U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______________ TO ________________
COMMISSION FILE NUMBER 0-22435
FIRSTBANK CORP.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1389562
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
920 MAIN STREET, LEWISTON, ID 83501
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES
(208) 746-9610
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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.
(X) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Common Stock 1,983,750 shares outstanding on September 30, 1998
Transitional Small Business Disclosure Format (check one):
( ) Yes (X) No
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FIRSTBANK CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Page
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Item 1. Financial Statements
Consolidated Statements of Financial Condition
As of September 30, 1998 and March 31, 1998 1
Consolidated Statements of Income
For the three months and six months ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows
For the six months ended September 30, 1998 and 1997 3
Consolidated Statements of Comprehensive Income
For the three months and six months ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FirstBank Corp. and Subsidiaries
Consolidated Statements of Financial Condition
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At September 30, At March 31,
1998 1998
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(Unaudited)
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ASSETS
Cash and cash equivalents:
Non-interest bearing deposits $ 7,255,498 $ 5,443,129
Interest bearing deposits 7,324,890 1,139,185
Federal funds sold 1,944,952 1,834,506
------------ ------------
Total cash and cash equivalents 16,525,340 8,416,820
Investment securities:
Held-to-maturity 1,699,375 2,449,375
Available-for-sale 5,015,963 2,654,233
Mortgage-backed securities:
Held-to-maturity 2,951,910 3,420,153
Available-for-sale 7,959,199 7,969,533
Certificates of deposit 991,000 991,000
Loans receivable, net 155,010,418 145,696,660
Accrued interest receivable 2,137,486 1,374,239
Real estate owned 505,580 883,441
Stock in FHLB, at cost 2,408,275 2,110,075
Premises and equipment, net 4,702,872 4,705,829
Income taxes receivable 0 468,807
Cash surrender value of life insurance policies 1,548,232 1,400,055
Mortgage servicing assets 661,292 406,666
Other assets 253,490 616,284
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TOTAL ASSETS $202,370,432 $183,563,170
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $123,164,552 $114,495,090
Advances from borrowers for taxes and insurance 1,332,536 1,329,080
Advances from FHLB 47,227,106 35,655,579
Income taxes payable 267,903 0
Deferred federal and state income taxes 263,509 245,017
- - Accrued expenses and other liabilities 1,274,974 1,830,406
------------ ------------
Total Liabilities 173,530,580 153,555,172
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Stockholders' Equity (Note 4):
Preferred stock, $.01 par value, 500,000 shares authorized; 0 shares issued
and outstanding 0 0
Common stock, $.01 par value, 5,000,000 shares authorized; 1,983,750
shares issued; 1,963,913 and 1,983,750 shares outstanding, 19,838 19,838
Additional paid-in-capital 18,696,639 18,989,977
Retained earnings, substantially restricted 13,152,853 12,493,990
Unearned ESOP shares (Note 3): (1,420,860) (1,493,430)
Deferred compensation (1,233,615) 0
Treasury stock, at cost; 19,337 and 0 shares (404,947) 0
Accumulated comprehensive gain (loss):
Unrealized gains (losses) on securities available-for-sale, net of tax 29,944 (2,377)
------------ ------------
Total Stockholders' Equity 28,839,852 30,007,998
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $202,370,432 $183,563,170
============ ============
See accompanying notes to consolidated financial statements
1
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FirstBank Corp. and Subsidiaries
Consolidated Statements of Income
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Three-months ended September 30, Six-months ended September 30,
1998 1997 1998 1997
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(Unaudited)
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Interest income:
Loans receivable $3,467,800 $2,921,401 $6,656,442 $5,587,142
Mortgage-backed securities 161,860 122,633 329,938 219,787
Investment securities 71,115 111,674 138,910 183,500
Other interest earning assets 217,301 312,071 378,109 375,643
---------- ---------- ---------- ----------
Total interest income 3,918,076 3,467,779 7,503,399 6,366,072
Interest expense:
Deposits 1,236,110 1,133,521 2,455,542 2,303,632
Advances from FHLB 637,004 524,007 1,162,416 855,537
---------- ---------- ---------- ----------
Total interest expense 1,873,114 1,657,528 3,617,958 3,159,169
Net interest income 2,044,962 1,810,251 3,885,441 3,206,903
Provision for loan losses 65,032 50,000 200,768 68,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,979,930 1,760,251 3,684,673 3,138,903
Non-interest income:
Gain on sale of loans 394,492 222,637 838,446 402,868
Service fees and charges 253,163 274,543 584,553 531,821
Commissions and other 20,552 41,090 60,189 67,464
---------- ---------- ---------- ----------
Total non-interest income 668,207 538,270 1,483,188 1,002,153
Non-interest expense:
Compensation and related benefits 1,032,935 906,615 1,982,819 1,732,871
Occupancy 217,929 200,481 432,950 378,710
Other 610,154 417,401 1,266,744 894,513
---------- ---------- ---------- ----------
Total non-interest expense 1,861,018 1,524,497 3,682,513 3,006,094
---------- ---------- ---------- ----------
Income before income tax expense 787,119 774,024 1,485,349 1,134,962
Income tax expense 291,928 292,705 539,579 428,184
---------- ---------- ---------- ----------
NET INCOME $ 495,191 $ 481,319 $ 945.770 $ 706,778
========== ========== ========== ==========
Earnings per share (Note 2):
Net income per share -basic $ 0.28 $ 0.26 $ 0.52 $ 0.39
Net income per share -diluted $ 0.27 $ 0.26 $ 0.52 $ 0.39
Weighted average shares outstanding -basic 1,776,211 1,826,981 1,807,564 1,826,021
Weighted average shares outstanding -diluted 1,802,217 1,826,981 1,820,495 1,826,021
See accompanying notes to consolidated financial statements
2
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FirstBank Corp. and Subsidiaries,
Consolidated Statements of Cash Flows
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Six-months ended September 30,
1998 1997
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(Unaudited)
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Cash flows from operating activities:
Net income $ 945,770 $ 706,778
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 234,587 322,082
Provision for loan losses 200,768 68,000
Gain on sale of loans (838,446) (402,868)
FHLB stock dividends (83,189) (58,500)
ESOP compensation expense 144,539 66,641
Other (gains) losses, net 49,935 10,498
Provision for real estate owned 20,410 0
Deferred compensation expense 63,006 31,680
Deferred income taxes (2,416) (7,980)
Changes in assets and liabilities:
Accrued interest receivable and other assets (999,711) (550,599)
Accrued expenses and other liabilities (597,528) (338,321)
Income taxes receivable (payable) 736,710 23,168
------------ -------------
Net cash used in operating activities (125,565) (129,421)
Cash flows from investing activities:
Purchase of mortgage-backed securities; available-for-sale (2,128,941) (8,327,422)
Proceeds from maturities of mortgage-backed securities; held-to-maturity 2,548,505 620,055
Decrease in loans receivable from loans sold 24,984,132 14,884,411
Other net change in loans receivable (34,016,113) (34,776,129)
Purchase of FHLB stock (215,012) (1,014,700)
Purchases of premises and equipment (287,956) (371,988)
Proceeds from sale of fixed assets 336,357 0
Net increase in cash surrender value of life insurance policies (148,177) (14,545)
Proceeds from sale of real estate owned 728,531 149,113
Purchase of investment securities; available for sale (2,250,000) (3,503,000)
Proceeds from maturities of investment securities; held-to-maturity 750,000 2,250,000
------------ -------------
Net cash used in investing activities (9,698,674) (30,104,205)
Cash flows from financing activities:
Proceeds from issuance of common stock 0 17,354,663
Cash paid for dividends (286,907) 0
Net increase in deposits 8,669,462 904,615
Bank overdrafts 0 49,539
Advances from borrowers for taxes and insurance 3,456 74,429
Advances from FHLB 48,230,000 149,372,915
Payments on advances from FHLB (36,658,473) (128,155,419)
Purchase of treasury stock (2,024,779) 0
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Net cash provided by financing activities 17,932,759 39,600,742
------------ -------------
Net increase in cash and cash equivalents 8,108,520 $ 9,367,116
Cash and cash equivalents, beginning of period 8,416,820 5,302,736
------------ -------------
Cash and cash equivalents, end of period $ 16,525,340 $ 14,669,852
============ =============
Supplemental disclosures of cash flow information: Cash paid during the
period for:
Interest $ 2,465,129 $ 3,159,867
Income taxes $ 18,934 $ 218,418
Noncash investing and financing activities:
Unrealized (gains) losses on securities; available-for-sale, net of tax $ (32,321) $ (117,501)
Loans receivable charged to the allowance for loan losses $ 23,459 $ 17,775
Transfer from loans converted to real estate acquired through foreclosure $ 355,901 $ 194,749
Issuance of common stock out of treasury under Management Recognition and
Development Plan $ 1,254,525 0
See accompanying notes to consolidated financial statements
3
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FirstBank Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
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Three-months ended Sept. 30, Six-months ended Sept. 30,
1998 1997 1998 1997
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(Unaudited)
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Net income $495,191 $481,319 $945,770 $706,778
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on securities;
available-for-sale, net of tax 53,873 76,701 32,321 117,501
-------- -------- -------- --------
Net other comprehensive income (loss) 53,873 76,701 32,321 117,501
-------- -------- -------- --------
Comprehensive income $549,064 $558,020 $975,714 $756,108
======== ======== ======== ========
See accompanying notes to consolidated financial statements
4
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FIRSTBANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Generally Accepted Accounting Principles (GAAP) for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. These statements
should be read in conjunction with the consolidated financial statements and
related notes included in the Company's Form 10-KSB for the year ended March 31,
1998. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation have been included. The
results of operations and other data for the three and six months ended
September 30, 1998 are not necessarily indicative of results that may be
expected for the entire fiscal year ending March 31, 1999.
The unaudited consolidated financial statements of FirstBank Corp. ("the
Company") include the accounts of its wholly-owned subsidiary, FirstBank
Northwest (the "Savings Bank") and it's wholly-owned subsidiary, TriStar
Financial Corporation for the three-months and six-months ended September 30,
1998. The financial statements for the periods prior to July 1, 1997 include
only the accounts of the Savings Bank and its subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
In September 1998, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged assets
or liability that are attributable to the hedged risk or (ii) the earnings
effect of the hedged forecasted transaction. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after September 15, 1999. Historically, the Company has not entered
into derivative contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of the new standard
on April 1, 2000 to affect its financial statements.
(2) EARNINGS PER SHARE
Basic earnings per share is computed by dividing the Company's net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. ESOP shares, which are unallocated and not yet committed to
be released, are excluded from the weighted average shares outstanding
calculation
(3) EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
During 1997 the Company established a tax-qualified internally leveraged ESOP.
The ESOP covers substantially all employees who have attained the age of 21 and
completed one year of service. In connection with the conversion to a stock
company, the ESOP purchased 158,700 shares of the Company's common stock at a
price of $10.00 per share using funds loaned by the Company. All ESOP shares are
held in a suspense account and are allocated among the participants on a pro
rata basis as the loan is repaid. Currently this receivable from the ESOP is
scheduled to be repaid with level principal and interest payments over 25 years
with no penalty for prepayment. Shares released from the suspense account are
allocated among the participants based upon their pro rata annual compensation.
The sale of the shares to the ESOP was recorded by the Company as unearned ESOP
shares, a contra equity account. As ESOP shares are committed to be released to
compensate employees, the contra equity account is reduced and a corresponding
charge to compensation expense equal to the fair market value of the shares
committed to be released is recorded. Upon committing these share to be
released, they become outstanding for purposes of earnings-per-share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction in ESOP debt. Compensation expense related to the ESOP was $145,000
for the six-months ended September 30, 1998. As of September 30, 1998, the
Company has allocated or committed to release to the ESOP 15,528 earned shares
and has 143,172 unearned, restricted shares remaining to be release. The market
value of unearned, restricted shares held by the ESOP trust was approximately
$2.5 million at September 30, 1998.
5
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(4) DIVIDEND
On July 23, 1998 the Board of Directors declared a cash dividend of $.08 per
common share to shareholders of record as of August 20, 1998. The dividend was
paid on September 3, 1998.
On October 19, 1998 the Board of Directors declared a cash dividend of $.09 per
common share to shareholders of record as of November 11, 1998. The dividend
will be paid November 25, 1998.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements, within the meaning of Section 21E of the Securities
and Exchange Act of 1934, are made throughout this Management's Discussion and
Analysis of Financial Condition and Results of Operations. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects", "estimates" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the results of the Company to
differ materially from those indicated herein. These factors include, but are
not limited to, those set forth in Item 7 entitled Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's Form
10-KSB for the year ended March 31, 1998.
GENERAL
On July 1, 1997, FirstBank Northwest converted from mutual to stock form and
became a wholly owned subsidiary of a newly formed Delaware holding company,
FirstBank Corp. The Company sold 1,983,750 shares of common stock at $10.00 per
share in conjunction with a subscription offering to the Savings Bank's Employee
Stock Ownership Plan (ESOP) and eligible account holders. The net proceeds were
approximately $18,921,825. The company used approximately $9,470,000 of the net
proceeds to purchase all the capital stock of the Savings Bank. In addition,
$1,587,000 was loaned to the ESOP for the purchase of 158,700 shares in the
offering.
The Company's principal business is the business of the Savings Bank. Therefore,
the discussion in the Management's Discussion and Analysis of Financial
Conditions and Results of Operation relates to the Savings Bank and its
operations. In August 1997, the Bank opened up a retail branch in Clarkston,
Washington. The Bank now has offices in Idaho and Washington. In January 1998
the Bank changed its charter to a Washington state charter.
During the 2nd quarter, the shareholders approved the Company's Management
Recognition and Development Plan and 1998 Stock Option Plan. The Board of
Directors awarded 79,350 shares of restricted stock and options to acquire
171,350 shares.
In August 1998 the Company completed the repurchase of 5%, or 99,187, of its
common shares. In September 1998, 79,350 of these shares were reissued out of
treasury under the Management Recognition and Development Plan. The Company has
also announced plans to repurchase an additional 4% of its shares on the open
market.
During the quarter ended September 31, 1998, the Company launched a pilot
program for its Online Homebanking. Effective on October 1, 1998 this new
service was offered to customers. With this system, customers can access their
accounts by screen phones, personal computers, touch-tone telephones and through
internet access.
On September 21st, the Company received FDIC approval to begin construction of a
new branch office in Liberty Lake, Washington. Liberty Lake is a fast-growing
bedroom community midway between Spokane, Washington and Coeur d' Alene, Idaho.
This will be the seventh retail branch for the Company, the second in Washington
State. It is expected the branch will open during the summer of 1999.
FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND MARCH 31, 1998
Assets increased from $183.6 million at March 31, 1998 to $202.4 million at
September 30, 1998. Cash and cash equivalents increased from $8.4 million at
March 31, 1998 to $16.5 million at September 30, 1998 as a result of an increase
in deposits. Loans receivable increased from $145.7 million at March 31, 1998 to
$155.0 million at September 30, 1998 as a result of a large increase in
commercial lending. Accrued interest receivable increased $1.4 million at March
31, 1998 to $2.1 million at September 30, 1998 due to a higher average asset
base in securities and loans. Deposits increased from $114.5 million at March
31, 1998 to $123.2 million at September 30, 1998. Activity within deposit
balances increased primarily due to the Savings Bank benefiting from funds
deposited by the customers of other local institutions, following larger bank
mergers, and from deposits of new commercial loan customers.
6
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Federal Home Loan Bank of Seattle (FHLB) advances increased from $35.7 million
at March 31, 1998 to $47.2 million at September 30, 1998. The increase in FHLB
borrowing was used to fund loan growth. Accrued expenses and other liabilities
decreased from $1.8 million at March 31, 1998 to $1.3 million at September 30,
1998. The primary reason for the decrease was timing of investor mortgage loan
payoffs. It is the policy of the Savings Bank to cease accruing interest on
loans 90 days or more past due. Nonaccrual loans decreased from $454,000 at
March 31, 1998 to $19,000 at September 30, 1998.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income increased from $481,000 for the three months ended September 30, 1997
to $495,000 for the three months ended September 30, 1998.
Net interest income increased from $1.8 million for the three months ended
September 30, 1997 to $2.0 million for the three months ended September 30,
1998. Total interest income increased from $3.5 million for the three months
ended September 30, 1997 to $3.9 million for three months ended September 30,
1998. The increase in interest income stemmed from an increase in average
interest earning assets offset slightly by a decrease in the weighted average
yield on the loan portfolio, which was 8.97% for the three months ended
September 30, 1997 compared to the weighted average yield for the three months
ended September 30, 1998 of 8.92%. The average balance of loans receivable was
$104.4 million in the 2nd quarter of 1997 compared to the 2nd quarter 1998
average balance of $155.5 million. Interest income from investment securities
decreased from $112,000 for the three months ended September 30, 1997 to $71,000
for the three months ended September 30, 1998. The decrease is primarily due to
a decrease in average yield. Interest income from mortgage-backed securities
increased from $123,000 for the three months ended September 30, 1997 to
$162,000 for the three months ended September 30, 1998. The increase is due
primarily to a higher average balance. Interest expense increased from $1.7
million for the three months ended September 30, 1997 to $1.9 million for the
same time period in 1998. The increase in interest expense is due primarily to
higher average deposit balances, an increase in average FHLB advances and a
decrease in weighted average rates. The weighted average rate on deposits for
the three months ended September 30, 1998 was 4.15%, whereas the weighted
average rate on deposits as of September 30, 1997 was 4.26%. The weighted
average rate on FHLB advances for the three months ended September 30, 1998 was
5.79%, whereas the weighted average rate on FHLB advances as of September 30,
1997 was 7.07%.
Provision for loan losses is based upon management's consideration of economic
conditions which may affect the ability of borrowers to repay the loans.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and considers, among other matters, the risks inherent in
the Savings Bank's portfolio and the estimated fair value of the underlying
collateral. This evaluation is ongoing and results in variations in the Savings
Bank's provision for loan losses. As a result of this evaluation, the Savings
Bank's provision for loan losses increased from $50,000 for the three months
ended September 30, 1997 to $65,000 for the three months ended September 30,
1998.
Non-interest income increased from $538,000 for the three months ended September
30, 1997 to $668,000 for the three months ended September 30, 1998. The primary
reason for the increase is the gain on sale of loans, which increased $172,000.
Non-interest expense increased from $1.5 million for the three months ended
September 30, 1997 to $1.9 million for the three months ended September 30,
1998. The increase in compensation and other related expenses of $126,000 is
because of the expanded commercial and agriculture departments. Other expenses
that were up are advertising, data processing and costs associated with becoming
a public company.
Income taxes decreased from an expense of $293,000 for the three months ended
September 30, 1997 to expense of $292,000 for the same time period in 1998.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income increased from $707,000 for the six months ended September 30, 1997
to $946,000 for the six months ended September 30, 1998.
Net interest income increased from $2.3 million for the six months ended
September 30, 1997 to $2.5 million for the six months ended September 30, 1998.
Total interest income increased from $6.4 million for the six months ended
September 30, 1997 to $7.5 million for six months ended September 30, 1998. The
increase in interest income stemmed from an increase in average interest earning
assets offset slightly by a decrease in the weighted average yield on the loan
portfolio, which was 8.94% for the six months ended September 30, 1997 compared
to the weighted average yield for the six months ended September 30, 1998 of
8.73%. The increase in interest earning assets was due in large part to the
completion of the Savings Bank's mutual to stock conversion in the middle of the
1997
7
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period. The average balance for loans receivable was $125.0 million in during
the six-months ended September 30, 1997 compared to the six-months ended
September 30, 1998 average balance of $152.4 million. Interest income from
investment securities decreased from $184,000 for the six months ended September
30, 1997 to $139,000 for the six months ended September 30, 1998. The decrease
is primarily due to a decrease in average yield from 5.86% at September 30, 1997
to 5.08% at September 30, 1998 . Interest income from mortgage-backed securities
increased from $220,000 for the six months ended September 30, 1997 to $330,000
for the six months ended September 30, 1998. The increase is due primarily to a
higher average balance. Interest expense increased from $3.2 million for the six
months ended September 30, 1997 to $3.6 million for the same time period in
1998. The increase in interest expense is due primarily to higher average
deposit balances, an increase in average FHLB advances and a decrease in
weighted average rates. The weighted average rate on deposits for the six months
ended September 30, 1998 was 4.17%, whereas the weighted average rate on
deposits for the six-months ended September 30, 1997 was 4.28%. The weighted
average rate on FHLB advances for the six months ended September 30, 1998 was
5.74%, whereas the weighted average rate on FHLB advances for the six-months
ended September 30, 1997 was 6.60%.
Provision for loan losses is based upon management's consideration of economic
conditions which may affect the ability of borrowers to repay the loans.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and considers, among other matters, the risks inherent in
the Savings Bank's portfolio and the estimated fair value of the underlying
collateral. This evaluation is ongoing and results in variations in the Savings
Bank's provision for loan losses. As a result of this evaluation, the Savings
Bank's provision for loan losses increased from $68,000 for the six months ended
September 30, 1997 to $201,000 for the six months ended September 30, 1998.
Non-interest income increased from $1.0 million for the six months ended
September 30, 1997 to $1.5 million for the six months ended September 30, 1998.
The primary reason for the increase is the gain on sale of loans increased
$436,000.
Non-interest expense increased from $3.0 million for the six months ended
September 30, 1997 to $3.7 million for the six months ended September 30, 1998.
The increase in compensation and other related expenses of $250,000 is because
of the expanded commercial and agriculture departments. Other expenses that were
up are advertising, data processing and costs associated with becoming a public
company.
Income taxes increased from an expense of $428,000 for the six months ended
September 30, 1997 to expense of $540,000 for the same time period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary recurring sources of funds are customer deposits,
proceeds from principal and interest payments on loans, proceeds from sales of
loans, maturing securities and FHLB advances. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Company generally maintains sufficient cash and short-term
investments to meet short-term liquidity needs. At September 30, 1998, cash and
cash equivalents totaled $16.5 million, or 8.17% of total assets. In addition,
the Company maintains a credit facility with the FHLB-Seattle, which provides
for immediately available advances. Advances under this credit facility totaled
$47.2 million at September 30, 1998.
The primary investing activity of the Company is the origination of
loans. During the quarters ended September 30, 1997 and 1998, the Company
originated loans in the amounts of $64.7 million and $84.0 million respectively.
At September 30, 1998, the Company had loan commitments totaling $29.3 million,
undisbursed lines of credit totaling $7.2 million, and undisbursed loans in
process totaling $12.5 million. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit that are scheduled to mature in less than one year from
September 30, 1998 totaled $48.5 million. Historically, the Company has been
able to retain a significant amount of its deposits as they mature. In addition,
management of the Company believes that it can adjust the offering rates of
savings certificates to retain deposits in changing interest rate environments.
The Bank is required to maintain specific amounts of capital pursuant
to the FDIC and the State of Washington requirements. As of September 30, 1998,
the Bank was in compliance with all regulatory capital requirements which were
effective as of such date with Tier 1 Capital to average assets, Tier 1 Capital
to risk-weighted assets and Total capital to risk-weighted assets of 10.91%,
14.96% and 14.98%, respectively.
8
<PAGE>
YEAR 2000 ISSUES
The Year 2000 issue exists because many computer systems and
applications use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems may recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the year 2000 may
cause systems to process financial and operational information incorrectly. In
order to alleviate the potential for systems failure or erroneous information,
the Company has created a Year 2000 compliance plan that focuses on identifying,
testing and implementing solutions for Year 2000 processing. A preliminary
estimate of the total cost to complete the Year 2000 compliance plan is
approximately $100,000, $60,000 of which has been spent on the project year to
date. Maintenance or modification costs will be expensed as incurred, while the
costs of new software will be capitalized and amortized over the software's
useful life. The costs for accomplishing the Company's plans to complete the
year 2000 modifications and testing processes are based on management's best
estimates, which were derived utilizing numerous assumption of future events,
including the continued availability of various resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ from those
plans. In the event that the Company's service bureau is unable to fulfill its
contractual obligations to the Company, it could have a significant adverse
impact on the financial condition and results of operations of the Company.
At June 30, 1998, the Company had completed the awareness training and
assessment phases of its Year 2000 compliance plan and was well into the testing
phase. The awareness phase included gaining understanding and support with the
help of an independent consulting firm experienced in Year 2000 management,
committing resources to the plan, established a project team consisting of
senior managers and department heads, and developing a strategy to address all
internal and external systems. The project team reports monthly to the Board of
Directors as to the status of timeline for competing the project.
The assessment phase involved attempting to identify all critical business
processes and determining the impact of Year 2000 on all computer systems
throughout the organization. Vendors were contacted and asked to submit
certification letters stating that they are in compliance with Year 2000
conversion issues.
As of September 30, 1998 the Company had successfully tested with the major
service provider. All hardware and computer systems and all of the embedded
systems contained in the building, equipment and other infrastructure have been
assessed. The Company has successfully tested the loan platforms systems for
loan documentation. It is estimated that testing programming changes (including
converting, replacing or eliminating all software and databases as necessary)
will be largely completed by March 31, 1999.
Contingency plans are being developed in the event modifications cannot be
completed in time, or in the event unforeseen problems develop in spite of the
Company's efforts to ensure compliance with Year 2000 standards.
Financial institutions also must consider the possibility of some level of
reduction in deposits during the month of December 1999. The Company has made
arrangements with the Federal Reserve for funds from the discount window if
needed.
In conjunction with its review of Year 2000 issues, the Company also is
assessing the impact of the Year 2000 problem on significant borrowers and their
ability to repay loans. As of September 30, 1998, a credit risk mitigation
assessment on loans was completed, resulting in the evaluation of an
insignificant number of loans with a high or medium risk factor.
9
<PAGE>
FIRSTBANK CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceeding
There are no material legal proceedings to which the Company or the Savings
Bank is a party or of which any of their property is subject. From time to
time, the Savings Bank is a party to various legal proceedings incident to
its business.
Item 2 - Changes in Securities
None.
Item 3 - Defaults upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company ("Meeting") was held on
July 22, 1998. The results of the vote on the matters presented at the Meeting
is as follows:
1. The following individuals were elected as directors, each for a
three-year term:
Voted For Vote Withheld
Larry K. Moxley 1,788,972 28,151
William J. Larson 1,776,130 40,993
The terms of Directors Steve R. Cox, James N. Marker, Robert S.
Coleman, Sr., W. Dean Jurgens, and Clyde E. Conklin continued after
the meeting.
2. The FirstBank Corp. 1998 Stock Option Plan was approved by
stockholders by the following vote:
For 1,133,306; Against 229,200; Abstain 11,655
3. The FirstBank Corp. Management Recognition and Development Plan was
approved by stockholders by the following vote:
For 1,109,566; Against 256,975; Abstain 7,620
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: none
(b) Reports on Form 8-K; No reports on Form 8-K have been filed during the
quarter for which this report is filed.
10
<PAGE>
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 CORP.
DATED: October 31, 1998 BY: /s/ CLYDE E. CONKLIN
------------------------------------------
Clyde E. Conklin
President and Chief Executive Officer
BY: /s/ LARRY K. MOXLEY
------------------------------------------
Larry K. Moxley
Secretary and Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of FirstBank Corp. for the six months ended September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001035513
<NAME> FirstBank Corp.
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
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