| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the quarterly period ended JUNE 30, 2002
or
| [ ] | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transaction period from ______ to _______.
Commission file number: 0-14209
FIRSTBANK CORPORATION
(Exact name of registrant as specified in its charter)
| Michigan (State or other jurisdiction of incorporation or organization) | 38-2633910 (I.R.S. Employer Identification Number) |
| 311 Woodworth Avenue, Alma, Michigan (Address of principal executive offices) | 48801 (Zip Code) |
Registrant's telephone number, including area code: (989) 463-3131
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common stock . . . 5,175,957 shares outstanding as of July 31, 2002.
INDEX
| Page | ||
| PART I.FINANCIAL INFORMATION | | |
| Item 1. Item 2. Item 3. | Financial Statements (UNAUDITED) Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk | 3 11 16 |
| PART II.OTHER INFORMATION | | |
| Item 1. Item 2. Item 3. Item 4. Item 5. Item 6. | Legal Proceedings Changes in Securities and Use of Proceeds Defaults Upon Senior Securities Submission of Matters to a Vote of Securities Holders Other Information Exhibits and Reports on Form 8-K | 17 17 17 17 17 17 |
| SIGNATURES EXHIBITS | 18 19 | |
Page 2
Item 1. Financial Statements (UNAUDITED)
FIRSTBANK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
(Dollars in thousands)
June 30, December 31,
2002 2001
---- ----
ASSETS
Cash and due from banks $24,942 $27,187
Short term investments 11,906 18,627
-------------- ------------
Total cash and cash equivalents 36,848 45,814
Securities available for sale 67,007 67,345
Federal Home Loan Bank Stock 4,746 4,633
Loans
Loans held for sale 1,930 5,722
Portfolio loans
Commercial 312,187 299,412
Real estate mortgage 210,794 228,349
Consumer 74,738 72,593
-------------- ------------
Total loans 597,719 600,354
Less allowance for loan losses (11,279) (11,038)
-------------- ------------
Net loans 586,440 589,316
Premises and equipment, net 17,463 17,624
Acquisition goodwill 5,049 5,161
Other intangibles 3,133 3,282
Accrued interest receivable and other 13,676 13,093
assets
-------------- ------------
TOTAL ASSETS $736,292 $751,990
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing accounts 86,033 86,736
Interest bearing accounts:
Demand 171,774 159,572
Savings 79,004 73,218
Time 216,661 241,613
-------------- ------------
Total deposits 553,472 561,139
Securities sold under agreements to
repurchase and overnight borrowings 28,692 32,223
Notes payable 66,119 75,615
Accrued interest and other liabilities 10,591 10,587
-------------- ------------
Total liabilities 658,874 679,564
SHAREHOLDERS' EQUITY
Preferred stock; no par value, 300,000 shares authorized, none issued
Common stock; 10,000,000 shares authorized, 5,182,468 shares
shares issued and outstanding (5,119,153 in December 2001) 64,341 63,100
Retained earnings 11,781 8,260
Accumulated other comprehensive income 1,296 1,066
-------------- ------------
Total shareholders' equity 77,418 72,426
-------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $736,292 $751,990
============== ============
Page 3
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
JUNE 30, 2002 and 2001
(Dollars in thousands except per share data)
UNAUDITED
Three months
ended June 30,
2002 2001
Interest income:
Interest and fees on loans $11,373 $13,230
Securities
Taxable 586 675
Exempt from federal income tax 291 325
Short term investments 78 47
--------------- ------------
Total interest income 12,328 14,277
Interest expense:
Deposits 3,029 5,069
Notes payable and other 1,019 1,483
--------------- ------------
Total interest expense 4,048 6,552
Net interest income 8,280 7,725
Provision for loan losses 223 228
--------------- ------------
Net interest income after
provision for loan losses 8,057 7,497
Noninterest income:
Gain on sale of mortgage loans 580 622
Service charges on deposit accounts 585 494
Trust fees 35 83
Gain on sale of securities 16 0
Mortgage servicing, net of amortization (102) (39)
Other 957 1,023
--------------- ------------
Total noninterest income 2,071 2,183
Noninterest expense:
Salaries and employee benefits 3,279 3,320
Occupancy 849 768
Amortization of intangibles 131 194
FDIC Insurance premium 25 27
Michigan Single Business Tax 37 124
Other 1,717 1,708
--------------- ------------
Total noninterest expense 6,038 6,141
Income before federal income taxes 4,090 3,539
Federal income taxes 1,333 1,121
--------------- ------------
NET INCOME $2,757 $2,418
=============== ============
Comprehensive Income $3,226 $2,437
=============== ============
Basic earnings per share $0.53 $0.48
=============== ============
Diluted earnings per share $0.52 $0.47
=============== ============
Dividends per share $0.19 $0.17
=============== ============
See notes to consolidated financial statements.
Page 4
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
JUNE 30, 2002 and 2001
(Dollars in thousands except per share data)
UNAUDITED
Six months
ended June 30,
2002 2001
Interest income:
Interest and fees on loans $23,004 $26,453
Securities
Taxable 1,193 1,387
Exempt from federal income tax 591 660
Short term investments 209 143
--------------- ------------
Total interest income 24,997 28,643
Interest expense:
Deposits 6,292 10,389
Notes payable and other 2,132 3,217
--------------- ------------
Total interest expense 8,424 13,606
Net interest income 16,573 15,037
Provision for loan losses 595 431
--------------- ------------
Net interest income after
provision for loan losses 15,978 14,606
Noninterest income:
Gain on sale of mortgage loans 1,582 957
Service charges on deposit accounts 1,128 918
Trust fees 106 172
Gain on sale of securities 9 25
Mortgage servicing, net of amortization (162) 2
Other 1,987 1,984
--------------- ------------
Total noninterest income 4,650 4,058
Noninterest expense:
Salaries and employee benefits 6,825 6,574
Occupancy 1,784 1,657
Amortization of intangibles 261 394
FDIC Insurance premium 49 52
Michigan Single Business Tax 61 256
Other 3,561 3,850
--------------- ------------
Total noninterest expense 12,541 12,783
Income before federal income taxes 8,087 5,881
Federal income taxes 2,663 1,851
--------------- ------------
NET INCOME $5,424 $4,030
=============== ============
Comprehensive Income $5,654 $4,477
=============== ============
Basic earnings per share $1.06 $0.80
=============== ============
Diluted earnings per share $1.03 $0.79
=============== ============
Dividends per share $0.37 $0.33
=============== ============
See notes to consolidated financial statements.
Page 5
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 2002 AND 2001
(Dollars in thousands)
UNAUDITED
Six months ended June 30,
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $5,424 $4,030
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 595 431
Depreciation of premises and equipment 819 685
Net amortization of security premiums/discounts 187 84
Gain on sale of securities (9) (25)
Amortization of goodwill and other intangibles 261 394
Gain on sale of mortgage loans (1,582) (957)
Proceeds from sales of mortgage loans 92,226 67,882
Loans originated for sale (86,852) (68,418)
Increase in accrued interest receivable and other assets (706) (510)
Increase in accrued interest payable and other liabilities 4 1,644
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,367 5,240
INVESTING ACTIVITIES
Proceeds from sale of securities available for sale 1,009 2,163
Proceeds from maturities of securities available for sale 24,955 14,715
Purchases of securities available for sale (25,451) (11,159)
Purchases of Federal Home Loan Bank stock (113) (300)
Net decrease (increase) in portfolio loans 2,281 (140)
Net purchases of premises and equipment (658) (856)
------------- --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,023 4,423
FINANCING ACTIVITIES
Net (decrease) increase in deposits (7,667) 9,768
Decrease in securities sold under agreements
to repurchase and other short term borrowings (3,531) (13,249)
Decrease of note payable (9,496) (6,698)
Cash proceeds from issuance of common stock 1,253 971
Purchase of common stock (12) (40)
Cash dividends (1,903) (1,675)
------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (21,356) (10,923)
DECREASE IN CASH AND CASH EQUIVALENTS (8,966) (1,260)
Cash and cash equivalents at beginning of period 45,814 28,096
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $36,848 $26,836
============= ==============
Supplemental Disclosure
Interest Paid $8,733 $13,014
Income Taxes Paid $3,263 $1,190
Non-cash transaction: purchased goodwill $254
See notes to consolidated financial statements.
Page 6
FIRSTBANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
UNAUDITED
NOTE A - FINANCIAL STATEMENTS
The accompanying unaudited financial information presented is for Firstbank Corporation (“Corporation”) and its wholly owned subsidiaries, Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch (including its majority holding in C.A. Hanes Realty, Inc.), Firstbank - Lakeview, Firstbank - St. Johns (collectively the “Banks”) and Gladwin Land Company. The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The balance sheet at December 31, 2001, has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2001.
NOTE B - SECURITIES
Individual securities held in the security portfolio are classified as securities available for sale. Securities might be sold prior to maturity due to changes in interest rates, prepayment risks, yield, availability of alternate 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 is reported, net of related income tax effects, as a separate component of shareholders’ equity until realized.
NOTE C - LOAN COMMITMENTS
Loan commitments (including unused lines of credit and letters of credit) are made to accommodate the financial needs of the Banks’ customers. The commitments have credit risk essentially the same as that involved in extending loans to customers, and are subject to the Corporation’s normal credit policies and collateral requirements. Loan commitments, which are predominately at variable rates, were approximately $116,443,000 and $108,696,000 at June 30, 2002, and December 31, 2001, respectively.
Page 7
NOTE D - NONPERFORMING LOANS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming Loans and Assets
The following table summarizes nonaccrual and past due loans at the dates indicated:
June 30, December 31,
(Dollars in thousands) 2002 2001
- ---------------------- ---------- --------------
Nonperforming loans:
Nonaccrual loans $ 922 $ 501
Loans 90 days or more past due 484 2,089
Renegotiated loans 53 53
------ -------
Total nonperforming loans $1,459 $2,643
Property from defaulted loans $ 500 $ 516
Nonperforming loans as a percent of total loans* .24% .44%
Nonperforming loans + ORE as a percent of total loans* + ORE .33% .53%
Nonperforming assets as a percent of total assets .27% .42%
Analysis of the Allowance for Loan Losses
- ----------------------------------------- Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(Dollars in thousands) 2002 2001 2002 2001
- ---------------------- -------- -------- -------- --------
Balance at beginning of period $11,107 $10,044 $11,038 $ 9,857
Charge-offs (97) (181) (498) (280)
Recoveries 46 73 144 156
------- ------- ------- -------
Net (charge-offs) recoveries (51) (108) (354) (124)
Additions from the provision
for loan losses 223 228 595 431
------- ------- ------- -------
Balance at end of period $11,279 $10,164 $11,279 $10,164
======= ======= ======= =======
Average total loans* outstanding
during the period 590,624 604,608 590,028 602,415
Allowance for loan losses as a
percent of total loans* 1.89% 1.69% 1.89% 1.69%
Allowance for loan losses as a percent
of nonperforming loans 773% 578% 773% 578%
Net Chargeoffs^ as a percent of
average loans* 0.03% 0.07% 0.12% 0.04%
*All loan ratios exclude loans held for sale
^Annualized
Page 8
NOTE E - RECLASSIFICATION
Certain 2001 amounts have been reclassified to conform to the 2002 presentation.
NOTE F - BASIC AND DILUTED EARNINGS PER SHARE
(Dollars in thousands except for per share data) Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Earnings per share
Net Income $2,757 $2,418 $5,424 $4,030
Weighted average common shares outstanding 5,160 5,039 5,141 5,024
----- ----- ----- -----
Basic earnings per share $ 0.53 $ 0.48 $ 1.06 $ 0.80
====== ====== ====== =======
Earnings per share assuming dilution
Net Income $2,757 $2,418 $5,424 $4,030
Weighted average common shares outstanding 5,160 5,039 5,141 5,024
Add dilutive effect of assumed exercises of options 126 69 117 69
------ ------- ------ -------
Weighted average common and dilutive potential
common shares outstanding 5,286 5,108 5,258 5,093
----- ----- ----- -----
Diluted earnings per share $ 0.52 $ 0.47 $ 1.03 $ 0.79
====== ====== ====== =======
Stock options for 83,323 and 267,153 shares of common stock were not considered in computing diluted earnings per share for the three and six month periods of 2002 and 2001 because they were antidilutive.
Page 9
NOTE G - GOODWILL AMORTIZATION
Adoption of a new accounting standard on January 1, 2002, recognized $3,533,000 of unamortized goodwill that will cease to be amortized into expense. According to the related amortization schedules, this will result in an increase of $261,000 in 2002 income. The following table reconciles 2001 net income and earnings per share as reported to adjusted income and earnings per share for the same period as if the new standard had been adopted in 2001, and compares those adjusted results to actual 2002 results.
(Dollars in thousands except for per share data) Three months Six months
ended June 30, ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Income as Reported $2,757 $2,418 $5,424 $4,030
Add Discontinued Goodwill Expense, net of tax 42 84
----- ----- ----- -----
Adjusted net income $2,757 $2,460 $5,424 $4,114
===== ===== ===== =====
As Reported:
Basic earnings per share $0.53 $0.48 $1.06 $0.80
Diluted earnings per share $0.52 $0.47 $1.03 $0.79
As Adjusted:
Basic earnings per share $0.53 $0.49 $1.06 $0.82
Diluted earnings per share $0.52 $0.48 $1.03 $0.81
Intangible assets subject to amortization are as follows:
Gross Accumulated
Amount Amortization
------ ------------
Goodwill premium resulting from branch acquisitions $2,410 $1,146
Core deposit premium resulting from branch acquisitions 5,147 2,014
Goodwill premium from purchase of brokerage customer list 393 141
------ ------
$7,950 $3,301
Amortization expense for the first six months of 2002 was $260. Estimated amortization expense for each of the next five fiscal years is:
2002 $521
2003 $521
2004 $521
2005 $520
2006 $506
Intangible assets not subject to amortization, because they have indefinite lives are as follows:
Gross Accumulated
Amount Amortization
------ ------------
1987 purchase of branch offices from Comerica Bank $ 525 $ 454
1997 purchase of Firstbank - Lakeview 3,617 843
2000 purchase of Gladwin Land, Inc. 342 29
2001 purchase of 55% ownership in CA Hanes Real Estate 404 29
------ ------
$4,888 $1,355
Page 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The consolidated financial information presented is for Firstbank Corporation ("Corporation") and its wholly owned subsidiaries, Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch (including its majority holding in C.A. Hanes Realty, Inc.), Firstbank - Lakeview, Firstbank - St. Johns (collectively the "Banks") and Gladwin Land Company.
Financial Condition
Total assets decreased slightly during the first six months of 2002 declining $15.7 million, or 2.1%, when compared to December 31, 2001. Cash and cash equivalents decreased $8.9 million, or 19.6%. Federal Home Loan Bank Stock increased $113,000, or 2.4%, while securities available for sale and loans held for sale declined $338,000, or 0.5% and $3.8 million, or 66.3%, respectively.
Although total loans decreased $2.6 million, or 0.4%, during the first half of 2002, the commercial loan portfolio grew by $12.8 million, or 4.3%, and the consumer loan portfolio by $2.1 million, or 2.9%. Growth in both the commercial and consumer portfolios was offset by a decrease in mortgage loans of $17.5 million, or 7.7%. The decline in mortgage loans was largely attributable to re-finance activity, where re-financed portfolio loans were sold into the secondary market (with servicing retained by the Corporation).
Net charge-offs of loans increased to $354,000 for the first six months of 2002 compared to $124,000 for the same period in 2001. The ratio of net charge-offs of loans (annualized) to average loans increased to 0.12% in the first half of 2002 compared to 0.04% in the first half of 2001. The provision for loan losses in the first half of 2002, at $595,000, exceeded net charge-offs by $241,000, and resulted in an increase in the allowance for loan loss of $241,000, or 2.2% during the first six months of 2002. At June 30, 2002, the allowance as a percent of outstanding loans was 1.89% compared to 1.84% at year end 2001. Management continues to maintain 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 and composition of the loan portfolio, delinquencies, and other relevant factors, as detailed further under “Results of Operations.”
Total deposits declined $7.7 million, or 1.4%, from December 31, 2001 to June 30, 2002. Increases of $12.2 million, or 7.6%, in interest bearing demand deposits and of $5.8 million, or 7.9%, in savings deposits were offset by decreases of $25.0 million, or 10.3%, in time deposits and of $703,000, or 0.8% in non-interest bearing account balances. For the six month period ended June 30, 2002, securities sold under agreements to repurchase and overnight borrowings decreased by $3.5 million, or 10.9%. Notes payable also decreased by $9.5 million, or 12.5%, from the end of December 2001, to the end of June 2002, as it was not necessary to renew all maturing notes. The reduced deposits and other funding sources were commensurate with the weak demand for funds from lending activities.
Page 11
Total shareholders’ equity increased nearly $5 million, or 6.9%, during the first six months of 2002. Net income of $5,424,000, stock issuances of $1,253,000, and net unrealized appreciation on securities available for sale of $230,000 increased shareholders’ equity, while stock repurchases of $12,000 and cash dividends of $1,903,000 decreased shareholders’ equity. Book value was $14.94 per share at June 30, 2002, up from $14.15 at December 31, 2001. On July 23, 2002, the board of directors authorized the repurchase of up to $10 million of the company’s common stock. The shares will be repurchased from time to time in keeping with the company’s capital needs, including retention of adequate capital to support growth opportunities, and the Corporation’s desire to maintain a “well capitalized” regulatory capital rating.
The following table discloses compliance with current regulatory capital requirements on a consolidated basis:
Total
Tier 1 Risk-based
(Dollars in thousands) Leverage Capital Capital
- --------------------------- -------- ------- -------
Capital balances at June 30, 2002 $67,781 $67,781 $74,731
Required Regulatory Capital $29,444 $22,688 $45,377
Capital in excess of regulatory minimums $38,337 $45,093 $29,354
Capital ratios at June 30, 2002 9.21% 11.95% 13.18%
Regulatory capital ratios -- "well capitalized"
definition 5.00% 6.00% 10.00%
Regulatory capital ratios -- minimum requirement 4.00% 4.00% 8.00%
Results of Operations
For the second quarter of 2002, net income was $2,757,000, basic earnings per share were $0.53, and diluted earnings per share were $0.52 compared to $2,418,000, $0.48, and $0.47 for the second quarter of 2001. Net income for the first half of 2002 was $5,424,000 with basic earnings per share of $1.06 and diluted earnings per share of $1.03, compared to $4,030,000, $0.80, and $0.79 for the first six months of 2001. Net income for 2001 was reduced by a $446,000 one-time charge (net of tax of $230,000) taken in the first quarter of 2001 and discussed in previous disclosures. Basic earnings per share and diluted earnings per share were each reduced by $0.09 in the first half of 2001 due to the one-time charge.
Net income for 2002 was increased as the result of new accounting guidance issued in 2001 which changed the accounting for goodwill and other intangible assets with indefinite lives. Adoption of this standard as required on January 1, 2002, resulted in $3,533,000 of unamortized goodwill ceasing to be amortized into expense and resulted in a $84,000 reduction of expense, net of tax, for the first half of 2002. Applying the new standard to the first six months of 2001 would result in adjusted net income of $4,114,000 with basic earnings per share increased by $0.02 to $0.82 and diluted earnings per share also increased by $0.02 to $0.81.
Average earning assets increased $1.7 million, or 0.25%, from the first half of 2001 to the same period of 2002. The yield on earning assets decreased 122 basis points to 7.36% at June 30, 2002 compared to 8.58% at June 30, 2001. The cost of funding related liabilities decreased 157 basis points when comparing the six month periods ended June 30, from 4.02% of earning assets in 2001 to 2.45% in 2002.
Page 12
Since the decrease in the cost of funds relative to earning assets was greater than the decrease in yield on earning assets, the net interest margin increased 35 basis point from 4.56% in 2001 to 4.91% in 2002. Net interest income increased $1.5 million, or 10.2%, in the first six months of 2002 compared to the same period in 2001.
The provision for loan losses increased $164,000 to $595,000 for the first half of 2002 compared to $431,000 in the first half of 2001. Net charge-offs of loans increased $230,000 as detailed above in the discussion under “Financial Condition.” Also, during 2001, management developed and implemented a more comprehensive quantitative and qualitative methodology for analyzing factors which impact the allowance more consistently across its five banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment growth rates, and industry and regional factors and trends as they affect our banks’ portfolios. The developments in the analysis process since the first quarter of 2001, 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. Maintaining these appropriate levels while experiencing greater net charge-offs required increased provision expense for the first half of 2002 compared to the year earlier level. (See discussion under “Financial Condition” for additional comments on the level of allowance for loan losses.)
Total non-interest income increased $592,000, or 14.6%, during the six month period ended June 30, 2002 when compared to the same period in 2001. Strong mortgage refinance activity has continued into the first half of 2002 and resulted in an increase of $625,000, or 65.3%, in gain on sale of mortgage loans when the first half of 2002 is compared to the first half of 2001. Service fees on deposit accounts for the six month period ended June 30, 2002 posted an increase of $210,000, or 22.9%, over the June 30, 2001 figure. Improved management of fee waivers contributed to the increase. Certain other categories of non-interest income declined, most notably mortgage servicing income, which declined from a positive $2,000 in the first six months of 2001 to a negative $162,000 in the first six months of 2002. The decline was due to the impact of refinances and other pre-payments, which require mortgage servicing rights to be written down or written off against mortgage servicing income. The write-downs and write-offs of mortgage servicing rights in the first half of 2002 totaled $628,000 compared to $342,000 for the first half of 2001. Trust fees declined $66,000, or 38.4%, at June 30, 2002 compared to June 30,2001. As previously disclosed, one bank’s trust department has been assumed by another, unrelated, financial institution.
Total non-interest expense decreased $242,000, or 1.9%, when comparing the six month periods ended June 30, 2002 and 2001. Amortization of intangibles decreased $133,000, or 33.8%, $130,000 of which was related to the accounting change discussed above. Michigan Single Business tax declined by $195,000, or 76.1%, as the company continued to benefit from the reorganization of the mortgage business of each of the five banks into the more efficient and competitive structure of a mortgage company subsidiary. Miscellaneous non interest expense declined by $289,000, or 7.5%. Excluding the one-time charge posted in the first quarter of 2001, miscellaneous expense increased $398,000. Of this figure, $167,000 represents the write-off of contractually obligated processing fees for the trust department of one of the banks and $42,000 represents the cost of upgrading personal computer software to a standard
Page 13
format throughout the Corporation. Salaries and employee benefits increased by $251,000, or 3.8% over the June 30, 2001 figure. Yearly merit raises and evenly accrued year-end bonus payments account for an increase of approximately $420,000 over the June 30, 2001 figure. The increase in salary costs was off-set by a decrease in employee benefits of $168,000. During the second quarter of 2001, increased accruals for employee health coverage were established. Federal Income Tax expense increased by $812,000, or 43.9%, in response to the increased income posted and also as a result of adopting a 35% corporate tax rate. This rate was adopted at year-end 2001 for all of 2001 but was not in place at June 30, 2001.
Analysis of the second quarter of 2002 compared to the second quarter of 2001 provides similar observations as comparisons of the year to date periods.
Total non-interest income showed a small decrease of $112,000, or 5.1%, during the second quarter of 2002 when compared to the same period in 2001. Service charges on deposit accounts posted a $91,000, or 18.4%, increase over the 2001 figure due to improved management of fee collections and fee waivers. The second quarter of 2002 also showed a $16,000 gain from the sale of securities. Certain other categories of non-interest income declined when the second quarter of 2002 is compared to the second quarter of 2001. The largest decrease was seen in mortgage servicing income which decreased from a negative $39,000 in the second quarter of 2001 to a negative $102,000 in the second quarter of 2002 due to the active mortgage refinance market. Trust fees declined $48,000, or 57.8%, when compared to the second quarter of 2001, as the trust contracts of one bank were assumed by another, unrelated, financial institution during the second quarter of 2002. Gains on sale of mortgage loans also declined decreasing $42,000, or 6.8% when the three month period ended June 30, 2002 is compared to the same period in 2001. Other non-interest income declined $66,000, or 6.4% during the same period.
During the second quarter of 2002 non-interest expense decreased $103,000, or 1.7% compared to the second quarter of 2001. Salaries and employee benefit expense showed a decline of $41,000, or 1.2%, which was due to the additional employee health insurance expenses posted during the second quarter of 2001. Amortization expense for intangible assets declined $63,000, or 32.4%, as the result of new accounting guidelines discussed previously. Michigan Single Business tax decreased by $87,000, or 70.1%, as the result of reorganizing each of the five banks mortgage business into a mortgage company subsidiary. These decreases were off-set by increases in certain other categories of non-interest expense, the largest of which was seen in occupancy and equipment costs which rose $81,000, or 10.6% in the second quarter of 2002 compared to the same period in 2001. Most of the increase was the result of depreciation costs associated with facilities and equipment put in place during the last half of 2001. Other non-interest expense increased $9,000, or 0.5%.
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This report contains 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 Corporation itself. Words such as “anticipate,” “believe,” “determine,” “estimate,” “expect,” “forecast,” “intend,” “is likely,” “plan,” “project,” “opinion,” variations of such terms, and similar expressions are intended to identify such forward-looking statements. The presentations and discussions of the provision and allowance for loan losses, and determinations as to the need for other allowances presented in this report are inherently forward-looking statements in that they involve judgements and statements of belief as to the outcome of future events. 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; and the vicissitudes of the national economy. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information under the headings, “Liquidity and Interest Rate Sensitivity” on page 8 and “Quantitative and Qualitative Disclosure About Market Risk” on pages 9 through 10 in the registrant’s annual report to shareholders for the year ended December 31, 2001, is here incorporated by reference. Firstbank’s annual report is filed as Exhibit 13 to its Form 10-K annual report for its fiscal year ended December 31, 2001.
Firstbank 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 Corporation manages this risk with static GAP analysis and simulation modeling. The Corporation does not believe that there has been a material change in the nature of the Corporation’s primary market risk exposures, including the categories of market risk to which the Corporation is exposed and the particular markets that present the primary risk of loss to the Corporation. As of the date of this Form 10-Q Quarterly Report, the Corporation 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 methods by which the Corporation manages its primary market risk exposures, as described in the sections of its Form 10-K Annual Report incorporated by reference in response to this item, have not changed materially during the current year. As of the date of this Form 10-Q quarterly report, the Corporation does not expect to change those methods in the near term. However, the Corporation may change those methods in the future to adapt to changes in circumstances or to implement new techniques.
The Corporation’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 Firstbank’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” on the preceding page of this Form 10-Q quarterly report for a discussion of the limitations on Firstbank’s responsibility for such statements.
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PART II - OTHER INFORMATION
| Item 1. Item 2. Item 3. Item 4. | Legal Proceedings. - None Changes in Securities and Use of Proceeds. - None Defaults Upon Senior Securities. - None Submission of Matters to a Vote of Securities Holders. |
| The annual meeting of shareholders of the Corporation was held on April 22, 2002. The shareholders of the Corporation voted on the following matters at the meeting: | |||||
| Election of three directors with terms expiring in 2005. | |||||
| Director Nominee: Edward B. Grant Philip G. Peasley Benson S. Munger | For 3,536,871 3,525,024 3,537,421 | Withhold 36,369 48,216 35,819 | |||
| Item 5. | Other Information. - None |
| Item 6. | Exhibits and Reports on Form 8-K. |
| (a) | Exhibits | |||
| 99.1 | Certificate of the Chief Executive Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
| 99.2 | Certificate of the Executive Vice President and Chief Financial Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
| (b) | Reports on 8-K - None | |||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FIRSTBANK CORPORATION (Registrant) | |
| Date: August 12, 2002 | \s\ Thomas R. Sullivan Thomas R. Sullivan President, Chief Executive Officer (Principal Executive Officer) |
| Date: August 12, 2002 | \s\ Samuel G. Stone Samuel G. Stone Executive Vice President, Chief Financial Officer (Principal Accounting Officer) |
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EXHIBIT INDEX
| Exhibit | Description |
| 99.1 | Certificate of the Chief Executive Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.2 | Certificate of the Executive Vice President and Chief Financial Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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I, Thomas R. Sullivan, Chief Executive Officer of Firstbank Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and | |
| (2) | the information contained in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of Firstbank Corporation. |
Dated: August 12, 2002
| /s/ Thomas R. Sullivan Thomas R. Sullivan Chief Executive Officer |
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I, Samuel G. Stone, Executive Vice President and Chief Financial Officer of Firstbank Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and | |
| (2) | the information contained in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of Firstbank Corporation. |
Dated: August 12, 2002
| /s/ Samuel G. Stone Samuel G. Stone Executive Vice President and Chief Financial Officer |
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