Firstbank (FBMI) 10-Q 2011 Q3 Quarterly report

 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 September 30, 2011

o 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 o

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 x   No o

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 o   Accelerated filer o   Non-accelerated filer ­­­o   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 o   No x

Common stock outstanding at October 31, 2011: 7,866,636 shares.

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (UNAUDITED)	Page   3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	Page  21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	Page  26
Item 4.	Controls and Procedures	Page  27
PART II.	OTHER INFORMATION
Item 5.	Other Information	Page  27
Item 6.	Exhibits	Page  27
SIGNATURES		Page  28

2

FIRSTBANK CORPORATION

              CONSOLIDATED BALANCE SHEETS

           AS OF SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

(Dollars in thousands)

UNAUDITED  

	September 30,		December 31,
	2011		2010
ASSETS
Cash and due from banks	$	24,086	$	25,322
Short term investments		77,477		48,216
Total Cash and cash equivalents		101,563		73,538
FDIC insured bank time certificates of deposit		3,196		10,405
Trading account securities		20		13
Securities available for sale		320,029		255,703
Federal Home Loan Bank stock		7,266		8,203
Loans held for sale		2,207		1,355
Loans, net of allowance for loan losses of $21,383 at September 30, 2011 and $21,431 at December 31, 2010		967,670		1,010,189
Premises and equipment, net		25,454		25,431
Goodwill		35,513		35,513
Core deposit and other intangibles		1,607		2,145
Other real estate owned		7,367		8,316
Accrued interest receivable and other assets		25,054		27,532
TOTAL ASSETS	$	1,496,946	$	1,458,343
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing accounts	$	204,604	$	185,191
Interest bearing accounts:
Demand		331,007		293,900
Savings		243,724		210,239
Time		460,834		494,453
Total Deposits		1,240,169		1,183,783
Securities sold under agreements to repurchase and overnight borrowings		42,839		41,328
Federal Home Loan Bank advances		16,517		40,658
Subordinated Debentures		36,084		36,084
Accrued interest and other liabilities		7,754		8,062
Total Liabilities		1,343,363		1,309,915
SHAREHOLDERS’ EQUITY
Preferred stock; no par value, 300,000 shares authorized, 33,000 issued		32,785		32,763
Common stock; 20,000,000 shares authorized, 7,853,295 shares issued and outstanding (7,803,816 at December 31, 2010)		115,663		115,224
Retained earnings		2,296		295
Accumulated other comprehensive income		2,839		146
Total Shareholders’ Equity		153,583		148,428
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,496,946	$	1,458,343

See notes to consolidated financial statements.

3

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

SEPTEMBER 30, 2011 AND 2010

(Dollars in thousands except per share data)

UNAUDITED

	hree Months Ended September 30,
	2011		2010
Interest Income:
Interest and fees on loans	$	15,290	$	16,869
Securities
Taxable		1,309		1,032
Exempt from Federal Income Tax		271		268
Short term investments		54		52
Total Interest Income		16,924		18,221
Interest Expense:
Deposits		2,691		3,871
FHLB advances and other borrowing		193		871
Subordinated Debt		259		383
Total Interest Expense		3,143		5,125
Net Interest Income		13,781		13,096
Provision for loan losses		3,459		3,066
Net Interest Income after provision for loan losses		10,322		10,030
Non-interest Income:
Service charges on deposit accounts		1,123		1,144
Gain on sale of mortgage loans		1,040		2,054
Mortgage servicing, net of amortization		17		(98	)
Gain/(loss) on trading account securities		0		(10	)
Gain/(loss) on securities		9		1
Other		404		192
Total Non-interest Income		2,593		3,283
Non-interest Expense:
Salaries and employee benefits		5,480		5,186
Occupancy and equipment		1,346		1,361
FDIC insurance premium		162		525
Amortization of intangibles		168		191
Outside professional services		280		293
Advertising and promotions		316		491
Other real estate owned costs		754		771
Other		2,239		2,123
Total Non-interest Expense		10,745		10,941
Income before federal income taxes		2,170		2,372
Federal income taxes		540		1,048
NET INCOME		1,630	$	1,324
Preferred stock dividends and accretion of discount on preferred stock		420		420
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	1,210	$	904
COMPREHENSIVE INCOME
Net Income	$	1,630	$	1,324
Change in unrealized gain on securities, net of tax and reclassification effects		683		469
TOTAL COMPREHENSIVE INCOME	$	2,313	$	1,793
Basic Earnings Per Share	$	0.15	$	0.12
Diluted Earnings Per Share	$	0.15	$	0.12
Dividends Per Share	$	0.01	$	0.01

See notes to consolidated financial statements.

4

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

SEPTEMBER 30, 2011 AND 2010

(Dollars in thousands except per share data)

UNAUDITED

	NineMonths Ended September 30,
	2011			2010
Interest Income:
Interest and fees on loans	$	46,507		$	50,883
Securities
Taxable		3,639			2,658
Exempt from Federal Income Tax		844			849
Short term investments		138			155
Total Interest Income		51,128			54,545
Interest Expense:
Deposits		8,685			12,347
FHLB advances and other borrowing		701			2,990
Subordinated Debt		928			1,120
Total Interest Expense		10,314			16,457
Net Interest Income		40,814			38,088
Provision for loan losses		10,726			8,623
Net Interest Income after provision for loan losses		30,088			29,465
Non-interest Income:
Service charges on deposit accounts		3,397			3,421
Gain on sale of mortgage loans		2,021			3,150
Mortgage servicing, net of amortization		121			91
Gain/(loss) on trading account securities		8			13
Gain/(loss) on securities		(1	)		10
Other		1,103			1,227
Total Non-interest Income		6,649			7,912
Non-interest Expense:
Salaries and employee benefits		15,920			15,895
Occupancy and equipment		4,054			4,220
FDIC insurance premium		1,204			1,555
Amortization of intangibles		538			611
Outside professional services		860			802
Advertising and promotions		961			1,119
Other real estate owned costs		2,132			2,081
Other		6,648			6,804
Total Non-interest Expense		32,317			33,087
Income before federal income taxes		4,420			4,290
Federal income taxes		947			1,370
NET INCOME	$	3,473		$	2,920
Preferred stock dividends and accretion of discount on preferred stock		1,260			1,260
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	2,213		$	1,660
COMPREHENSIVE INCOME
Net Income	$	3,473		$	2,920
Change in unrealized gain on securities, net of tax and reclassification effects		2,693			1,186
TOTAL COMPREHENSIVE INCOME	$	6,166		$	4,106
Basic Earnings Per Share	$	0.28		$	0.22
Diluted Earnings Per Share	$	0.28		$	0.22
Dividends Per Share	$	0.03		$	0.07

See notes to consolidated financial statements

5

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

                FOR THE NINE MONTHS ENDED

               SEPTEMBER 30, 2011 AND 2010

                (Dollars in thousands)

                UNAUDITED

	Nine months ended September 30,
	2011			2010
OPERATING ACTIVITIES
Net income	$	3,473		$	2,920
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		10,726			8,623
Depreciation of premises and equipment		1,572			1,723
Net amortization of security premiums/discounts		2,729			1,351
Loss/(Gain) on trading account securities		(8	)		(13	)
Loss/(Gain) on securities transactions		1			(10	)
Amortization and impairment of  intangibles		538			611
Stock option and stock grant compensation expense		100			82
Gain on sale of mortgage loans		(2,021	)		(3,150	)
Proceeds from sales of mortgage loans		61,580			100,270
Loans originated for sale		(60,411	)		(98,474	)
Deferred federal income tax expense/(benefit)		354			1,337
(Increase)/decrease in accrued interest receivable and other assets		2,314			4,318
Increase/(decrease) in accrued interest payable and other liabilities		(308	)		(2,484	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		20,639			17,104
INVESTING ACTIVITIES
Proceeds from sale of securities available for sale		289			7,425
Proceeds from sale of FHLB stock		937			0
Proceeds from maturities and calls of securities available for sale		102,540			87,403
Purchases of securities available for sale		(158,594	)		(177,572	)
Proceeds from sale of fixed assets		137			1,033
Net (increase)/decrease in portfolio loans		26,681			55,166
Proceeds from sale of other real estate owned		4,483			4,909
Net purchases of premises and equipment		(1,732	)		(2,165	)
NET CASH USED IN INVESTING ACTIVITIES		(25,259	)		(23,801	)
FINANCING ACTIVITIES
Net increase/(decrease) in deposits		56,386			23,188
Increase/(decrease) in securities sold under agreements to repurchase and other short term borrowings		1,511			208
Repayment of Federal Home Loan Bank borrowings		(24,141	)		(37,163	)
Proceeds from Federal Home Loan Bank borrowings		0			9,000
Cash proceeds from issuance of common stock, net		361			326
Cash dividends-preferred stock		(1,238	)		(1,238	)
Cash dividends-common stock		(234	)		(541	)
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES		32,645			(6,220	)
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		28,025			(12,917	)
Cash and cash equivalents at beginning of period		73,538			107,365
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	101,563		$	94,448
Supplemental Disclosure
Interest Paid	$	10,523		$	16,770
Income Taxes Paid	$	975		$	855
Non cash transfers of loans to Other Real Estate Owned	$	5,112		$	8,137

See notes to consolidated financial statements.

6

FIRSTBANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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, 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, in 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 and nine month periods ended September 30, 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.

Newly Adopted 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 have included the required disclosures in footnonte 2 to these financial statements.

Effect of Newly Issued but not yet Effective Accounting Standards

In April 2011, the FASB issued an Update related to Transfers and Servicing (Topic 860). The Update changes the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The Update also eliminates the requirement to demonstrate that the transferor possess adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The Update is effective in the first quarter of 2012.  We are currently evaluating the impact the Update will have on our financial statements.

In May 2011, the FASB issued an Update related to fair value measurements (Topic 820) and disclosure requirements. The Update results in common fair value measurement and disclosures in US GAAP and IFRS by changing the wording used to describe many of the fair value measurement requirements in US GAAP or to clarify the FASB’s intent about the application of existing fair value measurement requirements. The amendments will be adopted beginning in the first quarter of 2012 and applied to our financial statements prospectively.

7

In June 2011, the FASB issued an Update on the Presentation of Comprehensive Income (Topic 220).  The Update changes the reporting and presentation of comprehensive income on the face of the financial statements and provides two options of presentation- a single statement including net income and the components of other comprehensive income or two separate statements. The Update eliminates the option of presenting the components of other comprehensive income in the statement of changes in stockholders’ equity and requires reclassification adjustments to be reported on the face of the financial statements, rather than in the footnotes. The amendments in this Update will be adopted beginning in the first quarter of 2012 and will be applied to our financial statements retrospectively.

In September 2011, the FASB issued an Update on Intangibles – Goodwill and Other (Topic 350). The Update makes changes to the requirements for when a company must test its goodwill for impairment. Under the new guidelines, a company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. If after assessing the totality of these events and circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two step impairment test is unnecessary. If however an entity concludes otherwise, it is required to perform the first step of the two step impairment test. If the entity fails to pass the first step, it must then proceed to step two of the process. This amendment is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The amendments in this Update will be adopted beginning in the first quarter of 2012 and are not anticipated to result in a material impact to our financial statements.

NOTE 2 – GOODWILL

During the third quarter, Firstbank Corporation retained Austin Associates, LLC (“Austin”) to perform a goodwill impairment analysis. The valuation date was July 31, 2011. The steps that Austin utilized in a Step 1 valuation test included the reporting unit and the appropriate standard and level of value, the calculation of fair value and the comparison of fair value to carrying value. Austin determined that Firstbank Corporation was the relevant reporting unit to be valued. The standard of value used in the valuation was fair value. Austin’s interpretation of this definition is that it is the value of ownership of the specific business with consideration of synergies, efficiencies and other value enhancing factors. The appropriate level of value used was controlling interest level. This is consistent with allowing for synergies and other factors as described previously and also considers premiums where appropriate. The appraisal methodology utilized by Austin includes the following valuation approaches:

A. Income Approach: Under this approach, a discounted cash flow value is calculated based on earnings capacity.

B. Asset Approach: This approach is based on the difference between the estimated market value of assets and liabilities.

C. Market Approach: This analysis is based on price-to-earnings multiples, price-to-tangible-book ratios and core deposit premiums for selected bank sale transactions.

Austin used the individual valuation results to calculate their estimate of the fair value of common equity. This figure was then compared to the carrying value of equity to determine whether the Step 1 test had passed or failed. In its findings, Austin Associates determined that the fair value of Firstbank’s common equity was $105 million, below its carrying value of $117.4 million on the testing date. As required by generally accepted accounting principles, since the Step 1 test did not pass, it was necessary to complete a Step 2 test.

In the Step 2 test, Austin determines the implied value of goodwill compared with Firstbank’s carrying value of goodwill. In the Step 2 test, if the implied amount of goodwill exceeds the carrying amount, then no goodwill impairment charge is required. To determine the implied value of goodwill, Austin estimated the fair value of Firstbank’s identifiable assets less liabilities. The difference is the net identifiable assets of the company.

Austin used a variety of methods to determine the fair value of Firstbank’s assets and liabilities, including: recent transactions data, discounted cash flows, and market price indications. Assets reviewed consisted of: loans, investments, and other real estate owned, while liabilities reviewed included: deposits and borrowed funds. After completing this re-valuation exercise, the fair value of Firstbank’s common equity determined in Step 1 above, was subtracted from the estimated net identifiable assets to determine the implied fair value of goodwill. Based on the analysis, Austin concluded that the implied fair value of goodwill exceeded the carrying value; therefore, no goodwill impairment charge was required at this time. Whole bank sale transactions at a premium to tangible book value in the market place play an important role in the determination of fair value of the company. Changes in the pricing of future whole bank sales could negatively affect future valuation and result in goodwill impairment at a future date.

8

NOTE 3 - INVESTMENTS

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			Carrying Value
September 30, 2011
Securities available for sale
Treasury Notes	$	0	$	0	$	0		$	0
U.S. Government Agency Bonds		114,360		1,379		(29	)		115,710
U.S. Government Agency CMOs		131,225		2,173		(201	)		133,197
Municipal Securities		68,538		1,008		(78	)		69,468
Other Securities		1,596		58		0			1,654
Total Securities available for sale	$	315,719	$	4,618	$	(308	)	$	320,029
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

Securities with unrealized losses at September 30, 2011 and year end 2010 not recognized in income are as follows:

(In Thousands of Dollars)	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair  Value		Unrealized Loss
September 30, 2011
US Government Agencies	$	6,471	$	(29	)	$	0	$	0		$	6,471	$	(29	)
States and Political Subdivisions		10,251		(62	)		1,914		(16	)		12,165		(78	)
Collateralized Mortgage Obligations		17,829		(200	)		622		(1	)		18,451		(201	)
Equity Securities		0		0			0		(0	)		0		(0	)
Total Temporarily Impaired	$	34,551	$	(292	)	$	2,536	$	(16	)	$	37,088	$	(308	)
December 31, 2010
US Government Agencies	$	12,750	$	(130	)	$	0	$	0		$	12,750	$	(130	)
States and Political Subdivisions		19,284		(245	)		4,883		(201	)		24,167		(446	)
Collateralized Mortgage Obligations		65,378		(694	)		0		0			65,378		(694	)
Equity Securities		0		0			31		(3	)		31		(3	)
Total Temporarily Impaired	$	97,412	$	(1,069	)	$	4,914	$	(204	)	$	102,326	$	(1,273	)

Unrealized losses on securities shown in the previous tables have not been recognized into income because management has the intent and ability to hold these securities for the foreseeable future. The decline in market value is due to changes in interest rates for debt securities and considered normal market fluctuations for equity securities. Management has also reviewed the issuers’ bond ratings, noting they are of high credit quality.

Trading account securities are marked to market with the change in value reported on the income statement. Gains and losses on available for sale securities are recognized if the security is either deemed to be other than temporarily impaired, or the security is sold. Due to continuing problems within one equity security in the third quarter of 2010, we recorded other than temporary impairment of $150,000 bringing the carrying value of that security to zero. This security was a trust preferred security of a Michigan bank that had an original book value of $250,000. The following table shows gross gains and losses on investment securities for the nine months ended September 30 of 2011 and 2010.

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	As of September 30,
(In Thousands of Dollars)	2011			2010
Trading Account Securities Gains/Losses	$	8		$	13
Available for Sale Securities
Gross realized gains		28			197
Gross realized losses		(29	)		(187	)
Net realized gains (losses)	$	(1	)	$	10

The carrying value of securities at September 30, 2011, by stated maturity, is shown below. Actual maturities may differ from stated maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In Thousands of Dollars)	Carrying Value
Due in one year or less	$	85,691
Due after one year through five years		142,693
Due after five years through ten years		73,305
Due after ten years		17,186
Total debt securities		318,875
Equity securities		1,154
Total securities	$	320,029

At September 30, 2011 and 2010, securities with carrying values approximating $49,958,000 and $47,777,000 were pledged to secure public trust deposits, securities sold under agreements to repurchase, and for such other purposes as required or permitted by law.

Federal Home Loan Bank stock is carried at cost, which approximates fair value.

NOTE 4 - LOANS

The following information provides a description of how loan grades are determined for our Commercial and Industrial and Commercial Real Estate Segments. In general, for Commercial and Industrial, and Commercial Real Estate Segments, the probability of loss increases with each rate change from the Grade 1 Excellent down through the Grade 9 Doubtful classes. For Consumer and Residential Mortgage segments, the probability of loss increases as loans move down from current to greater than 60 days past due, nonaccrual.

Grade 1 Excellent – Characteristics of loans in this category include: the loan is generally secured by cash or readily marketable securities; the borrower provides annual audited financials with interim financials reviewed quarterly; the loan has no delinquencies over ten days in the past year; the company’s management is considered to have a high degree of integrity; management of the company has over 15 years of experience; lines of credit have not and are not expected to be utilized; financial statements demonstrate consistently strong profits; and the company has little competition and excellent growth prospects.

Grade 2 Quality – Characteristics of loans in this category include: high net worth borrowers with excellent cash flow and a high degree of liquidity; the borrower generally has annual audited financial statements; there has been one or fewer delinquencies over ten days in the past year; the company’s management is considered to have a high degree of integrity; the company’s management has over ten years of experience; lines of credit have had nominal use over the preceding 12 months; financial statements demonstrate consistent profitability; and the company is in an excellent competitive position.

Grade 3 Good – Loans in this category are very strong, but may lack some of the net worth and/or cash flow characteristics of the previous rating. Characteristics of loans in this category include: annual reviewed financial statements and compiled quarterly financial statements, there has only been one or fewer delinquencies over 15 days in the past year, the company’s management has solid integrity, the company’s management is capable and has over five years of experience, lines of credit have regular usage with no balance in the last 60 days, financial statements demonstrate consistent but nominal profits, and the company has good a solid market share.

10

Grade 4 Acceptable – Characteristics of loans in this category include: annual compiled financial statements with quarterly information available or CPA prepared tax returns, there are only two or fewer delinquencies over 15 days of which only one is over 30 days in the past year, the company’s management has average business experience of over three years, lines of credit have regular use but have no current balance or a significant reduction in balance in the last 30 days, the company has been profitable in two of the preceding three years, and the company is competitive in its market and is maintaining its market share.

Loans graded as one through four are considered as Pass loans and are shown as one class of loans in our credit quality table.

Grade 5 Watch - This rating is used for loans which have shown some sign of weakness, but have not degraded to the point of requiring an impairment review. Characteristics of loans in this rating include: annual management prepared financial statements; delinquencies not exceeding three times over 30 days or one time over 60 days in the past year; weakening financial statements but profitable in two of the last three years; and a declining market share in a competitive market. These loans merit monitoring by management to assure that if circumstances deteriorate further actions are taken to protect the bank’s position.

Grade 6 Special Mention - This rating is used for loans which are included on a watch list and have degraded to a point where additional supervision is required; however, the bank remains confident in the full collection of all principal and interest. These loans are reviewed for impairment on a quarterly basis. Characteristics of loans in this rating may include: repeat delinquency; longer term negative trends in financial results; continuing deterioration of cash flows; concerns regarding the liquidity of guarantors; and other negative business trends.

Grade 7 Substandard - This rating is for loans for which a lender is actively working with the borrower to resolve issues and the full repayment of the loan is questionable. The loan is inadequately protected by current sound worth of the borrower, paying capacity of the guarantor, or pledged collateral. Loans in this grade have well defined weaknesses that jeopardize the full collectability of the loan and a distinct possibility of loss exits.  These loans are reviewed for impairment on a quarterly basis. Characteristics of loans in this rating may include: persistent delinquency; poor financial results of the business; negative cash flow; the ability of guarantor(s) to provide support for the loan is questionable.

Grade 8 Impaired Nonaccrual - This rating is for loans which are considered impaired and classified as nonaccrual. Loans in this grade have all the weaknesses of those classified as substandard grade 7 above, with the added characteristic that, based upon currently known facts, the weaknesses make collection of all principal and interest due according to contractual terms unlikely. These loans are reviewed for impairment on a quarterly basis. Loans in this grade may be assigned an allocated reserve in the loan loss allowance analysis if a determination is made that the future cash flows or the value of the collateral do not support the current carrying value of the loan.

Grade 9 Doubtful Nonaccrual- This rating is for loans which are considered impaired and are classified as nonaccrual. Loans in this grade have all the weaknesses of those classified as impaired nonaccrual grade 8 above, with the added characteristic that the weaknesses make full collection through payment or liquidation of the collateral, based on currently known facts, highly questionable or improbable. These loans are reviewed for impairment on a quarterly basis. Loans in this grade may be assigned an allocated reserve in the loan loss allowance analysis if a determination is made that the future cash flows or the value of the collateral do not support the current carrying value of the loan.

Restructured Loans

Impaired Restructured and Accruing - Loans where the borrower is experiencing financial difficulty and the bank has granted a concession to the borrower. A concession may be: a reduction in the contractual interest rate below current market rates for loans of similar quality, a lengthening of the accrual time frame beyond normal market terms, a forgiveness of a portion of the outstanding principal, or acceptance of collateral in lieu of payment for a portion of the loan balance. If the loan is in accrual status at the time of the restructuring, the borrower has the ability to make the payments under the restructured terms, and the restructuring does not forgive principal, the loan remains on an accrual status under the new terms. However, if there is a forgiveness of debt or partial charge off, the loan will generally be graded as impaired nonaccrual (Grade 8) with any accrued interest reversed against interest income. If a loan is in nonaccrual status at the time of a restructuring, it will remain in nonaccrual status (Grade 8) at the time of restructuring. All non-accruing restructured loans remain in nonaccrual status until the borrower has demonstrated the ability to make the payments under the restructured terms by making a minimum of six months of payments. If the borrower makes the six months of payments without becoming past due 30 days or more, the loan may be returned to accrual status. The determination of the need for an allowance for loan loss adjustment is based on a factor relating to historical losses multiplied times the balance of the loan for residential mortgages, or a collateral impairment review for commercial loans, and a net present value adjustment relating to a change in interest rate and other terms, if applicable.

11

Impaired Restructured and Accruing loans are graded seven or better based on the above definitions. If  restructured loan is graded as eight or nine, it is reported as Impaired Nonaccrual, or Doubtful Nonaccrual, respectively.

For commercial loans graded eight and nine and consumer and residential mortgage loans reported in nonaccrual, interest income is generally not recognized until the loan improves and is returned to accrual status. In some cases, if the loan is well secured and the borrower’s ability to support the loan payments has improved, such as in the case of a restructured nonaccrual loan, interest income may be recognized on a cash basis while the loan is in nonaccrual status.

For Consumer and Residential Mortgage Loan Segments, loans are classified by risk based on current delinquency and nonaccrual status. These segments of loans will contain a separate class for restructured loans, if they exist.

The following credit quality indicators provide a system for distribution of our loan portfolio in a manner consistent with the previously described loan grading system and for use in 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. These variations primarily relate to how real estate loans are analyzed internally to determine the adequacy of the loan loss allowance, versus how we are required to report real estate loans for regulatory purposes.

12

Credit Quality Indicators:

Loans at period end were as follows:
(In Thousands of Dollars)	September 30, 2011		December 31, 2010
Commercial & Industrial
Pass loans	$	123,335	$	143,805
Watch loans		19,559		12,727
Special mention loans		8,093		4,267
Substandard loans		3,907		1,561
Impaired restructured and accruing loans		2,081		182
Impaired nonaccrual loans		2,365		1,649
Doubtful nonaccrual loans		0		141
Total Commercial & Industrial		159,340		164,332
Commercial Real Estate
Pass loans	$	369,786	$	394,674
Watch loans		54,437		50,590
Special mention loans		23,240		31,310
Substandard loans		6,143		8,320
Impaired restructured and accruing loans		11,643		5,780
Impaired nonaccrual loans		14,763		17,729
Doubtful nonaccrual loans		0		882
Total Commercial Real Estate		480,012		509,285
First lien residential mortgage loans
Performing loans	$	191,463	$	192,298
Loans > 60 days past due		1,877		2,102
Impaired restructured and accruing loans		4,725		4,205
Nonaccrual loans		4,208		5,160
Total First lien residential mortgage loans		202,273		203,765
Junior lien residential mortgage loans
Performing loans	$	69,541	$	75,590
Loans > 60 days past due		301		148
Nonaccrual loans		562		555
Total Junior lien residential mortgage loans		70,404		76,293
Consumer Loans
Performing loans	$	76,612	$	77,472
Loans > 60 days past due		175		289
Nonaccrual loans		237		184
Total Consumer Loans		77,024		77,945
Total Loans	$	989,053	$	1,031,620

Allowance for Loan Losses

The allowance for loan losses is determined based on management’s estimate of probable losses incurred within the loan portfolio as of the balance sheet date. We determine the amount of the allowance for loan losses based on periodic evaluation of the loan portfolios and other relevant factors. This evaluation is inherently subjective and requires material estimates, which are subject to change. Factors that are considered in the evaluation of individual, and pools of loans, include: historical loss experience; likelihood of default; liquidation value of a loan’s underlying collateral; timing and amounts of expected future cash flows; and our exposure to loss in the event of default. We further estimate the impact of qualitative factors that may cause future losses to differ from historical experience. Such factors include: changes in credit quality, macro economic impacts on our customers, and changes in underwriting standards.

Our historical loss experience is determined based on actual losses incurred over the previous twelve quarters. We utilize a method of averaging these losses whereby we place a heavier emphasis on more recent experience. Our model provides  a 50% weighting on the most recent four quarters, 30% weighting on the middle four quarters, and 20% weighting on the oldest four quarters.

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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 grouped by credit quality classifications.

The segments comprising commercial and industrial loans and commercial real estate loans are classified based on the loan grading system described above. We group loans rated as one through four together into one class of Pass loans. Commercial and industrial and commercial real estate loans graded as Pass and Watch are assigned a unique pooled loss rate based on historical losses incurred over the prior three years as described above. We adjust the calculated historical loss rate up or down based on current developments, that in management’s judgment are not reflected in the historical losses of the company. The current outstanding balance for each of these classes of loans is then multiplied by the adjusted historical loss rate to determine the amount of allowance for loan losses to reserve on that pool of loans.

Loans graded special mention 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 probability factor to determine a loss rate to be applied to this class of loans. The probability factor is determined from an analysis of the migration of special mention loans to more severe risk classes over the preceding 12 month period.

Loans graded as substandard use the 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. The calculated historical loss rate, without adjustment for migration, is then multiplied times the outstanding balance of substandard loans to determine the amount of allowance for loan losses to provide for this class of loans.

Loans graded as impaired nonaccrual, impaired doubtful, and impaired restructured and accruing are individually analyzed for loan losses. An allocated reserve is established within the allowance for loan losses for the difference between the carrying value of the loan and its determined collectable value. To determine the collectable value of the loan, the present value of expected cash flows, the collateral value, or some combination of the two is used. The allocated reserve is established as the difference between the carrying value of the loan and the collectable value.

For consumer and residential loan segments, loans that are current, or less than 60 days past due are assigned a unique historical loss rate as described above for commercial Pass and Watch loans. For loans that are more than 60 days past due including nonaccrual loans, a loss rate 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 rates are multiplied by the outstanding balances in each unique loan segment at the end of the reporting period to determine the amount of allowance for loan loss.

For restructured loans where the bank has granted a rate concession, an additional amount is added to the loan loss reserve that represents the difference in the present value of the cash flows between the original terms and the new terms of the modified loan, using the original interest rate of the loan as a discount rate. Any change in the present value of the loan due to passage of time is reflected as an adjustment to provision for loan loss expense.

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 aggregation 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 aggregation is below the current balance of the allowance for loan losses, management will determine, based upon the number, potential impact, and uncertainty of the estimates contained within the process whether the unallocated reserve is excessive. If in management’s judgment the unallocated reserve exceeds a level deemed prudent given the inherent uncertainty of these issues, a reversal of the provision for loan losses may be recorded.

The following table provides a breakdown of our loan portfolio by the primary credit quality indicators we use in the determination of our allowance for loan losses.

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Allowance for credit losses and recorded investment in financing receivables:

(In Thousands of Dollars)
Nine months ending September 30, 2011	Commercial and Industrial			Commercial Real Estate			First Lien Residential Mortgages			Junior Lien Residential Mortgages			Consumer Loans			Unallocated			Total
Allowance for Credit Losses:
Beginning balance	$	3,024		$	12,375		$	3,960		$	774		$	1,162		$	136		$	21,431
Provision for loan losses		1,855			4,379			3,544			(72	)		504			516			10,726
Loans charged off		(1,468	)		(6,903	)		(2,470	)		(148	)		(730	)		(0	)		(11,719	)
Recoveries		158			453			112			0			222			0			945
Ending balance	$	3,569		$	10,304		$	5,146		$	554		$	1,158		$	652		$	21,383
Ending balance: individually evaluated for impairment		1,311			2,382			0			0			0			-			3,693
Ending balance: collectively evaluated for impairment		2,258			7,922			5,146			554			1,158			652			17,690
Financing Receivables:
Ending balance		159,340			480,012			202,273			70,404			77,024			-			989,053
Ending balance: individually evaluated for impairment		4,445			26,405			0			0			0			-			30,850
Ending balance: collectively evaluated for impairment		154,895			453,607			202,273			70,404			77,024			-			958,203
Nine months ending September 30, 2010
Allowance for Credit Losses:
Beginning balance	$	3,640		$	10,473		$	2,502		$	967		$	1,525		$	7		$	19,114
Provision for loan losses		410			4,414			2,525			88			95			1,091			8,623
Loans charged off		(1,132	)		(4,215	)		(1,419	)		(175	)		(802	)		(0	)		(7,743	)
Recoveries		265			26			119			0			322			0			732
Ending balance	$	3,183		$	10,698		$	3,727		$	880		$	1,140		$	1,098		$	20,726
Ending balance: individually evaluated for impairment		172			3,044			0			0			0			-			3,216
Ending balance: collectively evaluated for impairment		3,011			7,654			3,727			880			1,140			1,098			17,510
Financing Receivables:
Ending balance		167,056			514,222			206,169			79,255			83,174			-			1,049,876
Ending balance: individually evaluated for impairment		1,214			21,564			0			0			0			-			22,778
Ending balance: collectively evaluated for impairment		165,842			492,658			206,169			79,255			83,174			-			1,027,098

15

Age Analysis of Past Due Loans excluding nonaccrual loans:

(In thousands of dollars)
At September 30, 2011	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 days and accruing
Commercial and Industrial	$	1,020	$	1,686	$	0	$	2,706	$	153,002	$	159,340	$	0
Commercial Real Estate		1,230		1,702		799		3,731		464,074		480,012		799
Residential Mortgages 1st Liens		556		1,186		584		2,326		195,739		202,273		584
Residential Mortgages Junior Liens		358		301		0		659		69,183		70,404		0
Consumer		734		103		72		909		75,878		77,024		72
Total	$	3,898	$	4,978	$	1,455	$	10,331	$	957,876	$	989,053	$	1,455
At December 31, 2010
Commercial and Industrial	$	916	$	400	$	0	$	1,316	$	159,532	$	164,413	$	0
Commercial Real Estate		3,514		981		18		4,513		352,615		373,996		18
Residential Mortgages 1st Liens		1,025		1,529		573		3,127		349,086		357,402		573
Residential Mortgages Junior Liens		628		148		0		776		74,934		76,266		0
Consumer		703		273		15		991		58,368		59,543		15
Total	$	6,786	$	3,331	$	606	$	10,723	$	994,535	$	1,031,620	$	606

16

Impaired loans were as follows:

(In Thousands of Dollars)
September 30, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	3,588	$	4,269		0	$	1,502	$	37
Commercial Real Estate		16,709		21,078		0		12,571		306
Residential Mortgages 1st Liens		8,933		9,731		0		9,009		234
Residential Mortgages Junior Liens		562		562		0		505		0
Consumer		237		254		0		188		4
Total	$	30,029	$	35,894	$	0	$	23,773	$	581
Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	527	$	879	$	331	$	723	$	0
Commercial Real Estate		7,622		11,097		2,075		8,648		0
Residential Mortgages 1st Liens		0		0		0		0		0
Residential Mortgages Junior Liens		0		0		0		0		0
Consumer		0		0		0		0		0
Total	$	8,149	$	11,976	$	2,406	$	9,371	$	0
Total
Commercial and Industrial	$	4,115	$	5,148	$	331	$	2,225	$	37
Commercial Real Estate		24.331		32,175		2,075		21,219		306
Residential Mortgages 1st Liens		8,933		9,731		0		9,009		234
Residential Mortgages Junior Liens		562		562		0		505		0
Consumer		237		237		0		188		4
Total	$	38,178	$	47,870	$	2,406	$	33,144	$	581
December 31, 2010
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	476	$	564		0	$	1,121	$	0
Commercial Real Estate		10,142		11,718		0		12,432		158
Residential Mortgages 1st Liens		9,365		9,959		0		7,721		253
Residential Mortgages Junior Liens		555		555		0		295		1
Consumer		134		165		0		200		5
Total	$	20,672	$	22,961		0	$	21,769	$	417
Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	693	$	1,978	$	804	$	438	$	0
Commercial Real Estate		9,725		16,614		4,532		8,724		125
Residential Mortgages 1st Liens		0		0		0		0		0
Residential Mortgages Junior Liens		0		0		0		0		0
Consumer		0		0		0		0		0
Total	$	10,418	$	18.592	$	5,336	$	9,162	$	125
Total
Commercial and Industrial	$	1,169	$	2,544	$	804	$	1,559	$	0
Commercial Real Estate		19,867		28,332		4,532		21,156		283
Residential Mortgages 1st Liens		9,365		9,959		0		7,721		253
Residential Mortgages Junior Liens		555		555		0		295		1
Consumer		134		165		0		200		5
Total	$	31,090	$	41,553	$	5,336	$	30,931	$	542

17

Loan Modifications as of the period ending:

(In thousands of dollars)	Troubled Debt Restructurings						Troubled Debt Restructurings that Subsequently Defaulted
	Number of contracts		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Number of contracts		Recorded investment
September 30, 2011
Commercial and industrial		4	$	2,045	$	2,035		3	$	652
Commercial real estate		25		11,639		10,623		11		1,768
Residential 1st liens		56		5,414		5,315		13		775
Residential junior liens		1		10		9		0		0
Consumer		0		0		0		0		0
December 31, 2010
Commercial and industrial		3	$	1,962	$	1,413		1	$	709
Commercial real estate		4		1,341		922		3		602
Residential 1st liens		26		2,933		2,608		7		493
Residential junior liens		0		0		0		0		0
Consumer		0		0		0		0		0

Financing Receivables on Nonaccrual Status were as follows:

(In Thousands of Dollars)	September 30, 2011		December 31, 2010
Nonaccrual loans at period end
Commercial and Industrial	$	3,632	$	3,565
Commercial Real Estate		12,207		16,868
Residential Mortgages 1st Liens		4,208		5.189
Residential Mortgages Junior Liens		562		556
Consumer		237		184
Total nonaccrual loans	$	20,846	$	26,362

NOTE 5 – FAIR VALUE

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

	(In Thousands of Dollars)
	September 30, 2011						December 31, 2010
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial Assets:
Cash and cash equivalents	$	96,718		$	96,718		$	73,538		$	73,538
FDIC insured bank certificates of deposit		5,700			5,700			10,405			10,405
Trading account securities		20			20			13			13
Securities available for sale		290,283			290,283			255,703			255,703
Federal Home Loan Bank stock		7,266			7,266			8,203			8,203
Loans held for sale		434			434			1,355			1,355
Loans, net		984,635			965,253			1,010,189			987,800
Accrued interest receivable		4,845			4,845			4,689			4,689
Financial Liabilities:
Deposits		(1,218,320	)		(1,210,213	)		(1,183,783	)		(1,173,030	)
Securities sold under agreements to repurchase and overnight borrowings		(46,304	)		(46,304	)		(41,328	)		(41,328	)
Federal Home Loan Bank advances		(21,543	)		(23,444	)		(40,658	)		(42,684	)
Accrued interest payable		(1,220	)		(1,220	)		(1,467	)		(1,467	)
Subordinated debentures		(36,084	)		(36,781	)		(36,084	)		(37,051	)

18

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.

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 September 30, 2011 and December 31, 2010.

The following tables present information about our assets measured at fair value on a recurring basis at September 30, 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.

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
September 30, 2011
Securities available for sale
Treasury Notes	$	0	$	0	$	0	$	0
U.S. Government Agency Bonds		115,710		0		0		115,710
U.S. Government Agency CMOs		0		133,197		0		133,197
Municipal Securities		0		56,130		13,338		69,468
Other Securities		92		0		1,562		1,654
Total Securities available for sale	$	115,802	$	189,327	$	14,900	$	320,029
Trading equity securities	$	20	$	0	$	0	$	20
December 31, 2010
Securities available for sale
Treasury Notes	$	12,530	$	0	$	0	$	12,530
U.S. Government 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

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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			(150	)
Total unrealized gains/(losses) included in other comprehensive income		(48	)		56
Purchases of securities		9,177			5,097
Sales of securities		0			(397	)
Calls and maturities		(5,062	)		(540	)
Net transfers in/(out) of Level 3		0			0
Balance at September 30 of each year	$	14,900		$	11,625

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.

Assets Measured at Fair Value on a Nonrecurring Basis

(Dollars in Thousands)	Balance at September 30,		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 nine month period ended September 30,
2011
Impaired loans	$	38,178		0		0	$	38,178	$	(6,462	)
Other Real Estate Owned	$	7,367		0		0	$	7,367	$	(1,128	)
2010
Impaired loans	$	29,587		0		0	$	29,587	$	(5,563	)
Other Real Estate Owned	$	9,020		0		0	$	9,020	$	(1,431	)

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 $6,462,000 loss on impaired loans indicated in the table above, for the nine month period ended September 30, 2011, and the $5,563,000 for the nine months ended September 30, 2010, were charged to the allowance for loan losses, while the $1,128,000 and the $1,431,000 losses, for the nine months ended September 30 of 2011 and 2010, in other real estate owned were charged to earnings through other non-interest expense on the income statement.

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NOTE 6 – BASIC AND DILUTED EARNINGS PER SHARE

(Dollars in Thousands Except per Share Data)	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Earnings per share
Net income	$	1,630	$	1,324	$	3,473	$	2,920
Preferred dividends and accretion of discount		420		420		1,260		1,260
Income available to common shareholders	$	1,210	$	904	$	2,213	$	1,660
Weighted average common shares outstanding		7,857,000		7,776,000		7,832,000		7,757,000
Basic Earnings per Share	$	0.15	$	0.12	$	0.28	$	0.22
Earnings per share assuming dilution
Net income	$	1,630	$	1,324	$	3,473	$	2,920
Preferred dividends and accretion of discount		420		420		1,260		1,260
Income available to common shareholders	$	1,210	$	904	$	2,213	$	1,660
Weighted average common shares outstanding		7,857,000		7,776,000		7,832,000		7,757,000
Add dilutive effect of assumed exercises of options		2,000		2,000		3,000		1,000
Weighted average common and dilutive       potential common shares outstanding		7,859,000		7,778,000		7,835,000		7,758,000
Diluted Earnings per Share	$	0.15	$	0.12	$	0.28	$	0.22

Stock options and stock warrants for 1,030,057 shares for the three month and nine month periods of 2011, and stock options and warrants for 1,042,695 shares for the three and six month periods of 2010, were not considered in computing diluted earnings per share because they were anti-dilutive.

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), Keystone Community Bank, Firstbank – West Michigan (collectively the “Banks”), FBMI Risk Management Services, Inc., and Austin Mortgage Company.

On September 30, 2011 we completed the previously announced merger of our smallest affiliate bank, Firstbank – St Johns, with the larger Firstbank – Alma affiliate as planned. Systems consolidations will occur in the fourth quarter and will result in regulatory and operational efficiencies going forward.

Financial Condition

The Michigan and national economies, have begun to show some signs of improvement, but continued to operate below optimal levels during the first half of the year. Michigan’s unemployment rate has improved slowly from a seasonally adjusted rate of 14.1% in of the third quarter of 2009 (the high point), to 10.1% in September 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. Restructured loans which are in conformance with their new terms were higher by $8.2 million compared with year end, nonaccrual loans declined $5.5 million, and loans 90 days or more past due increased $0.8 million. Other Real Estate Owned decreased $948,000. We believe these categories of loans will continue to be elevated in the near term as we work through the 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.

Despite the tough environment, we continue to invest in our infrastructure. During the third quarter of 2011 we continued the development of a new mobile banking product that we expect to roll out late in the first quarter 2012.

During the first nine months of 2011, total assets increased $38.6 million, or 2.6%, with cash and cash equivalents increasing $28.0 million, or 38.1% primarily driven by increases in deposits and lack of loan demand. Securities available for sale increased $57.1 million, or 21.5%, from year end 2010, due primarily to reinvestment of cash balances held at the Federal Reserve into higher yielding investment securities. As a result of the soft loan demand, ending total portfolio loan balances decreased $42.6 million, or 4.1%, and quarterly average total loans were 4.4% lower in the third quarter of 2011 when compared with the fourth quarter of 2010.

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

(In Thousands of Dollars)	September 30, 2011			December 31, 2010
Commercial	$	157,155		$	164,413
Mortgage Loans on Real Estate:
Residential		344,700			352,652
Commercial		352,156			373,996
Construction		74,561			81,016
Consumer		55,485			54,759
Credit Card		4,996			4,784
Subtotal		989,053			1,031,620
Less:
Allowance for loan losses		(21,383	)		(21,431	)
Loans, net	$	967,670		$	1,010,189

Residential mortgages decreased $8.0 million, or 2.3%, from year end 2010 as pay downs of loans and refinanced loans sold in the secondary market exceeded our ability to generate replacement balances. Real estate construction loans also decreased $6.5 million, or 8.0%, during the first nine months of 2011. Commercial and commercial real estate loans were $29.1 million, or 5.4%, lower at September 30 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 $10.8 million in the first three quarters compared with $7.0 million in the first three quarters of 2010. Third quarter 2011 net charge-offs were $3.4 million compared with $4.3 million in the second quarter of the year and $2.9 million in the third quarter of 2010. The ratio of net charge-offs of loans (annualized) to average loans was 1.42% in the first nine months of 2011 compared to 0.88% in the first nine months of 2010.

At September 30, 2011, the allowance as a percentage of average outstanding loans was 2.16% compared with 1.97% at the same point a year earlier and 2.08% at year end 2010. Restructured loans increased $8.2 from year end, as we work with our customers to resolve their current situations. Loans past due 90 days or more at September 30 increased $0.8 million compared with year end 2010. Partially offsetting these increases was a decrease of $5.5 million in nonaccrual loans compared with year end numbers. Despite the current elevated levels of these categories of loans, 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 $56.4 million, or 4.8% when compared with year end 2010 balances. Within the deposit base, interest bearing demand account balances increased $37.1 million, or 12.6%, savings balances increased $33.5 million, or 15.9%, and time balances decreased $33.6 million, or 6.8%. Within time balances, wholesale CDs were $9.5 million higher than year end, while core market CDs were down $43.1 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 $19.4 million, or 10.5% higher than year end.

For the nine month period ended September 30, 2011, Federal Home Loan Bank advances and notes payable were down $24.1 million, or 59.4% from year end, primarily because funding from core deposits is sufficient to allow Federal Home Loan Bank advances to mature without replacement. Securities sold under agreements to repurchase and overnight borrowings were $1.5 million, or 3.70% higher due to normal fluctuations in customer cash flows.

Total shareholders’ equity increased $5.2 million from the previous year end. Net income of $3,473,000 and common stock issuances of $361,000 increased shareholders’ equity, while common and preferred stock dividends of $1,472,000 decreased shareholders’ equity. Accumulated other comprehensive income increased $2.7 million from year end. Common stock issuance was primarily related to shares issued through supplemental investment plans and dividend reinvestment. The per share book value of shareholders’ common equity was $15.36 at September 30, 2011, increasing from $14.82 at December 31, 2010. Tangible shareholders common equity per share (total equity less goodwill and other intangible assets) was$10.64 at the end of the third quarter of 2011, increasing from $10.00 at year end 2010. Shareholders’ common equity per share calculations excludes preferred stock of $32.8 million.

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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 September 30, 2011	$	149,629		$	149,629		$	162,026
Required Regulatory Capital		59,163			39,482			78,964
Capital in Excess of Regulatory Minimums		90,466			110,147			83,062
Capital Ratios at September 30, 2011		10.12	%		15.16	%		16.42	%
Regulatory Capital Ratios – Minimum Requirement		4.00	%		4.00	%		8.00	%

Our capital remains above regulatory guidelines for the second quarter of 2011. At the end of the third quarter our total risk based capital ratio was 16.42% compared with 15.94% at year end 2010. Tier 1 capital and tier 1 leverage ratios were 15.16% and 10.12% 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 September 30, all of our affiliate banks continue to exceed the “Well Capitalized” regulatory definition.

Results of Operations

Three Months Ended September 30, 2011

For the third quarter of 2011, net income was $1,630,000,  basic and diluted earnings per share were $0.15, compared with net income of $1,324,000, and $0.12 basic and diluted per share for the third quarter of 2010, and net income of $628,000, $0.03 basic and diluted earnings per share, for the second quarter of 2011. Net income available to shareholders was $1,210,000 in the current quarter compared with $904,000 in the third quarter of 2010 and $208,000 in the second quarter of 2011. This year’s third quarter was once again, heavily impacted by a $3.4 million charge to loan loss provision, as well as $797,000 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 increased $17.2 million, when the third quarter of 2011 is compared to the same quarter a year ago. While overall earning assets increased from a year ago, a decrease in net loan balances of $64 million was offset by a $9 million increase in short term investments and a $80 million increase in available for sale securities. Compared with the previous quarter, average earning assets increased $9 million, or 0.7%. The yield on earning assets decreased 44 basis points, to 4.94%, for the quarter ended September 30, 2011, compared to 5.38% for the same quarter a year ago, and was 16 basis points lower when compared with the second quarter of 2011. The cost of funding related liabilities also decreased, falling 58 basis points when comparing this year’s third quarter to the same period a year ago, from 1.49% in 2010, to 0.91% in 2011. Compared with the prior quarter, the cost of funding related liabilities fell by 11 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 14 basis points from last year’s third quarter to 4.03% in the current quarter. The net interest margin decreased five basis points when compared to the previous quarter. Net interest income increased $685,000 to $13.8 million in the third quarter of 2011 compared with the same period of 2010, as the increase in net interest margin and higher level of earning assets 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 third quarter of 2011, interest reversals associated with loans moving to nonaccrual status were $155,000 compared with $99,000 in the same quarter a year ago and $154,000 in the second quarter of 2011. Interest expense associated with FHLB advances decreased $677,000 when the third quarter of 2011 is compared with the same period of 2010, providing for lower cost of funding earning assets.

The provision for loan losses increased $393,000 when the third quarter of 2011 is compared to the same quarter of 2010. Provision for loan losses was $3.5 million in this year’s third quarter compared with $3.1 million in the third quarter of 2010. Compared with the second quarter of this year, the provision for loan losses was $0.9 million lower. In the third quarter of the year we charged down $3.0 million of commercial loans, for which we had specific reserves set aside of $2.4 million at the end of the previous quarter. 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 more 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 $2.6 million in the third quarter of 2011, compared with $3.3 million in the third quarter of 2010 and $2.0 million in the second quarter of 2011. Compared with 2010’s third quarter, gains on sale of mortgages were $1.0 million or 49.4% lower, primarily due to lower mortgage refinancing resulting from the current interest rate and regulatory environments. Gain on the sale of mortgage loans was $627,000, or 152% higher when the third quarter is compared to the second quarter. Lower refinance rates on mortgage loans during the quarter lead to increased activity. Also effecting non interest income was higher other income, which increased $212,000 compared with last year’s third quarter.

Total non-interest expense decreased $196,000, or 1.8%, when comparing the three month periods ended September 30, 2011 and 2010 and was primarily due to lower FDIC premiums. Premiums are now calculated on the basis of total assets less tangible capital rather than deposits. This change has benefited most community banks, shifting more of the premium to larger financial institutions. Resulting from the change in methodology, we over estimated our FDIC cost by $137.000 second quarter which resulted in lower costs for the third quarter. We estimate our new normalized cost will be approximately $330,000 per quarter going forward.

Salary and benefits expense was $294,000 higher when compared with the second quarter of the year in part due to one additional accrual day in the third quarter, reduced variable compensation expense in the second quarter associated with the lower level of earnings, and increased group health insurance costs in the third quarter.  Advertising and marketing expenses were $125,000 lower in the quarter, while other non-interest expense was $116,000, lower than the previous quarter reflecting our continuing efforts to control costs.

Federal Income tax expense was $540,000 in the third quarter of 2011, compared with $1,048,000 in the third quarter last year and $58,000 in the second quarter of 2011. In the third quarter of 2010, we recorded a $425,000 deferred tax impairment charge resulting in a higher effective tax rate for that period. The impairment charge in 2010 related to a capital loss on the company’s bank stock portfolio, which it no longer believed would recover in value or be offset with capital gains from other activities, therefore, the capital loss was unlikely to be deductible. The increase in taxes compared with the second quarter was primarily driven by higher pre-tax earnings.

Nine Months Ended September 30, 2011

For the first nine months of 2011, net income was $3,473,000, basic and diluted earnings per share were $0.28, compared with net income of $2,920,000, and $0.22 basic and diluted per share for the first three quarters of 2010. Net income available to shareholders was $2,213,000 in the current year compared with $1,660,000 in the same period of 2010. This year’s results were heavily impacted by a $10.7 million charge to loan loss provision, as well as $2.1 million 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 increased $11.4 million, when the first nine months of 2011 are compared to the same time frame a year ago. While overall earning assets increased from a year ago, a decrease in higher yielding net loan balances was offset by an increase in lower yielding short term investments and available for sale securities. The yield on earning assets decreased 38 basis points, to 5.07%, for the nine months ended September 30, 2011, compared to 5.45% for the same nine months a year ago. The cost of funding related liabilities also decreased, falling 61 basis points when comparing this year’s first three quarters to the same period a year ago, from 1.62% in 2010, to 1.01% in 2011. 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 23 basis points from 3.83 % last year’s to 4.06% in the current year. Net interest income increased $2.7 million to $40.8 million in 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 2011, interest reversals associated with loans moving to nonaccrual status were $409,000 compared with $431,000 in the same period a year ago.

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The provision for loan losses increased $2.1 million when year to date 2011 is compared to the same period of 2010. Provision for loan losses was $10.7 million in this year’s first nine months compared with $8.6 million in the first nine months of 2010. We charged down $8.9 million of commercial loans in the first three quarters of the year, for which we had specific reserves set aside of $4.7 million at the end of 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 more 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.

Year to date total non-interest income was $6.6 million in 2011, compared with $7.9 million in the same period of 2010. Compared with 2010, gains on sale of mortgages were $1.1 million, or 35.8% lower, primarily due to lower mortgage refinancing resulting from a higher interest rate environment during the first half of the year and new restrictions placed on mortgage lending by secondary market participants. Also effecting non interest income was lower other income, which was down $124,000 compared with last year mainly due to reduced revenue from our armored car business which was sold at the end of March 2010.

Total non-interest expense decreased $770,000, or 2.3%, when comparing the nine month periods ended September 30, 2011 and 2010 and was primarily due to lower FDIC premiums, which decreased $351,000 based on the new asset based formula for determining the bank’s premium amount. Salaries and benefits expense increased 0.2% as a 2.6 reduction in salaries and wages was offset by a 20.2% increase in group health insurance costs. Advertising and marketing costs decreased $158,000, occupancy costs decreased $166,000, and other expenses decreased $156,000, as we continue our cost control program. Costs associated with our other real estate owned portfolio increased $51,000 over the prior year as write downs on OREO properties increased $255,000 and costs associated with maintaining those properties decreased $204,000. Also benefiting this year’s comparison is the sale of our armored car business at the end of March 2010.

Federal Income tax expense was $947,000 for the first three quarters of 2011, compared with $1,370,000 for the same period last year. The decrease in taxes was primarily driven by a $425,000 deferred tax impairment charge recorded in 2010. The impairment charge in 2010 related to a capital loss on the company’s bank stock portfolio, which it no longer believed would recover in value or be offset with capital gains from other activities, therefore, the capital loss was unlikely to be deductible.

Liquidity

At September 30, 2011, we have adequate sources of liquidity to meet our needs. Cash and cash equivalent balances were at $102 million, an increase of $28 million, or 38%, compared with year end 2010. This increase was primarily the result of a reduction in our loan portfolio and core deposit growth of $43 million and $56 million, respectively, which both increased liquidity. Offsetting these items was an increase in our available for sale investment portfolio of $57 million and repayment of $24 million of Federal Home Loan Bank advances. Our securities available for sale portfolio now stands at $320 million, providing a source of liquidity should it become 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, $101 million, and $64 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.

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Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition and results of operations, 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.

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.

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Item 4.  Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures

On November 9, 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 September 30, 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.

101 Interactive Data File

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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: November 9, 2011	By:	/s/ Thomas R. Sullivan
		Thomas R. Sullivan President, Chief Executive Officer (Principal Executive Officer)
Date: November 9, 2011	By:	/s/ Samuel G. Stone
		Samuel G. Stone Executive Vice President, Chief Financial Officer (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Description

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

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

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

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