U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| [X] | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2012. |
| [ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] for the transition period from to . |
Commission File Number: 000-14209
FIRSTBANK CORPORATION
(Exact name of registrant as specified in its charter)
| Michigan | 38-2633910 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |
| 311 Woodworth Avenue | ||
| Alma, Michigan | 48801 | |
| (Address of principal executive offices) | (Zip Code) | |
| Registrant’s telephone number, including area code: (989) 463-3131 | ||
| Securities registered pursuant to Section 12(b) of the Exchange Act: | ||
| Title of Class | Name of each exchange on which registered | |
| Common Stock | The Nasdaq Stock Market LLC | |
Securities registered pursuant to Section 12(g) of the Exchange Act: none
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No _X_
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller company filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer ___Accelerated filer Non-accelerated filer ___ Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X
Aggregate Market Value of common stock held by non-affiliates of the registrant as of June 30, 2012: $73,507,207
Common stock outstanding at March 1, 2013: 8,022,952 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s annual report to shareholders for the year ended December 31, 2012, are incorporated by reference in Part II.
Portions of the definitive proxy statement for the registrant’s annual shareholders meeting to be held April 22, 2013 are incorporated by reference in Part III.
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FORWARD LOOKING STATEMENTS
This annual report on Form 10-K including, without limitation, management’s discussion and analysis of financial condition and results of operations and other sections of the Corporation’s Annual Report to Shareholders which are incorporated by reference in this report, contains forward looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation itself. Words such as “anticipate”, “believe”, “determine”, “estimate”, “expect”, “forecast”, “intend”, “is likely”, “plan”, “project”, “opinion”, variations of such terms, and similar expressions are intended to identify such forward looking statements. The presentations and discussions of the provision and allowance for loan losses and determinations as to the need for other allowances presented or incorporated by reference in this report are inherently forward looking statements in that they involve judgments and statements of belief as to the outcome of future events. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward looking statements. Internal and external factors that may cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition of 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; changes in accounting principles, policies and guidelines; and the vicissitudes of the national economy. The Corporation undertakes no obligation to update, amend or clarify forward looking statements, whether as a result of new information, future events, or otherwise.
The Corporation’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the Corporation’s website (www.firstbankmi.com) as soon as reasonably practicable after the Corporation electronically files the material with, or furnishes it to, the Securities and Exchange Commission. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.
PART 1
ITEM 1. Business.
Firstbank Corporation (“We” or the “Corporation”) is a bank holding company. Prior to February 1, 2013, we owned all of the outstanding stock of Firstbank – Alma, Firstbank (Mt. Pleasant), Firstbank – West Branch, Keystone Community Bank, Firstbank – West Michigan, and FBMI Risk Management Services, Inc. (a captive insurance company). Effective February 1, 2013, we consolidated four bank charters into one charter. From February 1, 2013 going forward we have two subsidiary banks, Firstbank and Keystone Community Bank.
Our business is concentrated in a single industry segment – commercial banking. Each subsidiary bank is a full-service community bank. Our subsidiary banks offer all customary banking services, including the acceptance of checking, savings, and time deposits and the making of commercial, mortgage (principally single family), home improvement, automobile, and other consumer loans. Trust services are offered to customers through Citizens Bank Wealth Management in the Firstbank – Alma main office.
Our principal sources of revenues 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 75% of total revenue in 2012, 79% in 2011, and 80% in 2010. Non-interest revenue accounted for approximately 17% of total revenue in 2012, 13% in 2011, and 14% in 2010. Interest on securities accounted for approximately 8% of total revenue 2012 and 8% in 2011, and 6% in 2010. We have no foreign assets and no income from foreign sources. The business of our subsidiary banks is not seasonal to any material extent. Beginning in 2001, each of our subsidiary banks established mortgage company subsidiaries. Each of our subsidiary banks also offers securities brokerage services at their main offices through arrangements with third party brokerage firms.
Firstbank is a Michigan state chartered bank which was incorporated in 1894. Its main office and one branch are located in Mount Pleasant, Michigan. As of December 31, 2012, prior to the merger, Firstbank also had two full service branches in each of Union Township, Lakeview and Cadillac, and one full service branch located in each of the following communities near Mount Pleasant: Clare, Shepherd, Howard City, Morley, Remus, Canadian Lakes, and Winn. Firstbank Mortgage Company, a subsidiary of the bank, was established in 2001. As a result of the bank charter consolidation effective February 1, 2013, all of our branches are branches of Firstbank (except for branches of Keystone Community Bank). Also on February 1, 2013 we closed five offices of the consolidated Firstbank, in Morley, Prescott, Sunfield, Winn and Woodland.
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Prior to February 1, 2013, Firstbank – Alma was a Michigan state chartered bank. It and its predecessors have operated continuously in Alma, Michigan since 1880. Its main office and one branch are located in Alma. Firstbank – Alma also had two full service branches located in St Johns, and one full service branch located in each of the following communities near Alma: Ashley, Dewitt, Ithaca, Merrill, Pine River Township, St. Charles, St. Louis and Vestaburg. Firstbank – Alma Mortgage Company, a subsidiary of the bank, was established in 2001. Firstbank – Alma was consolidated into Firstbank on February 1, 2013.
Prior to February 1, 2013, Firstbank – West Branch was a Michigan state chartered bank which was incorporated in 1980. Its main office and two branches are located in West Branch, Michigan. Firstbank – West Branch also has one full service branch located in each of the following communities near West Branch: Fairview, Hale, Higgins Lake, Prescott, Rose City, St. Helen and West Branch Township. Firstbank – West Branch owns Firstbank - West Branch Mortgage Company (a subsidiary of the bank, established in 2001). Firstbank - West Branch also owns 46% of First Investors Title, LLC which is a title insurance provider. Firstbank – West Branch was consolidated into Firstbank on February 1, 2013.
Prior to February 1, 2013, Firstbank – West Michigan (formerly Ionia County National Bank of Ionia) was a Michigan state chartered bank which was established in 1934 and acquired by us on July 1, 2007. Its main office and two branches are located in Ionia, with one branch each in Belding, Hastings, Lowell, Sunfield, and Woodland. Firstbank – West Michigan was consolidated into Firstbank on February 1, 2013.
Keystone Community Bank is a Michigan state chartered bank which was established in 1997 and acquired by us on October 1, 2005. Its main office and three branches are located in Kalamazoo with two additional branches in Portage and one branch in Paw Paw. Keystone Mortgage Services, LLC, is a 99% owned subsidiary of the bank. Keystone Premium Finance, LLC, is a 90% owned subsidiary of the bank. Keystone T.I. Sub, LLC is wholly owned by the bank, and KCB Title Insurance Agency, LLC is a 50% owned subsidiary of Keystone T.I. Sub, LLC. Keystone Community Bank was not consolidated into Firstbank.
The following table shows comparative information concerning our subsidiary banks at December 31, 2012:
Firstbank – Alma | Firstbank (Mt. Pleasant) | Firstbank – West Branch | Keystone | Firstbank - West Michigan | Total | |||||||||||||||||||
| (In Thousands of Dollars) | ||||||||||||||||||||||||
| Assets | $ | 366,645 | $ | 421,250 | $ | 249,626 | $ | 250,648 | $ | 205,619 | $ | 1,493,788 | ||||||||||||
| Deposits | $ | 309,613 | $ | 372,947 | $ | 199,409 | $ | 198,962 | $ | 169,174 | $ | 1,250,105 | ||||||||||||
| Loans | $ | 197,315 | $ | 289,823 | $ | 184,550 | $ | 178,185 | $ | 116,537 | $ | 966,410 | ||||||||||||
As of December 31, 2012 we employed 438 persons on a full-time equivalent basis.
Banking in our market areas and in the State of Michigan is highly competitive. In addition to competition from other commercial banks, we face significant competition from non-bank financial institutions. Savings and loan associations are able to compete aggressively with commercial banks for deposits and loans. Credit unions and finance companies are also significant factors in the consumer loan market. Insurance companies, investment firms and retailers are significant competitors for investment products. Banks compete for deposits with a broad spectrum of other types of investments such as mutual funds, debt securities of corporations and debt securities of the federal government, state governments and their respective agencies. The principal methods of competition for financial services are price (interest rates paid on deposits, interest rates charged on loans and fees charged for services) and service (the convenience and quality of services rendered to customers).
Our subsidiary banks compete directly with other banks, thrift institutions, credit unions and other non-depository financial institutions in five geographic banking markets where their offices are located. Firstbank – Alma primarily competes in Gratiot, Clinton, Bay, Montcalm, and Saginaw counties; Firstbank (Mount Pleasant) primarily in Isabella, Clare, Mecosta, Montcalm, and Wexford counties; Firstbank – West Branch primarily in Iosco, Oscoda, Ogemaw, and Roscommon counties; Keystone Community Bank primarily in Kalamazoo and Van Buren counties, and Firstbank – West Michigan primarily competes in Ionia, Kent, Montcalm, Barry, and Eaton counties.
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SUPERVISION AND REGULATION
Banks and bank holding companies are extensively regulated. We are a bank holding company that is regulated by the Federal Reserve System. Firstbank – Alma, Firstbank (Mount Pleasant), Firstbank – West Branch, Keystone Community Bank and Firstbank – West Michigan are chartered under state law and are supervised, examined, and regulated by the Federal Deposit Insurance Corporation and the Division of Financial Institutions of the Michigan Office of Financial and Insurance Regulation.
General
Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, our growth and earnings performance can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the Federal Deposit Insurance Corporation (“FDIC”), the Commissioner of the Michigan Office of Financial and Insurance Regulation ("Commissioner"), the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to us and our banks establishes a comprehensive framework for our respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds, our depositors, and the public, rather than our shareholders.
Federal law and regulations establish supervisory standards applicable to the lending activities of our bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.
Regulatory Developments
Dodd-Frank Act: The Dodd-Frank Act was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, established the new federal Consumer Financial Protection Bureau ("CFPB"), and requires the CFPB and other federal agencies to implement many new and significant rules and regulations. The CFPB has issued significant new regulations that impact consumer mortgage lending and servicing. Those regulations become effective in January 2014. In addition, the CFPB is drafting regulations that will change the disclosure requirements and forms used under the Truth in Lending Act and Real Estate Settlement and Procedures Act. Compliance with these new laws and regulations and other regulations under consideration by the CFPB may result in additional costs to us.
Deposit Insurance: The FDIC finalized changes to its deposit insurance assessment base effective April 1, 2011, which uses average consolidated total assets less average tangible equity as the assessment base instead of quarterly deposits. Additional information about these changes may be found in this Item 1 below under the heading "Our Banks – Deposit Insurance."
As a result of provisions of the Dodd-Frank Act, all funds in a "noninterest-bearing transaction account" were insured in full by the FDIC from December 31, 2010, through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the general FDIC deposit insurance coverage of up to $250,000 available to depositors. The temporary coverage for noninterest-bearing transaction accounts expired as scheduled on December 31, 2012. Large depositors may look to reduce their exposure to individual institutions and spread their deposits among various institutions. While we don’t believe the impact of the expiring deposit insurance will have a significant impact on our banks or our customers, it is possible that large depositors could remove their uninsured balances from our banks. However, our banks could also benefit from movement of large uninsured balances from other financial institutions to our banks. The increase in maximum deposit insurance coverage to $250,000 was made permanent under the Dodd-Frank Act.
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Debit Card Interchange Fees and Routing: The Federal Reserve Board in June 2011 issued a rule to implement a provision in the Dodd-Frank Act that requires it to set debit-card interchange fees so they are "reasonable and proportional" in relation to the cost of the transaction incurred by the card issuer. The rule could result in a significant reduction in banks' debit-card interchange revenue. Though the rule technically does not apply to institutions with less than $10 billion, there is concern that the price controls will harm community banks, such as our banks, which will be pressured by the marketplace to lower their own interchange rates.
Future Legislation. Various other legislative and regulatory initiatives, including proposals to overhaul the banking regulatory system, are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Such future legislation regarding financial institutions may change banking statutes and our operating environment in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending on whether any such potential legislation is introduced and enacted. The nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable. We cannot determine the ultimate effect that any such potential legislation, if enacted, would have upon our financial condition or results of operations.
Firstbank Corporation
General. Firstbank Corporation is registered with, and subject to regulation by, the Federal Reserve Board under the Bank Holding Company Act, as amended (the "BHCA"). Under the BHCA, we are subject to periodic examination by the Federal Reserve Board, and are required to file with the Federal Reserve Board periodic reports of our operations and such additional information as the Federal Reserve Board may require.
In accordance with Federal Reserve Board policy, we are expected to act as a source of financial strength to our subsidiary banks and to commit resources to support our subsidiary banks in circumstances where we might not do so absent such policy. The Dodd-Frank Act codified this policy as a statutory requirement.
In addition, if the Commissioner deems one or more of our subsidiary bank's capital to be impaired, the Commissioner may require our subsidiary bank to restore its capital by a special assessment upon us as the bank's sole shareholder. If we were to fail to pay any such assessment, the directors of the applicable bank would be required, under Michigan law, to sell the shares of the bank's stock owned by us to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the bank's capital.
Investments and Activities. In general, any direct or indirect acquisition by us of any voting shares of any bank which would result in our direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation between us and another financial holding company or bank holding company, will require the prior written approval of the Federal Reserve Board under the BHCA.
The merger or consolidation of an existing bank subsidiary of ours with another bank, or the acquisition by such a subsidiary of assets of another bank, or the assumption of liability by such a subsidiary to pay any deposits in another bank, will require the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act. In addition, in certain such cases, an application to, and the prior approval of, the Federal Reserve Board under the BHCA and/or the Commissioner under the Michigan Banking Code, may be required.
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other items, be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve Board's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (a) a leverage capital requirement expressed as a percentage of total average assets, and (b) a risk-based requirement expressed as a percentage of total risk-weighted assets. The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders' equity) to total average assets of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.
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Included in our Tier 1 capital as of December 31, 2012, is $36.1 million of trust preferred securities (classified on our balance sheet as "Subordinated Debentures"). The Federal Reserve has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank holding companies. The aggregate amount of trust preferred securities and certain other capital elements is limited to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit could be included in the Tier 2 capital, subject to restrictions. The provisions of the Dodd-Frank Act imposed additional limitations on the ability to include trust preferred securities as Tier 1 capital; however, these additional limitations do not apply to our outstanding trust preferred securities.
Dividends. Firstbank Corporation is a corporation separate and distinct from our subsidiary banks. Most of our revenues are dividends paid by our banks. Thus, our ability to pay dividends to our shareholders is indirectly limited by statutory restrictions on our banks' ability to pay dividends described below. Further, in a policy statement, the Federal Reserve Board has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. Additionally, the Federal Reserve Board possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Similar enforcement powers over our banks are possessed by the FDIC. The "prompt corrective action" provisions of federal law and regulation authorizes the Federal Reserve Board to restrict the payment of dividends by us for an insured bank which fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve Board, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution a corporation, like us, can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution.
Prior to January 30, 2012, under the rules of the Troubled Asset Relief Program ("TARP") the consent of the United States Treasury was required for us to declare or pay any dividend or make any distribution on or repurchase of common stock other than (a) regular quarterly cash dividends of not more than $0.225 per share, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction, or (b) dividends payable solely in shares of our common stock. Since our exit from the TARP program, those restrictions no longer apply.
Federal Securities Regulation. Our common stock is registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. We are therefore subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under those statutes and related regulations.
Our Subsidiary Banks
General. Each of our banks is a Michigan banking corporation, and its deposit accounts are insured by the Deposit Insurance Fund (the "DIF") of the FDIC. As DIF insured Michigan chartered banks, our banks are subject to the examination, supervision, reporting and enforcement requirements of various agencies. These agencies and the federal and state laws applicable to our banks and their operations, extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.
Deposit Insurance. As an FDIC-insured institution, our banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of four categories and assessed insurance premiums, based upon their respective levels of capital and results of supervisory evaluation.
The FDIC is required to establish assessment rates for insured depository institutions at levels that will maintain the DIF at a Designated Reserve Ratio (DRR) selected by the FDIC within a range of 1.15% to 1.50% of estimated insured deposits. The FDIC is allowed to manage the pace at which the reserve ratio varies within this range. Due to recent disruptions in the financial markets and large numbers of bank failures in recent years, the DRR fell below 1.15%. The FDIC has adopted an Amended Restoration Plan which established the time within which the reserve ratio must be returned to 1.15% at seven years. The FDIC imposed a special assessment on all insured depository institutions that was collected on September 30, 2009. The FDIC may impose additional special assessments under certain circumstances. Additionally, in the fourth quarter of 2009, insured institutions were required to prepay their estimated risk-based assessments for all of 2010, 2011 and 2012 based on a 5% annual growth rate.
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The FDIC implemented changes to its deposit insurance assessment base effective April 1, 2011, which uses average consolidated total assets less average tangible equity as the assessment base instead of quarterly deposits. Under this new calculation, most well capitalized banks will pay 5 to 9 basis points annually, increasing up to 35 basis points for banks that post significant supervisory concerns. This base rate may be adjusted for the level of unsecured debt and brokered deposits, resulting in adjusted rates ranging from 2.5 to 9 basis points annually for most well capitalized banks to 30 to 45 basis points for banks that pose significant supervisory concerns. We estimate our annual assessment rate under these new guidelines to be 14 basis points in 2013.
During the fourth quarter of 2009, we prepaid estimated quarterly deposit insurance premium assessments to the FDIC for periods through the fourth quarter of 2012. These estimated quarterly deposit insurance premium assessments were based on projected deposit balances over the assessment periods. Due to changes in how FDIC premiums are assessed, the unused prepaid deposit insurance premium assessments totaled $2.0 million at December 31, 2012 and will be expensed over future assessment periods. The actual expense over the assessment periods will be different from this prepaid amount due to various factors, including variances in actual deposit balances and the assessment base and rates used during each assessment period.
In addition, our banks elected to participate in the FDIC's Transaction Account Guarantee Program (TAGP), which required us to pay an additional assessment to the FDIC. Under the TAGP, funds in non-interest bearing transaction accounts, in interest-bearing transaction accounts with an interest rate of 0.25% or less (after June 30, 2010), and in Interest on Lawyers Trust Accounts (IOLTA) had a temporary unlimited guarantee from the FDIC. This temporary coverage expired on December 31, 2010. The Dodd-Frank Act extended protection similar to that provided under the TAGP through December 31, 2012 for only non-interest bearing transaction accounts. This coverage applied to all insured depository institutions, and there was no separate FDIC assessment for the insurance. Furthermore, this unlimited coverage was separate from, and in addition to, the coverage provided to depositors with respect to other accounts held at an insured depository institution.
FICO Assessments. Our subsidiary banks, as members of the DIF, are subject to assessments to cover the payments on outstanding obligations of the Financing Corporation ("FICO"). From now until the maturity of the outstanding FICO obligations in 2019, DIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits.
Commissioner Assessments. Michigan banks are required to pay supervisory fees to the Commissioner to fund the operations of the Commissioner. The amount of supervisory fees paid by a bank is based upon the bank's total assets, as reported to the Commissioner.
Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered, FDIC insured non-member banks, such as our banks. A leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders' equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions.
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized."
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Regulations define these capital categories as follows:
Total Risk-Based Capital Ratio | Tier 1 Risk-Based Capital Ratio | Leverage Ratio | |||
| Well capitalized | 10% or above | 6% or above | 5% or above | ||
| Adequately capitalized | 8% or above | 4% or above | 4% or above | ||
| Undercapitalized | Less than 8% | Less than 4% | Less than 4% | ||
| Significantly undercapitalized | Less than 6% | Less than 3% | Less than 3% | ||
| Critically undercapitalized | -- | -- | A ratio of tangible equity to total assets of 2% or less |
As of December 31, 2012, each of our subsidiary banks' ratios exceeded minimum requirements for the well capitalized category.
Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.
Tier 1 Leverage Ratio | Tier 1 Risk-Based Capital Ratio | Total Risk-Based Capital Ratio | ||||||||||
| Minimum regulatory requirement | 4 | % | 4 | % | 8 | % | ||||||
| Well capitalized regulatory level | 5 | % | 6 | % | 10 | % | ||||||
| Firstbank Corporation – Consolidated | 9.71 | % | 14.73 | % | 15.99 | % | ||||||
| Firstbank – Alma | 8.15 | % | 14.55 | % | 15.81 | % | ||||||
| Firstbank (Mount Pleasant) | 8.12 | % | 11.49 | % | 12.74 | % | ||||||
| Firstbank – West Branch | 8.55 | % | 12.75 | % | 14.01 | % | ||||||
| Keystone Community Bank | 11.61 | % | 14.51 | % | 15.78 | % | ||||||
| Firstbank – West Michigan | 7.29 | % | 11.57 | % | 12.83 | % | ||||||
The following table shows the amounts by which our capital (on a consolidated basis) exceeds current regulatory requirements for a well capitalized bank on a dollar amount basis:
Tier 1 Leverage | Tier 1 Risk-Based Capital | Total Risk-Based Capital | ||||||||||
| (In Thousands of Dollars) | ||||||||||||
| Capital Balances at December 31, 2012 | $ | 142,884 | $ | 142,884 | $ | 155,135 | ||||||
| Well Capitalized Regulatory Capital Required | 58,854 | 38,809 | 77,618 | |||||||||
| Capital in Excess of Regulatory Well Capitalized | $ | 84,030 | $ | 104,075 | $ | 77,517 | ||||||
Dividends. Under Michigan law, our banks are restricted as to the maximum amount of dividends it may pay on its common stock. Our banks may not pay dividends except out of net income after deducting its losses and bad debts. A Michigan state bank may not declare or pay a dividend unless the bank will have surplus amounting to at least 20% of its capital after the payment of the dividend.
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Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by our bank, if such payment is determined, by reason of the financial condition of our bank, to be an unsafe and unsound banking practice.
Insider Transactions. Our banks are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to us or our subsidiaries, on investments in the stock or other securities of our subsidiaries and the acceptance of the stock or other securities of us or our subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by our banks to their respective directors and officers, to our directors and officers, to the directors and officers of our bank, to our principal shareholders and to "related interests" of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of our company or one of its subsidiaries or a principal shareholder in our company may obtain credit from banks with which our banks maintain a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines to promote the safety and soundness of federally insured depository institutions. These guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
Investments and Other Activities. Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law, as implemented by FDIC regulations, also prohibits FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC in accordance with federal law. These restrictions are not currently expected to have a material impact on the operations of our bank.
Consumer Protection Laws. Our banks' business includes making a variety of types of loans to individuals. In making these loans, we are subject to State usury and regulatory laws and to various federal statutes, including the privacy of consumer financial information provisions of the Gramm-Leach-Bliley Act and regulations promulgated there under, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act and the regulations promulgated there under, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of our bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, our banks are subject to extensive regulation under State and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon our banks and their respective directors and officers.
Branching Authority. Michigan banks have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals. Banks may establish interstate branch networks through acquisitions of other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.
Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Michigan Office of Financial and Insurance Regulation, Division of Financial Institutions, (a) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (b) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (c) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (d) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (e) establishment by foreign banks of branches located in Michigan.
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The nature of the business of our subsidiaries is such that they hold title, on a temporary or permanent basis, to a number of parcels of real property. These include property owned for branch offices and other business purposes as well as properties taken in, or in lieu of, foreclosures to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of remediation of contamination on or originating from such properties, even though they are wholly innocent of the actions which caused the contamination. Such liabilities can be material and can exceed the value of the contaminated property.
Investment Securities Portfolio
The carrying values of investment securities as of the date indicated are summarized as follows:
| (In Thousands of Dollars) | December 31 | |||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Taxable | ||||||||||||
| Treasury Note | $ | 0 | $ | 0 | $ | 12,530 | ||||||
| US Government Agencies | 106,885 | 133,834 | 82,897 | |||||||||
| States and Political Subdivisions | 38,015 | 31,162 | 15,510 | |||||||||
| Mortgage Backed Securities | 66,277 | 71,052 | 55,899 | |||||||||
| Collateralized Mortgage Obligations | 61,030 | 57,845 | 54,643 | |||||||||
| Corporate and Other | 1,672 | 1,664 | 1,647 | |||||||||
| Total Taxable | $ | 273,879 | $ | 295,557 | $ | 223,126 | ||||||
| Tax-Exempt | ||||||||||||
| States and Political Subdivisions | $ | 79,799 | $ | 46,627 | $ | 32,577 | ||||||
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Analysis of Investment Securities Portfolio
The following table shows, by class of maturities at December 31, 2012, the amounts and weighted average yields of such investment securities (1):
Carrying Value | Average Yield(2) | |||||||
| (In Thousands of Dollars) | ||||||||
| U.S. Government Agencies: | ||||||||
| One Year or Less | $ | 50,025 | 3.16 | |||||
| Over One Through Five Years | 55,222 | 2.71 | ||||||
| Over Five Years Through Ten Years | 1,638 | 2.06 | ||||||
| Total | $ | 106,885 | ||||||
| States and Political Subdivisions: | ||||||||
| One Year or Less | $ | 42,887 | 2.05 | |||||
| Over One Through Five Years | 49,492 | 2.66 | ||||||
| Over Five Through Ten Years | 22,022 | 3.28 | ||||||
| Over Ten Years | 3,413 | 4.86 | ||||||
| Total | $ | 117,814 | ||||||
| Mortgage Backed Securities: | ||||||||
| One Year or Less | $ | 270 | 4.12 | |||||
| Over One Through Five Years | 1,756 | 4.90 | ||||||
| Over Five Through Ten Years | 47,573 | 3.19 | ||||||
| Over Ten Years | 16,678 | 3.42 | ||||||
| Total | $ | 66,277 | ||||||
| Collateralized Mortgage Obligations: | ||||||||
| One Year or Less | $ | 0 | - | |||||
| Over One Through Five Years | 2,928 | 2.76 | ||||||
| Over Five Through Ten Years | 3,789 | 4.52 | ||||||
| Over Ten Years | 54,313 | 3.44 | ||||||
| Total | $ | 61,030 | ||||||
| Corporate and Other: | ||||||||
| One Year or Less | $ | 1,672 | - | |||||
| Total | $ | 1,672 | ||||||
| TOTAL | $ | 353,678 | ||||||
| (1) | Calculated on the basis of the carrying value and effective yields weighted for the scheduled maturity of each security. |
| (2) | Weighted average yield has been computed on a fully taxable equivalent basis. The rates shown on securities issued by states and political subdivisions have been presented assuming a 35% tax rate. |
Loan Portfolio
The following table presents the loans outstanding at December 31st for the years ended:
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| (In Thousands of Dollars) | ||||||||||||||||||||
| Loan Categories: | ||||||||||||||||||||
| Commercial and Industrial | $ | 149,265 | $ | 156,551 | $ | 164,413 | $ | 192,096 | $ | 184,455 | ||||||||||
| Commercial Real Estate | 357,831 | 365,029 | 373,996 | 398,416 | 391,572 | |||||||||||||||
| Real Estate Mortgages | 331,896 | 340,060 | 354,007 | 377,261 | 403,695 | |||||||||||||||
| Real Estate Construction | 58,530 | 60,280 | 81,016 | 85,229 | 103,206 | |||||||||||||||
| Consumer | 66,240 | 61,989 | 59,543 | 69,735 | 75,296 | |||||||||||||||
| Total | $ | 963,762 | $ | 983,909 | $ | 1,032,975 | $ | 1,122,737 | $ | 1,158,224 | ||||||||||
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The following table shows the maturity of commercial and agricultural and real estate construction loans outstanding at December 31, 2012. Also provided are the amounts due after one year, classified according to their sensitivity to changes in interest rates.
One Year or Less | One Year to Five Years | After Five Years | Total | |||||||||||||
| (In Thousands of Dollars) | ||||||||||||||||
| Commercial and Agricultural | $ | 82,315 | $ | 56,070 | $ | 10,880 | $ | 149,265 | ||||||||
| Real Estate Construction | 26,258 | 23,730 | 8,542 | 58,530 | ||||||||||||
| Total | $ | 108,573 | $ | 79,800 | $ | 19,422 | $ | 207,795 | ||||||||
| Loans Due after One Year: | ||||||||||||||||
| With Pre-determined Rate | $ | 67,248 | $ | 9,204 | $ | 76,452 | ||||||||||
| With Adjustable Rates | 12,552 | 10,218 | 22,770 | |||||||||||||
| Total | $ | 79,800 | $ | 19,422 | $ | 99,222 | ||||||||||
Nonperforming Loans and Assets
The following table summarizes nonaccrual, troubled debt restructurings and past-due loans at December 31st for the years ended:
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| (In Thousands of Dollars) | ||||||||||||||||||||
| Nonperforming Loans: | ||||||||||||||||||||
| Nonaccrual Loans: | ||||||||||||||||||||
| Commercial and Agricultural | $ | 447 | $ | 1,771 | $ | 3,565 | $ | 3,576 | $ | 6,511 | ||||||||||
| Commercial Real Estate | 8,454 | 15,336 | 16,868 | 22,945 | 9,817 | |||||||||||||||
| Real Estate Mortgages | 6,366 | 5,652 | 5,745 | 3,821 | 2,986 | |||||||||||||||
| Consumer | 401 | 210 | 184 | 335 | 268 | |||||||||||||||
| Total | 15,668 | 22,969 | 26,362 | 30,677 | 19,582 | |||||||||||||||
| Accruing Loans 90 Days or More Past Due: | ||||||||||||||||||||
| Commercial and Agricultural | 0 | 0 | 0 | 183 | 1,447 | |||||||||||||||
| Commercial Real Estate | 0 | 0 | 18 | 408 | 663 | |||||||||||||||
| Real Estate Mortgages | 37 | 401 | 573 | 2,504 | 2,790 | |||||||||||||||
| Consumer | 0 | 18 | 15 | 126 | 82 | |||||||||||||||
| Total | 37 | 419 | 606 | 3,221 | 4,982 | |||||||||||||||
| Renegotiated Loans: | ||||||||||||||||||||
| Commercial and Agricultural | 3,230 | 3,562 | 36 | 3,566 | 110 | |||||||||||||||
| Commercial Real Estate | 12,113 | 10,652 | 5,768 | 1,980 | 0 | |||||||||||||||
| Real Estate Mortgages | 5,188 | 4,703 | 4,252 | 1,560 | 165 | |||||||||||||||
| Consumer | 191 | 0 | 0 | 0 | 0 | |||||||||||||||
| Total | 20,722 | 18,917 | 10,056 | 7,106 | 275 | |||||||||||||||
| Total Nonperforming Loans | 36,427 | 42,305 | 37,024 | 41,004 | 24,839 | |||||||||||||||
| Property from Defaulted Loans | 2,925 | 5,251 | 8,316 | 7,425 | 5,382 | |||||||||||||||
| Total Nonperforming Assets | $ | 39,352 | $ | 47,556 | $ | 45,340 | $ | 48,429 | $ | 30,221 | ||||||||||
Nonperforming assets are defined as nonaccrual loans, accruing loans 90 days or more past due, property from defaulted loans and renegotiated loans.
The amount of interest income on the above loans that was included in net income for the period ended December 31, 2012, was $1,822,000. If the nonaccrual and renegotiated loans had performed in accordance with their original terms and had been outstanding throughout the period, or since origination if held for part of the period, an additional $1,007,000 in gross interest income would have been recorded.
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Loan performance is reviewed regularly by external loan review specialists, loan officers and senior management. When reasonable doubt exists concerning collectability of interest or principal, the loan is placed in nonaccrual status. Any interest previously accrued but not collected at that time is reversed and charged against current earnings.
At December 31, 2012 we had $102,686,000 in commercial and mortgage loans for which payments are presently current although the borrowers are experiencing financial difficulties. Those loans are subject to special attention and their status is reviewed on a monthly basis.
At December 31, 2012, there were no concentrations of loans exceeding 10 percent of total loans, which are not otherwise disclosed as a category of loans, in our consolidated balance sheets contained in our Annual Report to shareholders for the year ended December 31, 2012.
Analysis of the Allowance for Loan Losses
The following table summarizes changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category and additions to the allowance which were charged to expense at December 31st for the years ended:
| (In Thousands of Dollars) | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| Balance at Beginning of Period | $ | 21,019 | $ | 21,431 | $ | 19,114 | $ | 14,594 | $ | 11,477 | ||||||||||
| Charge-Offs: | ||||||||||||||||||||
| Commercial and Agricultural | 5,000 | 10,519 | 8,073 | 7,422 | 3,451 | |||||||||||||||
| Residential Real Estate Mortgages | 2,705 | 3,490 | 2,788 | 2,231 | 1,350 | |||||||||||||||
| Consumer | 727 | 913 | 1,102 | 1,532 | 1,014 | |||||||||||||||
| Total Charge-Offs | 8,432 | 14,922 | 11,963 | 11,185 | 5,815 | |||||||||||||||
| Recoveries: | ||||||||||||||||||||
| Commercial and Agricultural | 513 | 692 | 325 | 557 | 252 | |||||||||||||||
| Residential Real Estate Mortgages | 258 | 180 | 216 | 128 | 93 | |||||||||||||||
| Consumer | 292 | 301 | 395 | 349 | 331 | |||||||||||||||
| Total Recoveries | 1,063 | 1,173 | 936 | 1,034 | 676 | |||||||||||||||
| Net Charge-Offs | 7,369 | 13,749 | 11,027 | 10,151 | 5,139 | |||||||||||||||
| Provision for Loan Losses | 7,690 | 13,337 | 13,344 | 14,671 | 8,256 | |||||||||||||||
| Balance at End of Period | $ | 21,340 | $ | 21,019 | $ | 21,431 | $ | 19,114 | $ | 14,594 | ||||||||||
| Net Charge-Offs as a Percent of Average Loans | 0.75 | % | 1.37 | % | 1.05 | % | .90 | % | .45 | % | ||||||||||
The allowance for loan losses is based on management’s evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth, composition of the loan portfolio and other relevant factors. The allowance is increased by provisions for loan losses that have been charged to expense and reduced by net charge-offs.
Allocation of the Allowance for Loan Losses
The allowance for loan losses was allocated to provide for inherent losses within the following loan categories as of December 31st for the years ended:
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||||
| (In Thousands of Dollars) | ||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses | % of loans to total loans | Allowance for loan losses | % of loans to total loans | Allowance for loan losses | % of loans to total loans | Allowance for loan losses | % of loans to total loans | Allowance for loan losses | % of loans to total loans | |||||||||||||||||||||||||||||||
| Commercial and Agricultural | $ | 1,896 | 16 | % | $ | 2,485 | 16 | % | $ | 3,024 | 16 | % | $ | 3,640 | 17 | % | $ | 10,621 | 16 | % | ||||||||||||||||||||
| Secured by Real Estate | 17,776 | 77 | % | 17,432 | 77 | % | 17,109 | 78 | % | 13,942 | 77 | % | 2,644 | 77 | % | |||||||||||||||||||||||||
| Consumer | 805 | 7 | % | 931 | 7 | % | 1,162 | 6 | % | 1,525 | 6 | % | 1,169 | 7 | % | |||||||||||||||||||||||||
| Unallocated | 863 | 0 | % | 171 | 0 | % | 136 | 0 | % | 7 | 0 | % | 160 | 0 | % | |||||||||||||||||||||||||
| Total | $ | 21,340 | 100 | % | $ | 21,019 | 100 | % | $ | 21,431 | 100 | % | $ | 19,114 | 100 | % | $ | 14,594 | 100 | % | ||||||||||||||||||||
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We have developed and implemented a comprehensive quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses. This methodology is applied consistently across our five banking subsidiaries and considers exposures to industries potentially most affected by current risks in the economic and political environment and the review of potential risks in certain credits.
Average Deposits
The daily average deposits and rates paid on such deposits for the years ending December 31st are as follows:
| 2012 | 2011 | 2010 | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
| Average Balance: | (In Thousands of Dollars) | |||||||||||||||||||||||
| Non-interest-bearing demand deposits | $ | 226,061 | $ | 199,849 | $ | 170,823 | ||||||||||||||||||
| Interest-bearing demand deposits | 344,363 | 0.23 | % | 319,053 | 0.41 | % | 274,570 | 0.64 | % | |||||||||||||||
| Other savings deposits | 259,330 | 0.22 | % | 235,422 | 0.44 | % | 194,855 | 0.58 | % | |||||||||||||||
| Other time deposits | 400,397 | 1.31 | % | 470,314 | 1.82 | % | 529,947 | 2.43 | % | |||||||||||||||
| Total average deposits | $ | 1,230,151 | 0.54 | % | $ | 1,224,638 | 0.89 | % | $ | 1,170,195 | 1.58 | % | ||||||||||||
The time remaining until maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2012, was as follows (In Thousands of Dollars):
| Three Months or Less | $ | 43,518 | ||
| Over Three Through Six Months | 26,198 | |||
| Over Six Through Twelve Months | 39,442 | |||
| Over Twelve Months | 58,186 | |||
| Total | $ | 167,344 |
Return on Equity and Assets
The following table sets forth certain financial ratios for the years ended:
| 2012 | 2011 | 2010 | ||||||||||
| Financial Ratios: | ||||||||||||
| Return on Average Total Assets | 0.70 | % | 0.38 | % | 0.25 | % | ||||||
| Return on Average Equity | 7.00 | % | 3.75 | % | 2.56 | % | ||||||
| Average Equity to Average Total Assets | 10.04 | % | 10.07 | % | 9.87 | % | ||||||
| Dividend Payout Ratio | 21.97 | % | 5.58 | % | 16.47 | % | ||||||
Short Term Borrowed Funds
Included in short term borrowed funds are repurchase agreements as described in Note 11 to the consolidated financial statements in our Annual Report to Shareholders for the year ended December 31, 2012, which consist of the following:
| (In Thousands of Dollars) | 2012 | 2011 | 2010 | |||||||||
| Amounts Outstanding at the End of the Year | $ | 42,785 | $ | 46,784 | $ | 41,328 | ||||||
| Weighted Average Interest Rate at the End of the Year | 0.19 | % | 0.19 | % | 0.19 | % | ||||||
| Longest Maturity | 1/1/13 | 1/1/12 | 1/1/11 | |||||||||
| Maximum Amount Outstanding at any Month End During Year | $ | 55,047 | $ | 47,603 | $ | 46,477 | ||||||
| Approximate Average Amounts Outstanding During the Year | $ | 47,605 | $ | 43,847 | $ | 40,338 | ||||||
| Approximate Weighted Average Interest Rate for the Year | 0.18 | % | 0.19 | % | 0.24 | % | ||||||
The weighted average interest rates are derived by dividing the interest expense for the period by the daily average balance during the period.
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ITEM 1A. Risk Factors
You should carefully consider the following risk factors, together with the other information provided in this Annual Report on Form 10-K.
Changes in economic conditions or interest rates may negatively affect our earnings, capital and liquidity.
The results of operations for financial institutions, including our banks, may be materially and adversely affected by changes in prevailing local and national economic conditions, including declines in real estate market values, rapid increases or decreases in interest rates and changes in the monetary and fiscal policies of the federal government. Our profitability is heavily influenced by the spread between the interest rates we earn on investments and loans and the interest rates we pay on deposits and other interest-bearing liabilities. Substantially all our loans are to businesses and individuals in Michigan and any decline in the economy of this area could adversely affect us. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities may be such that they are affected differently by a given change in interest rates.
The value of certain securities in our investment portfolio may be negatively affected by disruptions in the market for those securities and future declines or other-than-temporary impairments could materially adversely affect our future earnings and regulatory capital.
Continued volatility in the market value for certain of our investment securities, whether caused by changes in market perceptions of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in significant fluctuations in the value of the securities. During the fourth quarter of 2008, the Corporation recorded an impairment charge on certain securities in its portfolio. Further impairment of these securities or other securities is possible. In addition, changes in accounting resulting from changes in and interpretations of applicable accounting standards may affect how we account for certain investment securities in our portfolio. The valuation and accounting for our investment securities could have a material adverse impact on our net income and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades or defaults in these securities could result in future classifications as other than temporarily impaired. This could have a material impact on our future earnings and financial condition.
The state of financial markets and the economy may adversely affect our sources of liquidity and capital.
There has been significant recent turmoil and volatility in worldwide financial markets which is, at present, ongoing. These conditions have resulted in a disruption in the liquidity of financial markets, and could directly impact us to the extent we need to access capital markets to raise funds to support our business and overall liquidity position. This situation could affect the cost of such funds or our ability to raise such funds. If we were unable to access any of these funding sources when needed, it could adversely impact our financial condition, results of operations, cash flows, and level of regulatory-qualifying capital.
There can be no assurance that the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act will stabilize the U.S. economy and financial system.
The U.S. Congress enacted the EESA in response to the impact of the volatility and disruption in the capital and credit markets on the financial sector. The U.S. Department of the Treasury and the federal banking regulators are implementing a number of programs under this legislation that are intended to address these conditions and the asset quality, capital and liquidity issues they have caused for certain financial institutions and to improve the general availability of credit for consumers and businesses. In addition, the U.S. Congress enacted the American Recovery and Reinvestment Act (“ARRA”) in an effort to save and create jobs, stimulate the U.S. economy and promote long-term growth and stability. There can be no assurance that EESA, ARRA or the programs that are implemented under them will achieve their intended purposes. The failure of EESA, ARRA or the programs that are implemented under them to achieve their intended purposes could result in a continuation or worsening of current economic and market conditions, and this could adversely affect our financial condition, results of operations, and/or the trading price of our common stock.
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Our credit losses could increase and our allowance for loan losses may not be adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities and nonpayment, if it occurs, may have a material adverse affect on our earnings and overall financial condition as well as the value of our common stock. We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for potential losses based on a number of factors. If our assumptions are wrong, our allowance for loan and lease losses may not be sufficient to cover our losses, thereby having an adverse affect on our operating results, and may cause us to increase the allowance in the future. The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for credit losses. These regulatory agencies may require us to increase our provision for credit losses or to recognize further loan or lease charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for credit losses could have a negative effect on our net income, financial condition and results of operations.
Our business is subject to various lending risks depending on the nature of the borrower's business, its cash flow and our collateral.
Repayment of our commercial loans is often dependent on cash flow of the borrower, which may be unpredictable, and collateral securing these loans may fluctuate in value. Our commercial loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Our commercial real estate loans involve higher principal amounts than other loans, and repayment of these loans may be dependent on factors outside our control or the control of our borrowers. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Because payments on loans secured by commercial real estate often depend upon the successful operating and management of the properties, repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market or the economy or changes in government regulation. If the cash flow from the project is reduced, the borrower's ability to repay the loan and the value of the security for the loan may be impaired.
Our construction loans are based upon estimates of costs to construct and value associated with the completed project. These estimates may be inaccurate. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. Delays in completing the project may arise from labor problems, material shortages and other unpredictable contingencies. If the estimate of the cost of construction is inaccurate, we may be required to advance additional funds to complete construction. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of the project.
Our consumer loans generally have a higher risk of default than our other loans. Consumer loans may involve greater risk than our other loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy, all of which increase when the economy is weak. Furthermore, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
We may experience difficulties in managing our growth.
To sustain our continued growth, we require additional capital to fund our expanding lending activities and any bank or branch acquisitions. We may acquire banks and related businesses that we believe provide a strategic fit with our business. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage such growth. Acquiring other banks and businesses involves risks commonly associated with acquisitions.
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We rely heavily on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our management team, including our Chief Executive Officer, Chief Financial Officer, the Presidents of each of our banks, and our other senior managers and commercial lenders. Losing one or more key members of the management team could adversely affect our operations. We do not maintain key man life insurance on any of our officers or directors.
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. We compete for deposits, loans and other financial services with numerous Michigan-based and out-of-state banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as we are. Many of our competitors have been in business for many years, are larger and have higher lending limits than we do. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.
We are subject to significant government regulation, and any regulatory changes may adversely affect us.
The banking industry is heavily regulated under both federal and state law. These regulations are primarily intended to protect customers, not our creditors or shareholders. As a bank holding company, we are also subject to extensive regulation by the Federal Reserve, in addition to other regulatory and self-regulatory organizations. Our ability to establish new facilities or make acquisitions is conditioned upon the receipt of the required regulatory approvals from these organizations. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of such changes, which could have a material adverse effect on our profitability or financial condition.
We continually encounter technological change, and we may have fewer resources than our competitors to continue to invest in technological improvements.
The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. There can be no assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.
Our articles of incorporation and by-laws and Michigan laws contain certain provisions that could make a takeover more difficult.
Our articles of incorporation and by-laws, and the laws of Michigan, include provisions which are designed to provide our board of directors with time to consider whether a hostile takeover offer is in our best interest and the best interests of our shareholders. These provisions, however, could discourage potential acquisition proposals and could delay or prevent a change in control. The provisions also could diminish the opportunities for a holder of our common stock to participate in tender offers, including tender offers at a price above the then-current price for our common stock. These provisions could also prevent transactions in which our shareholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of our shareholders to approve transactions that they may deem to be in their best interests.
The Michigan Business Corporation Act contains provisions intended to protect shareholders and prohibit or discourage certain types of hostile takeover activities. In addition to these provisions and the provisions of our articles of incorporation and by-laws, Federal law requires the Federal Reserve Board's approval prior to acquisition of "control" of a bank holding company. All of these provisions may have the effect of delaying or preventing a change in control at the company level without action by our shareholders, and therefore, could adversely affect the price of our common stock.
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Our ability to pay dividends is limited by law and contract.
We are a holding company and substantially all of our assets are held by our banks. Our ability to continue to make dividend payments to our shareholders will depend primarily on available cash resources at the holding company and dividends from our banks. Dividend payments or extensions of credit from our banks are subject to regulatory limitations, generally based on capital levels and current and retained earnings, imposed by regulatory agencies with authority over our banks. The ability of our banks to pay dividends is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements. We cannot assure you that our banks will be able to pay dividends to us in the future.
Acquisitions may affect our results.
Our financial results may be adversely affected if we are unable to successfully manage any financial institutions that we acquire.
The market price for our common stock fluctuates.
The market price for our common stock has fluctuated, and the overall market and the price of our common stock may continue to fluctuate. There may be a significant impact on the market price for our common stock due to, among other things:
| • | Variations in our anticipated or actual operating results or the results of our competitors; |
| • | Changes in investors' or analysts' perceptions of the risks and conditions of our business; |
| • | The size of the public float of our common stock; |
| • | Regulatory developments; |
| • | Market conditions; and |
| • | General economic conditions. |
Additionally, the average daily trading volume for our common stock as reported on the Nasdaq National Market is relatively low compared to larger companies whose shares trade on Nasdaq. There can be no assurance that a more active or consistent trading market in our common stock will develop. As a result, relatively small trades could have a significant impact on the price of our common stock.
ITEM 1B. Unresolved Staff Comments
There are no unresolved SEC comments with respect to reports filed by the Corporation under the Securities Exchange Act of 1934.
ITEM 2. Properties
Our headquarters is located in the main branch office in Alma, Michigan. Our subsidiary banks operate 46 banking offices throughout central and southwestern Michigan, most of which are full service facilities. Firstbank operates larger facilities in Alma, Mt. Pleasant, West Branch and Ionia. Keystone Community Bank’s main office is in Kalamazoo. The remaining branch facilities range in size from 1,200 to 3,200 square feet, based on the location and number of employees located at the facility. All but nine of the branch locations are owned by the company, with the remaining facilities rented under various operating lease agreements which have a range of remaining terms and renewal arrangements. In several instances, branch facilities contain more space than is required for current banking operations. This excess space, totaling approximately 17,000 square feet, is leased to unrelated businesses. We also maintain a separate facility for our central operations unit near our headquarters office in Alma, Michigan.
We consider our properties and equipment to be well maintained, in good operating condition and capable of accommodating current growth forecasts for their operations. However, we may choose to add additional branch locations to expand our presence in current or contiguous markets in the future to improve our opportunities for growth. We may also enter into sale/leaseback agreements in the future.
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ITEM 3. Legal Proceedings.
We are parties, as plaintiff or as defendant, to routine litigation arising in the normal course of their business. In the opinion of management, the liabilities arising from these proceedings, if any, will not be material to our consolidated financial condition.
ITEM 4. Mine Safety Disclosures.
Not applicable.
Supplemental Item. Executive Officers of the Registrant.
The following information concerning executive officers of the Corporation has been omitted from the registrant’s proxy statement pursuant to Instruction 3 to Regulation S-K, Item 401(b).
Officers of the Corporation are appointed annually by the Board of Directors of the Corporation and serve at the pleasure of the Board of Directors. Information concerning the executive officers of the Corporation is given below. Thomas R. Sullivan and Samuel G. Stone are executive officers of the corporation. None of the other listed officers are executive officers. Except as otherwise indicated, all existing officers have had the same principal employment for over 5 years.
William L. Benear (age 66) became President & CEO of Firstbank – West Michigan in August 2008. Mr. Benear became executive vice president of Firstbank – West Michigan in February of 2008. Mr. Benear has been a Vice President of the Corporation since 2000. Prior to joining the West Michigan staff, Mr. Benear was President & CEO of Firstbank – Lakeview since January of 2000.
David L. Miller (age 47) was named a Vice President of the Corporation in December 2000. Prior to this appointment Mr. Miller served as Senior Vice President of Firstbank - Lakeview, having been employed there since 1992. Mr. Miller serves in the Human Resources Department for the Corporation and its subsidiaries.
Douglas J. Ouellette (age 46) became President & CEO of Firstbank (Mt. Pleasant) and Vice President of the Corporation in February 2007. Mr. Ouellette joined Firstbank (Mt. Pleasant) in 2000 and has served as Executive Vice President for Firstbank (Mt. Pleasant) since 2005. Subsequent to year end 2012, Mr. Ouellette was named President and Chief Operating Officer of Firstbank following the merger of the bank charters.
Daniel H. Grenier (age 59) became President & CEO of Firstbank – West Branch and Vice President of the Corporation in January 2010. Mr. Grenier joined Firstbank – West Branch in 1987. Prior to his appointment as President & CEO, Mr. Grenier served as Executive Vice President for Firstbank – West Branch.
Richard D. Rice (age 53) was named a Vice President of the Corporation in April 2004. Mr. Rice joined the Corporation in July 2003 and has served as the Corporation’s Controller since December 2003. From 1998 until his appointment to Firstbank Corporation, Mr. Rice served as Vice President – Accounting of National City Corporation (successor to First of America). Previous positions Mr. Rice held during his 13-year tenure with First of America include Vice President – Accounting and several staff accounting positions.
Thomas O. Schlueter (age 55) became President & CEO of Keystone Community Bank and Vice President of the Corporation in October 2005. From November 1998 until his appointment to President of Keystone Community Bank, Mr. Schlueter served as Executive Vice President, in addition to being named Chief Operating Officer and a Director of Keystone Community Bank in December 1999. Prior to joining Keystone Community Bank, Mr. Schlueter was employed by First of America Bank/National City Bank for approximately 23 years, with his last position being that of Senior Vice President/Middle Market Lending Group Manager for Southwest Michigan.
Samuel G. Stone (age 67) was appointed Executive Vice President, CFO, Secretary and Treasurer of the Corporation in December 2001. From November 2000 to the December 2001 appointment, Mr. Stone was Vice President, CFO, Secretary and Treasurer of the Corporation. From 1998 until his appointment to Firstbank Corporation, Mr. Stone served as Senior Vice President – Corporate Planning of National City Corporation (successor to First of America). Previous positions Mr. Stone held during his 28-year tenure with First of America included Senior Vice President and Treasurer, Vice President – Director of Corporate Planning and Vice President – Trust Investments. Subsequent to year end 2012, Mr. Stone was named Chief Financial Officer of Firstbank following the consolidation of the bank charters.
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Thomas R. Sullivan (age 62) was appointed President & CEO of the Corporation in January 2000 and also served as President, CEO, and Director of Firstbank (Mt. Pleasant) from 1991 through 2007. Mr. Sullivan was Executive Vice President of the Corporation from 1996 to 2000 and served as Vice President of the Corporation from 1991 to 1996. Subsequent to year end 2012, Mr. Sullivan was named Chief Executive Officer of Firstbank, following the consolidation of the bank charters.
James E. Wheeler, II (age 53) was appointed President & CEO of Firstbank – Alma in January 2000. Mr. Wheeler has served as Vice President of the Corporation since March 1989. Mr. Wheeler served as Executive Vice President of Firstbank – Alma from 1999 to 2000 and from 1989 to 1999 as Senior Vice President and Chief Loan Officer of Firstbank – Alma. Subsequent to year end 2012, Mr. Wheeler was named Chief Lending Officer of Firstbank following the consolidation of bank charters.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
The information under the caption “Common Stock Data” on page 20 in the registrant’s annual report to shareholders for the year ended December 31, 2012, is here incorporated by reference.
ITEM 6. Selected Financial Data.
The information under the heading “Financial Highlights” on page 4 in the registrant’s annual report to shareholders for the year ended December 31, 2012, is here incorporated by reference.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information under the heading “Management���s Discussion and Analysis of Financial Condition and Results of Operations” on pages 5 through 21 in the registrant’s annual report to shareholders for the year ended December 31, 2012, is here incorporated by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information under the headings “Liquidity and Interest Rate Sensitivity” on pages 12 through 14 and “Quantitative and Qualitative Disclosure About Market Risk” on page 17 in the registrant’s annual report to shareholders for the year ended December 31, 2012, is here incorporated by reference.
ITEM 8. Financial Statements and Supplementary Data.
The following consolidated financial statements, management's report on internal controls, and the Report of Independent Registered Public Accounting Firm are set forth in our annual report, to be delivered to shareholders in connection with the April 22, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balances Sheets at December 31, 2012 and 2011
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 2012, 2011 and 2010
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Consolidated Statements of Changes In Shareholders' Equity
for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the years ended
December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
The supplementary data required by this item set forth under the caption "Note 27 - Quarterly Financial Data" in our annual report, to be delivered to shareholders in connection with the April 22, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.
The portions of our annual report, to be delivered to shareholders in connection with the April 22, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), which are not specifically incorporated by reference as part of this Form 10-K are not deemed to be a part of this report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The Corporation’s management is responsible for the establishing and maintaining effective disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this Form 10-K Annual Report. The Corporation’s Chief Executive Officer and the Chief Financial Officer, after evaluating the effectiveness of the Corporation’s disclosure controls and procedures, have concluded that the Corporation’s disclosure controls and procedures as of December 31, 2012 were adequate and effective to ensure that information required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized, and reported on a timely basis. Management’s responsibility relating to establishing and maintaining effective disclosure controls over financial reporting are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States.
(b) Management’s Report on Internal Controls over Financial Reporting.
As disclosed in the Report on Management’s Assessment of Internal Control Over Financial Reporting on page 22 of the registrant’s annual report to shareholders for the year ended December 31, 2012, (incorporated herein by reference to Exhibit 13 to this Form 10 K), management assessed the Corporation’s system of internal control over financial reporting. Based on this assessment, management believes that, as of December 31, 2012, its system of internal control over financial reporting was effective.
This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
(c) Changes in Internal Controls.
During the year ended December 31, 2012, there were no significant changes in the Corporation's internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Corporation’s internal control over financial reporting. There were no significant changes in the Corporation’s system of internal controls or other factors that could significantly affect internal controls subsequent to December 31, 2012.
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ITEM 9B. Other Information.
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance.
The information under the captions “Board of Directors”, “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held April 22, 2013, is here incorporated by reference.
The Board of Directors of the Corporation has determined that Edward B. Grant, a director and member of the Audit Committee, qualifies as an "Audit Committee Financial Expert" as defined in rules adopted by the Securities and Exchange Committee pursuant to the Sarbanes-Oxley Act of 2002.
The Board of Directors of the Corporation has adopted a Code of Ethics which details principles and responsibilities governing ethical conduct for all Corporation directors and executive officers. The Code of Ethics is filed as an Exhibit to this Report on Form 10-K.
We provide stock options and restricted stock to our employees that qualify for those benefits under the Firstbank Corporation Stock Option Plans of 1997 and 2006, as amended. These plans provide for shares of stock, in either restricted form or under option. Grant of options may be either incentive stock options or nonqualified stock options.
We provide an incentive based bonus program as a part of our overall compensation plan. All full time employees are eligible to receive payment under the plan, provided that our net income for the year is satisfactory. Annual bonuses are paid based on a discretionary evaluation of the performance of the employee and the employee’s individual achievements.
ITEM 11. Executive Compensation.
Information contained under the captions “Director Compensation”, “Compensation Discussion and Analysis”, Executive Compensation”, “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held April 22, 2013, is here incorporated by reference.
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ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
The information under the caption “Voting Securities” in the registrant’s definitive proxy statement for our annual meeting of shareholders to be held April 22, 2013, is here incorporated by reference.
Securities Authorized for Issuance Under Equity Compensation Plans. We had the following equity compensation plans at December 31, 2012:
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to be issued upon exercise of outstanding options | Weighted-average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A) | ||||||||||
| Plan Category | (A) | (B) | (C) | |||||||||
| Equity compensation plans approved by security holders | 356,030 | $ | 16.29 | 61,642 | ||||||||
| Equity compensation plans not approved by security holders | 0 | - | 0 | |||||||||
| Total | 356,030 | $ | 16.29 | 61,642 | ||||||||
These equity compensation plans are more fully described in Note 16 to the Consolidated Financial Statements.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
The information under the captions “Certain Relationships and Related Transactions” and “Corporate Governance – Independence of Directors and Attendance at Meetings” in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held April 22, 2013, is hereby incorporated by reference.
ITEM 14. Principal Accountant Fees and Services.
The information set forth under the heading “Relationship with Independent Certified Public Accountants” on page 30 of the Corporation’s definitive proxy statement for its annual meeting of shareholders to be held April 22, 2013, is hereby incorporated by reference.
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ITEM 15. Exhibits and Financial Statement Schedules.
(a) (1) Financial Statements.
The following consolidated financial statements of the Corporation and its subsidiaries and report of independent auditors are incorporated by reference from the registrant’s annual report to shareholders for the year ended December 31, 2012, in Item 8:
| Statement or Report | Page Number in Annual Report | |
| Report of Independent Registered Public Accounting Firm | 21 | |
| Consolidated Balance Sheets as of December 31, 2012 and 2011 | 22 | |
| Consolidated Statements of Income and Comprehensive | ||
| Income for the years ended December 31, 2012, 2011, and 2010 | 23 | |
| Consolidated Statements of Changes in Shareholders’ Equity for | ||
| the years ended December 31, 2012, 2011, and 2010 | 24 | |
| Consolidated Statements of Cash Flows for the years ended | ||
| December 31, 2012, 2011, and 2010 | 25 | |
| Notes to Consolidated Financial Statements | 28-55 |
The consolidated financial statements, notes to consolidated financial statements and report of independent auditors listed above are incorporated by reference in Item 8 of this report from the corresponding portions of the registrant’s annual report to shareholders for the year ended December 31, 2012.
| (2) | Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. |
| (3) | Exhibits (Numbered in accordance with Item 601 of Regulation S-K) The Exhibit Index is located on the final two pages of this report on Form 10-K. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 7, 2013.
FIRSTBANK CORPORATION
| By: | /s/ Thomas R. Sullivan | By: | /s/ Samuel G. Stone | ||
| Thomas R. Sullivan | Samuel G. Stone | ||||
| President & Chief Executive Officer | Executive Vice President & Chief Financial Officer | ||||
| (Principal Executive Officer) | (Principal Financial and Accounting Officer) | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Each director of the Registrant, whose signature appears below, hereby appoints Thomas R. Sullivan and Samuel G. Stone and each of them severally, as his attorney-in-fact, to sign in his name and on his behalf, as a director of the Registrant, and to file with the Commission any and all Amendments to this Report on Form 10-K.
| Signature | Date | ||
| /s/ Thomas R. Sullivan | March 7, 2013 | ||
| Thomas R. Sullivan, Principal Executive Officer and a Director | |||
| /s/ Samuel G. Stone | March 7, 2013 | ||
| Samuel G. Stone, Principal Financial and Accounting Officer | |||
| /s/ Thomas D. Dickinson | March 7, 2013 | ||
| Thomas D. Dickinson, Director | |||
| /s/ David W. Fultz | March 7, 2013 | ||
| David W. Fultz, Director | |||
| /s/ Jeff A. Gardner | March 7, 2013 | ||
| Jeff A. Gardner, Director | |||
| /s/ William E. Goggin | March 7, 2013 | ||
| William E. Goggin, Director | |||
| /s/ Edward B. Grant | March 7, 2013 | ||
| Edward B. Grant, Director | |||
| /s/ Samuel A. Smith | March 7, 2013 | ||
| Samuel A. Smith, Director |
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| Number | Exhibit |
| 3(a) | Restated Articles of Incorporation of Firstbank Corporation, incorporated by reference to the Exhibit 3(a) to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2009. |
| 3(b) | Bylaws. Previously filed as exhibit 3.2 to the Form 8K dated January 30, 2009. Here incorporated by reference. |
| 3(c) | Certificate of Designation for Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated by reference to Exhibit 3.1 to the Firstbank Corporation Current Report on Form 8-K dated January 26, 2009. |
| 4(a) | Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated by reference to Exhibit 4.1 to the Firstbank Corporation Current Report on Form 8-K dated January 26, 2009. |
| 4(b) | Instruments defining the Rights of Security Holders – reference is made to Exhibits 3(a), 3(b) and 3(c). In accordance with Regulation S-K Item 601(b)(4), Firstbank Corporation is not filing copies of instruments defining the rights of holders of long-term debt because none of those instruments authorizes debt in excess of 10% of the total assets of Firstbank Corporation and its subsidiaries on a consolidated basis. Firstbank Corporation hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. |
| 10(a)* | Form of Indemnity Agreement with Directors and Officers. Previously filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K dated June 27, 2005. Here incorporated by reference. |
| 10(b)* | Stock Option and Restricted Stock Plan of 1997. Previously filed as an appendix to the registrant’s definitive proxy statement for its annual meeting of shareholders held April 28, 1997. Here incorporated by reference. |
| 10(c)* | 2006 Stock Compensation Plan. Previously filed as Appendix A to registrant’s proxy statement dated March 13, 2006. Here incorporated by reference. |
| 10(d)* | Employee Stock Purchase Plan of 1999. Previously filed as an exhibit to the registrant’s Registration Statement on Form S-8 (Registration No. 333-89771) filed on October 27, 1999. Here incorporated by reference. |
| 10(e)* | Form of Agreement between Firstbank Corporation and each of Thomas R. Sullivan, Samuel G. Stone, William L. Benear, Douglas J. Ouellette and James E. Wheeler, II providing for certain severance benefits in connection with a change of control of Firstbank Corporation. Filed as exhibit 10 to registrant’s report on Form 10-Q for the quarter ended September 30, 2000. Here incorporated by reference. |
| 10(f)* | Form of Stock Option Agreement. Previously filed as Exhibit 10(h) to the registrant’s annual report on Form 10-K for the year ended December 31, 2004. Here incorporated by reference. |
| 10(g)* | Form of Stock Option Agreement for 2006 Stock Compensation Plan. Filed as exhibit 10.1 to registrant’s report on Form 10-Q for the quarter ended June 30, 2006. Here incorporated by reference. |
| 10(h)* | Form of Restricted Stock Agreement for 2006 Stock Compensation Plan, filed as exhibit 10(k) to registrant’s Annual Report on form 10-K for the year ended December 31, 2009. Here incorporated by reference. |
| 10(i)* | Firstbank Corporation Management Incentive Plan. |
| 12 | Ratio of Earning to Fixed Charges |
| 13 | 2012 Annual Report to Shareholders. (This report, except for those portions which are expressly incorporated by reference in this filing, is furnished for the information of the Securities and Exchange Commission and is not deemed “filed” as part of this filing). This report was delivered to the registrant’s shareholders along with the registrant’s proxy statement dated March 22, 2013, relating to the April 22, 2013 Annual Meeting of Shareholders which was delivered to the registrant’s shareholders in compliance with Rule 14(a)-3 under the Securities Exchange Act of 1934. |
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| 14. | Code of Ethics. |
| 21 | Subsidiaries of Registrant. |
| 23.1 | Consent of Plante & Moran PLLC - Independent Registered Public Accounting Firm. |
| 24 | Powers of Attorney. Contained on the signature page of this report. |
| 31.1 | Certificate of Chief Executive Officer of Firstbank Corporation pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certificate of Chief Financial Officer of Firstbank Corporation pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certificate of Chief Executive Officer and Chief Financial Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008 and 31 CFR subsection 30.15. |
| 99.2 | Firstbank Corporation 401(k) Plan Performance Table. |
| 101. | Interactive Data File |
*Management contract or compensatory plan.
The registrant will furnish a copy of any exhibit listed above to any shareholder of the registrant without charge upon written request to Samuel G. Stone, Secretary, Firstbank Corporation, 311 Woodworth Avenue, P.O. Box 1029, Alma, Michigan 48801.
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