10-Q 1 firstbank10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2001 or [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from ______ to _______. Commission file number: 0-14209 FIRSTBANK CORPORATION (Exact name of registrant as specified in its charter) Michigan 38-2633910 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 311 Woodworth Avenue, Alma, Michigan 48801 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (517) 463-3131 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock 4,799,232 shares outstanding as of April 30, 2001. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (UNAUDITED) page 3-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. page 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk. page 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K page 13 SIGNATURES page 14 Page 2 Item 1. Financial Statements (UNAUDITED) FIRSTBANK CORPORATION CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001, AND DECEMBER 31, 2000 (Dollars in Thousands) March 31, December 31, 2001 2000 ---- ---- ASSETS Cash and due from banks $20,630 $ 25,716 Short term investments 6,168 2,380 -------------- ------------- Total cash and cash equivalents 26,798 28,096 Securities available for sale 71,767 76,175 Loans Loans held for sale 712 1,018 Portfolio loans Commercial 290,986 279,060 Real estate mortgage 235,781 238,899 Consumer 79,801 81,790 -------------- ------------- Total loans 607,280 600,767 Less allowance for loan losses (10,044) (9,857) -------------- ------------- Net loans 597,236 590,910 Premises and equipment, net 15,815 15,682 Acquisition intangibles 9,029 8,974 Accrued interest receivable 4,448 4,623 Other assets 9,033 8,807 -------------- ------------- TOTAL ASSETS $734,126 $733,267 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits: Noninterest bearing accounts $74,270 $80,295 Interest bearing accounts: Demand 134,568 135,467 Savings 69,203 68,641 Time 269,730 252,821 -------------- ------------- Total deposits 547,771 537,224 Securities sold under agreements to repurchase and overnight borrowings 24,256 38,307 Notes payable 85,236 83,952 Accrued interest and other liabilities 11,052 9,580 -------------- ------------- Total liabilities 668,315 669,063 SHAREHOLDERS' EQUITY Preferred stock; no par value, 300,000 shares authorized, none issued Common stock; 10,000,000 shares authorized, 4,793,219 shares issued and outstanding as of March 31, 2001 (4,767,877 as of December 31, 2000) 56,927 56,550 Retained earnings 8,088 7,286 Accumulated other comprehensive income 796 368 -------------- ------------- Total shareholders' equity 65,811 64,204 -------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $734,126 $733,267 ============== =============
See notes to consolidated financial statements. Page 3 FIRSTBANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME & COMPREHENSIVE INCOME MARCH 31, 2001 AND 2000 (Dollars in Thousands except per share data) Three months ended March 31, 2001 2000 ---- ---- Interest income: Interest and fees on loans $13,223 $11,197 Investment securities Taxable 712 914 Exempt from Federal Income Tax 335 394 Short term investments 96 49 ------------ ------------ Total interest income 14,366 12,554 Interest expense: Deposits 5,320 4,325 Notes payable and other 1,734 1,262 ------------ ------------ Total interest expense 7,054 5,587 Net interest income 7,312 6,967 Provision for loan losses 203 175 ------------ ------------ Net interest income after provision for loan losses 7,109 6,792 Noninterest income: Gain on sale of mortgage loans 335 93 Service charges on deposit accounts 424 387 Trust fees 89 88 Gain (loss) on sale of securities 25 (3) Mortgage servicing 41 79 Other 961 682 ------------ ------------ Total noninterest income 1,875 1,326 Noninterest expense: Salaries and employee benefits 3,254 2,735 Occupancy 889 775 Amortization of intangibles 200 171 FDIC Insurance premium 25 25 Michigan Single Business Tax 132 163 Other 2,142 1,227 ------------ ------------ Total noninterest expense 6,642 5,096 Income before federal income taxes 2,342 3,022 Federal income taxes 730 912 ------------ ------------ NET INCOME $1,612 $2,110 ============ ============ Comprehensive income $2,040 $1,877 ============ ============ Basic earnings per share $0.34 $0.43 ============ ============ Diluted earnings per share $0.33 $0.42 ============ ============ Dividends per share $0.17 $0.16 ============ ============
See notes to consolidated financial statements. Page 4 FIRSTBANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 and 2000 (Dollars in Thousands) Three months ended March 31, 2001 2000 ---- ---- OPERATING ACTIVITIES Net income $1,612 $2,110 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 203 175 Depreciation of premises and equipment 307 361 Net amortization of security premiums/discounts 33 20 (Gain) loss on sale of securities (25) 3 Amortization of goodwill and other intangibles 200 171 Gain on sale of mortgage loans (335) (93) Proceeds from sales of mortgage loans 22,710 11,218 Loans originated for sale (22,069) (10,610) Increase (decrease) in accrued interest receivable and other assets (526) 213 Increase in accrued interest payable and other liabilities 1,472 1,348 ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,582 4,916 INVESTING ACTIVITIES Proceeds from sale of securities available for sale 2,163 995 Proceeds from maturities of securities available for sale 6,716 10,569 Purchases of securities available for sale (3,833) (7,634) Net increase in portfolio loans (6,835) (21,770) Net purchases of premises and equipment (439) (729) ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (2,228) (18,569) FINANCING ACTIVITIES Net increase in deposits 10,547 728 Decrease in securities sold under agreements to repurchase and other short term borrowings (14,051) (8,509) Increase of note payable 1,284 17,486 Cash proceeds from issuance of common stock 409 527 Purchase of common stock (30) (875) Cash dividends (811) (795) ------------- ------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,652) 8,562 DECREASE IN CASH AND CASH EQUIVALENTS (1,298) (5,091) Cash and cash equivalents at beginning of period 28,096 25,197 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $26,798 $20,106 ============= ============= Supplemental Disclosure Interest Paid $6,894 $5,609 Income Taxes Paid $0 $0 Non-cash transaction: purchased goodwill $254 $0
See notes to consolidated financial statements. Page 5 FIRSTBANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 NOTE A - FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2001, are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet and statement of shareholders' equity at December 31, 2000, have been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation's annual report on Form 10-K for the year ended December 31, 2000. NOTE B - SECURITIES Individual securities held in the securities portfolio are classified as securities available for sale. Securities might be sold prior to maturity due to changes in interest rates, prepayment risks, yield, availability of alternate investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value and the related unrealized holding gain or loss is reported, net of related income tax effects, as a separate component of shareholders' equity until realized. NOTE C - LOAN COMMITMENTS Loan commitments (including unused lines of credit and letters of credit) are made to accommodate the financial needs of the Banks' customers. The commitments have credit risk essentially the same as that involved in extending loans to customers, and are subject to the Banks' normal credit policies and collateral requirements. Loan commitments, which are predominately at variable rates, were approximately $78,477,000 and $88,264,000 at March 31, 2001, and December 31, 2000, respectively. Page 6 NOTE D - NONPERFORMING LOANS AND ALLOWANCE FOR LOAN LOSSES Nonperforming Loans and Assets The following table summarizes nonaccrual and past due loans at the dates indicated: March 31, December 31, (Dollars in thousands) 2001 2000 -------------------------------------------- ------- -------- Nonperforming loans: Nonaccrual loans $2,099 $1,715 Loans 90 days or more past due 231 366 Renegotiated loans 53 53 ------- ------- Total nonperforming loans $2,383 $2,134 ======= ======= Property from defaulted loans $ 585 $ 512 ======= ======= Nonperforming loans as a percent of: Total loans .39% .35% ======= ======= Allowance for loan losses 23.73% 25.51% ======= =======
Analysis of the Allowance for Loan Losses The following table summarizes changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off, and additions to the allowance which have been charged to expense. March 31 December 31 2001 2000 -------- -------- Loans outstanding at end of period $607,280 $600,767 ======= ======= Allowance at end of period $10,044 $9,857 ======= ===== Allowance as a percent of: Total loans at end of period 1.65% 1.64% ==== ==== Nonperforming loans at end of period 421% 462% === ===
Three Months Ended March 31, March 31, (Dollars in thousands) 2001 2000 -------------------------------------------------------------------------------------------- Balance at beginning of period $9,857 $9,317 Charge-offs (99) (178) Recoveries 83 246 ------ ------ Net (charge-offs) recoveries 16 68 Additions to allowance for loan losses 203 175 ------ ------ Balance at end of period $ 10,044 $9,560 ======== ===== Average loans outstanding during the period $602,361 $516,505 ======= ======= Net charge-offs (recoveries) as a percent of: Average loans outstanding .003% .013% ==== ==== Average Allowance for loan losses .16% .72% === ===
Page 7 NOTE E - RECLASSIFICATION Certain 2000 amounts have been reclassified to conform to the 2001 presentation. NOTE F - BASIC AND DILUTED EARNINGS PER SHARE (Dollars in thousands except for per share data) Three months ended March 31, 2001 2000 ---- ---- Earnings per share Net Income $1,612 $2,110 Weighted average common shares outstanding 4,771 4,917 ----- ----- Basic earnings per share $ 0.34 $ 0.43 ====== ====== Earnings per share assuming dilution Net Income $1,612 $2,110 Weighted average common shares outstanding 4,771 4,917 Add dilutive effect of assumed exercises of options 64 80 ---- ---- Weighted average common and dilutive potential common shares outstanding 4,835 4,997 ------ ------ Diluted earnings per share $ 0.33 $ 0.42 ====== ======
Stock options for 87,757 and 49,584 shares of common stock were not considered in computing diluted earnings per share for 2001 and 2000 because they were antidilutive. Page 8 Item 2. Management' s Discussion and Analysis of Financial Condition and Results of Operations. The consolidated financial information presented is for Firstbank Corporation ("Corporation") and its wholly owned subsidiaries, Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch (including its majority holding in C.A. Hanes Realty, Inc.), Firstbank - Lakeview, Firstbank - St. Johns (collectively the "Banks") and Gladwin Land Company. Financial Condition Total assets increased $1 million, or .12%, during the first three months of 2001. Cash and cash equivalents decreased by $1.3 million, or 4.6%, during the first quarter of 2001. Securities available for sale declined $4 million, or 5.8%, during the three months ending March 31, 2001. Nearly all of this decrease is due to the decision not to replace maturing securities. During the same time period, overnight borrowings and securities sold under agreements to repurchase also declined (see below). Total loans grew $6.5 million, or 1%, during the first quarter of 2001. The commercial portfolio grew $12 million, but this growth was partially offset by modest decreases in both consumer and mortgage loans of $2 million and $3.1 million, respectively. The allowance for loan losses increased $187,000 during the first three months of 2001. At March 31, 2001, the allowance as a percent of outstanding loans was 1.65% compared to 1.64% at December 31, 2000. The allowance as a percent of nonperforming loans was 421% at the end of the first quarter of 2001 and 462% at year end 2000. During the first quarter of 2001, the allowance was increased by a provision of $203,000 and decreased by net charge offs of $15,181. Management continues to maintain the allowance for loan losses at a level considered appropriate to absorb losses in the portfolio. The allowance balance is established after considering past loan loss experience, current economic conditions, volume, growth and composition of the loan portfolio, delinquencies, and other relevant factors. Total deposits increased $10.5 million, or 1.96%, from December 31, 2000, to March 31, 2001. Reductions in noninterest bearing account balances of $6 million and demand deposit checking account balances of $1 million were offset by increases in time and savings deposits of $17.5 million. An increase in state and municipal deposits accounted for approximately $12 million of the increase in time deposits. In addition, corporate transfers from repurchase agreements into time deposits totaled $5.5 million. Nearly all of these deposits have maturities of one to twelve months. For the three month period ended March 31, 2001, securities sold under agreements to repurchase and overnight borrowings have decreased by $14 million, or 36.7%. A portion of the decrease resulted from the transfer from repurchase agreements to time deposits discussed above. Also, the increase in time deposits was used to satisfy funding needs rather than overnight borrowings. Notes payable have increased a modest $1.3 million from the end of December 2000, to the end of March, 2001. Page 9 Total shareholders' equity increased $1.6 million, or 2.5%, during the first quarter of 2001. Net income of $1,612,000, stock issuances of $409,000, and net unrealized appreciation on securities available for sale of $428,000 increased shareholders' equity, while stock repurchases of $30,000 and dividends of $811,000 decreased shareholders' equity. Book value was $13.73 per share at March 31, 2001, and $13.47 at December 31, 2000. The following table discloses compliance with current regulatory capital requirements on a consolidated basis: Tier 1 Tier 1 Total Capital to Capital to Capital to Average Risk-weighted Risk-weighted (Dollars in thousands) Assets Assets Assets ------------------------------ -------- ---------- ---------- Capital balances at March 31, 2001 $56,292 $56,292 $63,221 Required Regulatory Capital $29,362 $22,048 $44,096 Capital in excess of regulatory minimums $26,930 $34,244 $19,125 Capital ratios at March 31, 2001 7.67% 10.21% 11.47% Regulatory capital ratios -- "well capitalized" definition 5.00% 6.00% 10.00% Regulatory capital ratios -- minimum requirement 4.00% 4.00% 8.00%
Results of Operations Net income during the first quarter of 2001 was reduced by several non-recurring charges totaling $446,000, after tax, resulting in net income of $1,612,000, basic earnings per share of $0.34, and diluted earnings per share of $0.33 for the first quarter of 2001 compared to $2,110,000, $0.43 and $0.42 for the first quarter of 2000. The non-recurring charges were related primarily to the consolidation of various activities into the corporate processing center. The largest of these charges related to processing errors that occurred over time at a subsidiary bank on mortgages sold into the secondary market. Those errors have been corrected, and the consolidation of mortgage processing at the corporate operations center will prevent their reoccurrence. The remaining charges relate to employee severance, formation of mortgage subsidiaries, and expenses incurred in preparing to list the Corporation's common stock on the NASDAQ National Market System. Operating earnings (excluding non-recurring charges) were $2,058,000, or $0.43 per share (diluted), in the first quarter of 2001 compared to $2,110,000, or $0.42 per share (diluted), in the first quarter of 2000. The rapid decline in interest rates in the first quarter of 2001 caused interest earned on loans and other earning assets to decline faster than interest costs of deposits and other funding sources, resulting in a decline in Firstbank's net interest margin. Average earning assets increased $70 million, or 11.57% for the first quarter of 2001 when compared to the first quarter of 2000. The yield on earning assets increased 21 basis points to 8.65% during the first three months of 2001 compared to 8.44% during the same period in 2000. The cost of funding rate related liabilities increased 49 basis points when comparing the quarter ends of March 2001 and March 2000, from 3.87% in 2000 to 4.36% in 2001. Net interest margin declined 29 basis points from 4.74% to 4.45% when comparing the quarters ended March 2000 and March 2001. Net interest income before provision increased $344,300, or 4.95%, when comparing the three months ending March 31, 2001, to the same period in 2000. Page 10 The provision for loan losses increased $28,000, or 16%, to $203,000 for the first quarter of 2001 compared to the first quarter of 2000. This increase is not a response to deteriorating loan quality, but a provision in recognition of significant loan growth. Total noninterest income increased $549,000, or 41.4%, in the first quarter of 2001 when compared to the respective period in 2000. Gains on sale of mortgages increased $242,000, or 260%, for the same period due to the decline in interest rates which has caused a substantial increase in mortgage lending activity. Miscellaneous income increased $279,000, or 41%, compared to the same period one year ago. Nearly all of this increase is due to the business activities of the new affiliates. Noninterest expense increased 30.3%, or $1,546,000, for the three months ending March 31, 2001, compared to the same period in 2000. The new operating entities of Firstbank - St. Johns, Gladwin Land Co. Inc., and C.A. Hanes Realty Inc. account for nearly $503,000 of this difference as their activity was added to the company in the second half of 2000. Salary expense increased $519,000 representing annual salary adjustments for continuing staff as well as additional staff required for the new subsidiaries. Non-recurring charges of $687,000 (as discussed earlier), further increased noninterest expense for the quarter. FORWARD LOOKING STATEMENTS This report contains "forward-looking statements" as that term is used in the securities laws. All statements regarding our expected financial position, performance, business and strategies are forward looking statements. These statements are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation itself. Words such as "anticipate," "believe," "determine," "estimate," "expect," "forecast," "intend," "is likely," "plan," "project," "opinion," variations of such terms, and similar expressions are intended to identify such forward-looking statements. The presentations and discussions of the provision and allowance for loan losses, and determinations as to the need for other allowances presented in this report are inherently forward-looking statements in that they involve judgements and statements of belief as to the outcome of future events. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Internal and external factors that may cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior and customer ability to repay loans; software failure, errors or miscalculations; and the vicissitudes of the national economy. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Further information concerning us and our business, including additional factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission. Page 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk Information under the headings, "Liquidity and Interest Rate Sensitivity" on page 8 and "Quantitative and Qualitative Disclosure About Market Risk" on pages 9 through 10 in the registrant's annual report to shareholders for the year ended December 31, 2000, is here incorporated by reference. Firstbank's annual report is filed as Exhibit 13 to its Form 10-K annual report for its fiscal year ended December 31, 2000. Firstbank faces market risk to the extent that both earnings and the fair values of its financial instruments are affected by changes in interest rates. The Corporation manages this risk with static GAP analysis and simulation modeling. The Corporation does not believe that there has been a material change in the nature of the Corporation's primary market risk exposures, including the categories of market risk to which the Corporation is exposed and the particular markets that present the primary risk of loss to the Corporation. As of the date of this Form 10-Q Quarterly Report, the Corporation does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term. The methods by which the Corporation manages its primary market risk exposures, as described in the sections of its Form 10-K Annual Report incorporated by reference in response to this item, have not changed materially during the current year. As of the date of this Form 10-Q quarterly report, the Corporation does not expect to change those methods in the near term. However, the Corporation may change those methods in the future to adapt to changes in circumstances or to implement new techniques. The Corporation's market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships in the future will be primarily determined by market factors which are outside of Firstbank's control. All information provided in response to this item consists of forward looking statements. Reference is made to the section captioned "Forward Looking Statements" on page of this Form 10-Q quarterly report for a discussion of the limitations on Firstbank's responsibility for such statements. Page 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K None Page 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRSTBANK CORPORATION (Registrant) Date: 5/11/01 \s\ Thomas R. Sullivan Thomas R. Sullivan President, Chief Executive Officer (Principal Executive Officer) Date: 5/11/01 \s\ Samuel G. Stone Samuel G. Stone Vice President, Chief Financial Officer (Principal Accounting Officer) Page 14