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 Company’s internet address is www.fnbsite.com.
The Bank was originally organized in 1934 as a national banking association. As of March 1, 2003, the Bank had approximately 136 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 $27,700,000, of which $22,100,000 is available, and $5,600,000 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, 2002, the Bank’s certificates of deposit of $100,000 or more constituted approximately 12% 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, 2002 and for the period ended December 31, 2001. Interest on investment securities, including short-term investments and federal funds sold, constituted approximately 9% of total revenues in 2002 and 10% of total revenues in 2001. 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, 2002, 30% of outstanding loans were for either commercial or residential construction or development. Fifty-one percent of the Bank’s loan portfolio is in fixed rate loans. Most of these loans, approximately 94%, mature within five years of issuance. Approximately $10,000,000 in loans (or about 3% of the Bank’s total loan portfolio) have fixed rates with maturities exceeding five years. Fifty-eight percent of the Bank’s interest-bearing deposits are in savings, NOW, and MMDAs, all of which are variable rate products. Of the approximately $131,500,000 in certificates, $55,000,000 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, 2002, was 43% asset sensitive, compared to 13% liability sensitive at December 31, 2001. 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 the Federal Home Loan Mortgage Corporation (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 eight offices within the four communities it serves, all of which are located in Livingston County, Michigan. Four 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 Standard Federal. 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, 2002, the Bank holds approximately 22.34% of local deposits, compared to approximately 19.85% held by Fifth Third Bank, approximately 10.36% held by National City, approximately 9.93% held by Republic Bank, and approximately 8.72% held by Standard Federal. 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 six branch offices, National City Bank operates seven branch offices, Republic Bank has five branch offices, and Standard Federal 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. There has been increased competition within the Bank’s market over the past few years as new branches are built to meet the needs of the growing population in the county. Management continues to evaluate the opportunities for the expansion of products and services and is anticipating opening a new branch in Hamburg in the fourth quarter of 2003.
Growth of Company
The following table sets forth certain information regarding the growth of the Company:
Balances as of December 31, (in thousands) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Total Assets $420,686 $392,978 $348,363 $296,419 $264,894 Loans, Net of Unearned Income 327,117 286,280 255,414 209,952 185,018 Securities 44,611 55,989 39,311 50,598 38,646 Noninterest-Bearing Deposits 62,232 62,938 55,253 47,980 47,402 Interest-Bearing Deposits 311,840 288,731 254,961 221,210 192,155 Total Deposits 374,072 351,669 310,214 269,190 239,557 Shareholders' Equity 37,580 32,404 28,887 25,312 23,497
Through 2001, the Bank operated seven branch facilities: one in downtown Howell, one at Lake Chemung (five miles east of downtown Howell), two in Brighton (one on the east side and one on the west side), one in Hartland, one in the village of Fowlerville, and the sixth is a grocery store branch, located west of downtown Howell. In April of 2002, the Bank opened a new branch on the east side of Howell. As of December 31, 2002, this new branch had approximately $2,500,000 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 Company’s common stock is registered with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act provides for numerous changes to the reporting, accounting, corporate governance and business practices of companies as well as financial and other professionals who have involvement with the U.S. public securities markets. The SEC continues to issue new and proposed rules implementing various provisions of the Sarbanes-Oxley Act.
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.
9.
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.
FICO Assessments. The Bank, as a member 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 0.02% 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, 2002, 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, 2002, 2001, and 2000.
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 11 basis points in 2002 as a result of a decrease of 121 basis points in yield on earning assets, partially offset by a decrease of 141 basis points in the interest cost on deposits. In 2001 the interest margin decreased 65 basis points due to an 85 basis point decrease in yield on earning assets partially offset by a 24 basis point decrease in interest cost.
Yield Analysis of Consolidated Average Assets and Liabilities
(dollars in thousands)
2002 2001 2000 ---- ---- ---- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- Assets: Interest earning assets: Short term investments $ 3,522 $ 57.4 1.63% $19,924 $770.6 3.87% $ 4,278 $271.7 6.35% Certificates of deposit 5,424 177.7 3.28% 929 26.9 2.90% Securities: Taxable 34,869 1,614.7 4.63% 24,075 1,372.0 5.70% 29,283 1,607.9 5.49% Tax-exempt 17,109 1,186.9 6.94% 18,415 1,246.4 6.77% 18,580 1,220.3 6.57% Loans(1)(2) 311,060 23,197.8 7.46% 270,776 24,182.3 8.93% 238,697 23,407.8 9.81% -------- --------- -------- --------- -------- --------- Total earning assets and total interest income 371,984 $26,234.5 7.05% 334,119 $27,598.2 8.26% 290,838 $26,507.7 9.11% Cash & due from banks 14,641 --------- 13,634 --------- 11,615 --------- All other assets 17,723 15,320 16,022 Allowance for loan loss (5,436) (5,614) (4,911) ----- ----- ----- Total assets $398,912 $357,459 $313,564 ======== ======== ======== Liabilities and Shareholders' Equity Interest bearing deposits: Savings, money market, NOW $153,651 $2,286.0 1.49% $128,257 $3,007.8 2.35% $120,770 $3,434.0 2.84% Time 131,019 5,154.8 3.93% 131,527 7,427.4 5.65% 104,669 6,158.5 5.88% Short term borrowings 8,430 167.6 1.99% 1,366 91.3 6.67% FHLB advances 5,578 408.8 7.23% 5,801 425.9 7.23% 4,893 358.0 7.23% -------- --------- -------- --------- -------- --------- Total interest bearing liabilities and total interest expense 298,678 $8,017.2 2.68% 265,585 $10,861.1 4.09% 231,698 $10,041.8 4.33% Non-interest bearing deposits 61,223 -------- 57,166 --------- 51,428 --------- All other liabilities 3,925 3,641 3,220 Shareholders' Equity 35,086 31,067 27,218 ------ ------ ------ Total liabilities and shareholders' equity $398,912 $357,459 $313,564 ======== ======== ======== Interest spread 4.37% 4.17% 4.78% ===== ===== ===== Net interest income-FTE $18,217.3 $16,737.1 $16,465.9 ========= ========= ========= Net interest margin 4.90% 5.01% 5.66% ===== ===== =====
(1) Included in average daily loan balances are nonaccruing loans with average balances of $2,322,000 in 2002, $1,612,000 in 2001, and $1,237,000 in 2000.
(2) Interest on loans includes origination fees totaling $750,000 in 2002, $790,000 in 2001, and $700,000 in 2000.
(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, 2002 compared to Year December 31, 2001 compared to Year ended December 31, 2001 ended December 31, 2000 ----------------------- -----------------------
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.... $ (634) $ (79) $ (713) $ 994 $ (495) $ 499 Certificates of deposit... 130 20 150 27 0 27 Securities: Taxable................. 615 (372) 243 (286) 50 (236) Tax Exempt.............. (88) 29 (59) (11) 37 26 Loans..................... 3,597 (4,582) (985) 3,145 (2,371) 774
Total interest income... $ 3,620 $(4,984) $(1,364) $ 3,869 $(2,779) $ 1,090
Interest Expense: Interest bearing deposits: Savings/NOW accounts.... $ 595 $(1,317) $ (722) $ 213 $ (639) $ (426) Time.................... (29) (2,244) (2,273) 1,580 (311) 1,269 Short term borrowings..... 168 0 168 (91) 0 (91) FHLB & other borrowings... (16) (1) (17) 66 1 67
Total interest expense.. $ 718 $(3,562) $(2,844) $ 1,768 $ (949) $ 819
Net interest income (FTE) $ 2,902 $(1,422) $ 1,480 $ 2,101 $(1,830) $ 271
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) 2002 2001 2000 ---- ---- ---- Held to maturity: States and political subdivisions 16,863 17,979 18,887 Mortgage-backed securities 26 78 577 -- -- --- Total $ 16,889 $ 18,057 $ 19,464 Available for sale: U.S. Treasury $ 0 $ 2,019 $ 13,028 U.S. Government agencies 12,032 9,569 5,986 Corporate securities 4,721 12,828 0 Mortgage-backed securities 9,925 12,683 0 FRB Stock 44 44 44 FHLB Stock 1,000 789 789 -------- -------- -------- Total $ 27,722 $ 37,932 $ 19,847
(B) The following table sets forth contractual maturities of securities at December 31, 2002 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 $ 1,398 7.32% $10,148 7.05% $5,317 6.65% 0 Mortgage backed securities 26 4.77% 0 0 0 -- - - - Total $ 1,424 7.27% $10,148 7.05% $5,317 6.65% $0 ======= ======= ====== ==
Tax equivalent adjustment for calculations of yield $29 $211 $110 === ==== ====
Available for sale U.S. Agency 1,548 4.84% $10,484 4.48% Corporate bonds 0 4,721 4.16% Mortgage backed securities 116 5.03% 3,358 4.58% $1,851 4.56% $4,600 6.26% FRB Stock 44 6.00% FHLB Stock 1,000 5.75% Total $ 1,664 4.85% $18,563 4.42% $1,851 4.56% $5,644 6.17% ======= ======= ====== ======
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 5.24% 2.08% 7.32% 1-5 years 4.97% 2.08% 7.05% 5-10 years 4.57% 2.08% 6.65%
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, 2002 included in the Appendix to the Company’s definitive proxy statement, dated March 13, 2003, relating to the April 15, 2003, 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) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Secured by real estate: Residential first mortgage $ 37,202 $ 27,456 $ 31,328 $ 29,904 $ 38,051 Residential home equity/other junior liens 11,184 8,066 9,999 7,822 9,106 Construction and land development 49,516 42,221 35,020 23,375 23,048 Commercial 153,720 118,191 105,041 89,809 68,960 Consumer 25,261 22,719 20,700 16,811 16,653 Commercial 43,276 59,602 45,239 38,891 26,058 Other 7,801 8,870 8,897 4,043 3,770 ------ ------ ------ ------ ------ Total Loans (Gross) $327,960 $287,125 $256,224 $210,655 $185,646
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 assist the Bank in evaluating 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, 2002 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.. $32,605 $16,911 0 $ 49,516 Real estate other (secured by commercial & multi-family)............................. 20,776 125,914 7,030 153,720 Commercial (secured by business assets or Unsecured)................................ 20,822 19,050 3,404 43,276 Other (loans to farmers, political Subdivisions, & overdrafts)............... 2,400 1,563 3,838 7,801 ------- -------- ------- -------- Totals................................. $76,603 $163,438 $14,272 $254,313
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...... $111,109 $52,329 Due after five years..................... 6,709 7,563
(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) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Nonperforming Loans: Nonaccrual loans $3,288 $ 2,636 $ 608 $ 173 $1,519 Loans past due 90 days or more 809 361 209 4 25 --- --- --- - -- Total nonperforming loans $4,097 $ 2,997 $ 817 $ 177 $1,544 ====== ======= ===== ===== ====== Percent of total loans 1.25% 1.04% .32% .08% .83%
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, 2002 included in the Appendix to the Company’s definitive proxy statement, dated March 13, 2003, relating to the April 15, 2003, 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, 2002, that would be required to be disclosed under Item III(C), if such assets were loans.
The loan portfolio has no significant concentrations in any one industry. There were no foreign loans outstanding at December 31, 2002.
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) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Loans: Average daily balance of loans for the year... $311,060 $270,776 $238,697 $198,448 $175,873 Amount of loans (gross) outstanding at end of the year................................. 327,960 287,125 256,224 210,655 185,646 Allowance for loan losses: Balance at beginning of year................. 5,668 5,193 4,483 3,958 3,424 Loans charged off: Real estate............................... 0 0 0 0 110 Commercial................................ 598 322 526 322 63 Consumer.................................. 169 195 83 164 129 --- --- -- --- --- Total charge-offs..................... 767 517 609 486 302 Recoveries of loans previously charged off: Real estate.............................. 0 0 0 35 96 Commercial............................... 177 47 79 98 51 Consumer................................. 91 45 40 38 49 -- -- -- -- -- Total recoveries..................... 268 92 119 171 196
Net loans charged off........................... 499 425 490 315 106 Additions to allowance charged to operations.... 625 900 1,200 840 640 --- --- ----- --- --- Balance at end of year............... $5,794 $5,668 $5,193 $4,483 $3,958
Ratios: Net loans charged off to average loans outstanding .16% .16% .21% .16% .06% Allowance for loan losses to loans outstanding 1.77% 1.97% 2.03% 2.13% 2.13%
(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) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent --------------- --------------- --------------- --------------- --------------- Commercial........ $5,166 89.2% $2,244 79.1% $4,725 77.0% $3,803 77.6% $3,384 74.1% Consumer.......... 406 7.0% 160 11.3% 315 12.2% 441 11.8% 355 12.5% Real Estate....... 222 3.8% 26 9.6% 153 10.8% 239 10.6% 219 13.4% --- --- --- Unallocated....... 3,238 ===== Total........ $5,794 100% $5,668 100% $5,193 100% $4,483 100% $3,958 100% ====== ==== ====== ==== ====== ==== ====== ==== ====== ====
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) 2002 2001 2000 ---- ---- ---- Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Non-interest bearing demand $ 61,223 $ 57,166 $ 51,428 Savings, money market and NOW 153,651 1.49% 128,257 2.35% 120,770 2.84% Time deposits 131,019 3.93% 131,527 5.65% 104,669 5.88% -------- -------- -------- Total $345,893 2.61% $316,950 4.02% $276,867 4.26% ======== ======== ========
The table for maturities of negotiated rate time deposits of $100,000 or more outstanding at December 31, 2002 is incorporated by reference to Note 9 of the Company’s Consolidated Financial Statements for the year ended December 31, 2002 included in the Appendix to the Company’s definitive proxy statement, dated March 13, 2003, relating to the April 15, 2003, Annual Meeting of Shareholders (as filed with the Commission as exhibit 13 to 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:
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Net income as a percent of: Average common equity 17.97% 16.80% 18.76% 15.05% 17.83% Average total assets 1.58% 1.46% 1.63% 1.33% 1.63%
Additional performance ratios are set forth in “Selected Financial Data” included in the Appendix to the Company’s definitive proxy statement, dated March 13, 2003, relating to the April 15, 2003, 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 13, 2003, relating to the April 15, 2003, Annual Meeting of Shareholders (as filed with the Commission as exhibit 13 to this Report).
VII SHORT-TERM BORROWING
The information required in this item is not applicable for this Company.
Item 2
Item 2 - Properties
The Bank operates from eight 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 three branches in Howell at 5990 East Grand River, 4299 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 remaining life of the lease is $3,888 monthly.
Item 3
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
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 2002.
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, 2002:
First Selected as an Officer Name (Age) Position with Company of the Company ---------- --------------------- -------------- Barbara D. Martin (56) President, Chief Executive 1983 Officer, and Director of the Company and the Bank Barbara J. Nelson (55) Secretary/Treasurer of the 1985 Company and Senior Vice President, Cashier, and Chief Financial Officer of the Bank Herbert W. Bursch (50) Senior Vice President, Retail 1999 Services, of the Bank Nancy Morgan (52) Senior Vice President, Human 1988 Resources of the Bank Janice Trouba (41) Senior Vice President, Finance 2002 and Accounting, of the Bank James Wibby (52) Senior Vice President, Senior 1997 Lender, of the Bank
PART II
Item 5
Item 5 - Market for Registrant’s Common Equity and Related Stockholder Matters
There is not an established trading market for the Company’s Common Stock. Information regarding its market price can be obtained on the internet at nasdaq.com, symbol FNHM. There is one market maker for the stock. 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, 2001, through December 31, 2002, there were, so far as the Company’s management knows, a total of 293,732 shares of the Company’s Common Stock sold. The price was reported to management in some of these transactions; however there may have been other transactions involving the Company stock at prices not reported to management. During 2002, the highest and lowest prices known to management involving sales of more than 200 shares were $25.00 and $19.25 per share, respectively. To the knowledge of management, the last sale of Common Stock occurred on February 21, 2003 at a price of $23.75 per share.
As of March 1, 2003, there were approximately 940 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 2001 and 2002, 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 exceeding 200 shares at higher or lower prices, there may have been transactions at prices outside the ranges listed in the table.
Sales price, for sales involving more than 200 shares, and dividend information for the years 2001 and 2002:
Sales Prices Cash Dividends Declared ------------ ----------------------- 2001 High Low ---- ---- --- First Quarter $21.00 $21.00 $0.10 Second Quarter $22.50 $21.00 $0.10 Third Quarter $22.50 $22.50 $0.10 Fourth Quarter $22.50 $20.00 $0.30(1)
2002 High Low ---- ---- --- First Quarter $22.50 $21.50 $0.13 Second Quarter $21.50 $19.25 $0.16 Third Quarter $23.00 $21.25 $0.17 Fourth Quarter $25.00 $22.49 $0.17
(1) Includes a special dividend of $0.20 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 statutory and regulatory restrictions and requirements.
Item 6
Item 6 - Selected Financial Data
The information set forth under the caption “Summary Financial Data” on page 44 of Appendix II to the Company’s definitive proxy statement, as filed with the Commission and dated March 13, 2003, relating to the April 15, 2003 Annual Meeting of Shareholders, is incorporated herein by reference.
Item 7
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 32 through 45 of Appendix II to the Company’s definitive proxy statement, as filed with the Commission and dated March 13, 2003, relating to the April 15, 2003 Annual Meeting of Shareholders, is incorporated herein by reference.
Item 7a
Item 7a - Quantitative and Qualititative Disclosures about Market Risk
Included in Management’s Discussion and Analysis
Item 8
Item 8 - Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data of the Company appear on pages 1 through 31 of Appendix II to the Company’s definitive Proxy Statement, dated March 13, 2003, relating to the April 15, 2003 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, 2002 and 2001 are reported on page 4 of Appendix II.
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10
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 and 3 of the Company’s definitive proxy statement, as filed with the Commission and dated March 13, 2003, relating to the April 15, 2003 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
Item 11 - Executive Compensation
The information set forth under the caption “Summary Compensation Table” on pages 6 and 7 of the Company’s definitive proxy statement, as filed with the Commission and dated March 13, 2003, relating to the April 15, 2003 Annual Meeting of Shareholders, is incorporated herein by reference. Information under the caption “Committee Report on Executive Compensation” on page 7 and “Shareholder Return Performance Graph” on page 9 of the definitive proxy statement is not incorporated by reference herein and is not deemed to be filed with the Securities and Exchange Commission.
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption “Ownership of Common Stock” on pages 8 and 9 of the Company’s definitive proxy statement, as filed with the Commission and dated March 13, 2003, relating to the April 15, 2003 Annual Meeting of Shareholders, is incorporated herein by reference.
The Company maintains a Long-Term Incentive Plan under which common stock of the Company is authorized for issuance to employees. As of December 31, 2002, the Company has not granted any options, warrants or rights to acquire common stock under the Plan. As of that date, the number of securities remaining available for issuance as equity-based compensation is 182,173 shares.
Item 13
Item 13 - Certain Relationships and Related Transactions
The information set forth under the caption “Certain Transactions with Management” on page 8 of the Company’s definitive proxy statement, as filed with the Commission and dated March 13, 2003, relating to the April 15, 2003 Annual Meeting of Shareholders, is incorporated herein by reference.
Item 14
Item 14 -Controls and Procedures
With the participation of management, the Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on January 30, 2003 (the “Evaluation Date”), have concluded that, as of such date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities in connection with the filing of the Company’s Annual Report on Form 10-K for the annual period ended December 31, 2002.
There were no significant changes to the Company’s internal controls or other factors that could significantly affect the Company’s disclosure controls subsequent to the Evaluation Date through the date of filing of this Form 10-K for the annual period ended December 31, 2002, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls that would require corrective action.
PART IV
Item 15
Item 15 - 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 13, 2003, relating to the April 15, 2003 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, 2002.
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 13, 2003.
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 & CFO
(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 Janice B. Trouba, 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.
Rickard Scofield, Chairman of the Board /s/ 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
Richard F. Hopper, Director /s/ Richard F. Hopper
Dona Scott Laskey, Director /s/ Dona Scott Laskey
Barbara D. Martin, Director /s/ Barbara D. Martin
James R. McAuliffe, Director
Randolph E. Rudisill, Director /s/ Randolph E. Rudisill
R. Michael Yost, Director /s/ R. Michael Yost
CERTIFICATIONS
I, Barbara D. Martin, certify that:
1.
I have reviewed this annual report on Form 10-K of FNBH Bancorp, Inc.;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of January 30, 2003 (the “Evaluation Date”); and
c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/ Barbara D. Martin
Barbara D. Martin
Chief Executive Officer
I, Barbara J. Nelson, certify that:
1.
I have reviewed this annual report on Form 10-K of FNBH Bancorp, Inc.;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of January 30, 2003 (the “Evaluation Date”); and
c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/ Barbara J. Nelson
Barbara J. Nelson
Chief Financial Officer
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the applicable assigned number:
Exhibit
Number
Page
(13)
Pages 1-45 of Appendix II to the Company’s Proxy Statement, dated March 13, 2003, for the Annual Meeting of Shareholders to be held April 15, 2003 representing that portion of the Appendix incorporated by reference in this report. This Appendix was filed with the Commission as part of the Company’s Proxy Statement and was delivered to Company shareholders in compliance with Rule 14(a)-3 of the Securities Exchange Act of 1934, as amended..................................................................................................................................................................
(21)
Subsidiaries of the Registrant..................................................................................................................................
(24)
Power of Attorney (included in signature section)
(99.1)
Certificate of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC 1350)...............................................................................................................................................
(99.2)
Certificate of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC 1350)...............................................................................................................................................
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 13
EXHIBIT 21
SUBSIDIARIES
Name Jurisdiction of Incorporation
First National Bank in Howell ................................................... Michigan
H.B. Realty Co .......................................................................... Michigan
EXHIBIT 99.1
CERTIFICATE OF THE
CHIEF EXECUTIVE OFFICER OF
FNBH BANCORP, INC.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):
I, Barbara D. Martin, Chief Executive Officer of FNBH Bancorp, Inc., certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) that:
(1) The annual report on Form 10-K for the period ended December 31, 2002, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;
(2) The information contained in this annual report on Form 10-K for the period ended December 31, 2002, fairly presents, in all material respects, the financial condition and results of operations of FNBH Bancorp, Inc.
EXHIBIT 99.2
CERTIFICATE OF THE
CHIEF FINANCIAL OFFICER OF
FNBH BANCORP, INC.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):
I, Barbara J. Nelson, Chief Financial Officer of FNBH Bancorp, Inc., certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) that:
(1) The annual report on Form 10-K for the annual period ended December 31, 2002, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;
(2) The information contained in this annual report on Form 10-K for the period ended December 31, 2002, fairly presents, in all material respects, the financial condition and results of operations of FNBH Bancorp, Inc.