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 September30, 2013

[ ]	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

(State of Incorporation)

38-2633910

(I.R.S. Employer Identification No.)

311 Woodworth Avenue

Alma, Michigan

(Address of principal executive offices)

48801

(Zip Code)

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

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

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

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

Large accelerated filer ___

Accelerated filer X

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 October 31, 2013: 8,076,622 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 24

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Page 29

Item 4.

Controls and Procedures

Page 30

PART II.

OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Page 30

Item 5.

Other Information

Page 30

Item 6.

Exhibits

Page 30

SIGNATURES

Page 33

FIRSTBANK CORPORATION

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2013 AND DECEMBER 31, 2012

(Dollars in thousands except share data)

UNAUDITED

	September 30, 2013			December 31, 2012
Assets:
Cash and due from banks	$	28,944		$	38,544
Short term investments		31,019			61,057
Total cash and cash equivalents		59,963			99,601

FDIC insured bank time certificates of deposit		1,440			2,927
Trading account securities		8			6
Securities available for sale		357,421			353,678
Federal Home Loan Bank stock		7,266			7,266
Loans held for sale		732			2,921
Loans		982,286			963,762
Allowance for loan losses		(19,608	)		(21,340	)
Premises and equipment, net		23,893			24,356
Goodwill		35,513			35,513
Core deposit and other intangibles		675			965
Other real estate owned		2,161			2,925
Accrued interest receivable and other assets		25,201			26,182

Total Assets	$	1,476,951		$	1,498,762


Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Non-interest bearing accounts	$	259,946		$	251,109
Interest bearing accounts:
Demand		359,926			348,598
Savings		276,783			265,323
Time		333,461			376,371
Total Deposits		1,230,116			1,241,401

Securities sold under agreements to repurchase and overnight borrowings		47,333			42,785
Federal Home Loan Bank advances and other borrowing		19,861			22,493
Subordinated debentures		36,084			36,084
Accrued interest and other liabilities		8,242			8,941
Total Liabilities		1,341,636			1,351,704


Shareholders’ Equity:
Preferred stock; no par value, 300,000 shares authorized, 0 issued and outstanding (17,000 at December 31, 2012)		0			16,908
Common stock; 20,000,000 shares authorized, 8,076,621 shares issued and outstanding (8,001,903 at December 31, 2012)		116,466			115,621
Retained earnings		18,064			10,921
Accumulated other comprehensive income		785			3,608
Total Shareholders’ Equity		135,315			147,058

Total Liabilities and Shareholders’ Equity	$	1,476,951		$	1,498,762

See notes to consolidated financial statements.

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

SEPTEMBER 30, 2013 AND 2012

(Dollars in thousands except per share data)

UNAUDITED

	Three Months Ended September 30,
	2013			2012
Interest income:
Interest and fees on loans	$	13,012		$	14,145
Securities:
Taxable		894			1,104
Exempt from federal income tax		441			272
Short term investments		36			53
Total interest income		14,383			15,574
Interest expense:
Deposits		1,190			1,588
FHLB advances and other borrowing		173			170
Subordinated Debt		165			274
Total Interest Expense		1,528			2,032
Net Interest Income		12,855			13,542
Provision for loan losses		0			1,364
Net interest income after provision for loan losses		12,855			12,178
Non-interest income:
Service charges on deposit accounts		1,043			1,048
Gain on sale of mortgage loans		894			1,661
Mortgage servicing, net of amortization		109			(95	)
Loss on trading account securities		(4	)		(5	)
Gain on sale of available for sale securities		0			2
Other		444			405
Total non-interest income		2,486			3,016
Non-interest expense:
Salaries and employee benefits		5,805			5,865
Occupancy and equipment		1,335			1,267
FDIC insurance premium		233			265
Amortization of intangibles		86			109
Outside professional services		324			293
Advertising and promotions		347			400
Other real estate owned costs		143			513
Other		2,236			2,717
Merger related expenses		738			0
Total non-interest expense		11,247			11,429

Income before federal income taxes		4,094			3,765
Federal income taxes		1,225			1,050
Net Income	$	2,869		$	2,715

Preferred stock dividends and accretion of discount on preferred stock		0			220
Net income available to common shareholders	$	2,869		$	2,495

Basic earnings per share	$	0.36		$	0.31
Diluted earnings per share	$	0.35		$	0.31
Dividends per share	$	0.06		$	0.01

See notes to consolidated financial statements.

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

SEPTMBER 30, 2013 AND 2012

(Dollars in thousands except per share data)

UNAUDITED

	Nine Months Ended September 30,
	2013			2012
Interest income:
Interest and fees on loans	$	39,695		$	43,206
Securities:
Taxable		2,721			3,508
Exempt from federal income tax		1,244			845
Short term investments		146			161
Total interest income		43,806			47,720
Interest expense:
Deposits		3,777			5,198
FHLB advances and other borrowing		475			552
Subordinated Debt		496			822
Total Interest Expense		4,748			6,572
Net Interest Income		39,058			41,148
Provision for loan losses		1,830			6,352
Net interest income after provision for loan losses		37,228			34,796
Non-interest income:
Service charges on deposit accounts		3,107			3,166
Gain on sale of mortgage loans		3,922			4,816
Mortgage servicing, net of amortization		(54	)		(174	)
Gain on trading account securities		2			1
Gain on sale of available for sale securities		52			42
Other		1,325			1,408
Total non-interest income		8,354			9,259
Non-interest expense:
Salaries and employee benefits		17,428			17,003
Occupancy and equipment		4,021			3,912
FDIC insurance premium		768			964
Amortization of intangibles		291			380
Outside professional services		964			895
Advertising and promotions		1,048			1,120
Other real estate owned costs		495			1,309
Other		7,002			7,925
Merger related expenses		738			0
Total non-interest expense		32,755			33,508

Income before federal income taxes		12,827			10,547
Federal income taxes		3,752			3,011
Net Income	$	9,075		$	7,536

Preferred stock dividends and accretion of discount on preferred stock		481			1,060
Net income available to common shareholders	$	8,594		$	6,476

Basic earnings per share	$	1.07		$	0.82
Diluted earnings per share	$	1.06		$	0.82
Dividends per share	$	0.18		$	0.08

See notes to consolidated financial statements.

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

SEPTEMBER 30, 2013 AND 2012

(Dollars in thousands)

UNAUDITED

	Three Months Ended September 30,
	2013			2012
Net income	$	2,869		$	2,715
Other comprehensive income/(loss):
Unrealized holding gains arising during the period		590			588
Less: reclassification adjustment for gains included in net income		0			(2	)
Other comprehensive income before taxes		590			586
Income tax expense related to items in other comprehensive income		(201	)		(199	)
Other comprehensive income net of income tax effect from reclassification of $0 and $1 in 2013 and 2012, respectively		389			387
Comprehensive income	$	3,258		$	3,102

	Nine Months Ended September 30,
	2013			2012
Net income	$	9,075		$	7,536
Other comprehensive income/(loss):
Unrealized holding gains/(losses) arising during the period		(4,218	)		1,934
Less: reclassification adjustment for gains included in net income		(52	)		(42	)
Other comprehensive income/(loss) before taxes		(4,270	)		1,892
Income tax benefit/(expense) related to items in other comprehensive income		1,447			(643	)
Other comprehensive income/(loss) net of income tax effect from reclassification of $27 and $22 in 2013 and 2012, respectively		(2,823	)		1,249
Comprehensive income	$	6,252		$	8,785

See notes to consolidated financial statements.

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR PERIODS ENDED SEPTEMBER 30, 2013 AND DECEMBER 31, 2012

(Dollars in thousands except share data)

	Common Stock			Preferred Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances at January 1, 2012	$	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 September 30, 2013								9,075						9,075
Cash dividends on common stock - $0.18 per share								(1,451	)					(1,451	)
Accrued dividends on preferred stock and accretion 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 stock through the dividend reinvestment plan		176												176
Issuance of 8,385 shares of common stock from supplemental shareholder investments		111												111
Issuance of 52,790 shares of common stock		489												489
Stock option and restricted stock expense		69												69
Net change in unrealized gain/(loss) on securities available for sale, net of tax of $(1,454)											(2,823	)		(2,823	)
Balances at September 30, 2013	$	116,466		$	0		$	18,064		$	785		$	135,315

See notes to consolidated financial statements.

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2013 AND 2012

(In thousands of dollars)

UNAUDITED

	Nine months ended September 30,
	2013			2012
Operating Activities:
Net income	$	9,075		$	7,536
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,830			6,352
Depreciation of premises and equipment		1,394			1,446
Net amortization of security premiums/discounts		3,287			2,895
Gain on trading account securities		(2	)		(1	)
Gain on available for sale securities transactions		(52	)		(42	)
Amortization of intangibles		291			380
Stock option and restricted stock expense		69			67
Gain on sale of mortgage loans		(3,922	)		(4,816	)
Proceeds from sales of mortgage loans		123,480			148,517
Loans originated for sale		(117,369	)		(147,165	)
Deferred federal income tax benefit		(558	)		(793	)
Decrease in accrued interest receivable and other assets		2,937			568
Increase/(decrease) in accrued interest payable and other liabilities		(699	)		2,536
Net cash provided from operating activities		19,761			17,480

Investing Activities:
Proceeds from sale of securities available for sale		6,332			2,705
Proceeds from maturities of CD’s		1,487			1,505
Proceeds from maturities and calls of securities available for sale		71,091			103,772
Purchases of securities available for sale		(88,678	)		(115,482	)
Proceeds from sale of premises and equipment		146			5
Net increase in portfolio loans		(26,170	)		(2,155	)
Proceeds from sale of other real estate owned		4,903			4,196
Net purchases of premises and equipment		(1,077	)		(1,290	)
Net cash used in investing activities		(31,966	)		(6,744	)

Financing Activities:
Net (decrease)/increase in deposits		(11,285	)		4,319
Net increase/(decrease) in securities sold under agreements to repurchase and overnight borrowings		4,548			(857	)
Repayment of Federal Home Loan Bank advances		(2,632	)		(7,899	)
Repurchase of preferred stock		(17,000	)		(15,056	)
Repurchase of stock warrants		0			(1,947	)
Proceeds from Federal Home Loan Bank advances		0			8,000
Cash proceeds from issuance of common stock, net		776			539
Cash dividends on preferred stock		(389	)		(1,040	)
Cash dividends on common stock		(1,451	)		(636	)
Net cash used by financing activities		(27,433	)		(14,577	)

Decrease in cash and cash equivalents		(39,638	)		(3,841	)
Cash and cash equivalents at beginning of period		99,601			75,816
Cash and cash equivalents at end of period	$	59,963		$	71,975

Supplemental Disclosure:
Interest Paid	$	4,669		$	6,658
Income Taxes Paid	$	3,925		$	3,400
Non cash transfers of loans to Other Real Estate Owned	$	4,084		$	6,615

See notes to consolidated financial statements.

FIRSTBANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 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 and nine month periods ended September 30, 2013, are 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
September 30, 2013
Securities available for sale
U.S. governmental agency	$	107,919	$	641	$	(224	)	$	108,336
States and political subdivisions		147,202		811		(1,656	)		146,357
Mortgage backed securities		62,127		1,149		(173	)		63,103
Collateralized mortgage obligations		37,344		499		(58	)		37,785
Equity and other securities		1,611		229		0			1,840
Total securities available for sale	$	356,203	$	3,329	$	(2,111	)	$	357,421

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

Securities with unrealized losses at September 30, 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
September 30, 2013
U.S. governmental agency	$	27,403	$	(224	)	$	0	$	0		$	27,403	$	(224	)
States and political subdivisions		68,508		(1,603	)		4,414		(53	)		72,922		(1,656	)
Mortgage backed securities		15,096		(173	)		0		0			15,096		(173	)
Collateralized mortgage obligations		2,483		(13	)		6,930		(45	)		9,413		(58	)
Total temporarily impaired	$	113,490	$	(2,013	)	$	11,344	$	(98	)	$	124,834	$	(2,111	)

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 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 September 30, 2013 there were 242 securities with negative market positions in the portfolio compared with 74 securities with negative market positions at December 31, 2012.

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 nine months ended September 30, 2013 and 2012.

	As of September 30,
(In thousands of dollars)	2013		2012
Trading Account Securities Gains/Losses	$	2	$	1

Available for Sale Securities
Gross realized gains		79		42
Gross realized losses		27		0
Net realized gains	$	52	$	42

The carrying value of securities at September 30, 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	$	50,587
Due after one year through five years		149,361
Due after five years through ten years		104,967
Due after ten years		50,666
Total debt securities		355,581

Equity securities		1,840
Total securities	$	357,421

At September 30, 2013 and December 31, 2012, securities with carrying values approximating $47,333,000 and $45,645,000, 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.

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.

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.

Credit Quality Indicators:

Loans at period end were as follows:

(In thousands of dollars)	September 30, 2013		December 31, 2012
Commercial and Industrial
Pass loans	$	142,668	$	133,678
Watch loans		6,629		5,367
Special mention loans		5,957		5,436
Substandard loans		2,178		1,881
Impaired restructured and accruing loans		1,548		3,234
Impaired nonaccrual loans		111		448
Doubtful nonaccrual loans		0		0
Total Commercial and Industrial		159,091		150,044

Commercial Real Estate
Pass loans	$	388,944	$	373,577
Watch loans		48,542		50,790
Special mention loans		16,747		18,117
Substandard loans		5,879		9,655
Impaired restructured and accruing loans		13,634		12,106
Impaired nonaccrual loans		5,914		8,427
Doubtful nonaccrual loans		0		25
Total Commercial Real Estate		479,660		472,697

First lien residential mortgage loans
Performing loans	$	206,987	$	202,357
Loans > 60 days past due		1,052		1,046
Impaired restructured and accruing loans		4,637		4,953
Nonaccrual loans		4,868		6,040
Total First lien residential mortgage loans		217,544		214,396

Junior lien residential mortgage loans
Performing loans	$	54,309	$	58,089
Loans > 60 days past due		19		96
Impaired restructured and accruing loans		248		235
Nonaccrual loans		275		327
Total Junior lien residential mortgage loans		54,851		58,747

Consumer Loans
Performing loans	$	70,738	$	67,042
Loans > 60 days past due		58		39
Impaired restructured and accruing loans		105		191
Nonaccrual loans		36		401
Total Consumer Loans		70,937		67,673

Deferred Fees and Costs		203		205

Total Loans	$	982,286	$	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.

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.

Allowance for credit losses for the three months ended September 30 were:

(In thousands of dollars)
Three months ending September 30, 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	$	1,821		$	10,237		$	6,287		$	569		$	579		$	746		$	20,239
Provision for loan losses		14			36			71			10			87			(218	)		0
Loans charged off		(68	)		(107	)		(587	)		(41	)		(79	)		0			(882	)
Recoveries		106			109			10			0			26			0			251
Ending balance	$	1,873		$	10,275		$	5,781		$	538		$	613		$	528		$	19,608

Three months ending September 30, 2012
Allowance for Credit Losses:
Beginning balance	$	2,404		$	11,215		$	5,643		$	523		$	851		$	886		$	21,522
Provision for loan losses		(238	)		817			845			229			94			(383	)		1,364
Loans charged off		(110	)		(956	)		(571	)		(174	)		(163	)		0			(1,974	)
Recoveries		34			277			35			0			74			0			420
Ending balance	$	2,090		$	11,353		$	5,952		$	578		$	856		$	503		$	21,332

Allowance for credit losses for the nine months ended September 30 were:

Nine months ending September 30, 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		92			283			1,626			207			(43	)		(335	)		1,830
Loans charged off		(274	)		(1,770	)		(1,570	)		(224	)		(367	)		0			(4,205	)
Recoveries		159			197			69			0			218			0			643
Ending balance	$	1,873		$	10,275		$	5,781		$	538		$	613		$	528		$	19,608

Nine months ending September 30, 2012
Allowance for Credit Losses:
Beginning balance	$	2,485		$	11,534		$	5,393		$	505		$	931		$	171		$	21,019
Provision for loan losses		81			3,059			2,138			533			209			332			6,352
Loans charged off		(535	)		(3,605	)		(1,744	)		(460	)		(547	)		0			(6,891	)
Recoveries		59			365			165			0			263			0			852
Ending balance	$	2,090		$	11,353		$	5,952		$	578		$	856		$	503		$	21,332

Unpaid principal balance in financing receivables at period end were:

(In thousands of dollars)					First Lien		Junior Lien
September 30, 2013	Commercial and Industrial		Commercial Real Estate		Residential Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Allowance for Credit Losses:
Ending balance: individually evaluated for impairment	$	524	$	4,137	$	2,493	$	137	$	27	$	0	$	7,318

Ending balance: collectively evaluated for impairment	$	1,349	$	6,138	$	3,288	$	401	$	586	$	528	$	12,290

Financing Receivables:
Ending balance	$	159,091	$	479,660	$	217,544	$	54,851	$	70,937	$	0	$	982,083

Ending balance: individually evaluated for impairment	$	1,659	$	19,548	$	9,505	$	523	$	141	$	0	$	31,376

Ending balance: collectively evaluated for impairment	$	157,432	$	460,112	$	208,039	$	54,328	$	70,796	$	0	$	950,707

September 30, 2012
Allowance for Credit Losses:
Ending balance: individually evaluated for impairment	$	321	$	3,479	$	0	$	0	$	0	$	0	$	3,800

Ending balance: collectively evaluated for impairment	$	1,769	$	7,874	$	5,952	$	578	$	856	$	503	$	17,532

Financing Receivables:
Ending balance	$	152,259	$	479,577	$	215,893	$	60,661	$	69,020	$	0	$	977,410

Ending balance: individually evaluated for impairment	$	2,675	$	22,625	$	0	$	0	$	0	$	0	$	25,300

Ending balance: collectively evaluated for impairment	$	149,584	$	456,952	$	215,893	$	60,661	$	69,020	$	0	$	952,110

Age Analysis of Past Due Loans:

(In thousands of dollars)															Recorded
At September 30, 2013	30-59 Days Past Due		60-89 Days Past Due		90 Day s or More Past Due		Total Past Due		Nonaccrual loans		Current		Total Financing Receivables		Investment > 90 days and accruing
Commercial and Industrial	$	685	$	46	$	0	$	731	$	111	$	158,249	$	159,091	$	0
Commercial Real Estate		625		324		14		963		5,914		472,783		479,660		14
Residential Mortgages First Liens		789		1,039		12		1,840		4,868		210,836		217,544		12
Residential Mortgages Junior Liens		379		19		0		398		275		54,178		54,851		0
Consumer		305		58		0		363		36		70,538		70,937		0
Deferred Fees and Costs		0		0		0		0		0		203		203		0
Total	$	2,783	$	1,486	$	26	$	4,295	$	11,204	$	966,787	$	982,286	$	26

At December 31, 2012
Commercial and Industrial	$	206	$	140	$	0	$	346	$	448	$	149,250	$	150,044	$	0
Commercial Real Estate		604		1,881		0		2,485		8,452		461,760		472,697		0
Residential Mortgages First Liens		772		969		37		1,778		6,040		206,578		214,396		37
Residential Mortgages Junior Liens		473		96		0		569		327		57,851		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

Impaired loans were as follows:

(In thousands of dollars)			Unpaid
September 30, 2013	Recorded Investment		Principal Balance		Related Allowance
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	341	$	337		0
Commercial Real Estate		6,692		6,676		0
Residential Mortgages First Liens		0		0		0
Residential Mortgages Junior Liens		0		0		0
Consumer		0		0		0
Total	$	7,033	$	7,013	$	0

Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	805	$	1,322	$	524
Commercial Real Estate		8,767		12,871		4,137
Residential Mortgages First Liens		7,058		9,504		2,493
Residential Mortgages Junior Liens		386		523		137
Consumer		115		141		27
Total	$	17,131	$	24,361	$	7,318

Total
Commercial and Industrial	$	1,146	$	1,659	$	524
Commercial Real Estate		15,459		19,545		4,137
Residential Mortgages First Liens		7,058		9,505		2,493
Residential Mortgages Junior Liens		386		523		137
Consumer		115		141		27
Total	$	24,164	$	31,376	$	7,318

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.

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 September 30, 2013				Three months ended September 30, 2012
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	984	$	1	$	2,779	$	18
Commercial Real Estate		7,387		40		9,260		113
Residential Mortgages First Liens		0		0		9,451		56
Residential Mortgages Junior Liens		0		0		530		2
Consumer		0		0		481		2
Total	$	8,371	$	41	$	22,501	$	191

Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	730	$	22	$	449	$	1
Commercial Real Estate		8,694		163		10,097		9
Residential Mortgages First Liens		7,420		68		0		0
Residential Mortgages Junior Liens		388		3		0		0
Consumer		117		1		0		0
Total	$	17,349	$	257	$	10,546	$	10

Total
Commercial and Industrial	$	1,714	$	23	$	3,228	$	19
Commercial Real Estate		16,081		203		19,357		122
Residential Mortgages First Liens		7,420		68		9,451		56
Residential Mortgages Junior Liens		388		3		530		2
Consumer		117		1		481		2
Total	$	25,720	$	298	$	33,047	$	201

	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(In thousands of dollars)	Nine months ended September 30, 2013				Nine months ended September 30, 2012
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	1,050	$	134	$	3,355	$	164
Commercial Real Estate		8,163		557		10,463		648
Residential Mortgages First Liens		0		0		9,749		295
Residential Mortgages Junior Liens		0		0		487		9
Consumer		0		0		414		15
Total	$	9,213	$	691	$	24,468	$	1,131

Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	1,125	$	59	$	532	$	2
Commercial Real Estate		8,517		429		11,107		100
Residential Mortgages First Liens		8,977		318		0		0
Residential Mortgages Junior Liens		497		14		0		0
Consumer		268		13		0		0
Total	$	19,384	$	833	$	11,639	$	102

Total
Commercial and Industrial	$	2,175	$	193	$	3,887	$	166
Commercial Real Estate		16,680		986		21,570		748
Residential Mortgages First Liens		8,977		318		9,749		295
Residential Mortgages Junior Liens		497		14		487		9
Consumer		268		13		414		15
Total	$	28,597	$	1,524	$	36,107	$	1,233

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:

September 30, 2013

Commercial and industrial

FIRSTBANK CORP 10-Q