FBMI Firstbank Corp. (MM)

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)

 

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

MARCH 31, 2013 AND 2012

(Dollars in thousands except per share data)

UNAUDITED

 

		Three Months Ended March 31,
		2013				2012
Interest income:
Interest and fees on loans		$	13,284			$	14,568
Securities:
Taxable			962				1,221
Exempt from federal income tax			371				283
Short term investments			55				54
Total interest income			14,672				16,126
Interest expense:
Deposits			1,350				1,892
FHLB advances and other borrowing			145				191
Subordinated Debt			165				276
Total Interest Expense			1,660				2,359
Net Interest Income			13,012				13,767
Provision for loan losses			1,278				2,494
Net interest income after provision for loan losses			11,734				11,273
Non-interest income:
Service charges on deposit accounts			1,020				1,058
Gain on sale of mortgage loans			1,561				1,695
Mortgage servicing, net of amortization			(136	)			(94	)
Gain on trading account securities			0				1
Gain on available for sale securities			50				13
Other			400				541
Total non-interest income			2,895				3,214
Non-interest expense:
Salaries and employee benefits			5,918				5,670
Occupancy and equipment			1,359				1,361
FDIC insurance premium			259				374
Amortization of intangibles			102				145
Outside professional services			293				303
Advertising and promotions			311				364
Other real estate owned costs			163				417
Other			2,196				2,413
Total non-interest expense			10,601				11,047
Income before federal income taxes			4,028				3,440
Federal income taxes			1,165				1,023
Net Income		$	2,863			$	2,417
Preferred stock dividends and accretion of discount on preferred stock			209				420
Net income available to common shareholders		$	2,654			$	1,997
Basic earnings per share		$	0.33			$	0.25
Diluted earnings per share		$	0.33			$	0.25
Dividends per share		$	0.06			$	0.06

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

MARCH 31, 2013 AND 2012

(Dollars in thousands)

UNAUDITED

 

		Three Months Ended March 31,
		2013				2012
Net income		$	2,863			$	2,417
Other comprehensive income:
Unrealized holding gains/(losses) arising during the period			(105	)			608
Less: reclassification adjustment for gains included in net income			(50	)			(13	)
Other comprehensive income/(loss) before taxes			(155	)			595
Income tax benefit/(expense) related to items in other comprehensive income			56				( 208	)
Other comprehensive income/(loss) net of income tax effect from reclassification of $17 and $4 in 2013 and 2012, respectively			(99	)			387
Comprehensive income		$	2,764			$	2,804

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR PERIODS ENDED DECEMBER 31, 2012 AND MARCH 31, 2013

( Dollars in thousands except share data)

 

		Common Stock				Preferred Stock				Retained Earnings				Accumulated Other Comprehensive Income				Total
Balances at December 31, 2011		$	115,734			$	32,792			$	3,955			$	2,896			$	155,377
Net income for 2012											10,534								10,534
Cash dividends on common stock - $0.29 per share											(2,314	)							(2,314	)
Accrued dividends on preferred stock and accretion of discount on preferred stock							22				(1,269	)							(1,247	)
Redemption of 16,000 shares of preferred stock			850				(15,906	)											(15,056	)
Amortization of stock warrants			(15	)							15								0
Repurchase of stock warrants			(1,947	)															(1,947	)
Issuance of 46,512 shares of common stock through the dividend reinvestment plan			440																440
Issuance of 21,925 shares of common stock from supplemental shareholder investments			201																201
Issuance of 40,980 shares of common stock			262																262
Stock option and restricted stock expense			96																96
Net change in unrealized gain/(loss) on securities available for sale, net of tax of $366															712				712
Balances at December 31, 2012		$	115,621			$	16,908			$	10,921			$	3,608			$	147,058
Year to date net income March 31, 2013											2,863								2,863
Cash dividends on common stock - $0.06 per share											(486	)							(486	)
Accrued dividends on preferred stock and accretion of discount on preferred stock							4				(213	)							(209	)
Issuance of 6,699 shares of common stock through the dividend reinvestment plan			88																88
Issuance of 4,098 shares of common stock from supplemental shareholder investments			53																53
Issuance of 19,960 shares of common stock			75																75
Stock option and restricted stock expense			24																24
Net change in unrealized gain/(loss) on securities available for sale, net of tax of $(56)															(99	)			(99	)
Balances at March 31, 2013		$	115,861			$	16,912			$	13,085			$	3,509			$	149,367

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED

MARCH 31, 2013 AND 2012

(In thousands of dollars)

UNAUDITED

 

		Three months ended March 31,
Operating Activities:		2013				2012
Net income		$	2,863			$	2,417
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,278				2,494
Depreciation of premises and equipment			451				486
Net amortization of security premiums/discounts			1,171				940
Gain on trading account securities			0				(1	)
Gain on available for sale securities transactions			(50	)			(13	)
Amortization of intangibles			102				145
Stock option and restricted stock expense			24				21
Gain on sale of mortgage loans			(1,561	)			(1,695	)
Proceeds from sales of mortgage loans			50,128				50,560
Loans originated for sale			(48,668	)			(53,933	)
Deferred federal income tax expense/(benefit)			(227	)			199
Decrease in accrued interest receivable and other assets			809				901
Increase in accrued interest payable and other liabilities			1,209				180
Net cash provided from operating activities			7,529				2,701
Investing Activities:
Proceeds from sale of securities available for sale			6,330				1,765
Proceeds from maturities of CD’s			0				248
Proceeds from maturities and calls of securities available for sale			17,723				31,521
Purchases of securities available for sale			(32,581	)			(45,227	)
Proceeds from sale of premises and equipment			23				1
Net increase in portfolio loans			(1,220	)			(869	)
Proceeds from sale of other real estate owned			1,235				1,357
Net purchases of premises and equipment			(617	)			(245	)
Net cash used in investing activities			(9,107	)			(11,449	)
Financing Activities:
Net increase in deposits			15,477				32,760
Increase in securities sold under agreements to repurchase and overnight borrowings			280				8,263
Repayment of Federal Home Loan Bank advances			(2,534	)			(3,031	)
Proceeds from Federal Home Loan Bank advances			0				8,000
Cash proceeds from issuance of common stock, net			216				142
Cash dividends on preferred stock			(209	)			(413	)
Cash dividends on common stock			(486	)			(474	)
Net cash provided by financing activities			12,744				45,247
Increase in cash and cash equivalents			11,166				36,499
Cash and cash equivalents at beginning of period			99,601				75,816
Cash and cash equivalents at end of period		$	110,767			$	112,315
Supplemental Disclosure:
Interest Paid		$	1,623			$	2,885
Income Taxes Paid		$	0			$	1,000
Non cash transfers of loans to Other Real Estate Owned		$	1,894			$	172

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

UNAUDITED

NOTE 1- FINANCIAL STATEMENTS

 

The accompanying unaudited financial information presented is for Firstbank Corporation (“Corporation”) and its wholly owned subsidiaries:  Firstbank and its 46% ownership in 1 st Investors Title, LLC, Keystone Community Bank, 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 1 st Investors Title, LLC, in which we have a 46% minority interest. Firstbank - Alma, Firstbank - West Branch, and Firstbank - West Michigan were consolidated into Firstbank effective at the open of business on February 1, 2013. 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, 2013, is not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The balance sheet at December 31, 2012, 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, 2012.

 

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, 2013
Securities available for sale
U.S. governmental agency		$	99,000			$	1,082			$	(6	)		$	100,076
States and political subdivisions			148,135				1,684				(211	)			149,608
Mortgage backed securities			58,917				1,789				0				60,706
Collateralized mortgage obligations			47,919				807				(31	)			48,695
Equity and other securities			1,632				219				0				1,851
Total securities available for sale		$	355,603			$	5,581			$	( 248	)		$	360,936
December 31, 2012
Securities available for sale
U.S. governmental agency		$	105,629			$	1,271			$	(15	)		$	106,885
States and political subdivisions			116,123				1,786				(95	)			117,814
Mortgage backed securities			64,550				1,729				(2	)			66,277
Collateralized mortgage obligations			60,278				810				(58	)			61,030
Equity and other securities			1,610				62				0				1,672
Total securities available for sale		$	348,190			$	5,658			$	( 170	)		$	353,678

 

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Securities with unrealized losses at March 31, 2013 and December 31, 2012 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, 2013
U.S. governmental agency		$	5,463			$	(6	)		$	0			$	0			$	5,463			$	(6	)
States and political subdivisions			39,624				(210	)			579				(1	)			40,203				(211	)
Mortgage backed securities			0				0				0				0				0				0
Collateralized mortgage obligations			4,926				(24	)			674				( 7	)			5,600				(31	)
Total temporarily impaired		$	50,013			$	( 240	)		$	1,253			$	( 8	)		$	51,266			$	( 248	)
December 31, 2012
U.S. governmental agencies		$	10,135			$	(15	)		$	0			$	0			$	10,135			$	(15	)
States and political subdivisions			17,141				(93	)			582				(2	)			17,723				(95	)
Mortgage backed securities			0				0				513				(2	)			513				(2	)
Collateralized mortgage obligations			19,995				(55	)			721				( 3	)			20,716				(58	)
Total temporarily impaired		$	47,271			$	( 163	)		$	1,816			$	( 7	)		$	49,087			$	( 170	)

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. The following table shows gross gains and losses on investment securities for the three months ended March 31 of 2013 and 2012.

		As of March 31,
(In thousands of dollars)		2013				2012
Trading Account Securities Gains/Losses		$	0			$	1
Available for Sale Securities
Gross realized gains			67				13
Gross realized losses			17				0
Net realized gains		$	50			$	13

The carrying value of securities at March 31, 2013, 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		$	48,052
Due after one year through five years			160,918
Due after five years through ten years			83,993
Due after ten years			66,122
Total debt securities			359,085
Equity securities			1,851
Total securities		$	360,936

At March 31, 2013 and 2012, securities with carrying values approximating $45,453,000 and $53,971,000, 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.

 

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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.

 

 

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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.

 

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Credit Quality Indicators:

 

Loans at period end were as follows:

(In thousands of dollars)		March 31, 2013				December 31, 2012
Commercial and Industrial
Pass loans		$	135,174			$	133,678
Watch loans			6,101				5,367
Special mention loans			5,455				5,436
Substandard loans			1,628				1,881
Impaired restructured and accruing loans			2,418				3,234
Impaired nonaccrual loans			281				448
Doubtful nonaccrual loans			0				0
Total Commercial and Industrial			151,057				150,044
Commercial Real Estate
Pass loans		$	376,028			$	373,577
Watch loans			51,723				50,790
Special mention loans			14,918				18,117
Substandard loans			8,724				9,655
Impaired restructured and accruing loans			13,450				12,106
Impaired nonaccrual loans			6,477				8,427
Doubtful nonaccrual loans			175				25
Total Commercial Real Estate			471,495				472,697
First lien residential mortgage loans
Performing loans		$	205,671			$	202,357
Loans > 60 days past due			180				1,046
Impaired restructured and accruing loans			4,609				4,953
Nonaccrual loans			5,466				6,040
Total First lien residential mortgage loans			215,926				214,396
Junior lien residential mortgage loans
Performing loans		$	55,609			$	58,089
Loans > 60 days past due			77				96
Impaired restructured and accruing loans			233				235
Nonaccrual loans			416				327
Total Junior lien residential mortgage loans			56,335				58,747
Consumer Loans
Performing loans		$	65,927			$	67,042
Loans > 60 days past due			106				39
Impaired restructured and accruing loans			188				191
Nonaccrual loans			56				401
Total Consumer Loans			66,277				67,673
Deferred Fees and Costs			228				205
Total Loans		$	961,318			$	963,762

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, 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 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.

 

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

 

(In thousands of dollars)

Three months ending March 31, 2013		Commercial and Industrial				Commercial Real Estate				First Lien Residential Mortgages				Junior Lien Residential Mortgages				Consumer Loans				Unallocated				Total
Allowance for Credit Losses:
Beginning balance		$	1,896			$	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

 

Three months ending March 31, 2012
Allowance for Credit Losses:
Beginning balance		$	2,485			$	11,534			$	5,393			$	505			$	931			$	171			$	21,019
Provision for loan losses			3				1,525				707				221				165				(127	)			2,494
Loans charged off			(129	)			(1,340	)			(583	)			(194	)			(249	)			0				(2,495	)
Recoveries			10				48				46				0				98				0				202
Ending balance		$	2,369			$	11,767			$	5,563			$	532			$	945			$	44			$	21,220

 

 

Recorded investment in financing receivables at period end were:

 

(In thousands of dollars)

March 31, 2013		Commercial and Industrial				Commercial Real Estate				First Lien Residential Mortgages				Junior Lien Residential Mortgages				Consumer Loans				Unallocated				Total
Ending balance: individually evaluated for impairment		$	581			$	3,139			$	2,437			$	141			$	55			$	0			$	6,353
Ending balance: collectively evaluated 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: individually evaluated for impairment		$	2,699			$	20,102			$	10,075			$	649			$	244			$	0			$	33,769
Ending balance: collectively evaluated for impairment		$	148,358			$	451,393			$	205,851			$	55,686			$	66,033			$	0			$	927,321

 

March 31, 2012
Ending balance: individually evaluated for impairment		$	253			$	3,399			$	2,167			$	106			$	186			$	0			$	6,111
Ending balance: collectively evaluated for impairment		$	2,116			$	8,368			$	3,396			$	426			$	759			$	44			$	15,109
Financing Receivables:
Ending balance		$	157,725			$	481,592			$	212,994			$	64,303			$	65,698			$	0			$	982,312
Ending balance: individually evaluated for impairment		$	4,013			$	24,979			$	10,014			$	609			$	485			$	0			$	40,100
Ending balance: collectively evaluated for impairment		$	153,712			$	456,613			$	202,980			$	63,694			$	65,213			$	0			$	942,212

 

 

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Age Analysis of Past Due Loans excluding nonaccrual loans:

 

(In thousands of dollars)

At March 31, 2013		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		$	296			$	11			$	0			$	307			$	281			$	150,469			$	151,057			$	0
Commercial Real Estate			3,011				199				0				3,210				6,652				461,633				471,495				0
Residential Mortgages First Liens			1,774				124				28				1,926				5,466				208,534				215,926				28
Residential Mortgages Junior Liens			395				34				36				465				416				55,454				56,335				36
Consumer			440				106				0				546				57				65,674				66,277				0
Deferred Fees and Costs			0				0				0				0				0­				­228				228				0
Total		$	5,916			$	474			$	64			$	6,454			$	12,872			$	941,992			$	961,318			$	64

 

At December 31, 2012
Commercial and Industrial		$	206			$	140			$	0			$	346			$	447			$	149,251			$	150,044			$	0
Commercial Real Estate			604				1,881				0				2,485				8,454				461,758				472,697				0
Residential Mortgages First Liens			772				969				37				1,778				6,038				206,580				214,396				37
Residential Mortgages Junior Liens			473				96				0				569				328				57,850				58,747				0
Consumer			435				39				0				474				401				66,798				67,673				0
Deferred Fees and Costs			0				0				0				0				0				­­­­­­205				205				0
Total		$	2,490			$	3,125			$	37			$	5,652			$	15,668			$	942,442			$	963,762			$	37

 

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Impaired loans were as follows:

 

(In thousands of dollars)

March 31, 2013		Recorded Investment				Unpaid Principal Balance				Related Allowance
Period end loans with no allocated allowance for loan losses
Commercial and Industrial		$	1,343			$	1,353				0
Commercial Real Estate			8,662				8,659				0
Residential Mortgages First Liens			0				0				0
Residential Mortgages Junior Liens			0				0				0
Consumer			0				0				0
Total		$	10,005			$	10,012			$	0
Period end loans with allocated allowance for loan losses
Commercial and Industrial		$	766			$	1,346			$	581
Commercial Real Estate			8,305				11,443				3,139
Residential Mortgages First Liens			7,638				10,075				2,437
Residential Mortgages Junior Liens			508				649				141
Consumer			190				244				55
Total		$	17,407			$	23,757			$	6,353
Total
Commercial and Industrial		$	2,109			$	2,699			$	581
Commercial Real Estate			16,967				20,102				3,139
Residential Mortgages First Liens			7,638				10,075				2,437
Residential Mortgages Junior Liens			508				649				141
Consumer			190				244				55
Total		$	27,412			$	33,769			$	6,353

 

December 31, 2012
Period end loans with no allocated allowance for loan losses
Commercial and Industrial		$	891			$	891				0
Commercial Real Estate			9,215				9,212				0
Residential Mortgages First Liens			0				0				0
Residential Mortgages Junior Liens			0				0				0
Consumer			0				0				0
Total		$	10,106			$	10,103			$	0
Period end loans with allocated allowance for loan losses
Commercial and Industrial		$	2,273			$	2,792			$	515
Commercial Real Estate			8,377				11,346				2,971
Residential Mortgages First Liens			8,695				10,993				2,298
Residential Mortgages Junior Liens			472				562				90
Consumer			366				592				226
Total		$	20,183			$	26,285			$	6,100
Total
Commercial and Industrial		$	3,164			$	3,683			$	515
Commercial Real Estate			17,592				20,558				2,971
Residential Mortgages First Liens			8,695				10,993				2,298
Residential Mortgages Junior Liens			472				562				90
Consumer			366				592				226
Total		$	30,289			$	36,388			$	6,100

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

 

 

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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, 2013								Three months ended March 31, 2012
Period end loans with no allocated allowance for loan losses
Commercial and Industrial		$	1,117			$	54			$	3,931			$	72
Commercial Real Estate			8,939				250				11,667				318
Residential Mortgages First Liens			0				0				0				0
Residential Mortgages Junior Liens			0				0				0				0
Consumer			0				0				0				0
Total		$	10,056			$	304			$	15,598			$	390
Period end loans with allocated allowance for loan losses
Commercial and Industrial		$	1,520			$	16			$	615			$	13
Commercial Real Estate			8,341				122				12,118				51
Residential Mortgages First Liens			10,534				152				10,047				123
Residential Mortgages Junior Liens			606				4				444				3
Consumer			419				7				348				8
Total		$	21,420			$	301			$	23,572			$	198
Total
Commercial and Industrial		$	2,637			$	70			$	4,546			$	85
Commercial Real Estate			17,280				372				23,785				369
Residential Mortgages First Liens			10,534				152				10,047				123
Residential Mortgages Junior Liens			606				4				444				3
Consumer			419				7				348				8
Total		$	31,476			$	605			$	39,170			$	588

Loan modifications as of the period ending:

		Troubled Debt Restructurings												Troubled Debt Restructurings that Subsequently Defaulted
(In thousands of dollars)		Number of contracts				Pre-modification outstanding recorded investment				Post-modification outstanding recorded investment				Number of contracts				Recorded investment
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
March 31, 2012
Commercial and industrial			5			$	787			$	782				0			$	0
Commercial real estate			8				1,985				1,983				4				1,047
Residential First Liens			4				377				377				6				561
Residential junior liens			2				103				103				0				0
Consumer			2				107				107				0				0
Total			21			$	3,359			$	3,352				10			$	1,608

 

 

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NOTE 4 - FAIR VALUE

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

 

March 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		$	110,767			$	110,767			$	110,767			$	0			$	0
FDIC insured bank certificates of deposit			2,927				2,927				2,927				0				0
Trading account securities			6				6				6				0				0
Securities available for sale			360,936				360,936				97				338,804				22,035
Federal Home Loan Bank stock			7,266				7,266				0				0				7,266
Loans held for sale			3,022				3,022				0				3,022				0
Loans, net			940,470				922,570				0				0				922,570
Financial Liabilities:
Deposits			(1,256,878	)			(1,256,668	)			0				0				(1,256,668	)
Securities sold under agreements to repurchase and overnight borrowing			(43,065	)			(43,065	)			0				(43,065	)			0
Federal Home Loan Bank advances			(19,959	)			(21,513	)			0				0				(21,513	)
Subordinated debentures			(36,084	)			(36,094	)			0				0				(36,094	)

 

December 31, 2012 (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		$	99,601			$	99,601			$	99,601			$	0			$	0
FDIC insured bank certificates of deposit			2,927				2,927				2,927				0				0
Trading account securities			6				6				6				0				0
Securities available for sale			353,678				353,678				91				331,717				21,870
Federal Home Loan Bank stock			7,266				7,266				0				0				7,266
Loans held for sale			2,921				2,921				0				2,921				0
Loans, net			942,422				930,354				0				0				930,354
Financial Liabilities:
Deposits			(1,241,401	)			(1,243,712	)			0				0				(1,243,712	)
Securities sold under agreements to repurchase and overnight borrowings			(42,785	)			(42,785	)			0				(42,785	)			0
Federal Home Loan Bank advances			(22,493	)			(24,122	)			0				0				(24,122	)
Subordinated debentures			(36,084	)			(36,093	)			0				0				(36,093	)

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, 2013 and December 31, 2012.

 

 

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The following tables present information about our assets measured at fair value on a recurring basis at March 31, 2013 and December 31, 2012, 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.

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, 2013
Securities available for sale
U.S. governmental agency		$	0			$	100,076			$	0			$	100,076
States and political subdivisions			0				129,327				20,281				149,608
Mortgage backed securities			0				60,706				0				60,706
Collateralized mortgage obligations			0				48,695				0				48,695
Equity and other securities			97				0				1,754				1,851
Total securities available for sale		$	97			$	338,804			$	22,035			$	360,936
Trading equity securities		$	6			$	0			$	0			$	6
December 31, 2012
Securities available for sale
U.S. governmental agency		$	0			$	106,885			$	0			$	106,885
States and political subdivisions			0				97,525				20,289				117,814
Mortgage backed securities			0				66,277				0				66,277
Collateralized mortgage obligations			0				61,030				0				61,030
Equity and other securities			91				0				1,581				1,672
Total securities available for sale		$	91			$	331,717			$	21,870			$	353,678
Trading equity securities		$	6			$	0			$	0			$	6

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

(In thousands of dollars)		2013				2012
Balance at beginning of year		$	21,870			$	16,914
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			165				2,242
Sales of securities			0				0
Calls and maturities			0				(2,528	)
Net transfers in/(out) of Level 3			0				0
Balance at March 31 of each year		$	22,035			$	16,628

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.

 

 

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Assets Measured at Fair Value on a Nonrecurring Basis

(In thousands of dollars)						Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
March 31, 2013
Impaired loans		$	33,769			$	0			$	0			$	33,769
Other real estate owned		$	3,541			$	0			$	0			$	3,541
Other repossessed assets		$	320			$	0			$	0			$	320
December 31, 2012
Impaired loans		$	36,388			$	0			$	0			$	36,388
Other real estate owned		$	1,296			$	0			$	0			$	1,296
Other repossessed assets		$	250			$	0			$	0			$	250

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. Losses on impaired loans indicated in the table above were charged to the allowance for loan losses. Losses in other real estate owned and other repossessed assets were charged to earnings through other non-interest expense on the income statement.

NOTE 5 – BASIC AND DILUTED EARNINGS PER SHARE

(In thousands of dollars except per share data)		Three Months Ended March 31,
		2013				2012
Earnings per share
Net income		$	2,863			$	2,417
Preferred stock dividends and accretion of discount			209				420
Income available to common shareholders		$	2,654			$	1,997
Weighted average common shares outstanding			8,016				7,897
Basic Earnings per Share		$	0.33			$	0.25
Earnings per share assuming dilution
Net income		$	2,863			$	2,417
Preferred stock dividends and accretion of discount			209				420
Income available to common shareholders		$	2,654			$	1,997
Weighted average common shares outstanding			8,016				7,897
Add dilutive effect of assumed exercises of options			48				6
Weighted average common and dilutive potential common shares outstanding			8,064				7,903
Diluted Earnings per Share		$	0.33			$	0.25

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. Stock options and warrants for 925,879 shares for the three month period of 2012, were not considered in computing diluted earnings per share because they were anti-dilutive.

 

 

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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 (including 1 st Title, Inc. and its 46% holdings in 1 ST Investors Title, LLC), Keystone Community Bank, FBMI Risk Management Services, Inc., and Austin Mortgage Company.

Highlights

On February 1, we completed our previously announced consolidation of Firstbank charters as planned. In a separate action, we also closed five branches as previously announced in the fourth quarter of 2012. Expenses relating to the branch closings were recorded in last year's fourth quarter.

Subsequent to the end of the quarter, we received notice from the Federal Reserve that they had no objection to our request to redeem the $17 million of outstanding preferred stock. We anticipate completing the redemption by the end of the second quarter of this year. Owners of the preferred stock will receive $1,000 par value, plus accrued interest through the redemption date. Funding for the redemption will be provided from a combination of internal funds and borrowing.

Financial Condition

Total assets at March 31, 2013 were little changed from year end 2012 at $1.515 billion, increasing by $17 million. Cash and cash equivalents increased $11 million from year end and securities available for sale increased $7 million as we elected to reinvest funds from maturing securities and deploy some of our excess cash in this area during the first quarter. The loan portfolio continued to decline as loan balances decreased $2.4 million before allowance for loan losses. The decrease in loans was driven by a $2.8 million decrease in nonaccrual loans.

The allowance for loan losses decreased by $492,000 in the first three months of the year to $20.8 million. The allowance to ending loans ratio was 2.17%, compared with 2.21% at year end 2012 and 2.16% at March 31, 2012. Our problem assets categories improved during the quarter as nonaccrual loans declined $2.8 million from year end and $8.9 million from March 31 a year ago. Restructured loans which are in conformance with their new terms were $178,000 higher compared with year end, and increased $2.8 million from March 31, 2012. Loans 90 days or more past due and still accruing interest increased $27,000 from year end, but were $1.1 million below year ago levels. Other Real Estate Owned increased $616,000 from the end of the year to $3.5 million, and was down $481,000 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, but expect that we will need to remain vigilant as work towards returning to our historical levels for these loan categories.

Despite the current elevated levels of problem 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 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, 2013				December 31, 2012				Change
Commercial and industrial		$	151,057			$	150,044			$	1,013
Commercial real estate			471,495				472,697				(1,202	)
First lien residential mortgages			215,926				214,396				1,530
Junior lien residential mortgages			56,335				58,747				(2,412	)
Consumer			66,277				67,673				( 1,396	)
Subtotal			961,090				963,557				(2,467	)
Add: Deferred fees (net of deferred costs)			228				205				23
Less: Allowance for loan losses			(20,848	)			(21,340	)			492
Loans, net		$	940,470			$	942,422			$	( 1,952	)

First lien residential mortgages increased $1.5 million, or 0.7%, from year end 2012 as new loan production more than offset pay downs of loans and refinanced loans sold in the secondary market. Junior lien residential mortgage loans however declined by $2.4 million, or 4.1% in part due to reduced seasonal line of credit draws. Commercial and industrial and commercial real estate loans were basically unchanged, decreasing $0.2 million as loan demand from qualified borrowers was unable to outpace principal pay downs. Consumer loans decreased $1.4 million, or 2.1% from year end. These numbers demonstrate the continued difficulty we are experiencing to generate new loans, however, we stand ready to make loans to qualified borrowers when the opportunity presents itself.

 

 

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Net charge-offs of loans were $1.8 million in the first three months of 2013, compared with $2.3 million in the comparable period of 2012, and $1.4 million in the fourth quarter of 2012. The ratio of net charge-offs of loans (annualized) to average loans was 0.73% in the first quarter of 2013 compared to 0.94% in the first quarter of 2012 and 0.55% in the fourth quarter of 2012. First quarter 2013 charge offs included $599,000 of loans which were specifically reserved for at the end of 2012.

Total deposits increased $15 million, or 1.2% when compared with year end 2012 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 $23 million, or 6.7%, savings balances increased $16 million, or 5.9%, and time balances decreased $16 million, or 4.1%. Within time balances, wholesale CDs were $295,000 lower than year end, while core market CDs were down $12.3 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 $8 million, or 3.2% lower than year end.

For the three month period ended March, 2013, Federal Home Loan Bank advances were down $2.5 million, or 11.3% from year end. Securities sold under agreements to repurchase and overnight borrowings were $280,000, or 0.7% 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 $2.3 million from the previous year end primarily due to net income exceeding dividends to shareholder by $2.2 million. Net income of $2,863,000 and common stock issuances of $240,000 increased shareholders’ equity, while common and preferred stock dividends of $0.7 million reduced shareholder’s equity. Accumulated other comprehensive income decreased $0.1 million from year end. Common stock issuance was primarily related to shares issued through supplemental investment plans and dividend reinvestment. Book value per share of shareholders’ common equity was $16.49 at March 31, 2013, increasing from $16.26 at December 31, 2012. Tangible shareholders common equity per share (total common equity less goodwill and other intangible assets) was $11.96 at the end of the first quarter of 2013, increasing from $11.71 at year end 2012. Shareholders’ common equity per share calculations excludes preferred stock of $16.9 million at March 31, 2013 and December 31, 2012.

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, 2013		$	145,565			$	145,565			$	157,736
Required Regulatory Capital		$	59,301			$	38,597			$	77,194
Capital in Excess of Regulatory Minimums		$	86,264			$	106,968			$	80,542
Capital Ratios at March 31, 2013			9.82	%			15.09	%			16.35	%
Regulatory Capital Ratios – Minimum Requirement			4.00	%			4.00	%			8.00	%

Our capital remains above regulatory guidelines for the first quarter of 2013. At the end of the first quarter our total risk based capital ratio was 16.35% compared with 15.99% at year end 2012. Tier 1 capital and tier 1 leverage ratios were 9.82% and 15.09% compared with 14.73% and 9.71% at year end 2012. The increase in all of the capital ratios during the quarter was a result of capital retention exceeding asset growth. As of March 31, 2013, both of our affiliate banks continue to exceed the “Well Capitalized” regulatory definition.

  Results of Operations

Three Months Ended March 31, 2013

For the first quarter of 2013, net income was $2,863,000, basic and diluted earnings per share were $0.33, compared with net income of $2,417,000, and $0.25 basic and diluted per share for the first quarter of 2012, and net income of $2,999,000, $0.35 basic and diluted earnings per share, for the fourth quarter of 2012. Net income available to common shareholders was $2,654,000 in the current quarter compared with $1,997,000 in the first quarter of 2012 and $2,783,000 in the fourth quarter of 2012.

 

 

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Favorably affecting the current quarter were mortgage loan sale gains of $1.6 million, securities gains of $50,000, lower provision for loan losses in this year’s first quarter, and lower costs associated with other real estate owned during the current quarter.

Average earning assets increased $13 million, when the first quarter of 2013 is compared to the same quarter a year ago. Average net loan balances declined $19 million, while average overnight investments and average available for sale securities increased $17 million and $12 million, respectively. The tradeoff of balances from the loan portfolio to the securities and overnight funding pools negatively affected the net interest margin. Compared with the previous quarter, average earning assets increased $15 million, or 1.2%.

The yield on earning assets decreased 42 basis points, to 4.31%, for the quarter ended March 31, 2013, compared to 4.73% for the same quarter a year ago, and was 11 basis points lower when compared with the fourth quarter of 2012. The cost of funding related liabilities also decreased, falling 21 basis points when comparing this year’s first quarter to the same period a year ago, from 0.69% in 2012, to 0.48% in 2013. Compared with the prior quarter, the cost of funding related liabilities fell by four basis points. The net interest margin decreased 20 basis points from last year’s first quarter of 4.03% to 3.83% in the current quarter. The net interest margin decreased eight basis points when compared to the previous quarter. Net interest income decreased $755,000 to $13.0 million in the first quarter of 2013 compared with the same period of 2012, due to the unfavorable shift of earning assets from loans to the investment portfolio, and the continued low interest rate environment. The current rate environment is resulting in loan refinancing at rates lower than the previous rate on the loan while our ability to reduce funding costs is limited. This combination has resulting in a lower net interest margin.

The provision for loan losses decreased $1.2 million when the first quarter of 2013 is compared to the same quarter of 2012. Provision for loan losses was $1.3 million in this year’s first quarter compared with $2.5 million in the first quarter of 2012. The provision for loan losses was also $60,000 lower than the fourth quarter of 2012. In the first quarter of the year we charged down $0.6 million of commercial loans, for which we had specific reserves set aside at the end of the previous year. 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 for future losses at the current level of 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 five 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 $2.9 million in the first quarter of 2013, compared with $3.2 million in the first quarter of 2012 and $3.4 million in the fourth quarter of 2012. Compared with 2012’s first quarter, gains on sale of mortgages were $134,000 or 7.9% lower, primarily due to current levels of mortgage refinancing resulting from the current interest rate environment. Gain on sale of mortgage loans also decreased by $146,000, or 8.6% when the first quarter of 2013 is compared to the fourth quarter of 2012. Lower refinance rates and less restrictive loan to value ratio criteria from Government Sponsored Entities in the secondary market are continuing to provide incentives to borrowers to refinance their loans at lower rates. Service charges on deposit accounts were $38,000 lower than the year ago first quarter, and were also down a similar $33,000 compared with the fourth quarter of 2012. The lower income in this area this year compared with a year ago was mainly due to changes in our overdraft policies, and in our customers’ management of their accounts, resulting in reduced charges to customers that overdraw their accounts. Mortgage servicing income decreased $42,000 compared with last year’s first quarter and was $78,000 below last year’s fourth quarter. The lower income in this area was due to accelerated write off of mortgage servicing assets in the current period as  more customers re-financed their loans. Other income decreased $141,000 from last year’s first quarter and was $303,000 lower than the fourth quarter of 2012. 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 $164,000 lower in this year’s first quarter and $160,000 lower than fourth quarter 2012. Also affecting the comparison to the fourth quarter was a swing in the fair value of mortgage loan commitments from a positive $104,000 in 2012’s fourth quarter to a negative $19,000 in this year’s first quarter.

 

 

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Total non-interest expense decreased $446,000, or 4.0%, when comparing the three month periods ended March 31, 2013 and 2012 and was primarily due to lower other real estate costs, which declined $254,000 from a year ago. FDIC premiums were also $115,000 lower than last year as we now are realizing the benefit of the new premium methodology implemented by the FDIC mid-year 2012. Salary and benefits expense was $248,000 higher when compared with the first quarter of last year due primarily to higher variable compensation expense, which increased by $142,000 as the company’s performance this year has improved compared with last year, and the impact of annual merit increases. Compared with fourth quarter 2012, non-interest expense was $575,000 lower, primarily due to the onetime $600,000 charge  recorded in connection with branch closings during the fourth quarter.

Federal Income tax expense was $1.2 million in the first quarter of 2013, compared with $1.0 million in last year’s first quarter and $1.2 million in the fourth quarter of 2012. The change in taxes compared with each of these quarters was primarily driven by changes in pre-tax earnings.

  Liquidity

At March 31, 2013, we have adequate sources of liquidity to meet our needs. Cash and cash equivalent balances were $111 million, an increase of $11 million, or 11%, compared with year end 2012. This increase was primarily the result of an increase in deposits of $15 million. Our securities available for sale portfolio now stands at $361 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, $105 million, and $46 million, respectively. Our banks also have access to funds through brokered CD markets for additional funding if needed.

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, 2012 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 14 and 15 of the Corporation’s Form 10K Annual Report dated December 31, 2012, 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 15 and 16 in the Corporation’s Form 10K Annual Report to shareholders for the year ended December 31, 2012.

Recent Accounting Pronouncements

During 2012, the Company adopted new guidance related to the presentation of comprehensive income in the financial statements. Among other changes, the new guidance eliminated the option to only present comprehensive income in the statement of equity. We have elected to report comprehensive income in a separate statement of comprehensive income following the consolidated statements of income. The change in presentation has been applied retrospectively and the 2012 financial statements have been restated to conform to the new presentation method. Other than the change in presentation of comprehensive income and related disclosures, the new guidance did not have any effect on the financial statements.

 

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FORWARD LOOKING STATEMENTS

This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation itself.  Words such as  “anticipate,”  “believe,”  “determine,” “estimate,”  “expect,”  “forecast,”  “intend,”  “is likely,”  “plan,”  “project,”  “opinion,” variations of such terms, and similar expressions are intended to identify such forward-looking statements.  The presentations and discussions of the provision and allowance for loan losses, and determinations as to the need for other allowances presented in this report are inherently forward-looking statements in that they involve judgments and statements of belief as to the outcome of future events.  These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence.  Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements.  Internal and external factors that may cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior and customer ability to repay loans; software failure, errors or miscalculations; and the vicissitudes of the national economy.  The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

Information under the headings, “Liquidity and Interest Rate Sensitivity” on pages 12 through 14 and “Quantitative and Qualitative Disclosure About Market Risk” on page 17 in the registrant’s annual report to shareholders for the year ended December 31, 2012, 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, 2012.  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, 2012.

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 May 7, 2013, the Corporation’s Chief Executive Officer and Chief Financial Officer reported on the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) to the Audit Committee.  The portion of that report which constitutes their conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of March 31, 2013 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. Firstbank – Alma, Firstbank – West Branch, and Firstbank – West Michigan were consolidated into Firstbank effective as of the close of business on January 31, 2013.

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: May 7, 2013	/s/ Thomas R. Sullivan
	Thomas R. Sullivan
	President, Chief Executive Officer
	(Principal Executive Officer)

 

Date: May 7, 2013	/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.

101	Interactive Data File

 

 

 

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