ITEM 1. Business.
Firstbank Corporation (the “Corporation”) is a bank holding company. The Corporation owns all of the outstanding stock of Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch, Firstbank - Lakeview, Firstbank - St. Johns and Gladwin Land Company, Inc. (a real estate appraisal company).
The Corporation’s business is concentrated in a single industry segment - commercial banking. Each subsidiary bank of the Corporation is a full-service community bank. The subsidiary banks offer all customary banking services, including the acceptance of checking, savings, and time deposits and the making of commercial, 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.
The principal sources of revenues for the Corporation and its subsidiaries are interest and fees on loans and non-interest revenue resulting from banking and non-bank subsidiary activity. On a consolidated basis, interest and fees on loans accounted for approximately 76% of total revenue in 2004, 68% in 2003, and 74% in 2002. Non-interest revenue accounted for approximately 19% of total revenue in 2004, 27% in 2003, and 20% in 2002. Interest on securities accounted for approximately 5% of total revenue in each of 2004, 2003, and 2002. The Corporation has no foreign assets and no income from foreign sources. The business of the subsidiary banks of the Corporation is not seasonal to any material extent. Beginning in 2001, each of the subsidiary banks established mortgage company subsidiaries. Each of the subsidiary banks also offers securities brokerage services at their main offices through arrangements with third party brokerage firms.
Firstbank - Alma is 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 has one full service branch located in each of the following communities near Alma: Ashley, Auburn, 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 (Mount Pleasant) is a Michigan state chartered bank which was incorporated in 1894. Its main office and one branch are located in Mount Pleasant, Michigan. Firstbank (Mount Pleasant) also has two full service branches in Union Township and one full service branch located in each of the following communities near Mount Pleasant: Clare, Shepherd, Cadillac and Winn. Firstbank (Mount Pleasant) Mortgage Company, a subsidiary of the bank, was established in 2001.
Firstbank - West Branch is 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, Rose City, St. Helen and West Branch Township. Firstbank - West Branch owns 1st Armored, Incorporated (an armored car service provider), 1st Title, Incorporated (a title insurance company), Firstbank - West Branch Mortgage Company (a subsidiary of the bank, established in 2001) and a 55% interest in C.A. Hanes Realty, Incorporated.
Firstbank - Lakeview is a Michigan state chartered bank which was established in 1904. Its main office and one branch are located in Lakeview, Michigan. Firstbank - Lakeview also has one full service branch located in each of the following communities; Howard City, Morley, Remus and Canadian Lakes (Morton Township). Firstbank - Lakeview Mortgage Company, a subsidiary of the bank, was established in 2001.
Firstbank - St. Johns is a Michigan state chartered bank which was established in 2000. Its main office and one branch are located in St. Johns, Michigan. Firstbank - St. Johns Mortgage Company, a subsidiary of the bank, was established in 2001.
The following table shows comparative information concerning the Corporation’s subsidiary banks at December 31, 2004:
As of February 28, 2005, the Corporation and its subsidiaries employed 365 persons on a full-time equivalent basis.
Banking in the Corporation’s market areas and in the State of Michigan is highly competitive. In addition to competition from other commercial banks, banks 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).
The Corporation’s 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, Bay, Montcalm, and Saginaw counties; Firstbank (Mount Pleasant) primarily in Isabella, Clare and Wexford counties; Firstbank - West Branch primarily in Iosco, Oscoda, Ogemaw, and Roscommon counties; Firstbank - Lakeview primarily in Mecosta and Montcalm counties; and Firstbank - St. Johns primarily in Clinton County.
Banks and bank holding companies are extensively regulated. The Corporation is a bank holding company that is regulated by the Federal Reserve System. Firstbank - Alma, Firstbank (Mount Pleasant), Firstbank - West Branch, Firstbank - Lakeview and Firstbank - St. Johns 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 Services.
Laws that govern banks significantly limit their business activities in a number of respects. Prior approval of the Federal Reserve Board, and in some cases various other governing agencies, is required for the Corporation to acquire control of any additional banks or branches. The business activities of the Corporation and its subsidiaries are limited to banking and to other activities which are determined, by the Federal Reserve Board, to be closely related to banking. Transactions among the Corporation and its subsidiary banks are significantly restricted. In addition, bank regulations govern the ability of the subsidiary banks to pay dividends or make other distributions to the Corporation.
In addition to laws that affect businesses in general, banks are subject to a number of federal and state laws and regulations which have a material impact on their business. These include, among others, state usury laws, state laws relating to the Expedited Funds Availability Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Bank Secrecy Act, the Community Development and Regulatory Improvement Act, the Financial Institutions Reform, the Recovery and Enforcement Act, the FDIC Improvement Act of 1991 (the “FDIC Improvement Act”), the U.S.A. Patriot Act, electronic funds transfer laws, redlining laws, antitrust laws, environmental laws and privacy laws.
The Corporation’s common stock is registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). It is therefore, subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act provides for numerous changes to the reporting, accounting, corporate governance and business practices of companies as well as financial and other professionals who have involvement with the U.S. public markets. In 2004 section 404 of the Sarbanes-Oxley Act were implemented, which require the bank and its auditors to report on the Company’s system of internal controls. Extensive testing and monitoring of the Company’s internal control environment were performed by both the Company’s management and its external audit firm.
The enactment of the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) represents a pivotal point in the history of the financial services industry. The GLB Act sweeps away large parts of a regulatory framework that had its origins in the Depression Era of the 1930‘s. Effective March 11, 2000, new opportunities became available for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial service organization to offer customers a more complete array of financial products and services. The GLB Act provided a new regulatory framework for regulation through the “financial holding company” which will have, as its umbrella regulator, the Federal Reserve Board. Functional regulation of the financial holding company’s separately regulated subsidiaries will be conducted by their primary functional regulator. In order to qualify as a financial holding company a bank holding company must file an election to become a financial holding company and each of its banks must be “well capitalized” and “well managed”. In addition, the GLB Act makes satisfactory or above Community Reinvestment Act compliance, for insured depository institutions and their financial holding companies, necessary in order for them to engage in new financial activities. The GLB Act provides a federal right to privacy of non-public personal information of individual customers. The Corporation and its subsidiary banks are also subject to certain state laws that deal with the use and distribution of non-public personal information.
The Corporation believes that the GLB Act could significantly increase competition in its business. The Corporation believes that it is qualified to elect financial holding company status but has not yet decided to do so.
The instruments of government monetary policy, as determined by the Federal Reserve Board, may influence the growth and distribution of bank loans, investments, and deposits and may also affect interest rates on loans and deposits. These policies have a significant effect on the operating results of banks.
Under applicable laws, regulations and policies, the Corporation is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each subsidiary bank. Any insured depository institution owned by the Corporation may be assessed for losses incurred by the Federal Deposit Insurance Corporation (the “FDIC”) in connection with assistance provided to, or the failure of, any other insured depository institution owned by the Corporation.
The FDIC has the authority to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources and to establish periodic assessment rates on Bank Insurance Fund (“BIF”) member banks so as to maintain the BIF at the designated reserve ratio defined in the FDIC Improvement Act. Firstbank - Alma and Firstbank (Mount Pleasant) also hold deposits that are insured by the Savings Association Insurance Fund (“SAIF”) administered by the FDIC. Deposit insurance premiums on those deposits are paid to the SAIF at rates applicable to that fund. The FDIC has implemented a system of risk-based premiums for deposit insurance pursuant to which the premiums paid by a depository institution will be based on the perceived probability that the insurance funds will incur a loss in respect of that institution.
Federal law allows bank holding companies to acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law and to establish interstate branch networks through acquisitions of other banks. Michigan and federal law permits both U.S. and non U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriated circumstances and with the approval of the Commissioner: (i) acquisition of Michigan banks by FDIC insured banks, savings banks, or savings and loan associations located in other states (ii) 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; (iii) consolidation of Michigan banks and FDIC insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation; (iv) 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 (v) establishment by foreign banks of branches located in Michigan.
Risk-based capital and leverage standards apply to all banks under federal regulations. The risk-based capital ratio standards establish a systematic analytical framework that is intended to make regulatory capital requirements sensitive to differences in risk profiles among banking organizations, take off-balance sheet liability exposures into explicit account in assessing capital adequacy and minimize disincentives to hold liquid, low risk assets. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments into risk-weighting categories. Higher levels of capital are required for categories perceived as representing greater risk.
Failure to meet minimum capital ratio standards could subject a bank to a variety of enforcement remedies available to the federal regulatory authorities including restrictions on certain kinds of activities, restrictions on asset growth, limitations on the ability to pay dividends, the issuance of a directive to increase capital and the termination of deposit insurance premiums at the lowest available rate.
Each of the Corporation’s subsidiary banks, and the Corporation itself on a consolidated basis, maintains capital at levels which exceed both the minimum and well capitalized levels under currently applicable regulatory requirements.
The following table summarizes compliance with regulatory capital ratios by the Corporation and each of its subsidiary banks at December 31, 2004:
The following table shows the amounts by which the Corporation’s capital (on a consolidated basis) exceeds current regulatory requirements on a dollar amount basis:
The nature of the business of the Corporation’s 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.
Volume/Rate Analysis(1)
The table below provides an analysis of the changes in interest income and interest expense due to volume and rate:
(1)
Changes in volume/rate have been allocated between the volume and rate variances on the basis of the ratio that the volume and rate variances bear to each other.
(2)
Interest is presented on a fully taxable equivalent basis using a federal income tax rate of 35%.
Investment Portfolio
The carrying values of investment securities as of the date indicated are summarized as follows:
Analysis of Investment Securities Portfolio
The following table shows, by class of maturities at December 31, 2004, the amounts and weighted average yields of such investment securities (1):
(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:
The following table shows the maturity of commercial and agricultural and real estate construction loans outstanding at December 31, 2004. Also provided are the amounts due after one year, classified according to their sensitivity to changes in interest rates.
Nonperforming Loans and Assets
The following table summarizes nonaccrual, troubled debt restructurings and past-due loans at December 31st for the years ended:
Nonperforming assets are defined as nonaccrual loans, 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, 2004, was $52,535. 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 $47,059 in gross interest income would have been recorded.
Loan performance is reviewed regularly by external loan review specialists, loan officers and senior management. When reasonable doubt exists concerning collectibility 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, 2004, the Corporation had $47,199,707 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, 2004, there were no concentrations of loans exceeding 10 percent of total loans, which are not otherwise disclosed as a category of loans, in the consolidated balance sheets of the Corporation contained in the Corporation’s Annual Report to shareholders for the year ended December 31, 2004.
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:
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:
*Beginning in 2001 and continuing throughout 2004, management has developed and implemented a more comprehensive quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses. This methodology is applied more consistently across the 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. One result of this methodology has been the reduction in the amount of allowance that is considered unallocated to specific loan categories.
Average Deposits
The daily average deposits and rates paid on such deposits for the years ending December 31st are as follows:
The time remaining until maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2004, was as follows (In Thousands of Dollars):
Return on Equity and Assets
The following table sets forth certain financial ratios for the years ended:
Short Term Borrowed Funds
Included in short term borrowed funds are repurchase agreements as described in Note K to the consolidated financial statements in the Corporation’s Annual Report to Shareholders for the year ended December 31, 2004, which consist of the following:
The weighted average interest rates are derived by dividing the interest expense for the period by the daily average balance during the period.
ITEM 2.
ITEM 2. Properties
The Corporation’s headquarters are located in the main branch office in Alma, Michigan. The subsidiary banks operate 37 branch offices throughout central Michigan, most of which are full service facilities. The subsidiaries operate larger facilities as main offices in Alma, Mt. Pleasant, West Branch, Lakeview, and St. Johns. 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 five 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. The Corporation also maintains a separate facility for its central operations unit near the Corporation’s headquarters office in Alma, Michigan.
Management considers the properties and equipment of the Corporation and its subsidiaries to be well maintained, in good operating condition and capable of accommodating current growth forecasts for their operations.
ITEM 3.
ITEM 3. Legal Proceedings.
The Corporation and its subsidiaries 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 the Corporation’s consolidated financial condition.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders.
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 to the Board of Directors of the Corporation is given below. Except as otherwise indicated, all existing officers have had the same principal employment for over 5 years.
William L. Benear (age 58) became president & CEO of Firstbank - Lakeview and Vice President of the Corporation in January 2000. Prior to his appointment as Lakeview’s President & CEO, Mr. Benear has served as Executive Vice President of Firstbank - Lakeview since 1994.
David M. Brown (age 46) became president & CEO of Firstbank - St. Johns and Vice President of the Corporation in January 2005. Prior to his appointment as St. Johns’ President & CEO, Mr. Brown was worked for over 24 years at both regional and community banks. Positions held during his career include Community Bank President, Commercial Loan Regional Manager, Vice President of Commercial Banking and Branch Manager.
David L. Miller (age 39) 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.
Dale A. Peters (age 62) has been a Vice President of the Corporation, President, CEO, and a director of Firstbank - West Branch since 1987.
Samuel G. Stone (age 59) 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.
Thomas R. Sullivan (age 54) was appointed President & CEO of the Corporation in January 2000. He also serves as President, CEO, and Director of Firstbank (Mt. Pleasant) by appointment in 1991. 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.
James M. Taylor (age 63) was appointed as the President & CEO of Firstbank - St. Johns in March 2000. He was appointed a Vice President of the Corporation in June 2000. Prior to these appointments, Mr. Taylor was Senior Vice President of Firstbank (Mount Pleasant) since 1989. Mr. Taylor retired from his positions with the Corporation and Firstbank - St. Johns effective December 31, 2004.
James E. Wheeler, II (age 45) was appointed President & CEO of Firstbank - Alma in January 2000. He also serves as a Vice President of the Corporation to which he was appointed in 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.
PART II
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
The information under the caption “Common Stock Data” on page 17 in the registrant’s annual report to shareholders for the year ended December 31, 2004, is here incorporated by reference.
ITEM 6.
ITEM 6. Selected Financial Data.
The information under the heading “Financial Highlights” on page 3 in the registrant’s annual report to shareholders for the year ended December 31, 2004, is here incorporated by reference.
ITEM 7.
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 4 through 18 in the registrant’s annual report to shareholders for the year ended December 31, 2004, is here incorporated by reference.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information under the headings “Liquidity and Interest Rate Sensitivity” on pages 10 and 11 and “Quantitative and Qualitative Disclosure About Market Risk” on pages 14 and 15 in the registrant’s annual report to shareholders for the year ended December 31, 2004, is here incorporated by reference.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
The reports of the independent registered public accounting firm, and the consolidated financial statements on pages 19 through 24, and the quarterly results of operations on page 42 in the registrant’s annual report to shareholders for the year ended December 31, 2004, are here incorporated by reference.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A.
ITEM 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The Corporation's management is responsible for 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, 2004 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 relates to establishing and maintaining effective disclosure controls over financial reporting that are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States.
(b) Management's Report on Internal Control Over Financial Reporting.
As disclosed in the Report on Management's Assessment of Internal Control Over Financial Reporting on page 18 of the registrant's annual report to shareholders for the year ended December 31, 2004 (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, 2004, its system of internal control over financial reporting was effective. Management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004, has been audited by Crowe Chizek and Company LLC, an independent registered certified public accounting firm, as stated in their report included in Exhibit 13 to this Annual Report on Form 10-K which is incorporated hereby by reference.
(c) Changes in Internal Controls.
During the quarter ended December 31, 2004, 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, 2004.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant.
The information under the captions “Board of Directors” 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 25, 2005, is here incorporated by reference.
The Board of Directors of the Corporation has determined that Edward J. 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.
The Corporation provides stock options to its full time employees that qualify for benefits under the Firstbank Corporation Stock Option Plans of 1993 and 1997, 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.
The Corporation provides an incentive based bonus program as a part of its overall compensation plan. All full time employees are eligible to receive payment under the plan, provided that the Corporations 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.
ITEM 11. Executive Compensation.
Information contained under the captions “Compensation of Directors and Executive Officers” and “Compensation Committee Interlocks and Insider Participation” in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held April 25, 2005, is here incorporated by reference.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners Management.
The information under the caption “Voting Securities” in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held April 25, 2005, is here incorporated by reference.
Securities Authorized for Issuance Under Equity Compensation Plans. The Corporation had the following equity compensation plans at December 31, 2004:
EQUITY COMPENSATION PLAN INFORMATION
These equity compensation plans are more fully described in Note O to the Consolidated Financial Statements.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions.
The information under the caption “Compensation Committee Interlocks and Insider Participation” in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held April 25, 2005, is hereby incorporated by reference.
ITEM 14.
ITEM 14. Controls and Procedures.
The information set forth under the heading “Relationship with Independent Registered Public Accounting Firm” on page 15 of the Corporation’s definitive proxy statement for its annual meeting of shareholders to be held April 25, 2005, is hereby incorporated by reference.
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(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, 2004, in Item 8:
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, 2004.
(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 page of this report on Form 10-K.
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 11, 2005.
FIRSTBANK CORPORATION
/s/ Thomas R. Sullivan
--------------
Thomas R. Sullivan
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Samuel G. Stone
--------------
Samuel G. Stone
Executive Vice President & Chief Financial 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
/s/ Duane A. Carr
--------------
Duane A. Carr
/s/ David W. Fultz
--------------
David W. Fultz
/s/ William E. Goggin
--------------
William E. Goggin
/s/ Edward B. Grant
--------------
Edward B. Grant
/s/ David D. Roslund
--------------
David D. Roslund
/s/ Samuel A. Smith
--------------
Samuel A. Smith
/s/Thomas R. Sullivan
--------------
Thomas R. Sullivan
Date
March 11, 2005
March 11, 2005
March 11, 2005
March 11, 2005
March 11, 2005
March 11, 2005
March 11, 2005
Number Exhibit
3(a) Articles of Incorporation. Previously filed as an exhibit to registrant’s Form 10-Q for the quarter ended March 31, 1997. Here incorporated by reference.
3(b) Bylaws. Previously filed as an exhibit to the registrant’s Registration Statement on Form S-2 (Registration No. 33-68432) filed on September 3, 1993. Here incorporated by reference.
10(a)* Form of Indemnity Agreement with Directors and Officers. Previously filed as an exhibit to the registrant’s Registration Statement on Form S-2 (Registration No. 33-68432) filed on September 3, 1993. Here incorporated by reference.
10(b)* Deferred Compensation Plan. Previously filed as an exhibit to the registrant's Form 10-K for the year ended December 31, 1995. Here incorporated by reference.
10(c)* Trust under Deferred Compensation Plan. Previously filed as an exhibit to the registrant's Form 10-K for the year ended December 31, 1995. Here incorporated by reference.
10(d)* Stock Option and Restricted Stock Plan of 1993. Previously filed as an appendix to the registrant’s definitive proxy statement for its annual meeting of shareholders held April 26, 1993. Here incorporated by reference.
10(e)* 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(f) 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(g)* Form of Change of Control Severance Agreement. Filed as exhibit 10 to registrant’s report on Form 10-Q for the quarter ended September 30, 2000. Here incorporated by reference.
10(h)* Form of Stock Option Agreement
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 as an appendix to the registrant’s proxy statement dated March 11, 2005, relating to the April 25, 2005 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.
14. Code of Ethics.
Subsidiaries of Registrant.
Consent of Crowe Chizek and Company LLC - Independent Public Accountants.
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.
Firstbank Corporation 401(k) Plan Performance Table.
*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.
EXHIBIT 10(h)
Grantee: ____________________________________ Grant Date: _______________________
Vesting Date: ________________________________
Expiration Date: _______________________________
Number of Shares: _____________________________ Option Number: ________________________
Exercise Price Per Share: _________________________
STOCK OPTION AGREEMENT
1997 Plan
This Stock Option Agreement (“Agreement”) is made as of the Grant Date set forth above between FIRSTBANK CORPORATION, a Michigan corporation (“Firstbank Corporation” or the (“Company”), and the grantee named above (“Grantee”).
The Firstbank Corporation and Restricted Stock Plan of 1997 (the “Plan”) is administered by a committee designated by the Firstbank Corporation Board of Directors (the “Committee”) . The Committee has determined that Grantee is eligible to participate in the Plan. The Committee has granted stock options to Grantee, subject to terms and conditions contained in this Agreement and in the Plan.
Grantee acknowledges receipt of a copy of the Plan and accepts this option subject to all terms, conditions, and provisions of this Agreement and the Plan.
1.
Grant. Firstbank Corporation grants to Grantee an option to purchase shares of the Company’s Common Stock (the “Common Stock”), as set forth above to be issued upon exercise of this option in accordance with the terms and conditions set forth herein. This option is not an incentive stock option as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended.
2.
Term and Delayed Vesting. The right to exercise a portion of this option shall commence on the Vesting Date shown above, which shall be no earlier than twelve months following the Grant Date. On the Vesting Date, the Grantee’s right to exercise 20% of the shares subject to this option shall vest and on the same day of each of the following four years, the Grantee’s right to exercise an additional 20% of the shares subject to the option shall vest. The Grantee’s right to exercise this option shall terminate on the Expiration Date shown above, unless earlier terminated under the Plan or under the Agreement.
3.
Exercise. Grantee may exercise this option by giving Firstbank Corporation written notice of the exercise of this option. The notice shall set forth the number of shares to be purchased, and shall be effective when received by the corporate Human Resources Department. Once payment has been received, the Company will deliver to Grantee a certificate or certificates for such shares out of previously unissued shares or reacquired shares of its Common Stock, as it may elect; provided, however, that the time of delivery shall be postponed for such period as may be required for Firstbank Corporation with reasonable diligence to comply with any registration requirements under the Securities Act of 1933, the Securities Exchange Act of 1934, and any requirements under any other law, regulation, or agreement applicable to the issuance, listing, or transfer of such shares. If Grantee fails to accept delivery of and pay for all or any part of the number of share specified in the notice upon tender or delivery of shares, Grantee’s right to exercise the option with respect to such undelivered shares shall terminate.
4.
Payment by Grantee. The Exercise Price per Share shall be the amount shown above; subject to adjustment as provided herein and in the Plan. In exercising this stock option, Grantee must pay the Exercise Price to Company in cash. The time and terms of payment may be amended before or after the exercise of the option (a) by the Committee, in its sole discretion, if the terms of such amendment are more favorable to the Grantee, or (b) in all other cases, by the Committee with the consent of the Grantee.
5.
Transferability. Unless the Committee otherwise consents, this option is not transferable by Grantee except by will or according to the laws of descent and distribution. This option is exercisable during Grantee’s lifetime only by Grantee or Grantee’s guardian or legal representative. The Committee may also impose other restrictions on any shares acquired pursuant to this option, including, without limitation, restrictions under applicable federal and state securities laws.
6. Termination of Employment.
(a)
General. If Grantee ceases to be employed by the Company or one of its subsidiaries for any reason other than the Grantee’s death, Total Disability, Normal Retirement, Early Retirement, voluntary termination, or termination for cause, Grantee may exercise the option for a period of 90 days after Grantee’s termination of employment (as defined in the Plan), but only to the extent the Participant was entitled to exercise the option on the date of termination and would be entitled to exercise the option if employed at the date of exercise, unless the Committee otherwise consents.
(b)
Death. If Grantee dies either while an employee of the Company or one of its subsidiaries or after the termination of Grantee’s employment other than for cause and other than as a result of a voluntary termination, but during the time when Grantee could have exercised the option granted under this Agreement, the option shall be exercisable by the Grantee’s personal representative or other successor to the interest of Grantee for one year after Grantee’s death, but only to the extent the Participant was entitled to exercise the option on the date of death or termination of employment, whichever first occurred, and would be entitled to exercise the option if employed at the date of exercise, unless the Committee otherwise consents.
(c) Total Disability. If Grantee ceases to be employed by the Company or one of its subsidiaries due to Grantee’s Total Disability (as defined in the Plan), Grantee may exercise the option for a period of one year from such termination of employment, but only to the extent the Participant was entitled to exercise the option on the date of termination unless the Committee otherwise consents.
(d) Normal Retirement. If Grantee ceases to be employed by the Company or one of its subsidiaries due to Grantee’s Normal Retirement (as defined in the Plan) after the Grantee has completed 5 years of service with the Company or any of its subsidiaries, Grantee may exercise all options granted under this Agreement notwithstanding the delayed vesting provisions in Paragraph 2, above for a period of three months after Grantee’s termination, provided, however, that the Participant may not elect to exercise the option at any time prior to twelve months from the Grant date.
(e) Early Retirement. If Grantee ceases to be employed by the Company or one of its subsidiaries due to Grantee’s Early Retirement (as defined in the Plan) Grantee may exercise the option for one year from the date of Early Retirement, but only to the extent the Participant was entitled to exercise the option on the date of termination unless the Committee otherwise consents.
(f) Voluntary Termination or Termination for Cause. If Grantee voluntarily terminates employment with the Company or one of its subsidiaries or is terminated for cause, Grantee shall have no further right to exercise any options previously granted under this Agreement.
(g) Suspension of Exercisability. If Grantee receives notice from the Company that Grantee may be terminated for cause, Grantee shall have no right to exercise any options previously granted under this Agreement for a period of sixty days from the receipt of such notice. If Grantee is terminated for cause, within such sixty-day period, Grantee shall have no further right to exercise any option previously granted under this Agreement. If Grantee is not terminated for cause within the sixty-day period, the provisions of this Agreement and the Plan shall continue to apply to the exercisability of Grantee’s options.
7.
Adjustment for Corporate Changes. In the event of any stock dividend, stock split, recapitalization, merger, consolidation, combination or exchange of shares or any other change in the corporate structure or shares of the Company, the aggregate number and class of shares covered by this option, and the Exercise Price, are subject to adjustment as provided in the Plan. If Firstbank Corporation is acquired by another corporation or is otherwise merged into or consolidated with another corporation, this option shall be immediately exercisable just prior to the effective date of the merger or consolidation, subject to the restrictions imposed by sections 5.5 and 5.6 of the Plan.
8.
Shareholder Rights. Grantee shall have no rights as a shareholder with respect to any shares covered by this option until exercise of the option and payment for such shares.
9.
Employment by Firstbank Corporation. The grant of this option shall not be construed as giving the Grantee the right to be retained in the employ of the Company or any of its subsidiaries. The Company or any subsidiary may, at any time, dismiss the Grantee from employment, free from any liability or claim under the Plan, unless otherwise expressly provided in the Plan or in any written agreement with the Grantee.
10.
Certifications. Grantee hereby represents ands warrants that Grantee is acquiring the option granted under this Agreement for Grantee’s own account and investment and without any intent to resell or distribute the shares upon exercise of the option. Grantee shall not resell or distribute the shares received upon exercise of the option except in compliance with such conditions as Firstbank Corporation may specify to ensure compliance with federal and state securities laws.
11.
Withholding. The Company or a subsidiary shall be entitled to (a) withhold and deduct from future wages of a Grantee, or make other arrangements for the collection of, all amounts deemed necessary to satisfy any and all federal, state, and local withholding and employment-related tax requirements attributable to the option as provided in the Plan or (b) require a Grantee promptly to remit the amount od such withholding to the Company before taking any action with respect to a stock option.
12.
Effective Date. This option shall be effective as of the Grant Date.
13.
Amendment. This option shall not be modified except in writing executed by the parties hereto.
14.
Plan Controls. The Plan is incorporated in this Agreement by reference. Capitalized terms not defined in this Agreement shall have those meanings provided in the Plan. In the event of any conflict between the terms of this Agreement and the terms of the Plan, the provisions of the Plan shall control.
FIRSTBANK CORPORATION
By:
William E Goggin
Chairman
ACKNOWLEDGMENT OF RECEIPT
Grantee__________________________
Option Number____________________
Grant Date________________________
Number of Shares__________________
I acknowledge receipt of the Stock Option Agreement issued by Firstbank Corporation for the option number indicated above, and agree to the terms and conditions of the Agreement.
I understand that I must return this Acknowledgement of Receipt form in order to exercise any options granted to me. I am under no obligation to purchase these shares; however, I am accepting the stock options granted at this time.
____________________________________
____________________________________
Date
Please sign and return this page by {date}, to:
Human Resources Department
Firstbank Corporation
P O Box 1029
Alma MI 48801
Please keep the stock option agreement for your records.
EXHIBIT 13
Rule 14a-3
Annual Report
Firstbank Corporation
Annual Report
This 2004 Annual Report contains audited financial statements and a detailed financial review. This is Firstbank Corporation’s 2004 Annual Report to Shareholders. Although attached to our proxy statement, this report is not part of our proxy statement, is not deemed to be soliciting material and is not deemed to be filed with the Securities and Exchange Commission (the “SEC”) except to the extent that it is expressly incorporated by reference in a document filed with the SEC.
The 2004 Report to Shareholders accompanies this proxy statement. That report presents information concerning the business and financial results of Firstbank Corporation in a format and level of detail that we believe shareholders will find useful and informative. Shareholders who would like to receive even more detailed information than that contained in this 2004 Annual Report are invited to request our Annual Report on Form 10-K.
Firstbank Corporation’s Form 10-K Annual Report filed with the Securities and Exchange Commission will be provided to any shareholder, without charge, upon written request. Requests should be addressed to Samuel G. Stone, Chief Financial Officer, Firstbank Corporation, 311 Woodworth Avenue, P.O. Box 1029, Alma, Michigan 48801-6029. Firstbank Corporation’s Form 10-K Annual Report may also be accessed through out website www.firstbankmi.com.
PRESIDENT’S MESSAGE
TO OUR SHAREHOLDERS:
The theme for this year’s Annual Report to Shareholders is Designing a Vibrant Future. We chose that theme because it reflects the steps we are taking to ensure that the shareholders, customers, employees, and communities we serve continue to benefit from their association with Firstbank Corporation.
The year of 2004 was another successful year for our company, even though we posted somewhat lower earnings than the prior year. Our net income of over $10.3 million was the third highest level of earnings ever achieved. In light of the soft economy in our markets, the rising interest rates that brought a halt to the mortgage refinance activity of prior years, and the uncertainties caused by the Iraq war and our national election, we are very pleased with the results. The impact of the rising rates - and the associated decline in residential mortgage volume - is clearly illustrated by the decline in our gains from the sale of mortgage loans from $8.6 million in 2003 to $2.7 million in 2004.
We continued to maintain our long term focus on growth and asset quality during 2004 as well. Our levels of net charge-off of loans, and non-performing assets, have remained low and compare very favorably with our peers. This strong commitment to asset quality does occasionally limit growth opportunities; however, we did post loan growth of 5.6% in a soft economy, and exceeded $800 million in total assets for the first time at year end.
We are also committed to the effective management of our shareholders capital investment in Firstbank. As a result, during 2004 the board of directors authorized the repurchase of shares through a tender offer process at a price of $28.57 (adjusted for the 5% stock dividend in December). This process allowed shareholders to elect whether to maintain their investment in Firstbank or to sell their shares directly back to the company for little or no brokerage cost. The company repurchased 600,000 of the shares tendered, and since that repurchase we have achieved improved valuation for our shares, increased earnings per share, and increased our return on shareholders’ equity. I am also very pleased to report that $100 invested in Firstbank Corporation common stock on December 31, 1999 with all dividends reinvested, was valued at $225 on December 31, 2004, a five year compound annual growth rate of 17.6% per year!
After posting a 9.8% improvement in earnings per share in the fourth quarter of 2004 versus 2003, we look forward to 2005 with enthusiasm and optimism. With the end of the mortgage refinance boom we have refocused our efforts on maintaining and expanding our relationship with existing customers, while also identifying and pursuing new business opportunities throughout our markets. Even though the Michigan economy continues to struggle, we believe that we have growth opportunities available, and are taking aggressive action to upgrade our sales and service capabilities.
As always, the success of Firstbank Corporation rests squarely on the shoulders of our people. We are fortunate to have outstanding individuals serving throughout the company from the front lines to the board rooms. Their dedication, hard work, commitment, and professionalism have positioned Firstbank Corporation as one of the leading community banking organizations in Michigan.
During 2004 we said farewell to two long time members of the Firstbank family. Sadly, Gerald L. Nielsen, who had served as a member of the Firstbank - Lakeview board of directors since 1986, passed away on August 6, 2004. Jerry’s dedication and insight will truly be missed throughout Firstbank and the entire Lakeview community. Jim Taylor, who had most recently served as President of Firstbank - St. Johns, retired in December and we wish him a happy and healthy retirement. Jim joined Firstbank (Mt. Pleasant) in 1988, and in 2000 was named the first Chief Executive Officer of the St. Johns bank. His leadership was instrumental in the success of that affiliate, and has positioned us for future growth. David M. Brown has been selected to succeed Jim as the President and Chief Executive Officer of Firstbank - St. Johns, and we welcome him into the Firstbank family.
Thank you for your investment in Firstbank Corporation. We appreciate the support and encouragement of our shareholders, and always welcome your comments or suggestions.
Respectfully submitted,
/s/ Thomas R. Sullivan
Thomas R. Sullivan
President & Chief Executive Officer
FINANCIAL HIGHLIGHTS
Firstbank Corporation
(In Thousands of Dollars, Except per Share Data)
Firstbank - St. Johns results are included from June 16, 2000, the date of inception.
Gladwin Land Company, Inc. results are included from May 8, 2000, the date of acquisition.
(1) All per share amounts are adjusted for stock dividends.
The Company’s Form 10-K Annual Report filed with the Securities and Exchange Commission will be provided to any shareholder, without charge, upon written request. Requests should be addressed to: Samuel G. Stone, Chief Financial Officer, Firstbank Corporation, 311 Woodworth Avenue, P.O. Box 1029, Alma, Michigan 48801-6029 The Company’s Form 10-K may also be viewed through our web site at www.firstbankmi.com.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The purpose of this section of the annual report is to provide a narrative discussion about Firstbank Corporation’s financial condition and results of operations. Please refer to the consolidated financial statements and the selected financial data presented in this report in addition to the following discussion and analysis.
RESULTS OF OPERATIONS
Highlights
Firstbank Corporation (“the Company”) had net income of $10,358,000 for 2004 compared with $12,056,000 in 2003, a decrease of $1,698,000, or 14.1%. These results reflect continued strength of core banking activities and favorable developments relating to classified loans, but a substantial reduction in mortgage refinances and resulting secondary market sales during the year. The mortgage refinancing levels of 2003 were at record levels with the historically low interest rates and were expected to decline significantly in 2004.
Management believes that standard performance indicators help evaluate performance. Firstbank posted a return on average assets of 1.32%, 1.58%, and 1.58% for 2004, 2003, and 2002, respectively. Total average assets increased $22 million in 2004, $14 million in 2003, and $13 million in 2002. Diluted earnings per share were $1.79, $1.97, and $1.94 for the same time periods. Return on equity was 13.06% in 2004, 14.47% in 2003, and 15.50% in 2002.
In 2000, 2002, and again in 2003, the Board of Directors authorized share repurchase programs that helped maintain capital and return on equity at appropriate levels. In June of 2004, the Board of Directors further authorized a self tender offer to repurchase shares of its common stock, which resulted in 600,000 shares, or 10.7% of the then outstanding shares of stock being repurchased for a total purchase price of $18 million. The company initially borrowed $11.0 million on its line of credit and utilized cash held by the parent company to fund the remaining $7.0 million of the purchase.
In October of 2004, Firstbank Capital Trust I (“the trust”), an unconsolidated special purpose trust of the Company, sold 10,000 variable rate trust preferred securities, at $1,000 per trust preferred security, for a total of $10 million in Trust Preferred Securities. The initial rate on the Trust Preferred Securities was 4.05% and will adjust quarterly to the then current 90 day LIBOR rate plus 1.99%. Firstbank Corporation issued subordinated debt to the trust in exchange for the proceeds of the offering. The debentures represent the sole assets of the trust. The Company used the proceeds of this transaction to provide long term funding for the self tender offer transaction described in the preceding paragraph, and paid off its line of credit borrowing.
Including the self tender shares repurchased discussed in the preceding paragraphs, the Company repurchased 706,700 shares of its common stock in 2004, 176,100 in 2003, and 122,710 shares in 2002.
Net Interest Income
The core business of the Company is earning interest on loans and securities while paying interest on deposits and borrowings. Interest rates in the first half of 2004 remained at historically low levels, and then began to rise in the second half of the year. During the first half of the year, interest spreads between earning assets and the cost of funding those assets compressed, continuing a pattern which began in 2002. As short term rates began to rise in the second half of the year the interest spread began to expand. The combination of higher earning asset balances and the improving interest spread resulted in the Company’s net interest income increasing by $751,000 in 2004, a 2.3% increase when compared to 2003. The net interest margin for the year decreased to 4.47% compared to 4.50% in 2003, and 4.80% in 2002. During 2004, the Company’s average loan to average deposit ratio was 110%, compared to 105% in 2003, and 107% in 2002.
A critical task of management is to price assets and liabilities so that the spread between the interest earned on assets and the interest paid on liabilities is maximized without unacceptable risks. While interest rates on earning assets and interest bearing liabilities are subject to market forces, in general and in the short run, the Company can exert more control over deposit rates than earning asset rates. However, competitive forces and the need to maintain and grow deposits as a funding source place limitations on the degree of control over deposit rates.
The following table presents a summary of net interest income for 2004, 2003, and 2002.
Summary of Consolidated Net Interest Income (dollars in thousands)
(1)
Presented on a fully taxable equivalent basis using a federal income tax rate of 35% for all periods presented.
(2)
Interest income includes amortization of loan fees of $1,396,000, $1,472,000, and $1,395,000 for 2004, 2003, and 2002, respectively.
Interest on nonaccrual loans is not included.
In 2004, the average rate realized on earning assets was 6.06%, a decrease of 20 basis points from the 2003 results of 6.26%, and a 106 basis point reduction from the 7.12% realized in 2002. During 2002, the prime rate held steady for the first three quarters and then decreased 50 basis points in the fourth quarter. In 2003 the prime rate continued to move lower, remaining unchanged in the first quarter and then decreasing 25 basis points in the second quarter and remaining at that level for the second half of the year. In 2004, the prime rate was unchanged in the first and second quarters, and then moved up in five 25 basis points increments in the third and fourth quarters to its year end level of 5.25%. As of December 31, 2004, slightly over 40% of the loan portfolio was comprised of variable rate instruments. Except for a relatively small portion of these loans that are affected under current interest rate conditions by interest rate floors or ceilings, these loans will re-price monthly or quarterly as rates change. The remaining 60% of the loan portfolio is made up of fixed rate loans that do not re-price until maturity. Of the fixed rate loans approximately $93 million, or nearly 23% of the fixed rate loan portfolio, matures within the next twelve months and are subject to rate adjustments at maturity.
As rates declined in 2002 and 2003, maturing securities in the investment portfolio could not be replaced with securities of comparable quality bearing equal or higher yields. Quality standards were maintained and portfolio yields declined. Although short term interest rates moved up in the second half of 2004, longer term rates have remained basically unchanged. As a result, maturing securities continue to run off from the investment portfolio at higher rates than comparable current offerings, reducing the overall investment portfolio yield from 4.45% in 2003 to 4.32% in 2004. In the current rate environment, management expects to be able to replace maturing investments in the portfolio with securities of high quality, and similar yields.
The average rate paid on interest bearing liabilities was 1.97% in 2004, compared to 2.19% in 2003, and 2.83% in 2002. Deposit rates decreased during 2004 as maturing time deposits were re-priced to lower rates and average rates paid on checking and savings deposits were lower in response to the prime rate reductions of 2002 and 2003. The Company began using brokered CDs in the third quarter of 2004 to assist with increased funding needs. The brokered CDs carry an interest rate that is generally higher than the rate offered in its local markets and were issued with original maturities ranging from three to twelve months.
In past years the Company has funded a portion of its loan growth with borrowings from the Federal Home Loan Bank and notes payable. During 2004, the average outstanding balance of FHLB advances and notes payable increased $5.6 million and the year end balance increased $4.2 million when compared to 2003 balances. While FHLB borrowings are an economical method of funding loans when increased core deposits are not available, the cost is typically higher than the Company’s core deposit costs. The average rate of Federal Home Loan Bank advances and notes payable funding decreased 36 basis points in 2004, to 5.24%, when compared to the 2003 rate of 5.60%, because new advances were at lower rates than maturing notes. Borrowings from the Federal Home Loan Bank carry significant prepayment penalties that act as a deterrent to prepayment. In October of 2004, the Company issued $10.3 million in subordinated debentures, at a variable interest rate of LIBOR plus 1.99%. The Company utilizes short term borrowing, made up of Federal Funds Purchased and Repurchase Agreements as a source of liquidity and to balance the daily cash needs of the Company. Average short term borrowed funds increased by $1.7 million when 2004 is compared with 2003.
The 2004 rate spread of 4.09% is two basis points higher than the 2003 result of 4.07%, but 20 basis points lower than the 2002 result of 4.29%. Tax equivalent net interest income increased $654,000 in 2004 as an increase in total average earning assets of $19 million more than offset the narrower net interest margin. The net interest margin of 4.47% for 2004 was three basis points below the 2003 results, and 33 basis points lower than in 2002. An increase in the rate spread was the result of rates on average earning assets decreasing 20 basis points while the average cost of interest bearing liabilities decreased 22 basis points. The three basis point decrease in the net interest margin was a result of a lower percentage of earning assets being funded by non interest bearing liabilities and equity. Average earning assets represented 93% of total average assets in 2004 and 94% in 2003.
Provision for Loan Losses
The provision for loan losses in 2004 was an expense recovery of $425,000 compared with expense of $550,000 in 2003, and $1,170,000 in 2002. In accordance with Statement of Financial Accounting Standard No. 114 Accounting by Creditor for the Impairment of a Loan, the Company sets aside specific reserves for loans that it determines to be impaired by charging its provision for loan losses. Likewise, if a loan for which reserves had been established pays off, or the risk of loss to the Company is otherwise eliminated, the Company is required to reverse those specific reserves. During 2004, favorable events pertaining to a few impaired loans, for which specific loan loss reserves had been established, caused the Company to reverse provision expense. Management believes the events that transpired in 2004 are rare in occurrence and does not anticipate similar events to occur on a regular basis in the future.
At December 31, 2004, the allowance for loan losses as a percent of total loans was 1.58% compared to 1.83% and 1.92% at December 31, 2003, and December 31, 2002, respectively. Net charged off loans totaled $621,000 in 2004, compared to $459,000 in 2003, and $672,000 in 2002. During 2004 recoveries of previously charged off loans were $309,000, compared to $319,000 in 2003, and $363,000 in 2002. Net charged off loans as a percent of average loans were 0.09% in 2004, 0.08% in 2003, and 0.11% in 2002. Total nonperforming loans were 0.28% of ending loans at December 31, 2004, compared to 0.22% and 0.63% at the two previous year ends. Management maintains the allowance for loan losses at a level considered appropriate. The allowance balance is established after considering past loan loss experience, current economic conditions, volume, growth and composition of the loan portfolio, delinquencies, and other relevant factors. Management uses a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across its five banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings, and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries most affected by current risks in the economic and political environment and the review of risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Management believes that the analysis described above provides a consistent basis for the current provision level.
Non-interest Income
Non-interest income declined sharply in 2004, primarily from a 69% reduction in gains on the sale of mortgage loans. Overall, non-interest income was down $5.8 million, or 36.7%. Gain on sale of mortgage loans in 2003 and 2002 benefited from forty year lows in mortgage interest rates which fueled mortgage refinance activity. The lower gains in 2004 are reflective of a more typical level of refinance activity and a return to more traditional new loan business.
When a mortgage is refinanced or pre-paid, capitalized mortgage servicing rights relating to that mortgage are written off. During 2002 and 2003, mortgage servicing income was affected by the refinance activity, causing net servicing income (serving income, net of amortization of capitalized serving rights) to swing to a net expense position. In 2004, with reduced levels of refinancing, the net servicing income, while still a negative $55,000 was largely neutral as compared with a negative $1.1 million in 2003 and a negative $709,000 in 2002.
Courier and cash delivery services income increased 45.7% to $1,072,000 in 2004 after having increased 30.5% in 2003. This revenue is from the operations of 1st Armored Incorporated, which operates an armored car and courier business, and does not include income from servicing Firstbank affiliates. In 2004, 1st Armored began servicing coin counting machines located in super markets for a single customer, which contributed $229,000 to revenue.
The mortgage refinance boom of 2002 and 2003 also benefited two of the Company’s non banking subsidiaries which provided title insurance and real estate appraisal services to customers. In 2004, as with gains on the sale of mortgage loans, business was down with decreased mortgage refinance activity. Real estate appraisal fees contributed $604,000 in 2004 down from $912,000 in 2003 and $857,000 in 2002. Title insurance sales declined to $618,000 compared with $1,104,000 in 2003 and $726,000 in 2002.
Other non-interest income decreased $465,000, or 25.8%, when the results of 2004 are compared to 2003. The lower level of income was primarily due to higher gains on the sale of other real estate owned and from the sale of certain customer lists associated with the brokerage business in 2003. When comparing 2003 to 2002 results, other non-interest income was $346,000 higher.
Non-interest Expense
Salary and employee benefits expenses decreased $480,000, or 3.0%, when 2004 is compared with 2003. Temporary staffing and overtime associated with originating, processing and managing secondary market sales related to the high volume in the mortgage business in 2003 were scaled back. The reduction in staffing was partially offset by annual salary increments, merit raises and normal staffing requirements related to growth in other business areas. Employee benefit costs increased 10.9% as well, primarily from higher employee group insurance cost which increased 18.6% in 2004. The Company employed 365 full time equivalent employees at the end of 2004, 25 fewer than at the same time in 2003. Salary and benefit expenses were $1,951,000 higher when 2003 is compared with 2002 as the Company expanded its work force to meet the demands of mortgage refinance activity, staffed new branch facilities and paid for annual merit and incentive increases.
Expenses of occupancy and equipment increased $141,000, or 3.8%, over the 2003 level primarily from higher depreciation expense on equipment as the Company upgraded its technology and phone systems. Occupancy and equipment expense had increased $53,000, in 2003 over the 2002 level.
Amortization of intangible assets decreased $34,000, or 10.1%, during 2004 as amortization was reduced due to the sale of certain customer lists related to the brokerage business in 2003. Intangible amortization decreased $26,000 in 2003 compared with 2002 also due to the sale of certain customer lists related to the brokerage business. Included in other non interest expense for 2004 was a $415,000 charge relating to impairment of goodwill at the Company’s Gladwin Land Company and CA Hanes, Realty Inc. businesses. In the fourth quarter of 2004, the Corporation determined that goodwill at its Gladwin Land Company and CA Hanes Realty, Inc. subsidiaries was impaired. The Company uses a discounted future cash flow model to evaluate the goodwill of its non banking subsidiaries. Under the provisions of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, the $314,000 of goodwill at Gladwin Land was determined to be fully impaired, and was written off in its entirety. The $376,000 of goodwill at CA Hanes Realty, Inc. was determined to be partially impaired and written down by $101,000 to a remaining value of $275,000.
Michigan single business tax expense increased $297,000 in 2004. During the fourth quarter of 2004 the Company performed a comprehensive review of its tax asset and liability accounts in order to adjust previous estimates of contingent tax liabilities. As a result, the Company increased its single business tax liability and the corresponding expense in the amount of $365,000. Proposed changes to the Michigan Single Business Tax, by the Governor of Michigan, could substantially increase the Company’s expense in years beginning in 2006.
Expenses for outside professional services decreased $397,000 to $1,598,000 in 2004 compared to $1,995,000 in 2003. Title search fees and costs paid to independent contractors in the title, appraisal and real estate sales operations accounted for substantially all of the reduction. These costs were largely driven by the high level of mortgage refinance activity in 2003. Professional service fees increased in 2003 above 2002‘s level by $436,000 with fees associated with mortgage refinancing driving the increase.
Advertising and special promotion expense decreased to $290,000 from $787,000 in 2003 primarily due to promotional expense for mortgage refinances in 2003. Advertising and promotional expense was higher in 2003 than the previous year by $265,000 for promotional expenditures relating to mortgage refinance activity.
Other non-interest expense increased from $5,679,000 in 2003 to $5,908,000 in 2004. Included in 2004 expense is the goodwill impairment charged discussed above and $205,000 relating to the cost of the Company’s implementation of newly enacted procedures on internal controls required by section 404 of the Sarbanes-Oxley Act. Other non-interest expense declined $186,000, or 3.1%. Prior year expenses had decreased from 2002 by $22,000.
Federal Income Tax
The Company’s effective federal income tax rates were 29% for 2004, and 33% for 2003 and 2002. As discussed above, the Company performed a comprehensive review of its tax asset and liability accounts in order to adjust previous estimates of contingent tax liabilities. As a result, the Company reduced its federal tax liability and the corresponding expense in the amount of $529,000. Excluding this adjustment, the Company’s federal income tax rate for 2004 would have been 32%. The Company’s investment in securities and loans which provide income exempt from federal income tax is the principal cause of the difference between the effective tax rates noted above and the statutory tax rate of 35% for all three years.
FINANCIAL CONDITION
Total assets at December 31, 2004 were $806 million, exceeding December 31, 2003 total assets of $777 million by $29 million, or 3.7%. Loans held for sale in the secondary market decreased 52.7% at December 31, 2004, when compared to the balance at December 31, 2003, reflecting the slower mortgage origination business at the end of the year. Total portfolio loans, net of allowance for loan loss, increased 5.9% at December 31, 2004 compared with the balance at the previous year end. Commercial loans decreased $1.9 million, or 1.8%. Residential mortgage and commercial mortgage loans increased $26.5 million, or 12.9%, and $22.3 million, or 11.0% respectively. Construction loans were lower at December 31, 2004, falling $7.2 million, or 13.1%, from the previous year end. Consumer loans were $3.8 million, or 6.3% lower at the current year end.
Total securities available for sale increased $1.7 million, or 2.5%, roughly keeping pace with overall asset growth. Securities available for sale were 9.0% of total assets at year end 2004, compared with 9.1% at the end of 2003.
Premises and equipment decreased by $445,000 after recognized depreciation of $1,954,000. The decrease in premise and equipment resulted from current year depreciation expense exceeding capital expenditures.
Total deposits increased at the end of 2004 to $603 million, an increase of 6.3%, compared to $568 million at year end 2003. In the middle of 2004, the Company entered the brokered CD market to expand its available funding sources. At the end of the year, $15.3 million of brokered CDs had been added to the balance sheet. Brokered CDs generally carry a higher interest rate than locally generated CDs of similar duration, but are available in large dollar pools which results in lower operational cost than smaller dollar local deposits. Including the brokered CDs, total time deposits increased $31.5 million, or 16.7% compared with the end of 2003. Non-interest bearing demand deposit balances increased $3.9 million, or 3.8%, while interest bearing demand deposits decreased by $4.6 million, or 2.5% and savings account balances increased $4.9 million, or 5.1%. Securities sold under agreements to repurchase increased by $4.1 million and federal funds purchased decreased $12.0 million.
Federal Home Loan Bank advances and notes payable increased by $4.2 million at December 31, 2004 as compared to December 31, 2003. Note K and Note L of the Notes to Consolidated Financial Statements have additional discussion of borrowings. The Company also issued $10.3 million in subordinated debentures in the fourth quarter of 2004. Note M of the Notes to Consolidated Financial Statements has additional discussion of that issuance.
Asset Quality
Loans are carried at an amount which management believes will be collected. A balance considered not collectible is charged against (reduction of) the allowance for loan losses. In 2004, net charged off loans were $621,000 compared to $459,000 in 2003. Net charged off loans as a percentage of average loans were 0.09% and 0.08% in 2004 and 2003.
Nonperforming loans are defined as nonaccrual loans, loans 90 days past due and any loans where the terms have been renegotiated. Total nonperforming loans were $1.9 million and $1.4 million at December 31, 2004 and 2003, respectively. The average investment in impaired loans was $1.6 million during 2004 compared to $3.5 million during 2003. At year end, impaired loans were $1.4 million compared with $3.4 million at December 31, 2003. The decrease in impaired loans was mainly due to full or partial repayment of several loans that were classified as impaired at the end of the prior year. Please refer to Note F of the Notes to Consolidated Financial Statements for more information on impaired loans. Total nonaccrual loans were $1,456,000 at December 31, 2004, compared to $834,000 at the end of 2003.
The allowance for loan losses was decreased $1,046,000, or 9.0%, during 2004. The allowance for loan losses represents 1.58% of outstanding loans at the end of 2004 as compared to 1.83% at December 31, 2003. As previously discussed under the provision for loan losses heading, favorable events pertaining to a few impaired loans, for which specific loan loss reserves had been established, caused the Company to reverse allowance. Management believes the events that transpired in 2004 are rare in occurrence and does not anticipate similar events to occur on a regular basis in the future. Management maintains the allowance at a level which they believe adequately provides for losses inherent in the loan portfolio. Such losses are estimated by a variety of factors, including specific examination of certain borrowing relationships and consideration of historical losses incurred on certain types of credits. Management focuses on early identification of problem credits through ongoing reviews by management, loan personnel and an outside loan review specialist.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Asset liability management aids the Company in achieving reasonable and predictable earnings and liquidity while maintaining a balance between interest earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of the Company’s customers. These customers may be either borrowers needing to meet their credit requirements or depositors wanting to withdraw funds. Management of interest rate sensitivity attempts to manage the level of varying net interest margins and to achieve consistent net interest income through periods of changing interest rates. The net interest margin was 4.47% in 2004 compared to 4.50% in 2003. Loan yields declined 48 basis points, from 6.81% in 2003, to 6.33% in 2004. Deposit costs decreased 26 basis points from 1.79% in 2003 to 1.53% in 2004. With low yields on loans through most of the year, demand was strong, and average loans outstanding increased by $51 million. Average total earning assets increased a smaller $19 million as loans were funded, in part, by a shift from lower yielding federal funds sold.
Rising interest rates in the second half of the year allowed the Company to increase its year end balance of time deposits by $31.5 million. Also contributing to the increase in time deposits was the addition of $15.3 million of brokered CDs. The Company continued to maintain its short term funding needs through the use of overnight funding, and ended the year with $10.3 million of federal funds purchased. The use of FHLB advances continued to be a significant source of longer term funding, with advances increasing from the prior year end by $4.2 million. The company also added $10.3 million in subordinated debentures during the year to fund its capital management strategy. Early in the fourth quarter, Firstbank Capital Trust I (“the trust”) raised $10.3 million of funding through the issuance of variable interest trust preferred securities. The Company then issued subordinated debentures to the trust in exchange for the proceeds of the offering. The trust is an unconsolidated subsidiary and accordingly this funding is shown on the balance sheet as subordinated debentures. The rate on these securities is adjustable quarterly to the then current LIBOR rate plus 1.99%
A decision to increase deposit rates affects most rates currently paid and, therefore, has an immediate negative impact on net interest margin. With the exception of variable rate loans, an increase in loan rates does not affect the yield until a new loan is made. During the first half of the year, the Company’s net interest margin compressed as pressure to raise rates on deposits came in advance of prime rate increases, which primarily affect loans. In the second half of 2004 the prime rate increased five times in 25 basis points increments, bringing the prime rate to 5.25% at year end. While deposit rates continued to move higher in the second half, the Company was able to increase rates on variable rate loans at a faster pace, causing the net interest margin to expand.
The principal sources of liquidity for the Company are maturing securities, federal funds purchased or sold, loan payments by borrowers, investment securities, loans held for sale, deposit or deposit equivalent growth and Federal Home Loan Bank advances. Securities maturing or re-pricing within one year at December 31, 2004 were $22.9 million, compared to $13.6 million at December 31, 2003. Total investments available for sale increased $1.7 million to $72.5 million.
The table below shows the interest sensitivity gaps for five different intervals as of December 31, 2004. Deposits that do not have a fixed maturity date are shown as immediately re-pricing according to reporting conventions.
For the one day interval, maturities of interest bearing liabilities exceed those of interest earning assets by $55.5 million. Included in the one day maturity classification are $277.3 million in savings and checking accounts which are contractually available to the Company’s customers immediately, but in practice, function as core deposits with considerably longer maturities. In the two day through the five year time frame, interest sensitive assets exceed interest sensitive liabilities, resulting in a cumulative position of interest sensitive liabilities exceeding interest sensitive assets by $22.1 million through five years. For the time period greater than five years, the positive relationship changes to an asset sensitive position, such that cumulatively, interest sensitive assets exceed interest sensitive liabilities by $28.9 million.
Showing a negative cumulative gap through the twelve month period does not necessarily result in a corresponding increase in net interest income during a declining rate environment. In practice, deposit rates do not change as rapidly as would be indicated by the contractual availability of deposit balances to customers. Some of the gain associated with the lowering of deposit costs is mitigated by rate decreases on variable rate loans and by fixed rate loan customers’ ability to use new, lower rate loans to prepay existing higher rate loans. Conversely, showing a negative cumulative gap through the twelve month period does not necessarily result in a corresponding decrease in net interest income during a rising rate environment for similar reasons. Due to the behavior of deposits, contrary to the GAP information as shown, management believes that an increase in interest rates will result in an increased spread and increased earnings. Conversely, a decrease in interest rates would likely result in a decrease in spreads and net income.
Interest rate sensitivity varies with different types of interest earning assets and interest bearing liabilities. Overnight investments, on which rates change daily, and loans tied to the prime rate differ considerably from long term investment securities and fixed rate loans. Time deposits over $100,000 and money market accounts are more interest sensitive than regular savings accounts. Comparison of the re-pricing intervals of interest earning assets to interest bearing liabilities is a measure of the interest sensitivity gap. Balancing interest rate sensitivity is a continual challenge in a changing rate environment. The Company uses a sophisticated computer program to perform analysis of interest rate risk, assist with its asset liability management, and model and measure interest rate sensitivity.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABLILITES, AND OFF-BALANCE SHEET ARRANGEMENTS
The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments.
The following table presents, as of December 31, 2004, significant fixed and determinable contractual obligations to third parties by payment date.
(1) Contractual payments including principal and interest.
(2) Contractual interest payments based on current interest rate.
Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
The Company’s operating lease obligations represent short and long-term lease and rental payments, primarily for facilities, and to a lesser degree for certain software and data processing equipment.
The following table details the amounts and expected maturities of significant commitments as of December 31, 2004.
Commitments to extend credit, including loan commitments, standby letters of credit and commercial letters of credit, do not necessarily represent future cash requirements in that these commitments often expire with being drawn upon. Further discussion of these commitments is included in Note Q to the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rate, in local and national economic conditions or the financial condition of borrowers. The Company’s significant accounting policies are discussed in detail in Note A of the Notes to the Consolidated Financial Statements.
Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, and estimating state and federal contingent tax liabilities.
Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. Management uses a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across its five banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries potentially most affected by current risks in the economic and political environment and the review of potential risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Loans are reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the fair value of collateral, if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the allowance for loan losses such increase is reported as provision for loan loss. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.
Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction, automobile, home equity and second mortgage loans, are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including the Company’s loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial loans are rated on a scale of 1 to 8, with grades 1 to 4 being pass grades, 5 being special attention or watch, 6 substandard, 7 doubtful, and 8 loss. Loans graded 5, 6, 7, and 8 are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Fair Value of Securities and Other Financial Instruments Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rate, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current market value of securities is recorded as a valuation adjustment and reported in other comprehensive income.
Valuation of Mortgage Servicing Rights Mortgage servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.
The Company utilizes a discounted cash flow model to determine the value of its servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, the Company’s cost to service loans, and other factors to determine the cash flow that the Company will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value for the right to service those loans. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance.
Contingent Tax Liabilities State and Federal contingent tax liabilities are estimated based on the Company’s exposures to interpretation of the US tax code. The Company estimates its contingent tax liabilities by determining the amount of income that may be at risk of an adverse interpretation by taxing authorities on specific issues, multiplied by its effective tax rate, to determine its gross exposure. Once this exposure is determined, an estimate of the probability of an adverse adjustment being required is determined and applied to the gross liability to determine the contingent tax reserve.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 123, Share Based Payments, was revised and requires that all public companies record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This will apply to all awards granted or modified after the first quarter or year beginning after June 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $186,000 during the balance of 2005, $103,000 in 2006, $57,000 in 2007, and $27,000 in 2008. There will be no significant effect on financial position as total equity will not change.
Statement of Position 03-3 requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition, and should not be recorded at acquisition. It applies to any loan acquired in a transfer that showed evidence of credit quality deterioration since it was made. The effect on results of operations and financial position of the Company will depend on the effect of future loan purchases and/or acquisitions and therefore cannot be quantified at this time.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company faces market risk to the extent that both earnings and the fair market values of its financial instruments are affected by changes in interest rates. The Company manages this risk with static GAP analysis and simulation modeling. During 2004 as the prime rate increased and fixed rate commercial mortgages in the Company’s portfolio replaced variable rate commercial loans, Firstbank’s simulations showed decreased sensitivity to changes in interest rates. However, the Company maintained an overall position which results in positive changes in projected earnings related to increases in rates, and negative changes in projected earnings related to decreases in rates. As of the date of this annual report the Company does not know of nor expect there to be any material change in the general nature of its primary market risk exposure in the near term.
The Company’s market risk exposure is mainly comprised of its vulnerability to interest rate risk. The Company does not accept significant interest rate risk in its mortgage banking operations. To manage its interest rate risk in mortgage banking the Company generally locks in its sale price to the purchaser of a loan at the same time it makes a rate commitment to the borrower. Prevailing interest rates and interest rate relationships in the future will be primarily determined by market factors which are outside of the Company’s control. All information provided in response to this item consists of forward looking statements. Reference is made to the section captioned “Forward Looking Statements” in this annual report for a discussion of the limitations on the Company’s responsibility for such statements.
The following tables provide information about the Company’s financial instruments that are sensitive to changes in interest rates as of December 31, 2004 and 2003. They show expected maturity date values for loans and securities which were calculated without adjusting the instruments’ contractual maturity dates for expected prepayments. Maturity date values for interest bearing core deposits were not based on estimates of the period over which the deposits would be outstanding, but rather, the opportunity for re-pricing. The Company believes that re-pricing dates, as opposed to expected maturity dates, may be more relevant in analyzing the value of such instruments and are reported as such in the following tables. Fair value is computed as the present value of expected cash flows at rates in effect at the date indicated.
Principal/Notional Amounts Maturing in:
CAPITAL RESOURCES
The Company obtains funds for its operating expenses and dividends to shareholders through dividends from its subsidiary banks. In general, the subsidiary banks pay only those amounts required to meet holding company cash requirements, while maintaining appropriate capital at the banks. Capital is maintained at the subsidiary banks to support growth.
Bank regulators have established risk based capital guidelines for banks and bank holding companies. Minimum capital levels are established under these guidelines and each asset category is assigned a perceived risk weighting. Off balance sheet items, such as loan commitments and standby letters of credit, also require capital allocations.
As of December 31, 2004, the Company’s total capital to risk weighted assets exceeded the minimum requirement for capital adequacy purposes of 8% by $31.6 million. Tier 1 capital to risk weighted assets exceeded the minimum of 4% by $49.6 million, and Tier 1 capital to average assets exceeded the minimum of 4% by $43.7 million. For a more complete discussion of capital requirements please refer to Note U of the Notes to Consolidated Financial Statements. The Federal Deposit Insurance Corporation insures specified customer deposits and assesses premium rates based on defined criteria. Insurance assessment rates may vary from bank to bank based on the factors that measure the perceived risk of a financial institution. One condition for maintaining the lowest risk assessment, and therefore, the lowest insurance rate, is the maintenance of capital at the “well capitalized” level. Each of the Company’s affiliate banks has exceeded the regulatory criteria for a “well capitalized” financial institution and each bank pays the lowest assessment rate assigned by the FDIC.
A certain level of capital growth is desirable to maintain an appropriate ratio of equity to total assets. The compound annual growth rate for total average assets for the past five years was 5.3%. The compound annual growth rate for average equity over the same period was 5.5%.
Management has determined one way of maintaining capital adequacy is to maintain a reasonable rate of internal capital growth. The percentage return on average equity times the percentage of earnings retained after dividends equals the internal growth percentage. The following table illustrates this relationship:
The Company has retained between 57% and 67% of its earnings from 2002 to 2004. To achieve the goal of acceptable internal capital growth, management intends to continue its efforts to increase the Company’s return on average equity while maintaining a reasonable cash dividend.
As an additional enhancement to capital growth the Company offers a dividend reinvestment program. The Firstbank Corporation Dividend Reinvestment Plan was first offered in 1988. At December 31, 1988, 123 owners holding 209,856 shares participated in the Plan. By the end of 2004, 1,654 owners holding 2,211,310 shares were participating in the Plan.
The Company is not aware of any recommendations by regulatory authorities at December 31, 2004, which are likely to have a material effect on Firstbank Corporation’s liquidity, capital resources or operations.
FORWARD LOOKING STATEMENTS
This annual report including, without limitation, management’s discussion and analysis of financial condition and results of operations, and other sections of the Company’s Annual Report to Shareholders, contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company itself. Words such as “anticipate”, “believe”, “determine”, “estimate”, “expect”, “forecast”, “intend”, “is likely”, “plan”, “project”, “opinion”, “should”, variations of such terms, and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward looking statements. Internal and external factors that may cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior and customer ability to repay loans; software failure, errors or miscalculations; the ability of the Company to locate and correct all data sensitive computer codes; and the vicissitudes of the national economy. The Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
COMMON STOCK DATA
Firstbank Corporation Common Stock was held by 1,658 shareholders of record as of December 31, 2004. Total shareholders number approximately 2,822, including those whose shares are held in nominee name through brokerage firms. The Company’s shares are listed on the NASDAQ National Market under the symbol FBMI and are traded by several brokers. The range of high and low sales prices for shares of common stock for each quarterly period during the past two years is as follows:
The prices quoted above were obtained from the NASDAQ.com through the Company’s market makers. Prices have been adjusted to reflect stock dividends.
The following table summarizes cash dividends paid per share (adjusted for stock dividends) of common stock during 2004 and 2003.
The Company’s principal sources of funds to pay cash dividends are the earnings of and dividends paid by the subsidiary banks. Under current regulations the subsidiary banks are restricted in their ability to transfer funds in the form of cash dividends, loans, and advances to the Company (See Note S of the Notes to Consolidated Financial Statements). As of January 1, 2005, approximately $22.0 million of the subsidiaries’ retained earnings were available for transfer in the form of dividends to the Company without prior regulatory approval. In addition, the subsidiaries’ 2005 earnings are expected to be available for distributions as dividends to the Company.
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Firstbank Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.
We, as management of Firstbank Corporation, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to errors or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement presentation.
The Audit Committee, consisting entirely of independent directors, meets regularly with management, internal auditors and the independent registered public accounting firm, and reviews audit plans and results, as well as management’s actions taken in discharging responsibilities for accounting, financial reporting, and internal control. Crowe Chizek and Company, LLC, independent registered public accounting firm, and the internal auditors have direct and confidential access to the Audit committee at all times to discuss the results of their examinations.
Management assessed the Corporation’s system of internal control over financial reporting as of December 31, 2004, in relation to criteria for effective internal control over financial reporting as described in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2004 its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control - Integrated Framework”. Crowe Chizek and Company LLC, independent registered public accounting firm, has issued an attestation report on management’s assessment of the Corporation’s internal control over financial reporting.
FIRSTBANK CORPORATION
/s/ Thomas R. Sullivan
--------------
Thomas R. Sullivan
President & Chief Executive Officer
(Principal Executive Officer)
/s/Samuel G. Stone
--------------
Samuel G. Stone
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: February 25, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited management’s assessment, included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting, that Firstbank Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Firstbank Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Firstbank Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, Firstbank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Firstbank Corporation as of December 31, 2004 and 2003 and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2004 and our report dated February 25, 2005 expressed an unqualified opinion on those consolidated financial statements.
/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Grand Rapids, Michigan
February 25, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Firstbank Corporation
Alma, Michigan
We have audited the consolidated balance sheets of Firstbank Corporation as of December 31, 2004 and 2003, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Firstbank Corporation at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with US generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Firstbank Corporation’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2005 expressed an unqualified opinion thereon.
/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
February 25, 2005
Grand Rapids, Michigan
FIRSTBANK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except for Share Data)
See notes to consolidated financial statements.
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In Thousands of Dollars, Except for Per Share Data)
See notes to consolidated financial statements.
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(In Thousands of Dollars, Except for Share and per Share Data)
See notes to consolidated financial statements.
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASHFLOWS
(In Thousands of Dollars)
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Firstbank Corporation (the “Company”) is a bank holding company. Each subsidiary bank of the Company is a full service community bank. The subsidiary banks offer all customary banking services, including the acceptance of checking, savings and time deposits, and the making of commercial, agricultural, real estate, personal, home improvement, automobile and other installment and consumer loans. The consolidated assets of the Company, of $806 million as of December 31, 2004, primarily represent commercial and retail banking activity. Mortgage loans serviced for others of $472 million, as of December 31, 2004, are not included in the Company’s consolidated balance sheet.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, Firstbank - Alma; Firstbank (Mt. Pleasant); Firstbank - West Branch; Firstbank - Lakeview; and Firstbank - St. Johns (the “Banks”); 1st Armored, Incorporated; Gladwin Land Company, Incorporated; 1st Title, Incorporated; and C.A. Hanes Realty, Incorporated, after elimination of inter-company accounts and transactions. These subsidiaries are wholly owned, except C.A. Hanes Realty, which has a 45% minority interest. During 2001, each of the Company’s five banks formed its own Mortgage Company. The operating results of these mortgage companies are consolidated into each Bank’s financial statements. During 2004 the Company formed a special purpose trust, Firstbank Capital Trust I, for the sole purpose of issuing variable interest trust preferred securities. Under generally accepted accounting principles, the trust is not consolidated into the financial statements of the Company.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Certain Significant Estimates: The primary estimates incorporated into the Company’s financial statements, which are susceptible to change in the near term, include the allowance for loan losses, the determination of the fair value of certain financial instruments, determination of state and federal tax liabilities, and the valuation of mortgage servicing rights.
Current Vulnerability Due to Certain Concentrations: The Company’s business is concentrated in the mid-central section of the lower peninsula of Michigan. Management is of the opinion that no concentrations exist that make the Company vulnerable to the risk of a near term severe impact. While the loan portfolio is diversified, the customers’ ability to honor their debts is partially dependent on the local economies. The Company’s service area is primarily dependent on manufacturing (automotive and other), agricultural and recreational industries. Most commercial and agricultural loans are secured by business assets, including commercial and agricultural real estate and federal farm agency guarantees. Generally, consumer loans are secured by various items of personal property and mortgage loans are secured by residential real estate. The Company’s funding sources include time deposits and other deposit products which bear interest. Periods of rising interest rates result in an increase in the cost of funds to the Company and an increase in yields on certain assets. Conversely, periods of falling interest rates result in a decrease in yields on certain assets and costs of certain funds.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, amounts due from banks and short term investments, which include interest bearing deposits with banks, federal funds sold, and overnight money market fund investments. Generally, federal funds and overnight money market funds are purchased for a one day period. The Company reports customer loan transactions, deposit transactions and repurchase agreements and overnight borrowings on a net basis within its cash flow statement.
Securities Available for Sale: Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rate, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value and the related unrealized holding gain or loss (the difference between the fair value and amortized cost of the securities so classified) is reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method anticipating prepayments. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Mortgage Banking Activities: Servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage serving rights is netted against loan servicing fee income.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the cost allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. The Company generally locks in its sale price to the purchaser of the loan at the same time it makes a rate commitment to the borrower.
Loans: Loans receivable, for which management has the intent and ability to hold for the foreseeable future or payoff are reported at their outstanding unpaid principal balances, net of any deferred fees or costs on originated loans, unamortized premiums or discounts. Loan origination fees and certain origination costs are capitalized and recognized as an adjustment to yield of the related loan. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term without anticipating prepayments. Interest income on mortgage and commercial loans is discontinued at the time the loan becomes 90 days delinquent unless the credit is well secured and in process of collection. Consumer and credit card loans are typically charged off no later than 120 days past due. In all cases loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued, but not received, for loans placed on nonaccrual status, is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Management uses a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across its five banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries potentially most affected by current risks in the economic and political environment and the review of potential risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Loans are reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the fair value of collateral, if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the allowance for loan losses such increase is reported as provision for loan loss. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.
Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction, automobile, home equity and second mortgage loans, are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including the Company’s loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial loans are rated on a scale of 1 to 8, with grades 1 to 4 being pass grades, 5 being special attention or watch, 6 substandard, 7 doubtful, and 8 loss. Loans graded 5, 6, 7, and 8 are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Premises and Equipment: Premises and equipment are stated on the basis of cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the assets, primarily by accelerated methods for income tax purposes and by the straight line method for financial reporting purposes. Buildings and related components have useful lives ranging from 5 to 33 years. Furniture, fixtures and equipment have useful lives ranging from 3 to 7 years.
Other Real Estate: Other real estate (included as a component of other assets) includes properties acquired through either a foreclosure proceeding or acceptance of a deed in lieu of foreclosure and is initially recorded at the fair value when acquired, establishing a new cost basis. These properties are evaluated periodically and if fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs after acquisition are expensed.
Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified.
Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives.
Long Term Assets: Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, a charge is taken to earnings, and the assets are written down to fair value.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Income Taxes: The Company records income tax expense based on the amount of taxes due on its tax return plus the change in deferred taxes, computed based on the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
Stock Splits and Dividends: Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock. Fractional shares are issued or are paid in cash. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements. A stock dividend of 5% was paid on December 31, 2004, to shareholders of record as of December 17, 2004. A stock dividend of 5% was paid on December 31, 2003, to shareholders of record as of December 18, 2003. A stock dividend of 5% was paid on December 31, 2002, to shareholders of record as of December 18, 2002.
Stock Compensation: Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.
The pro forma effects are computed using option pricing models and using the following weighted-average assumptions as of grant date.
Earnings Per Share: Basic earnings per share is based on weighted average common shares outstanding. Diluted earnings per share include the dilutive effect of additional common shares that may be issued under stock options. All per share amounts are restated for stock dividends and stock splits through the date of issuance of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and changes in unrealized gains and losses on securities available for sale, net of tax, which is recognized as a separate component of equity. Accumulated other comprehensive income consists of unrealized gains and losses on securities available for sale, net of tax.
Effect of Newly Issued But not Yet Effective Accounting Standards: Statement of Financial Accounting Standards No. 123R requires all public companies to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This will apply to awards granted or modified after the first quarter of or year beginning after June 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future options grants and the calculation of the fair value of the options grated at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $186,000 during the balance of 2005, $103,000 in 2006, $57,000 in 2007, and $27,000 in 2008. There will be no significant effect on financial position as total equity will not change.
Statement of Position 03-3 requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition, and should not be recorded at acquisition. It applies to any loan acquired in a transfer that showed evidence of credit quality deterioration since it was made. The effect on results of operations and financial position of the Company will depend on the effect of future loan purchases and/or acquisitions and therefore cannot be quantified at this time.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate in Note V. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Reclassification: Certain 2003 and 2002 amounts have been reclassified to conform to the 2004 presentation.
Adoption of New Accounting Standards: During 2004, the Company adopted FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, EITF Issue No. 03-16, Accounting for Investments in Limited Liability Companies, and SEC Staff Accounting Bulletin: NO. 105, Application of Accounting Principles to Loan Commitments. Adoption of the new standards did not materially affect the Company’s operating results or financial condition.
Segment Information: While the Company’s chief decision makers monitor the revenue streams of various products and services, substantially all of the Company’s operations are managed and financial performance is evaluated on a company wide basis. Accordingly, all of the Company’s operations are considered by Management to be aggregated in one reportable operating segment. There are no material separately identifiable reporting segments.
NOTE B - ACQUISITIONS/DIVESTURES
There are no acquisitions or divestures for 2002, 2003 or 2004.
NOTE C - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company’s subsidiary banks are required to maintain average reserve balances in the form of cash and non-interest bearing balances due from the Federal Reserve Bank. The average reserve balances required to be maintained at December 31, 2004 and 2003 were $4,151,000 and $3,269,000, respectively. These balances do not earn interest.
NOTE D - SECURITIES
The fair value of securities available for sale was as follows:
Securities with unrealized losses at year end 2004 and 2003 not recognized in income are as follows:
Unrealized losses on securities shown in the previous table have not been recognized into income because the issuers bonds are of high credit quality, management has the intent and ability to hold these bonds for the foreseeable future, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity, or interest rate reset dates.
Gross realized gains (losses) on sales and calls of securities were:
The fair value of securities at December 31, 2004, by stated maturity, is shown below. Actual maturities may differ from stated maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 2004 and 2003, securities with a carrying value approximating $56,427,000 and $59,510,000 were pledged to secure public trust deposits, securities sold under agreements to repurchase and for such other purposes as required or permitted by law.
NOTE E - SECONDARY MORTGAGE MARKET ACTIVITIES
Loans serviced for others, which are not reported as assets, total $472,067,000 at December 31, 2004, and $464,400,000 at December 31, 2003.
Activity for capitalized mortgage servicing rights was as follows:
Management has determined that a valuation allowance of $6,137 is necessary at December 31, 2004. A valuation allowance of $4,533 was required at December 31, 2003.
NOTE F - LOANS
Loans at year end were as follows:
Activity in the allowance for loan losses was as follows:
Impaired loans were as follows:
Approximately $37,051,000 and $37,146,000 of commercial loans were pledged to the Federal Reserve Bank of Chicago at December 31, 2004 and 2003 to secure potential overnight borrowings.
NOTE G - PREMISES AND EQUIPMENT
Year end premises and equipment were as follows:
Rent expense was $252,000 for 2004, $194,000 for 2003, and $173,000 for 2002. Rental commitments for the next five years under non-cancelable operating leases were as follows (before considering renewal options that generally are present):
NOTE H - GOODWILL AND INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of goodwill for the year is as follows:
In the fourth quarter of 2004, the company determined that goodwill at its Gladwin Land Company and CA Hanes Realty, Inc. subsidiaries was impaired. The Company uses a discounted future cash flow model to evaluate the goodwill of its non banking subsidiaries. Under the provisions of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, the $314,000 of goodwill at Gladwin Land was determined to be fully impaired, and was written off in its entirety. The $376,000 of goodwill at CA Hanes Realty, Inc. was determined to be partially impaired and written down by $101,000 to a remaining value of $275,000.
Acquired Intangible Assets
Acquired intangible assets at year end were as follows:
Aggregate amortization expense was $303,000, $336,000, and $362,000 for 2004, 2003, and 2002, respectively.
Estimated amortization expense for each of the next five years:
NOTE I - FEDERAL INCOME TAXES
Federal income taxes consist of the following:
A reconciliation of the difference between federal income tax expense and the amount computed by applying the federal statutory tax rate of 35% in 2004, 2003 and 2002 is as follows:
The federal tax accrual was reduced in the fourth quarter of the 2004 to reflect managements current estimate of contingent tax liabilities.
The components of deferred tax assets and liabilities consist of the following at December 31st year end:
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefits related to such assets will not be realized. Management has determined that no such allowance is required at December 31, 2004 or 2003.
Deferred tax assets at December 31, 2004 and 2003 are included in other assets in the accompanying consolidated balance sheets.
NOTE J - DEPOSITS
Time deposits of $100,000 or more were $68,922,000 and $38,924,000 at year end 2004 and 2003. In 2004, the Company began to use brokered CDs as an avenue for funding. There were $15.3 million of brokered CDs included in time deposits of $100,000 or more.
Scheduled maturities of time deposits at December 31, 2004 were as follows:
NOTE K - BORROWINGS
Information relating to securities sold under agreements to repurchase is as follows:
Securities sold under agreements to repurchase (repurchase agreements) generally have original maturities of less than one year. Repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities. Securities involved with the agreements are recorded as assets of the Company and are primarily held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain large deposit customers as deposit equivalent investments.
The Company had overnight borrowings of $10,250,000 at December 31, 2004. There were $22,300,000 overnight borrowings at December 31, 2003.
The Company established a line of credit agreement with LaSalle Bank, Chicago, Illinois on June 30, 2003 at a variable interest rate chosen by the Company of either, LaSalle Bank’s prime commercial borrowing rate, or LIBOR plus 2.25%. This agreement allows for a revolving line of credit up to an aggregate principal amount of $25,000,000. The collateral for this agreement consists of all outstanding capital stock of Firstbank - Alma, Firstbank (Mt. Pleasant) and Firstbank - West Branch. At December 31, 2003, there was no outstanding balance. In 2004, the Company accessed $11 million of the LaSalle Bank line of credit as temporary funding for its self tender offer. Those funds were repaid in October when the Company issued variable interest subordinated debt for long term funding.
Firstbank - Alma has notes payable with a total balance of $115,000 and $134,000 at December 31, 2004 and 2003. These notes mature on January 1, 2010 and were part of the consideration paid for a subsidiary, which has since been sold.
NOTE L - FEDERAL HOME LOAN BANK ADVANCES
Long term borrowings have been secured from the Federal Home Loan Bank to fund the Company’s loan growth. At year end, advances from the Federal Home Loan Bank were as follows:
Each Federal Home Loan Bank advance is payable at its maturity date with a prepayment penalty. The advances were collateralized by $142,145,000 and $135,350,000 of first mortgage loans under a blanket lien arrangement at year end 2004 and 2003. As of December 31, 2004, the Company had $27,376,000 of additional borrowing capacity with the Federal Home Loan Bank.
Maturities of FHLB advances are as follows:
NOTE M - SUBORDINATED DEBENTURES
A trust formed by the Company issued $10,310,000 of LIBOR plus 1.99% variable rate trust preferred securities in 2004 as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering; the debentures represent the sole assets of the trust. The Company may redeem the subordinated debentures, in whole or in part, any time on or after October 18, 2009 at 100% of the principal amount of the securities. The debentures are required to be paid in full on October 18, 2034.
NOTE N - BENEFIT PLANS
The 401(k) plan, a defined contribution plan, is an IRS qualified 401(k) salary deferral plan, under which employees can direct investment in Firstbank Corporation stock. Both employee and employer contributions may be made to the plan. Due to the March 2003 ESOP termination, at year end 2003, there were no ESOP shares outstanding. During March 2003, each participant was given various options to roll-over their ESOP balance to a qualified plan, including Firstbank Corporation 401(k), or take a distribution. At that time, participants that rolled their balance into the Firstbank Corporation 401(k) plan made new investment elections. At year end 2002, there were 195,972 ESOP shares outstanding with a market value of $4,919,000. The Company’s 2004, 2003 and 2002 matching 401(k) contributions charged to expense were $410,000, $407,000, and $357,000, respectively. The percent of the Company’s matching contribution to the 401(k) is determined annually by the Board of Directors.
The Board of Directors had established the Firstbank Corporation Affiliate Deferred Compensation Plan (“Plan”). The American Jobs Creation Act of 2004, passed in October, had significant impact on the design and operation of non-qualified deferred compensation plans. As a result of these changes, future deferrals into the “Plan” were suspended effective December 31, 2004. Prior to December 31, 2004, Directors of the holding company and each affiliate bank were eligible to participate in the Plan. In addition, key management of the holding company and affiliate banks as designated by the Board of Directors were eligible to participate. The plan is a nonqualified plan as defined by the Internal Revenue Code, and as such, all contributions are invested at the recommendation of the participant and are assets of the Company. The Company recognizes a corresponding liability to each participant. The plan allowed Directors to defer their director fees and key management to defer a portion of their salaries into the Plan.
NOTE O - STOCK OPTIONS
The Firstbank Corporation Stock Option Plans of 1993 and 1997 (“Plans”), as amended, provide for the grant of 359,171 and 538,592 shares of stock, respectively, in either restricted form or under option. Options may be either incentive stock options or nonqualified stock options. The Plan of 1993 terminated April 26, 2003. The 1997 Plan will terminate April 28, 2007. The Board, at its discretion, may terminate either or both Plans prior to the Plans’ termination dates.
Each option granted under the Plans may be exercised in whole or in part during such period as is specified in the option agreement governing that option. Options are issued with exercise prices equal to the stock’s market value at date of issuance. The length of time available for a nonqualified stock option to be exercised is governed by each option agreement, but has not been more than ten years from the grant date.
Incentive stock options may not be exercised after ten years from the grant date. In November 2001, the Board of Directors changed the ten year vesting schedule to five years with 20% of the options granted vesting each year. The new schedule was retroactive to the 1993 options. To date, the accelerated vesting schedule had no impact on compensation expense or net income as reported. However, the accelerated vesting schedule did impact pro forma net income and earnings per share for 2004, 2003 and 2002.
The following is a summary of option transactions which occurred during 2002, 2003 and 2004:
As of December 31, 2004, the range of options outstanding and exercisable was as follows.
The fair value of options granted during 2004, 2003 and 2002 is estimated using the Black-Scholes model and the following weighted average information: risk free interest rate of 4.20%, 4.04%, and 4.55%; expected life of 7 years; expected volatility of stock price of 23.7%, 21.8%, and 20.9%, and expected dividends of 3.6% in 2004 and 3.0% in 2003 and 2002. The fair values of each option granted in 2004, 2003, and 2002 were $6.40, $6.28, and $3.50, respectively. The aggregate fair value of the options granted in 2004, 2003, and 2002 were $319,048, $373,304, and $196,670, respectively.
NOTE P - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2004 were as follows:
Deposits from principal officers, directors, and their affiliates at year end 2004 and 2003 were $10,525,000 and $11,436,000, respectively.
NOTE Q - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
Financial instruments with off-balance sheet risk were as follows at year end:
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments have interest rates ranging from 1.93% to 10.5% and maturities ranging from 15 years to 30 years.
NOTE R - CONTINGENCIES
From time to time certain claims are made against the Company and its banking subsidiaries in the normal course of business. There were no outstanding claims considered by management to be material at December 31, 2004.
NOTE S - DIVIDEND LIMITATION OF SUBSIDIARIES
Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends the banks can pay to the Company. At December 31, 2004, using the most restrictive of these conditions for each bank, the aggregate cash dividends that the banks can pay the Company without prior approval was $22,006,000. It is not the intent of management to have dividends paid in amounts which would reduce the capital of the banks to levels below those which are considered prudent by management and in accordance with guidelines of regulatory authorities.
NOTE T - STOCK REPURCHASE PROGRAM
On July 23, 2002 the Corporation announced a stock repurchase plan authorizing the repurchase of up to $10 million in Firstbank Corporation common stock. As of December 31, 2002, 122,710 shares had been repurchased at an average price of $24.05 per share. During 2003, the Corporation had repurchased 168,100 shares of its stock at an average price of $31.49 per share under the 2002 authorization.
On November 25, 2003, the Corporation announced a repurchase plan that re-established the authorized limit for share repurchases, from that point forward, of up to $10 million of Firstbank Corporation common stock. As of December 31, 2003, the Corporation had repurchased 8,000 shares of its stock at an average price of $32.21 under the new authorization.
During 2004 the Corporation repurchased 106,700 shares of its common stock for an average cost per share of $29.95 under the November 2003 repurchase plan.
On June 15, 2004, the Corporation announced a self tender offer to purchase up to 500,000 shares of its common stock, plus up to 2% of outstanding shares, at a price of $30.00 per share and suspended activity under its repurchase program. The offer to purchase shares expired on July 30, 2004 with the tender offer over subscribed. On August 5, 2004, the Corporation accepted 600,000 shares of those tendered for a total cost of $18.0 million.
The Corporation has remaining authority to repurchase up to $6,546,888 in shares under the November 2003 repurchase plan.
NOTE U - CAPITAL ADEQUACY
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
At year end 2004 and 2003, the most recent regulatory notifications categorize the Company as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that classification.
Actual and required capital amounts at year end (in Thousands of Dollars) and ratios are presented below:
NOTE V - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as follows at year end:
The methods and assumptions used to estimate fair value are described as follows: The carrying amount is the estimated fair value for cash and cash equivalents, short term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short term debt, and variable rate loans or deposits that re-price frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements. The fair value of off-balance sheet items was not material to the consolidated financial statements at December 31, 2004 and 2003.
NOTE W - BASIC AND DILUTED EARNINGS PER SHARE
Stock options for 59,039, 59,039, and 145,529 shares of common stock were not considered in computing diluted earnings per share for 2004, 2003, and 2002 because they were anti-dilutive.
NOTE X - FIRSTBANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION (In Thousands of Dollars)
CONDENSED BALANCE SHEETS
Years Ended December 31st
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
NOTE Y - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows (In Thousands of Dollars):
NOTE Z - QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands of Dollars, Except per Share Data)
All per share amounts have been adjusted for stock dividends and stock splits.
FIRSTBANK CORPORATION
BOARD OF DIRECTORS
William E. Goggin, Chairman
Chairman, Firstbank - Alma
Attorney, Goggin & Baker
Duane A. Carr
Attorney, Miel and Carr
Edward B. Grant, Ph.D., CPA
Chairman, Firstbank (Mt. Pleasant)
General Manager, Public Broadcasting, Central Michigan University
David W. Fultz
Owner, Fultz Insurance Agency
Owner, Kirtland Insurance Agency
David D. Roslund, CPA
Administrator, Wilcox Health Care Center (Long-Term Care Facility)
Small Business Investor and Manager
Samuel A. Smith
Owner, Smith Family Funeral Homes, Inc.
Thomas R. Sullivan
President & Chief Executive Officer, Firstbank Corporation
President & Chief Executive Officer, Firstbank (Mt. Pleasant)
OFFICERS
Thomas R. Sullivan
President & Chief Executive Officer
Samuel G. Stone
Executive Vice President, Chief Financial
Officer, Secretary & Treasurer
William L. Benear
Vice President
David M. Brown
Vice President
David L. Miller
Vice President
Dale A. Peters
Vice President
James M. Taylor
Vice President
(retired 12/31/2004)
James E. Wheeler, II
Vice President
NON-BANK SUBSIDIARY
Gladwin Land Company
FIRSTBANK CORPORATION
311 Woodworth Avenue
P. O. Box 1029
Alma, Michigan 48801
(989) 463-3131
FIRSTBANK CORPORATION
OPERATIONS CENTER
308 Woodworth Avenue
Alma, Michigan 48801
FIRSTBANK - ALMA
BOARD OF DIRECTORS
William E. Goggin, Chairman
Chairman, Firstbank Corporation
Attorney, Goggin & Baker
Martha A. Bamfield, D.D.S.
Dentist, Nester & Bamfield, DDS, PC
Cindy Bosley
Chief Administrative Officer, Masonic Pathways
Edward J. DeGroat, CCIM
Commercial Real Estate Operator
Paul Lux
Owner, Lux Funeral Homes, Inc.
Donald L. Pavlik
Superintendent, Alma Public Schools
David D. Roslund, CPA
Administrator, Wilcox Health Care Center
Small Business Investor and Manage
Victor V. Rozas
Physician
Thomas R. Sullivan
President & Chief Executive Officer, Firstbank Corporation
President & Chief Executive Officer, Firstbank (Mt. Pleasant)
Saundra J. Tracy, Ph.D.
President, Alma College
James E. Wheeler, II
President & Chief Executive Officer, Firstbank - Alma
Vice President, Firstbank Corporation
OFFICERS
James E. Wheeler, II
President & Chief Executive Officer
Richard A. Barratt
Executive Vice President
Gregory A. Daniels
Vice President
Marita A. Harkness
Vice President
Gerald E. Kench
Vice President
Timothy M. Lowe
Vice President
Joan S. Welke
Vice President
Pamela K. Winters
Vice President
SUBSIDIARY
Firstbank - Alma Mortgage Company
OFFICE LOCATIONS
Alma
7455 N. Alger Road
(989) 463-3134
230 Woodworth Ave.
(989) 463-3137
311 Woodworth Ave.
(989) 463-3131
Ashley
114 S. Sterling St.
(989) 847-2394
Merrill
125 W. Saginaw St.
(989) 643-7253
Riverdale/Vestaburg
9002 W. Howard City
-Edmore Rd.
(989) 268-5445
Auburn
4710 S. Garfield Rd.
(989) 662-4459
St. Charles
102 Pine St.
(989) 865-9918
Ithaca
219 E. Center St.
(989) 875-4107
St. Louis
135 W. Washington Ave.
(989) 681-5758
FIRSTBANK (MT. PLEASANT)
BOARD OF DIRECTORS
Edward B. Grant, Ph.D., CPA, Chairman
General Manager, Public Broadcasting, Central Michigan University
Steve K. Anderson
President & CEO, Cadillac Tire Center, Cadillac
President & CEO, Upper Lakes Tire, Gaylord
Jack D. Benson
Management Consultant
Formerly - President, Old Kent Bank of Cadillac
Ralph M. Berry
Owner, Berry Funeral Home
Glen D. Blystone, CPA
Blystone & Bailey, CPA's, PC
Kenneth C. Bovee
Partner, Keystone Property Management, Inc.
Sibyl M. Ellis
President, Someplace Special, Inc.
Robert E. List, CPA
Shareholder, Weinlander Fitzhugh, CPA's
Manager, Clare and Gladwin Offices
William M. McClintic
Attorney, W.M. McClintic, PC
J. Regan O'Neill
President and Co-Founder, Network Reporting Corporation
President and Co-Founder, NetMed Transcription Services, LLC
Phillip R. Seybert
President, P.S. Equities, Inc.
Thomas R. Sullivan
President & Chief Executive Officer, Firstbank Corporation
President & Chief Executive Officer, Firstbank (Mt. Pleasant)
Arlene A. Yost
Secretary and Treasurer, Jay's Sporting Goods, Inc.
OFFICERS
Thomas R. Sullivan
President & Chief Executive Officer
John Buckley
Community Bank President - Cadillac
Douglas J. Ouellette
Executive Vice President
Mark B. Perry
Senior Vice President
Robert L. Wheeler
Senior Vice President
Cheryl Gaudard
Vice President
Daniel J. Timmins
Vice President
Roger Trudell
Vice President
SUBSIDIARY
Firstbank - Mt. Pleasant Mortgage Company
OFFICE LOCATIONS
Mt. Pleasant
102 S. Main St.
(989) 773-2600
4699 Pickard St.
(989) 773-2335
2013 S. Mission St.
(989) 773-3959
1925 E. Remus Rd.
(989) 775-8528
Clare
806 N. McEwan Ave.
(989) 386-7313
Cadillac
114 W. Pine St.
(231) 775-9000
Shepherd
258 W. Wright Ave.
(989) 828-6625
Winn
2783 Blanchard Rd.
(989) 866-2210
FIRSTBANK - WEST BRANCH
BOARD OF DIRECTORS
Joseph M. Clark, Chairman
Owner, Morse Clark Furniture
Bryon A. Bernard
CEO, Bernard Building Center
David W. Fultz
Owner, Fultz Insurance Agency
Owner, Kirtland Insurance Agency
Robert T. Griffin
Owner and President, Griffin Beverage Company
Northern Beverage Co. and West Branch Tank & Trailer
Charles A. Hanes
President, C. A. Hanes, Inc.
Christine R. Juarez
Attorney, Juarez and Juarez, PLLC
Norman J. Miller
Owner, Miller Farms and Miller Dairy Equipment and Feed
Dale A. Peters
President & Chief Executive Officer, Firstbank - West Branch
Vice President, Firstbank Corporation
Jeffrey C. Schubert, D.D.S.
Dentist
Camila J. Steckling, CPA
Weinlander Fitzhugh, CPA's
Certified Public Accountants & Consultants
Thomas R. Sullivan
President & Chief Executive Officer, Firstbank Corporation
President & Chief Executive Officer, Firstbank (Mt. Pleasant)
Mark D. Weber, MD C.A. Hanes Realty, Incorporated
Orthopedic Surgeon
OFFICERS
Dale A. Peters
President & Chief Executive Officer
Daniel H. Grenier
Executive Vice President
Michael F. Ehinger
Vice President
Danny J. Gallagher
Vice President
Eileen S. McGregor
Vice President
Larry M. Schneider
Vice President
Mark D. Wait
Vice President
Marie A. Wilkins
Vice President
SUBSIDIARIES
1ST Armored, Incorporated
1st Title, Incorporated
C.A. Hanes Realty, Incorporated
Firstbank - West Branch Mortgage Company
OFFICE LOCATIONS
West Branch
502 W. Houghton Ave.
(989) 345-7900
601 W. Houghton Ave.
(989) 345-7900
2087 S. M-76
(989) 345-5050
2375 M-30
(989) 345-6210
Fairview
1979 Miller Rd.
(989) 848-2243
Rose City
505 S. Bennett St.
(989) 685-3909
Hale
3281 M-65
(989) 728-7566
St. Helen
1990 N. St. Helen Rd.
(989) 389-1311
Higgins Lake
4522 W. Higgins Lake Dr.
(989) 821-9231
FIRSTBANK - LAKEVIEW
BOARD OF DIRECTORS
Kenneth A. Rader, Chairman
Owner, Ken Rader Farms
William L. Benear
President & Chief Executive Officer, Firstbank - Lakeview
Vice President, Firstbank Corporation
Duane A. Carr
Attorney, Miel and Carr
V. Dean Floria
Sheridan Township Supervisor
Chalmer Gale Hixson, Chairman
Owner, Country Corner Supermarket
Owner, A Flair for Hair
Owner, Harry Chalmers, Inc.
Owner, Powderhorn Ranch
Gerald L. Nielsen
Owner, Nielsen's TV & Appliance
Thomas R. Sullivan
President & Chief Executive Officer, Firstbank Corporation
President & Chief Executive Office, Firstbank (Mt. Pleasant)
OFFICERS
William L. Benear
President & Chief Executive Officer
Kim D. vonKronenberger
Executive Vice President
Karen McKenzie
Vice President
Dianne Stilson
Vice President
SUBSIDIARY
Firstbank - Lakeview Mortgage Company
OFFICE LOCATION
Lakeview
506 Lincoln Ave.
(989) 352-7271
9531 N. Greenville Rd.
(989) 352-8180
Canadian Lakes
10049 Buchanan Rd.
Stanwood, MI
(231) 972-4200
Remus
201 W. Wheatland Ave.
(989) 967-3602
Howard City
20020 Howard City-Edmore Rd.
(231) 937-4383
Morley
101 E. 4th St.
(231) 856-7652
FIRSTBANK - ST. JOHNS
BOARD OF DIRECTORS
John M. Sirrine, Chairman
Owner, John M. Sirrine & Associates, Inc., Accountants
David M. Brown
President & Chief Executive Officer
(effective 1/1/2005)
Ann M. Flermoen, D.D.S.
Dentist
William G. Jackson
Attorney, William G. Jackson, PC
Frank Pauli
President, St. Johns Ford-Mercury, Inc.
Sara Clark-Pierson
Attorney, Certified Public Accountant, Clark Family Enterprises
Donald A. Rademacher
Owner, RSI Home Improvement, Inc.
Samuel A. Smith
Owner, Smith Funeral Homes, Inc.
Thomas R. Sullivan
President & Chief Executive Officer, Firstbank Corporation
President & Chief Executive Officer, Firstbank (Mt. Pleasant)
James M. Taylor
President & Chief Executive Officer, Firstbank - St. Johns
Vice President, Firstbank Corporation
(retired 12/31/2004)
OFFICERS
James M. Taylor
President & Chief Executive Officer
(retired 12/31/2004)
David M. Brown
President & Chief Executive Officer
(effective 1/1/2005)
Craig A. Bishop
Vice President
Lawrence Kruger
Vice President
Peggy Underwood
Vice President
SUBSIDIARY
Firstbank - St. Johns Mortgage Company
OFFICE LOCATIONS
St. Johns
201 N. Clinton Ave.
(989) 227-8383
1501 Glastonbury Dr.
(989)227-6995
BUSINESS OF THE COMPANY
Firstbank Corporation (the “Company”) is a bank holding company. As of December 31, 2004, the Company’s subsidiaries are Firstbank - Alma; Firstbank (Mt. Pleasant); Firstbank - West Branch; Firstbank - Lakeview; Firstbank - St. Johns; 1st Armored, Incorporated; Gladwin Land Company; 1st Title, Incorporated;, and C.A. Hanes Realty, Incorporated. As of December 31, 2004, the Company and its subsidiaries employed 365 people on a full-time equivalent basis.
The Company is in the business of banking. Each subsidiary bank of the Company is a full service community bank. The subsidiary banks offer all customary banking services, including the acceptance of checking, savings and time deposits and the making of commercial, agricultural, real estate, personal, home improvement, automobile and other installment and consumer loans. Trust services are offered to customers through Citizens Bank Wealth Management in the Firstbank - Alma main office. Deposits of each of the banks are insured by the Federal Deposit Insurance Corporation.
The banks obtain most of their deposits and loans from residents and businesses in Bay, Clare, Gratiot, Iosco, Isabella, Mecosta, Midland, Montcalm, Ogemaw, Oscoda, Roscommon, Saginaw, and parts of Clinton and Wexford counties. Firstbank - Alma has its main office and one branch in Alma, Michigan, and one branch located in each of the following areas: Ashley, Auburn, Ithaca, Merrill, Pine River Township (near Alma), St. Charles, St. Louis, and Vestaburg, Michigan. Firstbank (Mt. Pleasant) has its main office in Mt. Pleasant, Michigan, two branches located in Union Township (near Mt. Pleasant), and one branch located in each of the following areas: Cadillac, Clare, Mt. Pleasant, Shepherd, and Winn, Michigan. Firstbank - West Branch has its main office in West Branch, Michigan, and one branch located in each of the following areas: Fairview, Hale, Higgins Lake, Rose City, St. Helen, and West Branch Township (near West Branch), Michigan. Firstbank - Lakeview has its main office and one branch in Lakeview, Michigan, and one branch located in each of the following areas: Canadian Lakes, Howard City, Morley, and Remus, Michigan. Firstbank - St. Johns has its main office and one branch located in St. Johns, Michigan. The banks have no material foreign assets or income.
The principal sources of revenues for the Company and its subsidiaries are interest and fees on loans and non-interest revenue resulting from banking and non-bank subsidiary activity. On a consolidated basis, interest and fees on loans accounted for approximately 76% of total revenues in 2004, 68% in 2003, and 74% in 2002. Non-interest revenue accounted for approximately 19% of total revenue in 2004, 27% in 2003, and 20% in 2002. Interest on securities accounted for approximately 5% of total revenue in each of 2004, 2003, and 2002.
CORPORATE INFORMATION
Annual Meeting:
The annual meeting of shareholders will be held on
Monday, April 25, 2005, 4:30 p.m., Heritage Center,
Alma College, Alma, Michigan.
Independent Auditors:
Crowe Chizek and Company LLC
Grand Rapids, Michigan
General Counsel:
Varnum Riddering Schmidt & Howlett, LLP
Grand Rapids, Michigan
Stock Information:
Organizations making a market in
Firstbank Corporation Common Stock
include:
Archipelago, LLC
BrokerageAmerica, LLC
B-Trade Services, LLC
Goldman, Sachs & Company
Howe Barnes Investments, Inc.
Keefe, Bruyette & Woods, Inc.
Knight Equity Markets, L.P.
Merrill Lynch, Pierce, Fenner
Morgan Stanley & Company., Inc.
Oppenheimes & Company., Inc.
Raymond James Financial Services, Inc.
RBC Dain Rauscher, Inc.
Robert W. Baird & Company, Inc.
Sandler O'Neill & Partners
Schwab Capital Markets
Stifel, Nicolaus & Company, Inc.
Susquehanna Capital Group
THE BRUT ECN, LLC
Trident Securities, Inc.
UBS Securities, LLC
For research information and/or investment
recommendations, contact:
Howe Barnes Investments, Inc.
(800) 800-4693
Oppenheimer & Co.
(800) 863-5434
Ryan Beck & Co., Inc.
(973) 549-4000
Stifel, Nicolaus & Company, Inc.
(314) 342-2000
Registrar and Transfer Company is
Firstbank Corporation's Transfer Agent.
You may contact the Investor Relations
Department at: (800) 368-5948
EXHIBIT 14
CODE OF ETHICS
FIRSTBANK CORPORATION
CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND
SENIOR FINANCIAL OFFICERS
In my role as the Chief Executive Officer or as a Senior Financial Officer of Firstbank Corporation (the “Company”), I certify to the Company and the Audit Committee of the Board of Directors of the Company, that I will adhere to and advocate the following principles and responsibilities governing my professional and ethical conduct to the best of my knowledge and ability:
1.
I will act with honesty and integrity, avoiding actual or apparent conflicts of interest in all personal and professional relationships.
2.
I will provide information that is accurate, complete, objective, relevant, timely and understandable.
3.
I will comply with the rules and regulations of federal, state, and local governments and other appropriate private and public regulatory agencies.
4.
I will act in good faith, responsibly, and with due care. I will not misrepresent material facts or allow my independent judgment to be subordinated or otherwise compromised.
5.
I will respect and maintain the confidentiality of information reviewed or acquired in carrying out my duties except when authorized or otherwise legally obligated to disclose.
6.
I will share knowledge and maintain skills important and relevant to the needs of the Company.
7.
I will proactively practice and promote ethical behavior as a professional in my role with the Company.
8.
I will comply with and adhere to all of the Company’s policies and practices, including those policies governing accounting and financial reporting practices and corporate governance.
9.
I will promptly disclose to an appropriate person or persons any material transaction or relationship that reasonably could be expected to give rise to a conflict of interest and/or violations of this Code.
EXHIBIT 21
FIRSTBANK CORPORATION SUBSIDIARIES
NAME
Firstbank - Alma
Firstbank (Mt. Pleasant)
Firstbank - West Branch
Firstbank - Lakeview
Firstbank - St. Johns
Gladwin Land Company
1st Armored, Inc.
1st Title, Inc.
C.A. Hanes Realty, Inc.
Firstbank - Alma Mortgage Company
Firstbank (Mt. Pleasant) Mortgage
Company
Firstbank - West Branch Mortgage
Company
Firstbank - Lakeview Mortgage
Company
Firstbank - St. Johns Mortgage Company
STATE OF INCORPORATION
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
OWNERSHIP
100%
100%
100%
100%
100%
100%
100% by Firstbank - West
Branch
100% by Firstbank - West
Branch
55% by Firstbank - West
Branch
100% by Firstbank - Alma
100% by Firstbank
(Mt. Pleasant)
100% by Firstbank - West
Branch
100% by Firstbank - Lakeview
100% by Firstbank -
St. Johns
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of Firstbank Corporation on Form S-8 (File Nos. 333-97011, 333-60190, 333-95427, 333-53957) and Form S-3 (File Nos. 333-84286, 333-15131) of our reports dated February 25, 2005 with respect to the consolidated financial statements of Firstbank Corporation, and management’s assessment of internal control over financial reporting and the effectiveness of internal control over financing reporting, which reports are included in the 2004 Annual Report on Form 10-K of Firstbank Corporation.
/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Grand Rapids, Michigan
March 9, 2005
EXHIBIT 31.1
CERTIFICATIONS
I, Thomas R. Sullivan, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Firstbank Corporation.
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 11, 2005
/s/ Thomas R. Sullivan
Thomas R. Sullivan
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS
I, Samuel G. Stone, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Firstbank Corporation.
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 11, 2005
/s/ Samuel G. Stone
Samuel G. Stone
Chief Financial Officer
Exhibit 32.1
Each of Thomas R. Sullivan, Chief Executive Officer, and Samuel G. Stone, Chief Financial Officer, of Firstbank Corporation., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
the Annual Report on Form 10-K for the fiscal year ended December 31, 2004, which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2)
the information contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2004, fairly presents, in all material respects, the financial condition and results of operations of Firstbank Corporation.
Dated: March 11, 2005
/s/ Thomas R. Sullivan
Thomas R. Sullian
Chief Executive Officer
/s/ Samuel G. Stone
Samuel G. Stone
Chief Financial Officer
EXHIBIT 99
Firstbank Corporation 401(k) PlanPerformance
Table*
*All assume an initial investment on 1/01/2000 of $1,000.00.