U.S. 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, 2008
[_] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number:
000-14209
FIRSTBANK CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
(State of Incorporation)
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38-2633910
(I.R.S. Employer Identification No.)
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311 Woodworth Avenue
Alma, Michigan
(Address of principal executive offices)
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48801
(Zip Code)
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Registrants
telephone number, including area code: (989) 463-3131
Securities
registered pursuant to Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
X
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act.
Yes [_] No [X] interceptions or interference.
Indicate by check mark whether the
registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes
X
No
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and
will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer
(as defined in Exchange Act Rule 12-b-2). Large accelerated filer ___ Accelerated filer
X
Non-accelerated filer ___
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
X
Common
stock outstanding at April 30, 2008: 7,448,913 shares.
INDEX
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PART I
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements (UNAUDITED)
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Page 3
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Item 2.
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Management's Discussion and Analysis of Financial Condition
and Results of Operations
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Page 11
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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Page 16
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Item 4.
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Controls and Procedures
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Page 17
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PART II
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OTHER INFORMATION
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Item 5.
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Other Information
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Page 18
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Item 6.
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Exhibits
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Page 18
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SIGNATURES
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Page 19
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EXHIBIT INDEX
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Page 20
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2
Item 1
: Financial
Statements (UNAUDITED)
FIRSTBANK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2008 AND DECEMBER 31, 2007
(Dollars in thousands)
UNAUDITED
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March 31,
2008
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December 31,
2007
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ASSETS
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Cash and due from banks
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$
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40,057
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$
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42,198
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Short term investments
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12,553
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3,331
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Total Cash and Cash Equivalents
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52,610
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45,529
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Trading account securities
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662
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675
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Securities available for sale
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107,204
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104,455
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Federal Home Loan Bank stock
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8,481
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8,007
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Loans held for sale
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238
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1,725
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Loans, net of allowance for loan losses of $11,550 at March 31, 2008
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and $11,477 at December 31, 2007
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1,117,257
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1,110,452
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Premises and equipment, net
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28,027
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27,554
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Acquisition goodwill
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35,345
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34,421
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Other intangibles
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4,670
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5,832
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Accrued interest receivable and other assets
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27,993
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27,089
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TOTAL ASSETS
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$
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1,382,487
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$
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1,365,739
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LIABILITIES AND SHAREHOLDERS' EQUITY
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LIABILITIES
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Deposits:
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Non-interest bearing accounts
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$
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143,246
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$
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152,126
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Interest bearing accounts:
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Demand
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224,998
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222,371
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Savings
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155,628
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147,654
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Time
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487,815
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489,241
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Total Deposits
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1,011,687
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1,011,392
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Securities sold under agreements to repurchase and overnight borrowings
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49,280
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42,791
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Federal Home Loan Bank advances
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146,613
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138,126
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Notes Payable
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959
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909
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Subordinated Debentures
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36,084
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36,084
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Accrued interest and other liabilities
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18,097
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17,826
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Total Liabilities
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1,262,720
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1,247,128
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SHAREHOLDERS' EQUITY
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Preferred stock; no par value, 300,000 shares authorized, none issued
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Common Stock; 20,000,000 shares authorized, 7,441,342 shares issued
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and outstanding (7,407,198 at December 31, 2007 )
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111,914
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111,436
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Retained earnings
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7,174
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6,692
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Accumulated other comprehensive income
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679
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483
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Total Shareholders' Equity
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119,767
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118,611
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
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$
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1,382,487
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$
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1,365,739
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See notes to consolidated
financial statements.
3
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
MARCH 31, 2008 AND 2007
(Dollars in thousands except per share data)
UNAUDITED
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Three Months ended March 31,
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2008
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2007
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Interest Income:
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Interest and fees on loans
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$
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19,755
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$
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16,798
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Securities
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Taxable
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1,039
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626
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Exempt from Federal Income Tax
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353
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270
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Short term investments
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91
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311
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Total Interest Income
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21,238
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18,005
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Interest Expense:
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Deposits
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7,089
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6,507
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FHLB advances and other
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2,137
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1,632
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Subordinated Debt
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548
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345
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Total Interest Expense
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9,774
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8,484
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Net Interest Income
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11,464
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9,521
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Provision for loan losses
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816
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(721
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Net Interest Income after provision for loan losses
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10,648
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10,242
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Non-interest Income:
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Gain on sale of mortgage loans
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1,142
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324
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Service charges on deposit accounts
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1,168
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944
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Gain/(loss) on trading account securities
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(13
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0
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Gain/(loss) on sale of securities
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129
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(130
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Mortgage servicing, net of amortization
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(123
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145
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Other
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628
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949
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Total Non-interest Income
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2,931
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2,232
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Non-interest Expense:
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Salaries and employee benefits
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5,847
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4,730
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Occupancy and equipment
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1,749
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1,351
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Amortization and impairment of intangibles
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281
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161
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FDIC insurance premium
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113
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24
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Other
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2,718
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2,429
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Total Non-interest Expense
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10,708
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8,695
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Income before federal income taxes
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2,871
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3,779
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Federal income taxes
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721
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1,121
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NET INCOME
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$
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2,150
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$
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2,658
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Comprehensive Income
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$
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2,346
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$
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2,797
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Basic Earnings Per Share
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$
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0.29
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$
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0.41
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Diluted Earnings Per Share
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$
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0.29
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$
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0.41
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Dividends Per Share
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$
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0.225
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$
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0.225
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See notes to consolidated financial
statements.
4
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
(Dollars in thousands)
UNAUDITED
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Three months ended March 31,
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2008
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2007
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OPERATING ACTIVITIES
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Net income
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$
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2,150
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$
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2,658
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Adjustments to reconcile net income to net cash provided by operating activities:
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Provision for loan losses
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816
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(721
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)
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Depreciation of premises and equipment
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775
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667
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Net amortization of security premiums/discounts
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15
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(67
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)
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Loss on trading account securities
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13
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0
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Loss/(Gain) on sale of securities
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(129
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)
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130
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Amortization and impairment of intangibles
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281
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161
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Stock option and stock grant compensation expense
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53
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72
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Gain on sale of mortgage loans
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(1,142
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)
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(324
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)
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Proceeds from sales of mortgage loans
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50,362
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15,269
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Loans originated for sale
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(47,733
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)
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(14,108
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)
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Deferred federal income tax expense/(benefit)
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76
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48
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Increase in accrued interest receivable and other assets
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(367
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)
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557
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Increase in accrued interest payable and other liabilities
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271
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2,806
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NET CASH PROVIDED BY OPERATING ACTIVITIES
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5,441
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7,148
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INVESTING ACTIVITIES
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Proceeds from sale of securities available for sale
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1,035
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13,386
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Proceeds from maturities and calls of securities available for sale
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41,175
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9,418
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Purchases of securities available for sale
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(44,548
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)
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(22,182
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)
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Purchases of FHLB stock
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(474
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)
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0
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Proceeds from sale of fixed assets
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7
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0
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Net increase in portfolio loans
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(8,378
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)
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(3,525
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)
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Net purchases of premises and equipment
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(1,255
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)
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(686
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)
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NET CASH USED IN INVESTING ACTIVITIES
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(12,438
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)
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(3,589
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)
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FINANCING ACTIVITIES
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Net increase/(decrease) in deposits
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295
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(1,814
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)
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Increase/(decrease) in securities sold under agreements to repurchase and other
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short term borrowings
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6,489
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2,991
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Repayment of notes payable and other borrowings
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(26
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)
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(22
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)
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Proceeds from issuance of other borrowings
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76
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0
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Repayment of Federal Home Loan Bank borrowings
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(8,013
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)
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(9
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)
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Proceeds from Federal Home Loan Bank borrowings
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16,500
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0
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Issuance of common stock, net
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|
425
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|
|
649
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Cash dividends
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(1,668
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)
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(1,461
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)
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NET CASH PROVIDED BY FINANCING ACTIVITIES
|
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|
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14,078
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|
|
334
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INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
|
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|
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7,081
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|
|
3,893
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Cash and cash equivalents at beginning of period
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45,529
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|
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56,937
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CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
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$
|
52,610
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$
|
60,830
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5
CONSOLIDATED STATEMENTS
OF CASHFLOWS (continued)
|
Three months ended March 31,
|
|
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|
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Supplemental Disclosure
|
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Interest Paid
|
|
|
$
|
9,305
|
|
$
|
8,216
|
|
Income Taxes Paid
|
|
|
$
|
0
|
|
$
|
0
|
|
Non cash transfers of loans to Other Real Estate Owned
|
|
|
$
|
757
|
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$
|
300
|
|
See notes to
consolidated financial statements.
ICNB Financial
acquisition:
(In Thousands of Dollars)
|
|
Securities acquired (including FHLB stock)
|
|
|
|
28,252
|
|
Loans acquired, net of allowance for loan losses
|
|
|
|
178,456
|
|
Bank premises and equipment acquired
|
|
|
|
7,283
|
|
Acquisition intangibles recorded
|
|
|
|
18,983
|
|
Other assets acquired
|
|
|
|
12,152
|
|
Deposits assumed
|
|
|
|
(171,999
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)
|
Borrowings assumed
|
|
|
|
(32,558
|
)
|
Other liabilities assumed
|
|
|
|
(6,679
|
)
|
6
FIRSTBANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
UNAUDITED
NOTE 1 FINANCIAL
STATEMENTS
The accompanying unaudited financial
information presented is for Firstbank Corporation (Corporation) and its
wholly owned subsidiaries: Firstbank Alma, Firstbank (Mt. Pleasant), Firstbank
West Branch (including its wholly owned subsidiaries; 1
st
Armored, Inc.,
1
st
Title, Inc., and its majority holding in 1
st
Investors Title,
LLC and C.A. Hanes Realty, Inc. for the three months of 2007), Firstbank Lakeview,
Firstbank St. Johns, Keystone Community Bank, Firstbank West Michigan and
its wholly owned subsidiary Accord Financial Services, Inc., collectively the
Banks), FBMI Risk Management Services, Inc., and Austin Mortgage Company. The
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America 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
accounting principles generally accepted in the United States of America 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, 2008, are not necessarily
indicative of the results that may be expected for the year ending December 31, 2008. The
balance sheet at December 31, 2007, has been derived from the audited financial statements
at that date. For further information, refer to the consolidated financial statements and
footnotes thereto included in the Corporations annual report on Form 10-K for the
year ended December 31, 2007.
Effect of Newly Issued
Accounting Standards
In February 2006, the Financial
Accounting Standards Board (FASB) issued Statement No. 159, The Fair Value Option for
Financial Assets and Liabilities. Adoption of this statement is required for January 1,
2008. Early adoption was allowed, effective to January 1, 2007, if that election was made
by April 30, 2007. This statement allows, but does not require, companies to record
certain assets and liabilities at their fair value. The fair value determination is made
at the instrument level, so similar assets or liabilities could be partially accounted for
using the historical cost method, while other similar assets or liabilities are accounted
for using the fair value method. Changes in fair value are recorded through the income
statement in subsequent periods. The statement provides for a one time opportunity to
transfer existing assets and liabilities to fair value at the point of adoption with a
cumulative effect adjustment recorded against equity. After adoption, the election to
report assets or liabilities at fair value must be made at the point of their inception.
The adoption of this standard did not have a material effect on our financial statements.
In September 2006, the FASB issued
Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes
a framework for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about the assumptions used
to measure fair value and clarifies assumptions about risk and the effect of a restriction
on the sale or use of an asset. The standard is effective for fiscal years beginning after
November 15, 2007. The adoption of this standard did not have a material effect on our
financial statements.
In September 2006, the FASB Emerging
Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.
This issue requires that a liability be recorded during the service period when a
split-dollar life insurance agreement continues after participants employment or
retirement. The required accrued liability will be based on either the post-employment
benefit cost for the continuing life insurance or based on the future death benefit
depending on the contractual terms of the underlying agreement. This issue is effective
for fiscal years beginning after December 15, 2007. The adoption of EITF No. 06-4 did not
have a material effect on our financial statements.
7
Effect of Newly Issued
but not yet Effective Accounting Standards
In January 2008, the FASB issued
Statement No. 160, Noncontrolling Interest in Consolidated Financial Statements an
amendment of ARB No. 51. This Statement applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations, but will affect only those
entities that have an outstanding noncontrolling interest in one or more subsidiaries or
that deconsolidate a subsidiary. The statement requires specific reporting and accounting
treatment for minority interest and changes in minority interest positions of an entity.
We do not anticipate that this statement will have a significant effect on the results of
the company.
NOTE 2 ACQUISITIONS
AND DIVESTITURES
On July 1, 2007 we acquired ICNB
Financial Corporation (ICNB). ICNB was the holding company for The Ionia County National
Bank of Ionia, based in Ionia, Michigan. Ionia County National Bank subsequently changed
its name to Firstbank West Michigan. The purpose of the acquisition was to increase
market share in the Michigan banking market. As of June 30, 2007, ICNB had total assets of
$231 million, total deposits of $171 million, and total loans, net of allowance, of $180
million. The merger was accounted for using the purchase accounting method of accounting,
and accordingly the purchase price was allocated to assets acquired and the liabilities
assumed based upon the estimated fair value as of the merger date.
Firstbank Corporation paid an
aggregate value of $38.4 million to acquire the shares of ICNB common stock outstanding.
The purchase price was determined using the Firstbanks market price on February 1,
2007, the date of the merger agreement. We issued 874,740 shares of Firstbank common
stock, and paid $19,584,000 in cash for the acquisition. The acquisition resulted in the
creation of $19.0 million of intangible assets, of which $15.3 million was designated as
goodwill and $3.7 million as core deposit intangible.
ICNBs financial information is
incorporated into the financial statements contained within this report from July 1, 2007
forward, the date of the merger.
On September 30, 2007, we sold our
55% ownership in C.A. Hanes Realty, Inc. at a loss after taxes of $104,000. Historical
earnings from C.A. Hanes Realty, Inc. are included in the financial statements presented
in this report.
NOTE 3 GOODWILL
Changes in the carrying amount of
goodwill are as follows:
|
(In Thousands of Dollars)
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
|
$
|
34,421
|
|
$
|
20,094
|
|
Impairment write down
|
|
|
|
0
|
|
|
0
|
|
Goodwill from acquisitions
|
|
|
|
42
|
|
|
0
|
|
Reclassification of other intangibles to goodwill
|
|
|
|
882
|
|
|
0
|
|
|
|
|
|
|
Balance at March 31
|
|
|
$
|
35,345
|
|
$
|
20,094
|
|
|
|
|
|
|
The $42,000 shown as goodwill from
acquisitions relates to the ICNB purchase, and the $882,000 reclassification represents
goodwill relating to the Firstbank Lakeview which had previously been reported as
other intangible assets.
8
NOTE 4
NONPERFORMING LOANS AND ASSETS
Nonperforming Loans and
Assets
The following table summarizes
nonaccrual and past due loans at the dates indicated:
(Dollars in thousands)
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans:
|
|
|
Nonaccrual loans
|
|
|
$
|
12,247
|
|
$
|
10,454
|
|
Loans 90 days or more past due and still accruing
|
|
|
|
1,768
|
|
|
3,161
|
|
Renegotiated loans
|
|
|
|
278
|
|
|
543
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
$
|
14,293
|
|
$
|
14,158
|
|
|
|
|
|
|
|
|
|
Property from defaulted loans
|
|
|
$
|
2,762
|
|
$
|
3,167
|
|
|
|
|
Nonperforming loans as a percent of total loans*
|
|
|
|
1.27
|
%
|
|
1.26
|
%
|
Nonperforming loans plus Other Real Estate as a percent of total
|
|
|
|
1.51
|
%
|
|
1.54
|
%
|
loans* plus Other Real Estate
|
|
|
Nonperforming assets as a percent of total assets
|
|
|
|
1.23
|
%
|
|
1.27
|
%
|
Analysis of the Allowance
for Loan Losses
(Dollars in Thousands)
|
Three months ended
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
11,477
|
|
$
|
9,966
|
|
Charge-offs
|
|
|
|
(1,009
|
)
|
|
(272
|
)
|
Recoveries
|
|
|
|
266
|
|
|
108
|
|
|
|
|
|
|
Net charge-offs
|
|
|
|
(743
|
)
|
|
(164
|
)
|
Provision for loan losses
|
|
|
|
816
|
|
|
(721
|
)
|
|
|
|
|
|
Balance at end of period
|
|
|
$
|
11,550
|
|
$
|
9,081
|
|
|
|
|
|
|
|
|
|
Average total loans* outstanding during the period
|
|
|
$
|
1,129,710
|
|
$
|
903,807
|
|
Allowance for loan loss as a percent of total loans*
|
|
|
|
1.01
|
%
|
|
1.00
|
%
|
Allowance for loan loss as a percent
|
|
|
of nonperforming loans
|
|
|
|
82
|
%
|
|
293
|
%
|
Net Charge-offs^ as a percent of average loans*
|
|
|
|
0.26
|
%
|
|
0.07
|
%
|
*All loan ratios exclude
loans held for sale
^Annualized
NOTE 5 FAIR VALUE
OF FINANCIAL INSTRUMENTS
The following tables present
information about our assets measured at fair value on a recurring basis at March 31,
2008, and valuation techniques used by us to determine those fair values.
In general, fair values determined by
Level 1 inputs use quoted prices in active markets for identical assets that we have the
ability to access.
Fair values determined by Level 2
inputs use other inputs that are observable, either directly or indirectly. These Level 2
inputs include quoted prices for similar assets in active markets, and other inputs such
as interest rates and yield curves that are observable at commonly quoted intervals.
9
Level 3 inputs are unobservable
inputs, including inputs that are available in situations where there is little, if any,
market activity for the related asset or liability.
Assets Measured at Fair
Value on a Recurring Basis
(Dollars in Thousands)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balance at
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
$
|
91,499
|
|
|
-
|
|
$
|
15,705
|
|
$
|
107,204
|
|
Federal Home Loan Bank stock
|
|
|
|
-
|
|
$
|
8,481
|
|
|
-
|
|
$
|
8,481
|
|
Trading securities
|
|
|
$
|
662
|
|
|
-
|
|
|
-
|
|
$
|
662
|
|
Changes in Level 3 Assets
Measured at Fair Value on a Recurring Basis
(Dollars in Thousands)
|
|
Investment Securities
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
$
|
12,760
|
|
Total realized and unrealized gains/(losses) included in income
|
|
|
|
0
|
|
Total unrealized gains/(losses) included in other comprehensive income
|
|
|
|
0
|
|
Net purchases, sales, calls and maturities
|
|
|
|
2,980
|
|
Net transfers in/out of Level 3
|
|
|
|
(35
|
)
|
|
|
|
Balance at March 31, 2008
|
|
|
$
|
15,705
|
|
The Level 3 assets that were still
held by us at March 31, 2008 are carried at book value and therefore have no market value
adjustment. During the period, $30,000 of these securities paid down, and $3,010,000 of
new securities were acquired. The $35,000 of net transfers out of Level 3 related to a
re-classification of two small assets which were reclassified to other assets.
Both observable and unobservable
inputs may be used to determine the fair value of positions classified as Level 3 assets.
As a result, the unrealized gains and losses for these assets presented in the tables
above may include changes in fair value that were attributable to both observable and
unobservable inputs.
Available for sale investments
securities categorized as Level 3 assets primarily consist of bonds issued by local
municipalities, auction rate securities, and other like assets. We carry these securities
at historical cost unless economic conditions for the municipalities changes to a degree
requiring a valuation adjustment. Valuation of auction rate securities is based on recent
transactions for similar securities.
We also have assets that under
certain conditions are subject to measurement at fair value on a non-recurring basis.
These assets consist of impaired loans, which are accounted for under the guidelines of
SFAS 114
Accounting by Creditors for Impairment of a Loan
. We
have estimated the fair value of these assets using Level 3 inputs, specifically valuation
of loans based on either a discounted cash flow projection, or a discount to the appraised
value of the collateral underlying the loan. At March 31, 2008 we recognized a non-cash
impairment charge of $536,000 to adjust these assets to their estimated fair values.
Assets Measured at Fair
Value on a Nonrecurring Basis
(Dollars in Thousands)
|
|
Balance at March 31, 2008
|
|
Quoted Prices
in Active Markets for Identical Assets (Level 1)
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Total Losses for the period
ended
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans accounted for
|
|
|
under FAS 114
|
|
|
$
|
18,933
|
|
|
-
|
|
|
-
|
|
$
|
18,933
|
|
$
|
(536
|
)
|
10
Impaired loans accounted for under
FAS 114 categorized as Level 3 assets consist of non-homogeneous loans that are considered
impaired. We estimate the fair value of the loans based on the present value of expected
future cash flows using managements best estimate of key assumptions. These
assumptions include future payment ability, timing, of payment streams, and estimated
realizable values of available collateral (typically based on outside appraisals).
Other assets, including bank-owned
life insurance, goodwill, intangible assets and other assets acquired in business
combinations, are also subject to periodic impairment assessments under other accounting
principles generally accepted in the United States of America. These assets are not
considered financial instruments. Effective February 12, 2008, the Financial Accounting
Standards Board issued a staff position, FSP FAS 157-2, which delayed the applicability of
FAS 157 to non-financial instruments. Accordingly, these assets have been omitted from the
above disclosures.
NOTE 6 BASIC AND
DILUTED EARNINGS PER SHARE
(Dollars in Thousands Except per Share Data)
|
Three Months Ended
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
Net income
|
|
|
$
|
2,150
|
|
$
|
2,658
|
|
Weighted average common shares outstanding
|
|
|
|
7,417,000
|
|
|
6,494,000
|
|
|
|
|
Basic Earnings per Share
|
|
|
$
|
0.29
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
Earnings per share assuming dilution
|
|
|
Net income
|
|
|
$
|
2,150
|
|
$
|
2,658
|
|
Weighted average common shares outstanding
|
|
|
|
7,417,000
|
|
|
6,494,000
|
|
Add dilutive effect of assumed exercises of options
|
|
|
|
0
|
|
|
23,000
|
|
|
|
|
|
|
|
|
|
Weighted average common and dilutive potential common
|
|
|
|
7,417,000
|
|
|
6,517,000
|
|
shares outstanding
|
|
|
|
|
|
Diluted Earnings per Share
|
|
|
$
|
0.29
|
|
$
|
0.41
|
|
|
|
|
|
|
Stock options for 230,945 shares for
the three month period of 2007, and 450,795 shares for the three month period of 2008,
were not considered in computing diluted earnings per share because they were
anti-dilutive.
11
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 wholly owned subsidiaries: 1
st
Armored, Inc.,
1
st
Title, Inc. and its majority holding in 1
ST
Investors Title,
LLC, and C.A. Hanes Realty, Inc.), Firstbank Lakeview, Firstbank St. Johns,
Keystone Community Bank, Firstbank West Michigan (collectively the
Banks), FBMI Risk Management Services, Inc., and Austin Mortgage Company. See
note 2 of the notes to consolidated financial statements for additional disclosures on
Firstbank West Michigan and C.A. Hanes Realty, Inc. Comparisons to prior year are
affected by the acquisition of our Firstbank West Michigan in the third quarter of
2007.
Events Occurring in the
First Quarter 2008
In the first quarter of 2008, we
announced our intention to merge our Mt. Pleasant and Lakeview affiliates into one entity.
While we still remain committed to our multi-charter structure, these two affiliates
already share many resources and have overlapping geographic markets. The merger of these
two affiliates is expected to provide greater efficiency in serving these markets and will
allow us to better serve our customers in those markets. The proposed merger is subject to
regulatory approval. We recorded $52,000 in pre-tax expense during the first quarter
associated with the pending merger. Additional costs will be incurred in the second and
third quarter as we complete the regulatory approval and systems conversion processes.
Subsequent Events
We also have concluded that we will
close our Austin Mortgage Company affiliate (acquired in the Ionia County National Bank
acquisition in 2007) in the second quarter of the year. Current market conditions and the
state of the economy in Michigan no longer provide a profitable business climate for the
lending activities in which this affiliate participates. We currently believe the cost to
close down this business will have a pre-tax cost of $100,000 to $200,000. We believe that
this action will be neutral to earnings over the remainder of the year.
Financial Condition
The Michigan economy continues to
struggle through difficult times with the highest unemployment rate in the nation, rising
foreclosures, and slowing demand for manufactured products. Despite these negative trends,
we have maintained respectable core profitability and favorable asset quality measures
compared with peer banks. Trends showing higher non performing assets, while elevated, are
showing signs of slowing in their progression. We do not believe we have seen the end of
problem loans, however, we are constantly monitoring our loan portfolios for developing
issues and reacting to them with swift actions to mitigate losses wherever possible.
Total assets increased $16.7 million,
or 1.2%, during the first three months of 2008. Cash and cash equivalents increased $7.1
million, or 15.6%. Securities available for sale were higher, increasing $2.7 million, or
2.6%, from December 31, 2007. Total portfolio loans increased $6.9 million, or 0.6%,
during the first three months of 2008. Average total loans were 1.0% higher in the first
quarter of 2008 when compared with the fourth quarter of 2007.
Residential mortgages grew $4.3
million, or 1.1% from year end 2007. For a short period in the first quarter, rates on
residential mortgages provided us the opportunity to refinance loans and increase our
residential portfolio. Real estate construction loans increased $4.9 million, or 3.9%
primarily from two new loans to developers. Commercial and commercial real estate loans
were $2.1 million, or 1.2%, lower, from December 31, 2007.
Net charge-offs of loans were
$743,000 in the first quarter of 2008 compared to $164,000 in the first three months of
2007 and $2,116,000 in the fourth quarter of 2007. The ratio of net charge-offs of loans
(annualized) to average loans was 0.26% in 2008 compared to 0.07% in the same period of
2007 and 0.76% in the fourth quarter of 2007. Of the $743,000 in net charge offs, $536,000
had specific reserves allocated to them in prior periods.
12
At March 31, 2008, the allowance as a
percentage of average outstanding loans was 1.02% compared with 1.00% at the same point a
year earlier and unchanged from year end 2007. Non-performing loans as a percent of total
loans was 1.27% at March 31, 2008, compared with 0.34% a year earlier, and 1.26% at year
end 2007. Nonperforming loans decreased $135,000 from year end, and other real estate
owned decreased $405,000 compared with year end numbers. Our overall asset quality remains
one of the strengths of our banking franchise and has allowed us to maintain strong asset
quality measures relative to competitor banks in Michigan. We continue to be diligent in
review of our loan portfolios for problem loans and believe that early detection of
troubled credits is critical to our ability to maintain our allowance for loan losses at
its current level. We maintain the allowance for loan losses at a level considered
adequate to cover losses within the loan portfolio. The allowance balance is established
after considering past loan loss experience, current economic conditions, composition of
the loan portfolio, delinquencies, and other relevant factors.
Securities available for sale grew by
$2.7 million or 2.6% in the first quarter, primarily due to a $2.2 million increase in
trust preferred auction rate securities. We held $9.8 million at March 31, 2008 compared
with $7.6 million of these auction rate securities at year end 2007. Due to current market
conditions, these auction rate securities are have become less liquid than in previous
periods. We continue to value them at par, based on the credit quality of the underlying
collateral supporting the securities.
Total deposits were basically
unchanged when compared with year end balances, increasing just $295,000. Within the
deposit base, non-interest bearing demand account balances decreased $8.9 million or 5.8%,
interest bearing demand account balances increased $2.6 million, or 1.2%, savings balances
increased $8.0 million, or 5.4%, and time balances decreased $1.4 million, or 0.3%. Within
time balances, wholesale CDs were $2.3 million lower than year end, while core market CDs
increased $0.9 million. The decline in non-interest bearing deposits reflects seasonal
activity in those accounts.
For the three month period ended
March 31, 2008, securities sold under agreements to repurchase and overnight borrowings
increased $6.5 million, or 15.2%, due to normal fluctuations in customer cash flows.
Federal Home Loan Bank advances and notes payable were up $8.5 million, or 6.1% higher
than year end. The increase resulted from a shift in funding from wholesale CDs to Federal
Home Loan Bank balances which provided a lower cost of funding in the first quarter.
Total shareholders equity
increased $1.2 million, or 1.0%, during the first three months of 2008. Net income of $2.2
million and stock issuances of $478,000 increased shareholders equity, while
dividends of $1.7 million decreased shareholders equity. Stock issuance was
primarily related to shares issued through dividend reinvestment. The per share book value
of shareholders equity was $16.09 at March 31, 2008, increasing from $16.01 at
December 31, 2007. Tangible shareholders equity (total equity less goodwill and other
intangible assets) was $10.72 at the end of the first quarter of 2008, compared with
$10.58 at year end 2007.
The following table discloses
compliance with current regulatory capital requirements on a consolidated basis:
(Dollars in Thousands)
|
Leverage
|
|
Tier I
Capital
|
|
Totak Risk-
Based Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Balances at March 31, 2008
|
|
|
$
|
115,019
|
|
$
|
115,019
|
|
$
|
126,485
|
|
Required Regulatory Capital
|
|
|
$
|
54,099
|
|
$
|
44,096
|
|
$
|
88,192
|
|
Capital in Excess of Regulatory Minimums
|
|
|
$
|
60,920
|
|
$
|
70,923
|
|
$
|
38,293
|
|
|
|
|
Capital Ratios at March 31, 2008
|
|
|
|
8.50
|
%
|
|
10.43
|
%
|
|
11. 47
|
%
|
Regulatory Capital Ratios - Minimum Requirement
|
|
|
|
4.00
|
%
|
|
4.00
|
%
|
|
8.00
|
%
|
13
Results of Operations
Three Months Ended March
31, 2008
For the first quarter of 2008, net
income was $2,150,000, basic earnings and diluted earnings per share were $0.29, compared
with $2,658,000, and $0.41 basic and diluted per share for the first quarter of 2007, and
$1,566,000, $0.21, for the fourth quarter of 2007. The first quarter of 2007 included a
one time benefit of a $971,000 pre-tax reversal of loan loss provision relating to a
payoff of a large commercial loan, which had been considered impaired. The benefit to last
years first quarter earnings of that event was $0.10 per share. The fourth quarter
of 2007 included additional provision expense of $1.2 million to provide for a large
commercial real estate loan located in the southeast side of the state and impacted
earnings per share by $0.11. The first quarter of this year included a $357,000 additional
provision expense to provide for a large commercial real estate loan in the western side
of the state, affecting earning per share by $0.03.
Average earning assets increased
$242.5 million, or 24.1%, when the first quarter of 2008 is compared to the same quarter a
year ago. This comparison is affected by the acquisition of Firstbank West Michigan
in the third quarter of 2007. Compared with the previous quarter, earning assets increased
$21.0 million, or 1.6%. The yield on earning assets decreased 40 basis points, to 6.93%,
for the quarter ended March 31, 2008, compared to 7.33% for the same quarter a year ago,
and was 33 basis points lowered when compared with the quarter ended December 31, 2007.
The cost of funding related liabilities also decreased, falling 29 basis points when
comparing this years first quarter to the same period a year ago, from 3.42% in
2007, to 3.13% in 2008. Compared with prior quarter, the cost of funding related
liabilities also fell by 29 basis points. Since the decrease in yield on earning assets
was larger than the decrease in the cost of funds relative to earning assets, the net
interest margin decreased 11 basis points from last years first quarter to 3.80% in
the current quarter and a similar 10 basis points when compared to the previous quarter.
Net interest income increased $1.9 million to $11.5 million in the first quarter of 2008
compared with the same period of 2007, primarily due to the previously mentioned
acquisition. The Federal Reserve lowered its target federal funds rate by 125 basis points
in January and by another 75 basis points in March. The prime rate, which is used in
pricing our variable rate loan portfolios followed suit and decreased by the same amount,
putting further pressure on our net interest margin late in the first quarter. These
significant rate moves by the Federal Reserve in the first quarter caused our loans tied
to prime rate to re-price at a significantly faster pace than we were able offset by
reducing the rates paid on our deposit accounts.
The provision for loan losses
increased $1.5 million when the first quarter of 2008 is compared to the same quarter of
2007. Provision for loan losses was $816,000 in the first quarter compared with a negative
provision for loan losses of $721,000 in the first quarter of 2007. At the end of the
first quarter of 2007, events relating to the sale of a business, and pending payoff of
its associated loans, caused us to conclude that specific reserves of $971,000 on that
relationship were no longer needed. Those excess reserves were reversed against provision
expense in the first quarter. We provided $250,000 of normal reserves to cover charged off
loans and other changes in our loan portfolio in the first three months of 2007. In 2008
we provided for probable losses identified in the portfolio and to replenish the allowance
for balances charged down during the quarter. We perform quantitative and qualitative
analysis of factors which impact the allowance for loan losses consistently across our
seven banking subsidiaries. The process applies risk factors for historical charge-offs
and delinquency experience, portfolio segment growth rates, 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 are not considered part of the
non-performing loan category contributed to the establishment of the allowance levels at
each bank.
Total non-interest income was $2.9
million in the first quarter, compared with $2.3 million in the first quarter of 2007 and
$2.1 million in the last quarter of 2007. The most significant increase in non interest
income from quarter to quarter was from gains on the sale of mortgage loans, which
increased $593,000 and $818,000 respectively, over last years fourth quarter and first
quarter. During the first two months of the year, rates on residential mortgage loans fell
to a level that spurred re-finance activity. We were able to take advantage of that rate
environment, resulting in higher gains on sale of loans. Also resulting from the increased
mortgage re-finance activity was a lower mortgage servicing income as amortization of
mortgage servicing rights increased in the quarter, reducing non-interest income by
$285,000 when compared with last years fourth quarter, and $268,000 when compared
with last years first quarter. Gains and losses on securities transactions, which
were $116,000 in this years first quarter, improved by $737,000 when compared with
last years fourth quarter and $246,000 compared with last years first quarter.
The fourth quarter of 2007 included a $675,000 charge to write down the companys
bank stock portfolio.
14
Total non-interest expense increased
$2.0 million, or 22.4%, when comparing the three month periods ended March 31, 2008 and
2007 and was largely due to the addition of Firstbank West Michigan in the third
quarter of last year. Compared with the fourth quarter of 2007, non-interest expense
increased $484,000, primarily from higher salary and benefits costs. Within the salary and
employee benefits area, salaries were $114,000 higher than fourth quarter and benefits
increased $410,000 mainly due to higher group health care, unemployment, and FICA costs.
Federal Income tax expense was
$395,000 lower than last years first quarter and $495,000 higher than the previous
quarter, mainly due to change in pre-tax income levels. Our effective tax rate was 25.1%
in this years first quarter compared with 12.6% in last years fourth quarter
and 29.6% in last years first quarter. Taxes in the fourth quarter of 2007 were
affected by the proportion of tax free income relative to total income in that quarter and
a year end adjustment to our full year effective tax rate.
Contractual Obligations,
Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
The Corporation has various financial
obligations, including contractual obligations and commitments that may require future
cash payments. Management believes that there have been no material changes in the
Corporations overall level of these financial obligations since December 31, 2007
and that any changes in the Corporations obligations which have occurred are routine
for the industry. Further discussion of the nature of each type of obligation is included
in Managements Discussion and Analysis on page 14 of the Corporations Form 10K
Annual Report, and is incorporated herein by reference.
Critical Accounting
Policies
Certain of the Corporations
accounting policies are important to the portrayal of the Corporations 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, without limitation, changes in interest rates, in local and national economic
conditions, or the financial condition of borrowers. 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, determination of purchase accounting adjustments, and estimating state
and federal contingent tax liabilities. The Corporations significant accounting
policies are discussed in detail in Managements Discussion and Analysis on pages 15
through 16 in the Corporations annual report to shareholders for the year ended
December 31, 2007.
FORWARD LOOKING
STATEMENTS
This report contains forward-looking
statements that are based on managements 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 judgments and statements of belief as to the outcome of future events. These
statements are not guarantees of future performance and involve certain risks,
uncertainties, and assumptions that are difficult to predict with regard to timing,
extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecasted in such forward-looking
statements. Internal and external factors that may cause such a difference include changes
in interest rates and interest rate relationships; demand for products and services; the
degree of competition 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.
15
Item 3
. Quantitative and
Qualitative Disclosures about Market Risk
Information under the headings,
Liquidity and Interest Rate Sensitivity on pages 12 through 14 and
Quantitative and Qualitative Disclosure About Market Risk on pages 17 and 18
in the registrants annual report to shareholders for the year ended December 31,
2007, is here incorporated by reference. Firstbanks annual report is filed as
Exhibit 13 to its Form 10-K annual report for its fiscal year ended December 31, 2007.
We face 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. We do not believe that there has been a material change in the nature
of our primary market risk exposures, including the categories of market risk to which we
are 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, we do not know of nor
expect there to be any material change in the general nature of our primary market risk
exposure in the near term.
The methods by which we manage our
primary market risk exposures, as described in the sections of our 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, we do not expect to
change those methods in the near term. However, we may change those methods in the future
to adapt to changes in circumstances or to implement new techniques.
Our market risk exposure is mainly
comprised of our vulnerability to interest rate risk. Prevailing interest rates and
interest rate relationships in the future will be primarily determined by market,
economic, and geopolitical factors which are outside of our control. All information
provided in response to this item consists of forward looking statements. Reference is
made to the section captioned Forward Looking Statements of this Form 10-Q
quarterly report for a discussion of the limitations on our responsibility for such
statements.
16
Item 4
. Controls and
Procedures
a)
|
Evaluation
of Disclosure Controls and Procedures
|
|
On May
6, 2008, the Corporations Chief Executive Officer and Chief Financial Officer
reported on the Corporations disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e) and 15d-15(e)) to the Audit Committee. The portion of that
report which constitutes their conclusions about the effectiveness of the disclosure
controls and procedures based on their evaluation as of March 31, 2008 is as follows:
Based on our knowledge and the most recent evaluation, we believe the disclosure
controls and procedures to be reasonably effective and commercially practical in
providing information for management of the Corporation and for fair reporting to the
investing public.
|
b)
|
Changes
in Internal Controls
|
|
During the
period covered by this report, there have been no changes in the Corporations
internal control over financial reporting that have materially affected or are reasonably
likely to materially affect the Corporations internal control over financial
reporting.
|
17
PART II. OTHER INFORMATION
Item 2
. Unregistered
Sales of Equity Securities and Use of Proceeds
During 2006, the Corporation
repurchased 222,500 shares of its common stock in open market transactions under the
November 2003 repurchase plan. The shares were purchased at an average price of $23.61 per
share. As of June 30, the Corporation had remaining authority to repurchase up to $278,813
of market value of its common stock under the November 2003 repurchase plan.
On July 23,2007, the board of
directors approved a plan to re-establish the authorization to repurchase shares for
an aggregate amount of up to $5 million, from this point forward, of Firstbank Corporation
stock. During the third quarter of 2007, we repurchased 103,100 shares of our stock at an
average price of $17.47. We had no stock repurchases during the first quarter of 2008.
ISSUER PURCHASES OF
EQUITY SECURITIES
Period
|
|
Total Number
of Shares Purchased
|
|
Average Price
Paid per Share
|
|
Total Number of
Shares Purchased as a Part of Publicly Announced Plans or Programs
|
|
Maximum Approximate
Dollar Value of Shares that May yet Be Purchased Under the Approved Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
|
0
|
|
|
-
|
|
|
0
|
|
$
|
3,199,242
|
|
|
|
|
February
|
|
|
|
0
|
|
|
-
|
|
|
0
|
|
$
|
3,199,242
|
|
|
|
|
March
|
|
|
|
0
|
|
|
-
|
|
|
0
|
|
$
|
3,199,242
|
|
|
|
|
Total
|
|
|
|
0
|
|
|
-
|
|
|
0
|
|
$
|
3,199,242
|
|
Item 5
. Other Information
The audit committee of the Board of
Directors approved the categories of all non-audit services performed by the
registrants independent accountants during the period covered by this report.
Item 6
. Exhibits
|
10.1
|
Consolidated
Agreement between Firstbank - Lakeview, Firstbank and Firstbank Corporation dated May 8,
2008.
|
|
31.1
|
Certificate
of the President and Chief Executive Officer of Firstbank Corporation pursuant to 18
U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certificate
of the Executive Vice President and Chief Financial Officer of Firstbank Corporation
pursuant to 18 U.S.C. Section 7241, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certificate
of the Chief Executive Officer and the 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.
|
18
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.
Date: May 6, 2008
|
|
FIRSTBANK CORPORATION
(Registrant)
/s/ Thomas R. Sullivan
Thomas R. Sullivan
President, Chief Executive Officer
(Principal Executive Officer)
|
Date: May 6, 2008
|
|
/s/ Samuel G. Stone
Samuel G. Stone
Executive Vice President, Chief Financial Officer
(Principal Accounting Officer)
|
19
EXHIBIT INDEX
10.1
|
Consolidated Agreement
between Firstbank - Lakeview, Firstbank and Firstbank Corporation dated May 8, 2008.
|
31.1
|
Certificate
of the Chief Executive Officer of Firstbank Corporation pursuant to 18 U.S.C. Section
7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2
|
Certificate
of the Chief Financial Officer of Firstbank Corporation pursuant to 18 U.S.C. Section
7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1
|
Certificate
of the Chief Executive Officer and the 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.
|
20
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