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EX-31.1 - CERTIFICATION CEO - FIRSTBANK CORPex31-1.htm
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EX-32.1 - CERTIFICATION CEO, CFO - FIRSTBANK CORPex32-1.htm
 U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011

[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                   .

Commission file number:  000-14209
 
FIRSTBANK CORPORATION
(Exact name of registrant as specified in its charter)

Michigan
 
38-2633910
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
     
311 Woodworth Avenue
   
Alma, Michigan
 
48801
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (989) 463-3131

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes          No___
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ___   Accelerated filer             Non-accelerated filer ­­­___   Smaller reporting company    X   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes           No    X  

Common stock outstanding at April 30, 2011:  7,834,499 shares.
 
 
 

 
 
INDEX
   
     
     
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (UNAUDITED)
Page 1
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Page 14
 
   
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Page 18
     
Item 4.
Controls and Procedures
Page 19
     
     
PART II.
OTHER INFORMATION
 
     
Item 4.
[removed and reserved]
 
     
Item 5.
Other Information
Page 19
     
Item 6.
Exhibits
Page 19
     
     
SIGNATURES
Page 20
     
EXHIBIT INDEX
Page 21
 
 
i

 
 
FIRSTBANK CORPORATION
              CONSOLIDATED BALANCE SHEETS
           AS OF MARCH 31, 2011 AND DECEMBER 31, 2010
(Dollars in thousands)
UNAUDITED  
                                                                                                                                                           
                                                                                                                                                                                   
   
March 31,
2011
   
December 31,
2010
 
             
ASSETS
           
Cash and due from banks
  $ 23,707     $ 25,322  
Short term investments
    74,074       48,216  
Total Cash and cash equivalents
    97,781       73,538  
                 
FDIC insured bank time certificates of deposit
    5,674       10,405  
Trading account securities
    19       13  
Securities available for sale
    276,022       255,703  
Federal Home Loan Bank stock
    8,203       8,203  
Loans held for sale
    27       1,355  
Loans, net of allowance for loan losses of $21,347 at March 31, 2011
               
and $21,431 at December 31, 2010
    994,193       1,010,189  
Premises and equipment, net
    25,461       25,431  
Goodwill
    35,513       35,513  
Core deposit and other intangibles
    1,960       2,145  
Other real estate owned
    7,922       8,316  
Accrued interest receivable and other assets
    26,724       27,532  
                 
TOTAL ASSETS
  $ 1,479,499     $ 1,458,343  
                 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
LIABILITIES
               
Deposits:
               
Non-interest bearing accounts
  $ 187,349     $ 185,191  
Interest bearing accounts:
               
Demand
    308,236       293,900  
Savings
    236,137       210,239  
Time
    485,997       494,453  
Total Deposits
    1,217,719       1,183,783  
                 
Securities sold under agreements to repurchase and overnight borrowings
    42,623       41,328  
Federal Home Loan Bank advances
    25,628       40,658  
Subordinated Debentures
    36,084       36,084  
Accrued interest and other liabilities
    7,879       8,062  
Total Liabilities
    1,329,933       1,309,915  
                 
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock; no par value, 300,000 shares authorized, 33,000 issued
    32,770       32,763  
Common stock; 20,000,000 shares authorized, 7,814,097 shares issued
               
and outstanding ( 7,803,816 at December 31, 2010 )
    115,320       115,224  
Retained earnings
    1,020       295  
Accumulated other comprehensive income
    456       146  
Total Shareholders’ Equity
    149,566       148,428  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 1,479,499     $ 1,458,343  
 
See notes to consolidated financial statements.

 
1

 
 
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
MARCH 31, 2011 AND 2010
(Dollars in thousands except per share data)
UNAUDITED
                                     
    Three Months Ended March 31,  
Interest Income:
  2011     2010  
Interest and fees on loans
  $ 15,646     $ 17,021  
Securities
               
Taxable
    1,011       716  
Exempt from Federal Income Tax
    293       309  
Short term investments
    39       53  
Total Interest Income
    16,989       18,099  
Interest Expense:
               
Deposits
    3,049       4,278  
FHLB advances and other borrowing
    281       1,130  
Subordinated Debt
    367       367  
Total Interest Expense
    3,697       5,775  
Net Interest Income
    13,292       12,324  
Provision for loan losses
    3,011       2,491  
Net Interest Income after provision for loan losses
    10,281       9,883  
Non-interest Income:
               
Service charges on deposit accounts
    1,092       1,097  
Gain on sale of mortgage loans
    568       370  
Mortgage servicing, net of amortization
    28       126  
Gain/(loss) on trading account securities
    6       23  
Gain/(loss) on securities
    (8 )     55  
Other
    359       593  
Total Non-interest Income
    2,045       2,264  
Non-interest Expense:
               
Salaries and employee benefits
    5,270       5,460  
Occupancy and equipment
    1,424       1,490  
FDIC insurance premium
    543       545  
Amortization of intangibles
    185       210  
Outside professional services
    263       218  
Advertising and promotions
    264       221  
Other real estate owned costs
    580       844  
Other
    2,233       2,439  
Total Non-interest Expense
    10,762       11,427  
                 
Income before federal income taxes
    1,564       670  
Federal income taxes
    349       11  
NET INCOME
  $ 1,215     $ 659  
                 
Preferred stock dividends and accretion of discount on preferred stock
    420       420  
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
  $ 795     $ 239  
                 
COMPREHENSIVE INCOME
               
Net Income
  $ 1,215     $ 659  
Change in unrealized gain on securities, net of tax and reclassification effects
    310       (41 )
TOTAL COMPREHENSIVE INCOME
  $ 1,525     $ 618  
                 
Basic Earnings Per Share
  $ 0.10     $ 0.03  
Diluted Earnings Per Share
  $ 0.10     $ 0.03  
Dividends Per Share
  $ 0.01     $ 0.05  
 
See notes to consolidated financial statements.
 
 
2

 
 
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
                FOR THE NINE MONTHS ENDED
               MARCH 31, 2011 AND 2010
                (Dollars in thousands)
                UNAUDITED

    Three months ended March 31,  
   
2011
   
2010
 
OPERATING ACTIVITIES
           
   Net income
  $ 1,215     $ 659  
   Adjustments to reconcile net income to net cash provided by operating activities:
               
   Provision for loan losses
    3,011       2,491  
   Depreciation of premises and equipment
    542       592  
   Net amortization of security premiums/discounts
    923       231  
   Loss/(Gain) on trading account securities
    (6 )     (23 )
   Loss/(Gain) on securities transactions
    8       (55 )
   Amortization and impairment of  intangibles
    185       210  
   Stock option and stock grant compensation expense
    33       33  
   Gain on sale of mortgage loans
    (568 )     (370 )
   Proceeds from sales of mortgage loans
    18,076       13,393  
   Loans originated for sale
    (16,180 )     (13,543 )
   Deferred federal income tax expense/(benefit)
    160       (21 )
   (Increase)/decrease in accrued interest receivable and other assets
    801       853  
   Increase/(decrease) in accrued interest payable and other liabilities
    (183 )     (655 )
        NET CASH PROVIDED BY OPERATING ACTIVITIES
    8,017       3,795  
                 
INVESTING ACTIVITIES
               
   Proceeds from sale of securities available for sale
    553       5,841  
   Proceeds from maturities and calls of securities available for sale
    27,121       19,749  
   Purchases of securities available for sale
    (43,723 )     (53.421 )
   Proceeds from sale of fixed assets
    1       1,018  
   Net (increase)/decrease in portfolio loans
    12,149       18,991  
   Proceeds from sale of other real estate owned
    917       1,285  
   Net purchases of premises and equipment
    (573 )     (648 )
        NET CASH USED IN INVESTING ACTIVITIES
    (3,555 )     (7,185 )
                 
FINANCING ACTIVITIES
               
   Net increase/(decrease) in deposits
    33,936       7,340  
   Increase/(decrease) in securities sold under agreements to repurchase and  other
      short term borrowings
    1,295       4,341  
   Repayment of Federal Home Loan Bank borrowings
    (15,030 )     (13,017 )
   Proceeds from Federal Home Loan Bank borrowings
    0       7,000  
   Cash proceeds from issuance of common stock, net
    70       135  
   Cash dividends-preferred stock
    (412 )     (413 )
   Cash dividends-common stock
    (78 )     (386 )
        NET CASH USED IN FINANCING ACTIVITIES
    19,781       5,000  
                 
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    24,243       1,610  
   Cash and cash equivalents at beginning of period
    73,538       107,365  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 97,781     $ 108,975  
                 
Supplemental Disclosure
               
   Interest Paid
  $ 3,665     $ 5,580  
   Income Taxes Paid
  $ 725     $ 0  
   Non cash transfers of loans to Other Real Estate Owned
  $ 836     $ 3,042  

See notes to consolidated financial statements.
 
 
3

 

FIRSTBANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
UNAUDITED

NOTE 1- FINANCIAL STATEMENTS

The accompanying unaudited financial information presented is for Firstbank Corporation (“Corporation”) and its wholly owned subsidiaries:  Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch (including its wholly owned subsidiaries; 1st Armored, Inc. (sold on March 31, 2010), 1st Title, Inc., and its 48% ownership in 1st Investors Title, LLC, Firstbank - St. Johns, Keystone Community Bank, Firstbank – West Michigan and its wholly owned subsidiary Accord Financial Services, Inc., collectively the “Banks”, FBMI Risk Management Services, Inc., a company that provides insurance coverage to only affiliates of Firstbank Corporation, and Austin Mortgage Company, a company that holds certain performing and non-performing residential mortgage loans originated prior to the acquisition of ICNB Financial Corporation, and beginning in the second quarter of 2009 certain non-performing loans transferred from affiliate banks. All of the subsidiaries listed above are fully owned except 1st Investors Title, LLC, which we have a 48% minority interest. The results of 1st Armored are consolidated into our results through March 31, 2010, the date of the sale. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The balance sheet at December 31, 2010, has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2010.


Effect of Newly Issued but not yet Effective Accounting Standards
 
In April 2011, the FASB issued, A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring, amends FASB ASC 310-40, Receivables — Troubled Debt Restructurings by Creditors because of inconsistencies in practice and the increased volume of debt modifications. The standard provides additional clarifying guidance in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring qualifies as a troubled debt restructuring. The effective date of implementation is for the first interim or annual period ending after June 15, 2011 to be applied retrospectively to restructurings taking place on or after the beginning of the fiscal year of adoption, with early application allowed. As a result of the clarifying guidance, receivables that are newly considered impaired for which impairment was previously measured using a general allowance for credit losses may be identified. In respect of such receivables, disclosure is required of (1) the total recorded investment in such receivables, and (2) the related allowance for credit losses as of the end of the period of adoption. For purposes of measuring impairment of those receivables, the effective date is for the first interim or annual period beginning on or after June 15, 2011 to be applied prospectively. We are analyzing the impact of the standard and will adopt the requirements in the third quarter of 2011.
 
 
4

 
 
NOTE 2- NONPERFORMING LOANS AND ASSETS

The following table shows the distribution of our loan portfolio in the manner that we break down the loan portfolio for use in our analysis of the determination of our loan loss allowance. This presentation differs somewhat by loan category from classification of loans presented elsewhere in our regulatory reports and within this report. The differences primarily relate to how we analyze real estate loans internally for the adequacy of the loan loss allowance, which is different from how we are required to report them for regulatory purposes.

Loans at period end were as follows:
 
     
(In Thousands of Dollars)
 
 
March 31,
2011
   
December 31,
2010
 
Commercial & Industrial
           
  Pass loans
  $ 140,454     $ 143,882  
  Watch loans
    14,391       12,714  
  Special mention loans
    3,570       4,262  
  Substandard loans
    1,849       1,560  
  Impaired loans
    961       3,424  
  Doubtful loans
    0       141  
  Restructured loans
    82       36  
Total Commercial & Industrial
    161,307       166,019  
                 
Commercial Real Estate
               
  Pass loans
    388,256       394,699  
  Watch loans
    51,480       50,596  
  Special mention loans
    29,483       31,324  
  Substandard loans
    8,536       8,450  
  Impaired loans
    18,333       15,987  
  Doubtful loans
    433       881  
  Restructured loans
    7,259       5,768  
Total Commercial Real Estate
    503,780       507,705  
                 
First lien residential mortgage loans
               
  Performing loans
    191,264       192,084  
  Loans > 60 days past due
    557       2,102  
  Nonaccrual loans
    4,767       5,189  
  Restructured loans
    4,362       4,252  
Total First lien residential mortgage loans
    200,950       203,627  
                 
Junior lien residential mortgage loans
               
  Performing loans
    73,413       75,562  
  Loans > 60 days past due
    100       148  
  Nonaccrual loans
    0       556  
Total Junior lien residential mortgage loans
    73,513       76,266  
                 
Consumer Loans
               
  Performing loans
    75,685       77,531  
  Loans > 60 days past due
    108       288  
  Nonaccrual loans
    197       184  
Total Consumer Loans
    75,990       78,003  
                 
Total Loans
  $ 1,015,540     $ 1,031,620  

 
5

 
 
Allowance for Loan Losses

The allowance for loan losses is determined based on management’s estimate of losses incurred within the loan portfolio. We rely on historical loss rates in conjunction with our judgment of the current environment to determine the appropriate level for the allowance at the end of each reporting period. The loan portfolio is segmented into five loan types: commercial and industrial loans, commercial real estate loans; consumer loans; residential mortgages – first liens; and residential mortgage – junior liens. These segments are further segmented by credit quality classifications. For commercial and industrial loan and commercial real estate loans, these segments are based on our loan grading system described previously in Note 1 of our annual report dated December 31, 2010. For consumer and residential mortgage loans, loans are segmented based on delinquency and nonaccrual categories. All loan segments also contain a separate category for restructured loans, if they exist.

Commercial and industrial and commercial real estate loans graded as pass or watch, are assigned a unique pooled loss rate based on historical losses incurred over the prior three years. The losses are weighted for each year, with the most recent 12 month period receiving a higher weight and the oldest 12 month period receiving a lower weight in the calculation of the historical loss. We then adjust the calculated historical loss rate up or down based on current environmental factors. These adjustments include items such as current unemployment rates, changes in the value of underlying collateral, and other observable items that indicate trends in asset quality. The current outstanding balance for each of these grades is then multiplied by the adjusted historical loss factor to determine the amount of allowance for loan losses to reserve on that pool of loans.

Loans graded special mention or substandard use a shorter 12 month loss history to determine the loss rate. Losses over the preceding 12 month period are divided by the average balance outstanding of substandard and impaired loans to determine a historical loss rate. That calculated historical loss rate is multiplied by a migration rate (rate at which special mention loan move to a more severe risk category) to determine the loss rate for special mention loans. The calculated historical loss rate, without adjustment for migration, is used for substandard loans.

Loans graded as impaired or restructured are reviewed individually for reserves. A specific reserve is established within the allowance for the difference between the carrying value of the loan and its calculated value. To determine the value of the loan, the present value of expected cash flows, the collateral value, or some combination of the two is used. The specific reserve is established as the difference between the carrying value of the loan and the calculated value.

For consumer and residential loan segments, loans that are current, or less than 60 days past due are each assigned a historical loss factor as described above for commercial pass and watch loans. For loans that are more than 60 days or more past due, a loss factor is determined based on charge offs within the last 12 months, divided by the sum of the average balance of loans 60 days or more past due and nonaccrual loans. These loss factors are multiplied by the outstanding balances in each segment at the end of the reporting period to determine the amount of allowance for loan loss.

After each of the steps outlined above is completed, the results are aggregated and compared with the existing balance of the allowance for loan losses. If the resulting calculation is greater than the balance, the allowance for loan losses is increased through a charge to earnings on the provision for loan losses line. If the resulting balance is below the current balance of the allowance for loan losses, a reversal of the provision for loan losses is recorded.

Activity in the allowance for loan losses was as follows:
 
(In Thousands of Dollars)
 
For the three months ended March 31,
 
2011
   
2010
 
Beginning balance
  $ 21,431     $ 19,114  
Provision for loan losses
    3,011       2,491  
Loans charged off
    (3,288 )     (1,808 )
Recoveries
    193       324  
Ending balance
  $ 21,347     $ 20,121  

 
6

 
 
As of March 31, key measurements of the allowance for loan losses were as follows:

(In Thousands of Dollars)
 
2011
   
2010
 
Average total loans* outstanding during the period
  $ 1,025,310     $ 1,108,023  
Allowance for loan loss as a percent of total loans*
    2.10 %     1.83 %
Allowance for loan loss as a percent
   of nonperforming loans
    58 %     57 %
Net Charge-offs^ as a percent of average loans*
    1.21 %     0.54 %

*All loan ratios exclude loans held for sale                ^ Annualized

Analysis of the allowance for loan losses for the current and prior year to date periods is as follows:

(In Thousands of Dollars)
                             
2011
 
Beginning
Balance
   
Charged
off
   
 
Recoveries
   
 
Provision
   
Ending
Balance
 
Commercial & Industrial
                             
  Pass loans
  $ 1,392                   (36 )   $ 1,356  
  Watch loans
    194                   43       237  
  Special mention loans
    240                   33       273  
  Substandard loans
    386                   197       583  
  Impaired loans
    661       (645 )     112       102       230  
  Doubtful loans
    115       (115 )             0       0  
  Restructured loans
    36    
 
   
 
      47       83  
Total Commercial & Industrial
    3,024       (760 )     112       386       2,762  
                                         
Commercial Real Estate
                                       
  Pass loans
    4,210                       8       4,218  
  Watch loans
    700                       23       723  
  Special mention loans
    1,339                       230       1,569  
  Substandard loans
    1,439                       334       1,773  
  Impaired loans
    3,900       (1,427 )     4       1,129       3,606  
  Doubtful loans
    188       (128 )     0       37       97  
  Restructured loans
    599    
 
   
 
      52       651  
Total Commercial Real Estate
    12,375       ( 1,555 )     4       1,813       12,637  
                                         
First lien residential mortgage loans
                                       
  Performing loans
    1,737                       201       1,938  
  Loans > 60 days past due
    631                       (436 )     195  
  Nonaccrual loans
    1,523       (461 )     4       572       1,638  
  Restructured loans
    69    
 
   
 
      182       251  
Total First lien residential mortgage loans
    3,960       ( 461 )     4       519       4,022  
                                         
Junior lien residential mortgage loans
                                       
  Performing loans
    563                       (48 )     515  
  Loans > 60 days past due
    44                       (11 )     33  
  Nonaccrual loans
    167       (331 )     0       164       0  
Total Junior lien residential mortgage loans
    774       (331 )     0       105       548  
                                         
Consumer Loans
                                       
  Performing loans
    902                       14       916  
  Loans > 60 days past due
    159                       (105 )     54  
  Nonaccrual loans
    101       (181 )     73       115       108  
Total Consumer Loans
    1,162       (181 )     73       24       1,078  
                                         
Unallocated Allowance
    136       0       0       164       300  
                                         
Total
  $ 21,431     $ (3,288 )   $ 193     $ 3,011     $ 21,347  
 
 
7

 
 
(In Thousands of Dollars)
                                       
 
2010
 
Beginning
Balance
   
Charged
off
   
 
Recoveries
   
 
Provision
   
Ending
Balance
 
Commercial & Industrial
                                       
  Pass loans
  $ 1,920                       (378 )   $ 1,542  
  Watch loans
    309                       (71 )     238  
  Special mention loans
    662                       (261 )     401  
  Substandard loans
    590                       947       1,537  
  Impaired loans
    159       (754 )     92       1,018       515  
  Doubtful loans
    0                       0       0  
  Restructured loans
    0    
 
   
 
      0       0  
Total Commercial & Industrial
    3,640       (754 )     92       1,255       4,233  
                                         
Commercial Real Estate
                                       
  Pass loans
    4,067                       (310 )     3,757  
  Watch loans
    708                       16       724  
  Special mention loans
    910                       30       940  
  Substandard loans
    1,519                       (38 )     1,481  
  Impaired loans
    3,269       (56 )     1       1,197       4,411  
  Doubtful loans
    0                       0       0  
  Restructured loans
    0    
 
   
 
      0       0  
Total Commercial Real Estate
    10,473       (56 )     1       895       11,313  
                                         
First lien residential mortgage loans
                                       
  Performing loans
    1,392                       (7 )     1,385  
  Loans > 60 days past due
    648                       (505 )     143  
  Nonaccrual loans
    462       (571 )     93       590       574  
  Restructured loans
    0    
 
   
 
      0       0  
Total First lien residential mortgage loans
    2,502       (571 )     93       78       2,102  
                                         
Junior lien residential mortgage loans
                                       
  Performing loans
    558                       53       611  
  Loans > 60 days past due
    242                       (161 )     81  
  Nonaccrual loans
    167       (86 )     0       (45 )     36  
Total Junior lien residential mortgage loans
    967       (86 )     0       (153 )     728  
                                         
Consumer Loans
                                       
  Performing loans
    1,178                       (50 )     1,128  
  Loans > 60 days past due
    179                       (120 )     59  
  Nonaccrual loans
    168       (341 )     138       228       193  
Total Consumer Loans
    1,525       (341 )     138       58       1,380  
                                         
Unallocated Allowance
    7       0       0       358       365  
                                         
Total
  $ 19,114     $ (1,808 )   $ 324     $ 2,491     $ 20,121  

 
8

 
 
Age Analysis of Past Due Loans

(In thousands of dollars)
                                   
 
 
At March 31, 2011
 
 
 
Current
   
 
30-59 Days
Past Due
   
 
60-89 Days
Past Due
   
90 Days
or More
Past Due
   
 
Total
Past Due
   
Total
Accruing
Loans
 
Commercial and Industrial
  $ 153,110     $ 2,983     $ 88     $ 16     $ 3,087     $ 156,197  
Commercial Real Estate
    354,446       3,560       1,484       160       5,204       359,650  
Residential Mortgages 1st Liens
    340,525       2,439       266       291       2,996       343,521  
Residential Mortgages Junior Liens
    73,285       137       65       35       237       73,522  
Consumer
    57,298       553       66       42       661       57,959  
  Total
  $ 978,664     $ 9,672     $ 1,969     $ 544     $ 12,185     $ 990,849  
 
At December 31, 2010
                                               
Commercial and Industrial
  $ 159,532     $ 916     $ 400     $ 0     $ 1,316     $ 160,848  
Commercial Real Estate
    352,615       3,514       981       18       4,513       357,128  
Residential Mortgages 1st Liens
    349,086       1,025       1,529       573       3,127       352,213  
Residential Mortgages Junior Liens
    74,934       628       148       0       776       75,710  
Consumer
    58,368       703       273       15       991       59,359  
  Total
  $ 994,535     $ 6,786     $ 3,331     $ 606     $ 10,723     $ 1,005,258  

Impaired loans were as follows:
(In Thousands of Dollars)
 
March 31, 2011
   
December 31, 2010
 
Period end loans with no allocated allowance for loan losses
           
   Commercial and Industrial
  $ 252     $ 833  
   Commercial Real Estate
    12,014       7,713  
   Residential Mortgages 1st Liens
    9,129       8,789  
   Residential Mortgages Junior Liens
    0       556  
   Consumer
    197       184  
     Total
  $ 21,592     $ 18,075  
                 
Period end loans with allocated allowance for loan losses
               
   Commercial and Industrial
  $ 791     $ 2,768  
   Commercial Real Estate
    14,011       14,923  
   Residential Mortgages 1st Liens
    0       652  
   Residential Mortgages Junior Liens
    0       0  
   Consumer
    0       0  
     Total
  $ 14,802     $ 18,343  
                 
Amount of the allowance for loan losses allocated
  $ 4,667     $ 5,529  
                 
Average of impaired loans during the period
               
   Commercial and Industrial
  $ 2,272     $ 5,051  
   Commercial Real Estate
    22,662       21,341  
   Residential Mortgages 1st Liens
    9,820       6,218  
   Residential Mortgages Junior Liens
    286       312  
   Consumer
    161       256  
     Total
  $ 35,201     $ 33,178  
                 
   
March 31, 2011
   
March 31, 2010
 
Interest income recognized during impairment
  $ 145     $ 77  
Cash-basis interest income recognized
  $ 21     $ 54  
 
 
9

 
 
Nonperforming Loans were as follows:
(In Thousands of Dollars)
 
March 31, 2011
   
December 31, 2010
 
             
Nonaccrual loans at period end
           
  Commercial and Industrial
  $ 961     $ 3,565  
  Commercial Real Estate
    18,766       16,868  
  Residential Mortgages 1st Liens
    4,767       5,189  
  Residential Mortgages Junior Liens
    0       556  
  Consumer
    197       184  
Total nonaccrual loans
  $ 24,691     $ 26,362  
                 
Restructured and accruing loans
               
  Commercial and Industrial
  $ 82     $ 36  
  Commercial Real Estate
    7,259       5,768  
  Residential Mortgages 1st Liens
    4,472       4,252  
Total restructured loans
  $ 11,813     $ 10,056  
                 
Loans past due over 90 days still on accrual at period end
               
  Commercial and Industrial
  $ 16     $ 0  
  Commercial Real Estate
    160       18  
  Residential Mortgages 1st Liens
    291       573  
  Residential Mortgages Junior Liens
    35       0  
  Consumer
    42       15  
Total loans past due 90 days and on accrual at period end
  $ 544     $ 606  
                 
Total nonperforming loans
  $ 35,848     $ 37,024  


NOTE 3 – FAIR VALUE

Carrying amount and estimated fair values of financial instruments were as follows:

    (In Thousands of Dollars)  
    March 31, 2011     December 31, 2010  
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Financial Assets:
                       
     Cash and cash equivalents
  $ 97,781     $ 97,781     $ 73,538     $ 73,538  
     FDIC insured bank certificates of deposit
    5,674       5,674       10,405       10,405  
     Trading account securities
    19       19       13       13  
     Securities available for sale
    276,022       276,022       255,703       255,703  
     Federal Home Loan Bank stock
    8,203       8,203       8,203       8,203  
     Loans held for sale
    27       27       1,355       1,355  
     Loans, net
    994,193       970,387       1,010,189       987,800  
     Accrued interest receivable
    5,175       5,175       4,689       4,689  
Financial Liabilities:
                               
     Deposits
    (1,217,719 )     (1,206,163 )     (1,183,783 )     (1,173,030 )
     Securities sold under agreements
     to repurchase and overnight
                               
     borrowings
    (42,623 )     (42,623 )     (41,328 )     (41,328 )
     Federal Home Loan Bank advances
    (25,628 )     (27,522 )     (40,658 )     (42,684 )
     Accrued interest payable
    (1,467 )     (1,467 )     (1,467 )     (1,467 )
     Subordinated debentures
    (36,084 )     (36,933 )     (36,084 )     (37,051 )

The methods and assumptions used to estimate fair value are described as follows: The carrying amount is the estimated fair value for cash and cash equivalents, short term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short term debt, and variable rate loans or deposits that re-price frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans and variable rate loans, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk based on historical losses on similar loan pools. For deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life of the product.
 
 
10

 

Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values for the specific loans in the portfolio and assumes the bank will resolve them through orderly liquidation. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements. The fair value of off-balance sheet items was not material to the consolidated financial statements at March 31, 2011 and December 31, 2010.

The following table presents information about our investment portfolio, showing the gross unrealized gains and losses within each segment of the portfolio. Unrealized gains and losses are included in other comprehensive income. Unrealized losses have been analyzed and determined to be temporary in nature. The unrealized losses are related to changes in the interest rate environment compared with rates at the time the securities were purchased.

 
(Dollars in Thousands)
 
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Market
Value
 
March 31, 2011
                       
Securities available for sale
                       
Treasury Notes
  $ 6,003     $ 6     $ 0     $ 6,009  
U.S.Government Agency Bonds
    107,014       508       (253 )     107,269  
U.S. Government Agency CMOs
    107.899       638       (318 )     108,219  
Municipal Securities
    52,778       335       (283 )     52,830  
Other Securities
    1,637       65       (7 )     1,695  
  Total Securities available for sale
  $ 275,331     $ 1,552     $ (861 )   $ 276,022  
                                 
December 31, 2010
                               
Securities available for sale
                               
Treasury Notes
  $ 12,513     $ 17     $ 0     $ 12,530  
U.S.Government Agency Bonds
    82,395       632       (130 )     82,897  
U.S. Government Agency CMOs
    110.645       591       (694 )     110,542  
Municipal Securities
    48,278       255       (446 )     48,087  
Other Securities
    1,650       0       (3 )     1,647  
  Total Securities available for sale
  $ 255,481     $ 1,495     $ (1,273 )   $ 255,703  


The following table’s present information about our assets measured at fair value on a recurring basis at March 31, 2011, and valuation techniques used by us to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that we have the ability to access. Securities for Level 1 include, Treasury Notes, Government Sponsored Agency Bonds, and Corporate Notes.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 2 securities consist of Government Sponsored Agency Backed Collateralized Mortgage Obligation and Municipal Securities.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. Level 3 Securities include local Municipal Securities where market pricing is not available, trust preferred securities issued by banks, and other miscellaneous investments.
 
 
11

 

Assets Measured at Fair Value on a Recurring Basis

 
 
 
 
 
(Dollars in Thousands)
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
 
Significant
Unobservable
Inputs
(Level 3)
   
 
 
 
 
Total
 
March 31, 2011
                       
Securities available for sale
                       
Treasury Notes
  $ 6,009       0       0     $ 6,009  
U.S.Govenment Agency Bonds
    107,269       0       0       107,269  
U.S. Government Agency CMOs
    0       108,219       0       108,219  
Municipal Securities
    0       43,114       9,716       52,830  
Other Securities
    99       0       1,596       1,695  
  Total Securities available for sale
  $ 113,377     $ 151,333     $ 11,312     $ 276,022  
                                 
Trading equity securities
  $ 19     $ 0     $ 0     $ 19  
                                 
December 31, 2010
                               
Securities available for sale
                               
Treasury Notes
  $ 12,530       0       0     $ 12,530  
U.S.Govenment Agency Bonds
    82,897       0       0       82,897  
U.S. Government Agency CMOs
    0       110,542       0       110,542  
Municipal Securities
    0       38,371       9,716       48,087  
Other Securities
    530       0       1,117       1,647  
  Total Securities available for sale
  $ 95,957     $ 148,913     $ 10,833     $ 255,703  
                                 
Trading equity securities
  $ 13     $ 0     $ 0     $ 13  

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis

(Dollars in Thousands)
 
2011
   
2010
 
Balance at beginning of year
  $ 10,833     $ 7,559  
  Total realized and unrealized gains/(losses) included in income
    0       0  
  Total unrealized gains/(losses) included in other comprehensive income
    (14 )     0  
  Purchases of securities
    0       99  
  Sales of securities
    0       0  
  Calls and maturities
    (7 )     0  
  Net transfers in/out of Level 3
    500       0  
Balance at March 31 of each year
  $ 11,312     $ 7,658  

The Level 3 assets that were held at March 31, 2011 are carried at historical cost unless a better fair value can be determined.

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets. As a result, the unrealized gains and losses for these assets presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

Available for sale investments securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities and other like assets. We carry local municipal securities at historical cost, which approximates fair value, unless economic conditions for the municipality changes to a degree requiring a valuation adjustment.

We also have assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets consist of impaired loans and other real estate owned. We have estimated the fair value of impaired loans using Level 3 inputs, specifically valuation of loans based on either a discounted cash flow projection, or a discount to the appraised value of the collateral underlying the loan. We use discounted appraised values or broker’s price opinions to determine the fair value other real estate owned.
 
 
12

 

Assets Measured at Fair Value on a Nonrecurring Basis

 
(Dollars in Thousands)
 
Balance at
March 31,
   
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total Losses
for the three
month period
ended
March 31,
 
2011
                             
Impaired loans
  $ 36,394       0       0     $ 36,394     $ (2,314 )
Other Real Estate Owned
  $ 7,922       0       0     $ 7,922     $ (358 )
                                         
2010
                                       
Impaired loans
  $ 33,940       0       0     $ 33,940     $ (615 )
Other Real Estate Owned
  $ 8,658       0       0     $ 8,658     $ (438 )

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. We estimate the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). Other Real Estate Owned is valued based on either a recent appraisal for the property or a brokers' price opinion of the value of the property, which are discounted for expected costs to dispose of the property. The $2,314,000 in losses indicated in the table above was charged to the allowance for loan losses, while the $358,000 was charged to earnings through other non-interest expense on the income statement.


NOTE 4 – BASIC AND DILUTED EARNINGS PER SHARE

 
(Dollars in Thousands Except per Share Data)
 
Three Months Ended
March 31,
 
   
2011
   
2010
 
Earnings per share
           
   Net income
  $ 1,215     $ 659  
Preferred dividends and accretion of discount
    420       420  
      Income available to common shareholders
  $ 795     $ 239  
   Weighted average common shares outstanding
    7,807,000       7,737,000  
                 
   Basic Earnings per Share
  $ 0.10     $ 0.03  
                 
Earnings per share assuming dilution
               
   Net income
  $ 1,215     $ 659  
Preferred dividends and accretion of discount
    420       420  
      Income available to common shareholders
  $ 795     $ 239  
   Weighted average common shares outstanding
    7,807,000       7,737,000  
   Add dilutive effect of assumed exercises of options
    3,000       1,000  
   Weighted average common and dilutive
               
      potential common shares outstanding
    7,810,000       7,738,000  
                 
   Diluted Earnings per Share
  $ 0.10     $ 0.03  

Stock options and stock warrants for 1,033,692 shares for the three month period of 2011, and stock options and warrants for 1,062,993 shares for the three month period of 2010, were not considered in computing diluted earnings per share because they were anti-dilutive.
 
 
13

 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The consolidated financial information presented is for Firstbank Corporation (“Corporation”) and its wholly owned subsidiaries; Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch (including its wholly owned subsidiaries: 1st Armored, Inc. (sold on March 31, 2010), 1st Title, Inc. and its 48% holdings in 1ST Investors Title, LLC), Firstbank - St. Johns, Keystone Community Bank, Firstbank – West Michigan (collectively the “Banks”), FBMI Risk Management Services, Inc., and Austin Mortgage Company.

Subequent Events

Subsequent to March 31, 2011, we have negotiated the sale of two non performing participation loans back to the lead bank. These two loan participations represent $2.2 million of the nonaccrual loans reported in Note 2 to the financial statements contained within this report. The agreement is pending execution as of the filing of this report. When the agreement is executed, which we expect to occur in the second quarter, we will accept a discount on the book value of these loans of approximately 30%. The transaction will cause us to record a charge off in the second quarter of approximately $700,000, which was fully reserved for at March 31 and therefore will not directly affect our second quarter loan loss provision expense. The information in Note 2 to the financial statements presented in this report does not reflect the impact of this pending agreement.

Financial Condition

The Michigan and national economies, have begun to show some signs of improvement over the past six months, but continued to operate below optimal levels during the first quarter. Michigan’s unemployment rate and has improved slowly from a seasonally adjusted rate of 14.1% in of the third quarter of 2009, to 10.3% in March of 2011. This stubbornly high unemployment continues to result in a higher than traditional level of problem loans. Real estate values continue to be depressed, also contributing to higher loan losses Nonperforming assets were $0.6 million lower compared with year end, as restructured loans which are in conformance with their new terms caused this category of nonperforming loans to be higher by $1.6 million, nonaccrual loans declined $1.7 million, and loans 90 days or more past due decreased $62,000. Other Real Estate Owned decreased $393,000. We believe nonperforming loans will continue to be elevated in the near term due to current economic conditions; however, we are constantly monitoring our loan portfolios for developing issues and reacting to them with swift actions to mitigate losses wherever possible.
 
 
During the first three months of 2011, total assets increased $21.2 million, or 1.5%, with cash and cash equivalents increasing $24.3 million, or 33.0% primarily driven by seasonal increases in deposits. Securities available for sale increased $20.3 million, or 7.9%, from year end 2010, due primarily to a reinvestment of cash balances held at the Federal Reserve into higher yielding investment securities and lack of loan demand. As a result of the soft loan demand, ending total portfolio loan balances decreased $16.1 million, or 1.6%, and quarterly average total loans were 1.7% lower in the first quarter of 2011 when compared with the fourth quarter of 2010.

Following is a comparison of loan balances for the quarter and prior year end.

 
     
(In Thousands of Dollars)
 
March 31,
2011
   
December 31,
 2010
 
Commercial
  $ 162,088     $ 164,413  
Mortgage Loans on Real Estate:
               
   Residential
    346,521       352,652  
   Commercial
    373,376       373,996  
   Construction
    75,399       81,016  
Consumer
    53,232       54,759  
Credit Card
    4,924       4,784  
    Subtotal
    1,015,540       1,031,620  
Less:
               
     Allowance for loan losses
    (21,347 )     (21,431 )
          Loans, net
  $ 994,193     $ 1,010,189  
 
 
14

 
 
Residential mortgages decreased $6.1 million, or 1.7%, from year end 2010 as pay downs on loans exceeded our ability to generate replacement balances. Real estate construction loans also decreased $5.6 million, or 6.9%, during the first three months of 2011. Commercial and commercial real estate loans were $2.9 million, or 0.5%, lower at March 31 when compared with year end 2010 as weak loan demand from qualified borrowers was unable to keep pace with principal pay downs.

Net charge-offs of loans were $3.1 million in the first quarter compared with $4.0 million in the fourth quarter of 2010 and $1.5 million in the first quarter of 2010. The ratio of net charge-offs of loans (annualized) to average loans was 1.21% in the first quarter of 2011 compared to 1.54% in the fourth quarter and 0.54% in the first quarter of 2010.

At March 31, 2011, the allowance as a percentage of average outstanding loans was 2.10% compared with 1.83% at the same point a year earlier and 2.08% at year end 2010. Non-performing loans as a percent of total loans was 3.64% at March 31, 2011, compared with 3.23% a year earlier, and 3.60% at year end 2010. Nonperforming loans decreased $0.2 million, primarily due to a lower level of nonaccrual loans compared with year end numbers, which was mostly offset by a higher level of restructured loans. Despite the current elevated levels of these measures, our overall asset quality compares favorably to many of our competitor banks in Michigan. We continue to be diligent in review of our loan portfolios for problem loans and believe that early detection of troubled credits is critical to our ability to maintain our allowance for loan losses at its current level. We maintain the allowance for loan losses at a level considered adequate to cover losses within the loan portfolio. The allowance balance is established after considering past loan loss experience, current economic conditions, composition of the loan portfolio, delinquencies, and other relevant factors.

Total deposits increased $33.9 million, or 2.9% when compared with year end 2010 balances. Within the deposit base, interest bearing demand account balances increased $14.3 million, or 4.9%, savings balances increased $25.9 million, or 12.3%, and time balances decreased $8.5 million, or 1.7%. Within time balances, wholesale CDs were $6.4 million higher than year end, while core market CDs were down $14.8 million. Given our current low levels of loan demand, time deposits are being allowed to mature without replacement, or being renewed at lower rates. Non-interest bearing demand account balances were $2.2 million, or 1.2% higher than year end.

For the three month period ended March 31, 2011, Federal Home Loan Bank advances and notes payable were down $15.0 million, or 37.0% from year end, primarily due to cash needs being sufficient to allow Federal Home Loan Bank advances to mature without replacement. Securities sold under agreements to repurchase and overnight borrowings were $1.3 million, or 3.1% higher due to normal fluctuations in customer cash flows.

Total shareholders’ equity increased $1.1 million from year end. Net income of $1,215,000 and common stock issuances of $70,000 increased shareholders’ equity, while common and preferred stock dividends of $490,000 decreased shareholders’ equity. Accumulated other comprehensive income increased $310,000 from year end. Common stock issuance was primarily related to shares issued through dividend reinvestment. The per share book value of shareholders’ common equity was $14.95 at March 31, 2011, increasing from $14.82 at December 31, 2010. Tangible shareholders common equity per share (total equity less goodwill and other intangible assets) was $10.15 at the end of the first quarter of 2011, increasing from $10.00 at year end 2010. Shareholders’ common equity per share calculations excludes preferred stock of $32.8 million.

The following table discloses compliance with current regulatory capital requirements on a consolidated basis:

(Dollars in Thousands)
 
Leverage
   
Tier 1
Capital
   
Total Risk-
Based Capital
 
                   
Capital Balances at March 31, 2011
  $ 147,631     $ 147,631     $ 160,212  
Required Regulatory Capital
    58,057       39,880       79,759  
Capital in Excess of Regulatory Minimums
    89,574       107,751       80,453  
                         
                         
Capital Ratios at March 31, 2011
    10.17 %     14.81 %     16.07 %
Regulatory Capital Ratios – Minimum Requirement
    4.00 %     4.00 %     8.00 %
 
 
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Our capital remains above regulatory guidelines for the first quarter of 2011. At the end of the first quarter our total risk based capital ratio was 16.07% compared with 15.94% at year end 2010. Tier 1 capital and tier 1 leverage ratios were 14.81% and 10.17% compared with 14.68% and 10.02% at year end 2010. The improvement in the risk based ratios was primarily driven by lower risk weighted assets compared with year end and higher levels of capital in the company. The change in the leverage ratio was mainly due to a higher level of retained capital and a lower level of average assets for the quarter. As of March 31, all of our affiliate banks continue to exceed the “Well Capitalized” regulatory definition.
 
Results of Operations
Three Months Ended March 31, 2011

For the first quarter of 2011, net income was $1,215,000, basic and diluted earnings per share were $0.10, compared with net income of $659,000, and $0.03 basic and diluted per share for the first quarter of 2010, and net income of $843,000, $0.05 basic and diluted earnings per share, for the fourth quarter of 2010. Net income available to shareholders was $795,000 in the current quarter compared with $239,000 in the first quarter of 2010 and $424,000 in the fourth quarter of 2010. This year’s first quarter was once again, heavily impacted by a $3.0 million charge to loan loss provision, as well as $580,000 in expense relating to other real estate owned. The charge to loan loss provision was necessary as we continue to work though loans for which the borrowers have exhausted their sources of repayment, or the value of the supporting collateral declined. These loans were either transferred into nonaccrual status and specific reserves established, or charged down to the estimated value of the collateral that can be recovered on the loan.

Average earning assets decreased $0.3 million, when the first quarter of 2011 is compared to the same quarter a year ago. While the change in the level of earning assets from a year ago was small, a decrease in net loan balances of $83 million and a $12 million decrease in short term investments was offset by a $103 million increase in available for sale securities. Compared with the previous quarter, average earning assets decreased $12 million, or 0.9%. The yield on earning assets decreased 34 basis points, to 5.17%, for the quarter ended March 31, 2011, compared to 5.51% for the same quarter a year ago, and was 11 basis points lower when compared with the fourth quarter of 2010. The cost of funding related liabilities also decreased, falling 62 basis points when comparing this year’s first quarter to the same period a year ago, from 1.74% in 2010, to 1.12% in 2011. Compared with the prior quarter, the cost of funding related liabilities fell by 17 basis points. Since the decrease in the cost of funds relative to earning assets was greater than the decrease in the yield on earning assets, the net interest margin increased 28 basis points from last year’s first quarter to 4.05% in the current quarter. The net interest margin increased six basis points when compared to the previous quarter. Net interest income increased $968,000 to $13.3 million in the first quarter of 2011 compared with the same period of 2010, as the increase in net interest margin resulted in higher net interest income. Unpaid interest on loans which are transferred to nonaccrual status is reversed against interest income in the period when the transfer occurs. During the first quarter of 2011, interest reversals associated with loans moving to nonaccrual status were $99,000 compared with $136,000 in the same quarter a year ago and $210,000 in the fourth quarter of 2010.

The provision for loan losses increased $520,000 when the first quarter of 2011 is compared to the same quarter of 2010. Provision for loan losses was $3.0 million in this year’s first quarter compared with $2.5 million in the first quarter of 2010. Compared with the fourth quarter of last year, the provision for loan losses was $1.7 million lower. In the first quarter of the year we charged down $2.3 million of commercial loans, for which we had specific reserves set aside of $1.6 million in the previous year. We also identified loans where the value of the underlying collateral of the loan continued to decline. After a detailed review of these loans, it was determined that some of these loans should be moved to nonaccrual status, while others should be charged off. Following that review, our analysis showed that we needed to provide slightly less for loan losses than our charge offs to cover losses inherent in the portfolio. We perform quantitative and qualitative analysis of factors which impact the allowance for loan losses consistently across our six banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment growth rates, and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries most affected by current risks in the economic and political environment and the review of risks in certain credits that are not considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank.
 
 
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Total non-interest income was $2.0 million in the first quarter of 2011, compared with $2.3 million in the first quarter of 2010 and $3.9 million in the fourth quarter of 2010. Compared with 2010’s first quarter, gains on sale of mortgages were $198,000, or 53.5% higher, primarily due to an increase in mortgage refinancing resulting from the current interest rate environment. Also effecting non interest income was lower other income, which was down $234,000 compared with last year’s first quarter, mainly due to the sale of our armored car business.

Total non-interest expense decreased $665,000, or 5.8%, when comparing the three month periods ended March 31, 2011 and 2010 and was primarily due to lower expenses from the sale of our armored car business. Our non-interest expenses were $150,000 lower due to the sale of 1st Armored. Compared with the fourth quarter of last year, non-interest expense was $853,000, or 7.3% lower, mainly due to lower OREO expenses which were down $851,000.

Federal Income tax expense was $349,000 in the first quarter of 2011, compared with $11,000 in the first quarter last year and of $142,000 in the fourth quarter of 2010. The increase was primarily driven by higher pre-tax earnings.

Liquidity

At March 31, 2011, we have adequate sources of liquidity to meet our needs. Cash and cash equivalent balances were at $98 million, an increase of $24.2 million, or 33%, compared with year end 2010. This increase was primarily the result of a reduction in our loan portfolio and core deposit growth of $16 million and $28 million, respectively. Offsetting these items was an increase in our available for sale investment portfolio of $16 million  and repayment of $15.0 million of Federal Home Loan Bank advances. Our securities available for sale portfolio now stands at $282 million, providing a source of liquidity should it be necessary.

Our banks maintain access to immediately available funds through federal funds lines at three correspondent banks, the Federal Home Loan Bank of Indianapolis, and the Federal Reserve’s discount window with aggregate available limits of $46 million, $107 million, and $62 million, respectively. Our banks also have access to funds through brokered CD markets.

Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements

The Corporation has various financial obligations, including contractual obligations and commitments that may require future cash payments. Management believes that there have been no material changes in the Corporation’s overall level of these financial obligations since December 31, 2010 and that any changes in the Corporation’s obligations which have occurred are routine for the industry. Further discussion of the nature of each type of obligation is included in Managements Discussion and Analysis on page 14 and 15 of the Corporation’s Form 10K Annual Report, and is incorporated herein by reference.

Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain.  Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances.  Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights and other intangibles, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Management’s Discussion and Analysis on pages 15 through 17 in the Corporation’s annual report to shareholders for the year ended December 31, 2010.
 
 
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FORWARD LOOKING STATEMENTS

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 in this report are inherently forward-looking statements in that they involve judgments and statements of belief as to the outcome of future events.  These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence.  Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements.  Internal and external factors that may cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior and customer ability to repay loans; software failure, errors or miscalculations; and the vicissitudes of the national economy.  The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Information under the headings, “Liquidity and Interest Rate Sensitivity” on pages 13 through 15 and “Quantitative and Qualitative Disclosure About Market Risk” on page 18 in the registrant’s annual report to shareholders for the year ended December 31, 2010, is here incorporated by reference.  Firstbank’s annual report is filed as Exhibit 13 to its Form 10-K annual report for its fiscal year ended December 31, 2010.  Also referenced here is information under the heading “Item 1A. Risk Factors” on pages 15 through 18 in the registrant’s Form 10-K annual report for its fiscal year ended December 31, 2010.

We face market risk to the extent that both earnings and the fair values of our financial instruments are affected by changes in volatility, market perceptions of credit risk and interest rates. We manage this risk with static GAP analysis and simulation modeling. We do not believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss to the Corporation. As of the date of this Form 10-Q quarterly report, we do not know of nor expect there to be any material change in the general nature of our primary market risk exposure in the near term.

The methods by which we manage our primary market risk exposures, as described in the sections of our Form 10-K Annual Report incorporated by reference in response to this item, have not changed materially during the current year. As of the date of this Form 10-Q quarterly report, we do not expect to change those methods in the near term. However, we may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

Our market risk exposure is mainly comprised of our vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships in the future will be primarily determined by market, economic, and geopolitical factors which are outside of our control. All information provided in response to this item consists of forward looking statements. Reference is made to the section captioned “Forward Looking Statements” of this Form 10-Q quarterly report for a discussion of the limitations on our responsibility for such statements.
 
 
18

 
 
Item 4.  Controls and Procedures
 
a)
Evaluation of Disclosure Controls and Procedures
 
On May 5, 2011, the Corporation’s Chief Executive Officer and Chief Financial Officer reported on the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) to the Audit Committee.  The portion of that report which constitutes their conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of March 31, 2011 is as follows:  “Based on our knowledge and the most recent evaluation, we believe the disclosure controls and procedures to be reasonably effective and commercially practical in providing information for management of the Corporation and for fair reporting to the investing public.”

b)
Changes in Internal Controls
 
During the period covered by this report, there have been no changes in the 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 II.  OTHER INFORMATION

 
Item 5.  Other Information

The audit committee of the Board of Directors approved the categories of all non-audit services performed by the registrant’s independent accountants during the period covered by this report.


Item 6.  Exhibits
 
 
Exhibit
Description
 
 
31.1
Certificate of the President and Chief Executive Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
31.2
Certificate of the Executive Vice President and Chief Financial Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
32.1
Certificate of the Chief Executive Officer and the Chief Financial Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
 
19

 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
    FIRSTBANK CORPORATION
(Registrant)
     
     
Date: May 5, 201
 
 
 
 
 
 
 
/s/ Thomas R. Sullivan                                                          
Thomas R. Sullivan
President, Chief Executive Officer
(Principal Executive Officer)
 
Date: May 5, 2011   /s/ Samuel G. Stone                                                                
Samuel G. Stone
Executive Vice President, Chief Financial Officer
(Principal Accounting Officer)
 
 
20

 
 
EXHIBIT INDEX
 
Exhibit
Description
 
31.1
Certificate of the President and Chief Executive Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2
Certificate of the Executive Vice President and Chief Financial Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1
Certificate of the Chief Executive Officer and the Chief Financial Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.