SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN
PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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FIRSTBANK CORPORATION
(Name of registrant as specified in its charter)
________________________________________________________________________
(Name of person(s) filing Proxy Statement, if other than the Registrant)
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 | 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 28, 2003, at 4:30 p.m. (Alma time) to consider and vote upon:
| 1. | The election of two 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 7, 2003, 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 28, 2003
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 PROMPTLYIN 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 28, 2003, 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 28, 2003.
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 David D. Roslund and Thomas R. Sullivan for election to the Board of Directors at the annual meeting to serve three year terms that will expire in 2006.
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
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VOTING SECURITIES
At the close of business on March 7, 2003, the record date for determination of the shareholders entitled to vote at the annual meeting, the Corporation had issued and outstanding 5,377,346 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 7, 2003.
Amount and Nature of Beneficial Ownership(1)
Sole Voting Shared
and Voting or Total
Investment Investment Beneficial Percent
Name and Address of Beneficial Owner Power Power(2) Ownership of Class
Firstbank Corporation
401(k) Plan 333,076 333,076 6.19%
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, 2002.
Amount and Nature of Beneficial Ownership (1)
Sole Shared Voting
Voting And or Investment Total Beneficial Percent
Name of Beneficial Owner Investment Power Power (2) Ownership of Class
William L. Benear 23,327 (4)(5) 0 23,327 (4)(5) *
Duane A. Carr 0 19,434 19,434 *
William E. Goggin 14,415 5,623 20,038 *
Edward B. Grant 0 6,568 6,568 *
Benson S. Munger 3,019 0 3,019 *
Phillip G. Peasley 17,992 239 18,231 *
Dale A. Peters 17,272 (4)(5) 6,832 24,104 (4)(5) *
David D. Roslund 2,219 0 2,219 *
Jeffrey C. Schubert 0 11,326 11,326 *
Samuel G. Stone 7,897 (4)(5) 0 7,897 (4)(5) *
Thomas R. Sullivan 44,906 (4)(5) 0 44,906 (4)(5) *
James E. Wheeler II 22,149 (4)(5) 14,673 36,822 (4)(5) *
All Directors and Executive Officers 169,518 (4)(5) 64,695 234,213 (4)(5) 4.36%
as a Group (14 Persons)
*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. |
| (3) | ABN AMRO Trust Services Company serves as the trustee of the 401(k) plan. The trustee has voting and limited investment power over shares, if any, held by the 401(k) trust, which have not been allocated to individual accounts, and limited investment power over shares which have been allocated to individual accounts. David L. Miller, an officer of the Corporation, is the plan administrator and directs the trustee as to the voting of the shares held by the 401(k) trust that have not been allocated to an individual account, if any. The plan administrator disclaims beneficial ownership of shares held by the 401(k) (except shares allocated to his individual account under the 401(k)) and 401(k) shares that are not reported as beneficially owned by the administrator unless the shares have been allocated to his individual account under the 401(k). |
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| At the November 2002 Board of Directors meeting, the Directors approved terminating the ESOP provisions of the 401(k) plan. The ESOP, invested entirely in Firstbank Corporation stock, restricted the participant’s ability to diversify. With these provisions eliminated, each participant has made, or will make, a new investment election. |
| (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 20,258 shares; Mr. Peters is 14,142 shares; Mr. Stone is 4,906 shares; Mr. Sullivan is 20,673 shares; and Mr. Wheeler is 18,436 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 practicable, 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 2006
| David D. Roslund (age 62) 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 facility located in Alma, Michigan. He also is an investor in, and manager of, several local small businesses. |
| Thomas R. Sullivan (age 52) became President & Chief Executive Officer of Firstbank Corporation in January 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. |
Directors with Terms Expiring in 2004
| Duane A. Carr (age 63) has been a Director of Firstbank — Lakeview since 1980 and of the Corporation since 1998. He is an attorney with the law firm of Miel & Carr in Stanton, Michigan. He is also an active farmer in Carr Farms Partnership in Lakeview, Michigan. |
| William E. Goggin (age 57) 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 in Alma, Michigan. |
| Jeffrey C. Schubert (age 54) 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 practicing dentist in West Branch, Michigan since 1973. |
Directors with 3-Year Terms Expiring in 2005
| Edward B. Grant (age 53) has been a director of Firstbank (Mt. Pleasant) 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. |
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| Phillip G. Peasley (age 69) has been a director of Firstbank — Alma since 1973 and of the Corporation since 1985. He is the Operations Manager of Peasley’s Hardware & Furniture, Inc., a retail hardware and furniture store located in Vestaburg, Michigan. |
| Benson S. Munger (age 61) is one of the incorporators of Firstbank — St. Johns. He is the Vice President of Data Harbor, Inc. located in St. Johns, Michigan. Mr. Munger is also the retired Executive Director of the American Board of Emergency Medicine. |
The Board of Directors of the Corporation held 12 regularly scheduled meetings during 2002. 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 a standing nominating committee. All members of the Board of 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 appoint the 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 examinations 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. 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 2002, the Audit Committee held four meetings.
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, 2002.
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, 2002.
Respectfully submitted, |
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REPORT ON EXECUTIVE COMPENSATION
Compensation Committee
The compensation committee is comprised of the outside directors of the Board of the Corporation and, as a committee, they 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 the 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 401(k) plan (under which employees can direct investment in Firstbank Corporation stock), a non-qualified deferred compensation plan, the 1993 Plan, and the 1997 Plan. The compensation committee of the Corporation also 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.
Executive Compensation Report
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. 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.
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 2002, stock options were awarded under the 1993 Plan and 1997 Plan to all full-time benefit eligible employees as of January 1, 2003. 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. 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% of the option vesting on each yearly 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.
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.
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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, |
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee is comprised of the outside members of the Board of Directors of the Corporation. 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.
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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 1997. 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.
| 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | |
| Firstbank | $100.00 | $144.88 | $ 97.71 | $102.74 | $112.14 | $160.02 |
| S & P 500 | $100.00 | $128.58 | $155.64 | $141.46 | $124.65 | $ 97.10 |
| KBW 50 | $100.00 | $108.28 | $104.52 | $125.48 | $120.31 | $112.00 |
| NASDAQ BANK | $100.00 | $ 99.36 | $ 95.51 | $108.95 | $117.97 | $120.61 |
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COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Through the year 2002 executive officers of the Corporation were compensated as previously described, 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, 2002, to the five most highly compensated officers of the Corporation, for the year ended December 31, 2002 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 2002 $200,000 $95,463 1,575 $5,980
Director, President & Chief Executive 2001 $182,000 $63,000 1,653 $7,424
Officer of the Corporation and of 2000 $167,712 $53,500 1,735 $5,543
Firstbank (Mt. Pleasant)
Samuel G. Stone 2002 $140,000 $53,008 1,312 $6,477
Executive Vice President & 2001 $129,592 $40,000 1,377 $5,259
Chief Executive Officer, Secretary and 2000 $ 9,231 $12,000 11,576 N/A
Treasurer of the Corporation(4)
James E. Wheeler II 2002 $127,000 $45,088 1,312 $4,304
Vice President of the 2001 $122,000 $37,500 1,377 $4,099
Corporation and President 2000 $109,699 $35,000 1,445 $3,686
& Chief Executive Officer
of Firstbank - Alma
Dale A. Peters 2002 $115,000 $41,346 1,312 $5,556
Vice President of the 2001 $103,184 $17,500 1,377 $4,155
Corporation and President 2000 $ 98,931 $12,500 1,445 $3,923
& Chief Executive Officer
of Firstbank - West Branch
William L. Benear 2002 $110,000 $37,802 1,312 $4,610
Vice President of the 2001 $100,000 $32,500 1,377 $4,113
Corporation and President 2000 $ 94,740 $30,000 1,445 $3,740
& Chief Executive Officer
of Firstbank - Lakeview
| (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, 2002 is comprised of matching contributions under the 401(k)/ESOP as follows: |
| Thomas R. Sullivan Samuel G. Stone James E. Wheeler II Dale A. Peters William L. Benear | $5,980 |
| (4) | Mr. Stone was hired effective November 2000. The Summary Compensation Table discloses his 2000 compensation from his date of hire through December 31, 2000. |
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 in appreciation by the price of the Corporation’s stock. Stock options which were granted or outstanding during 2002 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 2002.
Option Grants in Last Fiscal Year
Individual Grants
Potential Realizable Value at
Number of Percent of Assumed Annual Rates of
Shares Total Options Stock Price Appreciation
Underlying Granted to for Option Term(3)
Options Employees Exercise Expiration
Name Granted(2) In Fiscal Year Price(1) Date 5% 10%
Thomas R. Sullivan 1,575 3.08% $23.33 11/25/12 $23,112 $58,570
Samuel G. Stone 1,312 2.57% $23.33 11/25/12 $19,260 $48,808
James E. Wheeler II 1,312 2.57% $23.33 11/25/12 $19,260 $48,808
Dale A. Peters 1,312 2.57% $23.33 11/25/12 $19,260 $48,808
William L. Benear 1,312 2.57% $23.33 11/25/12 $19,260 $48,808
Option Exercises in 2002 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 20,673 5,186 $249,831 $26,305
Samuel G. Stone 0 $ 0 4,906 9,644 $ 38,616 $66,721
James E. Wheeler II 0 $ 0 18,436 4,178 $233,105 $21,789
Dale A. Peters 620 $ 9,053 14,142 4,529 $132,300 $22,571
William L. Benear 0 $ 0 20,258 4,280 $266,435 $21,791
| (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 2002. 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. 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 yearly anniversary of the date of the grant. |
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| (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, 2002 (when the closing price of the Corporation’s common stock was $25.10 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 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
All members of the Corporation’s Board of Directors also serve on the board of directors of a subsidiary bank. Only outside directors receive compensation for their service in each of those capacities.
The Corporation pays its Chairman of the Board a retainer of $3,000 per year and 100 shares of the Corporation’s common stock. The Chairman of the Audit Committee is paid a retainer of $1,000 per year. Additionally, each outside corporate director, including the Chairman, receives 250 shares of the Corporation’s common stock as a retainer and is paid a fee for attendance at meetings of the board or board committees. A fee of $600 is paid for each regular Board of Directors meeting attended, $250 for each conference call in which the director participates, and $1,000 for each full day and $750 for each half day special Board of Directors meeting attended. Directors who serve on the Corporation’s Audit and Compensation Committees are paid $250 for each committee meeting attended.
Each outside director of the Corporation is also a director of Firstbank — Alma, Firstbank (Mt. Pleasant), Firstbank — West Branch, Firstbank — Lakeview, or Firstbank — St. Johns. Outside Chairman of the Boards of Directors of the banks each receive 100 shares of the Corporation’s common stock as a retainer. Additionally, each outside member of a Bank Board, including the Chairman, receives a retainer of 100 shares of Firstbank Corporation common stock per year, and is paid a fee for attendance at bank board meetings. A fee of $400 is paid for each regular Bank Board of Directors meeting attended, $750 for each full day, and $500 for each half day special Bank Board of Directors meeting attended. Outside directors who serve on a committee of the bank board are paid $100 for each committee meeting attended.
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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.
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, 2002 through December 31, 2002, its directors, officers, and greater than 10% shareholders complied with all applicable filing requirements, except as follows: stock option grants made on November 25, 2002 were not reported until Form 4s were filed on December 24, 2002 for the following officers as the officers made adjustments in filing procedures in order to file electronically: William L. Benear — 1,250 shares; David L. Miller — 1,000 shares; Dale A. Peters — 1,250 shares; Samuel G. Stone — 1,250 shares; Thomas R. Sullivan — 1,500 shares; James M. Taylor — 1,250 shares; and James E. Wheeler — 1,250 shares; Mr. Jeffrey C. Schubert inadvertently did not report the purchase of 130 shares on October 16, 2002 until a Form 4 filing made on January 3, 2003; and Mr. James M. Taylor inadvertently did not report the purchase of 249 shares on July 23, 2002 until a Form 5 filing made on February 14, 2003.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 2002 and December 31, 2002. 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, 2002.
RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The financial statements of the Corporation for the year ended December 31, 2002 have been examined by Crowe Chizek and Company LLP, certified public accountants, as independent auditors of the Corporation for the 2002 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 has been the Corporation’s auditors for many years and has been reappointed by the Audit Committee of the Board of Directors as independent public accountants of the Corporation and its subsidiaries for the year ending December 31, 2003.
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, 2002 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 $100,049.
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Financial Information System Design and Implementation Fees
No professional services were rendered by Crowe Chizek and Company LLP for the year ended December 31, 2002 with respect to, directly or indirectly, operating or supervising the operation of the Corporation’s information systems, managing the Corporation’s local area network, 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 $58,790.
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, 2002 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 2004 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, 2003. 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 2004 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 6, 2004.
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Firstbank Corporation
2002
Annual Report
This 2002 Annual Report contains audited financial statements and a detailed financial review. This is Firstbank Corporation’s 2002 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 2002 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 2002 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:
The theme for this year’s Annual Report to Shareholders isWhere People Make the Difference. In 2002, our people really did make the difference. And that difference resulted in record breaking financial performance, substantial improvement in shareholder value, and continued focus on maintaining a high level of asset quality. Without the dedication, professionalism, and hard work of our people we would not have achieved these outstanding results.
Net income in 2002 exceeded $11.8 million which was a 23% increase over the operating earnings achieved in 2001, and 29% ahead of the net income posted last year. Return on shareholders’ equity improved to 15.5%. The record low interest rates resulted in a new wave of mortgage refinancing which helped to improve income. The softening economy did slow balance sheet growth and cause higher credit losses, but our continued focus on credit quality combined with strong loan loss reserves, positions us well when compared to peer banking companies.
We continue to see benefits from our efforts to improve the visibility and market valuation of our shares. Three investment banking firms are now providing market research and recommendations on our stock. The number of companies trading our shares has increased dramatically, as reflected on the last page of this report. The average trading volume currently exceeds 7,000 shares per day, and our share price now reflects a valuation in line with our peer banks. Enhancing the value of our stock remains a priority of Firstbank senior management.
Our success in 2002 is the result of our commitment to insuring that “Every person who walks through our door, including shareholders, customers, and employees, will benefit either personally or financially.” This commitment makes us unique in a world where business is becoming more impersonal. Our decentralized management approach supports a growing network of affiliate banks all with separate charters, local boards of directors, and strong management teams led by local CEOs. At Firstbank, the community bank’s power and autonomy stay at home, enabling our people to do whatever is necessary to deliver exceptional service.
While we are continuing to diversify the company, the banks are the primary source of earnings and the senior officers of the banks provide the leadership, guidance, and motivation which are critical to achieving high levels of success. These executives’ connections to their local communities, and constant attention to customer service, provide our company with a competitive advantage. We strive to instill this community-minded spirit in every Firstbank staff member, because it really is our people that make the difference.
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
Firstbank Corporation
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FINANCIAL HIGHLIGHTS
Firstbank Corporation
(In Thousands of Dollars, Except per Share Data) For the year: 2002 2001 2000 1999 1998 Interest income $49,248 $55,510 $54,224 $46,062 $44,484 Net interest income 32,987 30,917 28,697 26,779 25,131 Provision for loan losses 1,170 1,467 736 514 1,177 Non-interest income 12,133 9,940 5,539 5,369 5,868 Non-interest expense 26,237 25,756 21,052 20,068 19,402 Net income 11,826 9,122 8,543 8,036 7,303 At year end: Total assets 767,520 751,990 733,267 650,552 603,014 Total earning assets 709,857 696,681 679,322 598,915 555,254 Loans 611,058 606,076 600,767 508,238 441,028 Deposits 576,909 561,139 537,224 491,404 494,053 Other borrowings 98,942 107,838 122,259 90,203 40,894 Shareholders' equity 80,181 72,426 64,204 61,032 59,775 Average balances: Total assets 750,476 737,681 687,190 607,443 560,938 Total earning assets 690,452 679,558 637,317 561,045 516,455 Loans 602,243 604,439 553,201 464,550 414,316 Deposits 562,971 546,984 510,194 491,368 467,615 Other borrowings 99,939 107,733 105,593 47,120 29,065 Shareholders' equity 76,356 68,101 62,675 60,752 56,258 Per share: (1) Basic earnings $ 2.19 $ 1.72 $ 1.59 $ 1.47 $ 1.33 Diluted earnings $ 2.14 $ 1.69 $ 1.57 $ 1.44 $ 1.28 Cash dividends $ 0.71 $ 0.64 $ 0.59 $ 0.52 $ 0.46 Shareholders' equity $14.94 $13.47 $12.21 $11.79 $10.86 Financial ratios: Return on average assets 1.58% 1.24% 1.24% 1.32% 1.30% Return on average equity 15.50% 13.40% 13.63% 13.23% 12.98% Average equity to average assets 10.17% 9.23% 9.12% 10.00% 10.03% Dividend payout ratio 32.61% 37.50% 36.73% 35.76% 34.16%
Firstbank – St. Johns results are included from June 16, 2000, the date of inception. Gladwin Land Company, Inc. results are included from May 8, 2000, the date of acquisition.
(1) All per share amounts are 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL 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
Firstbank Corporation (“the Company”) posted record net earnings for the eleventh consecutive year. Net income of $11,826,000 exceeds 2001 results of $9,122,000 by more than 29%. For the past five years net income has increased at an annual compound growth rate of 16.3%. These results reflect continued strength of core banking activities as well as increased activity in mortgage refinances and resulting secondary market sales.
Management believes that standard performance indicators help evaluate our performance. We posted a return on average assets of 1.58%, 1.24%, and 1.24% for 2002, 2001, and 2000 respectively. Total average assets increased $13 million in 2002, $50 million in 2001, and $80 million in 2000. Diluted earnings per share were $2.14, $1.69, and $1.57 for the same time periods. The Company repurchased 122,710 shares of its common stock in 2002, 1,212 shares in 2001, and 258,319 shares in 2000. In 2000, and again in 2002, the Board of Directors authorized share repurchase programs that helped maintain capital at the appropriate level and allowed for growth in net income to reflect an increasing return on equity. Return on equity was 15.50% in 2002, 13.40% in 2001, and 13.63% in 2000.
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 $2.1 million for 2002, a 6.7% increase when compared to 2001. The net interest margin increased to 4.80% in 2002 compared to 4.61% in 2001, and 4.62% in 2000. As the volume of sold loans has grown in significance, Firstbank has determined to classify fees on these loans as part of gain on sale of mortgage loans and not as part of interest and fee income. This classification is reflected in all periods discussed in the annual report and shown in the accompanying income statements and has no impact on net income. During 2002 the Company’s average loan to average deposit ratio was 107% compared to 110% in 2001, and 108% in 2000. 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 2002, 2001, and 2000. In 2002 the average rate realized on earning assets was 7.12%, a decrease of 106 basis points from the 2001 results of 8.18%, and a 151 basis point reduction from the rate of 8.63% realized in 2000. 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. During 2002 the prime rate held steady for the first three quarters and then decreased 50 basis points in the fourth quarter. As of December 31, 2002, slightly over 31% of the loan portfolio was comprised of variable rate instruments. Except for a relatively small portion of these loans that are affected under current interest rate conditions by interest rate floors or ceilings, these loans will re-price monthly or quarterly as rates change. The remaining 69% of the loan portfolio is made up of fixed rate loans that do not re-price until maturity. Of the fixed rate loans approximately $108 million, or nearly 18%, of the loan portfolio matures within the next twelve months and are subject to rate adjustments at maturity.
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Summary of Consolidated Net Interest Income
Year Ended Year Ended Year Ended
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Average Assets
Interest Earning Assets:
Taxable securities $ 47,694 $ 2,310 4.84% $ 44,328 $ 2,708 6.11% $ 52,590 $ 3,364 6.40%
Tax exempt securities(1) 25,362 1,751 6.90% 28,885 1,971 6.82% 29,584 2,267 7.66%
------- ------ ------- ------ ------- ------
Total Securities 73,056 4,061 5.56% 73,213 4,679 6.39% 82,174 5,631 6.85%
Loans(1) (2) 601,306 45,434 7.56% 603,134 51,261 8.50% 551,357 49,129 8.91%
Federal funds sold 23,668 370 1.56% 11,601 354 3.05% 3,290 209 6.35%
Interest bearing deposits 2,793 43 1.54% 535 16 2.99% 496 26 5.24%
------- ------ ------- ------ ------- ------
Total Earning Assets 700,823 49,908 7.12% 688,483 56,310 8.18% 637,317 54,995 8.63%
Nonaccrual loans 880 1,177 1,844
Less allowance for loan loss (11,308) (10,230) (9,754)
Cash and due from banks 21,625 19,812 20,160
Other non-earning assets 38,456 38,439 37,623
------- ------- -------
Total Assets $750,476 $737,681 $687,190
======= ======= =======
Average Liabilities
Interest Bearing Liabilities:
Demand $171,376 $ 2,847 1.66% $145,260 $ 4,121 2.84% $131,998 $ 4,409 3.34%
Savings 78,512 899 1.15% 70,515 1,164 1.65% 70,461 1,668 2.37%
Time 224,932 8,258 3.67% 252,938 13,521 5.35% 231,367 13,044 5.64%
------- ------ ------- ------ ------- ------
Total Deposits 474,820 12,004 2.53% 468,713 18,806 4.01% 433,826 19,121 4.41%
Federal funds purchased
and repurchase agreements 31,143 422 1.36% 31,509 1,151 3.65% 41,901 2,288 5.46%
FHLB advances and notes 69,195 3,835 5.54% 80,175 4,636 5.78% 63,692 4,118 6.47%
payable ------- ------ ------- ------ ------- ------
Total Interest Bearing
Liabilities 575,158 16,261 2.83% 580,397 24,593 4.24% 539,419 25,527 4.73%
Demand Deposits 88,151 78,271 76,368
------- ------- -------
Total Funds 663,309 658,668 615,787
Other Non-Interest Bearing
Liabilities 10,811 10,912 8,728
------- ------- -------
Total Liabilities 674,120 669,580 624,515
Average Shareholders' Equity 76,356 68,101 62,675
Total Liabilities and ------- ------- -------
Shareholders' Equity $750,476 $737,681 $687,190
Net Interest Income(1) $33,647 $31,717 $29,468
====== ====== ======
Rate Spread(1) 4.29% 3.94% 3.90%
==== ==== ====
Net Interest Margin (percent of
Average earning assets) (1) 4.80% 4.61% 4.62%
==== ==== ====
| (1) | Presented on a fully taxable equivalent basis using a federal income tax rate of 35% for 2002, 35% for 2001, and 34% for 2000. |
| (2) | Interest income includes amortization of loan fees of $ 1,395,000, $1,454,000, and $1,194,000 for 2002, 2001, and 2000 respectively. |
As rates declined in 2001 and 2002 maturing securities in the investment portfolio could not be replaced with securities of comparable quality bearing equal or higher yields. Quality standards were maintained in the portfolio and portfolio yields declined. In the current rate environment, management expects to lose some additional yield when replacing securities and has chosen to use high quality, short term investments in order to be positioned to take advantage of the expected future rate increases.
The average rate paid on interest bearing liabilities was 2.83% in 2002 compared to 4.24% in 2001 and 4.73% in 2000. Deposit rates decreased during 2002 as maturing time deposits were re-priced and rates on checking and savings deposits were lowered in response to the prime rate reductions of 2001 and 2002.
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In past years the Company has funded a portion of its loan growth with borrowings from the Federal Home Loan Bank and notes payable. During 2002 the average outstanding balance of FHLB advances and notes payable decreased nearly $11 million and the year end balance decreased $7 million when compared to 2001 balances. Increased deposit levels allowed the Company to repay some maturing notes without renewing them. 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 24 basis points in 2002 to 5.54% when compared to 2001 rates of 5.78%. Borrowings from the Federal Home Loan Bank carry stiff prepayment penalties that act as a deterrent from prepayment.
The 2002 rate spread of 4.29% is 35 basis points higher than the 2001 results of 3.94% and 39 basis points higher than the 2000 results of 3.90%. Tax equivalent net interest income increased nearly $2 million in 2002 as total average earning assets grew $12 million and the spread increased. The net interest margin of 4.80% for 2002 was 19 basis points more than the 2001 results and 18 basis points higher than in 2000. Increases in both net interest margin and rate spread are the result of rates on average earning assets decreasing 106 basis points while the average cost of interest bearing liabilities decreased 141 basis points. Average earning assets represented 93% of total average assets in both 2002 and 2001.
Provision for Loan Losses
The provision for loan losses was $1,170,000 in 2002 compared to $1,467,000 in 2001 and $736,000 in 2000. At December 31, 2002, the allowance for loan losses as a percent of total loans was 1.92% compared to 1.84% and 1.64% at December 31, 2001, and December 31, 2000 respectively. Net charged off loans totaled $672,000 in 2002 compared to $286,000 in 2001 and $196,000 in 2000. During 2002 recoveries of previously charged off loans were $363,000 compared to $394,000 in 2001 and $629,000 in 2000. Net charged off loans as a percent of average loans were 0.11% in 2002, 0.05% in 2001, and 0.03% in 2000. Total nonperforming loans were 0.63% of ending loans at December 31, 2002, compared to 0.44% and 0.37% 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 is established after considering past loan loss experience, current economic conditions, volume, growth, and composition of the portfolio, delinquencies, and other relevant factors. Beginning in 2001 and continuing throughout 2002 management has developed and implemented a more comprehensive quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses more consistently across its five banking subsidiaries. The resulting provision is a result of considering 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.
Non-interest Income
Continuing the upward trend established by the substantial increase posted from 2000 to 2001, total non-interest income increased $2,193,000 during 2002. Improved management of fee waivers and growth in deposit accounts contributed to an increase of $433,000, or 21.8%, in service charges on deposit accounts from 2001 to 2002. Gain on sale of mortgage loans increased by $2,664,000, or 82.9%, over the 2001 results as low interest rates continued to fuel 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 $601,000, from a negative $108,000 in 2001, to a negative $709,000 in 2002 that resulted from the write off of previously capitalized mortgage servicing rights.
During the first quarter of 2002 Firstbank-Alma, the subsidiary that operated a Trust Department, reached an agreement with a larger, unrelated company to assume operations of the Trust Department. Therefore, the trust fee income reported for 2002 is for the first quarter only and shows a decline of $230,000, or 68%, from 2001 results compared to the $40,000 decline seen in 2001. The agreement with the unrelated company will provide for ongoing participation in trust fee income, but at a reduced level. As a result of the transaction, expenses related to the trust business are reduced by more than the reduction in revenue, resulting in a positive impact on net income.
Courier and cash delivery services income increased 21.8% to $564,000 in 2002 after having increased 3.1% in 2001. 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 $857,000 to non-interest income in 2002, up from $789,000 in 2001, and $276,000 in 2000.
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Commissions on real estate sales resulted in $816,000 of non-interest income in 2002 compared to $635,000 in 2001 and zero in 2000. Title insurance fees produced $726,000 of non-interest income compared to $593,000 in 2001 and $181,000 in 2000.
Other non-interest income showed a decline of $545,000, or 27.2%, when the results of 2002 are compared to 2001. The largest decrease was seen in fee income received from brokerage business activities which decreased $132,000 during 2002. Other non-interest income was also impacted by $86,000 less in dividend and capital gain income recognized on the investments underlying the balances in the deferred compensation accounts. This amount is offset by an equivalent non-interest expense and has no impact on total net income.
Non-interest Expense
Salary and employee benefits expenses increased $897,000, or 6.7%, when 2002 is compared to 2001. Increased salary expense was a result of originating, processing, and managing secondary market sales related to the high volume in the mortgage business, two new branch facilities, yearly salary increments, merit raises, and normal staffing requirements related to growth in business. These increases were offset somewhat by a reduction in the cost of employee benefits. The Company employed 356 full time equivalent employees at the end of 2002, 9 more than at the same time in 2001.
Expenses of occupancy and equipment increased $151,000, or 4.3%, over the 2001 level. Nearly all of this increase is the result of a full year’s depreciation on facilities and equipment which were put into place during the third and fourth quarter of 2001.
Amortization of intangible assets decreased $423,000, or 53.9%, during 2002. Upon adoption of new accounting standards on January 1, 2002 and October 1, 2002, the Company ceased amortizing goodwill related to past acquisitions of banks and branches.
Michigan single business tax decreased $137,000, or 44.1%, during 2002 which resulted from a decrease in income subject to the Michigan single business tax at the bank level.
Expenses for outside professional services increased $438,000 to $1,559,000 in 2002 compared to $1,121,000 in 2001. Title search fees and costs paid to independent contractors in the title, appraisal, and real estate sales operations accounted for substantially all of the increase.
Advertising and special promotion expense increased to $522,000 from $388,000 in 2001 and was largely driven by a large increase in mortgage activity.
Other non-interest expense decreased by $579,000, or 9.2%, from 2001 to 2002 as a result of a $687,000 non-recurring charge made in the first quarter of 2001 and discussed in previous disclosures. Without this charge other non-interest expense increased $108,000, or less than 2%.
Federal Income Tax
The Company’s effective federal income tax rates were 33% for both 2002 and 2001, and 31% for 2000. The Company’s investment in securities and loans which provide income exempt from federal income tax is the principal cause of the difference between the effective tax rates and the statutory tax rate of 35% for 2002 and 2001, and 34% for 2000.
FINANCIAL CONDITION
Total assets at December 31, 2002 were $768 million, exceeding the December 31, 2001 assets of $752 million by $16 million, or slightly over 2%. Short term investments increased by $12 million as the Company experienced continuing heavy mortgage re-financing which reduced mortgage portfolio balances, slowed consumer loan demand, and increased deposit growth. Loans held for sale on the secondary market increased 68.9% at December 31, 2002 when compared to the balance at December 31, 2001 as a result of the re-finance activity. Total portfolio loans, net of allowance for loan loss, showed very little change from the December 31, 2001 balance, increasing just .09%, although commercial real estate loans and real estate construction loans increased $38.8 million, or 19.2%. Decreases of $8 million, or 7.7%, in other commercial loans, $26 million, or 11.7%, in residential mortgages, and $3 million, or 5.4%, in consumer loans offset the growth in commercial real estate loans.
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(In Thousands of Dollars)
2002 2001 Change % Change
---- ---- ------ --------
Commercial $97,951 $106,148 $ (8,097) (8%)
Real estate 392,950 394,303 (7,180) (2%)
Construction 47,103 33,203 19,621 71%
Consumer 63,417 66,781 (3,358) (5%)
------- ------- -------
Total $601,421 $600,435 $ 986 0.16%
Mortgages serviced for others $373,800 $296,900 $76,900 26%
Total securities declined $3.9 million, or 5.8%, as maturing and called securities were not re-committed to the market under existing rate conditions.
Premises and equipment decreased by $110,000 after recognized depreciation of $1,710,000. During 2002 the Firstbank – Alma affiliate disposed of two branch buildings that had been combined into one new, modern facility that opened in late 2001.
Total deposits increased at the end of 2002 to $577 million, an increase of 2.8%, compared to $561 million at year end 2001. Demand deposit accounts showed the greatest change increasing a total of $28.9 million with interest demand balances increasing $17.4 million, or 10.9%, and non-interest accounts increasing $11.4 million, or 13.1%. Passbook and statement savings accounts increased $9.8 million, or 13.4%. These deposit increases were offset by a decrease in time deposits of $22.9 million, or 9.5%. Firstbank’s banks did not need to bid aggressively for higher cost, rate sensitive, time deposits. Securities sold under agreements to repurchase decreased by $1.9 million.
Federal Home Loan Bank advances and notes payable decreased by $7 million at December 31, 2002 as compared to December 31, 2001. 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 as they matured. There were no overnight borrowings at December 31, 2002 or 2001. Note K 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. 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 2002 net charged off loans were $672,000 compared to $286,000 in 2001. Net charged off loans as a percentage of average loans were .11% and .05% in 2002 and 2001.
Nonperforming loans are defined as nonaccrual loans, loans 90 days past due, and any loans where the terms have been renegotiated. Total nonperforming loans were $3.8 million and $2.6 million at December 31, 2002 and 2001 respectively. The average investment in impaired loans was $4.8 million during 2002 compared to $1.5 million during 2001. Please refer to Note F of the Notes to Consolidated Financial Statements for more information on impaired loans. Total nonaccrual loans were $630,000 at December 31, 2002 compared to $501,000 at the end of 2001.
The allowance for loan losses increased $498,000, or 4.5%, during 2002. The allowance for loan losses represents 1.92% of outstanding loans at the end of 2002 as compared to 1.84% at December 31, 2001. 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 reviews by management, loan personnel and an outside loan review specialist.
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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 4.80% in 2002 compared to 4.61% in 2001. Loan yields decreased by 94 basis points from 8.50% in 2001 to 7.56% in 2002. Deposit costs decreased 148 basis points from 4.01% in 2001 to 2.53% in 2002. Uncertainty in investment markets led to increasing deposit balances, which also helped to increase margins in 2002. As a result of increasing deposit balances, FHLB advances and notes payable decreased as a funding source with average balances of $69,195,000 in 2002 compared to $80,175,000 in 2001. In 2002 the average cost of funds on notes payable was 5.54% compared to 2.53% on deposits.
A decision to decrease 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 the level of interest rates decreases dramatically fixed rate loan customers will take new, lower rate loans to replace present higher rate loans. During most of 2002 interest rates stayed at historically low levels and Firstbank’s margins improved as the funding mix shifted to lower cost deposits. In the fourth quarter of 2002 the prime rate dropped 50 basis points bringing the average rate to 4.25% from an average of 4.75% in January. Since deposit rates were already at very low levels this change in the prime rate resulted in a decline in Firstbank’s net interest margin in the fourth quarter of 2002, although for the full year 2002 the net interest margin was higher than 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, 2002 were $15.8 million compared to $14.0 million at December 31, 2001.
The following table shows the interest sensitivity gaps for five different intervals as of December 31, 2002:
Maturity or Re-Pricing Frequency
--------------------------------
(Dollars in Millions)
2 Days 4 Months 13 Months
through through through
1 Day 3 Months 12 Months 5 Years 5 + Years
----- -------- --------- ------- ---------
Interest Earning Assets:
Loans $178.6 $ 91.8 $ 84.7 $240.8 $15.2
Securities 0 3.3 12.5 28.4 18.5
Other earning assets 30.6 0 0 0 5.5
----- ----- ----- ----- ----
Total $209.2 $ 95.1 $ 97.2 $269.2 $39.2
Interest Bearing Liabilities:
Deposits $260.0 $ 54.8 $ 93.0 $ 70.9 $0.1
Other interest bearing liabilities 30.4 0 4.0 17.7 46.8
----- ----- ----- ----- ----
Total $290.4 $ 54.8 $ 97.0 $ 88.6 $46.9
Interest Sensitivity Gap $(81.2) $ 40.3 $ 0.2 $180.6 $(7.7)
Cumulative Gap $(81.2) $ (40.9) $(40.7) $139.9 $132.2
For the one day interval, maturities of interest bearing liabilities exceed those of interest earning assets by $81.2 million. Included in the one day maturity classification are $260.0 million in 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. In the two day through the five year time frame, interest sensitive assets exceed interest sensitive liabilities resulting in a cumulative effect of interest sensitive assets exceeding interest sensitive liabilities by $139.9 million through five years. For the time period greater than five years the positive relationship reverses slightly so that, cumulatively, interest sensitive assets exceed interest sensitive liabilities by $132.2 million.
| 8 |
Showing a negative cumulative gap through the twelve month period does not necessarily result in a corresponding increase in net interest income during a declining rate environment. In practice, deposit rates do not change as rapidly, as would be indicated, by the contractual availability of deposit balances to customers and some of the gain associated with the lowering of 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. Conversely, showing a negative cumulative gap through the twelve month period does not necessarily result in a corresponding decrease in net interest income during a rising rate environment for similar reasons.
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 re-pricing intervals of interest earning assets to interest bearing liabilities is a measure of the interest sensitivity gap. Balancing interest rate sensitivity 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 market 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 2002 the results of these measurement techniques were acceptable according to the Company’s policy. The Company continued to rely on Federal Home Loan Bank borrowings in 2002 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 2002 as compared to 2001. As of the date of this annual report the Company does not know of nor 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. The Company does not accept significant interest rate risk in its mortgage banking operations. To manage its interest rate risk the Company generally locks in its sale price to the purchaser of the loan at the same time it makes a rate commitment to the borrower. 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, 2002 and 2001. 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 re-pricing. The Company believes that re-pricing 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.
| 9 |
December 31, 2002 (In Thousands of Dollars) Fair
Value
2003 2004 2005 2006 2007 Thereafter Total 12/31/02
Rate Sensitive Assets:
Fixed interest rate loans $108,167 $80,053 $68,209 $57,258 $40,218 $63,493 $417,398 $422,798
Average interest rate 7.27% 8.04% 7.89% 7.89% 7.90% 8.46%
Variable interest rate loans 76,391 11,703 16,647 17,478 50,682 20,759 193,660 193,443
Average interest rate 4.64% 5.20% 5.46% 5.31% 5.27% 5.00%
Fixed interest rate securities 15,805 8,228 4,391 6,145 9,685 19,133 63,386 63,386
Average interest rate 1.89% 2.12% 2.29% 3.87% 3.03% 4.47%
Variable interest rate
securities 65 65 65
Average interest rate 6.03%
Other interest bearing assets 30,602 4,746 35,348 35,348
Average interest rate 1.02%
Rate Sensitive Liabilities:
Savings and interest bearing
checking 260,038 260,038 260,038
Average interest rate 1.10%
Time deposits 147,742 32,633 14,732 9,065 14,397 154 218,723 321,564
Average interest rate 2.84% 4.18% 4.88% 4.62% 4.58% 2.81%
Fixed interest rate
borrowings 4,000 1,500 10,962 0 5,165 46,957 68,584 76,799
Average interest rate 5.16% 5.15% 6.29% 0.00% 5.02% 5.66%
Variable interest rate
borrowings 0 0 0
Average interest rate
Repurchase agreements 30,358 30,358 30,358
Average interest rate 1.62%
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 and interest bearing 232,790 232,790
checking 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%
| 10 |
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. Minimal 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 and 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, 2002, the Company’s total capital to risk weighted assets exceeded the minimum requirement for capital adequacy purposes of 8% by 5.16%, or $29 million. Tier 1 capital to risk weighted assets exceeded the minimum of 4% by 7.91%, or $45 million, and Tier 1 capital to average assets exceeded the minimum of 4% by 4.80%, or $37 million. For a more complete discussion of capital requirements please refer to Note T 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 each bank pays the lowest assessment rate assigned by the FDIC.
A certain level of capital growth is desirable to maintain an appropriate ratio of equity to total assets. The compound annual growth rate for total average assets for the past five years was 10.3%. The compound annual growth rate for average equity over the same period was 13.1%.
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:
2002 2001 2000
Return on average equity 15.50% 13.40% 13.63%
Multiplied by
Percentage of earnings retained 67.39% 62.50% 63.27%
Equals
Internal capital growth 10.45% 8.38% 8.63%
The Company has retained between 63% and 67% of its earnings from 2000 to 2002. 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 2002, 1,274 owners holding 1,523,364 shares were participating in the Plan.
The Company is not aware of any recommendations by regulatory authorities at December 31, 2002 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",
| 11 |
"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 codes; 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 1,680 shareholders of record as of December 31, 2002. Total shareholders number approximately 2,844 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 high and low sales prices for shares of common stock for each quarterly period during the past two years is as follows:
Quarter High Low
4th `02 $25.500 $21.905
3rd `02 $23.657 $21.095
2nd `02 $22.857 $19.638
1st `02 $20.952 $18.238
4th `01 $19.048 $15.211
3rd `01 $22.404 $16.327
2nd `01 $17.460 $14.512
1st `01 $17.480 $14.739
The prices quoted above were obtained from the Nasdaqtrader.com through the Company’s market makers. 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 2002 and 2001.
2002 2001
First Quarter $.1714 $.1542
Second Quarter .1809 .1633
Third Quarter .1809 .1633
Fourth Quarter .1809 .1633
Total $.7141 $.6441
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 R of the Notes to Consolidated Financial Statements). As of January 1, 2003, approximately $22.5 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’ 2003 earnings will be available for distributions as dividends to the Company.
| 12 |
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, 2002 and 2001 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, 2002. 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, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
 | ||
| CROWE, CHIZEK AND COMPANY LLP | ||
| January 31, 2003 Grand Rapids, Michigan |
| 13 |
FIRSTBANK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Expect for Share Data)
December 31
-----------
ASSETS 2002 2001
---- ----
Cash and due from banks $29,945 $27,187
Short term investments 30,602 18,627
Total cash and cash equivalents 60,547 45,814
Securities available for sale 63,451 67,345
Federal Home Loan Bank stock 4,746 4,633
Loans held for sale 9,663 5,722
Loans, net of allowance for loan losses of $11,536 in 2002 and
$11,038 in 2001 589,859 589,316
Premises and equipment, net 17,514 17,624
Goodwill 4,880 3,533
Core deposits and other intangibles 3,158 4,923
Accrued interest receivable and other assets 13,702 13,080
------- -------
TOTAL ASSETS $767,520 $751,990
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand accounts $98,148 $86,736
Interest bearing accounts:
Demand 177,018 159,572
Savings 83,020 73,218
Time 218,723 241,613
------- -------
Total Deposits $576,909 $561,139
Securities sold under agreements to repurchase and overnight borrowings $30,358 $32,223
Federal Home Loan Bank advances 68,433 72,747
Notes payable 151 2,868
Accrued interest payable and other liabilities 11,488 10,587
------- -------
Total Liabilities $687,339 $679,564
SHAREHOLDERS' EQUITY
Preferred stock; no par value, 300,000 shares authorized, none issued
Common stock, no par value, 10,000,000 shares authorized;
5,368,100 and 5,119,153 shares issued and outstanding in 2002 and 2001 $68,934 $63,100
Retained earnings 9,755 8,260
Accumulated other comprehensive income 1,492 1,066
------- -------
Total Shareholders' Equity 80,181 72,426
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $767,520 $751,990
======= =======
See notes to consolidated financial statements.
| 14 |
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In Thousands of Dollars, Except for Per Share Data)
Year Ended December 31
----------------------
2002 2001 2000
---- ---- ----
Interest Income:
Loans, including fees $45,387 $51,151 $49,129
Securities:
Taxable 2,310 2,708 3,364
Exempt from federal income tax 1,138 1,281 1,496
Short term investments 413 370 235
------ ------ ------
Total Interest Income 49,248 55,510 54,224
Interest Expense:
Deposits 12,004 18,806 19,121
Notes payable 3,835 4,636 4,118
Other 422 1,151 2,288
------ ------ ------
Total Interest Expense 16,261 24,593 25,527
------ ------ ------
Net Interest Income 32,987 30,917 28,697
Provision for loan losses 1,170 1,467 736
------ ------ ------
Net Interest Income after Provision for Loan Losses 31,817 29,450 27,961
Non-Interest Income:
Service charges on deposit accounts 2,419 1,986 1,705
Gain on sale of mortgage loans 5,879 3,215 574
Mortgage servicing, net of amortization (709) (108) 302
Trust fees 108 338 378
Gain (loss) on sale of securities 17 28 (2)
Courier and cash delivery services 564 463 449
Real estate appraisal services 857 789 276
Commissions on real estate sales 816 635 0
Title insurance fees 726 593 181
Other 1,456 2,001 1,676
------ ------ ------
Total Non-Interest Income 12,133 9,940 5,539
Non-Interest Expense:
Salaries and employee benefits 14,247 13,350 11,344
Occupancy and equipment 3,672 3,521 3,103
Amortization of intangibles 362 785 744
Michigan single business tax 174 311 639
Outside professional services 1,559 1,121 541
Advertising and promotions 522 388 178
Other 5,701 6,280 4,503
------ ------ ------
Total Non-Interest Expense 26,237 25,756 21,052
------ ------ ------
Income Before Federal Income Taxes 17,713 13,634 12,448
Federal Income Taxes 5,887 4,512 3,905
------ ------ ------
NET INCOME $11,826 $ 9,122 $ 8,543
Other comprehensive income:
Change in unrealized gain (loss) on securities, net of tax
and reclassification effects 426 698 1,032
------ ------ ------
COMPREHENSIVE INCOME $12,252 $ 9,820 $ 9,575
====== ====== ======
Basic earnings per share $2.19 $1.72 $1.59
===== ===== =====
Diluted earnings per share $2.14 $1.69 $1.57
===== ===== =====
See notes to consolidated financial statements.
| 15 |
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(In Thousands of Dollars, Except for Share and per Share Data)
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income (Loss) Total
----- -------- ------------- -----
Balances at January 1, 2000 $55,262 $6,434 $ (664) $61,032
Net income for 2000 8,543 8,543
Cash dividends - $.59 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 - $.64 per share (3,416) (3,416)
5% stock dividend - 243,748 shares 4,729 (4,732) (3)
Issuance of 10,520 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
Net income for 2002 $11,826 $11,826
Cash dividends - $.71 per share (3,857) (3,857)
5% stock dividend - 255,595 shares 6,474 (6,474)
Issuance of 37,331 shares of common stock
through exercise of stock options 566 566
Issuance of 54,764 shares of common stock
through the dividend reinvestment plan 1,210 1,210
Issuance of 10,434 shares of common stock
from supplemental shareholder investments 235 235
Purchase of 122,710 shares of stock (2,951) (2,963)
Issuance of 13,533 shares of common stock 300 312
Net change in unrealized appreciation on
securities available for sale, net of tax of $229,000 426 426
------ ------ ------ ------
BALANCES AT DECEMBER 31, 2002 $68,934 $ 9,755 $ 1,492 $80,181
====== ====== ====== ======
See notes to consolidated financial statements.
| 16 |
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASHFLOWS
(In Thousands of Dollars)
Year Ended December 31
----------------------
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES
Net income $ 11,826 $9,122 $8,543
Adjustments to reconcile net income to net cash from
operating activities:
Provision for loan losses 1,170 1,467 736
Depreciation of premises and equipment 1,534 1,469 1,394
Net amortization of security premiums/discounts 374 199 161
Loss (gain) on sale of securities (17) (28) 2
Amortization of intangibles 362 785 744
Gain on sale of mortgage loans (5,879) (2,727) (466)
Proceeds from sales of mortgage loans 270,864 179,344 43,859
Loans originated for sale (268,926) (181,321) (43,294)
Deferred federal income tax benefit 109 (699) (150)
(Increase) decrease in accrued interest receivable and other assets (904) 406 (2,102)
Increase (decrease) in accrued interest payable and other liabilities 901 1,007 1,478
------ ------ ------
NET CASH FROM OPERATING ACTIVITIES 11,414 9,024 10,905
INVESTING ACTIVITIES
Proceeds from sales and calls of securities available for sale 2,075 2,191 5,137
Proceeds from maturities of securities available for sale 47,901 55,810 38,413
Purchase of securities available for sale (45,784) (52,600) (26,003)
Purchase of Federal Home Loan Bank stock (113) (301) (2,054)
Net increase in portfolio loans (1,713) (891) (92,825)
Net purchases of premises and equipment (1,424) (3,411) (2,147)
------ ------ ------
NET CASH FROM INVESTING ACTIVITIES 942 798 (79,479)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 15,770 23,915 45,820
Net increase (decrease) in securities sold under agreements to
repurchase and overnight borrowings (1,865) (6,084) (13,512)
Retirement of notes payable (2,717) (5,416) (14)
Proceeds from Federal Home Loan Bank borrowings 3,500 21,250 115,794
Proceeds from notes payable 0 1,400 6,700
Retirement of Federal Home Loan Bank borrowings (7,814) (25,571) (76,912)
Cash dividends and cash paid in lieu of fractional shares on stock
dividend (3,857) (3,419) (3,141)
Purchase of common stock (2,963) (24) (5,227)
Net proceeds from issuance of common stock 2,323 1,845 1,965
------ ------ ------
NET CASH FROM FINANCING ACTIVITIES 2,377 7,896 71,473
INCREASE IN CASH AND CASH EQUIVALENTS 14,733 17,718 2,899
Cash and cash equivalents at beginning of year 45,814 28,096 25,197
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 60,547 $ 45,814 $ 28,096
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 16,744 $ 25,521 $ 24,805
Income taxes $ 5,433 $ 4,211 $ 4,050
See notes to consolidated financial statements.
| 17 |
NOTES TO CONDOLIDATED 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 $768 million as of December 31, 2002 primarily represent commercial and retail banking activity. Mortgage loans serviced for others of $374million as of December 31, 2002 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; Gladwin Land Company, Incorporated; 1st Title, Incorporated; and C.A. Hanes Realty, Incorporated, after elimination of inter-company accounts and transactions. These subsidiaries are wholly owned, except C.A. Hanes Realty, which has a 45% minority interest. During 2001 each of the Company’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 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 rate, 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.
| 18 |
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. The Company generally locks in its sale price to the purchaser of the loan at the same time it makes a rate commitment to the borrower.
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 income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued, but not received, for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
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 allowance 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. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Loans are 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 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, 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.
| 19 |
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 the loan amount 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 estimated fair value less estimated costs to sell.
Goodwill and other Intangibles Assets:Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Upon adopting new accounting guidance on January 1, 2002, the Company ceased amortizing goodwill. Goodwill is assessed, at least annually, for impairment and any such impairment will be recognized in the period identified. The effect on net income of ceasing goodwill amortization in 2002 was $296,000. Included in this amount is $123,000 of reversal of amortization recognized in the first three quarters of 2002 as a result of the Company adopting SFAS 147 on October 1, 2002 for goodwill on certain branch acquisitions. Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives,which is 10 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, 2002 to shareholders of record as of December 18, 2002. 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.
Stock Compensation:Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation.
2002 2001 2000
Net income as reported $11,826,000 $9,122,000 $8,543,000
Deduct stock-based compensation expense determined
under fair value based method 134,000 438,000 119,000
Pro forma net income $11,692,000 $8,684,000 $8,424,000
Basic earnings per share as reported $2.19 $1.80 $1.67
Pro forma basic earnings per share $2.17 $1.72 $1.65
Diluted earnings per share as reported $2.14 $1.78 $1.65
Pro forma diluted earnings per share $2.12 $1.69 $1.62
The pro forma effects are computed using option pricing models and using the following weighted-average assumptions as of grant date.
2002 2001 2000
Risk-free interest rate 4.55% 4.52% 5.71%
Expected option life 7 Years 7 Years 7 Years
Expected stock price volatility 20.9% 19.7% 19.8%
Dividend yield 3% 3% 3%
| 20 |
Earnings Per Share:Basic earnings per share is based on weighted average common shares outstanding. Diluted earnings per share include 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 2001 and 2000 amounts have been reclassified to conform to the 2002 presentation.
Newly Issued But Not Yet Effective Accounting Standards:New accounting standards on asset retirement obligations, restructuring activities and exit costs, operating leases, and early extinguishment of debt were issued in 2002. Management determined that when the new accounting standards are adopted in 2003 they will not have a material impact on the Company’s financial condition or results of operations.
Segment Information:While the Company’s chief decision makers monitor the revenue streams of various products and services, substantially all of the Company’s operations are managed and financial performance is evaluated on a company wide basis. Accordingly, all of the Company’s operations are considered by Management to be aggregated in one reportable operating segment. There are no material separately identifiable reporting segments.
NOTE B – ACQUISITIONS/DIVESTURES
On December 31, 2001 the Company’s Firstbank – West Branch subsidiary sold its collection agency, 1stCollections, 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, Incorporated. 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, Incorporated. Firstbank – West Branch maintains a 55% ownership of the new company which does business as C.A. Hanes Realty, Incorporated. This real estate subsidiary complements the prior acquisitions of Gladwin Land Company and 1stTitle, Incorporated 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.
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 non-interest bearing balances due from the Federal Reserve Bank. The average reserve balances required to be maintained at December 31, 2002 and 2001 were $3,381,000 and $2,867,000 respectively. These balances do not earn interest.
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NOTE D – SECURITIES
The fair value of securities available for sale was as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
(In Thousands of Dollars)
Securities Available for Sale:
December 31, 2002:
U.S. governmental agency $27,035 $ 434 $ (6)
States and political subdivisions 29,198 1,683 (1)
Collateralized mortgage obligations 2,119 117 (0)
Corporate 4,336 63 (2)
Equity 763 0 0
------ ----- -----
Total $63,451 $2,297 $ (9)
====== ===== =====
December 31, 2001:
U.S. treasury $ 3,043 $ 38 $ 0
U.S. governmental agency 25,808 597 (23)
States and political subdivisions 31,832 956 (98)
Collateralized mortgage obligations 172 1 0
Corporate 6,477 160 0
Equity 13 0 0
------ ----- -----
Total $67,345 $1,752 $(121)
====== ===== =====
Gross realized gains (losses) on sales and calls of securities were:
(In Thousands of Dollars)
2002 2001 2000
---- ---- ----
Gross realized gains $ 30 $ 28 $ 21
Gross realized losses (13) 0 (23)
-- -- --
Net realized gains (losses) $ 17 $ 28 $ (2)
== == ===
The fair value of securities at December 31, 2002, by stated maturity, is 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.
Fair Value
----------
(In Thousands of Dollars)
Due in one year or less $15,805
Due after one year through five years 28,448
Due after five years through ten years 14,398
Due after ten years 4,037
------
Total 62,688
Equity securities 763
------
Total securities $63,451
======
At December 31, 2002, securities with a carrying value approximating $40,839,000 were pledged to secure public trust deposits, securities sold under agreements to repurchase, and for such other purposes as required or permitted by law.
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NOTE E - SECONDARY MORTGAGE MARKET ACTIVITIES
Loans serviced for others, which are not reported as assets, total $373,800,000 and $296,900,000 at 2002 and 2001.
Activity for capitalized mortgage servicing rights was as follows:
(In Thousands of Dollars)
2002 2001
---- ----
Servicing rights:
Beginning of year $1,607 $1,165
Additions 2,078 1,318
Amortized to expense (1,623) (876)
------- ------
End of year $2,062 $1,607
====== ======
Management has determined that a valuation allowance is not necessary at December 31, 2002 or 2001.
NOTE F – LOANS
Loans at year end were as follows:
(In Thousands of Dollars)
2002 2001
---- ----
Commercial $97,951 $106,148
Mortgage Loans on Real Estate:
Residential 198,756 225,053
Commercial 194,194 169,250
Construction 47,103 33,203
Consumer 60,685 64,151
Credit Card 2,732 2,630
------- -------
Subtotal 601,421 600,435
Less:
Allowance for loan losses 11,536 11,038
Net deferred loan costs 26 81
------- -------
Loans, net $589,859 $589,316
======= =======
Activity in the allowance for loan losses was as follows:
(In Thousands of Dollars)
2002 2001 2000
---- ---- ----
Beginning balance $11,038 $ 9,857 $ 9,317
Provision for loan losses 1,170 1,467 736
Loans charged off ( 1,035) (680) (825)
Recoveries 363 394 629
------ ------ ------
Ending balance $11,536 $11,038 $ 9,857
====== ====== ======
Impaired loans were as follows:
(In Thousands of Dollars)
2002 2001
---- ----
Year end loans with no allocated allowance for loan losses $3,429 $2,117
Year end loans with allocated allowance for loan losses 1,209 2,957
----- -----
Total $4,638 $5,074
===== =====
Amount of the allowance for loan losses allocated $ 118 $ 339
(In Thousands of Dollars)
2002 2001 2000
---- ---- ----
Nonaccrual loans at year end $ 630 $ 501 $1,715
Loans past due over 90 days still on accrual at year end 3,130 2,089 462
Average of impaired loans during the year 4,754 1,513 5,939
Interest income recognized during impairment 283 10 488
Cash-basis interest income recognized 32 12 10
Approximately $37,146,000 and $44,840,000 of commercial loans were pledged to the Federal Reserve Bank of Chicago at December 31, 2002 and 2001 to secure overnight borrowings.
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NOTE G – PREMISES AND EQUIPMENT
Year end premises and equipment were as follows:
(In Thousands of Dollars)
2002 2001
---- ----
Land $ 3,925 $ 3,641
Buildings 14,988 14,242
Furniture, fixtures and equipment 12,792 12,405
------ ------
Total 31,705 30,288
Less:
Accumulated depreciation (14,191) (12,664)
------ ------
Total $17,514 $17,624
====== ======
Rent expense was $173,000 for 2002, $126,000 for 2001, and $130,000 for 2000. Rental commitments for the next five years under non-cancelable operating leases were as follows (before considering renewal options that generally are present):
2003 $193,000
2004 $167,000
2005 $149,000
2006 $131,000
2007 $132,000
-------
Total $772,000
=======
NOTE H – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of goodwill for the year is as follows:
Beginning of year $3,533
Branch goodwill reclassified from unidentifiable intangible asset 1,347
Goodwill from acquisition during year 0
------
End of year $4,880
======
Goodwill is no longer amortized starting in 2002. The effect of not amortizing goodwill is summarized as follows:
2002 2001 2000
---- ---- ----
Reported net income $11,826 $ 9,122 $ 8,543
Add back: goodwill amortization - 296 296
------ ------ ------
Adjusted net income $11,826 $ 9,418 $ 8,839
====== ====== ======
Basic earnings per share:
Reported net income $ 2.19 $ 1.72 $ 1.59
Goodwill amortization - .06 .06
------ ------ ------
Adjusted net income $ 2.19 $ 1.78 $ 1.65
====== ====== ======
Diluted earnings per share:
Reported net income $ 2.14 $ 1.69 $ 1.57
Goodwill amortization - .06 .06
------ ------ ------
Adjusted net income $ 2.14 $ 1.75 $ 1.63
====== ====== ======
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Acquired Intangible Assets
Acquired intangible assets at year end were as follows:
2002 2001
---- ----
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets:
Core deposit intangibles $4,740 $1,756 $4,740 $1,458
Other customer relationship intangibles 346 172 346 108
----- ----- ----- -----
Total $5,086 $1,928 $5,086 $1,566
===== ===== ===== =====
Aggregate amortization expense was $362,000, $785,000, and $744,000 for 2002, 2001, and 2000.
Estimated amortization expense for each of the next five years:
2003 $ 356
2004 $ 356
2005 $ 344
2006 $ 298
2007 $ 297
NOTE I – FEDERAL INCOME TAXES
Federal income taxes consist of the following:
(In Thousands of Dollars)
2002 2001 2000
---- ---- ----
Current expense $5,778 $5,211 $4,055
Deferred expense (benefit) 109 (699) (150)
----- ----- -----
Total $5,887 $4,512 $3,905
===== ===== =====
A reconciliation of the difference between federal income tax expense and the amount computed by applying the federal statutory tax rate of 35% in 2002 and 2001, and 34% 2000 is as follows:
(In Thousands of Dollars)
2002 2001 2000
---- ---- ----
Tax at statutory rate $6,200 $4,772 $4,244
Effect of surtax exemption 0 0 24
Effect of tax-exempt interest (374) (428) (463)
Other 61 168 100
----- ----- -----
Federal income taxes $5,887 $4,512 $3,905
===== ===== =====
Effective tax rate 33% 33% 31%
The components of deferred tax assets and liabilities consist of the following at December 31,year end:
(In Thousands of Dollars)
2002 2001
---- ----
Deferred tax assets:
Allowance for loan losses $4,038 $3,863
Deferred compensation 822 863
Other 297 420
----- -----
Total deferred tax assets 5,157 5,146
----- -----
Deferred tax liabilities:
Fixed assets (1,348) (1,388)
Mortgage servicing rights (722) (562)
Purchase accounting adjustment (401) (444)
Unrealized gain on securities available for sale (798) (573)
Other (245) (202)
----- -----
Total deferred tax liabilities (3,514) (3,169)
----- -----
Net deferred tax assets $1,643 $1,977
===== =====
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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, 2002 or 2001.
Deferred tax assets at December 31, 2002 and 2001 are included in other assets in the accompanying consolidated balance sheets.
NOTE J – DEPOSITS
Time deposits of $100,000 or more were $49,475,000 and $59,419,000 at year end 2002 and 2001.
Scheduled maturities of time deposits at December 31, 2002 were as follows:
(In Thousands of Dollars)
Year Amount
---- ------
2003 $142,068
2004 36,569
2005 15,685
2006 9,412
2007 14,681
2008 and after 308
-------
Total $218,723
NOTE K – BORROWINGS
Information relating to securities sold under agreements to repurchase is as follows:
(In Thousands of Dollars)
2002 2001
---- ----
At December 31:
Outstanding Balance $30,358 $32,223
Average Interest Rate .93% 1.62%
Daily Average for the Year:
Outstanding Balance $30,743 $27,558
Average Interest Rate 1.33% 3.44%
Maximum Outstanding at any Month End $37,194 $33,336
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, 2002 and 2001.
The Company established a line of credit agreement with Citizens Bank, Flint, Michigan on May 24, 2000 at an interest rate of 8.45%. This agreement was renewed on March 1, 2001 and on July 2, 2002 at a variable rate 80 basis points below Citizen's prime commercial borrowing rate. 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 - Alma, Firstbank (Mt. Pleasant) and Firstbank - West Branch. At December 31, 2002 there was no outstanding balance. At December 31, 2001 the Company had drawn $2,700,000 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.
| 26 |
Firstbank - Alma has notes payable with a total balance of $151,000 and $168,000 at December 31, 2002 and 2001. These notes mature on January 1, 2010 and were part of the consideration paid for a subsidiary, which has since been sold.
NOTE L - 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:
(In Thousands of Dollars)
2002 2001
---- ----
Maturities May 2003 through November 2022 at
fixed rates ranging from 1.87% to 7.3%, averaging 5.43% $68,433 $72,747
Each Federal Home Loan Bank advance is payable at its maturity date with a prepayment penalty. The advances were collateralized by $141,455,000 and $162,332,000 of first mortgage loans under a blanket lien arrangement at year end 2002 and 2001.
Maturities over the next five years are as follows:
(In Thousands of Dollars)
2003 $ 4,000
2004 1,500
2005 10,962
2006 0
2007 5,165
2008 and after 46,806
------
Total $68,433
======
NOTE M – BENEFIT PLANS
The 401(k) plan has ESOP provisions, is 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 2002 and 2001 there were 195,972 and 191,107 ESOP shares outstanding with a market value of $4,919,000 and $3,660,000. The Company’s 2002, 2001, and 2000 matching 401(k) contributions charged to expense were $357,000, $326,000 and $274,000 respectively. The percent of the Company’s matching contributions to the 401(k) is determined 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, and 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 N – STOCK OPTIONS
The Firstbank Corporation Stock Option Plans of 1993 and 1997 (“Plans”), as amended, provide for the grant of 325,779 and 488,519 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 pro forma net income and earnings per share for both 2002 and 2001 due to an increase in pro forma compensation expense for 2001.
| 27 |
The following is a summary of option transactions which occurred during 2000, 2001, and 2002:
Number Weighted
Of Shares Average
--------- -------
Outstanding - January 1, 2000 449,297 $15.43
Granted 60,197 $17.28
Exercised (16,209) $ 7.96
Cancelled (24,084) $17.10
-------
Outstanding - December 31, 2000 469,201 $15.83
Granted 50,054 $16.43
Exercised (11,594) $ 8.86
Cancelled (18,368) $18.94
-------
Outstanding - December 31, 2001 489,293 $15.93
Granted 51,083 $23.33
Exercised (39,337) $10.96
Cancelled (19,675) $21.49
-------
Outstanding - December 31, 2002 481,364 $16.89
Available for Grant - December 31, 2002 163,066
Available for Exercise - December 31, 2002 345,141 $15.59
Available for Exercise - December 31, 2001 341,893 $14.79
Available for Exercise - December 31, 2000 253,649 $14.15
Outstanding Exercisable
----------- -----------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Number Life Price Number Price
------ ------ ---- ----- ------ -----
$ 6 - $ 9 98,113 2.6 $7.76 98,113 $ 7.76
$12 - $16 88,960 6.6 $14.67 57,230 $13.69
$17 - $19 162,292 6.4 $17.53 121,505 $17.47
$23 - $26 131,999 7.4 $24.40 68,294 $25.07
------- -------
481,364 345,141
The fair value of options granted during 2002, 2001, and 2000 is estimated using the Black-Scholes model and the following weighted average information: risk free interest rate of 4.55%, 4.52%, and 5.71%; expected life of 7 years; expected volatility of stock price of 20.9%, 19.7%, and 19.8%, and expected dividends of 3% per year. The fair value of the options granted in 2002, 2001, and 2000 were $196,670, $167,000, and $254,000 respectively for options outstanding at December 31, 2002. The range of exercise prices was $6.68 to $25.07 and the weighted average remaining contractual life was 6.3 years.
NOTE O – RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2002 were as follows:
(In Thousands of Dollars)
Beginning balance $26,458
New loans 30,836
Effect of changes in related parties (21,265)
Repayments ( 1,421)
------
Ending balance $34,608
Deposits from principal officers, directors, and their affiliates at year end 2002 and 2001 were $11,492,000 and $12,511,000 respectively.
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NOTE P – 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:
(In Thousands of Dollars)
2002 2001
---- ----
Fixed Rate Variable Rate Fixed Rate Variable Rate
---------- ------------- ---------- -------------
Commitments to make loans $41,921 $ 8,148 $38,883 $11,975
(at market rates)
Unused lines of credit and letters of
credit $13,784 $65,158 $10,910 $50,826
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments have interest rates ranging from 3.4% to 10.75% and maturities ranging from 15 years to 30 years.
NOTE Q - 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, 2002.
NOTE R - 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, 2002 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 $22,520,000. 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 S - STOCK REPURCHASE PROGRAM
On July 23, 2002 the Company announced a stock repurchase plan authorizing the repurchase of up to $10 million in Firstbank Corporation common stock. As of December 31, 2002, 122,710 shares had been repurchased at an average price of $24.05.
NOTE T - 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.
| 29 |
Actual and required capital amounts at year end (in Thousands of Dollars) and ratios are presented below:
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
2002
Total Capital to Risk Weighted Assets
Consolidated $76,113 13.16% $46,279 8.00% $57,848 10.00%
Firstbank - Alma 21,658 12.37% 14,008 8.00% 17,511 10.00%
Firstbank - Mt. Pleasant 15,192 12.30% 9,882 8.00% 12,352 10.00%
Firstbank - West Branch 17,741 12.38% 11,465 8.00% 14,331 10.00%
Firstbank - Lakeview 11,310 11.56% 7,827 8.00% 9,783 10.00%
Firstbank - St. Johns 4,388 13.48% 2,605 8.00% 3,256 10.00%
Tier 1 (Core) Capital to Risk Weighted Assets
Consolidated $68,904 11.91% $23,139 4.00% $34,709 6.00%
Firstbank - Alma 19,448 11.11% 7,004 4.00% 10,560 6.00%
Firstbank - Mt. Pleasant 13,638 11.04% 4,941 4.00% 7,411 6.00%
Firstbank - West Branch 15,935 11.12% 5,732 4.00% 8,599 6.00%
Firstbank - Lakeview 10,081 10.30% 3,913 4.00% 5,870 6.00%
Firstbank - St. Johns 3,978 12.22% 1,302 4.00% 1,954 6.00%
Tier 1 (Core) Capital to Average Assets
Consolidated $68,904 8.80% $31,331 4.00% $39,164 5.00%
Firstbank - Alma 19,448 7.40% 10,510 4.00% 13,138 5.00%
Firstbank - Mt. Pleasant 13,638 8.49% 6,423 4.00% 8,029 5.00%
Firstbank - West Branch 15,935 8.46% 7,533 4.00% 9,416 5.00%
Firstbank - Lakeview 10,081 8.30% 4,857 4.00% 6,071 5.00%
Firstbank - St. Johns 3,978 9.44% 1,686 4.00% 2,108 5.00%
2001
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%
| 30 |
NOTE U – FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as follows at year end:
(In Thousands of Dollars)
2002 2001
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets:
Cash and cash equivalents $ 60,547 $ 60,547 $ 45,814 $ 45,814
Securities available for sale 63,451 63,451 67,345 67,345
Federal Home Loan Bank stock 4,746 4,746 4,633 4,633
Loans held for sale 9,663 9,663 5,722 5,722
Loans, net 589,859 595,042 589,316 590,917
Accrued interest receivable 2,873 2,873 3,595 3,595
Financial Liabilities:
Deposits $(576,909) $(581,602) $(561,139) $(563,273)
Securities sold under agreements to
repurchase and overnight borrowings $ (30,358) $ (30,358) $ (32,223) $ (32,223)
Federal Home Loan Bank advances (68,433) (76,616) (72,747) (76,124)
Notes payable (151) (183) (2,868) (2,906)
Accrued interest payable (836) (836) (1,319) (1,319)
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 re-price 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 re-pricing or re-pricing 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 was not material to the consolidated financial statements at December 31, 2002 and 2001.
NOTE V – BASIC AND DILUTED EARNINGS PER SHARE
(In Thousands, Except per Share Data) Year Ended December 31
2002 2001 2000
---- ---- ----
Basic Earnings per Share
Net income $11,826 $ 9,122 $ 8,543
Weighted average common shares outstanding 5,399 5,308 5,363
Basic earnings per share $ 2.19 $ 1.72 $ 1.59
====== ====== ======
Diluted Earnings per Share
Net income $11,826 $ 9,122 $ 8,543
Weighted average common shares outstanding 5,399 5,308 5,363
Add dilutive effects of assumed exercises of options 124 78 82
------ ------ ------
Weighted average common and dilutive potential
Common shares outstanding 5,523 5,386 5,445
------ ------ ------
Diluted earnings per share $ 2.14 $ 1.69 $ 1.57
====== ====== ======
| 31 |
Stock options for 131,999, 270,378, and 287,767 shares of common stock were not considered in computing diluted earnings per share for 2002, 2001, and 2000 because they were anti-dilutive.
NOTE W – FIRSTBANK CORPORATION (PARENT COMPANY ONLY)CONDENSED FINANCIAL INFORMATION (In Thousands of Dollars)
CONDENSED BALANCE SHEETS
Years Ended December 31 2002 2001
---- ----
ASSETS
Cash and cash equivalents $ 2,782 $ 1,108
Commercial loans 1,290 1,300
Investment in and advances to banking subsidiaries 68,807 66,201
Other assets 9,970 9,635
------- ------
Total Assets $82,849 $78,244
LIABILITIES AND EQUITY
Accrued expenses and other liabilities $ 2,668 $ 3,118
Notes payable 0 2,700
Shareholders' equity 80,181 72,426
------- ------
Total Liabilities and Shareholders' Equity $82,849 $78,244
======= ======
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31 2002 2001 2000
---- ---- ----
Dividends from banking subsidiaries $10,478 $10,302 $ 6,323
Other income 4,080 3,950 137
Other expense (5,308) (5,785) (1,457)
----- ----- -----
Income before income tax and undistributed subsidiary income 9,250 8,467 5,003
Income tax benefit 396 532 342
Equity in undistributed subsidiary income 2,180 123 3,198
------ ------ ------
Net income 11,826 9,122 8,543
Change in unrealized gain (loss) on securities, net of tax and
classification effects 426 698 1,032
------ ------ ------
Comprehensive income $12,252 $ 9,820 $ 9,575
====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31 2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income $11,826 $ 9,122 $ 8,543
Adjustments:
Equity in undistributed subsidiary income (2,180) (122) (3,198)
Cash in other assets (335) (1,687) (7)
Change in other liabilities (450) 409 (218)
------ ------- ------
Net cash from operating activities 8,861 7,722 5,120
Cash flows from investing activities
Purchases of securities available for sale 0 0 (9)
Proceeds from sale of securities available for sale 0 26
Net decrease (increase) in commercial loans 10 (1,300)
Payments for investments in subsidiaries 0 0 5,515
------ ------- ------
Net cash from investing activities 10 (1,274) (5,524)
Cash flows from financing activities
Proceeds from issuance of long-term debt 0 1,400 6,700
Payments of long-term debt (2,700) (5,400)
Proceeds from stock issuance 2,323 1,845 1,965
Purchase of common stock (2,963) (24) (5,227)
Dividends paid and cash paid in lieu of fractional shares
on stock dividend (3,857) (3,419) (3,141)
------ ------- ------
Net cash from financing activities (7,197) (5,598) 297
------ ------- ------
Net change in cash and cash equivalents 1,674 850 (107)
------ ------- ------
Beginning cash and cash equivalents 1,108 258 365
------ ------- ------
Ending cash and cash equivalents $ 2,782 $ 1,108 $ 258
====== ======= =======
| 32 |
NOTE X – OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows (In Thousands of Dollars):
2002 2001 2000
---- ---- ----
Unrealized holding gains and losses on available-for-sale securities $ 674 $1,102 $1,562
Less reclassification adjustments for gains and losses later recognized in income 17 28 (2)
---- ----- -----
Net unrealized gains and losses 657 1,074 1,564
Tax effect (231) (376) (532)
----- ----- -----
Other comprehensive income $ 426 $ 698 $1,032
==== ===== =====
NOTE Y – QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands of Dollars, Except per Share Data) 2002
----
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Interest income $12,497 $12,231 $12,375 $12,145 $49,248
Net interest income 8,121 8,183 8,365 8,318 32,987
Income before federal income taxes 4,038 4,131 4,661 4,883 17,713
Net income 2,697 2,787 3,110 3,232 11,826
Basic earnings per share 0.50 0.52 0.57 0.60 2.19
Diluted earnings per share 0.49 0.50 0.56 0.59 2.14
2001
----
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Interest income $14,311 $14,142 $13,781 $13,276 $55,510
Net interest income 7,257 7,590 7,840 8,230 30,917
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 0.31 0.46 0.47 0.48 1.72
Diluted earnings per share 0.30 0.45 0.46 0.48 1.69
All per share amounts have been adjusted for stock dividends and stock splits. The first, second, and third quarters of 2002 net income amounts have been restated by $30,000 (net of tax) for the impact of adopting SFAS 147 on October 1, 2002.
| 33 |
FIRSTBANK CORPORATION
| BOARD OF DIRECTORS William E. Goggin, Chairman Chairman, Firstbank - Alma Attorney, Goggin & Baker Duane A. Carr Attorney, Miel & Carr 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 & Furniture, 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 |
| 34 |
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 & Furniture, 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 Richard A. Barratt Executive Vice President Gregory A. Daniels Vice President Marita A. Harkness Vice President Gerald E. Kench Vice President Timothy M. Lowe 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 |
| 35 |
FIRSTBANK (MT. PLEASANT)
| BOARD OF DIRECTORS Edward B. Grant, Ph.D., CPA, Chairman General Manager, Public Broadcasting, Central Michigan University Steve K. Anderson President & CEO, Cadillac Tire Center, Cadillac President &CEO, Upper Lakes Tire, Gaylord Jack D. Benson Management Consulting Formerly - President, Old Kent Bank of Cadillac 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) Arlene A. Yost Secretary and Treasurer, Jay's Sporting Goods, Inc. | OFFICERS Thomas R. Sullivan President and Chief Executive Officer John Buckley Community Bank President - Cadillac Mark B. Perry Senior Vice President Robert L. Wheeler Senior 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 Cadillac (Temporary Office - Opened in Feb. 2003) 117 N. Mitchell (231) 775-9000 | Shepherd 258 W. Wright Ave. (989) 828-6625 | Winn 2783 Blanchard Rd. (989) 866-2210 |
| 36 |
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, Incorporated 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 |
| 37 |
FIRSTBANK - LAKEVIEW
| BOARD OF DIRECTORS Chalmer Gale Hixson, Chairman Owner, Country Corner Supermarket Owner, A Flair for Hair Owner, Harry Chalmers, Inc. Owner, Powderhorn Ranch William L. Benear President & Chief Executive Officer, Firstbank - Lakeview Vice President, Firstbank Corporation Duane A. Carr Attorney, Miel and Carr V. Dean Floria Sheridan Township Supervisor Gerald L. Nielsen Owner, Nielsen's TV & Appliance Kenneth A. Rader Owner, Ken Rader Farms Thomas R. Sullivan President & Chief Executive Officer, Firstbank Corporation President & Chief Executive Office, Firstbank (Mt. Pleasant) | OFFICERS William L. Benear President and Chief Executive Officer Kim D. vonKronenberger Senior 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 Remus 201 W Wheatland Ave. (989) 967-3602 | Howard City 20020 Howard City/Edmore Rd. (231) 937-4383 Morley 101 E 4th St. (231) 856-7652 |
| 38 |
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. Frank Pauli President, St. Johns Ford-Mercury, Inc. 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 | 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 1501 Glastonbury (989)227-6995 |
| 39 |
BUSINESS OF THE COMPANY
Firstbank Corporation (the "Company") is a bank holding company. As of December 31, 2002 the Company's subsidiaries are Firstbank - Alma; Firstbank (Mt. Pleasant); First Bank - West Branch; Firstbank - Lakeview; Firstbank - St. Johns; 1st Armored, Incorporated; Gladwin Land Company; 1st Title, Incorporated;, and C.A. Hanes Realty, Incorporated. As of December 31, 2002, the Company and its subsidiaries employed 356 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. Trust services are offered to customers through CB Wealth Management in the Firstbank - Alma main office. 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 counties. 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, Michigan. Firstbank - St. Johns has its main office and one branch located in St. Johns, Michigan. 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 and non-interest revenue resulting from banking and non-bank subsidiary activity. On a consolidated basis, interest and fees on loans accounted for approximately 74% of total revenues in 2002, 78% in 2001, and 82% in 2000. Non-interest revenue accounted for approximately 20% of total revenue in 2002, 15% in 2001, and 9% in 2000. Interest on securities accounted for approximately 5% of total revenue in 2002, 6% in 2001, and 8% in 2000.
| 40 |
CORPORATE INFORMATION
| Annual Meeting: The annual meeting of shareholders will be held on Monday, April 28, 2003, 4:30 p.m., Heritage Center, Alma College, Alma, Michigan. Independent Auditors: Crowe, Chizek & Company, LLP Grand Rapids, Michigan General Councel: Varnum Riddering Schmidt & Howlett, LLP Grand Rapids, Michigan | Stock Information: Organizations making a market in Firstbank Corporation Common Stock include: Archipelago, LLC B-Trade Services, LLC Dain Rauscher, Inc. Fahnestock & Company, Inc. Goldman, Sachs & Company Herzog, Heine, Geduld, LLC Howe, Barnes Investments, Inc. Instinet Corporation Island System Corporation Keefe, Bruyette & Woods, Inc. Knight Securities, L.P. McDonald Investments Merrill Lynch, Pierce, Fenner Monroe Securities Morgan Stanley RBC Dain Rauscher, Inc. Raymond James Financial Services, Inc. REDIBook ECN, LLC Robert W. Baird & Company, Inc. Sandler O'Neill & Partners Spear, Leeds & Kellogg Stifel, Nicolaus & Company, Inc. Susquehanna Capital Group THE BRUT ECN, LLC Trident Securities, Inc. For research information and/or investment recommendations, contact: Fahnestock & Company, Inc. (800) 863-5434 Howe Barnes Investments, Inc. (800) 800-4693 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 |
| 41 |
| [ X ] | PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE | REVOCABLE PROXY FIRSTBANK CORPORATION |
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS For Annual Meeting of Shareholders On April 28, 2003 | 1. | IN THE ELECTION OF DIRECTORS (except as marked to the contrary below): David D. Roslund, Thomas R. Sullivan | For [ ] | With- hold [ ] | For All Except [ ] |
| The undersigned, a shareholder of FIRSTBANK CORPORATION, hereby appoints THOMAS R. SULLIVAN and SAMUEL G. STONE as proxies, each with full power to act without the other and to appoint his substitute, and hereby authorizes them to represent and vote, as designated hereon, all shares of Firstbank Corporation that the undersigned is entitled to vote at the annual meeting of shareholders of Firstbank Corporation to be held April 28, 2003 and at any adjournment thereof. | INSTRUCTION: To withhold authority to vote for any individual nominee, mark "For All Except" and write that nominee's name in the space provided below: |
2. | Upon all matters which may properly come before the meeting, including matters incident to the conduct of the meeting or any adjournments thereof. | For [ ] | Against [ ] | Abstain [ ] |
| THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN A MANNER DIRECTED HEREIN BY THE BELOW SIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" ALL NOMINEES LISTED IN ITEM 1 AND IN THE PROXIES' DISCRETION ON OTHER MATTERS WHICH PROPERLY COME BEFORE THE MEETING. |
| Please be sure to sign and date this Proxy in the box below. Date: , 2003 ----Shareholder sign above -------Co-holder (if any) sign above--- | Please sign exactly as your name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership or limited liability company, please sign in partnership or company name by authorized person. |
Detach above card, sign, date and mail in postage paid envelope provided.
FIRSTBANK CORPORATION
PLEASE MARK/SIGN, DATE AND RETURN THIS PROXY
PROMPTLY USING TH ENCLOSED ENVELOPE
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.