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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Commission File Number: 000-14209

FIRSTBANK CORPORATION
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (989) 463-3131

Securities registered pursuant to Section 12(g) of the Act:

Common Stock
(Title of Class)

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 registrant’s 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. [ X ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2). Yes X No ___

State the aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second quarter.

Aggregate Market Value as of 6/30/2003: $158,626,464

Indicate the number of shares outstanding in each of the registrant’s classes of common stock, as of the latest practicable date.

        Common stock outstanding at March 5, 2004: 5,594,668 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s annual report to shareholders for the year ended December 31, 2003, are incorporated by reference in Part II.

Portions of the definitive proxy statement for the registrant’s annual shareholders meeting to be held April 26, 2004, are incorporated by reference in Part III.

FORWARD LOOKING STATEMENTS

        This annual report on Form 10-K including, without limitation, management’s discussion and analysis of financial condition and results of operations and other sections of the Corporation’s Annual Report to Shareholders which are incorporated by reference in this report, contains forward looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation itself. Words such as “anticipate”, “believe”, “determine”, “estimate”, “expect”, “forecast”, “intend”, “is likely”, “plan”, “project”, “opinion”, variations of such terms, and similar expressions are intended to identify such forward looking statements. The presentations and discussions of the provision and allowance for loan losses and determinations as to the need for other allowances presented or incorporated by reference 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 of 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; changes in accounting principles, policies and guidelines; 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.

Copies of the Corporation’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the Corporation’s website (www.firstbank-corp.com) as soon as reasonably practicable after the Corporation electronically files the material with, or furnishes it to, the Securities and Exchange Commission. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

PART 1

ITEM 1. Business.

        Firstbank Corporation (the “Corporation”) is a bank holding company. The Corporation owns all of the outstanding stock of Firstbank – Alma, Firstbank (Mt. Pleasant), Firstbank – West Branch, Firstbank – Lakeview, Firstbank – St. Johns and Gladwin Land Company, Inc. (a real estate appraisal company).

        The Corporation’s business is concentrated in a single industry segment – commercial banking. Each subsidiary bank of the Corporation is a full-service community bank. The subsidiary banks offer all customary banking services, including the acceptance of checking, savings, and time deposits and the making of commercial, mortgage (principally single family), home improvement, automobile, and other consumer loans. Trust services are offered to customers through Citizens Bank Wealth Management in the Firstbank – Alma main office.

        The principal sources of revenues for the Corporation and its subsidiaries are interest and fees on loans and non-interest revenue resulting from banking and non-bank subsidiary activity. On a consolidated basis, interest and fees on loans accounted for approximately 68% of total revenue in 2003, 74% in 2002, and 78% in 2001. Non-interest revenue accounted for approximately 27% of total revenue in 2003, 20% in 2002, and 15% in 2001. Interest on securities accounted for approximately 5% of total revenue in 2003, 5% in 2002, and 6% in 2001. The Corporation has no foreign assets and no income from foreign sources. The business of the subsidiary banks of the Corporation is not seasonal to any material extent. Beginning in 2001, each of the subsidiary banks established mortgage company subsidiaries. Each of the subsidiary banks also offers securities brokerage services at their main offices through arrangements with third party brokerage firms.

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        Firstbank – Alma is a Michigan state chartered bank. It and its predecessors have operated continuously in Alma, Michigan since 1880. Its main office and one branch are located in Alma. Firstbank – Alma also has one full service branch located in each of the following communities near Alma: Ashley, Auburn, Ithaca, Merrill, Pine River Township, St. Charles, St. Louis and Vestaburg. Firstbank – Alma Mortgage Company, a subsidiary of the bank, was established in 2001.

        Firstbank (Mount Pleasant) is a Michigan state chartered bank which was incorporated in 1894. Its main office and one branch are located in Mount Pleasant, Michigan. Firstbank (Mount Pleasant) also has two full service branches in Union Township and one full service branch located in each of the following communities near Mount Pleasant: Clare, Shepherd, Cadillac and Winn. Firstbank (Mount Pleasant) Mortgage Company, a subsidiary of the bank, was established in 2001.

        Firstbank – West Branch is a Michigan state chartered bank which was incorporated in 1980. Its main office and two branches are located in West Branch, Michigan. Firstbank – West Branch also has one full service branch located in each of the following communities near West Branch: Fairview, Hale, Higgins Lake, Rose City, St. Helen and West Branch Township. Firstbank – West Branch owns 1^st Armored, Incorporated (an armored car service provider), 1^st Title, Incorporated (a title insurance company), Firstbank — West Branch Mortgage Company (a subsidiary of the bank, established in 2001) and a 55% interest in C.A. Hanes Realty, Incorporated.

        Firstbank – Lakeview is a Michigan state chartered bank which was established in 1904. Its main office and one branch are located in Lakeview, Michigan. Firstbank – Lakeview also has one full service branch located in each of the following communities; Howard City, Morley, Remus and Canadian Lakes (Morton Township). Firstbank – Lakeview Mortgage Company, a subsidiary of the bank, was established in 2001.

        Firstbank – St. Johns is a Michigan state chartered bank which was established in 2000. Its main office and one branch are located in St. Johns, Michigan. Firstbank – St. Johns Mortgage Company, a subsidiary of the bank, was established in 2001.

        The following table shows comparative information concerning the Corporation’s subsidiary banks at December 31, 2003:

        As of December 31, 2003, the Corporation and its subsidiaries employed 390 persons on a full-time equivalent basis.

        Banking in the Corporation’s market areas and in the State of Michigan is highly competitive. In addition to competition from other commercial banks, banks face significant competition from non-bank financial institutions. Savings and loan associations are able to compete aggressively with commercial banks for deposits and loans. Credit unions and finance companies are also significant factors in the consumer loan market. Insurance companies, investment firms and retailers are significant competitors for investment products. Banks compete for deposits with a broad spectrum of other types of investments such as mutual funds, debt securities of corporations and debt securities of the federal government, state governments and their respective agencies. The principal methods of competition for financial services are price (interest rates paid on deposits, interest rates charged on loans and fees charged for services) and service (the convenience and quality of services rendered to customers).

        The Corporation’s subsidiary banks compete directly with other banks, thrift institutions, credit unions and other non-depository financial institutions in four geographic banking markets where their offices are located. Firstbank – Alma primarily competes in Gratiot, Bay, Montcalm, and Saginaw counties; Firstbank (Mount Pleasant) primarily in Isabella, Clare and Wexford counties; Firstbank – West Branch primarily in Iosco, Oscoda, Ogemaw, and Roscommon counties; Firstbank – Lakeview primarily in Mecosta and Montcalm counties; and Firstbank – St. Johns primarily in Clinton County.

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        Banks and bank holding companies are extensively regulated. The Corporation is a bank holding company that is regulated by the Federal Reserve System. Firstbank – Alma, Firstbank (Mount Pleasant), Firstbank – West Branch, Firstbank – Lakeview and Firstbank – St. Johns are chartered under state law and are supervised, examined, and regulated by the Federal Deposit Insurance Corporation and the Division of Financial Institutions of the Michigan Office of Financial and Insurance Services.

        Laws that govern banks significantly limit their business activities in a number of respects. Prior approval of the Federal Reserve Board, and in some cases various other governing agencies, is required for the Corporation to acquire control of any additional banks or branches. The business activities of the Corporation and its subsidiaries are limited to banking and to other activities which are determined, by the Federal Reserve Board, to be closely related to banking. Transactions among the Corporation and its subsidiary banks are significantly restricted. In addition, bank regulations govern the ability of the subsidiary banks to pay dividends or make other distributions to the Corporation.

        In addition to laws that affect businesses in general, banks are subject to a number of federal and state laws and regulations which have a material impact on their business. These include, among others, state usury laws, state laws relating to the Expedited Funds Availability Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Bank Secrecy Act, the Community Development and Regulatory Improvement Act, the Financial Institutions Reform, the Recovery and Enforcement Act, the FDIC Improvement Act of 1991 (the “FDIC Improvement Act”), the U.S.A. Patriot Act, electronic funds transfer laws, redlining laws, antitrust laws, environmental laws and privacy laws.

        The Corporation’s common stock is registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). It is therefore, subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act provides for numerous changes to the reporting, accounting, corporate governance and business practices of companies as well as financial and other professionals who have involvement with the U.S. public markets. The SEC continues to issue new and proposed rules implementing various provisions of the Sarbanes-Oxley Act.

        The enactment of the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) represents a pivotal point in the history of the financial services industry. The GLB Act sweeps away large parts of a regulatory framework that had its origins in the Depression Era of the 1930‘s. Effective March 11, 2000, new opportunities became available for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial service organization to offer customers a more complete array of financial products and services. The GLB Act provided a new regulatory framework for regulation through the “financial holding company” which will have, as its umbrella regulator, the Federal Reserve Board. Functional regulation of the financial holding company’s separately regulated subsidiaries will be conducted by their primary functional regulator. In order to qualify as a financial holding company a bank holding company must file an election to become a financial holding company and each of its banks must be “well capitalized” and “well managed”. In addition, the GLB Act makes satisfactory or above Community Reinvestment Act compliance, for insured depository institutions and their financial holding companies, necessary in order for them to engage in new financial activities. The GLB Act provides a federal right to privacy of non-public personal information of individual customers. The Corporation and its subsidiary banks are also subject to certain state laws that deal with the use and distribution of non-public personal information.

        The Corporation believes that the GLB Act could significantly increase competition in its business. The Corporation believes that it is qualified to elect financial holding company status but has not yet decided to do so.

        The instruments of government monetary policy, as determined by the Federal Reserve Board, may influence the growth and distribution of bank loans, investments, and deposits and may also affect interest rates on loans and deposits. These policies have a significant effect on the operating results of banks.

        Under applicable laws, regulations and policies, the Corporation is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each subsidiary bank. Any insured depository institution owned by the Corporation may be assessed for losses incurred by the Federal Deposit Insurance Corporation (the “FDIC”) in connection with assistance provided to, or the failure of, any other insured depository institution owned by the Corporation.

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        The FDIC has the authority to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources and to establish periodic assessment rates on Bank Insurance Fund (“BIF”) member banks so as to maintain the BIF at the designated reserve ratio defined in the FDIC Improvement Act. Firstbank – Alma and Firstbank (Mount Pleasant) also hold deposits that are insured by the Savings Association Insurance Fund (“SAIF”) administered by the FDIC. Deposit insurance premiums on those deposits are paid to the SAIF at rates applicable to that fund. The FDIC has implemented a system of risk-based premiums for deposit insurance pursuant to which the premiums paid by a depository institution will be based on the perceived probability that the insurance funds will incur a loss in respect of that institution.

        Federal law allows bank holding companies to acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law and to establish interstate branch networks through acquisitions of other banks. Michigan and federal law permits both U.S. and non U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriated circumstances and with the approval of the Commissioner: (i) acquisition of Michigan banks by FDIC insured banks, savings banks, or savings and loan associations located in other states (ii) sale by a Michigan bank of branches to an FDIC insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity; (iii) consolidation of Michigan banks and FDIC insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation; (iv) establishment of branches in Michigan by FDIC insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction; and (v) establishment by foreign banks of branches located in Michigan.

        Risk-based capital and leverage standards apply to all banks under federal regulations. The risk-based capital ratio standards establish a systematic analytical framework that is intended to make regulatory capital requirements sensitive to differences in risk profiles among banking organizations, take off-balance sheet liability exposures into explicit account in assessing capital adequacy and minimize disincentives to hold liquid, low risk assets. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments into risk-weighting categories. Higher levels of capital are required for categories perceived as representing greater risk.

        Failure to meet minimum capital ratio standards could subject a bank to a variety of enforcement remedies available to the federal regulatory authorities including restrictions on certain kinds of activities, restrictions on asset growth, limitations on the ability to pay dividends, the issuance of a directive to increase capital and the termination of deposit insurance premiums at the lowest available rate.

        Each of the Corporation’s subsidiary banks, and the Corporation itself on a consolidated basis, maintains capital at levels which exceed both the minimum and well capitalized levels under currently applicable regulatory requirements.

        The following table summarizes compliance with regulatory capital ratios by the Corporation and each of its subsidiary banks at December 31, 2003:

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        The following table shows the amounts by which the Corporation’s capital (on a consolidated basis) exceeds current regulatory requirements on a dollar amount basis:

        The nature of the business of the Corporation’s subsidiaries is such that they hold title, on a temporary or permanent basis, to a number of parcels of real property. These include property owned for branch offices and other business purposes as well as properties taken in, or in lieu of, foreclosures to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of remediation of contamination on or originating from such properties, even though they are wholly innocent of the actions which caused the contamination. Such liabilities can be material and can exceed the value of the contaminated property.

Volume/Rate Analysis⁽¹⁾

The table below provides an analysis of the changes in interest income and interest expense due to volume and rate:

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(1)

Changes in volume/rate have been allocated between the volume and rate variances on the basis of the ratio that the volume and rate variances bear to each other.

(2)

Interest is presented on a fully taxable equivalent basis using a federal income tax rate of 35%.

Investment Portfolio

        The carrying values of investment securities as of the date indicated are summarized as follows:

Analysis of Investment Securities Portfolio

        The following table shows, by class of maturities at December 31, 2003, the amounts and weighted average yields of such investment securities ⁽¹⁾:

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(2)

Weighted average yield has been computed on a fully taxable equivalent basis. The rates shown on securities issued by states and political subdivisions have been presented assuming a 35% tax rate.

Loan Portfolio

        The following table presents the loans outstanding at December 31st for the years ended:

        The following table shows the maturity of commercial and agricultural and real estate construction loans outstanding at December 31, 2003. Also provided are the amounts due after one year, classified according to their sensitivity to changes in interest rates.

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Nonperforming Loans and Assets

        The following table summarizes nonaccrual, troubled debt restructurings and past-due loans at December 31st for the years ended:

        Nonperforming assets are defined as nonaccrual loans, loans 90 days or more past due, property from defaulted loans and renegotiated loans.

        The amount of interest income on the above loans that was included in net income for the period ended December 31, 2003, was $115,347. If the nonaccrual and renegotiated loans had performed in accordance with their original terms and had been outstanding throughout the period, or since origination if held for part of the period, an additional $24,997 in gross interest income would have been recorded.

        Loan performance is reviewed regularly by external loan review specialists, loan officers and senior management. When reasonable doubt exists concerning collectibility of interest or principal, the loan is placed in nonaccrual status. Any interest previously accrued but not collected at that time is reversed and charged against current earnings.

        At December 31, 2003, the Corporation had $28,174,000 in commercial and mortgage loans for which payments are presently current although the borrowers are experiencing financial difficulties. Those loans are subject to special attention and their status is reviewed on a monthly basis.

        At December 31, 2003, there were no concentrations of loans exceeding 10 percent of total loans, which are not otherwise disclosed as a category of loans, in the consolidated balance sheets of the Corporation contained in the Corporation’s Annual Report to shareholders for the year ended December 31, 2003.

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Analysis of the Allowance for Loan Losses

        The following table summarizes changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category and additions to the allowance which were charged to expense at December 31st for the years ended:

        The allowance for loan losses is based on management’s evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth, composition of the loan portfolio and other relevant factors. The allowance is increased by provisions for loan losses that have been charged to expense and reduced by net charge-offs.

Allocation of the Allowance for Loan Losses

        The allowance for loan losses was allocated to provide for probable losses within the following loan categories as of December 31st for the years ended:

*Beginning in 2001 and continuing throughout 2003, management has developed and implemented a more comprehensive quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses. This methodology is applied more consistently across the five banking subsidiaries and considers exposures to industries potentially most affected by current risks in the economic and political environment and the review of potential risks in certain credits. One result of this methodology has been the reduction in the amount of allowance that is considered unallocated to specific loan categories.

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Average Deposits

        The daily average deposits and rates paid on such deposits for the years ending December 31st are as follows:

        The time remaining until maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2003, was as follows (In Thousands of Dollars):

Return on Equity and Assets

        The following table sets forth certain financial ratios for the years ended:

Short Term Borrowed Funds

        Included in short term borrowed funds are repurchase agreements as described in Note K to the consolidated financial statements in the Corporation’s Annual Report to Shareholders for the year ended December 31, 2003, which consist of the following:

The weighted average interest rates are derived by dividing the interest expense for the period by the daily average balance during the period.

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Item 2. Properties

        The offices of the Corporation and the main office of Firstbank – Alma are located at 311 Woodworth Avenue, Alma, Michigan. Firstbank – Alma occupies approximately 24,000 square feet of this building which is owned by the Bank. The Corporation’s Operations Center is housed in a 14,800 square foot building located at 308 Woodworth Avenue, Alma, Michigan and owned by Firstbank – Alma. The main office of Firstbank (Mount Pleasant) is located at 102 South Main Street, Mount Pleasant, Michigan. The 5,600 square foot facility is leased. This lease will expire in 2006, however, Firstbank (Mt. Pleasant) has an option to extend the term for an additional five years. The main office of Firstbank – West Branch is located at 502 West Houghton Avenue, West Branch, Michigan in an approximately 3,600 square foot building owned by the Bank. The executive offices of Firstbank – West Branch and a full service branch are located at 601 West Houghton Avenue, West Branch, Michigan in a 10,000 square foot building owned by the Bank. The main office of Firstbank – Lakeview is located at 506 South Lincoln Avenue, Lakeview, Michigan in an approximately 16,000 square foot building owned by the Bank. The main office of Firstbank – St. Johns is located at 201 North Clinton, St. Johns, Michigan in a 3,400 square foot building owned by the Bank. The subsidiary banks operate a total of 37 branch facilities, all but five of which are owned and most of which are full service facilities ranging in size from 1,200 to 3,200 square feet used for banking purposes. In several instances, branch facilities contain more space than is required for current banking operations. This excess space, totaling approximately 17,000 square feet, is leased to unrelated businesses.

        Management considers the properties and equipment of the Corporation and its subsidiaries to be well maintained, in good operating condition and adequate for their operations.

ITEM 3. Legal Proceedings.

        The Corporation and its subsidiaries are parties, as plaintiff or as defendant, to routine litigation arising in the normal course of their business. In the opinion of management, the liabilities arising from these proceedings, if any, will not be material to the Corporation’s consolidated financial condition.

ITEM 4. Submission of Matters to a Vote of Security Holders.

         Not applicable.

Supplemental Item. Executive Officers of the Registrant.

        The following information concerning executive officers of the Corporation has been omitted from the registrant’s proxy statement pursuant to Instruction 3 to Regulation S-K, Item 401(b).

        Officers of the Corporation are appointed annually by the Board of Directors of the Corporation and serve at the pleasure of the Board of Directors. Information concerning the executive officers of the Corporation to the Board of Directors of the Corporation is given below. Except as otherwise indicated, all existing officers have had the same principal employment for over 5 years.

        William L. Benear (age 57) became president & CEO of Firstbank – Lakeview and Vice President of the Corporation in January 2000. Prior to his appointment as Lakeview’s President & CEO, Mr. Benear has served as Executive Vice President of Firstbank – Lakeview since 1994.

        David L. Miller (age 38) was named a Vice President of the Corporation in December 2000. Prior to this appointment Mr. Miller served as Senior Vice President of Firstbank — Lakeview, having been employed there since 1992. Mr. Miller serves in the Human Resources Department for the Corporation and its subsidiaries.

        Dale A. Peters (age 61) has been a Vice President of the Corporation, President, CEO, and a director of Firstbank – West Branch since 1987.

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        Samuel G. Stone (age 58) was appointed Executive Vice President, CFO, Secretary and Treasurer of the Corporation in December 2001. From November 2000 to the December 2001 appointment, Mr. Stone was Vice President, CFO, Secretary and Treasurer of the Corporation. From 1998 until his appointment to Firstbank Corporation, Mr. Stone served as Senior Vice President – Corporate Planning of National City Corporation (successor to First of America). Previous positions Mr. Stone held during his 28-year tenure with First of America included Senior Vice President and Treasurer, Vice President – Director of Corporate Planning and Vice President – Trust Investments.

        Thomas R. Sullivan (age 53) was appointed President & CEO of the Corporation in January 2000. He also serves as President, CEO, and Director of Firstbank (Mt. Pleasant) by appointment in 1991. Mr. Sullivan was Executive Vice President of the Corporation from 1996 to 2000 and served as Vice President of the Corporation from 1991 to 1996.

        James M. Taylor (age 62) was appointed as the President & CEO of Firstbank – St. Johns in March 2000. He was appointed a Vice President of the Corporation in June 2000. Prior to these appointments, Mr. Taylor was Senior Vice President of Firstbank (Mount Pleasant) since 1989.

        James E. Wheeler, II (age 44) was appointed President & CEO of Firstbank – Alma in January 2000. He also serves as a Vice President of the Corporation to which he was appointed in 1989. Mr. Wheeler served as Executive Vice President of Firstbank – Alma from 1999 to 2000 and from 1989 to 1999 as Senior Vice President and Chief Loan Officer of Firstbank – Alma.

PART II

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

        The information under the caption “Common Stock Data” on page 13 in the registrant’s annual report to shareholders for the year ended December 31, 2003, is here incorporated by reference.

ITEM 6. Selected Financial Data.

        The information under the heading “Financial Highlights” on page 2 in the registrant’s annual report to shareholders for the year ended December 31, 2003, is here incorporated by reference.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 3 through 13 in the registrant’s annual report to shareholders for the year ended December 31, 2003, is here incorporated by reference.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.

        Information under the headings “Liquidity and Interest Rate Sensitivity” on pages 8 and 9 and “Quantitative and Qualitative Disclosure About Market Risk” on pages 10 and 11 in the registrant’s annual report to shareholders for the year ended December 31, 2003, is here incorporated by reference.

ITEM 8. Financial Statements and Supplementary Data.

        The report of independent auditors and the consolidated financial statements on pages 14 through 18 and the quarterly results of operations on page 36 in the registrant’s annual report to shareholders for the year ended December 31, 2003, are here incorporated by reference.

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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

         None.

ITEM 9A. Controls and Procedures

        (a) Evaluation of Disclosure Controls and Procedures.

        The Corporation’s Chief Executive Officer and the Chief Financial Officer, after evaluating the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this Form 10-K Annual Report, have concluded that the Corporation’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Corporation would be made known to them by others within the Corporation, particularly during the period in which this Form 10-K Annual Report was being prepared.

        (b) Changes in Internal Controls.

        During the period covered by this report, there have been no changes in the Corporation’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Corporation’s internal control over financial reporting.

PART III

ITEM 10. Directors and Executive Officers of the Registrant.

        The information under the captions “Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held April 26, 2004, is here incorporated by reference.

        The Board of Directors of the Corporation has determined that Edward J. Grant, a director and member of the Audit Committee, qualifies as an “Audit Committee Financial Expert” as defined in rules adopted by the Securities and Exchange Committee pursuant to the Sarbanes-Oxley Act of 2002.

        The Board of Directors of the Corporation has adopted a Code of Ethics which details principles and responsibilities governing ethical conduct for all Corporation directors and executive officers. The Code of Ethics is filed as an Exhibit to this Report on Form 10-K.

ITEM 11. Executive Compensation.

        Information contained under the captions “Compensation of Directors and Executive Officers” and “Compensation Committee Interlocks and Insider Participation” in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held April 26, 2004, is here incorporated by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners Management.

        The information under the caption “Voting Securities” in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held April 26, 2004, is here incorporated by reference.

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Securities Authorized for Issuance Under Equity Compensation Plans. The Corporation had the following equity compensation plans at December 31, 2003:

EQUITY COMPENSATION PLAN INFORMATION

        These equity compensation plans are more fully described in Note N to the Consolidated Financial Statements.

ITEM 13. Certain Relationships and Related Transactions.

        The information under the caption “Compensation Committee Interlocks and Insider Participation” in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held April 26, 2004, is hereby incorporated by reference.

ITEM 14. Controls and Procedures.

        The information set forth under the heading “Relationship with Independent Certified Public Accounts” on page 14 of the Corporation’s definitive proxy statement for its annual meeting of shareholders to be held April 26, 2004, is hereby incorporated by reference.

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ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)(1) Financial Statements.

        The following consolidated financial statements of the Corporation and its subsidiaries and report of independent auditors are incorporated by reference from the registrant’s annual report to shareholders for the year ended December 31, 2003, in Item 8:

        The consolidated financial statements, notes to consolidated financial statements and report of independent auditors listed above are incorporated by reference in Item 8 of this report from the corresponding portions of the registrant’s annual report to shareholders for the year ended December 31, 2003.

(b)     Reports on Form 8-K.

        Form 8-K Report filed November 25, 2003, announcing a 5% stock dividend and an increase in funds authorized for stock repurchases.

        Form 8-K Report filed October 28, 2003, announcing quarterly cash dividend.

        Form 8-K Report filed October 16, 2993, announcing financial results for the quarter ended September 30, 2003.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 15, 2004.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Each director of the Registrant, whose signature appears below, hereby appoints Thomas R. Sullivan and Samuel G. Stone and each of them severally, as his attorney-in-fact, to sign in his name and on his behalf, as a director of the Registrant, and to file with the Commission any and all Amendments to this Report on Form 10-K.

Number                                       Exhibit

*Management contract or compensatory plan.

The registrant will furnish a copy of any exhibit listed above to any shareholder of the registrant without charge upon written request to Samuel G. Stone, Secretary, Firstbank Corporation, 311 Woodworth Avenue, P.O. Box 1029, Alma, Michigan 48801.

EXHIBIT 13
Rule 14a-3
Annual Report

PRESIDENT’S MESSAGE

TO OUR SHAREHOLDERS:

During 2003 we achieved our 12^th consecutive year of record earnings, posting over $12 million of net income for the first time in the history of our company. These strong results, achieved during a year which featured sluggish state and local economies along with record low interest rates, is directly attributed to the balance we have created within our loan portfolios. The slow economy softened commercial and consumer loan demand, and the low interest rates squeezed margins as rates on loans declined faster and further than we could adjust deposit and funding costs. Our bank’s long history of residential mortgage lending, though, perfectly positioned us to produce record volumes of mortgage loans as homeowners rushed to refinance their mortgages in order to capture the record low rates. During the year our mortgage lending team originated, processed, and closed over 5,000 mortgage loans, representing over $375 million of local home loans, and contributing significantly to the income of Firstbank.

Briefly, one of the core strategies of our company has been to maintain a balance between residential mortgage lending, which generally features fixed rate loans and does well when rates are low or falling, and our other portfolios which have more variable rate loans and perform better when rates are rising. In 2003 this strategy contributed greatly to our success.

During 2003 we also took several steps to help position our company for growth in the future. A new branch facility of Firstbank – West Branch in St. Helen, located at exit 222 just off of I-75, improves both visibility and functionality versus the previous branch. Firstbank – St. Johns opened its first full service branch office, supplementing its Main Office in downtown St. Johns. Firstbank (Mt. Pleasant) partnered with key Cadillac community leaders to establish a full service office in Cadillac, a market which lacked a strong community banking organization. Finally, Firstbank – Alma began establishment of a loan production office in a high traffic, high growth area, of eastern Saginaw County which will open in early 2004.

Another key to the success of Firstbank Corporation is that we have dedicated, hard-working, energetic, and professional staff members who have done outstanding work again this year. We are also fortunate to have directors, at both the bank and corporate levels, who contribute their time and talent to helping Firstbank be a premier community banking company in Michigan.

I would particularly like to recognize Mr. Phillip Peasley who, after 31 years of service to Firstbank Corporation, will be retiring from the board following the Annual Meeting. Mr. Peasley joined the board of Firstbank – Alma in February 1973, was a founding member of the board of directors of Firstbank Corporation in 1985, and has maintained a record of perfect attendance at board meetings throughout all of those years. His many contributions are sincerely appreciated.

2004 will be a year of challenges for the banking industry. The low rate environment and soft economy will continue to limit our ability to expand margins and increase our asset base. However, we will continue to execute the strategies that have created a company that has a strong capital position with a focus on maintaining superior asset quality, and is positioned for future success.

Thank you for your investment in Firstbank Corporation. We appreciate the support and encouragement of our shareholders, and always welcome your comments or suggestions.

Respectfully Submitted,

/s/ Thomas R. Sullivan
Thomas R. Sullivan
President & Chief Executive Officer
Firstbank Corporation

FINANCIAL HIGHLIGHTS
Firstbank Corporation

Firstbank – St. Johns results are included from June 16, 2000, the date of inception. Gladwin Land Company, Inc. results are included from May 8, 2000, the date of acquisition.

⁽¹⁾     All per share amounts are adjusted for stock dividends and stock split.

The Company’s Form 10-K Annual Report filed with the Securities and Exchange Commission will be provided to any shareholder, without charge, upon written request. Requests should be addressed to: Samuel G. Stone, Chief Financial Officer, Firstbank Corporation, 311 Woodworth Avenue, P. O. Box 1029, Alma, Michigan 48801-6029.

MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The purpose of this section of the annual report is to provide a narrative discussion about Firstbank Corporation’s financial condition and results of operations. Please refer to the consolidated financial statements and the selected financial data presented in this report in addition to the following discussion and analysis.

RESULTS OF OPERATIONS

Highlights

Firstbank Corporation (“the Company”) posted record net earnings for the twelfth consecutive year. Net income of $12,056,000 exceeds 2002 results by $230,000, or 1.9%. For the past five years net income has increased at an annual compound growth rate of 10.6%. These results reflect continued strength of core banking activities as well as increased activity in mortgage refinances and resulting secondary market sales during the year. The mortgage refinancing levels of 2003 are expected to decline significantly in the current year, which will likely make it difficult to continue the growth trend of the last few years. Net income in 2002 increased $2,704,000, or 29%, over net income in 2001.

Management believes that standard performance indicators help evaluate performance. Firstbank posted a return on average assets of 1.58%, 1.58%, and 1.24% for 2003, 2002, and 2001, respectively. Total average assets increased $14 million in 2003, $13 million in 2002, and $50 million in 2001. Diluted earnings per share were $2.07, $2.04, and $1.61 for the same time periods. The Company repurchased 176,100 shares of its common stock in 2003, 122,710 shares in 2002, and 1,212 shares in 2001. In 2000, 2002, and again in 2003, the Board of Directors authorized share repurchase programs that helped maintain capital and return on equity at appropriate levels. Return on equity was 14.47% in 2003, 15.50% in 2002, and 13.40% in 2001.

Net Interest Income

The core business of the Company is earning interest on loans and securities while paying interest on deposits and borrowings. The interest rate environment in 2003 squeezed interest spreads between earning assets and the cost of funding those assets. As such, the Company’s net interest income decreased by $1.4 million for 2003, a 4.1% decrease when compared to 2002. The net interest margin also decreased to 4.50% in 2003 compared to 4.80% in 2002, and 4.61% in 2001. During 2003, the Company’s average loan to average deposit ratio was 105%, compared to 107% in 2002, and 110% in 2001. A critical task of management is to price assets and liabilities so that the spread between the interest earned on assets and the interest paid on liabilities is maximized without unacceptable risks. While interest rates on earning assets and interest bearing liabilities are subject to market forces, in general and in the short run, the Company can exert more control over deposit rates than earning asset rates. However, competitive forces and the need to maintain and grow deposits as a funding source place limitations on the degree of control over deposit rates.

The following table presents a summary of net interest income for 2003, 2002, and 2001. In 2003, the average rate realized on earning assets was 6.26%, a decrease of 86 basis points from the 2002 results of 7.12%, and a 192 basis point reduction from the rate of 8.18% realized in 2001. During 2001, the prime rate decreased each quarter sliding 150 basis points during the first quarter, 125 in the second quarter, 75 in the third quarter, and 125 in the fourth quarter, for a total decline of 475 basis points. During 2002, the prime rate held steady for the first three quarters and then decreased 50 basis points in the fourth quarter. In 2003, the prime rate continued the trend, remaining unchanged in the first quarter, and then falling 25 basis points in the second quarter to its current level of 4.00%. As of December 31, 2003, slightly over 40% of the loan portfolio was comprised of variable rate instruments. Except for a relatively small portion of these loans that are affected under current interest rate conditions by interest rate floors or ceilings, these loans will re-price monthly or quarterly as rates change. The remaining 60% of the loan portfolio is made up of fixed rate loans that do not re-price until maturity. Of the fixed rate loans approximately $108 million, or nearly 28% of the loan portfolio, matures within the next twelve months and are subject to rate adjustments at maturity.

Summary of Consolidated Net Interest Income

        Interest on nonaccrual loans is not included.

As rates declined in 2002 and 2003, maturing securities in the investment portfolio could not be replaced with securities of comparable quality bearing equal or higher yields. Quality standards were maintained and portfolio yields declined. In the current rate environment, management expects to lose some additional yield when replacing securities and has chosen to use high quality, short term investments in order to be positioned to take advantage of expected future rate increases.

The average rate paid on interest bearing liabilities was 2.19% in 2003, compared to 2.83% in 2002, and 4.24% in 2001. Deposit rates decreased during 2003 as maturing time deposits were re-priced and rates on checking and savings deposits were lowered in response to the prime rate reductions of 2002 and 2003.

In past years the Company has funded a portion of its loan growth with borrowings from the Federal Home Loan Bank and notes payable. During 2003, the average outstanding balance of FHLB advances and notes payable decreased nearly $900,000 and the year end balance decreased $1.3 million when compared to 2002 balances. Increases in other short term borrowing, primarily Federal Funds Purchased, allowed the Company to repay some maturing FHLB notes without renewing them and to provide funding for loan growth. While FHLB borrowings are an economical method of funding loans when increased core deposits are not available, the cost is typically higher than the Company’s core deposit costs. The average rate of Federal Home Loan Bank advances and notes payable funding increased 6 basis points in 2003, to 5.60%, when compared to the 2002 rate of 5.54%, because maturing notes were at lower than the average rate. Borrowings from the Federal Home Loan Bank carry significant prepayment penalties that act as a deterrent to prepayment.

The 2003 rate spread of 4.07% is 22 basis points lower than the 2002 result of 4.29%, but 13 basis points higher than the 2001 result of 3.94%. Tax equivalent net interest income decreased $1.4 million in 2003 as an increase in total average earning assets of $15 million was more than offset by the narrow interest margin. The net interest margin of 4.50% for 2003 was 30 basis points below the 2002 result, and 11 basis points lower than in 2001. Decreases in both net interest margin and rate spread are the result of rates on average earning assets decreasing 86 basis points while the average cost of interest bearing liabilities decreased 64 basis points. Average earning assets represented 94% of total average assets in 2003 and 93% in 2002.

Provision for Loan Losses

The provision for loan losses was $550,000 in 2003 compared to $1,170,000 in 2002, and $1,467,000 in 2001. At December 31, 2003, the allowance for loan losses as a percent of total loans was 1.83% compared to 1.92% and 1.84% at December 31, 2002, and December 31, 2001, respectively. Net charged off loans totaled $459,000 in 2003 compared to $672,000 in 2002 and $286,000 in 2001. During 2003, recoveries of previously charged off loans were $319,000 compared to $363,000 in 2002, and $394,000 in 2001. Net charged off loans as a percent of average loans were 0.08% in 2003, 0.11% in 2002, and 0.05% in 2001. Total nonperforming loans were 0.22% of ending loans at December 31, 2003, compared to 0.63% and 0.44% at the two previous year ends. Management maintains the allowance for loan losses at a level considered appropriate. The allowance balance is established after considering past loan loss experience, current economic conditions, volume, growth and composition of the loan portfolio, delinquencies, and other relevant factors. Management uses a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across its five banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings, and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries most affected by current risks in the economic and political environment and the review of risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Management believes that the analysis described above provides a consistent basis for the current provision level.

Non-interest Income

Continuing the upward trend which began in 2001, total non-interest income increased $3,745,000 during 2003. Improved collection rates on fees and better management of fee waivers along with growth in deposit accounts contributed to an increase of $115,000, or 4.8%, in service charges on deposit accounts from 2002 to 2003. Gain on sale of mortgage loans increased by $2,681,000, or 45.6%, over the 2002 results as forty year lows in mortgage interest rates continued to fuel mortgage refinance activity. In the final quarter of the year, the Company saw this activity diminish significantly as rates on residential mortgages increased. When a mortgage is refinanced or pre-paid, capitalized mortgage servicing rights relating to that mortgage are written off. The gain on sale was somewhat offset by a decline in mortgage servicing income of $391,000, from a negative $709,000 in 2002, to a negative $1,100,000 in 2003 that largely resulted from the write off of previously capitalized mortgage servicing rights. Gains on the sale of securities were $373,000 higher in 2003, mainly due to the sale of an equity holding that had a low yield compared to other investments. Total non-interest income grew by $2,193,000 in 2002 compared with 2001 reflecting improved collection rates on deposit fees and higher mortgage banking revenue.

During the first quarter of 2002, Firstbank-Alma, the subsidiary that operated a Trust Department, reached an agreement with a larger, unrelated company to assume operations of the Trust Department. As a part of the agreement, the bank received revenue of $152,000 in 2003, which is recorded in other income.

Courier and cash delivery services income increased 30.5% to $736,000 in 2003 after having increased 21.8% in 2002. This income is primarily from the operations of 1^st Armored and does not include income from servicing Firstbank affiliates. Real estate appraisal services contributed $912,000 to non-interest income in 2003, up from $857,000 in 2002 and $789,000 in 2001. Commissions on real estate sales resulted in $940,000 of non-interest income in 2003, compared to $816,000 in 2002 and $635,000 in 2001. Title insurance fees produced $1,104,000 of non-interest income, compared to $726,000 in 2002 and $593,000 in 2001. Appraisal and title insurance revenues were helped greatly by the high level of mortgage refinancing during the current year, which is not likely to continue in 2004.

Other non-interest income increased $346,000, or 23.8%, when the results of 2003 are compared to 2002. The improvement in this line was primarily due to an increase in gains on the sale of other real estate owned and from the sale of certain customer lists associated with the brokerage business. When comparing 2002 to 2001 results other non-interest income declined $545,000. The largest areas of decline were in fees from brokerage business activities and lower dividend and capital gains associated with deferred compensation accounts. The deferred compensation accounts change was offset by an equal decline in non-interest expenses.

Non-interest Expense

Salary and employee benefits expenses increased $1,951,000, or 13.7%, when 2003 is compared to 2002. Increased salary expense was a result of originating, processing and managing secondary market sales related to the high volume in the mortgage business, yearly salary increments, merit raises and normal staffing requirements related to growth in business. Employee benefits expense increased as well, primarily from higher employee group insurance cost and payroll taxes associated with the higher salary expense. The Company employed 390 full time equivalent employees at the end of 2003, 14 more than at the same time in 2002. Salary and benefit expenses were $897,000 higher when 2002 is compared with 2001 as the Company expanded its work force to meet the demands of mortgage refinance activity, staffed new branch facilities and yearly merit and incentive increases.

Expenses of occupancy and equipment increased $53,000, or 1.4%, over the 2002 level. This increase is primarily due to a full year of depreciation on facilities and equipment which were put into place during the prior year. Occupancy and equipment costs increased in 2002, compared with 2001, by $151,000 mainly due to costs associated with facilities and equipment which were put into place during the third and forth quarters of 2001.

Amortization of intangible assets decreased $26,000, or 7.2%, during 2003 as amortization was reduced due to the sale of certain customer lists related to the brokerage business. Intangible amortization decreased $423,000 in 2002 compared with 2001 due to adoption of new accounting standards on January 1, 2002, which required that the Company no longer amortize goodwill relating to past bank and branch acquisitions.

Expenses for outside professional services increased $436,000 to $1,995,000 in 2003 compared to $1,559,000 in 2002. Title search fees and costs paid to independent contractors in the title, appraisal and real estate sales operations accounted for substantially all of the increase. These costs were largely driven by the high level of mortgage refinance activity. Professional service fees increased in 2002 above 2001‘s level by $438,000 with fees associated with mortgage refinancing driving the increase.

Advertising and special promotion expense increased to $787,000 from $522,000 in 2002 and was largely driven by a large increase in promotional expense for mortgage refinances. Other non-interest expense decreased by $22,000, or 0.4%, from 2002 to 2003. Advertising and promotional expense was higher in 2002 than the previous year by $134,000 for expenditures relating to mortgage refinance activity.

Other non-interest expense decreased slightly from $5,701,000 in 2002 to $5,679,000 in 2003. Prior year expenses had also decreased from 2001 by $579,000, primarily as a result of a $687,000 non-recurring charge made in the first quarter of 2001.

Federal Income Tax

The Company’s effective federal income tax rates were 33% for 2003, 2002 and 2001. The Company’s investment in securities and loans which provide income exempt from federal income tax is the principal cause of the difference between the effective tax rates and the statutory tax rate of 35% for all three years.

   FINANCIAL CONDITION

Total assets at December 31, 2003 were $777 million, exceeding the December 31, 2002 assets of $768 million by $9 million, or slightly over 1%. Short term investments decreased by $25 million as the Company redeployed its excess liquidity which resulted from heavy mortgage re-financing and reduced mortgage portfolio balances. Loans held for sale in the secondary market decreased 56.9% at December 31, 2003, when compared to the balance at December 31, 2002, as re-finance activity slowed at the end of the year. Total portfolio loans, net of allowance for loan loss, increased 5.7% at December 31, 2003 compared with the balance at the previous year end. Commercial loans increased $14.4 million, or 14.7%. Residential mortgage and commercial mortgage loans increased $6.1 million, or 3.1%, and $8.9 million, or 4.6%, respectively. Construction loans were also higher at December 31, 2003, rising $8.1 million, or 17.1%, from the previous year end. Consumer loans were $3.3 million, or 5.2% lower at the current year end.

Total securities increased $7.5 million, or 10.9%, as available funds were invested to support collateral pledging needs.

Premises and equipment increased by $589,000 after recognized depreciation of $1,682,000. The increase in premise and equipment was mainly due to construction of two new branch facilities in Cadillac and St. Helen, Michigan, which opened in the fourth quarter.

Total deposits decreased at the end of 2003 to $568 million, a decrease of 1.6% compared to $577 million at year end 2002. A drop in time deposits of $30.5 million, or 13.9% from the prior year end, more than offset gains in all other categories of deposits. Non-interest bearing demand deposit balances increased $4.1 million, or 4.2%, while interest bearing demand increased by $4.6 million, or 2.6% and savings account balances increased by $12.4 million, or 14.9%. Firstbank’s banks did not need to bid aggressively for higher cost, rate sensitive, time deposits. Securities sold under agreements to repurchase decreased by $5.6 million and federal funds purchased increased $22.3 million.

Federal Home Loan Bank advances and notes payable decreased by $1.3 million at December 31, 2003 as compared to December 31, 2002. Excess liquidity and the use of federal funds purchased allowed repayment of some Federal Home Loan Bank borrowings as they matured. Note K and Note L of the Notes to Consolidated Financial Statements have additional discussion of borrowings.

Asset Quality

Management continues to follow a conservative course in the recognition of problem loans. Loans are carried at an amount which management believes will be collected. A balance considered not collectible is charged against (reduction of) the allowance for loan losses. In 2003, net charged off loans were $459,000 compared to $672,000 in 2002. Net charged off loans as a percentage of average loans were 0.08% and 0.11% in 2003 and 2002.

Nonperforming loans are defined as nonaccrual loans, loans 90 days past due, and any loans where the terms have been renegotiated. Total nonperforming loans were $1.4 million and $3.8 million at December 31, 2003 and 2002, respectively. The average investment in impaired loans was $3.5 million during 2003 compared to $4.8 million during 2002. The decrease in impaired loans was mainly due to two large past due credits which paid off or paid to current status in 2003. Please refer to Note F of the Notes to Consolidated Financial Statements for more information on impaired loans. Total nonaccrual loans were $834,000 at December 31, 2003, compared to $630,000 at the end of 2002.

The allowance for loan losses increased $91,000, or 0.8%, during 2003. The allowance for loan losses represents 1.83% of outstanding loans at the end of 2003 as compared to 1.92% at December 31, 2002. Management maintains the allowance at a level which they believe adequately provides for losses inherent in the loan portfolio. Such losses are estimated by a variety of factors, including specific examination of certain borrowing relationships and consideration of historical losses incurred on certain types of credits. Management focuses on early identification of problem credits through ongoing reviews by management, loan personnel and an outside loan review specialist.

LIQUIDITY AND INTEREST RATE SENSITIVITY

Asset liability management aids the Company in achieving reasonable and predictable earnings and liquidity while maintaining a balance between interest earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of the Company’s customers. These customers may be either borrowers needing to meet their credit needs or depositors wanting to withdraw funds. Management of interest rate sensitivity attempts to manage the level of varying net interest margins and to achieve consistent net interest income through periods of changing interest rates. The net interest margin was 4.50% in 2003, compared to 4.80% in 2002. Loan yields decreased by 75 basis points, from 7.56% in 2002, to 6.81% in 2003. Deposit costs decreased 74 basis points from 2.53% in 2002 to 1.79% in 2003. Although loan yields decreased approximately the same as deposit costs, loan demand was weak through most of the year and the mix of earning assets shifted from loans to lower yielding federal funds sold.

The low interest rate environment and uncertainty relating to the war in Iraq led to higher deposits early in the year. As the stock market recovered in the second half of the year, funds began to flow back into the equity markets resulting in a lower level of time deposits at year end. The lower level of time deposits coupled with high loan demand in the fourth quarter resulted in the use of overnight federal funds purchased of $22.3 million at year end. FHLB advances and notes payable decreased as a funding source with average balances of $68,296,000 in 2003 compared to $69,195,000 in 2002. In 2003, the average cost of funds on notes payable was 5.60% compared to 1.79% on deposits.

A decision to decrease deposit rates affects most rates currently paid and, therefore, has an immediate positive impact on net interest margin. With the exception of variable rate loans, a decrease in loan rates does not affect the yield until a new loan is made. When the level of interest rates decreases dramatically certain fixed rate loan customers demand new, lower rate loans to replace present higher rate loans. In the second quarter of 2003 the prime rate dropped 25 basis points bringing the average rate to 4.00%, from an average of 4.25% in January. Since deposit rates were already low, Firstbank’s net interest margin was compressed as the ability to lower deposit rates at the same pace as loan rates were declining was restricted by the already low rates being paid on deposits.

The principal sources of liquidity for the Company are maturing securities, federal funds purchased or sold, loan payments by borrowers, investment securities, loans held for sale, deposit or deposit equivalent growth and Federal Home Loan Bank advances. Although securities maturing within one year at December 31, 2003, were $8.0 million compared to $15.8 million at December 31, 2002, total investments available for sale increased $8 million to $74 million.

The table below shows the interest sensitivity gaps for five different intervals as of December 31, 2003. Deposits that do not have a fixed maturity date are shown as immediately re-pricing according to reporting conventions.