SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______.
Commission file number: 0-14209
FIRSTBANK CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2633910
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification
Number)
311 Woodworth Avenue, Alma, Michigan 48801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 463-3131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock . . . 4,479,161 shares outstanding as of July 31, 1999.
INDEX
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (UNAUDITED) page 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. page 11
Item 3. Quantitative and Qualitative Disclosures about Market
Risk. page 16
PART II. OTHER INFORMATION
- -------- -----------------
Item 2. Changes in Securities and Use of Proceeds page 17
Item 4. Submission of Matters to a Vote of Security Holders page 17
Item 6. Exhibits and Reports on Form 8-K page 17
SIGNATURES page 18
- ----------
EXHIBITS
- --------
Exhibit 27 -- Financial Data Schedule page 19
Page 2
FIRSTBANK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
June 30, December
1999 1998
--------------- --------------
ASSETS
Cash and due from banks $19,522,970 22,203,430
Short term investments 793,505 13,288,206
--------------- --------------
Total cash and cash equivalents 20,316,475 35,491,636
Securities available for sale 90,908,983 101,711,023
Loans
Loans held for sale 2,964,581 5,454,928
Portfolio loans
Commercial 202,975,190 192,212,168
Real estate mortgage 181,557,949 171,554,004
Consumer 73,936,829 71,806,822
--------------- --------------
Total loans 461,434,549 441,027,922
Less allowance for loan losses (9,221,000) (9,048,000)
--------------- --------------
Net loans 452,213,549 431,979,922
Premises and equipment, net 14,437,173 14,057,619
Acquisition intangibles 9,181,093 9,534,210
Accrued interest receivable 3,544,423 3,463,572
Other assets 8,005,459 6,775,852
--------------- --------------
TOTAL ASSETS $598,607,155 $603,013,834
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing accounts 69,398,521 68,887,968
Interest bearing accounts:
Demand 142,789,017 146,741,509
Savings 72,627,717 69,514,970
Time 200,329,204 208,908,518
--------------- --------------
Total deposits 485,144,459 494,052,965
Securities sold under agreements to
repurchase and overnight borrowings 31,768,562 26,577,527
Notes payable 14,168,360 14,316,550
Accrued interest and other liabilities 7,926,747 8,291,848
--------------- --------------
TOTAL LIABILITIES 539,008,128 543,238,890
SHAREHOLDERS' EQUITY
Preferred stock; no par value, 300,000
shares authorized, none issued
Common stock; 10,000,000 shares authorized, 4,488,762 shares issued
and outstanding as of June 1999 and 4,527,256 as of December 1998 51,419,625 52,796,743
Retained earnings 8,353,812 5,874,601
Unrealized gain (loss) on available for sale securities (174,410) 1,103,600
--------------- --------------
Total shareholders' equity 59,599,027 59,774,944
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $598,607,155 $603,013,834
=============== ==============
See notes to consolidated financial statements.
Page 3
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
JUNE 30, 1999 and 1998
Three months
ended June 30,
1999 1998
------------- ------------
Interest income:
Interest and fees on loans $9,885,649 9,503,869
Investment securities
Taxable 925,884 837,822
Exempt from Federal Income Tax 433,122 443,935
Short term investments 69,404 110,316
------------- ------------
Total interest income 11,314,059 10,895,942
Interest expense:
Deposits 4,233,137 4,417,836
Notes payable and other 469,552 382,939
------------- ------------
Total interest expense 4,702,689 4,800,775
------------- ------------
Net interest income 6,611,370 6,095,167
Provision for loan losses 126,000 205,000
------------- ------------
Net interest income after provision for loan losses 6,485,370 5,890,167
Noninterest income:
Gain on sale of mortgage loans 207,155 430,963
Service charges on deposit accounts 405,413 395,441
Trust fees 86,689 79,589
Gain on sale of securities 21,021 (742)
Mortgage servicing 47,956 115,210
Other 538,951 603,061
------------- ------------
Total noninterest income 1,307,185 1,623,522
Noninterest expense:
Salaries and employee benefits 2,564,966 2,483,092
Occupancy 761,268 687,958
Amortization of Intangibles 161,125 178,696
FDIC Insurance premium 19,005 18,031
Michigan Single Business Tax 99,700 96,700
Other 1,343,973 1,435,109
------------- ------------
Total noninterest expense 4,950,037 4,899,586
------------- ------------
Income before federal income taxes 2,842,518 2,614,103
Federal income taxes 862,000 784,000
------------- ------------
NET INCOME $1,980,518 $1,830,103
============= ============
Other comprehensive income:
Change in unrealized gain(loss) on securities,
net of tax and reclassification effects (929,302) 38,205
------------- ------------
COMPREHENSIVE NET INCOME $1,051,216 $1,868,308
============= ============
Per Share: BASIC EARNINGS $0.44 $0.40
============= ============
DILUTED EARNINGS $0.43 $0.39
============= ============
DIVIDENDS $0.16 $0.13
============= ============
Page 4
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
JUNE 30, 1999 and 1998 AND DECEMBER 31, 1998
Six months
ended June 30,
1999 1998
------------- -------------
Interest income:
Interest and fees on loans $19,422,644 $18,995,501
Investment securities
Taxable 1,824,185 1,647,023
Exempt from Federal Income Tax 885,701 887,801
Short term investments 189,569 230,000
------------- -------------
Total interest income 22,322,099 21,760,325
Interest expense:
Deposits 8,538,748 8,828,774
Notes payable and other 902,453 723,557
------------- -------------
Total interest expense 9,441,201 9,552,331
------------- -------------
Net interest income 12,880,898 12,207,994
Provision for loan losses 252,000 575,000
------------- -------------
Net interest income after provision for loan losses 12,628,898 11,632,994
Noninterest income:
Gain on sale of mortgage loans 538,481 992,426
Service charges on deposit accounts 762,367 741,798
Trust fees 183,501 147,216
Gain on sale of securities 21,021 78
Mortgage servicing 67,663 29,248
Other 1,154,694 997,348
------------- -------------
Total noninterest income 2,727,727 2,908,114
Noninterest expense:
Salaries and employee benefits 5,093,438 4,844,307
Occupancy 1,526,034 1,361,549
Amortization of Intangibles 342,828 363,412
FDIC Insurance premium 38,554 36,288
Michigan Single Business Tax 211,400 196,200
Other 2,533,030 2,635,462
------------- -------------
Total noninterest expense 9,745,284 9,437,218
------------- -------------
Income before federal income taxes 5,611,341 5,103,890
Federal income taxes 1,695,000 1,526,000
------------- -------------
NET INCOME $3,916,341 $3,577,890
============= =============
Other comprehensive income:
Change in unrealized gain(loss) on securities,
net of tax and reclassification effects (1,278,010) (64,258)
------------- -------------
COMPREHENSIVE NET INCOME $2,638,331 $3,513,632
============= =============
Per Share: BASIC EARNINGS $0.87 $0.79
============= =============
DILUTED EARNINGS $0.84 $0.76
============= =============
DIVIDENDS $0.32 $0.27
============= =============
Page 5
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Net unrealized
appreciation
(depreciation) on
(in thousands) available for
Common Retained sale
Stock Earnings securities TOTAL
------------------- ---------------- ---------------- ---------------
BALANCES AT DECEMBER 31, 1997 $46,223,949 $7,420,886 $887,059 $54,531,894
Cash dividends - $.55 per share (2,494,909) (2,494,909)
Issuance of 14,395 shares of common stock
through exercise of stock options 251,492 251,492
Issuance of 21,997 shares of common stock
through dividend reinvestment plan 635,966 635,966
Issuance of 16,747 shares of common stock through
supplemental purchase under dividend reinvestment plan 482,354 482,354
5% stock dividend - 215,388 shares 6,353,282 (6,353,946) (664)
Net change in unrealized appreciation (depreciation)
on available for sale securities 216,541 216,541
Purchase of 34,990 shares of stock (1,213,670) (1,213,670)
Issuance of 1,509 shares of stock 63,370 63,370
Net income for 1998 7,302,570 7,302,570
----------------- ---------------- ---------------- -------------
BALANCES AT DECEMBER 31, 1998 $52,796,743 $5,874,601 $1,103,600 $59,774,944
================= ================ ================ =============
Cash dividends - $.32 per share (1,437,130) (1,437,130)
Issuance of 16,443 shares of common stock
through exercise of stock options 212,599 212,599
Issuance of 20,218 shares of common stock
through dividend reinvestment plan 547,077 547,077
Issuance of 10,323 shares of common stock through
supplemental purchase under dividend reinvestment plan 297,978 297,978
Net change in unrealized appreciation (depreciation)
on available for sale securities (1,278,010) (1,278,010)
Purchase of 91,414 shares of stock (2,661,200) (2,661,200)
Issuance of 5,934 shares of stock 226,428 226,428
Net income year to date 3,916,341 3,916,341
----------------- ---------------- ---------------- -------------
BALANCES AT JUNE 30, 1999 $51,419,625 $8,353,812 ($174,410) $59,599,027
================= ================ ================ =============
Page 6
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
Six months ended June 30,
1999 1998
------------- --------------
OPERATING ACTIVITIES
Net income $3,916,341 $3,577,890
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 252,000 575,000
Depreciation of premises and equipment 648,264 630,400
Net amortization of security premiums/discounts 173,062 28,496
Loss (gain) on sale of securities (21,021) 742
Amortization of goodwill and other intangibles 342,828 363,412
Gain on sale of mortgage loans (538,481) (992,426)
Proceeds from sales of mortgage loans 33,458,948 77,631,109
Loans originated for sale (30,430,120) (77,481,037)
Increase in accrued interest receivable and other assets (641,801) (1,628,344)
Increase (decrease) in accrued interest payable and other liabilities (365,101) 639,093
------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,794,919 3,344,335
INVESTING ACTIVITIES
Proceeds from sale of securities available for sale 7,038,979 609,415
Proceeds from maturities of securities available for sale 17,675,148 16,583,618
Purchases of securities available for sale (16,000,506) (20,304,113)
Net increase in portfolio loans (22,975,974) (6,444,971)
Net purchases of premises and equipment (1,027,818) (590,442)
------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (15,290,171) (10,146,493)
FINANCING ACTIVITIES
Net increase (decrease) in deposits (8,908,506) 19,945,663
Increase (decrease) in securities sold under agreements
to repurchase and other short term borrowings 5,191,035 (5,012,099)
Increase (decrease) in note payable (148,190) 3,731,485
Issuance of common stock 1,284,082 593,036
Purchase of common stock (2,661,200)
Cash dividends (1,437,130) (1,248,829)
------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (6,679,909) 18,009,256
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,175,161) 12,455,927
Cash and cash equivalents at beginning of period 35,491,636 24,115,503
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $20,316,475 $36,571,430
============= ==============
Supplemental Disclosure
Interest Paid $9,671,912 $9,552,208
Income Taxes Paid $1,800,000 $1,850,000
Page 7
FIRSTBANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE A - FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1999,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. The balance sheet at December 31, 1998, has been
derived from the audited financial statements at that date. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Corporation's annual report on Form 10-K for the year
ended December 31, 1998.
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available for sale.
NOTE B - SECURITIES
Individual securities held in the security portfolio are classified as
securities available for sale. Securities might be sold prior to maturity due to
changes in interest rates, prepayment risks, yield, availability of alternate
investments, liquidity needs or other factors. Securities classified as
available for sale are reported at their fair value and the related unrealized
holding gain or loss is reported, net of related income tax effects, as a
separate component of shareholders' equity until realized.
NOTE C - LOAN COMMITMENTS
Loan commitments (including unused lines of credit and letters of credit) are
made to accommodate the financial needs of the Banks' customers. The commitments
have credit risk essentially the same as that involved in extending loans to
customers, and are subject to the Banks' normal credit policies and collateral
requirements. Loan commitments, which are predominately at variable rates, were
approximately $75,520,260 and $64,674,655 at June 30, 1999, and December 31,
1998, respectively.
Page 8
NOTE D - NONPERFORMING LOANS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming Loans and Assets
- ------------------------------
The following table summarizes nonaccrual and past due loans at the dates
indicated:
June 30, December 31,
(Dollars in thousands) 1999 1998
-------------------------------------------------- ----------- ------------
Nonperforming loans:
Nonaccrual loans $1,480 $ 790
Loans 90 days or more past due 419 621
Renegotiated loans 74 86
------ -----
Total nonperforming loans $1,973 $1,497
===== =====
Property from defaulted loans $ 520 $ 527
===== ======
Nonperforming loans as a percent of:
Total loans .43% .34%
==== ====
Allowance for loan losses 21.40% 16.55%
====== ======
Analysis of the Allowance for Loan Losses
- -----------------------------------------
The following table summarizes changes in the allowance for loan losses arising
from loans charged off, recoveries on loans previously charged off, and
additions to the allowance which have been charged to expense.
Six Twelve Six
months months months
ended ended ended
June 30, December 31, June 30,
(Dollars in thousands) 1999 1998 1998
- ----------------------------------------------------- ---------------- --------------- -----------------
Balance at beginning of period $ 9,048 $ 8,114 $ 8,114
Charge-offs (441) (712) (343)
Recoveries 362 469 209
----- ------- -----
Net charge-offs (79) (243) (134)
Additions to allowance for
loan losses 252 1,177 575
----- ------- -----
Balance at end of period $9,221 $ 9,048 $8,555
===== ====== =====
Average loans outstanding
during the period $447,987 $414,322 $406,401
======= ======= =======
Loans outstanding at end of period $461,435 $441,028 $411,961
======= ======= =======
Allowance as a percent of:
Total loans at end of period 2.00% 2.05% 2.08%
==== ==== ====
Nonperforming loans at end of period 467% 604% 399%
=== === ===
Net charge-offs as a percent of:
Average loans outstanding .02% .06% .03%
=== === ===
Average Allowance for loan losses .87% 1.67% 1.61%
=== ==== ====
Page 9
NOTE E - RECLASSIFICATION
Certain 1998 amounts have been reclassified to conform to the 1999 presentation.
Page 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- of Operations.
The consolidated financial information presented is for Firstbank Corporation
("Corporation") and its wholly owned subsidiaries, Bank of Alma, Firstbank (Mt.
Pleasant), 1st Bank (West Branch), and Bank of Lakeview (Lakeview),
(collectively the "Banks").
Financial Condition
- -------------------
Total assets of the Corporation decreased $4 million or .73% during the first
half of 1999. Cash and cash equivalents decreased $15 million or 42.76% while
securities available for sale declined $11 millions or 10.62%, offset by loan
growth of $20 million or 4.63% during the first two quarters of 1999.
All classifications of loans, except loans held for sale, grew during the first
six months of 1999. The number of mortgages in process was much higher at
December 31, 1998 than at the end of June 1999. The increase in mortgage rates
over the past six months has caused mortgage lending to slow. The allowance for
loan losses grew $173,000 or 1.91% from December 31, 1998 to June 30, 1999. At
June 30, 1999, the allowance for loan losses as a percent of outstanding loans
was 2.00%, compared to 2.05% at December 31, 1998. The allowance for loan losses
as a percent of nonperforming loans was 467% at the end of June, 1999 compared
to 604% at year end 1998. During the first six months of 1999, the allowance for
loan losses was decreased by net charge offs of $79,000 and increased by a
provision of $252,000. Management continues to maintain the allowance for loan
losses at a level considered appropriate to absorb losses in the portfolio. The
allowance for loan losses balance is established after considering past loan
loss experience, current economic conditions, volume, growth and composition of
the loan portfolio, delinquencies, and other relevant factors.
Total deposits decreased $8.9 million or 1.80% during the first half of 1999.
Time deposits declined by $8.6 million or 4.11% in the six month period December
31, 1998 to June 30, 1998. Over $5 million of this decline is from short term
municipal deposits. Interest bearing demand deposits decreased $4.0 million or
2.69% since the end of December, 1998, but grew in the second quarter of 1999 by
$4.6 million. Non interest demand and savings accounts both increased during the
first six months of 1999.
Bank overnight borrowings increased by $5.2 million or 66.14% during the first
six months of 1999. Given the current rate environment, this source provides the
least cost funding for loans while deposit programs are building the deposit
base.
Total shareholders' equity decreased $176,000 or .29% during the first half of
1999. Increases from net income of $3,916,000 and stock issuances of $1,284,000
were offset by repurchases of $2,661,000, dividends of $1,437,000 and net
unrealized losses on securities available for sale of $1,278,000. In January
1999, the Board of Directors continued the Corporation's stock repurchase
program by authorizing the repurchase of up to 200,000 shares of Firstbank
Corporation stock. As of June 30, 1999, the Corporation had acquired 90,811
shares pursuant to this repurchase program.
Page 11
The change in the unrealized gain or loss on securities available for sale is
the result of changes in the bond market rates and the maturities of $18 million
of securities yielding above market rates being replaced with securities
yielding market rates. At June 30, 1999, book value of the Corporation's common
stock was $13.28 per share, compared to $12.98 per share at December 31, 1998.
On April 1, 1999, one of the affiliate banks sold its 100% interest in a general
insurance agency to an unrelated party. The affiliate bank financed the
transaction. The gain on sale of approximately $50,000 is included in the second
quarter results.
The following table discloses compliance with current regulatory requirements on
a consolidated basis:
Tier 1 Risk-based
(Dollars in thousands) Leverage Capital Capital
----------------------------- -------- ------- ----------
Capital balances at June 30, 1999 50,472 50,472 56,073
Required Regulatory Capital 23,580 17,777 35,554
Capital in excess of regulatory minimums 26,892 32,695 20,519
Capital ratios at June 30, 1999 8.56% 11.36% 12.62%
Regulatory capital ratios -- "well capitalized"
definition 5.00% 6.00% 10.00%
Regulatory capital ratios -- minimum requirement 4.00% 4.00% 8.00%
Results of Operations
- ---------------------
Net income was $1,981,00 for the second quarter and $3,916,000 for the first six
months of 1999 compared to $1,830,000 and $3,578,000 for the corresponding
periods of 1998. Basic earnings per share were $.44 and $.40 for the three
months and $.87 and $.76 for the first six months of 1999 and 1998 respectively.
Average earning assets increased $52 million from June 30, 1998 to June 30,
1999. During this same time period, yields on earning assets declined 72 basis
points from 9.02% at June 30, 1998 to 8.30% at June 30, 1999. During this same
time period, cost on rate related liabilities decreased only 39 basis points
from 4.00% to 3.61%. Net interest margin for the six months ended June 30, 1999
was 4.84% a reduction of 32 basis points from the 5.16% for the corresponding
period in 1998.
The provision for loan losses was $126,000 for the second quarter and $252,000
for the first half of 1999, compared to $204,000 and $575,000 for the same time
periods in 1998. The allowances as a percent of nonperforming loans was 467% at
June 30, 1999 compared to 399% at June 30,1998.
Total noninterest income declined $180,000 during the first six months of 1999
when compared to the same period in 1998. All categories of noninterest income
increased with the exception of gains on sale of mortgage loans. With mortgage
rates increasing to the highest level in two years, the banks' refinancing
demand experienced a significant decline. Gains on sale of mortgage loans
Page 12
declined $454,000 or 45.74% when comparing the six months ended June 30,1998 to
the six months ended June 30,1999. Mortgage servicing income increased $38,000
during this same time period. As mortgage refinancing has declined, the banks
have not had to accelerate the recognition of servicing assets. Trust fees
increased $36,000 or 24.65% during the first six months of 1999 when compared to
the same period in 1998. This increase was the result of an increase in trust
fees to market rates and an expanded offering of employee benefit record keeping
services. Other income increased 15.78% to $1,155,000 at June 30, 1999 when
compared to the June 30, 1998 results of $997,000. Over three quarters of this
growth is from the recognition of an increase in market value, capital gains and
dividends with respect to assets designated to satisfy deferred compensation
obligations. A corresponding entry in other expense offsets this item so that
there is no effect on net income.
Noninterest expense increased 3.26% or $308,000 when comparing the six month
periods ended June 30, 1998 and 1999. The increase in salaries and employee
benefits reflects annual salary adjustments and additional staff. Occupancy
expenses rose 12.08% or $164,000 during the first half of 1999 when compared to
the same period in 1998. Since June 30, 1998, the Corporation has added a new
communications system, updated its mainframe computer and added a new operations
center. Depreciation of these additions will continue to cause the comparison of
1999 cost to increase in relation to the costs in 1998.
YEAR 2000 READINESS DISCLOSURE
The Corporation is currently in the process of addressing a potential problem
that is facing all users of automated information systems. The problem is that
many computer systems that process transactions based on two digits representing
the year of transaction may recognize a date using "00" as the year 1900 rather
than the year 2000. The problem could affect a wide variety of automated
information systems, such as mainframe applications, personal computers, and
communication systems, in the form of software failure, errors, or
miscalculations. By nature, the banking and financial services industries are
highly dependent upon computer systems because of significant transaction
volumes and a date dependency for interest measurements on financial instruments
such as loans and deposits. The Corporation's business is also dependent upon
the error free operation of computer systems of its telecommunications
providers, operators of electronic payment systems, and vendors who provide a
variety of products and services needed by the Corporation and its subsidiaries
to conduct their businesses. Data processing system failures, errors or
miscalculations could affect the ability of some borrowers to make timely
payment of amounts due, and could affect the long term financial viability of
some borrowers.
The Corporation developed a plan to prepare for the year 2000 in 1997. This plan
began with the performance of an inventory of software applications,
communicating with third party vendors and suppliers, and obtaining
certification of compliance with third party providers. The Corporation has a
comprehensive, written plan, which is regularly updated and monitored by
technical personnel. Plan status is regularly reviewed by management of the
Corporation. As of June 30, 1999, it is estimated that the requirements of this
plan are approximately 95% accomplished. The Corporation's subsidiaries have
also initiated a program of informing relevant customers of the Year 2000 issue
and encouraging them to address it in their own businesses.
Page 13
The Corporation will continue to assess the impact of the Year 2000 issue on the
remainder of its computer based systems and applications. The Corporation's
systems and applications are compliant with the century change, allowing the
rest of 1999 to be used for full validation and testing.
The Corporation estimates it will spend approximately $330,000 during 1998 and
1999 to remediate its Year 2000 issues. These costs will primarily consist of
personnel expense for staff dedicated to the effort and professional fees paid
to third party providers of remedial services. Costs to date associated with
Year 2000 issues total $294,000 which include expenditures of $37,000 and
estimated salary costs of $257,000. It is the Corporation's policy to expense
such costs as incurred. The Corporation may also invest in new or upgraded
technology which has definable value lasting beyond 2000. In these instances,
where Year 2000 compliance is merely ancillary, the Corporation may capitalize
and depreciate such an asset over its estimated useful life. In addition to
reviewing its own computer operating systems and applications, the Corporation
has initiated formal communications with its significant suppliers and large
customers to determine the extent to which the Corporation's interface systems
are vulnerable to those third parties' failure to resolve their own Year 2000
issues. There is no assurance that the systems of other companies on which the
Corporation's systems rely will be timely converted. If such modifications and
conversions are not made, or are not completed timely, the Year 2000 issue could
have an adverse impact on the operations of the Corporation. The Corporation has
identified its critical systems that are dependent on outside providers. For
each critical system, extensive testing has either been scheduled or has been
completed. To date, all tested systems have been able to accommodate dates
subsequent to January 1, 2000. The Corporation has contracted with an offsite
location to provide a backup site for its core application processing in the
event the Corporation's hardware of software should not function. Based on
testing of the Corporation's core processing hardware and software, management
believes that both are Year 2000 compliant.
Based on currently available information, management does not presently
anticipate that the costs to address the Year 2000 issues will have a materially
adverse impact on the Corporation's financial condition, results of operations,
or liquidity. Nevertheless, the inability of the Corporation to successfully
address Year 2000 issues could result in interruptions of the Corporation's
business and could have a materially adverse effect on the Corporation's results
of operations.
The costs of the project and the date on which the Corporation believes it will
complete the Year 2000 modifications are based on management's best estimates.
There can be no guarantee that these estimates will be achieved and actual
results could differ from those anticipated. Specific factors that might cause
differences include, but are not limited to, the ability of other companies on
which the Corporation's systems rely to modify or convert their systems to be
Year 2000 compliant, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
This Year 2000 Readiness Disclosure is based upon and partially repeats
information provided by the Corporation's outside consultants, vendors and
others regarding the Year 2000 readiness of the Corporation and its customers,
vendors, and other parties. Although the Corporation believes this information
to be accurate, it has not in each case independently verified such information.
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FORWARD LOOKING STATEMENTS
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 Year 2000 Readiness Disclosure, the
presentations and discussions of the provision and allowance for loan losses,
and determinations as to the need for other allowances presented in this report
are inherently forward-looking statements in that they involve judgements and
statements of belief as to the outcome of future events. These statements are
not guarantees of future performance and involve certain risks, uncertainties,
and assumptions that are difficult to predict with regard to timing, extent,
likelihood, and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecasted in such
forward-looking statements. Internal and external factors that may cause such a
difference include changes in interest rates and interest rate relationships;
demand for products and services; the degree of competition by traditional and
non-traditional competitors; changes in banking laws and regulations; changes in
tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of pending and future litigation and contingencies; trends in customer behavior
and customer ability to repay loans; software failure, errors or
miscalculations; the ability of other companies on which the Corporation relies
to be Year 2000 compliant; the ability of the Corporation to locate and correct
all data sensitive computer code; 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.
Page 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------
Information under the headings, "Liquidity and Interest Rate Sensitivity" on
pages 8 and 9 and "Quantitative and Qualitative Disclosure About Market Risk" on
pages 9 through 11 in the Corporation's annual report to shareholders for the
year ended December 31, 1998, is here incorporated by reference. Firstbank's
annual report is filed as Exhibit 13 to its Form 10-K annual report for its
fiscal year ended December 31, 1998.
Firstbank faces market risk to the extent that both earnings and the fair values
of its financial instruments are affected by changes in interest rates. The
Corporation manages this risk with static GAP analysis and simulation modeling.
Throughout the second quarter of 1999, the results of these measurement
techniques were within the Corporation's policy guidelines. The Corporation does
not believe that there has been a material change in the nature of the
Corporation's primary market risk exposures, including the categories of market
risk to which the Corporation is exposed and the particular markets that present
the primary risk of loss to the Corporation. As of the date of this Form 10-Q
Quarterly Report, the Corporation does not know of or expect there to be any
material change in the general nature of its primary market risk exposure in the
near term.
The methods by which the Corporation manages its primary market risk exposures,
as described in the sections of its Form 10-K Annual Report incorporated by
reference in response to this item, have not changed materially during the
current year. As of the date of this Form 10-Q quarterly report, the Corporation
does not expect to change those methods in the near term. However, the
Corporation may change those methods in the future to adapt to changes in
circumstances or to implement new techniques.
The Corporation's market risk exposure is mainly comprised of its vulnerability
to interest rate risk. Prevailing interest rates and interest rate relationships
in the future will be primarily determined by market factors which are outside
of Firstbank's control. All information provided in response to this item
consists of forward looking statements. Reference is made to the section
captioned "Forward Looking Statements" on page 15 of this Form 10-Q quarterly
report for a discussion of the limitations on Firstbank's responsibility for
such statements.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
- -------
At various times in the second quarter of 1999, the Corporation issued
unregistered shares of its common stock totaling 4,661 shares to members of the
board of directors of the Corporation and the Corporation's subsidiary banks.
The shares were issued as retainers and/or director fees for the directors'
services on the Boards. The Corporation claims an exemption from registration
for the issuances under Section 4(2) of the Securities Act of 1933, as amended,
which exempts transactions by an issuer not involving any public offering. The
issuance did not involve any general solicitation.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------
The annual meeting of shareholders of Firstbank Corporation was held on April
26, 1999. The purpose of the meeting was to elect directors. The name of each
director elected (along with the number of votes cast for or authority withheld)
at the meeting follows:
Votes Cast
Authority
For Withheld
Elected Directors
Edward B Grant 3,892,780.8564 500
Phillip G Peasley 3,892,774.1319 500
Item 6. Exhibits and Reports on Form 8-K
- -------
(a) Exhibits: The following documents are filed as exhibits to this
report on Form 10-Q:
Exhibit 27 -- Financial Data Schedule
(b) Reports on form 8-K:
A form 8-K dated July 28, 1999, was filed during the quarter
reporting the appointment of Thomas R. Sullivan as President-Elect
of Firstbank Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTBANK CORPORATION
---------------------
(Registrant)
Date: August 13, 1999 \s\ John McCormack
--------------- ---------------
John McCormack
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: August 13, 1999 \s\ Mary D. Deci
--------------- ------------
Mary D. Deci
Vice President and Chief Financial
Officer (Principal Accounting
Officer)
Page 18