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 June 30, 2011
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ___________ to ___________ .
Commission file number: 000-14209
(Exact name of registrant as specified in its charter)
Michigan
|
|
38-2633910
|
(State of Incorporation)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
311 Woodworth Avenue
|
|
|
Alma, Michigan
|
|
48801
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Registrant’s telephone number, including area code: (989) 463-3131
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes
X
No___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
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
_
Non-accelerated filer ___ Smaller reporting company _X__
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
X
Common stock outstanding at July 31, 2011: 7,853,844 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 18
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
Page 23
|
|
|
|
Item 4.
|
Controls and Procedures
|
Page 25
|
|
|
|
|
|
|
PART II.
|
OTHER INFORMATION
|
|
|
|
|
Item 4.
|
[removed and reserved]
|
|
|
|
|
Item 5.
|
Other Information
|
Page 25
|
|
|
|
Item 6.
|
Exhibits
|
Page 25
|
|
|
|
|
|
|
SIGNATURES
|
|
Page 25
|
|
|
|
|
|
|
EXHIBIT INDEX
|
|
Page 26
|
Item 1:
|
Financial Statements (UNAUDITED)
|
|
|
|
|
FIRSTBANK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2011 AND DECEMBER 31, 2010
(Dollars in thousands)
UNAUDITED
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
28,124
|
|
|
$
|
25,322
|
|
Short term investments
|
|
|
68,594
|
|
|
|
48,216
|
|
Total Cash and cash equivalents
|
|
|
96,718
|
|
|
|
73,538
|
|
|
|
|
|
|
|
|
|
|
FDIC insured bank time certificates of deposit
|
|
|
5,700
|
|
|
|
10,405
|
|
Trading account securities
|
|
|
20
|
|
|
|
13
|
|
Securities available for sale
|
|
|
290,283
|
|
|
|
255,703
|
|
Federal Home Loan Bank stock
|
|
|
7,266
|
|
|
|
8,203
|
|
Loans held for sale
|
|
|
434
|
|
|
|
1,355
|
|
Loans, net of allowance for loan losses of $21,327 at June 30, 2011
and $21,431 at December 31, 2010
|
|
|
984,635
|
|
|
|
1,010,189
|
|
Premises and equipment, net
|
|
|
25,557
|
|
|
|
25,431
|
|
Goodwill
|
|
|
35,513
|
|
|
|
35,513
|
|
Core deposit and other intangibles
|
|
|
1,775
|
|
|
|
2,145
|
|
Other real estate owned
|
|
|
8,469
|
|
|
|
8,316
|
|
Accrued interest receivable and other assets
|
|
|
25,023
|
|
|
|
27,532
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,481,393
|
|
|
$
|
1,458,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing accounts
|
|
$
|
194,795
|
|
|
$
|
185,191
|
|
Interest bearing accounts:
|
|
|
|
|
|
|
|
|
Demand
|
|
|
310,250
|
|
|
|
293,900
|
|
Savings
|
|
|
237,008
|
|
|
|
210,239
|
|
Time
|
|
|
476,267
|
|
|
|
494,453
|
|
Total Deposits
|
|
|
1,218,320
|
|
|
|
1,183,783
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase and overnight borrowings
|
|
|
46,304
|
|
|
|
41,328
|
|
Federal Home Loan Bank advances
|
|
|
21,543
|
|
|
|
40,658
|
|
Subordinated Debentures
|
|
|
36,084
|
|
|
|
36,084
|
|
Accrued interest and other liabilities
|
|
|
7,480
|
|
|
|
8,062
|
|
Total Liabilities
|
|
|
1,329,731
|
|
|
|
1,309,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock; no par value, 300,000 shares authorized, 33,000 issued
|
|
|
32,778
|
|
|
|
32,763
|
|
Common stock; 20,000,000 shares authorized, 7,853,295 shares issued
and outstanding ( 7,803,816 at December 31, 2010 )
|
|
|
115,571
|
|
|
|
115,224
|
|
Retained earnings
|
|
|
1,157
|
|
|
|
295
|
|
Accumulated other comprehensive income
|
|
|
2,156
|
|
|
|
146
|
|
Total Shareholders’ Equity
|
|
|
151,662
|
|
|
|
148,428
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
1,481,393
|
|
|
$
|
1,458,343
|
|
See notes to consolidated financial statements.
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
JUNE 30, 2011 AND 2010
(Dollars in thousands except per share data)
UNAUDITED
|
|
Three Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
Interest Income:
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
15,571
|
|
|
$
|
16,993
|
|
Securities
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,319
|
|
|
|
910
|
|
Exempt from Federal Income Tax
|
|
|
280
|
|
|
|
272
|
|
Short term investments
|
|
|
45
|
|
|
|
50
|
|
Total Interest Income
|
|
|
17,215
|
|
|
|
18,225
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,945
|
|
|
|
4,198
|
|
FHLB advances and other borrowing
|
|
|
227
|
|
|
|
988
|
|
Subordinated Debt
|
|
|
302
|
|
|
|
371
|
|
Total Interest Expense
|
|
|
3,474
|
|
|
|
5,557
|
|
Net Interest Income
|
|
|
13,741
|
|
|
|
12,668
|
|
Provision for loan losses
|
|
|
4,256
|
|
|
|
3,066
|
|
Net Interest Income after provision for loan losses
|
|
|
9,485
|
|
|
|
9,602
|
|
Non-interest Income:
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
1,182
|
|
|
|
1,180
|
|
Gain on sale of mortgage loans
|
|
|
413
|
|
|
|
726
|
|
Mortgage servicing, net of amortization
|
|
|
76
|
|
|
|
63
|
|
Gain/(loss) on trading account securities
|
|
|
2
|
|
|
|
0
|
|
Gain/(loss) on securities
|
|
|
(2
|
)
|
|
|
(46
|
)
|
Other
|
|
|
340
|
|
|
|
442
|
|
Total Non-interest Income
|
|
|
2,011
|
|
|
|
2,365
|
|
Non-interest Expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
5,170
|
|
|
|
5,249
|
|
Occupancy and equipment
|
|
|
1,284
|
|
|
|
1,369
|
|
FDIC insurance premium
|
|
|
499
|
|
|
|
485
|
|
Amortization of intangibles
|
|
|
185
|
|
|
|
210
|
|
Outside professional services
|
|
|
318
|
|
|
|
291
|
|
Advertising and promotions
|
|
|
380
|
|
|
|
408
|
|
Other real estate owned costs
|
|
|
797
|
|
|
|
466
|
|
Other
|
|
|
2,177
|
|
|
|
2,241
|
|
Total Non-interest Expense
|
|
|
10,810
|
|
|
|
10,719
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes
|
|
|
686
|
|
|
|
1,248
|
|
Federal income taxes
|
|
|
58
|
|
|
|
311
|
|
NET INCOME
|
|
|
628
|
|
|
$
|
937
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and accretion of discount on preferred stock
|
|
|
420
|
|
|
|
420
|
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
|
$
|
208
|
|
|
$
|
517
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
628
|
|
|
$
|
937
|
|
Change in unrealized gain on securities, net of tax and reclassification effects
|
|
|
1,700
|
|
|
|
758
|
|
TOTAL COMPREHENSIVE INCOME
|
|
$
|
2,328
|
|
|
$
|
1,695
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
Diluted Earnings Per Share
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
Dividends Per Share
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
See notes to consolidated financial statements.
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
JUNE 30, 2011 AND 2010
(Dollars in thousands except per share data)
UNAUDITED
|
|
Six Months Ended June 30
|
|
|
|
2011
|
|
|
2010
|
|
Interest Income:
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
31,217
|
|
|
$
|
34,014
|
|
Securities
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
2,330
|
|
|
|
1,626
|
|
Exempt from Federal Income Tax
|
|
|
573
|
|
|
|
581
|
|
Short term investments
|
|
|
84
|
|
|
|
103
|
|
Total Interest Income
|
|
|
34,204
|
|
|
|
36,324
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
5,994
|
|
|
|
8,476
|
|
FHLB advances and other borrowing
|
|
|
508
|
|
|
|
2,118
|
|
Subordinated Debt
|
|
|
669
|
|
|
|
738
|
|
Total Interest Expense
|
|
|
7,171
|
|
|
|
11,332
|
|
Net Interest Income
|
|
|
27,033
|
|
|
|
24,992
|
|
Provision for loan losses
|
|
|
7,267
|
|
|
|
5,557
|
|
Net Interest Income after provision for loan losses
|
|
|
19,766
|
|
|
|
19,435
|
|
Non-interest Income:
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
2,274
|
|
|
|
2,277
|
|
Gain on sale of mortgage loans
|
|
|
981
|
|
|
|
1,096
|
|
Mortgage servicing, net of amortization
|
|
|
104
|
|
|
|
189
|
|
Gain/(loss) on trading account securities
|
|
|
8
|
|
|
|
23
|
|
Gain/(loss) on securities
|
|
|
(10
|
)
|
|
|
9
|
|
Other
|
|
|
699
|
|
|
|
1,035
|
|
Total Non-interest Income
|
|
|
4,056
|
|
|
|
4,629
|
|
Non-interest Expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
10,440
|
|
|
|
10,709
|
|
Occupancy and equipment
|
|
|
2,708
|
|
|
|
2,859
|
|
FDIC insurance premium
|
|
|
1,042
|
|
|
|
1,030
|
|
Amortization of intangibles
|
|
|
370
|
|
|
|
420
|
|
Outside professional services
|
|
|
580
|
|
|
|
509
|
|
Advertising and promotions
|
|
|
644
|
|
|
|
629
|
|
Other real estate owned costs
|
|
|
1,378
|
|
|
|
1,311
|
|
Other
|
|
|
4,410
|
|
|
|
4,679
|
|
Total Non-interest Expense
|
|
|
21,572
|
|
|
|
22,146
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes
|
|
|
2,250
|
|
|
|
1,918
|
|
Federal income taxes
|
|
|
407
|
|
|
|
322
|
|
NET INCOME
|
|
$
|
1,843
|
|
|
$
|
1,596
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and accretion of discount on preferred stock
|
|
|
840
|
|
|
|
840
|
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
|
$
|
1,003
|
|
|
$
|
756
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,843
|
|
|
$
|
1,596
|
|
Change in unrealized gain on securities, net of tax and reclassification effects
|
|
|
2,010
|
|
|
|
717
|
|
TOTAL COMPREHENSIVE INCOME
|
|
$
|
3,853
|
|
|
$
|
2,313
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
0.13
|
|
|
$
|
0.10
|
|
Diluted Earnings Per Share
|
|
$
|
0.13
|
|
|
$
|
0.10
|
|
Dividends Per Share
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
See notes to consolidated financial statements
FIRSTBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED
JUNE 30, 2011 AND 2010
(Dollars in thousands)
UNAUDITED
|
|
Six months ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
$
|
1,843
|
|
|
$
|
1,596
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
7,267
|
|
|
|
5,557
|
|
Depreciation of premises and equipment
|
|
|
1,064
|
|
|
|
1,155
|
|
Net amortization of security premiums/discounts
|
|
|
1,784
|
|
|
|
697
|
|
Loss/(Gain) on trading account securities
|
|
|
(8
|
)
|
|
|
(23
|
)
|
Loss/(Gain) on securities transactions
|
|
|
10
|
|
|
|
(9
|
)
|
Amortization and impairment of intangibles
|
|
|
370
|
|
|
|
420
|
|
Stock option and stock grant compensation expense
|
|
|
67
|
|
|
|
49
|
|
Gain on sale of mortgage loans
|
|
|
(981
|
)
|
|
|
(1,096
|
)
|
Proceeds from sales of mortgage loans
|
|
|
30,104
|
|
|
|
37,127
|
|
Loans originated for sale
|
|
|
(28,202
|
)
|
|
|
(35,561
|
)
|
Deferred federal income tax expense/(benefit)
|
|
|
1,035
|
|
|
|
(214
|
)
|
(Increase)/decrease in accrued interest receivable and other assets
|
|
|
1,530
|
|
|
|
5,169
|
|
Increase/(decrease) in accrued interest payable and other liabilities
|
|
|
(582
|
)
|
|
|
(2,275
|
)
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
15,301
|
|
|
|
12,592
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from sale of securities available for sale
|
|
|
280
|
|
|
|
7,471
|
|
Proceeds from sale of FHLB stock
|
|
|
937
|
|
|
|
0
|
|
Proceeds from maturities and calls of securities available for sale
|
|
|
73,067
|
|
|
|
59,581
|
|
Purchases of securities available for sale
|
|
|
(101,970
|
)
|
|
|
(138,077
|
)
|
Proceeds from sale of fixed assets
|
|
|
20
|
|
|
|
1,029
|
|
Net (increase)/decrease in portfolio loans
|
|
|
14,442
|
|
|
|
29,547
|
|
Proceeds from sale of other real estate owned
|
|
|
2,601
|
|
|
|
2,639
|
|
Net purchases of premises and equipment
|
|
|
(1,210
|
)
|
|
|
(1,409
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(11,833
|
)
|
|
|
(39,219
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in deposits
|
|
|
34,537
|
|
|
|
13,165
|
|
Increase/(decrease) in securities sold under agreements to repurchase and other
short term borrowings
|
|
|
4,976
|
|
|
|
(2,808
|
)
|
Repayment of Federal Home Loan Bank borrowings
|
|
|
(19,115
|
)
|
|
|
(24,153
|
)
|
Proceeds from Federal Home Loan Bank borrowings
|
|
|
0
|
|
|
|
9,000
|
|
Cash proceeds from issuance of common stock, net
|
|
|
295
|
|
|
|
253
|
|
Cash dividends-preferred stock
|
|
|
(825
|
)
|
|
|
(825
|
)
|
Cash dividends-common stock
|
|
|
(156
|
)
|
|
|
(464
|
)
|
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES
|
|
|
19,712
|
|
|
|
(5,832
|
)
|
|
|
|
|
|
|
|
|
|
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
23,180
|
|
|
|
(32,459
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
73,538
|
|
|
|
107,365
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
96,718
|
|
|
$
|
74,906
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
|
|
|
|
|
|
|
|
|
Interest Paid
|
|
$
|
7,405
|
|
|
$
|
11,566
|
|
Income Taxes Paid
|
|
$
|
975
|
|
|
$
|
255
|
|
Non cash transfers of loans to Other Real Estate Owned
|
|
$
|
3,845
|
|
|
$
|
5,819
|
|
See notes to consolidated financial statements.
FIRSTBANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
UNAUDITED
NOTE 1- FINANCIAL STATEMENTS
The accompanying unaudited financial information presented is for Firstbank Corporation (“Corporation”) and its wholly owned subsidiaries: Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch (including its wholly owned subsidiaries; 1
st
Armored, Inc. (sold on March 31, 2010), 1
st
Title, Inc., and its 48% ownership in 1
st
Investors Title, LLC, Firstbank - St. Johns, Keystone Community Bank, Firstbank – West Michigan and its wholly owned subsidiary Accord Financial Services, Inc., collectively the “Banks”, FBMI Risk Management Services, Inc., a company that provides insurance coverage to only affiliates of Firstbank Corporation, and Austin Mortgage Company, a company that holds certain performing and non-performing residential mortgage loans originated prior to the acquisition of ICNB Financial Corporation, and beginning in the second quarter of 2009 certain non-performing loans transferred from affiliate banks. All of the subsidiaries listed above are fully owned except 1st Investors Title, LLC, in which we have a 48% minority interest. The results of 1
st
Armored are consolidated into our results through March 31, 2010, the date of the sale. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The balance sheet at December 31, 2010, has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2010.
Effect of Newly Issued but not yet Effective Accounting Standards
In April 2011, the FASB issued,
A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring
, amends
FASB ASC 310-40,
Receivables — Troubled Debt Restructurings by Creditors
because of inconsistencies in practice and the increased volume of debt modifications. The standard provides additional clarifying guidance in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring qualifies as a troubled debt restructuring. The effective date of implementation is for the first interim or annual period ending after June 15, 2011 to be applied retrospectively to restructurings taking place on or after the beginning of the fiscal year of adoption, with early application allowed. As a result of the clarifying guidance, receivables that are newly considered impaired for which impairment was previously measured using a general allowance for credit losses may be identified. In respect of such receivables, disclosure is required of (1) the total recorded investment in such receivables, and (2) the related allowance for credit losses as of the end of the period of adoption. For purposes of measuring impairment of those receivables, the effective date is for the first interim or annual period beginning on or after June 15, 2011 to be applied prospectively. We are analyzing the impact of the standard and will adopt the requirements in the third quarter of 2011.
In April 2011, the FASB issued an Update related to Transfers and Servicing (Topic 860). The Update changes the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The Update also eliminates the requirement to demonstrate that the transferor possess adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The Update is effective in the first quarter of 2012. We are currently evaluating the impact the Update will have on our financial statements.
In May 2011, the FASB issued an Update related to fair value measurements (Topic 820) and disclosure requirements. The Update results in common fair value measurement and disclosures in US GAAP and IFRS by changing the wording used to describe many of the fair value measurement requirements in US GAAP or to clarify the FASB’s intent about the application of existing fair value measurement requirements. The amendments will be adopted beginning in the first quarter of 2012 and applied to our financial statements prospectively.
In June 2011, the FASB issued an Update on the Presentation of Comprehensive Income (Topic 220). The Update changes the reporting and presentation of comprehensive income on the face of the financial statements and provides two options of presentation- a single statement including net income and the components of other comprehensive income or two separate statements. The Update eliminates the option of presenting the components of other comprehensive income in the statement of changes in stockholders’ equity and requires reclassification adjustments to be reported on the face of the financial statements, rather than in the footnotes. The amendments in this Update will be adopted beginning in the first quarter of 2012 and will be applied to our financial statements retrospectively.
NOTE 2- LOANS
The following table shows the distribution of our loan portfolio in the manner that we break down the loan portfolio for use in our analysis of the determination of our loan loss allowance. This presentation differs somewhat by loan category from classification of loans presented elsewhere in our regulatory reports and within this report. These variations primarily relate to how we analyze real estate loans internally for the adequacy of the loan loss allowance, which is different from how we are required to report them for regulatory purposes.
Loans at period end were as follows:
|
|
|
|
(In Thousands of Dollars)
|
|
June 30,
2011
|
|
|
December 31,
2010
|
|
Commercial & Industrial
|
|
|
|
|
|
|
Pass loans
|
|
$
|
136,028
|
|
|
$
|
143,882
|
|
Watch loans
|
|
|
14,625
|
|
|
|
12,714
|
|
Special mention loans
|
|
|
4,150
|
|
|
|
4,262
|
|
Substandard loans
|
|
|
4,608
|
|
|
|
1,560
|
|
Impaired loans
|
|
|
1,715
|
|
|
|
3,424
|
|
Doubtful loans
|
|
|
329
|
|
|
|
141
|
|
Restructured loans
|
|
|
1,555
|
|
|
|
36
|
|
Total Commercial & Industrial
|
|
|
163,010
|
|
|
|
166,019
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
Pass loans
|
|
|
382,489
|
|
|
|
394,699
|
|
Watch loans
|
|
|
55,391
|
|
|
|
50,596
|
|
Special mention loans
|
|
|
20,879
|
|
|
|
31,324
|
|
Substandard loans
|
|
|
8,001
|
|
|
|
8,450
|
|
Impaired loans
|
|
|
13,171
|
|
|
|
15,987
|
|
Doubtful loans
|
|
|
0
|
|
|
|
881
|
|
Restructured loans
|
|
|
11,962
|
|
|
|
5,768
|
|
Total Commercial Real Estate
|
|
|
491,893
|
|
|
|
507,705
|
|
|
|
|
|
|
|
|
|
|
First lien residential mortgage loans
|
|
|
|
|
|
|
|
|
Performing loans
|
|
|
191,612
|
|
|
|
192,084
|
|
Loans > 60 days past due
|
|
|
1,276
|
|
|
|
2,102
|
|
Nonaccrual loans
|
|
|
4,315
|
|
|
|
5,189
|
|
Restructured loans
|
|
|
4,472
|
|
|
|
4,252
|
|
Total First lien residential mortgage loans
|
|
|
201,675
|
|
|
|
203,627
|
|
|
|
|
|
|
|
|
|
|
Junior lien residential mortgage loans
|
|
|
|
|
|
|
|
|
Performing loans
|
|
|
72,094
|
|
|
|
75,562
|
|
Loans > 60 days past due
|
|
|
230
|
|
|
|
148
|
|
Nonaccrual loans
|
|
|
483
|
|
|
|
556
|
|
Total Junior lien residential mortgage loans
|
|
|
72,807
|
|
|
|
76,266
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
|
|
|
|
|
|
Performing loans
|
|
|
76,204
|
|
|
|
77,531
|
|
Loans > 60 days past due
|
|
|
182
|
|
|
|
288
|
|
Nonaccrual loans
|
|
|
191
|
|
|
|
184
|
|
Total Consumer Loans
|
|
|
76,577
|
|
|
|
78,003
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
1,005,962
|
|
|
$
|
1,031,620
|
|
Allowance for Loan Losses
The allowance for loan losses is determined based on management’s estimate of losses incurred within the loan portfolio. We rely on historical loss rates in conjunction with our judgment of the current environment to determine the appropriate level for the allowance at the end of each reporting period. The loan portfolio is segmented into five loan types: commercial and industrial loans, commercial real estate loans; consumer loans; residential mortgages – first liens; and residential mortgage – junior liens. These segments are further segmented by credit quality classifications. For commercial and industrial loans and commercial real estate loans, these segments are based on our loan grading system described previously in Note 1 of our annual report dated December 31, 2010. For consumer and residential mortgage loans, loans are segmented based on delinquency and nonaccrual categories. All loan segments also contain a separate category for restructured loans, if they exist.
Commercial and industrial and commercial real estate loans graded as pass or watch, are assigned a unique pooled loss rate based on historical losses incurred over the prior three years. The losses are weighted for each year, with the most recent 12 month period receiving a higher weight and the oldest 12 month period receiving a lower weight in the calculation of the historical loss. We then adjust the calculated historical loss rate up or down based on current environmental factors. These adjustments include items such as current unemployment rates, changes in the value of underlying collateral, and other observable items that indicate trends in asset quality. The current outstanding balance for each of these grades is then multiplied by the adjusted historical loss factor to determine the amount of allowance for loan losses to reserve on that pool of loans.
Loans graded special mention or substandard use a shorter 12 month loss history to determine the loss rate. Losses over the preceding 12 month period are divided by the average balance outstanding of substandard and impaired loans to determine a historical loss rate. That calculated historical loss rate is multiplied by a migration rate (rate at which special mention loan move to a more severe risk category) to determine the loss rate for special mention loans. The calculated historical loss rate, without adjustment for migration, is used for substandard loans.
Loans graded as impaired or restructured are reviewed individually for reserves. A specific reserve is established within the allowance for the difference between the carrying value of the loan and its calculated value. To determine the value of the loan, the present value of expected cash flows, the collateral value, or some combination of the two is used. The specific reserve is established as the difference between the carrying value of the loan and the calculated value.
For consumer and residential loan segments, loans that are current, or less than 60 days past due are each assigned a historical loss factor as described above for commercial pass and watch loans. For loans that are more than 60 days past due, a loss factor is determined based on charge offs within the last 12 months, divided by the sum of the average balance of loans 60 days or more past due and nonaccrual loans. These loss factors are multiplied by the outstanding balances in each segment at the end of the reporting period to determine the amount of allowance for loan loss.
After each of the steps outlined above is completed, the results are aggregated and compared with the existing balance of the allowance for loan losses. If the resulting calculation is greater than the balance, the allowance for loan losses is increased through a charge to earnings on the provision for loan losses line. If the resulting balance is below the current balance of the allowance for loan losses, a reversal of the provision for loan losses is recorded.
Activity in the allowance for loan losses was as follows:
(In Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Beginning balance
|
|
$
|
21,347
|
|
|
$
|
20,121
|
|
|
$
|
21,431
|
|
|
$
|
19,114
|
|
Provision for loan losses
|
|
|
4,256
|
|
|
|
3,066
|
|
|
|
7,267
|
|
|
|
5,557
|
|
Loans charged off
|
|
|
(4,422
|
)
|
|
|
(2,928
|
)
|
|
|
(7,710
|
)
|
|
|
(4,736
|
)
|
Recoveries
|
|
|
146
|
|
|
|
329
|
|
|
|
339
|
|
|
|
653
|
|
Ending balance
|
|
$
|
21,327
|
|
|
$
|
20,588
|
|
|
$
|
21,327
|
|
|
$
|
20,588
|
|
As of June 30, key measurements of the allowance for loan losses were as follows:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
(In Thousands of Dollars)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Average total loans* outstanding during the period
|
|
$
|
1,010,060
|
|
|
$
|
1,090,129
|
|
|
$
|
1,017,685
|
|
|
$
|
1,099,582
|
|
Allowance for loan loss as a percent of total loans*
|
|
|
2.11
|
%
|
|
|
1.90
|
%
|
|
|
2.11
|
%
|
|
|
1.90
|
%
|
Net Charge-offs^ as a percent of average loans*
|
|
|
1.69
|
%
|
|
|
0.95
|
%
|
|
|
1.45
|
%
|
|
|
0.74
|
%
|
*All loan ratios exclude loans held for sale ^ Annualized
Analysis of the allowance for loan losses for the current and prior year to date periods is as follows:
(In Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ending June 30, 2011
|
|
Beginning
Balance
|
|
|
Charged off
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Balance
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass loans
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
(116
|
)
|
|
$
|
1,276
|
|
Watch loans
|
|
|
194
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
162
|
|
Special mention loans
|
|
|
240
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
209
|
|
Substandard loans
|
|
|
386
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
426
|
|
Impaired loans
|
|
|
661
|
|
|
|
(774
|
)
|
|
|
122
|
|
|
|
427
|
|
|
|
436
|
|
Doubtful loans
|
|
|
115
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
187
|
|
|
|
187
|
|
Restructured loans
|
|
|
36
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
36
|
|
Total Commercial & Industrial
|
|
|
3,024
|
|
|
|
(
889
|
)
|
|
|
122
|
|
|
|
475
|
|
|
|
2,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass loans
|
|
|
4,210
|
|
|
|
|
|
|
|
|
|
|
|
808
|
|
|
|
5,018
|
|
Watch loans
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
918
|
|
Special mention loans
|
|
|
1,339
|
|
|
|
|
|
|
|
|
|
|
|
(455
|
)
|
|
|
884
|
|
Substandard loans
|
|
|
1,439
|
|
|
|
|
|
|
|
|
|
|
|
(84
|
)
|
|
|
1,355
|
|
Impaired loans
|
|
|
3,900
|
|
|
|
(4,239
|
)
|
|
|
43
|
|
|
|
2,985
|
|
|
|
2,689
|
|
Doubtful loans
|
|
|
188
|
|
|
|
(188
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Restructured loans
|
|
|
599
|
|
|
0
|
|
|
0
|
|
|
|
133
|
|
|
|
732
|
|
Total Commercial Real Estate
|
|
|
12,375
|
|
|
|
(
4,427
|
)
|
|
|
43
|
|
|
|
3,605
|
|
|
|
11,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien residential mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing loans
|
|
|
1,737
|
|
|
|
|
|
|
|
|
|
|
|
856
|
|
|
|
2,593
|
|
Loans > 60 days past due
|
|
|
631
|
|
|
|
|
|
|
|
|
|
|
|
(121
|
)
|
|
|
510
|
|
Nonaccrual loans
|
|
|
1,523
|
|
|
|
(1,764
|
)
|
|
|
40
|
|
|
|
1,326
|
|
|
|
1,125
|
|
Restructured loans
|
|
|
69
|
|
|
0
|
|
|
0
|
|
|
|
375
|
|
|
|
444
|
|
Total First lien residential mortgage loans
|
|
|
3,960
|
|
|
|
(
1,764
|
)
|
|
|
40
|
|
|
|
2,436
|
|
|
|
4,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior lien residential mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing loans
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
(199
|
)
|
|
|
364
|
|
Loans > 60 days past due
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
69
|
|
Nonaccrual loans
|
|
|
167
|
|
|
|
(113
|
)
|
|
|
0
|
|
|
|
67
|
|
|
|
121
|
|
Total Junior lien residential mortgage loans
|
|
|
774
|
|
|
|
(113
|
)
|
|
|
0
|
|
|
|
(
107
|
)
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing loans
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
991
|
|
Loans > 60 days past due
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
101
|
|
Nonaccrual loans
|
|
|
101
|
|
|
|
(517
|
)
|
|
|
134
|
|
|
|
387
|
|
|
|
105
|
|
Total Consumer Loans
|
|
|
1,162
|
|
|
|
(518
|
)
|
|
|
134
|
|
|
|
418
|
|
|
|
1,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Allowance
|
|
|
136
|
|
|
|
0
|
|
|
|
0
|
|
|
|
440
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,431
|
|
|
$
|
(
7,710
|
)
|
|
$
|
339
|
|
|
$
|
7,267
|
|
|
$
|
21,327
|
|
(In Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ending June 30, 2010
|
|
Beginning
Balance
|
|
|
Charged off
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Balance
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass loans
|
|
$
|
1,920
|
|
|
|
|
|
|
|
|
|
|
|
(206
|
)
|
|
$
|
1,714
|
|
Watch loans
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
(73
|
)
|
|
|
236
|
|
Special mention loans
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
(280
|
)
|
|
|
382
|
|
Substandard loans
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
774
|
|
|
|
1,364
|
|
Impaired loans
|
|
|
159
|
|
|
|
(761
|
)
|
|
|
290
|
|
|
|
710
|
|
|
|
398
|
|
Doubtful loans
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Restructured loans
|
|
|
0
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Total Commercial & Industrial
|
|
|
3,640
|
|
|
|
(761
|
)
|
|
|
290
|
|
|
|
925
|
|
|
|
4,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass loans
|
|
|
4,067
|
|
|
|
|
|
|
|
|
|
|
|
(620
|
)
|
|
|
3,447
|
|
Watch loans
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
(163
|
)
|
|
|
545
|
|
Special mention loans
|
|
|
910
|
|
|
|
|
|
|
|
|
|
|
|
340
|
|
|
|
1,250
|
|
Substandard loans
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
(358
|
)
|
|
|
1,161
|
|
Impaired loans
|
|
|
3,269
|
|
|
|
(2,255
|
)
|
|
|
15
|
|
|
|
3,172
|
|
|
|
4,201
|
|
Doubtful loans
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Restructured loans
|
|
|
0
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Total Commercial Real Estate
|
|
|
10,473
|
|
|
|
(2,255
|
)
|
|
|
15
|
|
|
|
2,371
|
|
|
|
10,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien residential mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing loans
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1,393
|
|
Loans > 60 days past due
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
604
|
|
Nonaccrual loans
|
|
|
462
|
|
|
|
(949
|
)
|
|
|
116
|
|
|
|
1,531
|
|
|
|
1,160
|
|
Restructured loans
|
|
|
0
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Total First lien residential mortgage loans
|
|
|
2,502
|
|
|
|
(949
|
)
|
|
|
116
|
|
|
|
1,488
|
|
|
|
3,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior lien residential mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing loans
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
612
|
|
Loans > 60 days past due
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
(92
|
)
|
|
|
150
|
|
Nonaccrual loans
|
|
|
167
|
|
|
|
(
146
|
)
|
|
|
0
|
|
|
|
22
|
|
|
|
43
|
|
Total Junior lien residential mortgage loans
|
|
|
967
|
|
|
|
(146
|
)
|
|
|
0
|
|
|
|
(16
|
)
|
|
|
805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing loans
|
|
|
1,178
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
1,028
|
|
Loans > 60 days past due
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
152
|
|
Nonaccrual loans
|
|
|
168
|
|
|
|
(
625
|
)
|
|
|
232
|
|
|
|
332
|
|
|
|
107
|
|
Total Consumer Loans
|
|
|
1,525
|
|
|
|
(625
|
)
|
|
|
232
|
|
|
|
155
|
|
|
|
1,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Allowance
|
|
|
7
|
|
|
|
0
|
|
|
|
0
|
|
|
|
634
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,114
|
|
|
$
|
(
4,736
|
)
|
|
$
|
653
|
|
|
$
|
5,557
|
|
|
$
|
20,588
|
|
Age Analysis of Past Due Loans
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011
|
|
Current
|
|
|
30-59
Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days
or More
Past Due
|
|
|
Total
Past Due
|
|
|
Total
Accruing
Loans
|
|
Commercial and Industrial
|
|
$
|
154,871
|
|
|
$
|
3,181
|
|
|
$
|
1,168
|
|
|
$
|
578
|
|
|
$
|
4,927
|
|
|
$
|
159,798
|
|
Commercial Real Estate
|
|
|
345,632
|
|
|
|
5,629
|
|
|
|
1,442
|
|
|
|
772
|
|
|
|
7,843
|
|
|
|
353,475
|
|
Residential Mortgages 1
st
Liens
|
|
|
339,190
|
|
|
|
737
|
|
|
|
901
|
|
|
|
404
|
|
|
|
2,042
|
|
|
|
341,232
|
|
Residential Mortgages Junior Liens
|
|
|
71,372
|
|
|
|
300
|
|
|
|
169
|
|
|
|
0
|
|
|
|
469
|
|
|
|
71,841
|
|
Consumer
|
|
|
58,699
|
|
|
|
529
|
|
|
|
149
|
|
|
|
33
|
|
|
|
711
|
|
|
|
59,410
|
|
Total
|
|
$
|
969,764
|
|
|
$
|
10,376
|
|
|
$
|
3,829
|
|
|
$
|
1,787
|
|
|
$
|
15,992
|
|
|
$
|
985,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
159,532
|
|
|
$
|
916
|
|
|
$
|
400
|
|
|
$
|
0
|
|
|
$
|
1,316
|
|
|
$
|
160,848
|
|
Commercial Real Estate
|
|
|
352,615
|
|
|
|
3,514
|
|
|
|
981
|
|
|
|
18
|
|
|
|
4,513
|
|
|
|
357,128
|
|
Residential Mortgages 1st Liens
|
|
|
349,086
|
|
|
|
1,025
|
|
|
|
1,529
|
|
|
|
573
|
|
|
|
3,127
|
|
|
|
352,213
|
|
Residential Mortgages Junior Liens
|
|
|
74,934
|
|
|
|
628
|
|
|
|
148
|
|
|
|
0
|
|
|
|
776
|
|
|
|
75,710
|
|
Consumer
|
|
|
58,368
|
|
|
|
703
|
|
|
|
273
|
|
|
|
15
|
|
|
|
991
|
|
|
|
59,359
|
|
Total
|
|
$
|
994,535
|
|
|
$
|
6,786
|
|
|
$
|
3,331
|
|
|
$
|
606
|
|
|
$
|
10,723
|
|
|
$
|
1,005,258
|
|
Impaired loans were as follows:
(In Thousands of Dollars)
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
Period end loans with no allocated allowance for loan losses
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
1,812
|
|
|
$
|
833
|
|
Commercial Real Estate
|
|
|
14,885
|
|
|
|
7,713
|
|
Residential Mortgages 1
st
Liens
|
|
|
8,787
|
|
|
|
8,789
|
|
Residential Mortgages Junior Liens
|
|
|
483
|
|
|
|
556
|
|
Consumer
|
|
|
191
|
|
|
|
184
|
|
Total
|
|
$
|
26,158
|
|
|
$
|
18,075
|
|
|
|
|
|
|
|
|
|
|
Period end loans with allocated allowance for loan losses
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
1,787
|
|
|
$
|
2,768
|
|
Commercial Real Estate
|
|
|
10,248
|
|
|
|
14,923
|
|
Residential Mortgages 1
st
Liens
|
|
|
0
|
|
|
|
652
|
|
Residential Mortgages Junior Liens
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
12,035
|
|
|
$
|
18,343
|
|
|
|
|
|
|
|
|
|
|
Amount of the allowance for loan losses allocated
|
|
$
|
2,708
|
|
|
$
|
5,529
|
|
|
|
|
|
|
|
|
|
|
Average of impaired loans during the 6 month period ended
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
4,352
|
|
|
$
|
5,051
|
|
Commercial Real Estate
|
|
|
28,784
|
|
|
|
21,341
|
|
Residential Mortgages 1
st
Liens
|
|
|
10,552
|
|
|
|
6,218
|
|
Residential Mortgages Junior Liens
|
|
|
638
|
|
|
|
312
|
|
Consumer
|
|
|
239
|
|
|
|
256
|
|
Total
|
|
$
|
44,565
|
|
|
$
|
33,178
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
Interest income recognized during impairment
|
|
$
|
434
|
|
|
$
|
77
|
|
Cash-basis interest income recognized
|
|
$
|
25
|
|
|
$
|
54
|
|
Performing adjusted loans, past due 90 day loans, and nonaccrual loans were as follows:
(In Thousands of Dollars)
|
|
June 30,
2011
|
|
|
December 31,
2010
|
|
Performing adjusted loans (Restructured and accruing)
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
1,555
|
|
|
$
|
36
|
|
Commercial Real Estate
|
|
|
11,962
|
|
|
|
5,768
|
|
Residential Mortgages 1
st
Liens
|
|
|
4,472
|
|
|
|
4,252
|
|
Total restructured loans
|
|
$
|
17,989
|
|
|
$
|
10,056
|
|
|
|
|
|
|
|
|
|
|
Loans past due over 90 days still on accrual at period end
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
578
|
|
|
$
|
0
|
|
Commercial Real Estate
|
|
|
772
|
|
|
|
18
|
|
Residential Mortgages 1
st
Liens
|
|
|
404
|
|
|
|
573
|
|
Residential Mortgages Junior Liens
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
33
|
|
|
|
15
|
|
Total loans past due 90 days and on accrual at period end
|
|
$
|
1,787
|
|
|
$
|
606
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans at period end
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
2,044
|
|
|
$
|
3,565
|
|
Commercial Real Estate
|
|
|
13,171
|
|
|
|
16,868
|
|
Residential Mortgages 1
st
Liens
|
|
|
4,316
|
|
|
|
5,189
|
|
Residential Mortgages Junior Liens
|
|
|
483
|
|
|
|
556
|
|
Consumer
|
|
|
191
|
|
|
|
184
|
|
Total nonaccrual loans
|
|
$
|
20,205
|
|
|
$
|
26,362
|
|
|
|
|
|
|
|
|
|
|
Total performing adjusted loans, past due over 90 days loans,
and nonaccrual loans
|
|
$
|
39,981
|
|
|
$
|
37,024
|
|
NOTE 3 – FAIR VALUE
Carrying amount and estimated fair values of financial instruments were as follows:
|
|
(In Thousands of Dollars)
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
96,718
|
|
|
$
|
96,718
|
|
|
$
|
73,538
|
|
|
$
|
73,538
|
|
FDIC insured bank certificates of deposit
|
|
|
5,700
|
|
|
|
5,700
|
|
|
|
10,405
|
|
|
|
10,405
|
|
Trading account securities
|
|
|
20
|
|
|
|
20
|
|
|
|
13
|
|
|
|
13
|
|
Securities available for sale
|
|
|
290,283
|
|
|
|
290,283
|
|
|
|
255,703
|
|
|
|
255,703
|
|
Federal Home Loan Bank stock
|
|
|
7,266
|
|
|
|
7,266
|
|
|
|
8,203
|
|
|
|
8,203
|
|
Loans held for sale
|
|
|
434
|
|
|
|
434
|
|
|
|
1,355
|
|
|
|
1,355
|
|
Loans, net
|
|
|
984,635
|
|
|
|
965,253
|
|
|
|
1,010,189
|
|
|
|
987,800
|
|
Accrued interest receivable
|
|
|
4,845
|
|
|
|
4,845
|
|
|
|
4,689
|
|
|
|
4,689
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(1,218,320
|
)
|
|
|
(1,210,213
|
)
|
|
|
(1,183,783
|
)
|
|
|
(1,173,030
|
)
|
Securities sold under agreements
to repurchase and overnight
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
borrowings
|
|
|
(46,304
|
)
|
|
|
(46,304
|
)
|
|
|
(41,328
|
)
|
|
|
(41,328
|
)
|
Federal Home Loan Bank advances
|
|
|
(21,543
|
)
|
|
|
(23,444
|
)
|
|
|
(40,658
|
)
|
|
|
(42,684
|
)
|
Accrued interest payable
|
|
|
(1,220
|
)
|
|
|
(1,220
|
)
|
|
|
(1,467
|
)
|
|
|
(1,467
|
)
|
Subordinated debentures
|
|
|
(36,084
|
)
|
|
|
(36,781
|
)
|
|
|
(36,084
|
)
|
|
|
(37,051
|
)
|
The methods and assumptions used to estimate fair value are described as follows: The carrying amount is the estimated fair value for cash and cash equivalents, short term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short term debt, and variable rate loans or deposits that re-price frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans and variable rate loans, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk based on historical losses on similar loan pools. For deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life of the product.
Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values for the specific loans in the portfolio and assumes the bank will resolve them through orderly liquidation. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements. The fair value of off-balance sheet items was not material to the consolidated financial statements at June 30, 2011 and December 31, 2010.
The following table presents information about our investment portfolio, showing the gross unrealized gains and losses within each segment of the portfolio. Unrealized gains and losses are included in other comprehensive income. Unrealized losses have been analyzed and determined to be temporary in nature. The unrealized losses are related to changes in the interest rate environment compared with rates at the time the securities were purchased.
(Dollars in Thousands)
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Market
Value
|
|
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Notes
|
|
$
|
1,000
|
|
|
$
|
1
|
|
|
$
|
0
|
|
|
$
|
1,001
|
|
U.S.Government Agency Bonds
|
|
|
113,962
|
|
|
|
1,108
|
|
|
|
(56
|
)
|
|
|
115,014
|
|
U.S. Government Agency CMOs
|
|
|
115.277
|
|
|
|
1,647
|
|
|
|
(65
|
)
|
|
|
116,859
|
|
Municipal Securities
|
|
|
55,173
|
|
|
|
653
|
|
|
|
(160
|
)
|
|
|
55,666
|
|
Other Securities
|
|
|
1,597
|
|
|
|
146
|
|
|
|
0
|
|
|
|
1,743
|
|
Total Securities available for sale
|
|
$
|
287,009
|
|
|
$
|
3,555
|
|
|
$
|
(
281
|
)
|
|
$
|
290,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Notes
|
|
$
|
12,513
|
|
|
$
|
17
|
|
|
$
|
0
|
|
|
$
|
12,530
|
|
U.S.Government Agency Bonds
|
|
|
82,395
|
|
|
|
632
|
|
|
|
(130
|
)
|
|
|
82,897
|
|
U.S. Government Agency CMOs
|
|
|
110.645
|
|
|
|
591
|
|
|
|
(694
|
)
|
|
|
110,542
|
|
Municipal Securities
|
|
|
48,278
|
|
|
|
255
|
|
|
|
(446
|
)
|
|
|
48,087
|
|
Other Securities
|
|
|
1,650
|
|
|
|
0
|
|
|
|
(3
|
)
|
|
|
1,647
|
|
Total Securities available for sale
|
|
$
|
255,481
|
|
|
$
|
1,495
|
|
|
$
|
(
1,273
|
)
|
|
$
|
255,703
|
|
The following tables present information about our assets measured at fair value on a recurring basis at June 30, 2011, and valuation techniques used by us to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that we have the ability to access. Securities for Level 1 include, Treasury Notes, Government Sponsored Agency Bonds, and Corporate Notes.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 2 securities consist of Government Sponsored Agency Backed Collateralized Mortgage Obligation and Municipal Securities.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. Level 3 Securities include local Municipal Securities where market pricing is not available, trust preferred securities issued by banks, and other miscellaneous investments.
Assets Measured at Fair Value on a Recurring Basis
(Dollars in Thousands)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Notes
|
|
$
|
1,001
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
1,001
|
|
U.S.Govenment Agency Bonds
|
|
|
115,014
|
|
|
|
0
|
|
|
|
0
|
|
|
|
115,014
|
|
U.S. Government Agency CMOs
|
|
|
0
|
|
|
|
116,859
|
|
|
|
0
|
|
|
|
116,859
|
|
Municipal Securities
|
|
|
0
|
|
|
|
47,032
|
|
|
|
8,634
|
|
|
|
55,666
|
|
Other Securities
|
|
|
180
|
|
|
|
0
|
|
|
|
1,563
|
|
|
|
1,743
|
|
Total Securities available for sale
|
|
$
|
116,195
|
|
|
$
|
163,891
|
|
|
$
|
10,197
|
|
|
$
|
290,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading equity securities
|
|
$
|
20
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Notes
|
|
$
|
12,530
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
12,530
|
|
U.S.Govenment Agency Bonds
|
|
|
82,897
|
|
|
|
0
|
|
|
|
0
|
|
|
|
82,897
|
|
U.S. Government Agency CMOs
|
|
|
0
|
|
|
|
110,542
|
|
|
|
0
|
|
|
|
110,542
|
|
Municipal Securities
|
|
|
0
|
|
|
|
38,371
|
|
|
|
9,716
|
|
|
|
48,087
|
|
Other Securities
|
|
|
530
|
|
|
|
0
|
|
|
|
1,117
|
|
|
|
1,647
|
|
Total Securities available for sale
|
|
$
|
95,957
|
|
|
$
|
148,913
|
|
|
$
|
10,833
|
|
|
$
|
255,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading equity securities
|
|
$
|
13
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
13
|
|
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
(Dollars in Thousands)
|
|
2011
|
|
|
2010
|
|
Balance at beginning of year
|
|
$
|
10,833
|
|
|
$
|
7,559
|
|
Total realized and unrealized gains/(losses) included in income
|
|
|
0
|
|
|
|
(150
|
)
|
Total unrealized gains/(losses) included in other comprehensive income
|
|
|
(26
|
)
|
|
|
56
|
|
Purchases of securities
|
|
|
3,360
|
|
|
|
146
|
|
Sales of securities
|
|
|
0
|
|
|
|
(397
|
)
|
Calls and maturities
|
|
|
(4,470
|
)
|
|
|
(540
|
)
|
Net transfers in/(out) of Level 3
|
|
|
500
|
|
|
|
0
|
|
Balance at June 30 of each year
|
|
$
|
10,197
|
|
|
$
|
6,670
|
|
The Level 3 assets that were held at June 30, 2011 are carried at historical cost unless a better fair value can be determined.
Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets. As a result, the unrealized gains and losses for these assets presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.
Available for sale investments securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities and other like assets. We carry local municipal securities at historical cost, which approximates fair value, unless economic conditions for the municipality changes to a degree requiring a valuation adjustment.
We also have assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets consist of impaired loans and other real estate owned. We have estimated the fair value of impaired loans using Level 3 inputs, specifically valuation of loans based on either a discounted cash flow projection, or a discount to the appraised value of the collateral underlying the loan. We use discounted appraised values or broker’s price opinions to determine the fair value other real estate owned.
Assets Measured at Fair Value on a Nonrecurring Basis
(Dollars in Thousands)
|
|
Balance at
June 30,
|
|
|
Quoted
Prices in
Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total Losses
for the six
month period
ended
June 30,
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
38,194
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
38,194
|
|
|
$
|
(3,138
|
)
|
Other Real Estate Owned
|
|
$
|
8,469
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
8,469
|
|
|
$
|
(777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
34,849
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
34,849
|
|
|
$
|
(2,744
|
)
|
Other Real Estate Owned
|
|
$
|
9,780
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
9,780
|
|
|
$
|
(829
|
)
|
Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. We estimate the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). Other Real Estate Owned is valued based on either a recent appraisal for the property or a brokers' price opinion of the value of the property, which are discounted for expected costs to dispose of the property. The $3,138,000 loss on impaired loans indicated in the table above, for the six months period ended June 30, 2011, and the $2,744,000 for the six months ended June 30, 2010, were charged to the allowance for loan losses, while the $777,000 and the $829,000 losses, for the six months ended June 30 of 2010 and 2011, in other real estate owned were charged to earnings through other non-interest expense on the income statement.
NOTE 4 – BASIC AND DILUTED EARNINGS PER SHARE
(Dollars in Thousands Except per Share Data)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
628
|
|
|
$
|
937
|
|
|
$
|
1,843
|
|
|
$
|
1,596
|
|
Preferred dividends and accretion of discount
|
|
|
420
|
|
|
|
420
|
|
|
|
840
|
|
|
|
840
|
|
Income available to common shareholders
|
|
$
|
208
|
|
|
$
|
517
|
|
|
$
|
1,003
|
|
|
$
|
756
|
|
Weighted average common shares outstanding
|
|
|
7,833,000
|
|
|
|
7,757,000
|
|
|
|
7,820,000
|
|
|
|
7,747,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
$
|
0.13
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share assuming dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
628
|
|
|
$
|
937
|
|
|
$
|
1,843
|
|
|
$
|
1,596
|
|
Preferred dividends and accretion of discount
|
|
|
420
|
|
|
|
420
|
|
|
|
840
|
|
|
|
840
|
|
Income available to common shareholders
|
|
$
|
208
|
|
|
$
|
517
|
|
|
$
|
1,003
|
|
|
$
|
756
|
|
Weighted average common shares outstanding
|
|
|
7,833,000
|
|
|
|
7,757,000
|
|
|
|
7,820,000
|
|
|
|
7,747,000
|
|
Add dilutive effect of assumed exercises of options
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and dilutive p
otential common shares outstanding
|
|
|
7,835,000
|
|
|
|
7,759,000
|
|
|
|
7,822,000
|
|
|
|
7,748,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
$
|
0.13
|
|
|
$
|
0.10
|
|
Stock options and stock warrants for 1,033,518 shares for the three month and six month periods of 2011, and stock options and warrants for 1,044,495 shares for the three and six month periods of 2010, were not considered in computing diluted earnings per share because they were anti-dilutive.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The consolidated financial information presented is for Firstbank Corporation (“Corporation”) and its wholly owned subsidiaries; Firstbank - Alma, Firstbank (Mt. Pleasant), Firstbank - West Branch (including its wholly owned subsidiaries: 1
st
Armored, Inc. (sold on March 31, 2010), 1
st
Title, Inc. and its 48% holdings in 1
ST
Investors Title, LLC), Firstbank - St. Johns, Keystone Community Bank, Firstbank – West Michigan (collectively the “Banks”), FBMI Risk Management Services, Inc., and Austin Mortgage Company.
Subsequent Event
We continually evaluate our unique structure of maintaining separately chartered community banks within our holding company. The holding company structure brings many operating cost efficiencies to the back-room support functions for all of the banks while the separate bank charters with separate legal boards of directors give us an advantage in terms of customer service and community support. There is some added cost of maintaining this structure, and we must always consider the cost versus the benefit. In the last two or three years, the burden of the regulatory process has increased throughout the industry as regulatory agencies are responding to the financial crises and major Wall Street bankruptcies of 2008 and 2009. It has become more difficult to profitably manage our smallest bank, Firstbank – St. Johns, in this environment, and we can identify geographic, market, balance sheet, and growth synergies between Firstbank – St. Johns and Firstbank - Alma. Therefore, the boards of these two banks and the board of our holding company recently have determined to combine these two banks, subject to regulatory approval.
Financial Condition
The Michigan and national economies, have begun to show some signs of improvement, but continued to operate below optimal levels during the first half of the year. Michigan’s unemployment rate and has improved slowly from a seasonally adjusted rate of 14.1% in of the third quarter of 2009 (the high point), to 10.3% in May of 2011. This stubbornly high unemployment continues to result in a higher than traditional level of problem loans. Real estate values continue to be depressed, also contributing to higher loan losses. Restructured loans which are in conformance with their new terms were higher by $7.9 million compared with year end, nonaccrual loans declined $6.2 million, and loans 90 days or more past due increased $1.2 million. Other Real Estate Owned increased $153,000. We believe these categories of loans will continue to be elevated in the near term as we work through the current economic conditions; however, we are constantly monitoring our loan portfolios for developing issues and reacting to them with swift actions to mitigate losses wherever possible.
Despite the tough environment, we continue to invest in our infrastructure. During the econd quarter of 2011 we opened our second office in the Cadillac market. The Cadillac market, while not a huge metropolitan area in any sense, is showing growth in employment and has some important manufacturers experiencing upturns in business. Cadillac is also a vibrant tourism area with two very nice lakes and close access to skiing and snow mobile trails for winter recreation. Our decision to open this second office reflects our belief in Cadillac’s future economic prosperity.
During the first six months of 2011, total assets increased $23.1 million, or 1.6%, with cash and cash equivalents increasing $23.2 million, or 31.5% primarily driven by seasonal increases in deposits. Securities available for sale increased $34.6 million, or 13.5%, from year end 2010, due primarily to a reinvestment of cash balances held at the Federal Reserve into higher yielding investment securities and lack of loan demand. As a result of the soft loan demand, ending total portfolio loan balances decreased $25.7 million, or 2.5%, and quarterly average total loans were 3.1% lower in the second quarter of 2011 when compared with the fourth quarter of 2010.
Following is a comparison of loan balances for the quarter and prior year end.
(In Thousands of Dollars)
|
|
June 30,
2011
|
|
|
December 31,
2010
|
|
Commercial
|
|
$
|
162,686
|
|
|
$
|
164,413
|
|
Mortgage Loans on Real Estate:
|
|
|
|
|
|
|
|
|
Residential
|
|
|
344,853
|
|
|
|
352,652
|
|
Commercial
|
|
|
365,803
|
|
|
|
373,996
|
|
Construction
|
|
|
73,019
|
|
|
|
81,016
|
|
Consumer
|
|
|
54,806
|
|
|
|
54,759
|
|
Credit Card
|
|
|
4,795
|
|
|
|
4,784
|
|
Subtotal
|
|
|
1,005,962
|
|
|
|
1,031,620
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(21,327
|
)
|
|
|
(21,431
|
)
|
Loans, net
|
|
$
|
984,635
|
|
|
$
|
1,010,189
|
|
Residential mortgages decreased $7.8 million, or 2.2%, from year end 2010 as pay downs on loans exceeded our ability to generate replacement balances. Real estate construction loans also decreased $8.0 million, or 9.9%, during the first six months of 2011. Commercial and commercial real estate loans were $9.9 million, or 1.8%, lower at June 30 when compared with year end 2010 as weak loan demand from qualified borrowers was unable to keep pace with principal pay downs.
Net charge-offs of loans were $7.4 million in the first half compared with $4.1 million in the first half of 2010.
Second quarter 2011 net charge-offs were $4.3 million compared with $3.1 million in the first quarter of the year and $2.6 million in the second quarter of 2010. The ratio of net charge-offs of loans (annualized) to average loans was 1.45% in the first half of 2011 compared to 0.74% in the first half of 2010.
At June 30, 2011, the allowance as a percentage of average outstanding loans was 2.12% compared with 1.90% at the same point a year earlier and 2.08% at year end 2010. Restructured loans increased $7.9 as we work with our customers to resolve their current situations. Loans past due 90 days or more at June 30 increased $1.2 million compared with year end 2010. Partially offsetting these increases was a decrease of $6.2 million in nonaccrual loans compared with year end numbers. Despite the current elevated levels of these categories of loans, our overall asset quality compares favorably to many of our competitor banks in Michigan. We continue to be diligent in review of our loan portfolios for problem loans and believe that early detection of troubled credits is critical to our ability to maintain our allowance for loan losses at its current level. We maintain the allowance for loan losses at a level considered adequate to cover losses within the loan portfolio. The allowance balance is established after considering past loan loss experience, current economic conditions, composition of the loan portfolio, delinquencies, and other relevant factors.
Total deposits increased $34.5 million, or 2.9% when compared with year end 2010 balances. Within the deposit base, interest bearing demand account balances increased $16.4 million, or 5.6%, savings balances increased $26.8 million, or 12.7%, and time balances decreased $18.2 million, or 3.7%. Within time balances, wholesale CDs were $8.8 million higher than year end, while core market CDs were down $27.0 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 $9.6 million, or 5.2% higher than year end.
For the six month period ended June 30, 2011, Federal Home Loan Bank advances and notes payable were down $19.1 million, or 47.0% from year end, primarily because funding from core deposits is sufficient to allow Federal Home Loan Bank advances to mature without replacement. Securities sold under agreements to repurchase and overnight borrowings were $5.0 million, or 12.0% higher due to normal fluctuations in customer cash flows.
Total shareholders’ equity increased $3.2 million from the previous year end. Net income of $1,843,000 and common stock issuances of $295,000 increased shareholders’ equity, while common and preferred stock dividends of $981,000 decreased shareholders’ equity. Accumulated other comprehensive income increased $2.0 million from year end. Common stock issuance was primarily related to shares issued through dividend reinvestment. The per share book value of shareholders’ common equity was $15.14 at June 30, 2011, increasing from $14.82 at December 31, 2010. Tangible shareholders common equity per share (total equity less goodwill and other intangible assets) was $10.39 at the end of the second quarter of 2011, increasing from $10.00 at year end 2010. Shareholders’ common equity per share calculations excludes preferred stock of $32.8 million.
The following table discloses compliance with current regulatory capital requirements on a consolidated basis:
(Dollars in Thousands)
|
|
Leverage
|
|
|
Tier 1
Capital
|
|
|
Total Risk-
Based Capital
|
|
|
|
|
|
|
|
|
|
|
|
Capital Balances at June 30, 2011
|
|
$
|
148,089
|
|
|
$
|
14,089
|
|
|
$
|
160,635
|
|
Required Regulatory Capital
|
|
|
58,767
|
|
|
|
39,968
|
|
|
|
79,935
|
|
Capital in Excess of Regulatory Minimums
|
|
|
89,322
|
|
|
|
108,121
|
|
|
|
80,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios at June 30, 2011
|
|
|
10.08
|
%
|
|
|
14.82
|
%
|
|
|
16.08
|
%
|
Regulatory Capital Ratios – Minimum Requirement
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
8.00
|
%
|
Our capital remains above regulatory guidelines for the second quarter of 2011. At the end of the second quarter our total risk based capital ratio was 16.08% compared with 15.94% at year end 2010. Tier 1 capital and tier 1 leverage ratios were 14.82% and 10.08% compared with 14.68% and 10.02% at year end 2010. The improvement in the risk based ratios was primarily driven by lower risk weighted assets compared with year end and higher levels of capital in the company. The change in the leverage ratio was mainly due to a higher level of retained capital and a lower level of average assets for the quarter. As of June 30, all of our affiliate banks continue to exceed the “Well Capitalized” regulatory definition.
Results of Operations
Three Months Ended June 30, 2011
For the second quarter of 2011, net income was $628,000, basic and diluted earnings per share were $0.03, compared with net income of $937,000, and $0.07 basic and diluted per share for the second quarter of 2010, and net income of $1,215,000, $0.10 basic and diluted earnings per share, for the first quarter of 2011. Net income available to shareholders was $208,000 in the current quarter compared with $517,000 in the second quarter of 2010 and $795,000 in the first quarter of 2011. This year’s second quarter was once again, heavily impacted by a $4.3 million charge to loan loss provision, as well as $797,000 in expense relating to other real estate owned. The charge to loan loss provision was necessary as we continue to work though loans for which the borrowers have exhausted their sources of repayment, or the value of the supporting collateral declined. These loans were either transferred into nonaccrual status and specific reserves established, or charged down to the estimated value of the collateral that can be recovered on the loan.
Average earning assets increased $17.4 million, when the second quarter of 2011 is compared to the same quarter a year ago. While overall earning assets increased from a year ago, a decrease in net loan balances of $77 million was offset by a $19 million increase in short term investments and a $35 million increase in available for sale securities. Compared with the previous quarter, average earning assets increased $24 million, or 1.8%. The yield on earning assets decreased 37 basis points, to 5.10%, for the quarter ended June 30, 2011, compared to 5.47% for the same quarter a year ago, and was 7 basis points lower when compared with the first quarter of 2011. The cost of funding related liabilities also decreased, falling 63 basis points when comparing this year’s second quarter to the same period a year ago, from 1.65% in 2010, to 1.02% in 2011. Compared with the prior quarter, the cost of funding related liabilities fell by 10 basis points. Since the decrease in the cost of funds relative to earning assets was greater than the decrease in the yield on earning assets, the net interest margin increased 26 basis points from last year’s second quarter to 4.08% in the current quarter. The net interest margin increased three basis points when compared to the previous quarter. Net interest income increased $1.1 million to $13.7 million in the second quarter of 2011 compared with the same period of 2010, as the increase in net interest margin resulted in higher net interest income. Unpaid interest on loans which are transferred to nonaccrual status is reversed against interest income in the period when the transfer occurs. During the second quarter of 2011, interest reversals associated with loans moving to nonaccrual status were $154,000 compared with $196,000 in the same quarter a year ago and $99,000 in the first quarter of 2011.
The provision for loan losses increased $1.2 million when the second quarter of 2011 is compared to the same quarter of 2010. Provision for loan losses was $4.3 million in this year’s second quarter compared with $3.1 million in the second quarter of 2010. Compared with the first quarter of this year, the provision for loan losses was also $1.2 million higher. In the second quarter of the year we charged down $3.5 million of commercial loans, for which we had specific reserves set aside of $1.5 million at the end of the previous quarter. We also identified loans where the value of the underlying collateral of the loan continued to decline. After a detailed review of these loans, it was determined that some of these loans should be moved to nonaccrual status, while others should be charged off. Following that review, our analysis showed that we needed to provide slightly less for loan losses than our charge offs to cover losses inherent in the portfolio. We perform quantitative and qualitative analysis of factors which impact the allowance for loan losses consistently across our six banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment growth rates, and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries most affected by current risks in the economic and political environment and the review of risks in certain credits that are not considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank.
Total non-interest income was $2.0 million in the second quarter of 2011, compared with $2.4 million in the second quarter of 2010 and $2.0 million in the first quarter of 2011. Compared with 2010’s second quarter, gains on sale of mortgages were $313,000, or 43.1% lower, primarily due to lower mortgage refinancing resulting from the current interest rate environment and regulatory environment. Also effecting non interest income was lower other income, which was down $102,000 compared with last year’s second quarter.
Total non-interest expense increased $91,000, or 0.8%, when comparing the three month periods ended June 30, 2011 and 2010 and was primarily due to higher costs of administering our Other Real Estate Owned properties which increased $313,000 from the prior year and was partially offset by lower salary and benefits expense which was down $79,000 and occupancy expense which was down $85,000. Compared with the first quarter of this year, non-interest expense was $48,000, or 0.4% higher, mainly due to higher OREO expenses which were up $217,000 and were partially offset by lower salary and benefits costs which were down $100,000 and occupancy costs which were down $140,000.
Federal Income tax expense was $58,000 in the second quarter of 2011, compared with $311,000 in the second quarter last year and $349,000 in the first quarter of 2011. The decrease in taxes in both comparisons was primarily driven by lower pre-tax earnings.
Six Months Ended June 30, 2011
For the first six months of 2011, net income was $1,843,000, basic and diluted earnings per share were $0.13, compared with net income of $1,596,000, and $0.10 basic and diluted per share for the first half of 2010. Net income available to shareholders was $1,003,000 in the current year compared with $756,000 in the same period of 2010. This year’s results were heavily impacted by a $7.3 million charge to loan loss provision, as well as $1.4 million in expense relating to other real estate owned. The charge to loan loss provision was necessary as we continue to work though loans for which the borrowers have exhausted their sources of repayment, or the value of the supporting collateral declined. These loans were either transferred into nonaccrual status and specific reserves established, or charged down to the estimated value of the collateral that can be recovered on the loan.
Average earning assets increased $8.5 million, when the first half of 2011 is compared to the time frame a year ago. While overall earning assets increased from a year ago, a decrease in higher yielding net loan balances was offset by an increase in lower yielding short term investments and available for sale securities. The yield on earning assets decreased 36 basis points, to 5.13%, for the six months ended June 30, 2011, compared to 5.49% for the same six months a year ago. The cost of funding related liabilities also decreased, falling 62 basis points when comparing this year’s first half to the same period a year ago, from 1.69% in 2010, to 1.07% in 2011. Since the decrease in the cost of funds relative to earning assets was greater than the decrease in the yield on earning assets, the net interest margin increased 27 basis points from 3.80 % last year’s to 4.07% in the year. Net interest income increased $2.0 million to $27.0 million in 2011 compared with the same period of 2010, as the increase in net interest margin resulted in higher net interest income. Unpaid interest on loans which are transferred to nonaccrual status is reversed against interest income in the period when the transfer occurs. During the 2011, interest reversals associated with loans moving to nonaccrual status were $253,000 compared with $332,000 in the same period a year ago.
The provision for loan losses increased $1.7 million when year to date 2011 is compared to the period of 2010. Provision for loan losses was $7.3 million in this year’s first half compared with $5.6 million in the first half of 2010. We charged down $5.8 million of commercial loans in the first half of the year, for which we had specific reserves set aside of $2.4 million at the end of the previous year. We also identified loans where the value of the underlying collateral of the loan continued to decline. After a detailed review of these loans, it was determined that some of these loans should be moved to nonaccrual status, while others should be charged off. Following that review, our analysis showed that we needed to provide slightly less for loan losses than our charge offs to cover losses inherent in the portfolio. We perform quantitative and qualitative analysis of factors which impact the allowance for loan losses consistently across our six banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment growth rates, and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries most affected by current risks in the economic and political environment and the review of risks in certain credits that are not considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank.
Year to date total non-interest income was $4.1 million in 2011, compared with $4.6 million in the same period of 2010. Compared with 2010, gains on sale of mortgages were $115,000, or 10.5% lower, primarily due to lower mortgage refinancing resulting from the current interest rate environment and regulatory environment. Also effecting non interest income was lower other income, which was down $336,000 compared with last year mainly due to reduced revenue from our armored car business which was sold at the end of March 2010.
Total non-interest expense decreased $574,000, or 2.6%, when comparing the six month periods ended June 30, 2011 and 2010 and was primarily due to lower salary and benefits expense which was down $269,000 and occupancy expense which was down $151,000. Also benefiting this year’s comparison is the sale of our armored car business at the end of March 2010.
Federal Income tax expense was $407,000 for the first two quarters of 2011, compared with $311,000 for the same period last year. The increase in taxes was primarily driven by higher pre-tax earnings in the current year.
Liquidity
At June 30, 2011, we have adequate sources of liquidity to meet our needs. Cash and cash equivalent balances were at $96.7 million, an increase of $23.2 million, or 31.5%, compared with year end 2010. This increase was primarily the result of a reduction in our loan portfolio and core deposit growth of $25.7 million and $25.7 million, respectively, which both increased liquidity. Offsetting these items was an increase in our available for sale investment portfolio of $34.6 million and repayment of $19.1 million of Federal Home Loan Bank advances. Our securities available for sale portfolio now stands at $290 million, providing a source of liquidity should it be necessary.
Our banks maintain access to immediately available funds through federal funds lines at three correspondent banks, the Federal Home Loan Bank of Indianapolis, and the Federal Reserve’s discount window with aggregate available limits of $46 million, $99 million, and $62 million, respectively. Our banks also have access to funds through brokered CD markets.
Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
The Corporation has various financial obligations, including contractual obligations and commitments that may require future cash payments. Management believes that there have been no material changes in the Corporation’s overall level of these financial obligations since December 31, 2010 and that any changes in the Corporation’s obligations which have occurred are routine for the industry. Further discussion of the nature of each type of obligation is included in Managements Discussion and Analysis on page 14 and 15 of the Corporation’s Form 10K Annual Report, and is incorporated herein by reference.
Critical Accounting Policies
Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights and other intangibles, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Management’s Discussion and Analysis on pages 15 through 17 in the Corporation’s annual report to shareholders for the year ended December 31, 2010.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation itself. Words such as “anticipate,” “believe,” “determine,” “estimate,” “expect,” “forecast,” “intend,” “is likely,” “plan,” “project,” “opinion,” variations of such terms, and similar expressions are intended to identify such forward-looking statements. The presentations and discussions of the provision and allowance for loan losses, and determinations as to the need for other allowances presented in this report are inherently forward-looking statements in that they involve judgments and statements of belief as to the outcome of future events. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Internal and external factors that may cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior and customer ability to repay loans; software failure, errors or miscalculations; and the vicissitudes of the national economy. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Information under the headings, “Liquidity and Interest Rate Sensitivity” on pages 13 through 15 and “Quantitative and Qualitative Disclosure About Market Risk” on page 18 in the registrant’s annual report to shareholders for the year ended December 31, 2010, is here incorporated by reference. Firstbank’s annual report is filed as Exhibit 13 to its Form 10-K annual report for its fiscal year ended December 31, 2010. Also referenced here is information under the heading “Item 1A. Risk Factors” on pages 15 through 18 in the registrant’s Form 10-K annual report for its fiscal year ended December 31, 2010.
We face market risk to the extent that both earnings and the fair values of our financial instruments are affected by changes in volatility, market perceptions of credit risk and interest rates. We manage this risk with static GAP analysis and simulation modeling. We do not believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss to the Corporation. As of the date of this Form 10-Q quarterly report, we do not know of nor expect there to be any material change in the general nature of our primary market risk exposure in the near term.
The methods by which we manage our primary market risk exposures, as described in the sections of our Form 10-K Annual Report incorporated by reference in response to this item, have not changed materially during the current year. As of the date of this Form 10-Q quarterly report, we do not expect to change those methods in the near term. However, we may change those methods in the future to adapt to changes in circumstances or to implement new techniques.
Our market risk exposure is mainly comprised of our vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships in the future will be primarily determined by market, economic, and geopolitical factors which are outside of our control. All information provided in response to this item consists of forward looking statements. Reference is made to the section captioned “Forward Looking Statements” of this Form 10-Q quarterly report for a discussion of the limitations on our responsibility for such statements.
Item 4.
Controls and Procedures
a)
|
Evaluation of Disclosure Controls and Procedures
|
|
On August 8, 2011, the Corporation’s Chief Executive Officer and Chief Financial Officer reported on the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) to the Audit Committee. The portion of that report which constitutes their conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of June 30, 2011 is as follows: “Based on our knowledge and the most recent evaluation, we believe the disclosure controls and procedures to be reasonably effective and commercially practical in providing information for management of the Corporation and for fair reporting to the investing public.”
|
b)
|
Changes in Internal Controls
|
During the period covered by this report, there have been no changes in the Corporation’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Corporation’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 5.
Other Information
The audit committee of the Board of Directors approved the categories of all non-audit services performed by the registrant’s independent accountants during the period covered by this report.
|
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
|
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)
|
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Date: August 10, 2011
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/s/ Thomas R. Sullivan
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Thomas R. Sullivan
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President, Chief Executive Officer
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(Principal Executive Officer)
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Date: August 10, 2011
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/s/ Samuel G. Stone
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Samuel G. Stone
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Executive Vice President, Chief Financial Officer
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(Principal Accounting Officer)
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EXHIBIT INDEX
31.1
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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.
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31.2
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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.
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32.1
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Certificate of the Chief Executive Officer and the Chief Financial Officer of Firstbank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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27
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