| NOTICE OF ANNUAL MEETING OF SHAREHOLDERS FIRSTBANK CORPORATION 311 Woodworth Avenue P.O. Box 1029 Alma, Michigan 48801 |
The annual meeting of the shareholders of Firstbank Corporation will be held at the Heritage Center on the campus of Alma College, West Superior Street, Alma, Michigan 48801 on April 22, 2002, at 4:30 p.m. (Alma time) to consider and vote upon:
1. | The election of three directors to hold office for a three-year term. |
2. | Any other business that may properly come before the meeting or any adjournment of the meeting. |
Shareholders of record at the close of business on March 1, 2002, will be entitled to vote at the annual meeting and any adjournment of the meeting.
BY ORDER OF THE BOARD OF DIRECTORS, |
Alma, Michigan
March 27, 2002
IMPORTANT
All shareholders are cordially invited to attend the meeting.WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, YOU ARE URGED TO DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE POSTAGE PAID ENVELOPE PROVIDED. This will assure your representation and a quorum for the transaction of business at the meeting. If you do attend the meeting in person and if you have submitted a proxy card, it will not be necessary for you to vote in person at the meeting. However, if you attend the meeting and wish to change your proxy vote, you will be given an opportunity to do so.
PROXY STATEMENT
FIRSTBANK CORPORATION
311 Woodworth Avenue
P.O. Box 1029
Alma, Michigan 48801
Telephone: (989) 463-3131
ANNUAL MEETING OF SHAREHOLDERS
This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Firstbank Corporation (the "Corporation") to be voted at the annual meeting of its shareholders to be held at the Heritage Center on the campus of Alma College, West Superior Street, Alma, Michigan 48801, on Monday, April 22, 2002, at 4:30 p.m., Alma time, and at any adjournment of the meeting, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders. This proxy statement and form of proxy are first being sent to shareholders on or about March 27, 2002.
If a proxy in the accompanying form is properly executed, duly returned, and not revoked, the shares represented by the proxy will be voted at the annual meeting of the Corporation' s shareholders and at any adjournment of that meeting. Where a shareholder specifies a choice, a proxy will be voted as specified. If no choice is specified, the shares represented by the proxy will be voted for election of all nominees of the Board of Directors. The Corporation's management does not know of any other matters to be presented at the annual meeting. If other matters are presented, the shares represented by proxy will be voted at the discretion of the persons designated as proxies, who will take into consideration the recommendations of the Corporation's management.
Any shareholder executing a proxy in the enclosed form has the power to revoke it by notifying the Secretary of the Corporation in writing at the address indicated above at any time before it is exercised, or by appearing at the meeting and voting in person.
Solicitation of proxies is being made by mail. Directors, officers, and regular employees of the Corporation and its subsidiaries may also solicit proxies in person or by telephone without additional compensation. In addition, banks, brokerage firms, and other custodians, nominees, and fiduciaries may solicit proxies from the beneficial owners of shares they hold and may be reimbursed by the Corporation for reasonable expenses incurred in sending proxy material to beneficial owners of the Corporation's stock. The Corporation will pay all expenses of soliciting proxies.
ELECTION OF DIRECTORS
The Board of Directors has nominated Edward B. Grant, Benson S. Munger, and Phillip G. Peasley for election to the Board of Directors at the annual meeting to serve three year terms that will expire in 2005.
The proposed nominees are willing to be elected and to serve. In the event that any nominee is unable to serve or is otherwise unavailable for election, which is not now contemplated, the incumbent Board of Directors may or may not select a substitute nominee. If a substitute nominee is selected, all proxies will be voted for the person so selected. If a substitute nominee is not so selected, all proxies will be voted for the election of the remaining nominees. Proxies will not be voted for a greater number of persons than the number of nominees named.
A vote of shareholders holding a plurality of shares voting is required to elect directors. For the purpose of counting votes on this proposal, abstentions, broker non-votes, and other shares not voted will not be counted as shares voted.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR ELECTION OF ALL NOMINEES AS DIRECTORS
VOTING SECURITIES
At the close of business on March 1, 2002, the record date for determination of the shareholders entitled to vote at the annual meeting, the Corporation had issued and outstanding 5,123,129 of its Common Stock, the only class of voting securities presently outstanding. Each share entitles its holder to one vote on each matter to be voted upon at the meeting.
The following table shows certain information concerning the number of shares of Common Stock held by the only shareholder who is known to management of the Corporation to be the beneficial owner of more than five percent of the outstanding shares of Common Stock of the Corporation as of March 1, 2002.
Amount and Nature of Beneficial Ownership(1)
Sole Shared
Voting and Voting or Total
Name & Address of Investment Investment Beneficial Percent
Beneficial Owner Power Power(2) Ownership of Class
- ---------------- ---------- ---------- ---------- --------
Firstbank Corporation
Employee Stock Ownership
Plan ("401(k)/ESOP") 0 347,897 347,897 6.79%
311 Woodworth Avenue
Alma, Michigan 48801 (3)
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The following table shows certain information concerning the shares of the Corporation beneficially owned by each of the Corporation's directors and nominees for director, by the executive officers named in the summary compensation table below, and by all directors and executive officers as a group as of December 31, 2001.
Amount and Nature of Beneficial Ownership (1)
---------------------------------------------
Sole Shared
Voting and Voting or
Name of Investment Investment Total Beneficial Percent of
Beneficial Owner Power Power(2) Ownership Class
---------------- ----- -------- --------- -----
William L. Benear 20,413 (4)(5) 0 20,413 (4)(5) *
Duane A. Carr 0 18,035 18,035 *
William E. Goggin 12,732 5,333 18,065 *
Edward B. Grant 0 5,604 5,604 *
Benson S. Munger 2,320 0 2,320 *
Phillip G. Peasley 16,224 220 16,444 *
Dale A. Peters 14,806 (4)(5) 5,853 20,659 (4)(5) *
David D. Roslund 1,172 0 1,172 *
Jeffrey C. Schubert 0 9,214 9,214 *
Samuel G. Stone 3,142 (4)(5) 0 3,142 (4)(5) *
Thomas R. Sullivan 39,206 (4)(5) 0 39,206 (4)(5) *
James E. Wheeler II 19,308 (4)(5) 13,975 33,283 (4)(5) *
All directors and
executive officers as
a group (14 persons) 144,234 (4)(5) 58,234 202,468 (4)(5) 3.95%
*Represents less than 1 percent of the outstanding shares.
| (1) | The numbers of shares stated are based on information furnished by each person listed and include shares personally owned of record by that person and shares which under applicable regulations are deemed to be otherwise beneficially owned by that person. Under these regulations, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, has or shares voting power or investment power with respect to the security. Voting power includes the power to vote or to direct the voting of the security. Investment power includes the power to dispose or to direct the disposition of the security. A person will also be considered the beneficial owner of a security if the person has a right to acquire beneficial ownership of the security within 60 days. |
| (2) | Includes shares as to which the indicated person is legally entitled to share voting or investment power by reason of joint ownership, trust, or other contract or property right, and shares held by spouses and children over whom the indicated person may have substantial influence by reason of the relationship. |
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| (3) | William L. Benear, Dale A. Peters, Thomas R. Sullivan, James M. Taylor, James E. Wheeler II, and David L. Miller, all officers of the Corporation, are the members of the Pension Committee of the Corporation. Firstbank - Alma was the trustee of the 401(k)/ESOP Trust, which holds shares of the Corporation for the 401(k)/ESOP. Effective March 1, 2002, ABN AMRO will become the trustee of the 401(k)/ESOP Trust. The trustee has voting and limited investment power over shares, if any, held by the 401(k)/ESOP Trust which have not been allocated to individual accounts, and limited investment power over shares which have been allocated to individual accounts. The Pension Committee has the power to direct the trustee as to the voting of the shares held by the 401(k)/ESOP Trust that have not been allocated to an individual account, if any. Each of the members of the Pension Committee disclaims beneficial ownership of shares held by the 401(k)/ESOP (except shares allocated to the person’s individual account under the 401(k)/ESOP), and 401(k)/ESOP shares are not reported as beneficially owned by the members of the Pension Committee as individuals unless the shares have been allocated to the person’s individual account under the 401(k)/ESOP. |
| (4) | Includes shares allocated to individual accounts under the 401(k)/ESOP. |
| (5) | Shares that may be acquired pursuant to stock options that are exercisable within 60 days are included in the table. The number of shares subject to such options for Mr. Benear is 17,527 shares; Mr. Peters is 12,015 shares; Mr. Stone is 2,205 shares; Mr. Sullivan is 17,507 shares; and Mr. Wheeler is 15,791 shares. |
BOARD OF DIRECTORS
The Articles of Incorporation of the Corporation provide that the Board of Directors will be divided into three classes, as nearly equal in number as possible, with the term of office of one class expiring each year. The present Board of Directors consists of eight persons, who are elected to the Board of Directors for terms of three years each by the Corporation's shareholders.
Biographical information concerning the current directors and the nominees who are nominated for election to the Board of Directors at the annual meeting is presented below. Except as otherwise indicated, all directors and nominees have had the same principal employment for over five years.
Nominees for 3-Year Terms Expiring in 2005
Edward B. Grant (age 52) has been a director of Firstbank (Mt. Pleasant), a wholly owned subsidiary of the Corporation, since 1988, and of the Corporation since 1990. He has served as Chairman of the Board of Firstbank (Mt. Pleasant) since 1989. Mr. Grant is the General Manager of Public Broadcasting at Central Michigan University.
Phillip G. Peasley (age 68) has been a director of Firstbank - Alma, a wholly owned subsidiary of the Company, since 1973, and of the Corporation since 1985. He is the Operations Manager of Peasley's Hardware & Carpeting Inc., a retail hardware and floor covering store located in Vestaburg, Michigan.
Benson S. Munger (age 60) is one of the incorporators of Firstbank - St. Johns. Currently he is a Vice President of Data Harbor, Inc. Mr. Munger is the retired Executive Director of the American Board of Emergency Medicine.
Directors with Terms Expiring in 2004
Duane A. Carr(age 62) has been a Director of Firstbank - Lakeview since 1980 and of the Corporation since 1998. He is an attorney with the law firm of Carr and Mullendore in Greenville, Michigan. He is an active farmer in Carr Farms Partnership in Lakeview, Michigan.
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William E. Goggin (age 56) has been a director of Firstbank - Alma since 1974, and of the Corporation since 1985. Mr. Goggin has served as Chairman of the Board of the Corporation since 1986, and Chairman of the Board of Firstbank - Alma since 1974. He is an attorney with the law firm of Goggin & Baker.
Jeffrey C. Schubert (age 53) was appointed as one of the original Board of Directors of Firstbank - West Branch in 1987, and has been a Director of the Corporation since 2001. He has been a dentist in the West Branch, Michigan, area since 1973.
Directors with Terms Expiring 2003
David D. Roslund (age 61) has been a director of the Corporation since 1995 and has been a director of Firstbank - Alma since 1990. Mr. Roslund, a certified public accountant, is the Administrator of Wilcox Health Care Center, a nursing home located in Alma, Michigan. He also is an investor in, and manager of, several local small businesses.
Thomas R. Sullivan (age 51) became President & Chief Executive Officer of Firstbank Corporation on January 1, 2000. He has also served as President, Chief Executive Officer and a director of Firstbank (Mt. Pleasant), since 1991. Mr. Sullivan had been Executive Vice President of the Corporation since 1996 and served as Vice President of the Corporation from 1991 to 1996.
The Board of Directors of the Corporation held 12 regularly scheduled and 2 special meetings during 2001. All incumbent directors attended at least 75 percent of all meetings of the Board of Directors and any committees on which they served.
The Board of Directors of the Corporation does not have standing nominating or compensation committees. The outside members of the Board of Directors perform the functions of the compensation committee, and all directors perform the function of the nominating committee. In making nominations for election to the Board of Directors, the Board of Directors will consider recommendations of shareholders. Shareholders who wish to recommend nominees should submit their recommendations in writing, delivered or mailed to the Secretary of the Corporation.
Audit Committee
The Board of Directors of the Corporation has a standing Audit Committee. It is the duty of the Audit Committee to cause a suitable examination of the Corporation ’s financial records and operations, and those of its subsidiaries, to be made by the internal auditor through a program of continuous internal audits; to recommend to the Board of Directors the appointment of independent auditors to audit the consolidated financial statements of the Corporation and its subsidiaries and make such additional examinations as the Committee deems advisable; to review reports of examination of the Corporation and its subsidiaries received from regulatory authorities; and to report to the Board of Directors at least once each calendar year on the results of examinations made and offer such conclusions and recommendations as the Committee deems appropriate. Messrs. Goggin, Grant, Munger, and Roslund serve on this Committee, and each of them is independent, as defined in Rule 4200(a) of the NASD Listing Standards. During 2001, the Audit Committee held four meetings.
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Audit Committee Report
We have reviewed and discussed with management the Corporation’s audited financial statements as of and for the year ended December 31, 2001.
We have discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants.
We have received and reviewed the written disclosures and the letter from the independent auditors required by Independence Standard No. 1, Independence Discussions with Audit Committees, as amended, by the Independence Standards Board, and have discussed with the auditors the auditors' independence.
Based on the reviews and discussions referred to above, we recommend to the Board of Directors that the financial statements referred to above be included in the Corporation's Form 10-K for the year ended December 31, 2001.
Management is responsible for the Corporation's financial reporting process including its systems of internal control, and for the preparation of consolidated financial statements in accordance with generally accepted accounting principles. The Corporation's independent auditors are responsible for auditing those financial statements. Our responsibility is to monitor and review these processes. It is not our duty or our responsibility to conduct auditing or accounting reviews or procedures. We are not employees of the Corporation and we may not be, and we may not represent ourselves to be or to serve as, accountants or auditors by profession or experts in the fields of accounting or auditing. Therefore, we have relied, without independent verification, on management's representation that the financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States of America and on the representations of the independent auditors included in their report on the Corporation's financial statements. Our oversight does not provide us with an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or policies, or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, our considerations and discussions with management and the independent auditors do not assure that the Corporation's financial statements are presented in accordance with generally accepted accounting principles, that the audit of our Corporation's financial statements has been carried out in accordance with generally accepted auditing standards or that our Corporation's independent accountants are in fact "independent."
Respectfully submitted, |
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REPORT ON EXECUTIVE COMPENSATION
Mr. Sullivan serves as President and Chief Executive Officer of Firstbank Corporation and Firstbank (Mt. Pleasant). With the exception of Mr. Sullivan, all officers of the corporation who are also officers of one of its affiliates, serve as officers of the Corporation as an incident to their primary service as an officer and employee of a subsidiary bank and receive no compensation directly from the Corporation. Although there is a great deal of communication between the Board of Directors of the Corporation and the Boards of Directors of the banks, except as to subsidiary bank chief executive officers, the Boards of Directors of the banks retain authority and responsibility for setting compensation for their own officers, including those officers who also serve as officers of the Corporation.
The outside directors of the Board of the Corporation serve as a compensation committee, and as a committee to administer the Stock Option and Restricted Stock Plan of 1993 (the "1993 Plan") and the Stock Option and Restricted Stock Plan of 1997 as amended (the "1997 Plan"). The Corporation's Board of Directors has responsibility for establishing the formal employee benefit plans which are available to the employees of all of the subsidiary banks. These plans currently include a qualified employee stock ownership and 401(k) plan, a non-qualified deferred compensation plan, the 1993 Plan, and the 1997 Plan. The Board of Directors of the Corporation reviews and formally approves the compensation to be paid to the chief executive officers of the subsidiary banks, each of whom is also an officer of the Corporation. Recommendation of the compensation of the subsidiary bank chief executive officers is, however, the role of the Boards of Directors of the subsidiary banks.
All officers receive a salary and, if net income is satisfactory, an annual cash bonus. It is the policy of the Corporation and the banks to set salaries at levels which will be competitive with other comparable financial institutions in order to enable the Corporation and the banks to retain, and when needed attract, qualified executive officers. Information on compensation levels of other institutions is obtained from compensation surveys published by the Michigan Bankers Association, and other sources. In setting salaries, the Corporation and the banks also seek to assure relative fairness in the compensation of officers and to recognize the value of the contribution that each makes to the Corporation's success. Annual cash bonuses are based on a discretionary evaluation of the performance of the Corporation and the bank, if any, served by the officer. Bonuses also take into account recognition of specific personal achievements of the individual officers.
During the third quarter of 2001, the accounting firm of Plante & Moran LLP conducted a compensation study for the Corporation. This study, among other things, included a local, regional, and national survey of financial institutions comparable in size to the Corporation. The information from this study has been and will be used primarily for establishing compensation levels and programs for 2002 and subsequent years.
During 2001, stock options were awarded under the 1993 Plan and 1997 Plan to all full-time benefit eligible employees as of January 1, 2002. The number of shares subject to each option was based on the position and a discretionary assessment of the performance of each grantee. All options are granted for a term of ten years but terminate, subject to certain limited exercise provisions, in the event of death, retirement, or other termination of employment. The options vest over different periods of time depending on the employment classification of the grantee. All options awarded to hourly employees become fully vested one year after the grant date. Options awarded to salaried employees vest over a period of five years from the date of the grant with 20% vesting on each anniversary of the date of the grant.
The Corporation generally maintains a conservative level of perquisites and personal benefits. The dollar value of perquisites and personal benefits provided to executive officers does not exceed 10% of each executive officer's respective annual salary and bonus.
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Section 162(m) of the Internal Revenue Code provides that publicly held corporations may not deduct compensation paid to certain executive officers in excess of $1 million annually, with certain exemptions. The Corporation's Board of Directors has examined its executive compensation policies in light of Section 162(m) and the regulations issued by the Internal Revenue Service to implement that section. It is not expected that any portion of the Corporation's deduction for employee remuneration will be disallowed in 2002 or in future years by reason of actions expected to be taken in 2002.
The salary of Thomas R. Sullivan, President and Chief Executive Officer of the Corporation and Firstbank (Mt. Pleasant), is reviewed and approved by the Compensation Committee and the Board of Directors of the Corporation. Mr. Sullivan's bonus is reviewed by a collective effort between the Firstbank Corporation and Firstbank (Mt. Pleasant) Boards of Directors with the final approval residing with the Corporate Board. In recommending and approving Mr. Sullivan's salary, the committee and the boards consider a survey of compensation paid to executive officers by Michigan financial institutions of more or less comparable size. Mr. Sullivan's salary, bonus, and stock option awards were also based on a discretionary evaluation of Mr. Sullivan's personal performance and the operating results of the Corporation and Firstbank (Mt. Pleasant). For this purpose, the committee and the Boards of Directors focused on the earnings of the Corporation and Firstbank (Mt. Pleasant) in the year just completed, the quality and productivity of the management team, administrative staffing, and continuing improvements made in loan quality, loan and loan allowance management, and loan documentation and procedure.
Respectfully submitted, |
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STOCK PERFORMANCE
The following graph compares the cumulative total shareholder return on the common stock of the Corporation to the KBW 50 Index, published by Keefe, Bruyette & Woods, Inc., the Standard & Poor's 500 Stock Index, and the NASDAQ Bank Index, assuming a $100 investment at the end of 1996. The Standard & Poor's 500 Stock Index is a broad equity market index. The KBW 50 Index is composed of 50 money center and regional bank holding companies. The NASDAQ Bank Index is composed of 584 banks and savings institutions, as well as companies performing functions closely related to banking, such as check cashing agencies, currency exchanges, safe deposit companies and corporations for banking abroad. Cumulative total return is measured by dividing (i) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the share price at the end and the beginning of the measurement period; by (ii) the share price at the beginning of the measurement period.
The table below shows dollar values for cumulative total shareholder return plotted in the graph above.
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
Firstbank $100.00 $148.19 $214.69 $144.79 $152.24 $166.18
S& P 500 $100.00 $133.36 $171.47 $207.56 $188.66 $166.24
KBW 50 $100.00 $146.19 $158.29 $152.80 $183.45 $175.89
NASDAQ Bank $100.00 $167.41 $166.33 $159.89 $182.38 $197.44
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COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Through the year 2001, executive officers of the Corporation were compensated as described above by Firstbank Corporation and/or Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch, Firstbank - Lakeview, or Firstbank - St. Johns, in accordance with their employment with the applicable banks. Presented below is the remuneration paid for the three years ended December 31, 2001, to the five most highly compensated officers of the Corporation for the year ended December 31, 2001, whose salary and bonus exceeded $100,000.
Summary Compensation Table
Annual Compensation Long Term All Other
Name and Principal Position Year Salary(1) Bonus(1) Compensation Compensation(3)
- --------------------------- ---- --------- -------- ------------ ---------------
Shares
Underlying
Options(2)
----------
Thomas R. Sullivan
President & Chief Executive 2001 $182,000 $63,000 1,575 $7,424
Officer of the Corporation 2000 167,712 53,500 1,653 5,543
and President, Chief 1999 129,644 20,000 1,446 5,370
Executive Officer and Director
of Firstbank (Mt. Pleasant)(4)
Samuel G. Stone
Executive Vice President & 2001 $129,592 $40,000 1,312 $5,259
Chief Financial Officer of 2000 $9,231 12,000 11,025 N/A
the Corporation(4) 1999 N/A N/A N/A N/A
James E. Wheeler II
Vice President of the 2001 $122,000 $37,500 1,312 $4,099
Corporation and President 2000 109,699 35,000 1,377 3,686
and Chief Executive Officer 1999 92,845 24,000 1,158 2,925
of Firstbank - Alma(4)
Dale A. Peters
Vice President of the 2001 $103,184 $17,500 1,312 $4,334
Corporation and President 2000 98,931 17,500 1,377 4,155
and Chief Executive Officer 1999 93,395 12,500 1,446 3,923
of Firstbank - West Branch
William L. Benear
Vice President of the 2001 $100,000 $32,500 1,312 $4,113
Corporation and President 2000 94,740 30,000 1,377 3,740
and Chief Executive Officer 1999 79,944 23,000 1,158 3,358
of Firstbank - Lakeview(4)
(1) | Includes compensation voluntarily deferred under the 401(k)/ESOP and under the Firstbank Corporation Nonqualified Deferred Compensation Plan. |
(2) | The numbers of shares subject to stock options have been adjusted to reflect stock dividends. |
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(3) | All other compensation for the year ended December 31, 2001, is comprised of matching contributions under the 401(k)/ESOP as follows: |
| Thomas R. Sullivan | $7,424 | |
| Samuel G. Stone | $5,259 | |
| James E. Wheeler II | $4,099 | |
| Dale A. Peters | $4,334 | |
| William L. Benear | $4,113 |
(4) | Mr. Sullivan was named to the position of President and Chief Executive Officer of the Corporation as of January 1, 2000, in addition to his position as President and Chief Executive Officer of Firstbank (Mt Pleasant). Mr. Stone was hired effective November 2000, at an annual salary of $120,000. The Summary Compensation Table discloses his 2000 compensation from his date of hire through December 31, 2000. Mr. Wheeler was appointed the President and Chief Executive Officer of Firstbank-Alma as of January 1, 2000, prior to which time he served as that bank's Executive Vice President and Senior Loan Officer. Mr Benear was designated as President and Chief Executive Officer of Firstbank-Lakeview as of January 1, 2000. He previously served as that bank's Executive Vice President and Senior Loan Officer. |
Stock Option Information
Stock options are believed to help align the interests of employees with the interests of shareholders by promoting stock ownership by employees and by rewarding them for appreciation in the price of the Corporation's stock. Stock options which were granted or outstanding during 2001 were granted under the 1993 and 1997 Plans.
The following tables set forth information concerning stock options granted to, exercised by, and retained by the named executive officers of the Corporation during 2001.
Option Grants in Last Fiscal Year
Individual Grants
---------------------------------------------------
Percent of
Total Potential Realizable Value at
Number of Options Assumed Annual Rates of
Shares Granted to Stock Price Appreciation
Underlying Employees for Option Term(3)
Options In Fiscal Exercise Expiration -----------------------------
Name Granted(2) Year Price(1) Date 5% 10%
---- ---------- --------- -------- ---------- -- ---
Thomas R. Sullivan 1,575 3.30% $17.25 11/26/11 $17,084 $43,294
Samuel G. Stone 1,312 2.75% $17.25 11/26/11 $14,237 $36,078
James E. Wheeler II 1,312 2.75% $17.25 11/26/11 $14,237 $36,078
Dale A. Peters 1,312 2.75% $17.25 11/26/11 $14,237 $36,078
William L. Benear 1,312 2.75% $17.25 11/26/11 $14,237 $36,078
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==============================================================================================================
Option Exercises in 2001 and Year End Option Values
Number of Shares Underlying Value of Unexercised
Shares Unexercised Options at In-the-Money Options at
Acquired on Value Year End(2) Year End(4)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- ------------------------- -------------------------
Thomas R. Sullivan 0 $0 17,507 / 5,620 $124,142 / $2,120
Samuel G. Stone 0 $0 2,205 / 10,132 $2,226 / $8,903
James E. Wheeler II 0 $0 15,791 / 4,592 $119,505 / $1,740
Dale A. Peters 2,476 $33,718 12,015 / 6,409 $59,118 / $1,897
William L. Benear 0 $0 17,527 / 4,592 $139,796 / $1,740
____________________________________________________
(1) | The per share exercise price of each option is equal to the market value of the common stock on the date each option was granted, as adjusted for the stock dividend issued in December 2001. All outstanding options were granted for a term of ten years. Options terminate, subject to certain limited exercise provisions, in the event of death, retirement, or other termination of employment. No option is exercisable until one year after the date of grant, except for options granted in 1994, which became fully vested six months after the date of grant, the right to exercise options vests over five years with 20% becoming vested on each anniversary of the date of the grant. |
| (2) | The numbers have been adjusted in accordance with the 1993 Plan and the 1997 Plan to reflect stock dividends. |
| (3) | These amounts are based on assumed rates of appreciation over the entire option period without any discount to present value. Actual gains, if any, on stock option exercises will be dependent upon future overall market conditions and on the future performance of the Corporation's common stock. Amounts realized, if any, may be more or less than the amounts reflected in the table. |
| (4) | The value of unexercised options reflects the increase in market value of the Corporation's common stock from the date of grant through December 31, 2001 (when the closing price of the Corporation's common stock was $19.15 per share). Value actually realized upon exercise by the named executives will depend upon the value of the Corporation's common stock at the time of exercise. |
Severance Benefit Agreements
The Corporation has entered into individual severance benefit agreements with the named executives as well as certain other of its senior officers. These agreements provide severance benefits if the executive's employment is terminated without cause within two (2) years after a change-in-control or within six (6) months before a change-in-control of the Corporation. For the purpose of these agreements, a "change-in-control" is defined as a purchase, merger, buyout, consolidation or other reorganization under the terms of which more than fifty percent (50%) of the combined voting power of the outstanding stock of the Corporation becomes held by any group of less
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than ten (10) individuals, a banking entity, a trust, a corporation, or any other business entity. Severance benefits will not be payable if the Corporation terminates the executive's employment for cause or if the executive resigns for reasons other than a substantial change in the terms or conditions of the executive's employment. An executive may resign as a result of a substantial change in the terms or conditions of his employment after a change-in-control and retain the benefits provided under the agreement. A substantial change in terms or conditions of employment will be deemed to have occurred if any of the following occurs: the Corporation reduces the executive's base salary; the Corporation discriminates against the executive as to bonuses, salary increases or fringe benefits; the executive is assigned duties which result in a significant reduction or material change in the executive's authority or responsibility; or the executive is relocated to a place in excess of twenty-five (25) miles from the location where the executive was based at the time the agreement was executed. The agreements continue indefinitely unless the Corporation takes action to terminate by giving notice at least two (2) years prior to the anniversary date of the agreements when the termination is to be effective. These agreements provide a severance benefit of a lump sum payment equal to one and one-half years salary and incentive bonus and continuation of benefits coverage for two (2) years. The agreements provide that benefits payable under them will be reduced or delayed to the extent necessary so that they would not become subject to any excise taxes imposed with respect to so-called "parachute payments" under the Internal Revenue Code of 1986, as amended.
Compensation of Directors
The Corporation pays its Chairman of the Board a retainer of $3,000 per year and the Chairman of the Audit Committee a retainer of $1,000 per year. Each outside corporate director also receives 100 shares of the Corporation's common stock and is paid a fee of $600 for each regular Board of Directors meeting attended, $250 for each conference call in which the director participates, $1,000 for each full day and $750 for each half day special Board of Directors meeting attended. In addition, directors who serve on the Corporation's audit committee are paid $250 for each committee meeting attended.
Each outside director or nominee of the Corporation is also a director of Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch, Firstbank - Lakeview, or Firstbank - St. Johns. For each regular board meeting attended, outside directors receive $400. Each outside director of Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch, and Firstbank - Lakeview, attending a special full day Board of Directors meeting receives $750, and $400 for each half day meeting. Firstbank - St. Johns outside directors also receive $750 for special full day meetings and $500 for each half day meeting attended. In addition, outside directors of all banks who serve on a committee are paid $100 for each committee meeting attended.
Chairmen of the Boards of Directors for Firstbank Corporation, Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - Lakeview, and Firstbank - St. Johns receive a retainer of 200 shares of Firstbank Corporation common stock per year, and the outside directors of the Corporate Board and all of the Bank Boards receive a retainer of 100 shares of Firstbank Corporation common stock per year.
Directors of all the banks have the option of receiving meeting fees in cash or to purchase Firstbank Corporation common stock. Directors of the Corporation and each subsidiary bank may also elect to defer their director fees under the Firstbank Corporation Nonqualified Deferred Compensation Plan. Deferrals are discretionary and each director is permitted to select an investment option for the deferred fees under the Deferred Compensation Plan.
15
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Exchange Act requires the Corporation's directors, officers, and persons who own more than 10% of the Corporation's common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). SEC regulations require such reporting persons to furnish the Corporation with copies of all such reports they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no filings were required for those persons, the Corporation believes that, from January 1, 2001, through December 31, 2001, its directors, officers, and greater than 10% shareholders complied with all applicable filing requirements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All outside members of the Board of Directors of the Corporation serve as the compensation committee. Mr. Sullivan, the President and Chief Executive Officer of the Corporation, has served on the Board of Directors and participated in deliberations concerning compensation of other executive officers. Mr. Sullivan, however, has been excused from meetings at which decisions with respect to his own compensation have been made. The entire Board of Directors, except Mr. Sullivan, serves as a committee to administer the 1993 and 1997 Plans.
Directors and officers of the Corporation and their associates were customers of, and had transactions with, the Corporation's subsidiary banks in the ordinary course of business between January 1, 2001, and December 31, 2001. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. All loans to directors, officers, and their associates were current as of December 31, 2001.
RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The financial statements of the Corporation for the year ended December 31, 2001, have been examined by Crowe Chizek and Company LLP, certified public accountants, as independent auditors of the Corporation for the 2001 fiscal year. A representative of Crowe Chizek and Company LLP will be at the annual meeting of shareholders and will have an opportunity to make a statement and be available to answer appropriate questions. Crowe Chizek and Company LLP have been the Corporation's auditors for many years and have been reappointed by the Board of Directors as independent public accountants of the Corporation and its subsidiaries for the year ending December 31, 2002.
Audit Fees
Aggregate fees billed for professional services rendered for the audit of the Corporation's annual consolidated financial statements for the fiscal year ended December 31, 2001, and the review of financial statements included in the Corporation's Form 10-K filed with the Securities and Exchange Commission for that fiscal year were $86,100.
16
Financial Information System Design and Implementation Fees
No professional services were rendered by Crowe Chizek and Company LLP for the year ended December 31, 2001, with respect to, directly or indirectly, operating, or supervising the operation of, the Corporation's information systems or managing the Corporation's local area network or designing or implementing a hardware or software system that aggregates source data underlying the financial statements or generates information that is significant to the Corporation's financial statements taken as a whole.
All Other Fees
The aggregate fees billed for services rendered by Crowe Chizek and Company LLP for services not covered under the two preceding captions totaled $55,380.
The Corporation's Audit Committee has concluded that the provision of services covered under the preceding caption "All Other Fees" is compatible with Crowe Chizek and Company LLP maintaining their independence. None of the hours expended by Crowe Chizek's engagement to audit the Corporation's consolidated financial statements for the year ended December 31, 2001, were attributed to work performed by persons other than Crowe Chizek's full-time, permanent employees.
SHAREHOLDER PROPOSALS
Shareholder proposals intended to be presented at the 2003 annual meeting must be received by the Corporation for inclusion in its proxy statement and form of proxy relating to that meeting by November 28, 2002. Shareholder proposals should be made in accordance with Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended, and should be addressed to Samuel G. Stone, Secretary, Firstbank Corporation, 311 Woodworth Avenue, Alma, Michigan 48801. Proxies to be solicited by the Corporation to vote at the annual meeting of shareholders to be held in 2003 may confer discretionary authority on the persons named as proxies to vote on any matter if the Corporation does not have notice of the matter by February 7, 2003.
17
Firstbank Corporation
2001
Annual Report
This 2001 Annual Report contains audited financial statements and a detailed financial review. This is Firstbank Corporation's 2001 annual report to shareholders. Although attached to our proxy statement, this report is not part of our proxy statement, is not deemed to be soliciting material, and is not deemed to be filed with the Securities and Exchange Commission (the "SEC") except to the extent that it is expressly incorporated by reference in a document filed with the SEC.
The 2001 Report to Shareholders accompanies this proxy statement. That report presents information concerning the business and financial results of Firstbank Corporation in a format and level of detail that we believe shareholders will find useful and informative. Shareholders who would like to receive even more detailed information than that contained in this 2000 Annual Report are invited to request our Annual Report on Form 10-K.
Firstbank Corporation's Form 10-K Annual Report filed with the Securities and Exchange Commission will be provided to any shareholder without charge upon written request. Requests should be addressed to Samuel G. Stone, Chief Financial Officer, Firstbank Corporation, 311 Woodworth Avenue, P.O. Box 1029, Alma, Michigan 48801-6029.
PRESIDENT'S MESSAGE
TO OUR SHAREHOLDERS:
Opening Doors For Your Community, the theme of our 2001 Annual Report to Shareholders, reflects our commitment to our various communities. We serve the shareholder and investment community through our financial performance, and the individual and business community through our quality banking and investment services. The local markets in which we operate benefit from our active and supportive leadership, which helps our communities to grow and prosper. Our employees appreciate our commitment to providing a challenging, professional, and rewarding work environment. As stakeholders in Firstbank Corporation, whether shareholders, customers, employees, or community members, we all benefit from our organization’s success.
The challenges presented during 2001 were daunting. The national economy fell into recession during the month of March. The Federal Reserve lowered interest rates nine times during the year to levels not seen in over 40 years. And the tragic events of September 11th caused personal suffering and financial uncertainty throughout our country. In the face of these obstacles I am pleased to report that we achieved record earnings and sustained asset quality during the year. Net income exceeded $9 million for the first time in our history, as dramatically falling interest rates reduced our funding costs more quickly than the corresponding decline in earnings on loans and other investments. The low rates also stimulated an explosion of mortgage refinancing which provided record levels of loan volume and related fee income. Our asset quality measures remained strong with only .05% of average loans being charged off during the year. Our allowance for loan losses was strengthened to more than $11 million to reflect our assessment that the state and national economies may continue to struggle.
We also took action during the year to improve the liquidity and visibility of our shares to the investment community. On August 15, 2001, the shares of Firstbank Corporation began trading on the NASDAQ National Market System, making information about our company and its financial performance more readily available to investors. Trading volume of our shares has shown a modest improvement, and we have achieved a reduced spread between the stock’s bid and ask price. Most importantly, our NASDAQ listing has generated renewed support from market makers and investment analysts, which should be positive for the marketability and valuation of our shares.
Service improvements were also implemented during 2001. Internet banking products for both individuals and businesses were introduced along with our new Truly Free CheckingPlusaccount. Also, a new mainframe computer system was installed. This not only upgraded speed and accessibility, but added imaging capability and enough capacity for us to almost double the number of customers we can service.
Our commitment to community involvement and support did not waiver during 2001. Our directors, officers, and staff members remained actively engaged in service clubs and community organizations throughout our markets. A few of those activities are highlighted in this report. We continue to believe that our strong local connections provide a competitive advantage that benefits shareholders, customers, employees, and our communities.
The people that comprise the Firstbank team made the difference for our company in 2001. Their ability to respond to a rapidly changing and challenging environment, while remaining focused on improving profitability without sacrificing quality, demonstrated their commitment and dedication. My sincere appreciation, and congratulations, to each of them for the success we achieved this year.
Thank you for your investment in Firstbank Corporation. We appreciate the support and encouragement of our shareholders, and always welcome your comments or suggestions.
Respectfully submitted,
Thomas R. Sullivan
President & Chief Executive Officer
FINANCIAL HIGHLIGHTS
Firstbank Corporation
For the year: 2001 2000 1999 1998 1997 (In Thousands of Dollars, except per share data) Interest income $55,998 $54,332 $46,062 $44,484 $37,864 Net interest income 31,405 28,805 26,779 25,131 21,334 Provision for loan losses 1,467 736 514 1,177 1,398 Noninterest income 9,452 5,431 5,369 5,868 3,697 Noninterest expense 25,756 21,052 20,068 19,402 15,825 Net income 9,122 8,543 8,036 7,303 5,558 At year end: Total assets 751,990 733,267 650,552 603,014 536,322 Total earning assets 696,681 679,322 598,915 555,254 486,949 Loans 606,076 600,767 508,238 441,028 404,808 Deposits 561,139 537,224 491,404 494,053 445,666 Other borrowings 107,838 122,259 90,203 40,894 28,823 Shareholders' equity 72,426 64,204 61,032 59,775 54,532 Average balances: Total assets 737,681 687,190 607,443 560,938 460,439 Total earning assets 688,483 637,317 561,045 516,455 427,640 Loans 604,439 553,201 464,550 414,316 353,061 Deposits 546,984 510,194 491,368 467,615 395,883 Other borrowings 107,733 105,593 47,120 29,065 17,948 Shareholders' equity 68,101 62,675 60,752 56,258 41,240 Per share:(1) Basic earnings $1.80 $1.67 $1.54 $1.40 $1.22 Diluted earnings $1.78 $1.65 $1.51 $1.34 $1.18 Cash dividends $0.68 $0.62 $0.55 $0.48 $0.39 Shareholders' equity $14.15 $12.82 $12.38 $11.40 $10.45 Financial ratios: Return on average assets 1.24% 1.24% 1.32% 1.30% 1.21% Return on average equity 13.40% 13.63% 13.23% 12.98% 13.48% Average equity to average assets 9.23% 9.12% 10.00% 10.03% 8.96% Dividend payout ratio 37.50% 36.73% 35.76% 34.16% 33.51%
| Firstbank - - Lakeview results are included from August 8, 1997, the date of acquisition Firstbank - St. Johns results are included from June 16, 2000, the date of inception Gladwin Land Company results are included from May 8, 2000, the date of acquisition |
(1)All per share amounts adjusted for stock dividends and stock split
The Company’s Form 10-K Annual Report filed with the Securities and Exchange Commission will be provided to any shareholder without charge upon written request. Requests should be addressed to Samuel G. Stone, Chief Financial Officer, Firstbank Corporation, 311 Woodworth Avenue, P. O. Box 1029, Alma, Michigan 48801-6029.
MANAGEMENT’S DISCUSSION AND ANALYSISOF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this section of the annual report is to provide a narrative discussion about Firstbank Corporation’s financial condition and results of operations. Please refer to the consolidated financial statements and the selected financial data presented in this report in addition to the following discussion and analysis.
RESULTS OF OPERATIONS
Highlights
We posted record net earnings for the tenth consecutive year. Net income of $9,122,000 exceeded 2000 results of $8,543,000 by 6.8%. For the past five years, net income has increased at an annual compound growth rate of 14.5%. These results reflect continued strength of core banking activities and include the effect of a nonrecurring expense recorded in the first quarter of 2001.
Management believes that standard performance indicators help evaluate our performance. We posted a return on average assets of 1.24%, 1.24%, and 1.32% for 2001, 2000 and 1999, respectively. Total average assets increased $50 million in 2001, $80 million in 2000, and $47 million in 1999. Diluted earnings per share were $1.78, $1.65 and $1.51 for the same time periods. The company repurchased 1,212 shares of its common stock in 2001, 258,319 shares in 2000, and 180,150 shares in 1999. The repurchase program helped to maintain capital at the appropriate level and allow growth in net income to reflect an increasing return on equity. Return on equity was 13.40% in 2001, 13.63% in 2000, and 13.23% in 1999.
Net Interest Income
The core business of the Company is earning interest on loans and securities while paying interest on deposits and borrowings. In successfully managing this business, the Company increased its net interest income by $2.6 million for 2001, for a 9% gain when compared to 2000. The net interest margin increased to 4.68% in 2001 compared to 4.64% in 2000, but is less than the 1999 rate of 4.93%. During 2001, the Company’s average loan to average deposit ratio was 110% compared to 108% in 2000 and 94% in 1999.
A critical task of management is to price assets and liabilities so that the spread between the interest earned on assets and the interest paid on liabilities is maximized without unacceptable risks. While interest rates on earning assets and interest bearing liabilities are subject to market forces, in general and in the short run, the Company can exert more control over deposit rates than earning asset rates. However, competitive forces and the need to maintain and grow deposits as a funding source place limitations on the degree of control over deposit rates.
The following table presents a summary of net interest income for 2001, 2000, and 1999. In 2001, the average rate realized on earning assets was 8.25%, a decrease of 40 basis points from the 2000 results of 8.65%, and a 12 basis point reduction from the rate of 8.37% realized in 1999. In 1999, the prime rate was increased 25 basis points three times during the second half of the year. During 2000, the prime rate increased 25 basis points twice in the first quarter, another 50 basis points in the second quarter then was unchanged for the balance of the year. In 2001, the prime rate decreased each quarter sliding 150 basis points during the first quarter, 125 in the second quarter, 75 in the third quarter and 125 in the fourth quarter for a total decline of 475 basis points. At December 31, 2001, slightly over 21% of the loan portfolio was comprised of variable rate instruments. Those loans will reprice monthly or quarterly as rates change. The remaining 79% of the loan portfolio is made up of fixed rate loans that do not reprice until maturity. Of the fixed rate loans, approximately $117 million, or 19.3% of the loan portfolio, mature within the next twelve months and are subject to rate adjustments at maturity.
Summary of Consolidated Net Interest Income
Year Ended Year Ended Year Ended
December 31, 2001 December 31, 2000 December 31, 1999
(In Thousands of Dollars) Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Average Assets
Interest earning assets:
Taxable securities $ 44,328 $ 2,708 6.11% $52,590 $ 3,364 6.40% $60,033 $ 3,651 6.08%
Tax exempt securities (1) 28,885 1,971 6.82 29,584 2,267 7.66 33,307 2,572 7.72
Total securities 73,213 4,679 6.39 82,174 5,631 6.85 93,340 6,223 6.67
Loans (1) (2) 603,134 51,749 8.58 551,357 49,237 8.93 462,516 40,467 8.75
Federal funds sold 11,601 354 3.05 3,290 209 6.35 4,190 208 4.96
Interest bearing deposits 535 16 2.99 496 26 5.24 999 55 5.50
Total earning assets 688,483 56,798 8.25 637,317 55,103 8.65 561,045 46,953 8.37
Nonaccrual loans 1,177 1,844 2,034
Less allowance for loan loss (10,230) (9,754) (9,213)
Cash and due from banks 19,812 20,160 18,877
Other non earning assets 38,439 37,623 34,700
Total assets $737,681 $687,190 $607,443
Average Liabilities
Interest bearing liabilities:
Demand $145,260 $ 4,121 2.84% $131,998 $ 4,409 3.34% $143,828 $ 4,662 3.24%
Savings 70,515 1,164 1.65 70,461 1,668 2.37 72,412 1,776 2.45
Time 252,938 13,521 5.35 231,367 13,044 5.64 204,417 10,485 5.13
Total deposits 468,713 18,806 4.01 433,826 19,121 4.41 420,657 16,923 4.02
Federal funds purchased and
repurchase agreements 31,509 1,151 3.65 41,901 2,288 5.46 29,343 1,426 4.86
Notes payable 80,175 4,636 5.78 63,692 4,118 6.47 17,777 934 5.25
Total interest bearing liabilities 580,397 24,593 4.24 539,419 25,527 4.73 467,777 19,283 4.12
Demand deposits 78,271 76,368 70,711
Total funds 658,668 615,787 538,488
Other non interest bearing liabilities 10,912 8,728 8,203
Total liabilities 669,580 624,515 546,691
Average shareholders' equity 68,101 62,675 60,752
Total liabilities and
shareholders' equity $737,681 $687,190 $607,443
Net interest income (1) $32,205 $29,577 $27,670
Rate spread (1) 4.01% 3.92% 4.25%
Net interest margin (percent of
average earning assets) (1) 4.68% 4.64% 4.93%
| (1) | Presented on a fully taxable equivalent basis using a federal income tax rate of 35% for 2001, 34% for 2000 and 1999. |
| (2) | Interest income includes amortization of loan fees of $1,942,000, $1,302,000, and $1,312,000, respectively. Interest on nonaccrual loans is not included. |
As rates decline, maturing securities could not be replaced with comparable securities bearing higher yields than available a year ago, although yields would not necessarily be lower than the yields on maturing securities. Much of the current investment portfolio was purchased in rate environments similar to the current rate conditions. Although management expects to lose some yield when replacing securities, they do not believe that the decrease will equate to the basis point decline seen in the prime rate.
The average rate paid on interest bearing liabilities was 4.24% in 2001 compared to 4.73% and 4.12% in 2000 and 1999. As the prime rate decreased in 2001, deposit rates also decreased but not as fast nor to the extent of the changes in the prime rate primarily do to contractual rates of some time deposits and the lower level of deposit rates compared to loan rates.
The Company has funded a portion of its loan growth with borrowings from the Federal Home Loan Bank. Although average outstanding balances of notes payable increased over $16 million in 2001, year end balances show a decrease of $8 million when comparing 2001 to 2000. While these borrowings are an economical method of funding loans when increased core deposits are not available, the cost is typically higher than the Company's core deposit costs. The average rate of Federal Home Loan Bank funding decreased 90 basis points in 2001 to 5.74% when compared to 2000 rates of 6.37%.
The 2001 rate spread of 4.01% is 9 basis points higher than 2000 results of 3.92% and a 24 basis points reduction from 4.25% in 1999. Tax equivalent net interest income increased $2.6 million in 2001 as total average earning assets grew $50 million. The net interest margin of 4.68% for 2001 was 4 basis points more than the 2000 results. Increases in both net interest margin and rate spread are the result of rates on average earning assets decreasing 40 basis points while the average cost of interest bearing liabilities decreased 49 basis points. Average earning assets represented 93% of total average assets in both 2001 and 2000.
Provision for Loan Losses
The provision for loan losses was $1,467,000 in 2001 compared to $736,000 in 2000 and $514,000 in 1999. The increase in the provision for loan losses in 2001 reflects the growth in the commercial loan portfolio and increasing trends to some degree in net charge offs and nonperforming loans, although net charge offs and nonperforming loans remained at very low levels. At December 31, 2001, the allowance for loan losses as a percent of total loans was 1.84% compared to 1.64% and 1.84% at December 31, 2000, and December 31, 1999, respectively. Net charged off loans totaled $286,000 in 2001 compared to $196,000 in 2000 and $245,000 in 1999. During 2001, $394,000 of recoveries were realized helping to keep net charge offs at their low levels. Recoveries in 2000 were $629,000 and in 1999 were $554,000. Net charged off loans as a percent of average loans were .05% in 2001 compared to .03% in 2000 and .05% in 1999. Total nonperforming loans were .44% of ending loans at December 31, 2001, compared to .37% and .67% at the two previous year ends. Management maintains the allowance for loan losses at a level considered appropriate to absorb losses in the portfolio. The allowance balance is established after considering past loan loss experience, current economic conditions, volume, growth, composition of the portfolio, and delinquencies and other relevant factors. During 2001, management developed and implemented a more comprehensive quantitative and qualitative methodology for analyzing these factors more consistently across its five banking subsidiaries. The development of the analysis process, the consideration of exposures to industries potentially most affected by current risks in the economic and political environment, and the review of potential risks in certain credits that are not considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank and resulted in the increased provision expense.
Noninterest Income
After a moderate increase of $62,000 from 1999 to 2000, total noninterest income increased $4,021,000 in 2001. Service charges on deposit accounts increased $281,000 or 16.5%, from 2000 to 2001. Firstbank - St Johns, a de novo bank that began operations in June of 2000 but was in full operation for all of 2001, accounted for $40,000 of the increase. Gain on sale of mortgage loans increased by $2,261,000, or over 485%, as the declining interest rates of 2001 fueled mortgage refinance activity. When a mortgage is refinanced or pre-paid, previously capitalized mortgage servicing rights are written off. The gain on sale was somewhat offset by a decline in mortgage servicing income of $410,000 that resulted from the write off of previously capitalized mortgage servicing rights. Trust fees declined $41,000, or 5.5%, in 2001 compared to the $3,000 decline seen in 2000. During the first quarter of 2002, Firstbank - Alma, the subsidiary that has operated a Trust Department, reached agreement with a larger, unrelated company to assume operations of the Trust Department. This arrangement will allow Firstbank - Alma to continue to participate, at a reduced level, in the trust income, but at a more profitable rate. Courier and cash delivery services income increased 3.1% to $463,000 in 2001, after having increased 41% in 2000. This income is primarily from the operations of the 1st Armored subsidiary of Firstbank - West Branch and does not include income from servicing Firstbank affiliates. Real estate appraisal services contributed $789,000 to noninterest income in 2001, up from $276,000 in 2000 and zero in 1999. Commissions on real estate sales resulted in $635,000 noninterest income in 2001, the first year for this business. Title insurance fees produced $593,000 in noninterest income compared to $181,000 in 2000 and zero in 1999.
Other noninterest income posted gains of $325,000, or 19.4%, during 2001. New companies which were operational for all of 2001 but for only a portion of 2000 (Firstbank - St Johns; Gladwin Land, Inc.; and new subsidiaries of Firstbank - West Branch), contributed over $97,000 to the increase in other noninterest income. In addition to the new entities, other noninterest income was strengthened by an increase of $100,000 in income from brokerage operations. Also impacting other noninterest income was the recognition of $113,000 market gains and dividends on the investments underlying the balances in the deferred compensation accounts, which amount is offset by an equivalent noninterest expense and has no impact on total net income.
Noninterest Expense
Salary and employee benefits expenses increased $2,006,000, or 17.7%, during 2001. Over $763,000 of the increase was due to the new entities mentioned earlier. Excluding the impact of the new entities, employee benefit expense increased $565,000 as the Company experienced additional costs in providing health insurance to its employees. The remaining increase is the result of normal salary increments, merit raises, and normal staff growth. The Company employed 347 full time equivalent employees at the end of 2001, 24 more than at the same time in 2000.
Expenses for occupancy and equipment increased $418,000, or 12.5% from the 2000 level. The new entities amounted to $125,000 of the increase. The remaining increase was due to depreciation expense on new and remodeled facilities, upgrades to the computer mainframe and establishment of image storage and retrieval capabilities, and the purchase of new personal computers and communication network upgrades throughout the Company which were required by new operating technologies.
Amortization of intangible assets increased $41,000, or 5.5%, as the entities purchased during 2000 showed goodwill expense for the entire 2001 year.
Michigan single business tax decreased $328,000, or 51%, during 2001 which resulted from a decrease in income subject to the Michigan single business tax at the bank level.
Outside professional services expense increased to $1,121,000 in 2001 from $541,000 in 2000. Audit and legal fees increased, in part due to work involved in the establishment of the mortgage subsidiaries of the banks. Title search fees and costs paid to independent contractors in the title, appraisal, and real estate sales operations also contributed significantly to the increase in outside professional services expense.
The $210,000 increase in advertising and promotion expense was largely driven by promotional expenses associated with the large increase in mortgage refinance activity.
Other noninterest expense increased $1,777,000, or 39.5%. Increased operations of the new entities amounted to $719,000 of the increase. An additional $687,000 was the result of non-recurring charges which were recognized in the first quarter of 2001, and discussed in previous disclosures.
Federal Income Tax
The Company's effective tax rates were 33%, 31% and 31% for 2001, 2000, and 1999. The principal difference between the effective tax rates and the statutory tax rate of 35% is the Company's investment in securities and loans which provide income exempt from federal income tax.
FINANCIAL CONDITION
Total assets at December 31, 2001, were $752 million, exceeding the December 31, 2000 assets of $733 million by $19 million, or 2.5%. Short term investments increased by $16 million as the Company experienced heavy mortgage re-financing which reduced mortgage portfolio balances, slower commercial and consumer loan demand, and increased deposit growth. Loans held for sale on the secondary market increased over 450% at December 31, 2001 when compared to the balance at December 31, 2000 as a result of increased re-finance activity. Total portfolio loans, net of allowance for loan loss, showed very little change from the December 31, 2000 balance, decreasing just 0.10%, although commercial and commercial real estate loans increased $13.4 million, or over 5%. Decreases of $4.5 million, or 1.7% in residential mortgages and $8.4 million, or 11.2%, in consumer loans offset the growth in commercial loans.
The following table provides information on the changes in loan balances and mortgages serviced for others during 2001:
(In Thousands of Dollars)
2001 2000 Change % Change
Loans Held for Sale $ 5,722 $ 1,018 $ 4,704 462.1%
Commercial 299,412 279,060 20,352 7.3%
Real Estate Mortgages 228,349 238,899 (10,550) (4.4%)
Consumer 72,593 81,790 (9,197) (11.2%)
Total $606,076 $600,767 $ 5,309 0.9%
Mortgages serviced for others $296,900 $238,800 $58,100 24.3%
Total securities declined $4.5 million or 6% as maturing and called securities were not re-committed to the market under existing rate conditions.
Premises and equipment increased $1,942,000 after recognized depreciation of $1,469,000. Several projects contributed to this increase. During 2001, one affiliate bank built a new branch office and another affiliate bank finished extensive remodeling on a support facility. In addition, in December 2001, the Company purchased a new central mainframe computer and software to support operating upgrades from its operating system vendor and to establish image storage and retrieval capabilities. Management believes the new systems will facilitate increased efficiency and improved service quality capabilities.
Total deposits increased at the end of 2001 to $561 million, an increase of $24 million, or 4.5%. Demand deposit accounts increased a total of $30.5 million with interest demand balances increasing $24 million, or 17.8% and noninterest accounts increasing $6 million, or 8%. Passbook and statement savings accounts increased $4.5 million, or 6.6%. These deposit increases were partially offset by a decrease of $11 million, or 4.4% in time deposits. Securities sold under agreements to repurchase decreased by $6 million.
Federal Home Loan Bank advances and notes payable decreased by $8 million at December 31, 2001, as compared to December 31, 2000. The increase in deposits, the decrease in the security portfolio, and the slower loan growth have allowed repayment of some Federal Home Loan Bank borrowings. Overnight borrowings decreased $16 million from year end 2000 to 2001. Note J of the Notes to Consolidated Financial Statements has a more complete discussion of borrowings.
Asset Quality
Management continues to follow a conservative course in the recognition of problem loans. In most cases, when a loan reaches 90 days past due, all income earned but not collected is deducted from current income. Loans are carried at an amount which management believes will be collected. A balance considered not collectible is charged against (reduction of) the allowance for loan losses. In 2001, net charged off loans were $286,000 compared to $196,000 in 2000. Net charged off loans as a percentage of average loans were .05% and .04% in 2001 and 2000.
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past due, and any loans where the terms have been renegotiated. Total nonperforming loans were $2.6 million and $2.2 million at December 31, 2001 and 2000. The investment in impaired loans was $5.1 million at December 31, 2001, compared to $5.8 million at December 31, 2000. Please refer to Note F of the Notes to Consolidated Financial Statements for more information on impaired loans. Total nonaccrual loans were $520,000 at December 31, 2001, compared to $1.7 million at the end of 2000.
The allowance for loan losses increased $1,181,000 or 12% during 2001. The allowance for loan losses represents 1.84% of outstanding loans at the end of 2001 as compared to 1.64% at December 31, 2000. Management maintains the allowance at a level which they believe adequately provides for losses inherent in the loan portfolio. Such losses are estimated by a variety of factors, including specific examination of certain borrowing relationships and consideration of historical losses incurred on certain types of credits. Management focuses on early identification of problem credits through ongoing review by management, loan personnel and an outside loan review specialist.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Asset liability management aids the Company in achieving reasonable and predictable earnings and liquidity while maintaining a balance between interest earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of the Company's customers. These customers may be either borrowers needing to meet their credit needs or depositors wanting to withdraw funds. Management of interest rate sensitivity attempts to avoid widely varying net interest margins and to achieve consistent net interest income through periods of changing interest rates. The net interest margin was 4.68% in 2001 compared to 4.64% in 2000. Loan yields were 8.58% in 2001 compared to 8.93% in 2000. Deposit costs decreased 40 basis points from 4.41% in 2000 to 4.01% in 2001. Notes payable increased as a funding source, with average balances of $80,175,000 in 2001 compared to $63,692,000 in 2000. In 2001, the average cost of funds on notes payable was 5.78%, compared to 4.01% on deposits.
A decrease in deposit rates affects most rates currently paid and, therefore, has an immediate positive impact on net interest margin. With the exception of variable rate loans, a decrease in loan rates does not affect the yield until a new loan is made. When rates decrease dramatically, fixed rate loan customers will take new lower rate loans to replace present higher rate loans. The prime rate decreased every month in 2001 dropping from an average rate of 9.05% in January to an average rate of 4.84% in December. Uncertainty in the markets led to increasing deposits levels, which helped to increase margins in 2001.
The principal sources of liquidity for the Company are maturing securities, federal funds purchased or sold, loan payments by borrowers, investment securities, loans held for sale, deposit or deposit equivalent growth, and Federal Home Loan Bank advances. Securities maturing within one year at December 31, 2001, were $14.0 million compared to $18.0 million at December 31, 2000.
The following table shows the interest sensitivity gaps for five different intervals as of December 31, 2001:
Maturity or repricing frequency
(Dollars in millions)
2 days 4 mos. 13 mos.
through through through
1 day 3 mos. 12 mos. 5 yrs. 5+ yrs.
Interest earning assets:
Loans $122.2 $ 83.3 $ 83.0 $287.2 $30.3
Securities 1.7 1.6 10.7 28.2 25.1
Other earning assets 18.6 4.7 0.0 0.0 0.0
Total 142.5 89.6 93.7 315.4 55.4
Interest bearing liabilities:
Deposits 234.2 66.3 95.7 56.2 22.0
Other bearing liabilities 2.7 32.1 1.7 37.6 33.8
Total 236.9 98.4 97.4 93.8 55.8
Interest sensitivity gap (94.4) (8.8) (3.7) 221.6 (0.4)
Cumulative gap (94.4) (103.2) (106.9) 114.7 114.3
For the one day interval, maturities of interest bearing liabilities exceed those of interest earning assets by $94.4 million. Included in the one day maturity classification are $233.8 million savings and checking accounts which are contractually available to the Company's customers immediately, but in practice, function as core deposits with considerably longer maturities. The pattern of interest sensitive liability maturities exceeding interest sensitive assets changes through the five year time frame resulting in a cumulative effect of $114.7 million through five years. For the time period greater than five years, the positive trend reverses slightly so that interest sensitive assets exceed interest sensitive liabilities by $114.3 million.
Showing a negative gap through the twelve month period in a declining rate environment, as the company experienced in 2001, does not necessarily result in a corresponding increase in net interest income. In practice, some of the gain of lowering deposit costs is mitigated by rate decreases on variable rate loans, and by fixed rate loan customers ability to use new lower rate loans to prepay existing higher rate loans.
Interest rate sensitivity varies with different types of interest earning assets and interest bearing liabilities. Overnight investments, on which rates change daily, and loans tied to the prime rate differ considerably from long term investment securities and fixed rate loans. Time deposits over $100,000 and money market accounts are more interest sensitive than regular savings accounts. Comparison of the repricing intervals of interest earning assets to interest bearing liabilities is a measure of the interest sensitivity gap. Balancing this gap is a continual challenge in a changing rate environment. The Company uses a sophisticated computer program to perform analysis of interest rate risk, assist with its asset liability management, and model and measure interest rate sensitivity.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company faces market risk to the extent that both earnings and the fair values of its financial instruments are affected by changes in interest rates. The Company manages this risk with static GAP analysis and simulation modeling. Throughout 2001, the results of these measurement techniques were within the Company's policy guidelines. The Company continued to rely on Federal Home Loan Bank borrowings in 2001 and does not believe that there has been a material change in the nature of the Company's primary market risk exposures, including the categories of market risk to which the Company is exposed and the particular markets that present the primary risk of loss to the Company, or in how those exposures were managed in 2001 as compared to 2000. As of the date of this annual report, the Company does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term.
The Company's market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships in the future will be primarily determined by market factors which are outside of the Company's control. All information provided in response to this item consists of forward looking statements. Reference is made to the section captioned "Forward Looking Statements" in this annual report for a discussion of the limitations on the Company's responsibility for such statements.
The following tables provide information about the Company's financial instruments that are sensitive to changes in interest rates as of December 31, 2001 and 2000. They show expected maturity date values for loans and securities which were calculated without adjusting the instruments' contractual maturity dates for expected prepayments. Maturity date values for interest bearing core deposits were not based on estimates of the period over which the deposits would be outstanding, but rather the opportunity for repricing. The Company believes that repricing dates, as opposed to expected maturity dates may be more relevant in analyzing the value of such instruments and are reported as such in the following tables. Fair value is computed as the present value of expected cash flows at rates in effect at the date indicated.
December 31, 2001 (In Thousands of Dollars)
Fair Value
2002 2003 2004 2005 2006 Thereafter Total 12/31/01
Rate sensitive assets:
Fixed interest rate loans $116,576 $82,986 $89,036 $49,990 $56,735 $73,657 $468,980 $470,220
Average interest rate 7.83% 8.49% 8.17% 8.46% 8.30% 8.41%
Variable interest rate loans 57,832 11,507 13,622 13,470 20,785 19,880 137,096 137,457
Average interest rate 5.39% 5.61% 5.80% 5.42% 5.69% 5.65%
Fixed interest rate securities 14,045 10,575 8,630 5,819 3,145 24,981 67,195 67,195
Average interest rate 2.61% 3.67% 4.63% 5.51% 5.74% 6.85%
Variable interest rate securities 150 150 150
Average interest rate 7.61%
Other interest bearing assets 18,627 4,633 23,260 23,260
Average interest rate 1.49%
Rate sensitive liabilities:
Savings & interest bearing checking 232,790 232,790 232,790
Average interest rate 1.50%
Time deposits 185,312 31,989 12,995 6,741 4,554 22 241,613 243,747
Average interest rate 4.02% 4.81% 5.11% 5.94% 4.93% 6.01%
Fixed interest rate borrowings 6,200 4,000 1,500 11,121 0 48,794 71,615 72,097
Average interest rate 4.99% 5.15% 5.15% 4.19% 5.69%
Variable interest rate borrowings 4,000 4,000 4,027
Average interest rate 1.99%
Repurchase Agreements 32,223 32,223 32,223
Average interest rate 1.62%
December 31, 2000 (In Thousands of Dollars)
Fair Value
2001 2002 2003 2004 2005 Thereafter Total 12/31/00
Rate sensitive assets:
Fixed interest rate loans $120,718 $83,055 $96,225 $62,427 $56,460 $72,315 $491,200 $489,710
Average interest rate 8.19% 8.46% 8.35% 8.06% 8.28% 8.32%
Variable interest rate loans 53,178 7,642 10,645 7,503 17,166 13,433 109,567 109,836
Average interest rate 9.87% 10.31% 10.13% 10.29% 9.74% 9.51%
Fixed interest rate securities 14,385 10,909 6,784 8,371 4,628 30,880 75,957 75,957
Average interest rate 6.31% 5.99% 7.29% 6.64% 6.76% 5.76%
Variable interest rate securities 218 218 218
Average interest rate 7.51%
Other interest bearing assets 2,380 2,380 2,380
Average interest rate 5.08%
Rate sensitive liabilities:
Savings & interest bearing checking 204,108 204,108 204,108
Average interest rate 2.94%
Time deposits 203,394 28,218 11,130 5,212 4,028 839 252,821 254,987
Average interest rate 5.96% 6.09% 5.90% 5.65% 6.45% 5.91%
Fixed interest rate borrowings 31,850 1,500 7,000 0 11,304 48,948 100,602 96,174
Average interest rate 7.10% 6.85% 6.04% 0% 5.70% 5.55%
Variable interest rate borrowings (0) (0) 0
Average interest rate 0%
Repurchase Agreements 21,657 21,657 19,194
Average interest rate 4.05%
CAPITAL RESOURCES
The Company obtains funds for its operating expenses and dividends to shareholders through dividends from its subsidiary banks. In general, the subsidiary banks pay only those amounts required to meet holding company cash requirements. No excess liquidity is accumulated at the holding company, rather capital is maintained at the subsidiary banks to support growth.
Bank regulators have established risk based capital guidelines for banks and bank holding companies. Minimum capital levels are established under these guidelines. Each asset category is assigned a perceived risk weighting. Off balance sheet items, such as loan commitments and standby letters of credit, also require capital allocations.
As of December 31, 2001, the Company’s total capital to risk weighted assets exceeded the minimum requirement for capital adequacy purposes of 8% by 4.41%, or $25 million, Tier 1 capital to risk weighted assets exceeded the minimum of 4% by 7.18%, or $40 million, and Tier 1 capital to average assets exceeded the minimum of 4% by 4.35%, or $33 million. For a more complete discussion of capital requirements, please refer to Note R of the Notes to Consolidated Financial Statements.
The Federal Deposit Insurance Corporation insures specified customer deposits and assesses premium rates based on defined criteria. Insurance assessment rates may vary from bank to bank based on the factors that measure the perceived risk of a financial institution. One condition for maintaining the lowest risk assessment, and therefore the lowest insurance rate, is the maintenance of capital at the "well capitalized" level. Each of the Company’s affiliate banks has exceeded the regulatory criteria for a "well capitalized" financial institution, and is paying the lowest assessment rate assigned by the FDIC.
A certain level of capital growth is desirable to maintain a good ratio of equity to total assets. The compound annual growth rate for total average assets for the past five years was 14.6%. The compound annual growth rate for average equity over the same period was 17.3%.
Management has determined one way of maintaining capital adequacy is to maintain a reasonable rate of internal capital growth. The percentage return on average equity times the percentage of earnings retained after dividends equals the internal growth percentage. The following table illustrates this relationship:
2001 2000 1999
Return on Equity 13.40% 13.63% 13.23%
multiplied by
Percentage of Earnings Retained 62.50% 63.27% 64.22%
equals
Internal Capital Growth 8.38% 8.63% 8.49%
The Company has retained between 63% and 64% of its earnings from 1999 to 2001. To maintain sufficient capital, management has determined that the rate of internal capital growth should exceed 5% and keep pace with asset growth over time. To achieve the goal of acceptable internal capital growth, management intends to continue its efforts to increase the Company's return on average equity while maintaining a reasonable cash dividend.
As an additional enhancement to capital growth, the Company offers a dividend reinvestment program. The Firstbank Corporation Dividend Reinvestment Plan was first offered in 1988. At December 31, 1988, 123 owners holding 209,856 shares participated in the Plan. By the end of 2001, 1,260 owners holding 1,842,236 shares were participating in the Plan.
The Company is not aware of any recommendations by regulatory authorities at December 31, 2001, which are likely to have a material effect on Firstbank Corporation's liquidity, capital resources or operations.
FORWARD LOOKING STATEMENTS
This annual report including, without limitation, management's discussion and analysis of financial condition and results of operations and other sections of the Company's Annual Report to Shareholders contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company itself. Words such as "anticipate," "believe," "determine," "estimate," "expect," "forecast," "intend," "is likely," "plan," "project," "opinion," "should," variations of such terms, and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward looking statements. Internal and external factors that may cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior and customer ability to repay loans; software failure, errors or miscalculations; the ability of the Company to locate and correct all data sensitive computer code; and the vicissitudes of the national economy. The Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
COMMON STOCK DATA
Firstbank Corporation Common Stock was held by 1,692 shareholders of record as of December 31, 2001. Total shareholders number approximately 2,200 including those whose shares are held in nominee name through brokerage firms. The Company's shares are listed on the NASDAQ National Market under the symbol FBMI and are traded by several brokers. The range of bid prices for shares of common stock for each quarterly period during the past two years is as follows:
Low and High Bid Quotations
2001 2000
First Quarter $14.05 - $18.21 $17.46 - $18.37
Second Quarter $15.24 - $18.10 $17.69 - $18.03
Third Quarter $17.14 - $23.33 $17.91 - $18.48
Fourth Quarter $16.95 - $19.11 $18.10 - $19.28
The prices quoted above were obtained from the Bloomberg System through the Company’s market makers. The over the counter market quotations reflect interdealer prices without retail mark up, mark down, or commission, and may not necessarily represent actual transactions. Prices have been adjusted to reflect stock dividends.
The following table summarizes cash dividends paid per share (adjusted for stock dividends) of common stock during 2001 and 2000.
2001 2000
First Quarter .1691 .1542
Second Quarter .1691 .1542
Third Quarter .1691 .1542
Fourth Quarter .1691 .1542
.6764 .6168
The Company’s principal sources of funds to pay cash dividends are the earnings of and dividends paid by the subsidiary banks. Under current regulations, the subsidiary banks are restricted in their ability to transfer funds in the form of cash dividends, loans and advances to the Company (See Note P of the Notes to Consolidated Financial Statements). As of January 1, 2002, approximately $20.7 million of the subsidiaries’ retained earnings were available for transfer in the form of dividends to the Company without prior regulatory approval. In addition, the subsidiaries’ 2002 earnings will be available for distributions as dividends to the Company.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Firstbank Corporation
Alma, Michigan
We have audited the consolidated balance sheets of Firstbank Corporation as of December 31, 2001 and 2000, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 Firstbank Corporation at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
Crowe, Chizek and Company LLP
February 1, 2002
Grand Rapids, Michigan
FIRSTBANK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, except for share data)
December 31
2001 2000
ASSETS
Cash and due from banks $ 27,187 $ 25,716
Short term investments 18,627 2,380
Total cash and cash equivalents 45,814 28,096
Securities available for sale 67,345 71,843
Federal Home Loan Bank stock 4,633 4,332
Loans held for sale 5,722 1,018
Loans, net of allowance for loan losses
of $11,038 in 2001 and $9,857 in 2000 589,316 589,892
Premises and equipment, net 17,624 15,682
Intangibles 8,443 8,974
Accrued interest receivable and other assets 13,093 13,430
TOTAL ASSETS $751,990 $733,267
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand accounts $ 86,736 $ 80,295
Interest bearing accounts:
Demand 159,572 135,467
Savings 73,218 68,641
Time 241,613 252,821
Total deposits 561,139 537,224
Securities sold under agreements to
repurchase and overnight borrowings 32,223 38,307
Federal Home Loan Bank advances 72,747 77,068
Notes payable 2,868 6,884
Accrued interest payable and other liabilities 10,587 9,580
Total liabilities 679,564 669,063
SHAREHOLDERS' EQUITY
Preferred stock; no par value,
300,000 shares authorized, none issued
Common stock, no par value; 10,000,000 shares authorized;
5,119,153 and 4,767,877 shares issued and outstanding
in 2001 and 2000 63,100 56,550
Retained earnings 8,260 7,286
Accumulated other comprehensive income 1,066 368
Total shareholders' equity 72,426 64,204
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $751,990 $733,267
See notes to consolidated financial statements.
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In Thousands of Dollars, except for per share data)
Year Ended December 31
2001 2000 1999
Interest income:
Loans, including fees $51,639 $49,237 $40,451
Securities:
Taxable 2,708 3,364 3,651
Exempt from federal income tax 1,281 1,496 1,697
Short term investments 370 235 263
Total interest income 55,998 54,332 46,062
Interest expense:
Deposits 18,806 19,121 16,923
Notes payable 4,636 4,118 934
Other 1,151 2,288 1,426
Total interest expense 24,593 25,527 19,283
Net interest income 31,405 28,805 26,779
Provision for loan losses 1,467 736 514
Net interest income after
provision for loan losses 29,938 28,069 26,265
Noninterest income:
Service charges on deposit accounts 1,986 1,705 1,577
Gain on sale of mortgage loans 2,727 466 883
Mortgage servicing, net of amortization (108) 302 202
Trust fees 338 378 381
Gain (loss) on sale of securities 28 (2) (1)
Courier and cash delivery services 463 449 318
Real estate appraisal services 789 276 0
Commissions on real estate sales 635 0 0
Title insurance fees 593 181 0
Other 2,001 1,676 2,009
Total noninterest income 9,452 5,431 5,369
Noninterest expense:
Salaries and employee benefits 13,350 11,344 10,505
Occupancy and equipment 3,521 3,103 3,037
Amortization of intangibles 785 744 617
Michigan Single Business tax 311 639 565
Outside professional services 1,121 541 390
Advertising and promotions 388 178 138
Other 6,280 4,503 4,816
Total noninterest expense 25,756 21,052 20,068
Income before federal income taxes 13,634 12,448 11,566
Federal income taxes 4,512 3,905 3,530
NET INCOME $9,122 $8,543 $8,036
Other comprehensive income:
Change in unrealized gain (loss) on
securities, net of tax and reclassification effects 698 1,032 (1,767)
COMPREHENSIVE INCOME $ 9,820 $ 9,575 $ 6,269
Basic earnings per share $1.80 $1.67 $1.54
Diluted earnings per share $1.78 $1.65 $1.51
See notes to consolidated financial statements.
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(In Thousands, except for share and per share data)
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income(Loss) Total
Balances at January 1, 1999 $52,797 $5,875 $1,103 $59,775
Net income for 1999 8,036 8,036
Cash dividends-%.55 per share (2,874) (2,874)
5% stock dividend-224,526 shares 4,602 (4,603) (1)
Issuance of 50,310 shares of common
stock through exercise of stock options 817 817
Issuance of 44,246 shares of common stock
through the dividend reinvestment plan 1,098 1,098
Issuance of 19,807 shares of common stock from
supplemental shareholder investments 527 527
Purchase of 180,150 shares of stock (4,793) (4,793)
Issuance of 7,770 shares of common stock 214 214
Net change in unrealized appreciation
(depreciation) on securities available
for sale, net of tax of $(912,000) (1,767) (1,767)
BALANCES AT DECEMBER 31, 1999 55,262 6,434 (664) 61,032
Net income for 2000 8,543 8,543
Cash dividends-$.62 per share (3,138) (3,138)
5% stock dividend- 227,504 shares 4,550 (4,553) (3)
Issuance of 14,002 shares of common
stock through exercise of stock options 191 191
Issuance of 64,008 shares of common stock
through the dividend reinvestment plan 1,244 1,244
Issuance of 15,164 shares of common stock from
supplemental shareholder investments 301 301
Purchase of 258,319 shares of stock (5,227) (5,227)
Issuance of 11,753 shares of common stock 229 229
Net change in unrealized appreciation
on securities available for sale, net of tax
of $532,000 1,032 1,032
BALANCES AT DECEMBER 31, 2000 56,550 7,286 368 64,204
Net income for 2001 9,122 9,122
Cash dividends-$.68 per share (3,416) (3,416)
5% stock dividend- 243,748 shares 4,729 (4,732) (3)
Issuance of 10,502 shares of common
stock through exercise of stock options 135 135
Issuance of 70,081 shares of common stock
through the dividend reinvestment plan 1,207 1,207
Issuance of 15,553 shares of common stock from
supplemental shareholder investments 283 283
Purchase of 1,212 shares of stock (24) (24)
Issuance of 12,604 shares of common stock 220 220
Net change in unrealized appreciation
on securities available for sale, net of tax
of $375,000 698 698
BALANCES AT DECEMBER 31, 2001 $63,100 $8,260 $1,066 $72,426
See notes to consolidated financial statements.
FIRSTBANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Year Ended December 31
2001 2000 1999
OPERATING ACTIVITIES
Net income $ 9,122 $ 8,543 $ 8,036
Adjustments to reconcile net income to net cash from
operating activities:
Provision for loan losses 1,467 736 514
Depreciation of premises and equipment 1,469 1,394 1,342
Net amortization of security premiums/discounts 199 161 303
Loss (gain) on sale of securities (28) 2 1
Amortization of intangibles 785 744 617
Gain on sale of mortgage loans (2,727) (466) (883)
Proceeds from sales of mortgage loans 179,344 43,859 57,566
Loans originated for sale (181,321) (43,294) (52,345)
Deferred federal income tax benefit (699) (150) (305)
(Increase) decrease in accrued interest receivable
and other assets 406 (2,102) (866)
Increase (decrease) in accrued interest payable and
other liabilities 1,007 1,478 (379)
NET CASH FROM OPERATING ACTIVITIES 9,024 10,905 13,601
INVESTING ACTIVITIES
Proceeds from sale of securities available for sale 2,191 5,137 7,018
Proceeds from maturities of securities available for sale 55,810 38,413 29,481
Purchases of securities available for sale (52,600) (26,003) (27,547)
Purchase of Federal Home Loan Bank stock (301) (2,054) (491)
Net increase in portfolio loans (891) (92,825) (71,793)
Net purchases of premises and equipment (3,411) (2,147) (2,213)
NET CASH FROM INVESTING ACTIVITIES 798 (79,479) (65,545)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 23,915 45,820 (2,649)
Net increase (decrease) in securities sold under
agreements to repurchase and overnight borrowings (6,084) (13,512) 25,242
Retirement of notes payable (5,416) (14) (14)
Proceeds from Federal Home Loan Bank borrowings 21,250 115,794 31,720
Proceeds from notes payable 1,400 6,700
Retirement of Federal Home Loan Bank borrowings (25,571) (76,912) (7,638)
Cash dividends and cash paid in lieu of fractional
shares on stock dividend (3,419) (3,141) (2,875)
Purchase of common stock (24) (5,227) (4,793)
Net proceeds from issuance of common stock 1,845 1,965 2,656
NET CASH FROM FINANCING ACTIVITIES 7,896 71,473 41,649
INCREASE IN CASH AND CASH EQUIVALENTS 17,718 2,899 (10,295)
Cash and cash equivalents at beginning of year 28,096 25,197 35,492
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 45,814 $ 28,096 $ 25,197
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 25,521 $ 24,805 $19,340
Income taxes $ 4,211 4,050 4,000
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Firstbank Corporation (the "Company") is a bank holding company. Each subsidiary bank of the Company is a full service community bank. The subsidiary banks offer all customary banking services, including the acceptance of checking, savings and time deposits, and the making of commercial, agricultural, real estate, personal, home improvement, automobile and other installment and consumer loans. The consolidated assets of the Company of $752 million as of December 31, 2001, primarily represent commercial and retail banking activity. Mortgage loans serviced for others of $297 million and trust assets of $47 million as of December 31, 2001, are not included in the Company’s consolidated balance sheet.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries: Firstbank - Alma; Firstbank (Mt. Pleasant); Firstbank - West Branch; Firstbank - Lakeview; and Firstbank - St. Johns (the "Banks"); 1st Armored, Incorporated; 1st Collections, Incorporated; Gladwin Land Company; 1st Title, Incorporated; and C.A. Hanes Realty, Incorporated; after elimination of intercompany accounts and transactions. These subsidiaries are wholly owned, except C.A. Hanes Realty, which has a 45% minority interest. (See Note B regarding 1st Collections, Incorporated.) During 2001, each of the Corporation’s five banks formed its own Mortgage Company. The operating results of these companies are consolidated into each Bank’s financial statements.
Use of Estimates: 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 reported period. Actual results could differ from those estimates.
Certain Significant Estimates: The primary estimates incorporated into the Company’s financial statements which are susceptible to change in the near term include the allowance for loan losses and the determination and carrying value of certain financial instruments.
Current Vulnerability Due to Certain Concentrations:The Company’s business is concentrated in the mid-central section of the lower peninsula of Michigan. Management is of the opinion that no concentrations exist that make the Company vulnerable to the risk of a near term severe impact. While the loan portfolio is diversified, the customers’ ability to honor their debts is partially dependent on the local economies. The Company’s service area is primarily dependent on the manufacturing (automotive and other), agricultural and recreational industries. Most commercial and agricultural loans are secured by business assets, including commercial and agricultural real estate and federal farm agency guarantees. Generally, consumer loans are secured by various items of personal property and mortgage loans are secured by residential real estate. The Company’s funding sources include time deposits and other deposit products which bear interest. Periods of rising interest rates result in an increase in the cost of funds to the Company.
Cash and Cash Equivalents:Cash and cash equivalents include cash on hand, amounts due from banks, and short term investments which include interest bearing deposits with banks, federal funds sold, and overnight money market fund investments. Generally, federal funds and overnight money market funds are purchased for a one day period. The Company reports customer loan transactions, deposit transactions, and repurchase agreements and overnight borrowings on a net cash flow basis.
Securities Available for Sale: Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value and the related unrealized holding gain or loss (the difference between the fair value and amortized cost of the securities so classified) is reported, net of related income tax effect in accumulated other comprehensive income, a separate component of shareholders’ equity, until realized. Gains and losses on sales are determined using the specific identification method. Premium and discount amortization is recognized in interest income using the level yield method over the period to maturity.
Mortgage Banking Activities: Servicing rights are recognized as assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.
Loans: Loans receivable, for which management has the intent and ability to hold for the foreseeable future or payoff, are reported at their outstanding unpaid principal balances net of any deferred fees or costs on originated loans, or unamortized premiums or discounts. Loan origination fees and certain origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest on loans is accrued over the term of the loans based upon the principal outstanding. The carrying value of impaired loans is periodically adjusted to reflect cash payments, revised estimates of future cash flows and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such and other cash payments are reported as reductions in carrying value.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Management’s determination of the adequacy of the al-lowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth and composition of the loan portfolio and other relevant factors. The allowance is increased by provisions for loan losses charged to expense and reduced by charge offs, net of recoveries.
The valuation of loans is reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that the Company will be unable to collect all 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 the loan’s observable market price or at the fair value of collateral if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the allowance for loan losses, such increase is reported as provision for loan loss. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.
Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction loans, automobile, home equity and second mortgage loans are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including the Company’s loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial loans are rated on a scale of 1 to 8, with grades 1 to 4 being pass grades, 5 being special attention or watch, 6 substandard, 7 doubtful and 8 loss. Loans graded 6, 7 and 8 are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Premises and Equipment:Premises and equipment are stated on the basis of cost, less accumulated depreciation. Depreciation is computed over the estimated useful lives of the assets, primarily by accelerated methods for income tax purposes, and by the straight line method for financial reporting purposes.
Other Real Estate:Other real estate (included as a component of other assets) includes properties acquired through either a foreclosure proceeding or acceptance of a deed in lieu of foreclosure and is initially recorded at the lower of cost or fair value at the date of foreclosure, establishing a new cost basis. These properties are evaluated periodically and are carried at the lower of cost or esti-mated fair value less estimated costs to sell.
Acquisition Intangibles:The acquisition of purchased subsidiaries and branches has included amounts related to the value of customer deposit relationships ("core deposit intangibles") and excess of cost over estimated fair value of net assets acquired ("goodwill"). The core deposit intangibles are amortized over the expected lives of the acquired relationships. The goodwill is amortized using the straight line method for periods of not less than 15 years or more than 20 years.
Income Taxes: The Company records income tax expense based on the amount of taxes due on its tax return plus the change in deferred taxes computed, based on the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
Stock Splits and Dividends: Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock. Fractional shares are issued or are paid in cash. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements. A stock dividend of 5% was paid on December 31, 2001, to shareholders of record as of December 14, 2001. A stock dividend of 5% was paid on December 29, 2000, to shareholders of record as of December 13, 2000. A stock dividend of 5% was paid on December 31, 1999, to shareholders of record as of December 16, 1999.
Earnings Per Share: Basic earnings per share is based on weighted average common shares outstanding. Diluted earnings per share includes the dilutive effect of additional common shares issuable under stock options. All per share amounts are restated for stock dividends and stock splits through the date of issuance of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and unrealized gains and losses on securities available for sale, net of tax, which is also recognized as a separate component of equity. Accumulated other comprehensive income consists of unrealized gains and losses on securities available for sale, net of tax.
Reclassification: Certain 2000 and 1999 amounts have been reclassified to conform to the 2001 presentation.
Accounting Changes: Beginning January 1, 2001, a new accounting standard requires all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values are recorded in the income statement. Fair value changes involving hedges are generally recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this standard on January 1, 2001, did not have a material effect on the consolidated financial statements.
In 2001, new accounting guidance was issued that will, beginning in 2002, revise the accounting for goodwill and intangible assets. Intangible assets with indefinite lives and goodwill will no longer be amortized, but will periodically be reviewed for impairment and written down if impaired. Additional disclosures about intangible assets and goodwill may be required. An initial goodwill impairment test is required during the first six months of 2002. Adoption of this standard on January 1, 2002, resulted in $3,533,000 of unamortized goodwill ceasing to be amortized into expense. According to the related amortization schedules, this will result in an increase of $261,000 in 2002 income. Current interpretations issued by the Financial Accounting Standards Board (FASB) will require the amortization of the core deposit intangibles and the unidentifiable intangibles resulting from branch acquisitions. However, the Company understands that FASB is reconsidering their interpretation and it is possible that in the future the Company will not be required to amortize the unidentifiable intangibles resulting from branch acquisitions.
Segment Information: While the Company’s chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a company wide basis. Accordingly, all of the Company’s banking operations are considered by Management to be aggregated in one reportable operating segment.
NOTE B – ACQUISITIONS/DIVESTURES
On December 31, 2001, the Company’s Firstbank - West Branch subsidiary sold its collection agency, 1st Collections, Incorporated. Operating results of 1st Collections are included in consolidated results until the date of sale. The effect of the operation and sale of 1st Collections was not material to the consolidated financial statements of the Company.
On October 20, 2000, Firstbank Corporation, through its affiliate Firstbank - West Branch, completed the acquisition of the West Branch Real Estate One franchise, which was re-named 1st Realty, Inc. On January 2, 2001, also through its Firstbank - West Branch affiliate, Firstbank Corporation completed the acquisition of C.A. Hanes Real Estate in a transaction that merged C.A. Hanes with 1st Realty, Inc. Firstbank - West Branch maintains a 55% ownership of the new company which does business as C.A. Hanes Realty Inc. This real estate subsidiary complements the prior acquisitions of Gladwin Land Company and 1st Title, Inc., and these subsidiaries provide service to all five banks of Firstbank Corporation and position the banks to provide the full spectrum of services related to real estate transactions. This acquisition did not have a material effect on the Company’s consolidated financial statements.
On April 1, 1999, the Company’s Firstbank - Alma subsidiary sold its insurance agency, Niles Agency, Incorporated, to an unrelated third party. Operating results of the Niles Agency are included in consolidated results until the date of sale. A gain of $59,000 was recognized on the sale of the agency, and is included in other income of the consolidated statements of income and comprehensive income. The effect of the operation and sale of the Niles Agency was not material to the consolidated financial statements of the Company.
NOTE C – RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company’s subsidiary banks are required to maintain average reserve balances in the form of cash and noninterest bearing balances due from the Federal Reserve Bank. The average reserve balances required to be maintained at December 31, 2001 and 2000 were $2,867,000 and $2,886,000 respectively. These balances do not earn interest.
NOTE D – SECURITIES
The carrying amounts of securities and their fair values were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available for sale: (In Thousands of Dollars)
December 31, 2001:
U.S. Treasury $ 3,005 $ 38 $ 0 $ 3,043
U.S. governmental agency 25,234 597 (23) 25,808
States and political subdivisions 30,974 956 (98) 31,832
Collateralized mortgage obligations 171 1 0 172
Corporate 6,317 160 0 6,477
Equity 13 0 0 13
$65,714 $ 1,752 $ (121) $67,345
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available for sale: (In Thousands of Dollars)
December 31, 2000:
U.S. Treasury 4,021 13 (2) 4,032
U.S. governmental agency 21,997 163 (104) 22,056
States and political subdivisions 34,104 575 (87) 34,592
Collateralized mortgage obligations 1,004 0 (3) 1,001
Corporate 10,121 15 (13) 10,123
Equity 39 0 0 39
$71,286 $766 $(209) $71,843
Gross realized gains (losses) on sales and calls of securities were:
2001 2000 1999
(In Thousands of Dollars)
Gross realized gains $28 $ 21 $ 38
Gross realized losses 0 (23) (39)
Net realized gains (losses) $ 28 $( 2) $( 1)
The amortized cost and fair value of securities at December 31, 2001, by stated maturity are shown below. Actual maturities may differ from stated maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Available for Sale
(In Thousands of Dollars)
Amortized Fair
Cost Value
Due in one year or less $13,879 $14,045
Due after one year through five years 27,336 28,169
Due after five years through ten years 18,157 18,638
Due after ten years 6,329 6,480
Total 65,701 67,332
Equity securities 13 13
Total securities $65,714 $67,345
At December 31, 2001, securities with a carrying value approximating $48,830,000 were pledged to secure public and trust deposits, securities sold under agreements to repurchase, and for such other purposes as required or permitted by law.
NOTE E – SECONDARY MORTGAGE MARKET ACTIVITIES
Loans serviced for others, which are not reported as assets, total $296,900,000 and $238,800,000 at 2001 and 2000.
Activity for capitalized mortgage servicing rights was as follows:
2001 2000
---- ----
Servicing rights: (In Thousands of Dollars)
Beginning of year $1,165 $1,224
Additions 1,318 251
Amortized to expense (876) (310)
------ ------
End of year $1,607 $1,165
====== ======
Management has determined that a valuation allowance is not necessary at December 31, 2001 or 2000.
NOTE F - LOANS
Loans at year-end were as follows:
2001 2000
(In Thousands of Dollars)
Commercial $106,148 $111,703
Mortgage loans on real estate:
Residential 225,053 234,915
Commercial 169,250 150,234
Construction 33,203 27,853
Consumer 64,151 72,684
Credit Card 2,630 2,543
Subtotal 600,435 599,932
Less:
Allowance for loan losses 11,038 9,857
Net deferred loan costs 81 183
Loans, net $589,316 $589,892
======== ========
Activity in the allowance for loan losses for the year was as follows:
2001 2000 1999
(In Thousands of Dollars)
Beginning balance $ 9,857 $9,317 $9,048
Provision for loan losses 1,467 736 514
Loans charged-off (680) (825) (799)
Recoveries 394 629 554
Ending balance $11,038 $9,857 $9,317
Impaired loans were as follows: 2001 2000
(In Thousands of Dollars)
Year-end loans with no allocated allowance for loan losses $2,117 $4,716
Year-end loans with allocated allowance for loan losses 2,957 1,062
Total $5,074 $5,778
Amount of the allowance for loan losses allocated $ 339 $ 48
2001 2000 1999
(In Thousands of Dollars)
Loans past due over 90 days still on accrual at year end $2,113 $ 462 $ 663
Average of impaired loans during the year 5,632 5,939 5,133
Interest income recognized during impairment 402 488 284
Cash-basis interest income recognized 7 10 112
Approximately $89,732,000 and $71,205,000 of commercial loans were pledged to the Federal Reserve Bank of Chicago at December 31, 2001 and 2000, to secure overnight borrowings.
NOTE G – PREMISES AND EQUIPMENT
Year end premises and equipment were as follows: 2001 2000
(In Thousands of Dollars)
Land $ 3,641 $ 3,464
Buildings 14,242 13,314
Furniture, fixtures and equipment 12,405 10,100
30,288 26,878
Less: Accumulated depreciation (12,664) (11,196)
$17,624 $15,682
Rent expense for 2001 was $126,000, for 2000 was $130,000, and for 1999 was $106,000. Rental commitments for the next five years under noncancellable operating leases were as follows, before considering renewal options that generally are present.
2002 $137,000
2003 137,000
2004 133,000
2005 127,000
2006 127,000
Total $661,000
NOTE H – FEDERAL INCOME TAXES
Federal income taxes consist of the following: 2001 2000 1999
(In Thousands of Dollars)
Current expense $5,211 $4,055 $3,835
Deferred benefit (699) (150) (305)
Total $4,512 $3,905 $3,530
A reconciliation of the difference between federal income tax expense and the amount computed by applying the federal statutory tax rate of 35% in 2001 and 34% in 2000 and 1999 is as follows:
2001 2000 1999
(In Thousands of Dollars)
Tax at statutory rate $4,772 $4,244 $3,932
Effect of surtax exemption 0 24 16
Effect of tax-exempt interest (428) (463) (544)
Other 168 100 126
Federal income taxes $4,512 $3,905 $3,530
Effective tax rate 33% 31% 31%
The components of deferred tax assets and liabilities consist of the following at December 31:
2001 2000
Deferred tax assets: (In Thousands of Dollars)
Allowance for loan losses $3,863 $3,141
Deferred compensation 863 896
Other 420 305
Total deferred tax assets 5,146 4,342
Deferred tax liabilities:
Fixed assets (1,388) (1,386)
Mortgage servicing rights (562) (396)
Purchase accounting adjustment (444) (517)
Unrealized gain on securities available for sale (573) (190)
Other (202) (192)
Total deferred tax liabilities (3,169) (2,681)
Net deferred tax asset $1,977 $1,661
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefits related to such assets will not be realized. Management has determined that no such allowance is required at December 31, 2001 or 2000.
Deferred tax assets at December 31, 2001 and 2000, are included in other assets in the accompanying consolidated balance sheets.
NOTE I – DEPOSITS
Time deposits of $100,000 or more were $59,419,000 and $57,496,000 at year-end 2001 and 2000.
Scheduled maturities of time deposits were as follows:
Year Amount
(In Thousands of Dollars)
2002 $185,312
2003 31,989
2004 12,995
2005 6,741
2006 4,554
2007 and after 22
Total $241,613
NOTE J - BORROWINGS
Information relating to securities sold under agreements to repurchase follows:<e
At December 31: 2001 2000
(In Thousands of Dollars)
Outstanding balance $32,223 $21,657
Average interest rate 1.62% 4.88%
Daily average for the year:
Outstanding balance $27,558 $23,649
Average interest rate 3.44% 4.62%
Maximum outstanding at any month end $33,336 $26,374
Securities sold under agreements to repurchase (repurchase agreements) generally have original maturities of less than one year. Repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities. Securities involved with the agreements are recorded as assets of the Company and are primarily held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain large deposit customers as deposit equivalent investments.
The Company had no overnight borrowings at December 31, 2001 and $16,650,000 in overnight borrowings at December 31, 2000.
The Company established a line of credit agreement with Citizens Bank, Flint, Michigan, on May 24, 2000, at an interest rate of 8.45%, and renewed on March 1, 2001. This agreement allows for a revolving line of credit up to an aggregate principal amount of $20,000,000. The collateral for this agreement consists of all outstanding capital stock of Firstbank - West Branch, Firstbank Alma, and Firstbank (Mt. Pleasant). At December 31, 2001 and 2000, the Company has drawn $2,700,000 and $6,700,000 against the line of credit at an interest rate of 0.80% under prime which was negotiated on March 1, 2001. This borrowing was made primarily to establish the new bank in St. Johns, Michigan, to fund the stock repurchase program, and to meet other cash needs of Firstbank Corporation.
Firstbank – Alma has notes payable with a total balance of $168,000 and $184,000 at December 31, 2001 and 2000. These notes mature on January 1, 2010 and were part of the consideration paid for a subsidiary which has since been sold.
NOTE K – FEDERAL HOME LOAN BANK ADVANCES
Long term borrowings have been secured from the Federal Home Loan Bank to fund the Company’s loan growth. At year-end, advances from the Federal Home Loan Bank were as follows:
2001 2000
Maturities January 2002 through December 2020 primarily (In Thousands of Dollars)
fixed rate at rates from 1.87% to 7.3% averaging 5.43% $72,747 $77,068
Each Federal Home Loan Bank advance is payable at its maturity date, with a prepayment penalty. The advances were collateralized by $162,332,000 and $176,497,000 of first mortgage loans under a blanket lien arrangement at year-end 2001 and 2000.
Maturities over the next five years are: (In Thousands of Dollars)
2002 $ 3,500
2003 8,000
2004 1,500
2005 11,122
2006 0
2007 and after 48,625
$72,747
NOTE L – BENEFIT PLANS
The ESOP is a qualified stock bonus plan, a qualified 401(k) salary deferral plan and a qualified employee stock ownership plan. Both employee and employer contributions may be made to the ESOP. At year-end 2001 and 2000, there were 191,107 and 191,655 ESOP shares outstanding with a market value of $3,660,000 and $3,665,000. The Company’s 2001, 2000, and 1999, matching 401(k) contributions charged to expense were $326,000, $274,000, and $276,000, respectively. The percent of the Company’s matching contributions to the 401(k) is determined annually by the Board of Directors.
The Board of Directors established the Firstbank Corporation Affiliate Deferred Compensation Plan (Plan). Directors of the holding company and each affiliate bank are eligible to participate in the Plan. In addition, key management of the holding company and affiliate banks as designated by the Board of Directors, are eligible to participate. The Plan is a nonqualified plan as defined by the Internal Revenue Code. As such, all contributions are invested at the recommendation of the participant and are assets of the Company. The Company recognizes a corresponding liability to each participant. The Plan allows Directors to defer their director fees and key management to defer a portion of their salaries into the Plan.
NOTE M – STOCK OPTIONS
The Firstbank Corporation Stock Option Plans of 1993 and 1997 ("Plans"), as amended, provide for the grant of 310,266 and 465,256 shares of stock, respectively, in either restricted form or under option. Options may be either incentive stock options or nonqualified stock options. The Plan of 1993 will terminate April 26, 2003. The 1997 Plan will terminate April 28, 2007. The Board, at its discretion, may terminate either or both Plans prior to the Plans’ termination dates.
Each option granted under the Plans may be exercised in whole or in part during such period as is specified in the option agreement governing that option. Options are issued with exercise prices equal to the stock’s market value at date of issuance. The length of time available for a nonqualified stock option to be exercised is governed by each option agreement, but has not been more than ten years from the grant date. Incentive stock options may not be exercised after ten years from the grant date. In November, 2001, the Board of Directors changed the ten year vesting schedule to five years with 20% of the options granted vesting each year. The new schedule is retroactive to the 1993 options. To date, the accelerated vesting schedule had no impact on compensation expense or net income as reported. However, the accelerated vesting schedule did impact 2001 pro forma net income and earnings per share, disclosed below, due to an increase in pro forma compensation expense for 2001. The following is a summary of option transactions which occurred during 1999, 2000, and 2001:
Number Weighted
of Shares Average
Outstanding - January 1, 1999 451,813 $15.04
Granted 47,810 $19.66
Exercised (58,157) $ 9.33
Canceled (13,564) $18.95
Outstanding - December 31, 1999 427,902 $16.20
Granted 57,330 $18.14
Exercised (15,437) $ 8.36
Canceled (22,937) $17.96
Outstanding - December 31, 2000 446,858 $16.62
Granted 47,670 $17.25
Exercised (11,042) $ 9.30
Canceled (17,493) $19.89
Outstanding - December 31, 2001 465,993 $16.73
Available for grant - December 31, 2001 188,420
Available for exercise - December 31, 2001 325,612 $15.53
Available for exercise - December 31, 2000 241,570 $14.86
Available for exercise - December 31, 1999 195,216 $13.53
Financial Accounting Standards No. 123,Accounting for Stock Based Compensation (SFAS 123) establishes a fair value based method of accounting for employee stock options. Accordingly, the following pro forma information presents net income and earnings per share information as if SFAS 123 had been adopted. No compensation cost was actually recognized for stock options in 2001, 2000, or 1999.
2001 2000 1999
Net income as reported $9,122,000 $8,543,000 $8,036,000
Pro forma net income $8,684,000 $8,424,000 $7,923,000
Basic earnings per share as reported $1.80 $1.67 $1.54
Pro forma basic earnings per share $1.72 $1.65 $1.52
Diluted earnings per share as reported $1.78 $1.65 $1.51
Pro forma diluted earnings per share $1.69 $1.62 $1.49
In future years, the pro forma effect under this standard is expected to increase as additional options are granted.
The fair value of options granted during 2001, 2000, and 1999, is estimated using the Black-Scholes model and the following weighted average information: risk free interest rate of 4.52%, 5.71%, and 6.28%, expected life of 7 years; expected volatility of stock price of 19.7%, 19.8%, and 36.2%, and expected dividends of 3% per year. The fair value of the options granted in 2001, 2000, and 1999, were $167,000, $254,000, and $235,000, respectively. For options outstanding at December 31, 2001, the range of exercise prices was $7.01 to $26.33 and the weighted average remaining contractual life was 6.3 years.
NOTE N – RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2001 were as follows:
(In Thousands of Dollars)
Beginning balance $24,736
New loans 30,420
Effect of changes in related parties (1,434)
Repayments (27,264)
Ending balance $26,458
Deposits from principal officers, directors, and their affiliates at year end 2001 and 2000 were $12,511,000 and $10,710,000.
NOTE O – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
Financial instruments with off-balance-sheet risk were as follows at year end:
2001 2000
(In Thousands of Dollars)
Fixed Rate Variable Rate Fixed Rate Variable Rate
Commitments to make loans
(at market rates) $38,883 $11,975 $6,830 $5,057
Unused lines of credit and
letters of credit $10,910 $50,826 $10,690 $53,652
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments have interest rates ranging from 3.2% to 11.5% and maturities ranging from 15 years to 30 years.
NOTE P - CONTINGENCIES
From time to time certain claims are made against the Company and its banking subsidiaries in the normal course of business. There were no outstanding claims considered by management to be material at December 31, 2001.
NOTE Q - DIVIDEND LIMITATION OF SUBSIDIARIES
Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends the banks can pay to the Company. At December 31, 2001, using the most restrictive of these conditions for each bank, the aggregate cash dividends that the banks can pay the Company without prior approval was $20,700,000. It is not the intent of management to have dividends paid in amounts which would reduce the capital of the banks to levels below those which are considered prudent by management and in accordance with guidelines of regulatory authorities.
NOTE R - CAPITAL ADEQUACY
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
To Be Well
Actual and required capital amounts at year end Minimum Required Capitalized Under
(in thousands of dollars) and ratios are presented below: For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
2001 Amount Ratio Amount Ratio Amount Ratio
Total Capital to risk weighted assets
Consolidated $69,649 12.41% $44,883 8.00% $56,104 10.00%
Firstbank - Alma 21,577 12.23% 14,118 8.00% 17,647 10.00%
Firstbank (Mt. Pleasant) 14,182 11.82% 9,600 8.00% 12,001 10.00%
Firstbank - West Branch 15,339 11.14% 11,020 8.00% 13,775 10.00%
Firstbank - Lakeview 12,239 13.87% 7,060 8.00% 8,826 10.00%
Firstbank - St. Johns 4,032 14.69% 2,195 8.00% 2,744 10.00%
Tier 1 (Core) Capital to risk weighted assets
Consolidated $62,726 11.18% $22,441 4.00% $33,662 6.00%
Firstbank - Alma 19,349 10.96% 7,059 4.00% 10,588 6.00%
Firstbank (Mt. Pleasant) 12,674 10.56% 4,800 4.00% 7,200 6.00%
Firstbank - West Branch 13,607 9.88% 5,510 4.00% 8,265 6.00%
Firstbank - Lakeview 11,131 12.61% 3,530 4.00% 5,295 6.00%
Firstbank - St. Johns 3,687 13.44% 1,098 4.00% 1,646 6.00%
Tier 1 (Core) Capital to average assets
Consolidated $62,726 8.35% $30,063 4.00% $37,579 5.00%
Firstbank - Alma 19,349 7.69% 10,067 4.00% 12,584 5.00%
Firstbank (Mt. Pleasant) 12,674 8.43% 6,012 4.00% 7,515 5.00%
Firstbank - West Branch 13,607 7.34% 7,414 4.00% 9,267 5.00%
Firstbank - Lakeview 11,131 9.03% 4,929 4.00% 6,161 5.00%
Firstbank - St. Johns 3,687 10.92% 1,351 4.00% 1,689 5.00%
2000
Total Capital to risk weighted assets
Consolidated $61,691 11.28% $43,736 8.00% $54,669 10.00%
Firstbank - Alma 21,387 12.34% 13,860 8.00% 17,324 10.00%
Firstbank (Mt. Pleasant) 14,340 11.10% 10,337 8.00% 12,922 10.00%
Firstbank - West Branch 15,361 10.80% 11,383 8.00% 14,229 10.00%
Firstbank - Lakeview 12,158 13.68% 7,112 8.00% 8,890 10.00%
Firstbank - St. Johns 3,940 25.54% 1,234 8.00% 1,542 10.00%
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
2000, cont. Amount Ratio Amount Ratio Amount Ratio
Tier 1 (Core) Capital to risk weighted assets
Consolidated $54,820 10.03% $21,868 4.00% $32,802 6.00%
Firstbank - Alma 19,199 11.08% 6,930 4.00% 10,395 6.00%
Firstbank (Mt. Pleasant) 12,761 9.88% 5,169 4.00% 7,753 6.00%
Firstbank - West Branch 13,570 9.54% 5,692 4.00% 8,538 6.00%
Firstbank - Lakeview 11,043 12.42% 3,556 4.00% 5,334 6.00%
Firstbank - St. Johns 3,773 24.46% 617 4.00% 925 6.00%
Tier 1 (Core) Capital to average assets
Consolidated $54,820 7.77% $28,205 4.00% $35,257 5.00%
Firstbank - Alma 19,199 8.21% 9,359 4.00% 11,698 5.00%
Firstbank (Mt. Pleasant) 12,761 8.17% 6,244 4.00% 7,806 5.00%
Firstbank - West Branch 13,570 7.24% 7,497 4.00% 9,371 5.00%
Firstbank - Lakeview 11,043 9.00% 4,909 4.00% 6,136 5.00%
Firstbank - St. Johns 3,773 19.08% 791 4.00% 989 5.00%
NOTE S – FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as follows at year-end:
2001 2000
Carrying Carrying
(In Thousands of Dollars) or Notional Fair or Notional Fair
Amount Value Amount Value
Financial assets:
Cash and cash equivalents $ 45,814 $ 45,814 $ 28,096 $ 28,096
Securities available for sale 67,345 67,345 71,843 71,843
Federal Home Loan Bank stock 4,633 4,633 4,332 4,332
Loans held for sale 5,722 5,722 1,018 1,018
Loans, net 589,316 590,917 589,892 588,671
Accrued interest receivable 3,595 3,595 4,623 4,623
Financial liabilities:
Deposits $(561,139) $(563,273) $(537,224) $(539,347)
Securities sold under agreements to repurchase
and overnight borrowings 32,223 32,223 (38,307) (38,307)
Federal Home Loan Bank advances (72,747) (76,124) (77,068) (72,640)
Notes payable (2,868) (2,906) (6,884) (6,884)
Accrued interest payable (1,319) (1,319) (1,977) (1,977)
The methods and assumptions used to estimate fair value are described as follows.
Carrying amount is the estimated fair value for cash and cash equivalents, short term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off balance sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements. The fair value of off balance sheet items were not material to the consolidated financial statements at December 31, 2001 and 2000
NOTE T – BASIC AND DILUTED EARNINGS PER SHARE
(In Thousands, except per share data) Year Ended December 31
2001 2000 1999
Basic earnings per share
Net income $9,122 $8,543 $8,036
Weighted average common shares outstanding 5,055 5,108 5,207
Basic earnings per share $ 1.80 $ 1.67 $ 1.54
Diluted earnings per share
Net income $9,122 $8,543 $8,036
Weighted average common shares outstanding 5,055 5,108 5,207
Add dilutive effects of assumed exercises of options 75 78 128
Weighted average common and dilutive potential
common shares outstanding 5,130 5,186 5,335
Diluted earnings per share $ 1.78 $ 1.65 $ 1.51
Stock options for 257,503, 274,065, and 98,638 shares of common stock were not considered in computing diluted earnings per share for 2001, 2000, and 1999 because they were antidulitive.
NOTE U - FIRSTBANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
(In Thousands of Dollars)
CONDENSED BALANCE SHEETS December 31
2001 2000
ASSETS
Cash and cash equivalents $ 1,108 $ 258
Securities available for sale 0 26
Commercial loans 1,300 0
Investment in and advances to banking subsidiaries 66,201 65,381
Other assets 9,635 7,948
Total assets $78,244 $73,613
LIABILITIES AND EQUITY
Accrued expenses and other liabilities $ 3,118 $ 2,709
Notes payable 2,700 6,700
Shareholders' equity 72,426 64,204
Total liabilities and shareholders' equity $78,244 $73,613
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31 2001 2000 1999
Dividends from banking subsidiaries $10,302 $6,323 $4,890
Other income 3,950 137 330
Other expense (5,785) (1,457) (1,052)
Income before income tax and undistributed
subsidiary income 8,467 5,003 4,168
Income tax benefit 532 342 139
Equity in undistributed subsidiary income 123 3,198 3,729
Net income 9,122 8,543 8,036
Change in unrealized gain(loss) on securities,
net of tax and classification effects 698 1,032 (1,767)
Comprehensive income $ 9,820 $9,575 $6,269
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31 2001 2000 1999
Cash flows from operating activities
Net income $9,122 $8,543 $8,036
Adjustments:
Equity in undistributed subsidiary income (122) (3,198) (3,729)
Change in other assets (1,687) (7) (507)
Change in other liabilities 409 (218) 315
Net cash from operating activities 7,722 5,120 4,115
Cash flows from investing activities
Purchases of securities available for sale 0 (9)
Proceeds from sale of securities available for sale 26
Net increase in commercial loans (1,300)
Payments for investments in subsidiaries 0 (5,515) (2)
Net cash from investing activities (1,274) (5,524) (2)
Cash flows from financing activities
Proceeds from issuance of long-term debt 1,400 6,700
Payments of long-term debt (5,400)
Proceeds from stock issuance 1,845 1,965 2,656
Purchase of common stock (24) (5,227) (4,793)
Dividends paid and cash paid in lieu of
fractional shares on stock dividend (3,419) (3,141) (2,874)
Net cash from financing activities (5,598) 297 (5,011)
Net change in cash and cash equivalents 850 (107) (898)
Beginning cash and cash equivalents 258 365 1,263
Ending cash and cash equivalents $1,108 $ 258 $ 365
NOTE V – OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows (In Thousands of Dollars):
2001 2000 1999
Unrealized holding gains and losses on
available-for-sale securities $1,102 $1,562 $(2,680)
Less reclassification adjustments for
gains and losses later recognized in income 28 (2) (1)
Net unrealized gains and losses 1,074 1,564 (2,679)
Tax effect (376) (532) 912
Other comprehensive income $ 698 $1,032 $(1,767)
NOTE W - QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands of Dollars, except per share data)
2001
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Interest income $14,366 $14,277 $13,876 $13,479 $55,998
Net interest income 7,312 7,725 7,935 8,433 31,405
Income before federal income taxes 2,342 3,539 3,693 4,060 13,634
Net income 1,612 2,418 2,503 2,589 9,122
Basic earnings per share 0.32 0.48 0.49 0.51 1.80
Diluted earnings per share 0.32 0.48 0.48 0.50 1.78
2000
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Interest income $12,554 $13,232 $14,060 $14,486 $54,332
Net interest income 6,967 7,132 7,292 7,414 28,805
Income before federal income taxes 3,022 3,170 3,109 3,147 12,448
Net income 2,110 2,140 2,142 2,151 8,543
Basic earnings per share 0.41 0.42 0.42 0.43 1.68
Diluted earnings per share 0.40 0.42 0.41 0.42 1.65
All per share amounts have been adjusted for stock dividends and stock splits.
FIRSTBANK CORPORATION
| BOARD OF DIRECTORS William E. Goggin, Chairman Chairman, Firstbank - Alma Attorney, Goggin & Baker Duane A. Carr Attorney, Carr & Mullendore, PC Edward B. Grant, Ph.D., CPA Chairman, Firstbank (Mt. Pleasant) General Manager Public Broadcasting, Central Michigan University Benson S. Munger, Ph.D. Chairman, Firstbank - St. Johns Vice President, Data Harbor Inc. Phillip G. Peasley Operations Manager, Peasley's Hardware & Carpeting Inc. (Retail) David D. Roslund, CPA Administrator, Wilcox Health Care Center (Long-Term Care Facility) Small Business Investor and Manager Jeffrey C. Schubert, D.D.S. Dentist Thomas R. Sullivan President & Chief Executive Officer, Firstbank Corporation President & Chief Executive Officer, Firstbank (Mt. Pleasant) | OFFICERS Thomas R. Sullivan President & Chief Executive Officer Samuel G. Stone Executive Vice President, Chief Financial Officer, Secretary & Treasurer William L. Benear Vice President David L. Miller Vice President Dale A. Peters Vice President James M. Taylor Vice President James E. Wheeler, II Vice President NON-BANK SUBSIDIARY Gladwin Land Company |
| FIRSTBANK CORPORATION 311 Woodworth Avenue P. O. Box 1029 Alma, Michigan 48801 (989) 463-3131 | Firstbank Corporation Operations Center 308 Woodworth Avenue Alma, Michigan 48801 |
| FIRSTBANK - ALMA BOARD OF DIRECTORS William E. Goggin, Chairman Chairman, Firstbank Corporation Attorney, Goggin & Baker Bob M. Baker President and CEO, Gratiot Community Hospital Martha A. Bamfield, D.D.S. Dentist, Nester & Bamfield, DDS, PC Donald W. Crumbaugh Agriculture Edward J. DeGroat, CCIM Commercial Real Estate Operator Paul C. Lux Owner, Lux Funeral Homes, Inc. Phillip G. Peasley Operations Manager, Peasley's Hardware & Carpeting Inc. David D. Roslund, CPA Administrator, Wilcox Health Care Center Small Business Investor and Manager Victor V. Rozas, MD Physician Thomas R. Sullivan President & Chief Executive Officer, Firstbank Corporation President & Chief Executive Officer, Firstbank (Mt. Pleasant) Saundra J. Tracy, Ph.D. President, Alma College James E. Wheeler, II President & Chief Executive Officer, Firstbank - Alma Vice President, Firstbank Corporation | OFFICERS James E. Wheeler, II President & Chief Executive Officer Gregory A. Daniels Vice President Marita A. Harkness Vice President Gerald E. Kench Vice President Timothy M. Lowe Vice President Harmony L. Nowlin Vice President Joan S. Welke Vice President SUBSIDIARY Firstbank - Alma Mortgage Company |
OFFICE LOCATIONS
| Alma 7455 N. Alger Rd. (989) 463-3134 230 Woodworth Ave. (989) 463-3137 311 Woodworth Ave. (989) 463-3131 | Ashley 114 S. Sterling St. (989) 847-2394 Merrill 125 W. Saginaw St. (989) 643-7253 Riverdale/Vestaburg 9002 W. Howard City-Edmore Rd. (989) 268-5445 | Auburn 4710 S. Garfield Rd. (989) 662-4459 St. Charles 102 Pine St. (989) 865-9918 | Ithaca 219 E. Center St. (989) 875-4107 St. Louis 135 W. Washington Ave. (989) 681-5758 |
| FIRSTBANK BOARD OF DIRECTORS Edward B. Grant, Ph.D., CPA, Chairman General Manager, Public Broadcasting, Central Michigan University Ralph M. Berry Owner, Berry Funeral Home Kenneth C. Bovee, CPM Partner, Keystone Property Management, Inc. Glen D. Blystone, CPA Blystone & Bailey, CPAs, PC Sibyl M. Ellis President, Someplace Special, Inc. Douglas N. LaBelle Partner, LaBelle Management Robert E. List, CPA Shareholder, Weinlander Fitzhugh Manager, Clare and Gladwin Offices William M. McClintic Attorney, W.M. McClintic, P.C. Phillip R. Seybert President, P.S. Equities, Inc. Thomas R. Sullivan President & Chief Executive Officer, Firstbank Corporation President & Chief Executive Officer, Firstbank (Mt. Pleasant) Gail F. Torreano President, SBC Ameritech Michigan Arlene A. Yost Secretary and Treasurer, Jay's Sporting Goods, Inc. | OFFICERS Thomas R. Sullivan President and Chief Executive Officer Mark B. Perry Senior Vice President Robert L. Wheeler Senior Vice President James L. Binder Vice President Cheryl Gaudard Vice President Douglas J. Ouellette Vice President Daniel J. Timmins Vice President Roger L. Trudell Vice President SUBSIDIARY Firstbank - Mt. Pleasant Mortgage Company |
OFFICE LOCATIONS
| Mt. Pleasant 102 S. Main St. (989) 773-2600 4699 E. Pickard St. (989) 773-2335 2013 S. Mission St. (989) 773-3959 1925 E. Remus Rd. (989) 775-8528 | Clare 806 N. McEwan Ave. (989) 386-7313 | Shepherd 258 W. Wright Ave. (989) 828-6625 | Winn 2783 Blanchard Rd. (989) 866-2210 |
| FIRSTBANK - WEST BRANCH BOARD OF DIRECTORS Dale A. Peters, Chairman President and Chief Executive Officer, Firstbank - West Branch Vice President, Firstbank Corporation Bryon A. Bernard CEO, Bernard Building Center Joseph M. Clark Owner, Morse Clark Furniture David W. Fultz Owner, Fultz Insurance Agency Robert T. Griffin Owner and President, Griffin Beverage Company, Northern Beverage Co., and West Branch Tank & Trailer Charles A. Hanes C.A. Hanes, Inc. Christine R. Juarez Attorney, Juarez & Juarez, PLLC Norman J. Miller Owner, Miller Farms, and Miller Dairy Equipment and Feed Jeffrey C. Schubert, D.D.S. Dentist Camila J. Steckling, CPA Weinlander-Fitzhugh, P.C. Certified Public Accountants & Consultants Thomas R. Sullivan President & Chief Executive Officer, Firstbank Corporation President & Chief Executive Officer, Firstbank (Mt. Pleasant) Mark D. Weber, MD Orthopaedic Surgeon | OFFICERS Dale A. Peters President and Chief Executive Officer Daniel H. Grenier Executive Vice President Michael F. Ehinger Vice President Danny J. Gallagher Vice President Eileen S. McGregor Vice President W. John Powell Vice President Larry M. Schneider Vice President Mark D. Wait Vice President Marie A. Wilkins Vice President SUBSIDIARIES 1st Armored, Incorporated 1st Title, Incorporated C.A. Hanes Realty Inc. Firstbank - West Branch Mortgage Company |
OFFICE LOCATIONS
| West Branch 502 W. Houghton Ave. (989) 345-7900 601 W. Houghton Ave. (989) 345-7900 2087 S. M-76 (989) 345-5050 2375 M-30 (989) 345-6210 | Fairview 1979 Miller Rd. (989) 848-2243 Rose City 505 S. Bennett St. (989) 685-3909 | Hale 3281 M-65 (989) 728-7566 St. Helen 2040 N. St. Helen Rd. (989) 389-1311 | Higgins Lake 4522 W. Higgins Lake Dr. (989) 821-9231 |
| FIRSTBANK - LAKEVIEW BOARD OF DIRECTORS Gerald L. Nielsen, Chairman Owner, Nielsen's TV & Appliances William L. Benear President and Chief Executive Officer, Firstbank - Lakeview Vice President, Firstbank Corporation Duane A. Carr Attorney, Carr & Mullendore V. Dean Floria Sheridan Township Supervisor Chalmer Gale Hixson Owner, Country Corner Supermarket Owner, A Flair for Hair Owner, Harry Chalmers, Inc. Owner, Powderhorn Ranch Kenneth A. Rader Owner, Ken Rader Farms Thomas R. Sullivan President & Chief Executive Officer, Firstbank Corporation President & Chief Executive Officer, Firstbank (Mt. Pleasant) | OFFICERS William L. Benear President and Chief Executive Officer Kim D. vonKronenberger Vice President SUBSIDIARY Firstbank - Lakeview Mortgage Company |
OFFICE LOCATIONS
| Lakeview 506 Lincoln Ave. (989) 352-7271 9531 N Greenville Rd. (989) 352-8180 | Canadian Lakes 10049 Buchanan Rd. Stanwood, MI (231) 972-4200 | Howard City 20020 Howard City/Edmore Rd. (231) 937-4383 Remus 201 W Wheatland Ave. (989) 967-3602 | Morley 101 E 4th St. (231) 856-7652 |
| FIRSTBANK - ST. JOHNS BOARD OF DIRECTORS Benson S. Munger, Ph.D., Chairman Vice President, Data Harbor, Inc. Ann M. Flermoen, D.D.S. Dentist William G. Jackson Attorney, William G. Jackson, P.C. Donald A. Rademacher Owner, RSI Home Improvement, Inc. John M. Sirrine Owner, John M. Sirrine & Associates, Inc., Accountants Samuel A. Smith Owner, Smith Funeral Homes, Inc. Thomas R. Sullivan President & Chief Executive Officer, Firstbank Corporation President & Chief Executive Officer, Firstbank (Mt. Pleasant) James M. Taylor President & Chief Executive Officer, Firstbank - St. Johns Vice President, Firstbank Corporation Robert E. Thompson Consultant | OFFICERS James M. Taylor President and Chief Executive Officer Craig A. Bishop Vice President SUBSIDIARY Firstbank - St. Johns Mortgage Company |
OFFICE LOCATIONS
| St. Johns 201 N. Clinton Ave. (989) 227-8383 |
BUSINESS OF THE COMPANY
Firstbank Corporation (the "Company") is a bank holding company. As of December 31, 2001, the Company’s subsidiaries are Firstbank - Alma; Firstbank (Mt. Pleasant); Firstbank - West Branch; Firstbank - Lakeview; Firstbank - St. Johns; 1st Armored, Incorporated; Gladwin Land Company; 1st Title, Incorporated; and C.A. Hanes Realty. As of December 31, 2001, the Company and its subsidiaries employed 347 people on a full-time equivalent basis.
The Company is in the business of banking. Each subsidiary bank of the Company is a full service community bank. The subsidiary banks offer all customary banking services, including the acceptance of checking, savings and time deposits, and the making of commercial, agricultural, real estate, personal, home improvement, automobile and other installment and consumer loans. Firstbank - Alma also offers trust services. Deposits of each of the banks are insured by the Federal Deposit Insurance Corporation.
The banks obtain most of their deposits and loans from residents and businesses in Bay, Clare, Gratiot, Iosco, Isabella, Mecosta, Midland, Montcalm, Ogemaw, Oscoda, Roscommon, Saginaw and parts of Clinton County. Firstbank - Alma has its main office and one branch in Alma, Michigan, and one branch located in each of the following areas: Ashley, Auburn, Ithaca, Merrill, Pine River Township (near Alma), St. Charles, St. Louis, and Vestaburg, Michigan. Firstbank (Mt. Pleasant) has its main office in Mt. Pleasant, Michigan, two branches located in Union Township (near Mt. Pleasant), and one branch located in each of the following areas: Clare, Mt. Pleasant, Shepherd, and Winn, Michigan. Firstbank - West Branch has its main office in West Branch, Michigan, and one branch located in each of the following areas: Fairview, Hale, Higgins Lake, Rose City, St. Helen, and West Branch Township (near West Branch), Michigan. Firstbank -Lakeview has its main office and one branch in Lakeview, Michigan, and one branch located in each of the following areas: Canadian Lakes, Howard City, Morley, and Remus. The banks have no material foreign assets or income.The principal sources of revenues for the Company and its subsidiaries are interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for approximately 79% of total revenues in 2001, 82% in 2000, and 78%in 1999. Interest on securities accounted for approximately 6% of total revenues in 2001, 8% in 2000, and 10% in 1999. No other single source of revenue accounted for 8% of the Company’s total revenues in any of the last 3 years.
| CORPORATE INFORMATION Annual Meeting: The annual meeting of shareholders will be held on Monday, April 22, 2002, 4:30 p.m., Heritage Center, Alma College, Alma, Michigan Independent Auditors: Crowe, Chizek & Company LLP Grand Rapids, Michigan General Counsel: Varnum Riddering Schmidt & Howlett LLP Grand Rapids, Michigan | Stock Information: Organizations making a market in Firstbank Corporation Common Stock include: Fahnestock & Co., Inc. Howe, Barnes Investments, Inc. Keefe, Bruyette & Woods, Inc. McDonald Investments Morgan Stanley RBC Dain Rauscher, Inc. Stifel, Nicolaus & Company, Inc. For research information and/or investment recommendations, contact: Fahnestock & Co., Inc. (800) 863-5434 Stifel, Nicolaus & Company, Inc. (314) 342-2000 Registrar and Transfer Company is Firstbank Corporation's Transfer Agent. You may contact the Investor Relations Department at: (800) 368-5948 |
EXHIBIT 21
FIRSTBANK CORPORATION SUBSIDIARIES
| NAME | STATE OF INCORPORATION | OWNERSHIP |
| Firstbank - Alma | Michigan | 100% |
| Firstbank | Michigan | 100% |
| Firstbank - West Branch | Michigan | 100% |
| Firstbank - Lakeview | Michigan | 100% |
| Firstbank - St. Johns | Michigan | 100% |
| Gladwin Land Company | Michigan | 100% |
| 1st Armored, Inc. | Michigan | 100% by Firstbank - West Branch |
| 1st Title, Inc. | Michigan | 100% by Firstbank - West Branch |
| C.A. Hanes Realty, Inc. | Michigan | 55% by Firstbank - West Branch |
| Firstbank - Alma Mortgage Company | Michigan | 100% by Firstbank - Alma |
| Firstbank Mortgage Company | Michigan | 100% by Firstbank |
| Firstbank - West Branch Mortgage Company | Michigan | 100% by Firstbank - West Branch |
| Firstbank - Lakeview Mortgage Company | Michigan | 100% by Firstbank - Lakeview |
| Firstbank - St. Johns Mortgage Company | Michigan | 100% by Firstbank - St. Johns |
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of Firstbank Corporation on Form S-8 (File Nos. 333-60190, 333-95427, 333-89771 and 333-53957) and Form S-3 (File No. 333-15131 and ) of our report dated February 1, 2002, on the 2001 Consolidated Financial Statements of Firstbank Corporation, which report is included in the 2001 Annual Report on Form 10-K of Firstbank Corporation.
| ||
| CROWE, CHIZEK AND COMPANY LLP | ||
| Grand Rapids, Michigan March 12, 2002 |
EXHIBIT 99
Firstbank Corporation 401(k) Plan
Performance Table*
VALUE VALUE VALUE VALUE VALUE
AS OF AS OF AS OF AS OF AS OF
FUND 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001
Firstbank Corporation Common 44.203% 26.495% -31.288% 5.37% 9.45%
Stock $1,442.03 $1,824.10 $1,253.37 $1,320.68 $1,445.48
Federated Money Market for 5.22% 5.11% 4.64% 5.33% 4.16%
U.S. Treasury Obligations $1,052.20 $1,105.97 $1,157.28 $1,218.96 $1,269.67
Federated Capital Preservation 5.86% 5.64% 5.57% 5.97% 5.08%
Fund $1,058.60 $1,118.31 $1,180.59 $1,251.07 $1,314.62
Vanguard Fixed Income 9.44% 8.60% -.70% 10.72% 8.20%
Total Bond Fund $1,094.40 $1,188.52 $1,180.20 $1,306.72 $1,413.87
Vanguard Fixed Income 13.79% 9.20% -6.23% 11.08% 9.63%
Long Term Corporate Bond Fund $1,137.90 $1,242.59 $1,165.17 $1,294.27 $1,418.91
Federated Stock 34.42% 17.26% 6.08% 2.82% 0.89%
$1,344.20 $1,576.21 $1,672.04 $1,719.19 $1,734.49
Vanguard Index 500 Fund 33.21% 28.60% 21.07% -9.06% -12.02%
$1,332.10 $1,713.08 $2,074.03 $1,886.12 $1,659.41
American Century 20th Century 23.13% 34.55% 41.46% -19.63% 14.61%
Ultra $1,231.30 $1,656.71 $2,343.59 $1,883.54 $1,608.35
Warburg Pincus 21.27% 5.82% 41.81% -10.56% -24.81%
Emerging Growth Fund $1,212.70 $1,283.28 $1,819.82 $1,627.65 $1,223.83
T. Rowe Price International 2.70% 16.14% 34.60% -16.57% -21.97%
Stock Fund $1,027.00 $1,192.76 $1,605.45 $1,339.43 $1,045.16
Vanguard International Growth 4.12% 16.93% 26.30% -8.57% -19.12%
Fund $1,041.20 $1,217.48 $1,537.67 $1,405.89 $1,137.08
Fidelity Overseas Fund 10.92% 12.84% 42.89% -18.44% -20.22%
$1,109.20 $1,251.62 $1,788.44 $1,458.65 $1,163.71
American Century 20th Century 17.48% 17.86% 88.54% -14.29% -21.77%
International Discovery Fund $1,174.80 $1,384.62 $2,610.56 $2,237.51 $1,750.40
*All assume an initial investment on 12/31/96 of $1,000.00