Firstbank (FBMI) 10-Q 2014 Q1 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 March 31, 2014

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to                  .

Commission file number: 000-14209

FIRSTBANK CORPORATION

(Exact name of registrant as specified in its charter)

Michigan	38-2633910
(State of Incorporation)	(I.R.S. Employer Identification No.)
311 Woodworth Avenue
Alma, Michigan	48801
(Address of principal executive offices)	(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X   No___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesX    No___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ___ Accelerated filerX  Non-accelerated filer ___ Smaller reporting company ___ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes        No X  

Common stock outstanding at April 28, 2014: 8,087,921 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 25
Item 4.	Controls and Procedures	Page 26
PART II.	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Page 26
Item 5.	Other Information	Page 26
Item 6.	Exhibits	Page 27
SIGNATURES		Page 28

2

FIRSTBANK CORPORATION

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2014 AND DECEMBER 31, 2013

(Dollars in thousands except share data)

UNAUDITED  

	March 31, 2014			December 31, 2013
Assets:
Cash and due from banks	$	27,907		$	28,874
Short term investments		66,845			45,780
Total cash and cash equivalents		94,752			74,654
FDIC insured bank time certificates of deposit		746			944
Trading account securities		18			18
Securities available for sale		359,863			343,602
Federal Home Loan Bank stock		7,266			7,266
Loans held for sale		69			401
Loans		969,552			987,146
Allowance for loan losses		(16,979	)		(17,997	)
Premises and equipment, net		24,219			24,169
Goodwill		35,513			35,513
Core deposit and other intangibles		517			596
Other real estate owned		1,202			1,838
Accrued interest receivable and other assets		23,669			21,575
Total Assets	$	1,500,407		$	1,479,725
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Non-interest bearing accounts	$	265,579		$	267,405
Interest bearing accounts:
Demand		372,693			360,834
Savings		297,611			282,341
Time		313,653			322,212
Total Deposits		1,249,536			1,232,792
Securities sold under agreements to repurchase and overnight borrowings		55,741			47,635
Federal Home Loan Bank advances and other borrowing		12,000			19,790
Subordinated debentures		36,084			36,084
Accrued interest and other liabilities		6,985			5,798
Total Liabilities		1,360,346			1,342,099
Shareholders’ Equity:
Preferred stock; no par value, 300,000 shares authorized, 0 issuedand outstanding		0			0
Common stock; 20,000,000 shares authorized, 8,087,421 shares issuedand outstanding (8,083,022 at December 31, 2013)		116,733			116,640
Retained earnings		22,604			20,739
Accumulated other comprehensive income		724			247
Total Shareholders’ Equity		140,061			137,626
Total Liabilities and Shareholders’ Equity	$	1,500,407		$	1,479,725

See notes to consolidated financial statements.

3

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

MARCH 31, 2014 AND 2013

(Dollars in thousands except per share data)

UNAUDITED 

	Three Months Ended March 31,
	2014		2013
Interest income:
Interest and fees on loans	$	12,518	$	13,284
Securities:
Taxable		1,077		962
Exempt from federal income tax		448		371
Short term investments		32		55
Total interest income		14,075		14,672
Interest expense:
Deposits		1,041		1,350
FHLB advances and other borrowing		57		145
Subordinated Debt		158		165
Total Interest Expense		1,256		1,660
Net Interest Income		12,819		13,012
Provision for loan losses		0		1,278
Net interest income after provision for loan losses		12,819		11,734
Non-interest income:
Service charges on deposit accounts		977		1,020
Gain on sale of mortgage loans		318		1,561
Mortgage servicing, net of amortization		154		(136	)
Gain on sale of available for sale securities		1		50
Other		480		400
Total non-interest income		1,930		2,895
Non-interest expense:
Salaries and employee benefits		5,877		5,918
Occupancy and equipment		1,432		1,359
FDIC insurance premium		231		259
Amortization of intangibles		79		102
Outside professional services		356		293
Advertising and promotions		239		311
Other real estate owned costs		153		163
FHLB advance prepayment cost		1,260		0
Merger related expenses		251		0
Other		1,561		2,196
Total non-interest expense		11,439		10,601
Income before federal income taxes		3,310		4,028
Federal income taxes		960		1,165
Net Income	$	2,350	$	2,863
Preferred stock dividends and accretion of discount on preferred stock		0		209
Net income available to common shareholders	$	2,350	$	2,654
Basic earnings per share	$	0.29	$	0.33
Diluted earnings per share	$	0.29	$	0.33
Dividends per share	$	0.06	$	0.06

See notes to consolidated financial statements.

4

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

MARCH 31, 2014 AND 2013

(Dollars in thousands)

UNAUDITED

	Three Months Ended March 31,
	2014			2013
Net income	$	2,350		$	2,863
Other comprehensive income/(loss):
Unrealized holding gains/(losses) arising during the period		742			(105	)
Less: reclassification adjustment for gains included in net income		(1	)		(50	)
Other comprehensive income/(loss) before taxes		741			(155	)
Income tax expense related to items in other comprehensive income		(264	)		56
Other comprehensive income/(loss) net of income tax effect fromreclassification of $0 and $17 in 2014 and 2013, respectively		477			(99	)
Comprehensive income	$	2,827		$	2,764

See notes to consolidated financial statements.

5

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR PERIODS ENDED MARCH 31, 2014 AND DECEMBER 31, 2013

(Dollars in thousands except share data)

	Common Stock		Preferred Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances at January 1, 2013	$	115,621	$	16,908		$	10,921		$	3,608		$	147,058
Net income for 2013							12,234						12,234
Cash dividends on common stock - $0.24per share							(1,935	)					(1,935	)
Accrued dividends on preferred stock andaccretion of discount on preferred stock				92			(481	)					(389	)
Redemption of 17,000 shares of preferred stock				(17,000	)								(17,000	)
Issuance of 13,543 shares of common stockthrough the dividend reinvestment plan		177											177
Issuance of 8,386 shares of common stockfrom supplemental shareholder investments		111											111
Issuance of 37,900 shares of common stock		338											338
Exercise of 21,290 stock options		232											232
Stock option and restricted stock expense		161											161
Net change in unrealized gain/(loss) onsecurities available for sale, net of tax of $1,737										(3,361	)		(3,361	)
Balances at December 31, 2013		116,640		0			20,739			247			137,626
Year to date net income March 31, 2014							2,350						2,350
Cash dividends on common stock - $0.06per share							(485	)					(485	)
Exercise of 4,400 stock options		61											61
Stock option and restricted stock expense		32											32
Net change in unrealized gain/(loss) onsecurities available for sale, net of tax of $264										477			477
Balances at March 31, 2014	$	116,733	$	0		$	22,604		$	724		$	140,061

See notes to consolidated financial statements.

6

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED

MARCH 31, 2014 AND 2013

(In thousands of dollars)

UNAUDITED

	Three months ended March 31,
	2014			2013
Operating Activities:
Net income	$	2,350		$	2,863
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		0			1,278
Depreciation of premises and equipment		426			451
Net amortization of security premiums/discounts		766			1,171
Gain on available for sale securities transactions		(1	)		(50	)
Amortization of intangibles		79			102
Stock option and restricted stock expense		32			24
Gain on sale of mortgage loans		(318	)		(1,561	)
Proceeds from sales of mortgage loans		10,230			50,128
Loans originated for sale		(9,580	)		(48,668	)
Deferred federal income tax benefit		69			(227	)
(Increase)/decrease in accrued interest receivable and other assets		(2,584	)		809
Increase/(decrease) in accrued interest payable and other liabilities		1,187			1,209
Net cash provided by operating activities		2,656			7,529
Investing Activities:
Proceeds from sale of securities available for sale		1			6,330
Proceeds from maturities of CD’s		198			0
Proceeds from maturities and calls of securities available for sale		22,954			17,723
Purchases of securities available for sale		(39,258	)		(32,581	)
Proceeds from sale of premises and equipment		43			23
Net decrease/(increase) in portfolio loans		16,205			(1,220	)
Proceeds from sale of other real estate owned		1,182			1,235
Net purchases of premises and equipment		(519	)		(617	)
Net cash provided by/(used in) investing activities		806			(9,107	)
Financing Activities:
Net increase in deposits		16,744			15,477
Net increase in securities sold under agreements to repurchase and overnight borrowings		8,106			280
Repayment of Federal Home Loan Bank advances		(7,790	)		(2,534	)
Cash proceeds from issuance of common stock, net		61			216
Cash dividends on preferred stock		0			(209	)
Cash dividends on common stock		(485	)		(486	)
Net cash provided by financing activities		16,636			12,744
Increase in cash and cash equivalents		20,098			11,166
Cash and cash equivalents at beginning of period		74,654			99,601
Cash and cash equivalents at end of period	$	94,752		$	110,767
Supplemental Disclosure:
Interest Paid	$	1,318		$	1,623
Income Taxes Paid	$	0		$	0
Non cash transfers of loans to Other Real Estate Owned	$	371		$	1,894

See notes to consolidated financial statements.

7

FIRSTBANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

UNAUDITED

NOTE 1- FINANCIAL STATEMENTS

The accompanying unaudited financial information presented is for Firstbank Corporation (“Corporation”) and its wholly owned subsidiaries: Firstbank (and its 44% ownership in 1^st Investors Title, LLC), and Keystone Community Bank, collectively the “Banks”, FBMI Risk Management Services, Inc., (dissolved in December 2013) a company that provided 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 1^st Investors Title, LLC, in which we have a 44% minority interest. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The balance sheet at December 31, 2013, 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, 2013.

NOTE 2 - SECURITIES

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.

(In thousands of dollars)	Amortized Cost		Unrealized Gains		Unrealized Losses			Carrying Value
March 31, 2014
Securities available for sale
U.S. governmental agency	$	109,838	$	358	$	(344	)	$	109,852
States and political subdivisions		148,443		868		(880	)		148,431
Mortgage backed securities		67,079		1,002		(218	)		67,863
Collateralized mortgage obligations		31,808		410		(65	)		32,153
Equity and other securities		1,564		0		0			1,564
Total securities available for sale	$	358,732	$	2,638	$	(1,507	)	$	359,863
December 31, 2013
Securities available for sale
U.S. governmental agency	$	101,444	$	445	$	(285	)	$	101,604
States and political subdivisions		147,421		756		(1,513	)		146,664
Mortgage backed securities		58,533		961		(235	)		59,259
Collateralized mortgage obligations		34,225		361		(100	)		34,486
Equity and other securities		1,589		0		0			1,589
Total securities available for sale	$	343,212	$	2,523	$	(2,133	)	$	343,602

8

Securities with unrealized losses at March 31, 2014 and December 31, 2013 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
March 31, 2014
U.S. governmental agency	$	49,666	$	(316	)	$	4,607	$	(28	)	$	54,273	$	(344	)
States and political subdivisions		43,068		(541	)		17,049		(339	)		60,117		(880	)
Mortgage backed securities		22,445		(179	)		3,215		(39	)		25,660		(218	)
Collateralized mortgage obligations		6,454		(35	)		3,445		(30	)		9,899		(65	)
Total temporarily impaired	$	121,633	$	(1,071	)	$	28,316	$	(436	)	$	149,949	$	(1,507	)
December 31, 2013
U.S. governmental agencies	$	23,077	$	(237	)	$	9,836	$	(48	)	$	32,913	$	(285	)
States and political subdivisions		53,185		(1,176	)		14,085		(337	)		67,270		(1,513	)
Mortgage backed securities		16,719		(235	)		0		0			16,719		(235	)
Collateralized mortgage obligations		4,132		(35	)		8,246		(65	)		12,378		(100	)
Total temporarily impaired	$	97,113	$	(1,683	)	$	32,167	$	(450	)	$	129,280	$	(2,133	)

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 improvement in market value reflected above was due to changes in longer term interest rates for debt securities, following comments made by the chairman of the federal reserve. The value of a security moves inversely to interest rates, so as rates rose, the unrealized gain or loss in the portfolio was negatively affected. Changes in rates are typical and do not impact earnings of the company so long as investments are held to their maturity. Where unrealized losses exist, management has reviewed the issuers’ bond ratings, noting they remain of high credit quality. As of March 31, 2014 there were 207 securities with negative market positions in the portfolio compared with 210 securities with negative market positions at December 31, 2013.

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. The following table shows gross gains and losses on investment securities for the three months ended March 31, 2014 and 2013.

	As of March 31,
(In thousands of dollars)	2014		2013
Trading Account Securities Gains/Losses	$	0	$	0
Available for Sale Securities
Gross realized gains		1		67
Gross realized losses		0		17
Net realized gains	$	1	$	50

The carrying value of securities at March 31, 2014, 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	$	43,871
Due after one year through five years		156,797
Due after five years through ten years		105,058
Due after ten years		52,573
Total debt securities		358,299
Equity securities		1,564
Total securities	$	359,863

At March 31, 2014 and December 31, 2013, securities with carrying values approximating $55,741,000 and $47,635,000, respectively, 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.

9

NOTE 3 - 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 Nonaccrual 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.

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 exists. These loans are reviewed for potential impairment on a quarterly basis. Characteristics of loans in this rating may include: persistent delinquency; poor financial results of the business; negative cash flow; and the ability of guarantor(s) to provide support for the loan is questionable.

10

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 by 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.

Impaired Restructured and Accruing loans are graded seven or better based on the above definitions. If a 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. 

11

Credit Quality Indicators:

Loans at period end were as follows:
(In thousands of dollars)	March 31, 2014		December 31, 2013
Commercial and Industrial
Pass loans	$	148,483	$	152,031
Watch loans		6,807		6,578
Special mention loans		4,384		4,549
Substandard loans		2,470		2,448
Impaired restructured and accruing loans		824		1,272
Impaired nonaccrual loans		110		116
Total Commercial and Industrial		163,078		166,994
Commercial Real Estate
Pass loans	$	388,821	$	391,485
Watch loans		45,594		46,061
Special mention loans		13,452		16,623
Substandard loans		7,786		5,764
Impaired restructured and accruing loans		13,306		14,016
Impaired nonaccrual loans		5,559		5,447
Total Commercial Real Estate		474,518		479,396
First lien residential mortgage loans
Performing loans	$	204,799	$	207,019
Loans > 60 days past due		169		686
Impaired restructured and accruing loans		5,081		5,030
Nonaccrual loans		3,450		4,217
Total First lien residential mortgage loans		213,499		216,952
Junior lien residential mortgage loans
Performing loans	$	51,956	$	53,874
Loans > 60 days past due		0		81
Impaired restructured and accruing loans		243		246
Nonaccrual loans		285		287
Total Junior lien residential mortgage loans		52,484		54,488
Consumer Loans
Performing loans	$	65,618	$	68,987
Loans > 60 days past due		53		36
Impaired restructured and accruing loans		130		132
Nonaccrual loans		26		9
Total Consumer Loans		65,827		69,164
Deferred Fees and Costs		146		152
Total Loans	$	969,552	$	987,146

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.

12

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, doubtful nonaccrual, 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 mortgage 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. 

13

Allowance for credit losses for the three months ended March 31 were:

(In thousands of dollars)
Three months ending March 31, 2014	Commercial and Industrial			Commercial Real Estate			First Lien Residential Mortgages			Junior Lien Residential Mortgages			Consumer Loans			Unallocated			Total
Allowance for Credit Losses:
Beginning balance	$	1,812		$	9,308		$	5,161		$	608		$	540		$	568		$	17,997
Provision for loan losses		303			72			(316	)		(53	)		13			(19	)		0
Loans charged off		(309	)		(440	)		(410	)		(12	)		(76	)		0			(1,247	)
Recoveries		22			77			98			0			32			0			229
Ending balance	$	1,828		$	9,017		$	4,533		$	543		$	509		$	549		$	16,979
Three months ending March 31, 2013
Allowance for Credit Losses:
Beginning balance	$	1,896		$	11,565		$	5,656		$	555		$	805		$	863		$	21,340
Provision for loan losses		74			775			397			46			(57	)		43			1,278
Loans charged off		(50	)		(927	)		(770	)		(55	)		(153	)		0			(1,955	)
Recoveries		18			61			31			0			75			0			185
Ending balance	$	1,938		$	11,474		$	5,314		$	546		$	670		$	906		$	20,848

Unpaid principal balance in financing receivables at period end were:

(In thousands of dollars) March 31, 2014	Commercial and Industrial		Commercial Real Estate		First Lien Residential Mortgages		Junior Lien Residential Mortgages		Consumer Loans		Unallocated		Total
Allowance for Credit Losses:
Ending balance: individuallyevaluated for impairment	$	438	$	3,406	$	1,977	$	178	$	30	$	0	$	6,029
Ending balance: collectivelyevaluated for impairment	$	1,390	$	5,611	$	2,556	$	365	$	479	$	549	$	10,950
Financing Receivables:
Ending balance	$	163,078	$	474,518	$	213,499	$	52,484	$	65,827	$	0	$	969,406
Ending balance: individuallyevaluated for impairment	$	934	$	18,865	$	8,531	$	528	$	156	$	0	$	29,014
Ending balance: collectivelyevaluated for impairment	$	162,144	$	455,653	$	204,968	$	51,956	$	65,671	$	0	$	940,392
March 31, 2013
Allowance for Credit Losses:
Ending balance: individuallyevaluated for impairment	$	581	$	3,139	$	2,437	$	141	$	55	$	0	$	6,353
Ending balance: collectivelyevaluated for impairment	$	1,357	$	8,335	$	2,877	$	405	$	615	$	906	$	14,495
Financing Receivables:
Ending balance	$	151,057	$	471,495	$	215,926	$	56,335	$	66,277	$	0	$	961,090
Ending balance: individuallyevaluated for impairment	$	2,699	$	20,102	$	10,075	$	649	$	244	$	0	$	33,769
Ending balance: collectivelyevaluated for impairment	$	148,358	$	451,393	$	205,851	$	55,686	$	66,033	$	0	$	927,321

14

Age Analysis of Past Due Loans:

(In thousands of dollars) At March 31, 2014	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Nonaccrual loans		Current		Total Financing Receivables		Recorded Investment >90 days and accruing
Commercial and Industrial	$	86	$	116	$	0	$	202	$	110	$	162,766	$	163,078	$	0
Commercial Real Estate		1,016		163		0		1,179		5,559		467,780		474,518		0
Residential MortgagesFirst Liens		1,087		50		119		1,256		3,450		208,793		213,499		119
Residential MortgagesJunior Liens		211		0		0		211		285		51,988		52,484		0
Consumer		298		53		0		351		26		65,450		65,827		0
Deferred Fees and Costs		0		0		0		0		0		146		146		0
Total	$	2,698	$	382	$	119	$	3,199	$	9,430	$	956,923	$	969,552	$	119
At December 31, 2013
Commercial and Industrial	$	220	$	0	$	0	$	220	$	116	$	166,658	$	166,994	$	0
Commercial Real Estate		999		97		0		1,096		5,447		472,853		479,396		0
Residential MortgagesFirst Liens		907		826		0		1,733		4,217		211,002		216,952		0
Residential MortgagesJunior Liens		0		81		0		81		287		54,120		54,488		0
Consumer		459		36		0		495		9		68,660		69,164		0
Deferred Fees and Costs		0		0		0		0		0		152		152		0
Total	$	2,585	$	1,040	$	0	$	3,625	$	10,076	$	973,445	$	987,146	$	0

Impaired loans were as follows:

(In thousands of dollars) March 31, 2014	Recorded Investment		Unpaid Principal Balance		Related Allowance
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	129	$	128		0
Commercial Real Estate		8,113		8,090		0
Residential Mortgages First Liens		0		0		0
Residential Mortgages Junior Liens		0		0		0
Consumer		0		0		0
Total	$	8,242	$	8,218	$	0
Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	374	$	806	$	438
Commercial Real Estate		7,395		10,777		3,406
Residential Mortgages First Liens		6,553		8,530		1,977
Residential Mortgages Junior Liens		351		529		178
Consumer		125		154		30
Total	$	14,798	$	20,796	$	6,029
Total
Commercial and Industrial	$	503	$	934	$	438
Commercial Real Estate		15,508		18,867		3,406
Residential Mortgages First Liens		6,553		8,530		1,977
Residential Mortgages Junior Liens		351		529		178
Consumer		125		154		30
Total	$	23,040	$	29,014	$	6,029

Note: Recorded investment includes principal outstanding plus deferred fee and accrued interest, net of related allowance for loan losses.

15

(In thousands of dollars) December 31, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	398	$	396		0
Commercial Real Estate		7,473		7,449		0
Residential Mortgages First Liens		0		0		0
Residential Mortgages Junior Liens		0		0		0
Consumer		0		0		0
Total	$	7,871	$	7,845	$	0
Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	448	$	992	$	549
Commercial Real Estate		8,313		12,014		3,678
Residential Mortgages First Liens		7,013		9,247		2,082
Residential Mortgages Junior Liens		365		533		168
Consumer		399		141		19
Total	$	16,538	$	22,927	$	6,496
Total
Commercial and Industrial	$	846	$	1,388	$	549
Commercial Real Estate		15,786		19,463		3,678
Residential Mortgages First Liens		7,013		9,247		2,082
Residential Mortgages Junior Liens		365		533		168
Consumer		399		141		19
Total	$	24,409	$	30,772	$	6,496

Note: Recorded investment includes principal outstanding plus deferred fee and accrued interest, net of related allowance for loan losses.

Average recorded investment and income recognized on impaired loans were as follows:

	Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized
(In thousands of dollars)	Three months ended March 31, 2014				��	Three months ended March 31, 2013
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	264	$	1		$	1,117	$	54
Commercial Real Estate		7,793		165			8,939		250
Residential Mortgages First Liens		0		0			0		0
Residential Mortgages Junior Liens		0		0			0		0
Consumer		0		0			0		0
Total	$	8,057	$	162		$	10,056	$	304
Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	411	$	13		$	1,520	$	16
Commercial Real Estate		7,854		115			8,341		122
Residential Mortgages First Liens		6,783		72			10,534		152
Residential Mortgages Junior Liens		358		3			606		4
Consumer		191		2			419		7
Total	$	15,597	$	205		$	21,420	$	301
Total
Commercial and Industrial	$	675	$	14		$	2,637	$	70
Commercial Real Estate		15,647		280			17,280		372
Residential Mortgages First Liens		6,783		72			10,534		152
Residential Mortgages Junior Liens		358		3			606		4
Consumer		191		2			419		7
Total	$	23,654	$	371		$	31,476	$	605

16

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
Quarter to date:
March 31, 2014
Commercial and industrial		1	$	60	$	60		0	$	0
Commercial real estate		0		0		0		2		504
Residential First Liens		2		69		38		1		15
Residential junior liens		0		0		0		0		0
Consumer		0		0		0		0		0
Total		3	$	129	$	98		3	$	519
March 31, 2013
Commercial and industrial		3	$	89	$	88		1	$	9
Commercial real estate		5		1,661		1,671		0		0
Residential First Liens		2		263		263		3		396
Residential junior liens		0		0		0		0		0
Consumer		0		0		0		0		0
Total		10	$	2,013	$	2,022		4	$	405

NOTE 4 - FAIR VALUE

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

March 31, 2014 (In thousands of dollars)	Carrying Amount			Estimated Fair Value			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash and cash equivalents	$	94,752		$	94,752		$	94,752	$	0		$	0
FDIC insured bank certificates of deposit		746			746			746		0			0
Trading account securities		18			18			18		0			0
Securities available for sale		359,863			359,863			0		341,196			18,667
Federal Home Loan Bank stock		7,266			7,266			0		0			7,266
Loans held for sale		69			69			0		69			0
Loans, net		952,573			946,946			0		0			946,946
Financial Liabilities:
Deposits		(1,249,536	)		(1,229,907	)		0		0			(1,229,907	)
Securities sold under agreementsto repurchase and overnight borrowings		(55,741	)		(55,741	)		0		(55,741	)		0
Federal Home Loan Bank advances andother borrowing		(12,000	)		(12,145	)		0		0			(12,145	)
Subordinated debentures		(36,084	)		(21,084	)		0		0			(21,084	)

17

December 31, 2013 (In thousands of dollars)	Carrying Amount			Estimated Fair Value			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash and cash equivalents	$	74,654		$	74,654		$	74,654	$	0		$	0
FDIC insured bank certificates of deposit		944			944			944		0			0
Trading account securities		18			18			18		0			0
Securities available for sale		343,602			343,602			570		323,582			19,450
Federal Home Loan Bank stock		7,266			7,266			0		0			7,266
Loans held for sale		401			401			0		401			0
Loans, net		969,149			968,072			0		0			968,072
Financial Liabilities:
Deposits		(1,232,792	)		(1,213,535	)		0		0			(1,213,535	)
Securities sold under agreementsto repurchase and overnight borrowings		(47,635	)		(47,635	)		0		(47,635	)		0
Federal Home Loan Bank advances andother borrowing		(19,790	)		(20,098	)		0		0			(20,098	)
Subordinated debentures		(36,084	)		(21,084	)		0		0			(21,084	)

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, demand deposits, 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 March 31, 2014 and December 31, 2013.

The following tables present information about our assets measured at fair value on a recurring basis at March 31, 2014 and December 31, 2013, and valuation techniques used by us to determine those fair values.

Level 1 assets are assets which are actively traded on an open market and pricing is publicly available.

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 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. 

18

Assets Measured at Fair Value on a Recurring Basis

(In thousands of dollars)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
March 31, 2014
Securities available for sale
U.S. governmental agency	$	0	$	109,852	$	0	$	109,852
Mortgage backed securities		0		67,863		0		67,863
Collateralized Mortgage Obligations		0		32,153		0		32,153
States and political subdivisions		0		131,328		17,103		148,431
Equity and other securities		0		0		1,564		1,564
Total securities available for sale	$	0	$	341,196	$	18,667	$	359,863
Trading equity securities	$	18	$	0	$	0	$	18
December 31, 2013
Securities available for sale
U.S. governmental agency	$	0	$	101,604	$	0	$	101,604
Mortgage backed securities		0		59,259		0		59,259
Collateralized Mortgage Obligations		570		33,916		0		34,486
States and political subdivisions		0		128,803		17,861		146,664
Equity and other securities		0		0		1,589		1,589
Total securities available for sale	$	570	$	323,582	$	19,450	$	343,602
Trading equity securities	$	18	$	0	$	0	$	18

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

(In thousands of dollars)	2014			2013
Balance at beginning of year	$	19,450		$	21,870
Total realized and unrealized gains/(losses) included in income		0			0
Total unrealized gains/(losses) included in other comprehensive income		0			0
Purchases of securities		325			165
Sales of securities		0			0
Calls and maturities		(1,108	)		0
Net transfers into Level 3		0			0
Balance at March 31 of each year	$	18,667		$	22,035

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, other real estate owned and other repossessed assets. 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 of other real estate owned. 

19

Assets Measured at Fair Value on a Nonrecurring Basis

(In thousands of dollars)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2014
Impaired loans	$	29,014	$	0	$	0	$	29,014
Other real estate owned	$	285	$	0	$	0	$	285
December 31, 2013
Impaired loans	$	30,772	$	0	$	0	$	30,772
Other real estate owned	$	537	$	0	$	0	$	537

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.

NOTE 5 - BASIC AND DILUTED EARNINGS PER SHARE

(In thousands of dollars except per share data)	Three Months Ended March 31,
	2014		2013
Earnings per share
Net income	$	2,350	$	2,863
Preferred stock dividends and accretion of discount		0		209
Income available to common shareholders	$	2,350	$	2,654
Weighted average common shares outstanding (000)		8,086		8,016
Basic Earnings per Share	$	0.29	$	0.33
Earnings per share assuming dilution
Net income	$	2,350	$	2,863
Preferred stock dividends and accretion of discount		0		209
Income available to common shareholders	$	2,350	$	2,654
Weighted average common shares outstanding (000)		8,086		8,016
Add dilutive effect of assumed exercises of options		76		48
Weighted average common and dilutivepotential common shares outstanding (000)		8,162		8,064
Diluted Earnings per Share	$	0.29	$	0.33

Stock options for 125,041 shares for the three months of 2014, were not considered in computing diluted earnings per share because they were anti-dilutive. Stock options for 219,880 shares for the three months of 2013, were not considered in computing diluted earnings per share because they were anti-dilutive.

20

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 it’s wholly owned subsidiaries; Firstbank (including its 44% holdings in 1^st Investors Title, LLC), Keystone Community Bank, FBMI Risk Management Services, Inc., and Austin Mortgage Company.

Highlights

Through the first three months of the year, earnings were $2.4 million, or $0.29 per diluted share, compared with $2.6 million, or $0.33 per diluted share in the first three months of 2013. New loan production was sluggish in the quarter and residential mortgage refinance activity was almost nonexistent, although new mortgage business did improve compared with a year ago.

We continue to await regulatory approval of our pending merger with and into Mercantile Bank Corporation. Organizational and systems integration planning and development are in full swing so that we are prepared to hit the ground running when final approval is granted. Meanwhile, we continue to make progress on asset quality with nonaccrual loans and other real estate owned reaching the lowest levels since 2007.

Financial Condition

Total assets at March 31, 2014 increased $21 million from year end 2013 to $1.5 billion. Cash and cash equivalents increased $20 million from year end and securities available for sale increased $16 million. Loans decreased $18 million before the allowance for loan losses. The increase in securities was due to investment of excess liquidity as proceeds from loan pay downs and payoffs exceeded our ability to originate new loans.

The allowance for loan losses decreased by $1.0 million in the first three months of the year to $17.0 million. The allowance to ending loans ratio was 1.75%, compared with 1.82% at year end 2013 and 2.17% at March 31, 2013. Our problem assets categories continued to show improvement during the quarter as nonaccrual loans have now declined $646,000 from year end and $3.4 million from March 31 a year ago. Restructured loans which are in conformance with their new terms were $1.1 million lower compared with year end, and decreased $1.3 million from March 31, 2013. Loans 90 days or more past due and still accruing interest increased $119,000 from year end, and were $55,000 higher than year ago levels. Other Real Estate Owned decreased $636,000 from the end of the year to $1.2 million, and was down $2.3 million from last year’s first quarter. We are pleased with the progress we have made in the problem loan area over the past two years and expect that we will need to remain vigilant as we work through the remaining problem loans in these categories. 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 minimize or avoid losses. 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.

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

(In thousands of dollars)	March 31, 2014			December 31, 2013			Change
Commercial and industrial	$	163,078		$	166,994		$	(3,916	)
Commercial real estate		474,518			479,396			(4,878	)
First lien residential mortgages		213,499			216,952			(3,453	)
Junior lien residential mortgages		52,484			54,488			(2,004	)
Consumer		65,827			69,164			(3,337	)
Subtotal		969,406			986,994			(17,588	)
Add: Deferred fees (net of deferred costs)		146			152			(6	)
Less: Allowance for loan losses		(16,979	)		(17,997	)		1,018
Loans, net	$	952,573		$	969,149		$	(16,576	)

Overall, the loan portfolio showed a decrease of $17.6 million, or 1.8% during the first quarter of the year as several large loan payoffs more than offset new originations. First lien residential mortgages decreased $3.5 million, or 1.6%, from year end 2013 as new loan production was more than offset pay downs of loans. Junior lien residential mortgage loans also declined by $2.0 million, or 3.7% as new equity lines failed to replace those that paid off. Commercial and industrial and commercial real estate loans fell in the quarter, decreasing $8.8 million, or 1.4% as new loans from qualified borrowers were unable to outpace principal pay downs. Consumer loans decreased $3.3 million, or 4.8% from year end.

21

Net charge-offs of loans were $1.0 million in the first quarter of 2014, compared with $1.6 million in the fourth quarter of the last year and $1.8 million in the first quarter of 2013. The ratio of net charge-offs of loans (annualized) to average loans was 0.42% in the first quarter of 2014 compared to 0.65% in the fourth quarter of 2013 and 0.73% in the first quarter of 2013.

Total deposits increased $17 million, or 1.4% when compared with year end 2013 balances. In this low interest rate environment, our customers have been willing to trade a small step up in yield for liquidity, resulting in a decline in time balances even as other deposit categories continue to grow. Within the deposit base, interest bearing demand account balances increased $12 million, or 3.3%, savings balances increased $15 million, or 5.4%, and time balances decreased $9 million, or 2.7%. Within time balances, wholesale CDs were unchanged from year end, while core market CDs were down $9 million. Given our current low levels of loan demand, time deposits are being allowed to mature without replacement, or being renewed at lower rates. Non-interest bearing demand account balances were $2 million, or 0.7% lower than year end.

For the three month period ended March 31, 2014, Federal Home Loan Bank advances were down $7.8 million, or 39% from year end. In January we determined that, given the level of excess liquidity on our balance sheet, we should prepay $6.8 million of higher rate long term advances. As a result of the prepayment, we incurred a prepayment penalty of $1.3 million, which was expensed through other non-interest expense in the first quarter. Securities sold under agreements to repurchase and overnight borrowings were $8 million, or 17% higher due to normal fluctuations in customer cash flows. Accrued interest and other liabilities increased $1.2 million compared with year end.

Total shareholders’ equity increased $2.4 million from the previous year end primarily due to net income of $2.4 million. Common stock dividends during the first quarter of $485,000 reduced shareholder’s equity, while accumulated other comprehensive income increased $477,000 from year end as a favorable change in interest rates at the end of the quarter caused an increase in the fair value of our investment portfolio. Common stock issuances of $61,000 were due to stock option exercises during the quarter. Book value per share of shareholders’ common equity was $17.32 at March 31, 2014, increasing from $17.03 at December 31, 2013. Tangible shareholders common equity per share (total common equity less goodwill and other intangible assets) was $12.86 at the end of the first quarter of 2014, increasing from $12.56 at year end 2013.

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

(In thousands of dollars)	Leverage			Tier 1 Capital			Total Risk- Based Capital
Capital Balances at March 31, 2014	$	139,392		$	139,392		$	151,563
Required Regulatory Capital	$	57,922		$	38,908		$	77,815
Capital in Excess of Regulatory Minimums	$	81,470		$	100,484		$	73,748
Capital Ratios at March 31, 2014		9.63	%		14.33	%		15.58	%
Regulatory Capital Ratios – Minimum Requirement		4.00	%		4.00	%		8.00	%

Our capital remains above regulatory guidelines for the first quarter of 2014. At the end of the first quarter our total risk based capital ratio was 15.58% compared with 15.33% at year end 2013. Tier 1 capital and tier 1 leverage ratios were 14.33% and 9.63% compared with 14.08% and 9.49% at year end 2013. The increase in all of the capital ratios compared with year end was a result of capital retention and limited asset growth. As of March 31, 2014, both of our affiliate banks continue to exceed the regulatory “Well Capitalized” definition.

Results of Operations

Three Months Ended March 31, 2014

For the first quarter of 2014, net income was $2,350,000, and basic and diluted earnings per share were both $0.29. In comparison net income in the first quarter of 2013 was $2,863,000, and basic and diluted earnings per share were $0.33, and net income was $3,159,000, and basic and diluted earnings per share were $0.39 in the fourth quarter of 2013. Net income available to common shareholders was $2,350,000 in the current quarter compared with $2,654,000 in the first quarter of 2013 and $3,159,000 in the fourth quarter of 2013. Unfavorably affecting the current quarter comparisons were $1.3 million charge for prepayment of FHLB advances and $251,000 of expenses recorded in connection with the merger with Mercantile. Last year’s fourth quarter was affected by $133,000 of merger related expense, while last year’s first quarter had no unusual charges. All unfavorable amounts above are pre-tax.

22

Average earning assets decreased $15 million, when the first quarter of 2014 is compared to the same quarter a year ago. Average loan balances increased $15 million, while average overnight investments decreased $22 million, and average available for sale securities decreased $9 million. Compared with the previous quarter, average earning assets increased $5 million, or 0.4%.

The yield on earning assets decreased 11 basis points, to 4.20%, for the quarter ended March 31, 2014, compared to 4.31% for the same quarter a year ago, and was five basis points lower when compared with the fourth quarter of 2014. The cost of funding related liabilities also decreased, falling 11 basis points when comparing this year’s first quarter to the same period a year ago, from 0.48% in 2013, to 0.37% in 2014. Compared with the prior quarter, the cost of funding related liabilities fell by four basis points. The net interest margin was unchanged from last year’s first quarter at 3.83% and was one basis point lower when compared to the previous quarter. Net interest income decreased $193,000 to $12.8 million in the first quarter of 2014 compared with the same period of 2013, due to the lower level of average earning assets. The current rate environment is resulting in loan refinancing at rates lower than the previous rate on a loan while our ability to reduce funding costs is limited, making it difficult to maintain the net interest margin at current levels.

Improving metrics in our problem asset categories coupled with a lower level of charge offs in the quarter allowed us to keep the quarterly provision for loan losses at zero for the third consecutive quarter. Provision for loan losses was $1.3 million in the first quarter of 2013, and $0 in the fourth quarter of 2013. After a detailed review of the loan portfolio, it was determined that some loans should be moved to nonaccrual status, while others should be charged off. Following that review, our analysis showed that we did not need to provide additional reserves for future losses to cover losses inherent in the portfolio. We perform quantitative and qualitative analysis of factors which impact the allowance for loan losses consistently across both of our banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment growth rates, and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries most affected by current risks in the economic and political environment and the review of risks in certain credits that are not considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank.

Total non-interest income was $1.9 million in the first quarter of 2014, compared with $2.9 million in the first quarter of 2013 and $2.4 million in last year’s fourth quarter. Compared with 2013’s first quarter, gains on sale of mortgages were $1.2 million lower, as residential mortgage refinancing has slowed considerably with the current higher level of interest rates. Gain on sale of mortgage loans decreased by $196,000, when the first quarter of 2014 is compared to the fourth quarter of last year. Service charges on deposit accounts were $43,000 lower at $977,000 in this year’s first quarter compared with $1,020,000 in the first quarter of 2013 and $1,029,000 in last year’s fourth quarter. Mortgage servicing income increased $290,000 compared with last year’s first quarter (the first quarter of 2013 was a negative $136,000) and also increased $37,000 from last year’s fourth quarter. Changes in this area are primarily related to a reduction in accelerated write off of mortgage servicing assets in the period due to fewer customers re-financing their loans. Other income increased $80,000 from last year’s first quarter and was basically unchanged from the fourth quarter. This category of earnings includes gains and losses on the sale of other real estate. Other real estate sales occur when the bank has foreclosed on property and subsequently sells the property. The net gain on sale of other real estate was $170,000 higher in this year’s first quarter than a year ago, and $51,000 more than the fourth quarter 2013.

Total non-interest expense increased $838,000, or 7.9%, when comparing the three month periods ended March 31, 2014 and 2013. The current quarter includes a charge of $1.3 million for the prepayment of FHLB advances and $251,000 in expense related to the merger with Mercantile. Favorable comparison with the prior year include: salary and benefits expense, which was $41,000 lower; and advertising and promotions expense, which was $72,000 lower. Prepayment of FHLB advances in January resulted in a $1,260,000 charge to expense. The category of other non-interest expense shows a decrease of $635,000, due to a reversal of expense of $511,000 related to the termination of our debit card rewards program, as redemption of points earned occurred at a lower level than we had anticipated. Unfavorably affecting the comparison to a year ago was: higher occupancy and equipment expense, which increased $73,000; and outside professional services, which increased $63,000.

Compared with the fourth quarter 2013, non-interest expense was $504,000 higher. This comparison is affected by the same $1.3 million FHLB prepayment charge and the benefit of the $511,000 debit card rewards termination adjustment. In addition, merger related expense in the current quarter was $118,000 higher, occupancy and equipment expense was $147,000 higher and other real estate related expense was $89,000 higher. Favorably affecting the comparison with the prior quarter was a $450,000 charge relating to secondary market loan repurchase reserves in the fourth quarter of last year.

23

Federal Income tax expense was $960,000 in the first quarter of 2014, compared with $1.2 million in last year’s first quarter and $1.4 million in the fourth quarter of 2013. The change in taxes compared with each of these quarters was primarily driven by the level of pre-tax earnings.

Liquidity

At March 31, 2014, we have adequate sources of liquidity to meet our needs. Cash and cash equivalent balances were $95 million, an increase of $20 million compared with year end 2013. This increase was primarily the result of an increase in deposits of $17 million and a decrease in portfolio loans of $18 million. Our securities available for sale portfolio now stands at $360 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 $54 million, $111 million, and $48 million, respectively. Our banks also have access to funds through brokered CD markets for additional funding if needed. In addition, in the second quarter of 2013, we established a $10 million line of credit for the corporation. The line had $10 million of availability at the end of the quarter.

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, 2013 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 Management’s Discussion and Analysis on page 30 and 31 of the Corporation’s Form 10K Annual Report dated December 31, 2013, and is incorporated herein by reference.

Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition 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. We believe that our critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, including possible impairment of goodwill and other assets, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, determination of the fair value of other real estate owned, and estimating state and federal tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Management’s Discussion and Analysis on pages 31 and 32 in the Corporation’s Form 10K Annual Report to shareholders for the year ended December 31, 2013. 

24

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: whether regulators approve the merger with Mercantile Bank Corporation; 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 34 through 36 and “Market Risk” on page 36 in the registrant’s annual report to shareholders for the year ended December 31, 2013, is here incorporated by reference. Firstbank’s annual report is incorporated into its Form 10-K annual report for its fiscal year ended December 31, 2013. Also referenced here is information under the heading “Item 1A. Risk Factors” on pages 14 through 17 in the registrant’s Form 10-K annual report for its fiscal year ended December 31, 2013.

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. 

25

Item 4. Controls and Procedures

a)

Evaluation of Disclosure Controls and Procedures

On April 28, 2014the Corporation’s Chief Executive Officer and Chief Financial Officer reported on the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) to the Audit Committee. The portion of that report which constitutes their conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of March 31, 2014 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

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.

On April 28, 2014, the board of directors of Firstbank Corporation set the director compensation for 2014. In previous years, directors were paid an annual retainer consisting of two components: shares of Firstbank common stock and cash. The merger agreement with Mercantile Bank Corporation restricts Firstbank's ability to issue additional shares of common stock. Therefore our board of directors has decided to pay the 2014 directors compensation all in cash and decided to pay the fees quarter by quarter rather than annually in advance. The cash amount was calculated based on 2013's cash director fees and the market value of the Firstbank shares that would have been issued had we issued the same number of retainer shares as we did in 2013.

For directors of Firstbank Corporation, the cash retainer will be $11,157 per quarter for the Chairman of the Board, $10,227 per quarter for the Chairman of the Audit Committee and the Chairman of the Compensation Committee and $9,477 per quarter for all other independent board members. The meeting fees per meeting attended remain unchanged from 2013.

For directors of the subsidiary banks Firstbank and Keystone Community Bank, the cash retainer will be $1,292 per quarter for the Chairman of the Board and $1,723 per quarter for all other independent board members. The meeting fees per meeting attended remain unchanged from 2013.

Directors who are employees of Firstbank, such as Mr. Sullivan, do not receive any director fees. 

26

Item 6. Exhibits

Exhibit	Description
3.1	Amendment to Firstbank Corporation Bylaws dated February 20, 2014, incorporated by reference to exhibiy 3.1 to the Firstbank Corporation current report on Form 8-k dated February 20, 2014.
10.1	First Amendment to Agreement and Plan of Merger dated February 20, 2014, by and between Firstbank Corporation and Mercantile Bank Corporation, incorporated by reference to exhibit 10.1 to the Firstbank Corporation current report on Form 8-k dated February 20, 2014.
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 President and Chief Executive Officer and the Excecutive Vice President and 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

27

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: April 28, 2014	/s/ Thomas R. Sullivan
	Thomas R. Sullivan President, Chief Executive Officer (Principal Executive Officer)
Date: April 28, 2014	/s/ Samuel G. Stone
	Samuel G. Stone Executive Vice President, Chief Financial Officer (Principal Accounting Officer)

28

 EXHIBIT INDEX 

Exhibit	Description
3.1	Amendment to Firstbank Corporation Bylaws dated February 20, 2014, incorporated by reference to exhibiy 3.1 to the Firstbank Corporation current report on Form 8-k dated February 20, 2014.
10.1	First Amendment to Agreement and Plan of Merger dated February 20, 2014, by and between Firstbank Corporation and Mercantile Bank Corporation, incorporated by reference to exhibit 10.1 to the Firstbank Corporation current report on Form 8-k dated February 20, 2014.
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 President and Chief Executive Officer and the Executive Vice President and 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

  29