313,564 $279,195
Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings, money market, NOW $128,257 $3,007.8 2.35% $120,770 $3,434.0 2.84% $111,141 $2,991.6 2.69%
Time 131,527 7,427.4 5.65% 104,669 6,158.5 5.88% 92,802 4,970.0 5.36%
FLHB and other borrowings 5,801 425.9 7.23% 6,259 449.3 7.18% 98 5.3 5.40%
Total interest bearing
liabilities and total interest
expense 265,585 $10,861.1 4.09% 231,698 $10,041.8 4.33% 204,041 $7,966.9 3.90%
Non-interest bearing deposits 57,166 51,428 48,240
All other liabilities 3,641 3,220 2,232
Shareholders' Equity 31,067 27,218 24,682
Total liabilities and
shareholders' equity $357,459 $313,564 $279,195
Interest spread 4.17% 4.78% 4.70%
Net interest income-FTE $16,737.1 $16,465.9 $14,023.1
Net interest margin 5.01% 5.66% 5.48%
(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 $790,000 in 2001, $700,000 in 2000, and $710,000 in 1999.
(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, 2001 compared to December 31, 2000 compared to
Year ended December 31, 2000 Year ended December 31, 1999
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...... $ 994 $ (495) $ 499 $(298) $ 62 $(236)
Certificates of deposit..... 27 0 27
Securities:
Taxable................... (286) 50 (236) (39) 121 82
Tax Exempt................ (11) 37 26 116 (61) 55
Loans....................... 3,145 (2,371) 774 3,811 806 4,617
Total interest income..... $3,869 $(2,779) $1,090 $3,590 $ 928 $4,518
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts...... $ 213 $ (639) $(426) $ 259 $ 183 $ 442
Time...................... 1,580 (311) 1,269 636 553 1,189
FHLB & other borrowings..... (25) 1 (24) 426 18 444
Total interest expense... $1,768 $ (949) $ 819 $1,321 $ 754 $2,075
Net interest income (FTE) $2,101 $(1,830) $ 271 $2,269 $ 174 $2,443
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.
II INVESTMENT PORTFOLIO
(A)The following table sets forth the book value of securities at December 31:
(in thousands)
2001 2000 1999
Held to maturity:
States and political subdivisions 17,979 18,887 17,709
Mortgage-backed securities 78 577 335
Total $18,057 $19,464 $18,044
Available for sale:
U.S. Treasury $2,019 $13,028 $22,860
U.S. Government agencies 9,569 5,986 8,861
Corporate securities 12,828 0 0
Mortgage-backed securities 12,683 0 0
FRB Stock 44 44 44
FHLB Stock 789 789 789
Total $37,932 $19,847 $32,554
(B)The following table sets forth contractual maturities of securities at December 31, 2001 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
States and political
subdivisions $ 867 6.88% $ 9,539 7.00% $7,574 6.52% 0
Mortgage backed securities 0 78 5.50% 0 0
Total $ 867 6.88% $ 9,617 6.99% $7,574 6.52% $ 0
Tax equivalent adjustment
for calculations of yield $ 16 $ 182 $ 144
Available for sale
U.S. Treasury $2,019 6.54%
U.S. Agency 2,008 5.91% $ 7,561 4.78%
Corporate bonds 2,161 4.27% 10,667 3.95%
Mortgage backed securities 3,330 5.13% $2,960 5.25% $6,393 6.41%
FRB Stock 44 6.00%
FHLB Stock 789 8.25%
Total $6,144 5.54% $21,517 4.42% $2,990 5.25% $7,240 6.52%
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:
Rate on Tax
Tax-Exempt Rate Adjustment Equivalent Basis
Under 1 year 4.98% 1.90% 6.88%
1-5 years 5.10% 1.90% 7.00%
5-10 years 4.62% 1.90% 6.52%
Additional statistical information concerning the Bank's securities portfolio is incorporated by reference in Note 3 of the Company's Consolidated Financial Statements for the year ended December 31, 2001 included in the Appendix to the Company's definitive proxy statement, dated March 15, 2002, relating to the April 17, 2002, 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)
2001 2000 1999 1998 1997
Secured by real estate:
Residential first mortgage $ 27,456 $ 31,328 $ 29,904 $ 38,051 $ 38,073
Residential home equity/other junior liens 8,066 9,999 7,822 9,106 13,665
Construction and land development 42,221 35,020 23,375 23,048 19,490
Other 118,191 105,041 89,809 68,960 53,743
Consumer 22,719 20,700 16,811 16,653 14,011
Commercial 59,602 45,239 38,891 26,058 18,299
Other 8,870 8,897 4,043 3,770 1,729
Total Loans (Gross) $287,125 $256,224 $210,655 $185,646 $159,010
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, 2001 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.. $25,917 $16,304 0 $ 42,221
Real estate other (secured by commercial &
multi-family)............................. 17,006 93,450 6,758 117,214
Commercial (secured by business assets or
Unsecured)................................ 21,284 36,795 1,523 59,602
Other (loans to farmers, political
Subdivisions, & overdrafts)............... 2,143 2,169 4,558 8,870
Totals................................. $66,350 $148,718 $12,839 $227,907
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......... $116,197 $33,475
Due after five years........................ 8,088 4,955
(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)
2001 2000 1999 1998 1997
Nonperforming Loans:
Nonaccrual loans $2,636 $ 608 $ 173 $1,519 $ 809
Loans past due 90 days or more 361 209 4 25 249
Total nonperforming loans $2,997 $ 817 $ 177 $1,544 $1,058
Percent of total loans 1.04% .32% .08% .83% .67%
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, 2001 included in the Appendix to the Company's definitive proxy statement, dated March 15, 2002, relating to the April 17, 2002, 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, 2001, 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, 2001.
IV SUMMARY OF LOAN LOSS EXPERIENCE
(A) The following table sets forth loan balances and summarizes the changes in the allowance for loan losses, which is the Company's critical accounting policy, for each of the years ended December 31:
(dollars in thousands)
2001 2000 1999 1998 1997
Loans:
Average daily balance of loans for the year.. $270,776 $238,697 $198,448 $175,873 $148,096
year....
Amount of loans (gross) outstanding at end
of the year.............................. 287,125 256,224 210,655 185,646 159,010
Allowance for loan losses:
Balance at beginning of year................ 5,193 4,483 3,958 3,424 3,335
Loans charged off:
Real estate.............................. 0 0 0 110 0
Commercial............................... 322 526 322 63 375
Consumer................................. 195 83 164 129 124
Total charge-offs.................... 517 609 486 302 499
Recoveries of loans previously charged off:
Real estate.............................. 0 0 35 96 32
Commercial............................... 47 79 98 51 43
Consumer................................. 45 40 38 49 27
Total recoveries..................... 92 119 171 196 102
Net loans charged off.......................... 425 490 315 106 397
Additions to allowance charged to operations... 900 1,200 840 640 486
Balance at end of year............... $5,668 $5,193 $4,483 $3,958 $3,424
Ratios:
Net loans charged off to average loans
outstanding .16% .21% .16% .06% .27%
Allowance for loan losses to loans
outstanding 1.97% 2.03% 2.13% 2.13% 2.15%
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)
2001 2000 1999 1998 1997
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial....... $2,244 79.1% $4,725 77.0% $3,803 77.6% $3,384 74.1% $2,785 69.2%
Consumer......... 160 11.3% 315 12.2% 441 11.8% 355 12.5% 332 15.6%
Real Estate...... 26 9.6% 153 10.8% 239 10.6% 219 13.4% 307 15.2%
Unallocated...... 3,238
Total....... $5,668 100% $5,193 100% $4,483 100% $3,958 100% $3,424 100%
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)
2001 2000 1999
Average Average Average
Balance Rate Balance Rate Balance Rate
Non-interest bearing demand $57,267 $51,428 $48,240
Savings, money market and NOW 128,256 2.35% 120,770 2.84% 111,141 2.69%
Time deposits 131,527 5.65% 104,669 5.88% 92,802 5.36%
Total $317,050 4.02% $276,867 4.26% $252,183 3.90%
The table for maturities of negotiated rate time deposits of $100,000 or more outstanding at December 31, 2001 is incorporated by reference to Note 8 of the Company's Consolidated Financial Statements for the year ended December 31, 2001 included in the Appendix to the Company's definitive proxy statement, dated March 15, 2002, relating to the April 17, 2002, Annual Meeting of Shareholders and is incorporated by reference in Item 8, PART II of this 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:
2001 2000 1999 1998 1997
Net income as a percent of:
Average common equity 16.80% 18.76% 15.05% 17.83% 17.84%
Average total assets 1.46% 1.63% 1.33% 1.63% 1.79%
Additional performance ratios are set forth in "Selected Financial Data" included in the Appendix to the Company's definitive proxy statement, dated March 15, 2002, relating to the April 17, 2002, Annual Meeting of Shareholders and is incorporated herein by reference. 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 15, 2002, relating to the April 17, 2002, Annual Meeting of Shareholders and is incorporated herein by reference 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 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 2001.
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, 2001:
First Selected as an Officer
Name (Age) Position with Company of the Company
Barbara D. Martin (55) President, Chief Executive 1983
Officer, and Director of the
Company and the Bank
Barbara J. Nelson (54) Secretary/Treasurer of the 1985
Company and Senior Vice
President, Cashier, and Chief
Financial Officer of the Bank
Herbert W. Bursch (49) Senior Vice President, Retail 1999
Services, of the Bank
James Wibby (51) Senior Vice President, Senior 1997
Lender, of the Bank
Nancy Morgan (51) Vice President, Human Resources 1988
of the 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, 2000, through December 31, 2001, there were, so far as the Company's management knows, 326 sales of shares of the Company's Common Stock, involving a total of 48,603 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 2001, the highest and lowest prices known to be paid were $45.00 and $40.00 per share, respectively. To the knowledge of management, the last sale of Common Stock occurred on February 22, 2002 at a price of $43 per share.
As of March 1, 2002, there were approximately 930 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 2000 and 2001, 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 2000 and 2001:
Sales Prices Cash Dividends Declared
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(1)
2000 High Low
First Quarter $42.00 $42.00 $0.20
Second Quarter $45.00 $42.00 $0.20
Third Quarter $45.00 $45.00 $0.20
Fourth Quarter $45.00 $40.00 $0.60(2)
(1) Includes a special dividend of $0.35 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 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
The information set forth under the caption "Summary Financial Data" of Appendix III to the Company's definitive proxy statement, as filed with the Commission and dated March 15, 2002, relating to the April 17, 2002 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" of Appendix III to the Company's definitive proxy statement, as filed with the Commission and dated March 15, 2002, relating to the April 17, 2002 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 in Appendix III to the Company's definitive Proxy Statement, dated March 15, 2002, relating to the April 17, 2002 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, 2001 and 2000 are reported on page 48 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 2 through 4 of the Company's definitive proxy statement, as filed with the Commission and dated March 15, 2002, relating to the April 17, 2002 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 8 and 9 of the Company's definitive proxy statement, as filed with the Commission and dated March 15, 2002, relating to the April 17, 2002 Annual Meeting of Shareholders, is incorporated herein by reference. Information under the caption "Committee Report on Executive Compensation" on pages 7 and 8 and "Shareholder Return Performance Graph" on page 11 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 pages 10 and 11 of the Company's definitive proxy statement, as filed with the Commission and dated March 15, 2002, relating to the April 17, 2002 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 10 of the Company's definitive proxy statement, as filed with the Commission and dated March 15, 2002, relating to the April 17, 2002 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 15, 2002, relating to the April 17, 2002 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, 2001.
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 14, 2002.
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) |
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 |
| Athena Bacalis, Director | /s/ Athena Bacalis |
| Gary R. Boss, Director | /s/ Gary R. Boss |
| Harry E. Griffith, Director | /s/ Harry E. Griffith |
| Dona Scott Laskey, Director | /s/ Dona Scott Laskey |
| 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 |
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the applicable assigned number:
| Exhibit Number | Page | |
| (13) | Appendix III to the Company's Proxy Statement, dated March 15, 2002, for the Annual Meeting of Shareholders to be held April 17, 2002 representing that portion of the Proxy Statement 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 |
| (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 of the Registrant | Exhibit 3.1 of Form 10, effective June 30, 1995 ("Form 10") |
| 3.2 | Amendment to the Company's Articles of Incorporation to Increase Authorized Shares | Appendix I of Proxy Statement dated March 17, 1998 |
| 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 Purchase Plan* | Exhibit 4 to Registration Statement on Form S-8 (Reg. No. 333-46244) |
| *Represents a compensation plan | ||
EXHIBIT 13
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.
FNBH BANCORP, INC. AND SUBSIDIARIES
| Consolidated Financial Statements |
 |
December 31, 2001 and 2000
FINANCIAL INFORMATION
FNBH BANCORP, INC., AND SUBSIDIARIES
| Page | |
| Independent Auditor's Report................................................................................................................. | 21 |
| Consolidated Balance Sheets.................................................................................................................. | 22 |
| Consolidated Statements of Income...................................................................................................... | 24 |
| Consolidated Statements of Stockholders' Equity............................................................................... | 26 |
| Consolidated Statements of Cash Flows................................................................................................ | 27 |
| Notes to Consolidated Financial Statements......................................................................................... | 29 |
| Management's Discussion and Analysis.............................................................................................. | 51 |
| Summary Financial Data............................................................................................................................ | 62 |
| Stock and Earnings Highlights................................................................................................................ | 63 |
-20-
Independent Auditors’ 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
January 11, 2002
-21-
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
Assets 2001 2000
Cash and cash equivalents:
Cash and due from banks $ 18,335,732 17,501,547
Short-term investments 16,307,263 25,743,118
Total cash and cash equivalents 34,642,995 43,244,665
Certificates of deposit 5,917,000 --
Investment securities held to maturity, net (fair value
of $18,581,000 in 2001 and $19,218,000 in 2000) 17,978,980 18,886,677
Investment securities available for sale, at fair value 25,249,139 19,847,480
Mortgage-backed securities held to maturity, net (fair
value of $78,000 in 2001 and $578,000 in 2000) 78,063 576,994
Mortgage-backed securities available for sale, at fair value 12,682,581 --
Total investment and mortgage-backed securities 55,988,763 39,311,151
Loans:
Commercial 227,228,805 197,203,204
Consumer 32,346,942 31,180,063
Real estate mortgage 27,548,873 27,840,497
Total loans 287,124,620 256,223,764
Less unearned income (845,014) (809,746)
Less allowance for loan losses (5,667,906) (5,193,263)
Net loans 280,611,700 250,220,755
Bank premises and equipment, net 9,106,648 8,238,743
Land held for sale, net 1,530,290 1,530,290
Accrued interest income and other assets 5,181,098 5,817,824
Total assets $ 392,978,494 348,363,428
See accompanying notes to consolidated financial statements.
-22-
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
Liabilities and Stockholders' Equity 2001 2000
Deposits:
Demand (non-interest bearing) $ 62,938,059 55,252,490
NOW 39,566,687 34,637,247
Savings and money market accounts 114,919,743 98,887,217
Time 134,244,261 121,436,864
Total deposits 351,668,750 310,213,818
Other borrowings 5,792,911 6,000,000
Accrued interest, taxes, and other liabilities 3,113,030 3,262,975
Total liabilities 360,574,691 319,476,793
Commitments and contingencies
Stockholders' equity:
Common stock, $0 par value. Authorized 4,200,000
shares; 1,573,375 shares issued and outstanding
at December 31, 2001 and 1,567,748 shares issued
and outstanding at December 31, 2000 5,246,770 5,025,476
Retained earnings 27,361,215 24,027,158
Unearned management retention plan (231,143) (183,188)
Accumulated other comprehensive income 26,961 17,189
Total stockholders' equity 32,403,803 28,886,635
Total liabilities and stockholders' equity $ 392,978,494 348,363,428
-23-
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
Interest and dividend income:
Interest and fees on loans $ 24,018,140 23,254,289 18,725,205
Interest and dividends on investment and
mortgage-backed securities:
U.S. Treasury securities 517,042 1,159,774 999,431
Obligations of other U.S. Government agencies 650,606 376,491 461,654
Obligations of state and political subdivisions 904,026 913,065 838,532
Other securities 204,340 67,717 64,975
Interest on certificates of deposit and other bank deposits 30,300 -- --
Interest on short-term investments 770,588 275,656 507,499
Total interest and dividend income 27,095,042 26,046,992 21,597,296
Interest expense:
Interest on deposits 10,435,255 9,592,538 7,961,603
Interest on other borrowings 425,859 449,272 5,283
Total interest expense 10,861,114 10,041,810 7,966,886
Net interest income 16,233,928 16,005,182 13,630,410
Provision for loan losses 900,000 1,200,000 840,000
Net interest income after provision
for loan losses 15,333,928 14,805,182 12,790,410
Non-interest income:
Service charges and other fee income 2,642,886 2,322,591 1,762,678
Trust income 176,729 192,568 143,707
Gain on sale of loans 228,111 74,354 43,262
Other 71,989 14,377 65,456
Total non-interest income 3,119,715 2,603,890 2,015,103
-24-
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
Non-interest expenses:
Salaries and employee benefits $ 5,955,251 5,441,548 4,832,475
Net occupancy expense 776,503 773,865 689,777
Equipment expense 830,322 885,036 741,580
Professional and service fees 846,548 456,723 460,742
Printing and supplies 255,892 239,059 335,574
Michigan Single Business Tax 264,300 262,200 164,600
Provision for real estate losses -- 155,000 300,000
Other 2,131,915 1,975,133 2,018,447
Total non-interest expenses 11,060,731 10,188,564 9,543,195
Income before Federal income taxes 7,392,912 7,220,508 5,262,318
Federal income taxes 2,173,300 2,115,000 1,547,000
Net income $ 5,219,612 5,105,508 3,715,318
Basic and diluted net income per share $ 3.32 3.26 2.38
Cash dividends per share $ 1.20 1.15 1.10
See accompanying notes to consolidated financial statements.
-25-
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2001, 2000 and 1999
Unearned Accumulated
management other
Common Retained retention comprehensive
stock earnings plan income (loss) Total
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 from management
retention plan (12,725) -- 12,725 -- --
Issued 337 shares for employee stock
purchase plan 12,031 -- -- -- 12,031
Amortization of management retention
plan -- -- 50,574 -- 50,574
Comprehensive income:
Net income -- 5,105,508 -- -- 5,105,508
Changes in unrealized gain (loss) 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
Issued 3,219 shares for management
retention plan 135,198 -- (135,198) -- --
Retired 395 shares from management
retention plan (16,450) -- 16,450 -- --
Issued 2,803 shares for employee stock
purchase plan 102,546 -- -- -- 102,546
Amortization of management retention
plan -- -- 70,793 -- 70,793
Comprehensive income:
Net income -- 5,219,612 -- -- 5,219,612
Changes in unrealized gain on securities
available for sale, net of tax -- -- -- 9,772 9,772
Total comprehensive income 5,229,384
Cash dividends ($1.20 per share) -- (1,885,555) -- -- (1,885,555)
Balances at December 31, 2001 $ 5,246,770 27,361,215 (231,143) 26,961 32,403,803
See accompanying notes to consolidated financial statements.
-26-
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
Cash flows from operating activities:
Net income $ 5,219,612 5,105,508 3,715,318
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900,000 1,200,000 840,000
Depreciation and amortization 863,911 912,832 760,047
Deferred Federal income tax benefit (89,400) (337,000) (235,600)
Net amortization on investment securities 68,024 20,635 88,233
Earned portion of management retention
plan 70,793 50,574 24,023
Loss on disposal of equipment 554 80,800 18,358
Gain on sale of loans (228,111) (74,354) (43,262)
Proceeds from sale of loans 16,869,945 9,336,943 16,044,643
Origination of loans held for sale (17,945,804) (9,470,567) (16,080,472)
Provision for real estate losses -- 155,000 300,000
(Increase) decrease in accrued interest income
and other assets 726,126 (237,044) (109,238)
Increase (decrease) in accrued interest, taxes,
and other liabilities (155,045) 1,238,554 (30,241)
Net cash provided by operating activities 6,300,605 7,981,881 5,291,809
Cash flows from investing activities:
Purchases of available-for-sale securities (33,024,189) (10,982,824) (17,157,030)
Proceeds from maturities of available-for-sale
securities 14,000,000 24,000,000 3,000,000
Repayments from mortgage-backed securities
available for sale 901,553 -- --
Purchases of held-to-maturity securities -- (2,496,204) (2,919,503)
Proceeds from maturities and calls of held-to-
maturity securities 892,000 605,000 4,268,000
Repayments from mortgage-backed securities
held to maturity 499,872 455,981 460,169
Purchases of certificates of deposit (5,917,000) -- --
Purchase of loans (1,192,540) (2,325,000) --
Net increase in loans (28,794,435) (43,419,426) (25,181,161)
Capital expenditures (1,732,370) (222,714) (2,498,605)
Net cash used in investing activities (54,367,109) (34,385,187) (40,028,130)
-27-
FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
Cash flows from financing activities:
Net increase in deposits $ 41,454,932 41,023,365 29,633,689
Increase in borrowings -- 6,000,000 --
Payments on other borrowings (207,089) -- --
Dividends paid (1,885,555) (1,801,707) (1,720,748)
Shares issued for employee purchase plan 102,546 12,031 --
Net cash provided by financing
activities 39,464,834 45,233,689 27,912,941
Net increase (decrease) in cash and
cash equivalents (8,601,670) 18,830,383 (6,823,380)
Cash and cash equivalents at beginning of year 43,244,665 24,414,282 31,238,662
Cash and cash equivalents at end of year $ 34,642,995 43,244,665 24,415,282
Supplemental disclosures:
Interest paid $ 11,064,961 9,703,333 7,904,981
Federal income taxes paid 2,357,000 2,208,000 1,607,000
Supplemental schedule of noncash investing
and financing activities:
Loans transferred to other real estate -- 649,203 900,000
Loans charged off 517,165 608,520 485,657
See accompanying notes to consolidated financial statements.
-28-
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (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) | Certificates of Deposit Brokered certificates of deposit are purchased periodically from other financial institutions in denominations of less than $100,000. These investments are fully insured by the FDIC. Brokered CDs are not marketable, and there is a penalty for early withdrawal. | |
| (c) | 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. | |
| -29- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (d) | Loans Loans are stated at their principal amount outstanding, net of an allowance for loan losses and unearned discount. 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. | |
| (e) | 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 probable losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, nonperforming loan levels, the composition of the loan portfolio, and management’s evaluation of the collectibility of specific loans, which includes analysis of the value of the underlying collateral. 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. |
| -30- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (f) | 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. | |
| (g) | 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. | |
| (h) | 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. | |
| (i) | 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. |
| -31- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (j) | 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. | |
| (k) | 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 includes net income and any changes in equity from non-owner sources that bypass the income statement. | |
| (l) | Earnings Per Share Earnings per share of common stock are based on the weighted average number of common shares outstanding during the year. | |
| (2) | Certificates of Deposit At December 31, 2001, the scheduled maturities of brokered certificates were: | |
Maturing in 2002 $ 2,037,000
Maturing in 2003 2,425,000
Maturing in 2004 1,455,000
$ 5,917,000
| -32- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (3) | Investment and Mortgage-backed Securities A summary of the amortized cost and approximate fair value of investment and mortgage-backed securities at December 31, 2001 follows: | |
Held to maturity Available for sale
Amortized Approximate fair Amortized Approximate fair
cost value cost value
U.S. Treasury and agency
securities $ -- -- 11,490,119 11,588,517
Obligations of states
and political
subdivisions 17,978,980 18,581,000 -- --
Corporate bonds -- -- 12,839,663 12,827,872
Federal Reserve Bank
stock -- -- 44,250 44,250
Federal Home Loan Bank
stock -- -- 788,500 788,500
17,978,980 18,581,000 25,162,532 25,249,139
Mortgage-backed
securities 78,063 78,000 12,728,327 12,682,581
$ 18,057,043 18,659,000 37,890,859 37,931,720
| A summary of unrealized gains and losses on investment and mortgage-backed securities at December 31, 2001 follows: |
Held to maturity Available for sale
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains losses gains losses
U.S. Treasury and agency securities $ -- -- 106,494 8,096
Obligations of states and political
subdivisions 622,664 20,644 -- --
Corporate bonds -- -- 62,290 74,081
Mortgage-backed securities -- 63 27,437 73,183
$ 622,664 20,707 196,221 155,360
| -33- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| The amortized cost and approximate fair value of investment and mortgage-backed securities at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. | ||
Held to maturity Available for sale
Amortized Approximate fair Amortized Approximate fair
cost value cost value
Due in one year or less $ 866,686 872,000 6,143,829 6,188,010
Due after one year
through five years 9,538,502 9,985,000 18,185,953 18,228,379
Due after five years
through ten years 7,573,792 7,724,000 -- --
17,978,980 18,581,000 24,329,782 24,416,389
Federal Reserve Bank
stock -- -- 44,250 44,250
Federal Home Loan Bank
stock -- -- 788,500 788,500
Mortgage-backed
securities 78,063 78,000 12,728,327 12,682,581
$ 18,057,043 18,659,000 37,890,859 37,931,720
| The amortized cost and approximate fair value of investment securities of states (including all their political subdivisions) that individually exceeded 10% of stockholders’ equity at December 31, 2001 and 2000 are as follows: |
2001 2000
Amortized Approximate fair Amortized Approximate fair
cost value cost value
State of Michigan $ 10,518,334 10,836,000 10,981,883 11,132,000
| Investment securities, with an amortized cost of approximately $1,798,000 at December 31, 2001 and $1,800,600 at December 31, 2000, were pledged to secure public deposits and for other purposes as required or permitted by law. |
| -34- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| A summary of the amortized cost and approximate fair value of investment and mortgage-backed securities at December 31, 2000 follows: | ||
Held to maturity Available for sale
Amortized Approximate fair Amortized Approximate fair
cost value cost value
U.S. Treasury and agency
securities $ -- -- 18,988,741 19,014,730
Obligations of states
and political
subdivisions 18,886,677 19,218,000 -- --
Federal Reserve Bank
stock -- -- 44,250 44,250
Federal Home Loan Bank
stock -- -- 788,500 788,500
18,886,677 19,218,000 19,821,491 19,847,480
Mortgage-backed
securities 576,994 578,000 -- --
$ 19,463,671 19,796,000 19,821,491 19,847,480
| A summary of unrealized gains and losses on investment and mortgage-backed securities at December 31, 2000 follows: |
Held to maturity Available for sale
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains losses gains losses
U.S. Treasury and agency securities $ -- -- 59,585 33,596
Obligations of states and political
subdivisions 377,574 45,976 -- --
Mortgage-backed securities 1,232 501 -- --
$ 378,806 46,477 59,585 33,596
| (4) | Loans Loans on nonaccrual amounted to $2,636,000, $608,000, and $173,000 at December 31, 2001, 2000, and 1999, respectively. If these loans had continued to accrue interest in accordance with their original terms, approximately $220,000, $87,000, and $21,000 of interest income would have been recognized in 2001, 2000, and 1999, respectively. The Bank had no troubled-debt restructured loans at December 31, 2001 and 2000. | |
| -35- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| Details of past-due and nonperforming loans follow: | ||
90 days past due
and still accruing Nonaccrual
2001 2000 2001 2000
Commercial and mortgage loans
secured by real estate $ 73,000 164,000 2,212,000 387,000
Consumer loans 31,000 22,000 60,000 28,000
Commercial and other loans 257,000 23,000 364,000 193,000
$ 361,000 209,000 2,636,000 608,000
| Impaired loans totaled $8.7 million, $3.9 million, and $3.4 million at December 31, 2001, 2000, and 1999, respectively. Specific reserves relating to these loans were $1.6 million, $1.9 million, and $900,000 at December 31, 2001, 2000, and 1999, respectively. These reserves were calculated in accordance with SFAS No. 114. Cash receipts received and recognized as income on impaired loans approximated $550,000, $306,000, and $313,000 for the years ended December 31, 2001, 2000, and 1999, respectively. Average impaired loans for the years ended December 31, 2001, 2000, and 1999 were approximately $6.8 million, $5.2 million, and $4.6 million, respectively. Loans serviced for others were approximately $58.3 million, $53.4 million, and $49.5 million at December 31, 2001, 2000, and 1999, respectively. The Bank capitalized $92,000, $27,000, and $79,000 in mortgage servicing rights and incurred approximately $52,000, $44,000, and $52,000 in related amortization expense during 2001, 2000, and 1999, respectively. At December 31, 2001 and 2000, these mortgage servicing rights had a book value of $234,000 and $195,000 and fair value of approximately $406,000 and $390,000, respectively. Mortgage loans with mortgage servicing rights capitalized totaled approximately $35.3 million at December 31, 2001 and $34 million at December 31, 2000. No valuation allowance for capitalized mortgage servicing rights was considered necessary as of December 31, 2001 and 2000. Included in real estate loans at December 31, 2001 and 2000 were approximately $1,212,000 and $181,000, respectively, of fixed-rate mortgage loans held for sale. The Bank’s primary market area is considered to be Livingston County, Michigan. The Bank is not dependent upon any single industry or business for its banking opportunities. Certain directors and executive officers, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during 2001 and 2000. Such loans were made in the ordinary course of business in accordance with the Bank’s normal lending policies, including the interest rate charged and collateralization, and do not represent more than a normal credit risk. |
| -36- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| Loans to related parties are summarized below for the periods indicated: | ||
2001 2000
Balance at beginning of year $ 496,000 798,000
New loans and related parties 4,201,000 24,000
Loan repayments (39,000) (326,000)
Balance at end of year $ 4,658,000 496,000
| (5) | Allowance for Loan Losses The following represents a summary of the activity in the allowance for loan losses for the years ended December 31, 2001, 2000, and 1999: | |
2001 2000
Balance at beginning of year $ 5,193,263 4,483,283
Provision charged to operations 900,000 1,200,000
Loans charged off (517,165) (608,520)
Recoveries of loans charged off 91,808 118,500
Balance at end of year $ 5,667,906 5,193,263
| (6) | Bank Premises and Equipment A summary of bank premises and equipment, and related accumulated depreciation and amortization at December 31, 2001 and 2000 follows: | |
2001 2000
Land and land improvements $ 2,489,173 2,368,791
Bank premises 7,655,975 6,496,071
Furniture and equipment 5,012,419 4,574,756
15,157,567 13,439,618
Less accumulated depreciation and amortization (6,050,919) (5,200,875)
$ 9,106,648 8,238,743
| -37- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (7) | Land Held for Sale In 1997, the Bank purchased an option for $900,000 and, in 1998, exercised that option for approximately $3 million for a tract of land. Subsequent improvements to the land were made amounting to approximately $200,000. During 1998, the Bank allocated approximately $800,000 of the carrying value of the property to land for a branch site. During 2000, one parcel of the property was sold. The remaining property is held for sale. The Bank also reduced the carrying cost of the land held for sale by approximately $0, $155,000, and $300,000 during 2001, 2000, and 1999, respectively, to provide for estimated disposal costs and/or decline in estimated market value. These charges are included as a component of non-interest expense. |
| (8) | Time Certificates of Deposit At December 31, 2001, the scheduled maturities of time deposits with a remaining term of more than one year were: |
Year of maturity:
2003 $ 13,058,870
2004 4,536,216
2005 4,409,885
2006 1,944,335
2007 and beyond 428,132
$ 24,377,438
| Included in time deposits are certificates of deposit in amounts of $100,000 or more. These certificates and their remaining maturities at December 31, 2001, 2000, and 1999 are as follows: |
2001 2000 1999
Three months or less $ 21,009,465 12,583,794 5,436,960
Three through six months 14,435,441 8,415,061 5,190,724
Six through twelve months 5,355,211 4,954,522 6,731,297
Over twelve months 3,907,542 7,159,896 5,073,865
$ 44,707,659 33,113,273 22,432,846
| Interest expense attributable to the above deposits amounted to approximately $2,209,000, $1,516,000, and $1,167,000 in 2001, 2000, and 1999, respectively. |
| -38- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (9) | Other Borrowings The Bank has a borrowing capacity of approximately $18,000,000 with the Federal Home Loan Bank of Indianapolis (FHLB) and had FHLB advances outstanding of approximately $5,793,000 and $6,000,000 at December 31, 2001 and 2000, respectively. Variable- or fixed-rate advances are available with terms ranging from one day to ten years. An outstanding advance requires 125% collateral coverage by one-to-four family whole-mortgage loans. A summary of outstanding advances at December 31, 2001 follows: |
Weighted average
Maturity interest rate Amount
Fixed rate:
Within one year 7.29% $ 223,656
Two years 7.29 241,547
Three years 7.29 260,872
Four years 7.18 3,281,742
Five years 7.29 304,281
Thereafter 7.29 1,480,813
$ 5,792,911
| (10) | Federal Income Taxes Federal income tax expense (benefit) consists of: |
2001 2000 1999
Current $ 2,262,700 2,452,000 1,782,600
Deferred (89,400) (337,000) (235,600)
$ 2,173,300 2,115,000 1,547,000
| Federal income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to pretax income as a result of the following: |
2001 2000 1999
Computed "expected" tax expense $ 2,513,600 2,455,000 1,789,200
Increase (reduction) in tax resulting from:
Tax-exempt interest and dividends, net (380,800) (379,300) (294,600)
Other, net 40,500 39,300 52,400
$ 2,173,300 2,115,000 1,547,000
| -39- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below: |
2001 2000
Deferred tax assets:
Allowance for loan losses $ 1,792,300 1,630,700
Deferred loan fees -- 11,700
Other 556,600 499,800
Total gross deferred tax assets 2,348,900 2,142,200
Deferred tax liabilities:
Deferred loan fees 126,300 --
Unrealized gain on securities available for sale 13,900 8,800
Other 180,200 189,200
Total gross deferred tax liabilities 320,400 198,000
Net deferred tax asset $ 2,028,500 1,944,200
| The deferred tax assets are subject to certain asset realization tests. Management believes no valuation allowance is required at December 31, 2001, due to the combination of potential recovery of tax previously paid and the reversal of certain deductible temporary differences. |
| (11) | Leases The Bank has a noncancelable operating lease that provides for renewal options. Future minimum lease payments under the noncancelable lease as of December 31, 2001 are as follows: |
Year ending December 31:
2002 $ 39,250
2003 43,000
2004 43,000
2005 43,000
2006 43,000
2007 32,250
$ 243,500
| Rental expense charged to operations in 2001, 2000, and 1999 amounted to approximately $40,000, $41,000, and $42,000, respectively, including amounts paid under short-term, cancelable leases. |
| -40- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (12) | Pension Plan The Bank sponsors a defined contribution money purchase thrift plan covering all employees 21 years of age or older who have completed one year of service as defined in the plan agreement. Contributions are equal to 5% of total employee earnings plus 50% of employee contributions (limited to 10% of their earnings), or the maximum amount permitted by the Internal Revenue Code. The pension plan expense of the Bank for 2001, 2000, and 1999 was approximately $302,000, $245,000, and $236,000, respectively. |
| (13) | Management Retention Plan Restricted stock was awarded to key employees, beginning in 1998, providing for the immediate award of the Corporation’s stock, subject to a vesting period which takes place over five years. The awards are recorded at fair market value and amortized into salary expense over the vesting period. The amount of compensation costs related to restricted stock awards included in salary expense in 2001, 2000, and 1999 amounted to $70,793, $50,574, and $24,023, respectively. |
| (14) | Employees’ Stock Purchase Plan The Employees’ Stock Purchase Plan allows eligible employees to purchase shares of common stock, no par value, of FNBH Bancorp, Inc. at a price less than market price under Section 423 of the Internal Revenue Code of 1986, as amended. Eligible employees must have been continuously employed for one year, must work at least 20 hours per week, and must work at least five months in a calendar year. The purchase price from each share of stock is 85% of fair market value of a share of stock on the purchase date. |
| (15) | Financial Instruments with Off-balance-sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are loan commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of the nonperformance by the other party to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of these instruments. The Bank uses the same credit policies in making credit commitments as it does for on-balance-sheet loans. Financial instruments whose contract amounts represent credit risk at December 31, 2001 and 2000 are as follows: |
2001 2000
Fixed rate $ 12,400,000 6,600,000
Variable rate 12,800,000 29,100,000
Total credit commitments $ 25,200,000 35,700,000
Letters of credit $ 2,380,000 2,030,000
| -41- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable; inventory; property, plant, and equipment; residential real estate; and income-producing commercial properties. Market risk may arise if interest rates move adversely subsequent to the extension of commitments. Letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. All letters of credit are short-term guarantees of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank primarily holds real estate as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held on those commitments at December 31, 2001 and 2000 is in excess of the committed amount. | |
| (16) | Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). The most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category. |
| -42- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| The Bank’s actual capital amounts and ratios are also presented in the following table as of December 31, 2001 and 2000: |
To be well capitalized
For capital adequacy under prompt corrective
Actual purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2001
Total capital (to
risk-weighted
assets) $ 33,870,000 10.58% $ 25,597,000 =>8% $ 31,996,000 =>10%
Tier 1 capital (to
risk-weighted
assets) 29,870,000 9.33% 12,798,000 =>4% 19,198,000 =>6%
Tier 1 capital (to
average assets) 29,870,000 7.90% 15,126,000 =>4% 18,907,500 =>5%
As of December 31,
2000:
Total capital (to
risk-weighted
assets) 29,658,000 11.00% 21,572,000 =>8% 26,965,000 =>10%
Tier 1 capital (to
risk-weighted
assets) 26,292,000 9.75% 10,786,000 =>4% 16,179,000 =>6%
Tier 1 capital (to
average assets) 26,292,000 8.02% 13,121,000 =>4% 16,401,000 =>5%
| (17) | Net Income Per Common Share Basic net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares and potential common stock, such as stock options outstanding during the period, of which there were none. |
Year ended December 31
2001 2000 1999
Basic:
Average shares outstanding 1,570,559 1,566,390 1,563,996
Net income $ 5,219,612 5,105,508 3,715,318
Net income applicable to common stock $ 5,219,612 5,105,508 3,715,318
Basic and diluted net income per share $ 3.32 3.26 2.38
| (18) | Contingent Liabilities The Bank is subject to various claims and legal proceedings arising out of the normal course of business, none of which, in the opinion of management, based on the advice of legal counsel, is expected to have a material effect on the Bank’s financial position or results of operations. |
| -43- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (19) | Fair Value of Financial Instruments SFAS No. 107,Disclosures About Fair Value of FinancialInstruments, requires disclosure of fair-value information about financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair-value estimates cannot be substantiated by comparison to independent markets and, in many cases, cannot be realized in immediate settlement of the instrument. Fair-value methods and assumptions for the Bank’s financial instruments are as follows: Cash and Cash Equivalents – The carrying amounts reported in the consolidated balance sheet for cash federal funds and short-term investments sold reasonably approximate those assets’ fair values. Investment and Mortgage-backed Securities – Fair values for investment and mortgage-backed securities are based on quoted market prices. Loans – For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are generally based on carrying values. The fair value of fixed-rate loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. FHLB Advances – The fair value of FHLB advances is estimated based on quoted market prices. Accrued Interest Income – The carrying amount of accrued interest income is a reasonable estimate of fair value. Deposit Liabilities – The fair value of deposits with no stated maturity, such as demand deposit, savings, NOW, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is estimated using rates currently offered for deposits with similar remaining maturities. Accrued Interest Payable – The carrying amount of accrued interest payable is a reasonable estimate of fair value. Off-balance-sheet Instruments – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of commitments to extend credit, including letters of credit, are estimated to approximate their aggregate book balance. |
| -44- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| The estimated fair values of the Bank’s financial instruments are as follows: |
2001 2000
Carrying Fair Carrying Fair
Financial Assets value value value value
Cash and cash equivalents $ 34,643,000 34,600,000 43,245,000 43,200,000
Certificates of deposit 5,917,000 5,900,000 -- --
Investment and mortgage-backed
securities 55,989,000 56,600,000 39,311,000 39,600,000
Loans, net 280,612,000 287,100,000 250,221,000 248,400,000
Accrued interest income 2,136,000 2,100,000 2,408,000 2,400,000
Financial Liabilities
Deposits:
Demand $ 62,938,000 62,900,000 55,252,000 55,300,000
NOW 39,567,000 39,600,000 34,637,000 34,600,000
Savings and money market
accounts 114,920,000 114,900,000 98,887,000 98,900,000
Time 134,244,000 134,500,000 121,437,000 122,300,000
FHLB advances 5,793,000 6,800,000 6,000,000 6,300,000
Accrued interest payable 832,000 800,000 993,000 1,000,000
| Limitations Fair-value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discounts that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair-value estimates are based on judgments regarding future loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. | |
| (20) | Dividend Restrictions On a parent company-only basis, the Corporation’s only source of funds is dividends paid by the Bank. The ability of the Bank to pay dividends is subject to limitations under various laws and regulations and to prudent and sound banking principles. The Bank may declare a dividend without the approval of the Office of Comptroller of the Currency (OCC) unless the total dividend in a calendar year exceeds the total of its net profits for the year combined with its retained profits of the two preceding years. Under these provisions, approximately $11.1 million was available for dividends on December 31, 2001 without the approval of the OCC. |
| -45- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (21) | Condensed Financial Information – Parent Company Only The condensed balance sheets at December 31, 2001 and 2000, and the condensed statements of income and cash flows for the years ended December 31, 2001, 2000, and 1999, of FNBH Bancorp, Inc. follow: |
Condensed Balance Sheets
2001 2000
Assets:
Cash $ 25,621 31,920
Investment in subsidiaries:
First National Bank in Howell 29,897,166 26,309,256
H.B. Realty Co. 2,214,998 2,442,490
Other assets 282,518 115,719
$ 32,420,303 28,899,385
Liabilities and stockholders' equity:
Other liabilities $ 16,500 12,750
Stockholders' equity 32,403,803 28,886,635
Total liabilities and stockholders' equity $ 32,420,303 28,899,385
Condensed Statements of Income
Year ended December 31
2001 2000 1999
Operating income:
Dividends from subsidiaries $ 1,920,050 1,835,500 1,720,748
Total operating income 1,920,050 1,835,500 1,720,748
Operating expenses:
administrative and other expenses 33,084 33,697 37,223
Total operating expenses 33,084 33,697 37,223
Income before equity in undistributed net
income of subsidiaries 1,886,966 1,801,803 1,683,525
Equity in undistributed net income of
subsidiaries 3,332,646 3,303,705 2,031,793
Net income $ 5,219,612 5,105,508 3,715,318
| -46- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
Condensed Statements of Cash Flows
Year ended December 31
2001 2000 1999
Net income $ 5,219,612 5,105,508 3,715,318
Adjustments to reconcile net income to net cash
from operating activities:
Increase in other assets (166,799) (56,065) (20,097)
Increase in other liabilities 3,750 6,500 6,250
Equity in undistributed net income of
subsidiaries (3,332,646) (3,303,705) (2,031,793)
Total adjustments (3,495,695) (3,353,270) (2,045,640)
Net cash provided by operating
activities 1,723,917 1,752,238 1,669,678
Cash flow from investing activities:
investments in and advancements to
subsidiary, net (18,000) -- --
Net cash used in investing
activities (18,000) -- --
Cash flow from financing activities:
Dividends paid (1,885,555) (1,801,707) (1,720,748)
Common stock issued 221,294 106,196 97,505
Change in management retention plan (47,955) (43,591) (73,377)
Net cash used in financing
activities (1,712,216) (1,739,102) (1,696,620)
Net increase (decrease) in cash (6,299) 13,136 (26,942)
Cash at beginning of year 31,920 18,784 45,726
Cash at end of year $ 25,621 31,920 18,784
| -47- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (22) | Quarterly Financial Data – Unaudited The following table presents summarized quarterly data for each of the two years ended December 31: |
Quarters ended in 2001
March 31 June 30 September 30 December 31
Selected operations data:
Interest income $ 6,971,194 6,792,817 6,776,549 6,554,482
Net interest income 4,067,727 3,999,923 4,031,538 4,134,740
Provision for loan losses 300,000 300,000 290,000 10,000
Income before income taxes 1,822,708 1,744,156 1,850,345 1,975,703
Net income 1,291,708 1,231,756 1,310,245 1,385,903
Basic and diluted net
income per share 0.82 0.79 0.83 0.88
Cash dividends per share 0.20 0.20 0.20 0.60
Quarters ended in 2000
March 31 June 30 September 30 December 31
Selected operations data:
Interest income $ 5,853,715 6,302,364 6,797,141 7,093,772
Net interest income 3,603,459 3,925,697 4,189,862 4,286,164
Provision for loan losses 300,000 300,000 300,000 300,000
Income before income taxes 1,440,452 1,755,408 1,905,332 2,119,316
Net income 1,029,652 1,240,408 1,313,632 1,521,816
Basic and diluted net
income per share 0.66 0.79 0.84 0.97
Cash dividends per share 0.20 0.20 0.20 0.55
| -48- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| (23) | Impact of New Accounting Standards The Financial Accounting Standards Board (FASB) issued SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, in June 1998. SFAS No. 133, which has been subsequently amended by SFAS No. 137 and SFAS No. 138, requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. The accounting for increases and decreases in the value of derivatives will depend upon the use of derivatives and whether the derivatives will qualify for hedge accounting. Management has evaluated the impact of SFAS No. 133 at December 31, 2001 and has concluded that the adoption of this Statement did not have a material effect on the Bank. The FASB has adopted SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140, which replaces SFAS No. 125,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, revises the standards for accounting for the securitization and other transfers of financial assets and collateral. SFAS No. 140 also requires certain disclosures, but carries over most of the provisions of SFAS No. 125. This Statement is effective for transactions occurring after March 31, 2001, with earlier application not allowed, and is to be applied prospectively. The adoption of this Statement did not have a material impact on the Bank’s financial statements. On June 29, 2001, the FASB approved for issuance SFAS No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets. Under SFAS No. 141, all business combinations initiated after June 30, 2001 must be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization, but instead must be reviewed for impairment. The amortization of goodwill ceases upon adoption of SFAS No. 142, which is effective for fiscal years beginning after December 15, 2001. Management does not expect that these Statements will have an impact on the Bank’s results of operations. Emerging Issues Task Force (EITF) Issue 99-20,Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets, was effective for the Bank’s quarter ended June 30, 2001. The adoption of EITF 99-20 did not have a material impact on the financial condition or operations of the Bank. On October 3, 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-lived Assets. Statement No. 144 supersedes FASB Statement No. 121,Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of, but retains many of the fundamental provisions of that Statement. |
| -49- | (Continued) |
FNBH BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
| Statement No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30,Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management’s ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. Statement No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Early application is encouraged. Management does not expect that the adoption of this Statement will have a significant impact on the Bank’s results of operations. |
| -50- |
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
This discussion provides information about the consolidated financial condition and results of operations of FNBH Bancorp, Inc. (“Company”) and its subsidiaries, First National Bank in Howell (“Bank”) and HB Realty Co., and should be read in conjunction with the Consolidated Financial Statements.
FINANCIAL CONDITION
At year end 2001 total assets were $392,978,000 representing a 13% increase from the prior year when assets were $348,363,000. Investment securities increased $16.7 million (42%) to $55,989,000 while gross loans increased $30.9 million (12%) to $287,125,000. Deposits increased $41.5 million (13%) to $351,669,000. Stockholders’ equity increased $3.5 million (12%) to $32,404,000.
Securities
During 2001, the composition of the securities portfolio changed as the Company’s Investment Policy was expanded to provide greater latitude in terms of acceptable investments. The changes to the policy were recommended by a consultant as part of an overall change to asset/liability management.
With deposit growth outpacing loan growth throughout the year, and excess liquidity in the form of a large balance in Fed Funds at the end of 2000, the Company looked to improve the yield of the investment portfolio as it played a bigger role in generating interest income. Consequently, the Company stopped investing in U.S. Treasury securities instead buying some U.S. Agency bonds which produce a slightly better yield. Additionally investments were made in government agency mortgage backed pools, corporate bonds, and brokered certificates of deposit from other insured financial institutions. “Other” securities consist of equity holdings in the Federal Reserve Bank and the Federal Home Loan Bank.
The following table shows the percentage makeup of the securities portfolio as of December 31:
2001 2000
U.S. Treasury & agency securities.............................. 20.6% 48.4%
Agency mortgage backed securities.............................. 22.9% 1.5%
Tax exempt obligations of states and political subdivisions.... 32.1% 48.0%
Corporate bonds................................................ 22.9% 0%
Other.......................................................... 1.5% 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 funds for home purchases, business purposes, and consumer needs. The overall loan portfolio grew $30,900,000 (12%) in 2001.
As a full service lender, the Bank offers a variety of home mortgage loan products. The Bank makes, and subsequently sells, fixed rate, long-term mortgages which conform to secondary market standards. This practice allows the Bank to meet the housing credit needs of its service area, while at the same time maintaining loan to deposit ratios and interest sensitivity and liquidity positions within Bank policy. The Bank retains servicing on sold mortgages thereby furthering the customer relationship and adding to servicing income. During 2001 the Bank sold $13,700,000 in residential mortgages.
The Bank has also been able to service customers with loan needs which do not conform to secondary market requirements by offering variable rate products which are retained in the mortgage portfolio. While not meeting secondary market requirements, these nonconforming mortgages do meet bank loan guidelines and have a good payment record. During 2001 the Bank made approximately $7,200,000 in variable rate mortgage loans which it retained in the mortgage portfolio.
-51-
The Bank experienced a significant amount of loan demand throughout 2001. Growth in Livingston County resulted in a need for financing commercial projects, some of which were for the construction of commercial buildings and some of which were for the development of residential subdivisions. Commercial loans ended the year at $227,229,000, a 15% increase for the year. Additionally, the Bank originated $3,100,000 in commercial loans which it sold in part or total to other banks due to legal lending limits. Consumer loans increased $1,200,000, or about 4%, from the preceding year.
The following table reflects the makeup of the commercial and consumer loans in the Consolidated Financial Statements. Included in the residential first mortgage totals below are the “real estate mortgage” loans listed in the Consolidated Financial Statements and other loans to customers who pledge their homes as collateral for their borrowings. A portion of the loans listed in residential first mortgages represent commercial loans where the borrower has pledged his/her residence as collateral. In the majority of the loans to commercial customers, the Bank is relying on the borrower’s cash flow to service the loans. “Other” real estate loans include $116,800,000 in loans secured by commercial property, with the remaining $1,400,000 secured by multi-family units or farm property. The most significant loan growth was in commercial loans secured by business property which increased $13,150,000, 12.5% over the prior year, in construction and land development loans which increased $7,200,000, a 20.5% increase, and other commercial loans which increased $14,400,000, 31.7%.
The following table shows the balance and percentage makeup of loans as of December 31:
(dollars in thousands)
2001 2000
Balances Percentage Balances Percentage
Secured by real estate:
Residential first mortgage $ 27,456 9.6% $ 31,328 12.2%
Residential home equity/other junior liens 8,066 2.8% 9,999 3.9%
Construction and land development 42,221 14.7% 35,020 13.7%
Other 118,191 41.2% 105,041 41.0%
Consumer 22,719 7.9% 20,700 8.1%
Commercial 59,602 20.7% 45,239 17.6%
Other, primarily commercial 8,870 3.1% 8,897 3.5%
Total Loans (Gross) $287,125 100.0% $256,224 100.0%
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 $400,000 are approved by a committee of the Board or the Board. The Bank has hired an independent contractor to review the quality of the loan portfolio on a regular basis. The quality of the loan portfolio is illustrated in the table below for December 31:
(Dollars in thousands)
2001 2000 1999
Nonperforming Loans:
Nonaccrual loans......................................... $2,636 $ 608 $173
Loans past due 90 days and still accruing................ 361 209 4
Total nonperforming loans............................. 2,997 817 177
Other real estate........................................ 0 649 0
Total nonperforming assets............................. $2,997 $1,466 $177
Nonperforming loans as a percent of total loans.......... 1.04% .32% .08%
Loan loss reserve as a percent of nonperforming
loans.................................................. 189% 636% 2533%
-52-
Nonperforming assets are comprised of loans for which the accrual of interest has been discontinued, accruing loans 90 days or more past due in payments, and other real estate which has been acquired primarily through foreclosure and is waiting disposition. Loans are generally placed on a nonaccrual basis when principal or interest is past due 90 days or more and when, in the opinion of management, full collection of principal and interest is unlikely. The increase in the nonaccrual balance is largely due to a loan relationship with one builder who has $1,400,000 in debt. The loans are well collateralized and are not expected to result in significant losses for the Company.
Impaired loans totaled $8,700,000 at December 31, 2001, compared to $3,900,000 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 $6,200,000 of commercial loans separately identified as impaired. Included in impaired loans is a loan for $2,200,000 which is current and making regular payments; however the cash generated solely by the business is not presently adequate to cover debt service. Another loan, for $1,200,000, was made to purchase medical buildings in Lansing. The buildings are not fully leased and cash flow has not been sufficient to cover debt service. Both loans are secured with first mortgages on commercial real estate and the real estate is being actively marketed. Nonperforming loans are reviewed regularly for collectability. Any uncollectable balances are promptly charged off.
During 2001 the Bank charged off loans totaling $517,000 and recovered $92,000 for a net charge off amount of $425,000. In the previous year, the Bank had net charge offs totaling $490,000.
The allowance for loan losses totaled $5,668,000 at year end which was 1.97% of total loans, compared to $5,193,000 (2.03%) in 2000. The adequacy of the allowance for loan losses is determined by management’s assessment of the composition of the loan portfolio, an evaluation of specific credits, an analysis of the value of the underlying collateral for those loans, historical loss experience, and the level of nonperforming loans and loans that have been identified as impaired. Management continues to refine its techniques in this analysis. Externally, the local economy and events or trends which might negatively impact the loan portfolio are also considered. Economic factors considered in arriving at the loan loss reserve adequacy as of December 31, 2001 included layoffs in the automotive industry, lower levels of consumer confidence, and the current recession. Management also considered the increase in nonperforming loans and the increased risk of the loan portfolio. In light of these factors, management determined that the $900,000 provision and resulting $5,668,000 allowance was appropriate. Although management evaluates the adequacy of the allowance for loan losses based on information known at a given time, as facts and circumstances change the provision and resulting allowance may also change.
The following table shows changes in the loan loss reserve for the years ended December 31:
(Dollars in thousands)
2001 2000 1999
Balance at beginning of the year............... $5,193 $4,483 $3,958
Additions (deduction):
Loans charged off........................... (517) (609) (486)
Recoveries of loans previously charged off.. 92 119 171
Provision charged to operations............. 900 1,200 840
Balance at end of the year..................... $5,668 $5,193 $4,483
Allowance for loan losses to loans outstanding 1.97% 2.03% 2.13%
Deposits
Deposit balances of $351,669,000 at December 31, 2001 were approximately $41.5 million (13%) higher than the previous year end. Because year end deposit balances can fluctuate in unusual ways, it is more meaningful to analyze changes in average balances. Average deposits increased 14.5% in 2001. Average demand deposits increased $5.7 million (11%) while average savings and NOW balances increased $7.5 million (6%). Certificates of deposit increased $26.9 million (26%). Management strives to price deposits competitively and periodically offers special rates on specific certificates to stimulate deposit growth.
-53-
The following table sets forth average deposit balances for the years ended December 31:
(in thousands)
2001 2000 1999
Non-interest bearing demand $ 57,267 $ 51,528 $ 48,914
Savings, NOW and money market 128,256 120,770 111,141
Time deposits 131,527 104,669 92,802
Total average deposits $317,050 $276,967 $252,857
The growth in time deposits was primarily in over $100,000 certificates which increased 63% on average. This growth was not the result of marketing efforts for $100,000 certificates. The majority of the Bank’s deposits are from core customer sources-long term relationships with local personal, business, and public customers. In some financial institutions, the presence of interest bearing certificates greater than $100,000 indicates a reliance upon purchased funds. However, large certificates in the Bank’s portfolio consist primarily of core deposits of local customers. See Note 8 of the Consolidated Financial Statements for a maturity schedule of over $100,000 certificates.
Capital
The Company’s capital at year end totaled $32,404,000, a $3,500,000 (12%) increase over the prior year. Banking regulators have established various ratios of capital to assets to assess a financial institution’s soundness. Tier 1 capital is equal to shareholders’ equity while Tier 2 capital includes a portion of the allowance for loan losses. The regulatory agencies have set capital standards for “well capitalized” institutions. The leverage ratio, which divides Tier 1 capital by three months average assets, must be 5% for a well capitalized institution. The Bank’s leverage ratio was 7.90% at year end 2001. Tier 1 risk-based capital, which includes some off balance sheet items in assets and weights assets by risk, must be 6% for a well capitalized institution. The Bank’s was 9.33% at year end 2001. 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 10.58% at year end. The Bank’s strong capital ratios put it in the best classification on which the FDIC bases its assessment charge.
The following table lists various Bank capital ratios at December 31:
2001 2000 1999
Equity to asset ratio 8.08% 7.59% 7.44%
Tier 1 leverage ratio 7.90% 8.02% 7.74%
Tier 1 risk-based capital 9.33% 9.75% 9.90%
Total risk-based capital 10.58% 11.00% 11.15%
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 2001 the Company paid dividends totaling $1,886,000, or 36% of earnings. Book value of the stock was $20.60 at year end.
In 2001 management updated the Company’s five year plan which was the result of a formal strategic planning process. Management and the Board monitor progress toward the long term goals on an ongoing basis. The new plan focuses on delivery of services and allocation of more resources in the southeast quadrant of the county. It also calls for growth of the Trust and Investment Department as well as in the areas of residential mortgage and consumer loans. These strategies are designed to increase non-interest income, reducing the Company’s dependence on net interest income for profitability and to pursue growth opportunities in the largest and fastest growing section of the county.
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In 1999, the Bank opened a new branch in the northwest part of Brighton. Adjoining the building site are three parcels of vacant land. The Company has sold one parcel, and intends to sell the remaining two pieces which are valued at approximately $1.5 million.
Liquidity and Funds Management
Liquidity is monitored by the Bank’s Asset/Liability Management Committee (ALCO) which meets at least monthly. With the availability of lines of credit from the Federal Home Loan Bank of Indianapolis (FHLBI), the way liquidity is viewed and the ratios to calculate it have changed recently. The Board of Directors has approved a liquidity policy which requires the Bank, while it is well capitalized as defined by the Federal Financial Institutions Examination Council (FFIEC), to maintain a current ratio of no less than 1:1 (core basic surplus liquidity equal to 0). Additional requirements of the policy are that when FHLBI available credit is added to core basic surplus liquidity, the Bank must have liquidity totaling 5% of assets and when brokered CDs and Fed Funds lines are added, the Bank must have liquidity totaling 8% of assets. Should the Bank’s capital ratios fall below the “well capitalized” level, additional liquidity totaling 5% of assets will be required. As of December 31, 2001, the Bank had excess liquidity of at least 3.1% of assets under any of the above standards.
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.
It is the intention of the Bank’s management to handle unexpected liquidity needs through its Federal Funds position with a correspondent bank and by FHLBI borrowings. The Bank has an $18,000,000 line of credit available at the FHLBI and the Bank has pledged certain mortgage loans as collateral for this borrowing. At December 31, 2001, the Company had $5,800,000 in borrowings against the line. The Bank also has a blanket repurchase agreement in place where it can borrow from a broker pledging Treasury and Agency securities as collateral. In the event the Bank must borrow for an extended period, management may look to “available for sale” securities in the investment portfolio for liquidity.
Throughout the past year, Fed Funds Sold balances have averaged nearly $20,000,000 as deposit growth outpaced loan growth. During 2001 management endeavored to put these excess funds to use in the investment security portfolio to pick up yield as interest rates fell.
Quantitative and Qualitative Disclosures about Market Risk
ALCO reviews other areas of the Bank’s performance. The committee discusses the current economic outlook and its impact on the Bank and current interest rate forecasts. Actual results are compared to budget in terms of growth and income. A yield and cost analysis is done to monitor interest margin. Various ratios are discussed including capital ratios and liquidity. The quality of the loan portfolio is reviewed in light of the current allowance. The Bank’s exposure to market risk is reviewed.
Interest rate risk is the potential for economic losses due to future rate changes and can be reflected as a loss of future net interest income and/or a loss of current market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Tools used by management include the standard GAP report which lays out the repricing schedule for various asset and liability categories and an interest rate shock simulation report. The Bank has no market risk sensitive instruments held for trading purposes. However, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers including commitments to extend credit and letters of credit. A commitment or letter of credit is not recorded as an asset until the instrument is exercised (see Note 15 of the Consolidated Financial Statements).
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The table below shows the scheduled maturity and repricing of the Bank’s interest sensitive assets and liabilities as of December 31, 2001:
0-3 4-12 1-5 5+
Months Months Years Years Total
Assets:
Loans, net.......................... $105,604 $28,630 $141,532 $11,359 $287,125
Securities.......................... 5,156 2,732 36,047 12,054 55,989
Certificates of Deposit............. 2,037 3,880 5,917
Short term investments.............. 16,307 16,307
Total assets..................... $127,067 $33,399 $181,459 $23,413 $365,338
Liabilities & Shareholders' Equity:
MMDA, Savings & NOW............. $71,247 $83,240 $154,487
Time................................ 54,429 58,093 21,296 426 134,244
FHLB advances....................... 224 4,088 1,481 5,793
Total liabilities and equity..... 125,900 $58,093 $25,384 $85,147 $294,524
Rate sensitivity gap and ratios:
Gap for period...................... $1,167 $(24,694) $156,075 $(61,734)
Cumulative gap...................... 1,167 (23,527) 132,548 70,814
Cumulative rate sensitive ratio........ 1.01 .87 1.63 1.24
December 31, 2000 rate sensitive ratio 1.17 1.16 1.34 1.23
The preceding table sets forth the time periods in which earning assets and interest bearing liabilities will mature or may re-price in accordance with their contractual terms. The entire balance of savings, MMDA, and NOW are not categorized as 0-3 months, although they are variable rate products. Some of these balances are core deposits and are not considered rate sensitive. Allocations are made to time periods based on the Bank’s historical experience and management’s analysis of industry trends.
In the gap table above, the short term (one year and less) cumulative interest rate sensitivity is 13% liability sensitive at year end. Accordingly, if market interest rates increase, this negative gap position indicates that the interest margin would be negatively affected. However, gap analysis is limited and may not provide an accurate indication of the impact of general interest rate movements on the net interest margin since repricing of various categories of assets and liabilities is subject to the Bank’s needs, competitive pressures, and the needs of the Bank’s customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within the period and at different rate indices. Additionally, simulation modeling, which measures the impact of upward and downward movements of interest rates on interest margin, indicates that an upward movement of interest rates would not significantly reduce net interest income.
Total Average Interest Rate Estimated Fair Value
Assets:
Loans, net $280,612 8.93% $288,700
Securities 55,989 5.36% 56,600
Certificates of deposit 5,917 2.90% 5,900
Short term investments 16,307 3.87% 16,300
Liabilities:
Savings, NOW, MMDA $154,487 2.35% 154,500
Time 134,244 5.65% 134,500
FHLB borrowings 5,793 7.23% 6,800
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Estimated fair value for securities are based on quoted market prices. For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are generally based on carrying values. The fair value of other loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Because it has a one day maturity, the carrying value is used as fair value for fed funds sold. The fair value of deposits with no stated maturity, such as savings, NOW and money market accounts is equal to the amount payable on demand. The fair value of certificates of deposit and FHLB borrowings is estimated using rates currently offered for products with similar remaining maturities.
RESULTS OF OPERATIONS
Net income of $5,200,000 was an increase of $100,000 (2%) over 2000 earnings. The Company’s earnings resulted in a return on average assets (ROA) of 1.46% and a return on average stockholders’ equity (ROE) of 16.80%. Net income per share was $3.32 in 2001 compared with $3.26 in 2000. Earnings in 1999 were hampered by costs associated with conversion to a new computer system and preparation for Y2K.
The following table contains key performance ratios for years ended December 31:
2001 2000 1999
Net income to:
Average stockholders' equity 16.80% 18.76% 15.05%
Average assets 1.46% 1.63% 1.33%
Basic earnings per common share: $3.32 $3.26 $2.38
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 the Company’s earnings. For analytical purposes, the interest earned on investments and loans is expressed on a fully taxable equivalent (FTE) basis. Tax-exempt interest is increased to an amount comparable to interest subject to federal income taxes in order to properly evaluate the effective yields earned on earning assets. The tax equivalent adjustment is based on a federal income tax rate of 34%.
The following table shows the average balance and percentage earned or paid on key components of earning assets and paying liabilities for the year ended December 31:
2001 2000 1999
Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate
Interest earning assets:
Short term investments $19,924 3.87% $ 4,278 6.35% $10,384 4.89%
Certificates of deposit 929 2.90%
Taxable securities 24,075 5.70% 29,283 5.49% 30,051 5.08%
Tax-exempt securities 18,415 6.77% 18,580 6.57% 16,896 6.90%
Loans 270,776 8.93% 238,697 9.81% 198,448 9.47%
Total earning assets $334,119 8.26% $290,838 9.11% $255,779 8.60%
Interest bearing funds:
Savings/NOW accounts $128,257 2.35% $ 120,770 2.84% $ 111,141 2.69%
Time deposits 131,527 5.65% 104,669 5.88% 92,802 5.36%
Federal funds purchased 6.67% 98 5.40%
1,366
FHLB advances 5,801 7.23% 4,893 7.23%
Total interest bearing funds: $265,585 4.09% $231,698 4.33% $204,041 3.90%
Interest spread 4.17% 4.78% 4.70%
Net interest margin 5.01% 5.66% 5.48%
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Tax equivalent interest income in each of the three years includes loan origination fees. A substantial portion of such fees is deferred for recognition in future periods or is considered in determining the gain or loss on the sale of real estate mortgage loans. Tax equivalent interest income includes net loan origination fees totaling $790,000 in 2001, $700,000 in 2000, and $710,000 in 1999.
The following table sets forth the effects of volume and rate changes on net interest income on a taxable equivalent basis. The change in interest due to changes in both balance and rate has been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.
Year ended Year ended
December 31, 2001 compared to Year December 31, 2000 compared to Year
Year ended December 31, 2000 Year ended December 31, 1999
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............ $ 994 $ (495) $ 499 $ (298) $ 62 $ (236)
Certificates of deposit....... 27 0 27
Securities:
Taxable..................... (286) 50 (236) (39)
Tax Exempt.................. (11) 37 26 116 55
Loans......................... 3,145 (2,371) 774 3,811 806 4,617
Total interest income....... $3,869 $(2,779) $ 1,090 $ 3,590 $ 928 $ 4,518
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts.. $ 213 $ (639) $ (426) $ 259 $ 183 $ 442
Time.......................... 1,580 (311) 1,269 636 553 1,189
Short-term borrowings......... (91) 0 (91) 68 18 86
FHLB advance.................. 66 1 67 358 0 358
Total interest expense..... $1,768 $ (949) $ 819 $ 1,321 $ 754 $2,075
Net interest income (FTE) $ 2,101 $(1,830) $ 271 $2,269 $ 174 $2,443
Tax equivalent net interest income increased $271,000 in 2001 over the prior year due to a $1,090,000 increase in interest income partially offset by approximately $819,000 increase in interest expense. The increase in interest income is attributable to an increase in average earning assets of $43,300,000 although the interest earned on these balances declined 85 basis points during the year. The year 2001 was unique in that the Federal Reserve Board (Fed) cut interest rates an unprecedented 475 basis points. Because the Company’s assets repriced more quickly than liabilities, net interest income was negatively affected. Loan interest income was $774,000 higher in 2001 than the previous year. The increase was due to an increase of $32,000,000 in average balances. While the balances grew, the rate of interest earned on loans declined by 88 basis points during the year. Loan growth was fueled by general growth in Livingston County which created a demand for consumer and commercial building projects even
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as rates were driven down by the decline in the prime interest rate from 9.5% at the beginning of the year to 4.75% by year end. Income on taxable securities decreased $236,000 in 2001 due to a $5,200,000 decrease in average balances although the interest yield improved 21 basis points. The interest yield improved in spite of a declining rate environment because many of the low yielding bonds acquired two years ago matured. Additionally management diversified the investment portfolio by replacing lower yielding US Treasury bonds with US Agency, Agency mortgage backed, and corporate bonds. Tax equivalent income on tax-exempt bonds increased $26,000 in 2001. The average balance of these securities decreased $165,000 while the rate increased 20 basis points. Interest income on short term investments increased $499,000 due to an increase in average balances of $15,600,000, partially offset by a decrease in rates of 248 basis points. The unusually high balance in short term investments was the result of deposit growth outpacing loan growth and the search for acceptable investment products as interest rates fell throughout the year.
Interest expense increased $819,000 in 2001 because average balances increased approximately $33,900,000 although interest rates decreased 24 basis points. The interest cost for savings and NOW accounts decreased $426,000 because the interest rate paid declined 49 basis points although average balances increased $7,500,000. Interest on time deposits increased $1,269,000 because average time deposits increased $26,900,000 even as interest rates decreased 23 basis points. Growth in time deposits was encouraged by competitive pricing and periodically offering special rates on specific products. There was no Fed Funds borrowing during 2001. The Company entered into two long term borrowings with the Federal Home Loan Bank of Indianapolis in 2000. One of the loans amortizes and had a balance of $2,793,000 at year end while the other loan, for $3,000,000 matures in its entirety in April 2005. The loans have an average interest rate of 7.23%.
In the previous year, net interest income had increased $2,443,000. The increase in net interest income was the result of an increase in interest income of $4,518,000, partially offset by an increase in interest expense of approximately $2,075,000. The increase in interest income in 2000 was the result of a $35,100,000 increase in earning assets and of a 51 basis point increase in interest rates. The increase in interest expense was the result of average balances growing $27,700,000 and interest rates increasing 43 basis points.
In the coming year, management expects growth to continue in both loans and deposits. An economic decline could, however, adversely affect growth. The decline in the interest spread and interest margin which the Company experienced in 2001 due to the steepness of Fed interest rate cuts is not expected to continue in 2002 as the outlook for future rate cuts is minimal.
The following table shows the composition of average earning assets and interest paying liabilities for the years ended December 31:
2001 2000 1999
As a percent of average earning assets:
Loans 81.04% 82.07% 77.59%
Securities 12.72% 16.46% 18.35%
Certificates of Deposit .28%
Short term investments 5.96% 1.47% 4.06%
Average earning assets 100.00% 100.00% 100.00%
Savings and NOW 38.39% 41.52% 43.45%
Time deposits 39.37% 35.99% 36.28%
Short term borrowing .47% .04%
FHLB advances 1.74% 1.68%
Average interest bearing liabilities 79.50% 79.66% 79.77%
Earning asset ratio 93.47% 92.75% 91.61%
Free-funds ratio 20.50% 20.34% 20.23%
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Provision for Loan Losses
The provision for loan losses decreased to $900,000 in 2001 compared to $1,200,000 in 2000. At year end the ratio of allowance for loan loss to loans was 1.97%, compared to 2.03% in 2000. Management analyzes the adequacy of the allowance quarterly taking into consideration the portfolio mix, historical loss experience, the level of nonperforming loans and loans that have been identified as impaired, as well as economic conditions within the Bank’s market. Despite the recorded increase in impaired loans, the decrease was deemed appropriate based upon management’s analysis of the balance in the loan loss reserve and the collateral position held in the major problem loans.
Non-interest Income
Non-interest income, which includes service charges on deposit accounts, loan fees, other operating income, and gain(loss) on sale of assets and securities transactions, increased approximately $516,000 (20%) in 2001 compared to the previous year. Service charge income increased 14% to $2,643,000, primarily due to growth in deposits and loans. Additionally, the Company had the full year effect of service charge increases that had been implemented in the second quarter of 2000. Trust fees decreased $16,000 in 2001. The decline was the result of a lack of growth of the business as the department was not fully staffed throughout the year and a general decrease in the market value of trust assets. The $228,000 gain realized on the sale of real estate mortgage loans was a $154,000 increase over 2000. Sales volume was up more than 300% as the low interest rate environment was conducive to substantial mortgage refinancing and it also allowed more buyers to enter the real estate market.
Non-interest Expense
Non-interest expense ended the year at $11,061,000, a 9% increase over other operating expenses of $10,189,000 in 2000. The most significant component of non-interest expense is salaries and benefits expense. In 2001 salaries and benefits expense increased 9% to $5,955,000, due to the combined effects of salary increases, increased cost of medical insurance, and an increase in the retirement plan expense. Occupancy expense totaled $777,000 in 2001, a $3,000 increase over the prior year. Equipment expense decreased $55,000, due to a decline in depreciation expense as the personal computers purchased in 1998 were fully depreciated in 2001. Overall other expenses increased 13% primarily due to an 85% increase in professional and service fees. Most of this increase was the result of projects undertaken in 2001 which are not ongoing in future years such as strategic planning, an employee opinion survey, an employee compensation study, and architectural fees attributable to an abandoned project.
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 $58,000 to $2,173,000 (3%) in 2001. The effective income tax rate was 29% in both 2001 and 2000 as a result of tax exempt interest and dividends. For further information see Note 10 “Federal Income Taxes” in the Company’s Consolidated Financial Statements.
Impact of New Accounting Standards
The Financial Accounting Standards Board (FASB) issued SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, in June 1998.
SFAS No. 133, which has been subsequently amended by SFAS No. 137 and SFAS No. 138, requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. The accounting for increases and decreases in the value of derivatives will depend upon the use of derivatives and whether the derivatives will qualify for hedge accounting. Management has evaluated the impact of SFAS No. 133 at December 31, 2001 and has concluded that the adoption of this Statement did not have a material effect on the Company.
The FASB has adopted SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 140, which replaces SFAS No. 125,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, revises the standards for accounting for the securitization and other transfers of financial assets and collateral. SFAS No. 140 also requires certain disclosures, but carries over most of the provisions of SFAS No. 125.
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This Statement is effective for transactions occurring after March 31, 2001, with earlier application not allowed and is to be applied prospectively. The adoption of this Statement did not have a material impact on the Company’s financial statements.
On June 29, 2001, the FASB approved for issuance SFAS No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets.
Under SFAS No. 141, all business combinations initiated after June 30, 2001, must be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization, but instead must be reviewed for impairment. The amortization of goodwill ceases upon adoption of SFAS No. 142, which is effective for fiscal years beginning after December 15, 2001. Management does not expect that these Statements will have an impact on the Bank’s results of operations.
Emerging Issues Task Force (EITF) Issue 99-20,Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets, was effective for the Company’s quarter ended June 30, 2001. The adoption of EITF 99-20 did not have a material impact on the financial condition or operations of the Company.
On October 3, 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 supersedes FASB Statement No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, but retains many of the fundamental provisions of that Statement.
Statement No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30,Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management’s ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity.
Statement No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Early application is encouraged. Management does not expect that the adoption of this Statement will have a significant impact on the Bank’s results of operations.
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SUMMARY FINANCIAL DATA
(in thousands, except per share data)
2001 2000 1999 1998 1997
Income Statement Data:
Interest income $27,095 $26,047 $21,597 $19,910 $17,276
Interest expense 10,861 10,042 7,967 7,400 6,305
Net interest income 16,234 16,005 13,630 12,510 10,971
Provision for loan losses 900 1,200 840 640 486
Non-interest income 3,120 2,604 2,015 1,954 1,851
Non-interest expense 11,061 10,188 9,543 8,238 6,982
Income before tax 7,393 7,221 5,262 5,586 5,354
Net income 5,220 5,106 3,715 3,907 3,733
Basic Per Share Data(1):
Net income $3.32 $3.26 $2.38 $2.49 $2.37
Dividends paid 1.20 1.15 1.10 1.05 1.00
Weighted average shares
outstanding 1,570,559 1,566,390 1,563,996 1,570,537 1,575,000
Balance Sheet Data:
Total assets 392,978 348,363 296,419 264,894 226,314
Loans, net 286,280 255,414 209,952 185,018 158,397
Allowance for loan losses 5,668 5,193 4,483 3,958 3,424
Deposits 351,669 310,214 269,193 239,557 202,299
Shareholders' equity 32,404 28,887 25,312 23,497 21,732
Ratios:
Dividend payout ratio 36.12% 35.29% 46.31% 42.11% 42.19%
Equity to asset ratio 8.69% 8.68 % 8.84% 9.13% 10.05%
(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.
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STOCK AND EARNINGS HIGHLIGHTS
There is no active market for the Company’s Common Stock, and there is no published information with respect to its market price. There are occasional direct sales by shareholders of which the Company’s management is generally aware. It is the understanding of the management of the Company that over the last two years, the Company’s Common Stock has sold at a premium to book value. From January 1, 2000, through December 31, 2001, there were, so far as the Company’s management knows, 326 sales of shares of the Company’s Common Stock, involving a total of 48,603 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 2001, the highest and lowest prices known to be paid were $45.00 and $40.00 per share, respectively. To the knowledge of management, the last sale of Common Stock occurred on February 22, 2002.
As of March 1, 2002, there were approximately 930 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 2000 and 2001, 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 2000 and 2001:
Sales Prices Cash Dividends Declared
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(1)
2001 High Low
First Quarter $42.00 $42.00 $0.20
Second Quarter $45.00 $42.00 $0.20
Third Quarter $45.00 $45.00 $0.20
Fourth Quarter $45.00 $40.00 $0.60(2)
(1) Includes a special dividend of $0.35 per share.
(2) Includes a special dividend of $0.40 per share.
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EXHIBIT 21
SUBSIDIARIES
| Name | Jurisdiction of Incorporation |
| First National Bank in Howell | Michigan |
| H.B. Realty Co | Michigan |